Supply and Demand

11 December 2008 at 11:11 pm Peter G. Klein 3 comments

| Peter Klein |

You may have seen this ad that is currently making the rounds. It’s good for a chuckle, and also raises a serious point. Current discussion of the US automakers’ problems focuses almost entirely on the supply side: high labor costs, poor management, lack of innovation. The demand side is largely ignored — there’s talk about the distribution of demand for US products between large and small vehicles, but the overall demand for US cars and trucks, regardless of type, seems to be taken as fixed. But what if consumers change their preferences, not toward “small cars,” but toward non-US products? What, then, is the appropriate policy response?

Bailout proponents seem to believe that US cars “really are” as good as, say Japanese cars, but somehow consumers have been tricked into preferring cars from Japan. As usual, bailout proponents have no argument or evidence whatsoever for this belief, but no matter. A normal person might think consumers are fully entitled to buy, and refuse to buy, whatever brands they like. In today’s corporate-statist economy, however, consumer demand cannot be allowed to influence the allocation of resources.

Entry filed under: - Klein -, Bailout / Financial Crisis.

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3 Comments Add your own

1. Nathan Shepperd (scumble) | 12 December 2008 at 6:45 am

I think what no-one considers is letting things take their own course, or whether it matters if car manufacturers are nominally “American”. Let’s face it, the whole thing is confused unless you say the main point is to maintain the position of a certain bunch of priviledged executives.
2. Matt C. | 12 December 2008 at 10:21 am

I would like to point out that “American” made cars are much better than they used to be. They may be as good as foreign nameplates. From what I have read in all the trade magazines they have made a substantial come back in quality and reliability.

The problem is that the “American” made car were crap and were unreliable. Once you earn that reputation it’s very difficult to shake it.

Megan McArdle pointed out yesterday that Japenese aren’t selling more fuel efficient vehicles either. Their big sellers are not the Prius or the Insight. Politicians and those who call for the bailout so the Big Three can produce more fuel efficient vehicles are either full of crap or delusional. (I know where the politicians are on this spectrum.) It also suggests that even if you mandate changes in the vehicles that are made by these companies that they will eventually go belly up. The majority of consumers just want, at minimum, a cheap four door sedan.

What the Big Three do make well are Trucks and SUVs. They are good hard working trucks, always have been. But because of other institutions involved they can’t specialize like they would be able to in a truly competitive market.
3. Matt C. | 12 December 2008 at 10:23 am

Nathan-
I think you are pointing to only one group. I think the actions of the current politicians have proved that they don’t really want to let the bankruptcies take place because of the impact on Big Labor. They aren’t all that concerned about the auto executives, maybe a little, but not a whole lot. They are more concerned with the Union exectutives.