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.

John McCain, technology and competition

Salon has an excellent piece on John McCain and his rather awkward approach to high tech stuff. Kind of funny to think of a fighter pilot unfamiliar with something as simple as email. I thot fighter pilots were supremely macho guys who were in command of some of the most sophisticated and powerful technology of the day. Maybe email is too down to earth.

This is not just a style issue. McCain has been in an important place to oversee the growth of the Internet: he was chairman of the Senate Commerce Committee. His record there is not good.

During McCain's tenure, the committee oversaw the implementation of the 1996 Telecommunications Act, the first major overhaul of U.S. telecom law in nearly 62 years. McCain had to choose whether to be pro-competition or pro-big business. In most instances, he chose the latter route, by opposing increased Internet access for schools and libraries, backing large mergers to benefit the telecom industry and supporting a virtual system of haves and have-nots.

McCain, of course, does not see things this way. He's in favor of letting the free market work, and thinks the government should just stay out of the way.

McCain's long history in the Senate has one main theme: Government can do no good in telecom policy. "McCain is a pure free-market ideologue," said Mark Cooper, director of research at the Consumer Federation of America. "Their [Bush and McCain] belief is that government should just get out of the way and let the private sector do it. Clearly, in the financial markets, the private sector has done a horrible job."

But there is no such thing as a pure free market in an area of the economy like telecommunications. Government regulation will determine the structure of that market. The difference of opinion is simply what the structure of the market will be, not whether or the market will be free. The issue here is not whether the telecom industry will be owned by the state or private industry. That debate, at least in this country, is over. And for telecom, it was never really an issue - the state has never, as far as I know, owned telecom companies in this country.

The debate over state vs. private control of the economy is an old one, but conservatives are still fighting that fight, because they are still enjoying the fact that they won that ideological battle. John McCain is still fighting it.

a common theme of McCain's views on tech policy is the belief that law can rarely be used to benefit telecommunications. Government intervention, for the most part, is bad. "Unless there is a clear-cut, unequivocal restraint of competition, the government should stay out of it," McCain said in 2007. "These things will sort themselves out."

That's like saying that we should have a minimum of rules in a game like football, and just let the teams play, and let them "sort things out" on the field. We don't do that because we understand that competition has to have rules to be fair.

McCain seems oblivious to the fact that these things get "sorted out" in the halls of Congress, and that he is a key part of that process.

McCain has boasted that he has "never done any favors for anybody -- lobbyist or special interest group -- that's a clear, 24-year record."

But the record isn't so clear. McCain's chairmanship of the Senate Commerce Committee has been good for large corporations, and they have rewarded him handsomely. In 2000, Washington Internet Daily, a trade site, reported that McCain was the "[c]lear leader in fund-raising from high-tech companies." Over those past two years, McCain collected $1.2 million from communications and electronics companies, including nearly $700,000 from phone companies and telecom infrastructure firms.

I am actually not as suspicious of this kind of politician-money connection as most people. I don't think the companies are buying McCain's loyalty. I think he was already in their camp, and they are simply supporting someone who agrees with them.

The problem is that he sees large corporations as doing no wrong. He sees them as acting in their best interests, and therefore in their customers' best interest. And since their customers are the public, what is in their customers' best interest is in the public's best interest.

What McCain, and many conservatives, seem to miss is that what is in a corporation's best interest is NOT necessarily in their customers' best interest, and certainly not necessarily in the public's best interest. It goes back to the old state-vs.-private ownership issue. McCain trusts large corporations because he thinks the alternative is state control. But that is no longer the debate. The debate now is between different KINDS of competition. The issue is no longer whether or not we should allow competition or impose regulations. The issue now is how to use regulations to MANAGE competition. In this respect, Democrats may actually be better capitalists than Republicans, because they understand the need to be skeptical of large corporations' claims to be in favor of the "free market," when in fact they are in favor of skewing the rules to be in favor of them.

We do not the most successful teams set the rules for baseball, basketball, football, etc. We should have the same standards for the market.

Ten Days That Changed Capitalism

That's not my own hyperbole in the title of this post - that's the headline of a Page One article in the Wall Street Journal. The world is different now.

"The past ten days will be remembered as the time the U.S. government discarded a half-century of rules to save American financial capitalism from collapse."

It is different in ways that many people don't appreciate. "[the changes from the government] are shrouded in technicalities and buried in a pile of new acronyms."

The political implications are, to use an overused word, profound.

"A Republican Administration, not eager to be seen as the second coming of the Hoover administration, showed it no longer believes the market can sort out the mess."

This is a dramatic change in ideology. Conservatives argue that the market works best when it is regulated as little as possible. This mess has illustrated, very clearly, the limitations of that ideology. And it's only going to get worse. When will we know it's gotten worse? When the bill shows up. "The next step, if one proves necessary, is almost sure to require the explicit use of taxpayer money." How happy are Main Street Americans going to be about bailing out people on Wall Street? Not very. I'm not going to be thrilled about it, that's for sure.

That's the article on Page One: change is coming, get used to it. But one interesting effect of reading the Wall Street Journal is that you notice a strong divide between the reporting and the editorial pages. Sometimes it's an almost schizophrenic divide. Just a few pages behind the article articulating just exactly why and how the government intervened in the market is an Op-Ed piece challenging the need for new regulations. Allan Meltzer, a professor at Carnegie Mellon, lets us know that "Mistaken regulation contributed greatly to the current problems in financial markets." So apparently it wasn't investment bankers making bad decisions based on greed and an unclear comprehension of how much risk they were taking on. It was the government trying to regulate the markets. I was under the impression that establishing guidelines for behavior was the government's job. I was also under the impression that responsible citizens generally try to follow those guidelines. Not according to Prof. Meltzer: "The first principle of regulation is: Lawyers and and politicians write rules; and markets develop ways to circumvent these rules without violating them." So it's fine to violate the spirit of the law, as long as you're within the letter. This is sort of like Martin Luther King's doctrine of civil disobedience, but for yuppies instead of oppressed minorities - if you consider the law unjust, try to work around it. Ethics be damned, apparently.

I've worked for investment banks, and I can actually understand this point of view. Investment bankers are paid to be creative with finances, and that requires knowing where the lines are in the law. And who among us has not thot about just how fast you can drive above the speed limit without getting caught? But instead of being creative on the legal side, shouldn't the core principle of a business be figuring out how to deliver value for your client? I notice that JPMorgan was in a position to take advantage of Bear Stearns' mishaps. I'm fairly certain that's because JPMorgan understood that one purpose of the rules and regulations that structure our financial system is to protect people from themselves. Those laws exist because when people get themselves into trouble, they tend to get other people in trouble, too. That's also why we have laws against drunk driving.

What's particularly bizarre about this line of argument is what happens when you apply it to the world outside of Wall Street. Let's try this. Should we have laws against robbing banks? No, because robbers are constantly innovating, and we can't catch up with them. Maybe we shouldn't try. Or how about this: if you install a burglar alarm in your house, some thief is just going to figure out how to get around it. So don't even bother locking your doors!

Conservatives occasionally make a good argument for too much regulation having unintended consequences. But the solution is not to abandon the enterprise of regulating the financial system or to take the path of least resistance. Conservatives, I think, are getting desperate to protect their franchise before it becomes so invalidated that they lose elections. But it's not working, because reality is intruding. You can tell people are is this kind of trouble when their arguments are sloppy. Prof. Meltzer uses a couple of examples of the failure of regulation that I think fail to prove his case:

"Regulators did not see the chicanery at Enron. Nor did they prevent the dot-com bubble or the Latin American debt problems in the 1980s."

They didn't see the problems at Enron because Enron was engaged in criminal activity and hiding it from regulators. And the dot-com bubble was a normal market correction - too many people got too greedy, and did not exercise good judgment. That's unfortunate, but there was very little illegality. And I don't know enough about the Latin American debt problems in the 1980s to comment intelligently. But the point is that this is a red herring - these are not examples of failures of regulation.

Mr. Meltzer seems to think that those who took the risks should pay the price - enforcing the moral hazard. Let the government keep this system afloat, but don't save anyone's skin who doesn't deserve it. Let the idiots hang. It's a harsh perspective, but not unusual (and, for some, I'm sure, a nice revenge fantasy).

What I find bizarre is the idea that we shouldn't bother trying to learn the proper lessons from this so that we can prevent it from happening again. It will happen again, the good professor seems to be arguing, so what's the point of even trying? Because, Prof. Meltzer, trying to find the proper range of regulation to balance the disparate needs of society is the purpose of democracy.