Lesson in American capitalism for manufacturers

New York Times

When the American auto industry was in the hands of private investors, it was managed as a state enterprise. Now, when the state manages it, it will make you finally into capitalist business?
The idea is heretical, but maybe that’s exactly what happens. Which speaks well for the administration led by Obama’s rescue General Motors and Chrysler.
In the disastrous past when Detroit ruled the alleged capitalists, the plan seemed to be turning around only increase the volume. When sales weakened, they came and scale price discounts and rebates. And sweet lease deals that would sounded logical financial companies only if they were too optimistic expectations about the prices of used cars after the expiration of the lease.
The idea was to keep the cash flow to cover the variable costs of production and to protect market share. Former leadership of G.M. as it is primarily interested in those elements, not profitability.
Alternative strategy would require management to reduce production, close factories and lay off workers. This is simply considered to be impossible. Unions were strong and contracts meant that the cost will not fall much even if firms have fewer cars to sell.

„Limonene socialism“

Anyone who has ever taught microeconomics, can understand the attractiveness of the strategy used by Detroit. In the short term, it sounds logical to sell the car at a price higher than the additional costs of production j. However, if prices are too low to cover fixed costs, the manufacturer is increasingly run up a debt until the creditors realize what is happening and stop tap .
And that’s exactly what happened.
One of the main accusations against socialism has always been that governments are more worried about jobs than about profits. No politician is unwilling to assume responsibility for redundancies so happy that the government relies on optimistic forecasts in order to avoid painful decisions. Thus was created the term „lemon socialism“.
But what happened this year?
First, the administration insisted Obama GM and Chrysler to design strategies for working out of difficulty. When these plans have emerged with the usual pink cape, the government insisted on changes.
Came and the big cuts – something unexpected from the administration, elected with the support of unions. Unions lost their generous compensation for exempt employees. Their reorganization plans are not received as raw terms, as some lenders, but ultimately, creditors and employees paid for the mistakes of the previous guidelines.
Evidence of the events appear in the data on consumer prices in October, removed last week. The index of new cars rose by 1.6 percent for the month and 3.8 percent for the past 12 months – most recently made such a jump is more than a decade. This can happen when companies seek to increase margins despite the impact on the volume.
Of course, the consumer price index is not entirely objective. Adapt to data quality, which is not an easy job (how much more expensive than last year’s model may be from 2010, how great is the difference if the engine is greater than or fuel is more economical, or interior is nice). For quite some time, however, there was no change. So there’s no reason to think that the government is doing less well with the index of previous years.
Then comes the question of how the program cache for old car influenced the data. The scheme may allow retailers to raise prices temporarily. If so, the impact will soon diminish.

27-year low sales

Because of these factors, many analysts admitted that the rising prices of cars in recent months were statistically phenomenon. „This significant price increase did not logical in a situation in which sales of cars approaching 27-year low,“ said economist of UniCredit Research Harman Bandholts after the announcement of the November index. And later confided that he believed this was a „statistical anomaly“, which will probably undergo a correction in the coming months.
Another possible explanation is a weakening of the dollar. Germany, Japanese and Korean car manufacturers to raise prices in the United States to offset the growth in the euro, yen and won. This gives Detroit an excuse to raise prices too. But, as the Bandholts and prices of imported cars increased, but not so fast. „Higher prices of imports can explain part of the surge in sales prices, but not all,“ he said.
If car prices do not fall soon, you may need to assume that higher values are real and they happen because Detroit has been really different. If true, Obama’s administration deserves praise for the manner in which has dealt with saving the auto industry with an incredible combination of market discipline and government property.
In the short term, however, that success does not reflect well on the political image of the president. Unemployment is higher than it would if the administration had decided that the crisis will pass quickly, and Detroit was forced to introduce changes. And higher prices will negatively affect sales of what the economy does not look very good.
Detroit has promised to cut rebates and before and seen how the promise is falling apart before disillusioned person business. When the dollar stabilizes, the pressure on imports could be increased. Too early to declare complete success.
However, it is interesting to imagine what would happen on Wall Street, where the government was ready and could impose market discipline on banks, so that creditors can take larger losses, and shareholders – to be liquidated, even the banks can continue to fulfill their economic functions.
Authorities found no way to do this and what happened after the collapse of Lehman Brothers may have been done. But if this was done, the chances for Congress to establish a real financial reform would be much larger than it seems at the moment.

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