Saturday, May 16, 2009

GM, Chrysler closing dealerships

GM and Chrysler are closing lots and lots of dealerships, roughly 2,000, all told.

No one is surprised by this. Many people have known for years that GM and Chrysler have too many dealerships. GM has several thousand more dealers than Toyota, but sells roughly the same number of cars.

From a political perspective, what's bizarre about this is that this failure is actually an argument for the conservative principle that excessive government regulation is bad for the economy. In this case, dealers across the country were protected by state and local laws that made it difficult for them to be closed. Dealers obviously wanted to be protected from the vagaries of the market. The free market. So they relied on government regulation to protect them. And yet I somehow don't think that many of them were Democrats.

My guess is that many of these dealerships were profitable for themselves, but not profitable for GM and Chrysler. Let's say you have a dealership that has been around in rural Kentucky for 50 years. The dealership probably owns the land and the building, so there is no mortgage or rent. That saves a large chunk of overhead right there. They probably have a great credit history, so their cost of capital is low. They pay taxes, sponsor Little League teams, and are generally good citizens in the local community. The police department buys their cars from this dealer. The wife of the dealer is on the board of the local hospital. So that dealership has no incentive to close, even if they are not profitable from the perspective of the manufacturers. But they and the local politicians have every incentive to make it difficult for any car manufacturer to close them.

When a parent does too much to protect their child from the unpleasantness of the real world by, for example, buying them expensive toys or paying their rent after they have graduated from college, we say that the child is spoiled.

It's a very harsh thing to say, but these dealers were basically spoiled children. Their parents, GM and Chrysler, were protecting them from the unpleasantness of the real by absorbing their costs, by, for example, taking their unsold cars back.

The great irony is that if everyone involved had let the free market work properly, many of these dealers probably would have gone out of business a long time ago, and others would have either taken up their business or bought them out. The process of winnowing out the unprofitable dealers would have been much slower, but also much less painful. Instead of taking place over years, however, the process is now taking place over months. If dealers had gone out of business when GM and Chrysler were financially healthy, they could have individually negotiated good buyouts from them. GM and Chrysler could have easily handled 50 to 100 or 200 dealers closing over the last 10 or 15 years. At $1million a pop, 200 dealers would be $200 million a year. That's probably what GM spends on laptops in a given year. Or, rather, spent.

But now that Chrysler is in bankruptcy, with GM likely to follow, the dealers may get nothing or very little. Bankruptcy changes the game. Imagine a spoiled child whose parent is suddenly unemployed. The kid's support is cut off, but she is totally unprepared for it, having never had to worry about it before. So she whines and complains and slams her fists. Guess what the Chrysler and GM dealers are doing.

I don't have a lot of sympathy. Yes, it sucks that many people who were responsible, hardworking people will lose their jobs. I have sympathy for them. They've done everything right, and now they are victims of forces beyond their control. But so are all of us.

But I don't have much sympathy for the dealers. They knew the rules of the game: if you open a business, you agree to play by the rules of capitalism. One of those rules is that the better competitor will win.

If this is an example of the conservative idea that excessive regulation is bad for markets, it is also an example of one of the core failings of conservatism. Conservatives argue that the free markets work because individuals are allowed to act according to their own best interests, and they understand what those best interests are better than the government.

What this argument ignores is that in every capitalist transactions, there is both competition and cooperation; the parties both have an interest in common, and an interest in conflict. If I buy a car, the car dealer and I both have an interest in me buying a car. But the dealer has an interest in charging me the highest price possible, while I have an interest in paying the lowest price possible. So each of us has an interest in distorting the rules governing the transaction to fit our needs. The dealer has an interest in blocking competition; this is why we have antitrust laws. I may have an interest in hiding the fact that I have, for example, a bad credit score, or the fact that I just lost my job (speaking hypothetically here).

That's what happened here: the dealers distorted the free market. They acted according to their own best self-interest. But what was in their best self-interest was contrary to the best self-interest of the car manufacturers. The manufacturers didn't object, because they had no reason to suspect that they would have to close down several hundred dealers all at once. They assumed this because they assumed that the free market would work as it is supposed to. Which, ironically, it did. Just not the way conservative theorists think it does.

The final irony is that this is one of the basic organizing principles of liberalism. Markets encourage efficiency, but, left to their own devices, capitalists will distort just about any market. One essential purpose of government is to regulate competition so that the distortions do not ultimately cause the markets to cease functioning properly. In this sense, the government is taking a capitalist role: the government represents the people in the country as a whole acting in the best interests of the country as a whole. There is no other mechanism for all of the people in a particular area, or affected by a particular industry, to act according to their own best interests, except through government.

So conservatives are right: if free markets had been allowed to work perfectly, this would not have happened. But conservatives are the starry-eyed idealists here, who live in their own fantasy land. Liberals are the grounded realists, and, essentially, the better capitalists.

I've said it once, I'll say it again: Irony is 9/10th of the law.

No comments: