The Coming GM Debacle
It pains me more than I can say to agree with David Brooks. Nor is it a question of the stopped clock being right twice a day. No, this time he's got a genuine, giant nugget of insight: In his Monday column he argues that the GM bailout won't work because it doesn't change — indeed it reinforces — GM's bureaucratic culture of failure.
One of the only things I learned in graduate school that was actually useful in government is the idea that in a bureaucracy it's the informal organization, not the formal organization as laid out so neatly on a chart, that makes things happen. A lot of people, including a lot of very smart people, never manage to wrap their minds around the paradox, experience be damned. Talking about the "culture" of an organization is another way, though not the exact same thing, of getting at the workings of informal organization. One advantage of the narrower "culture" concept, however, is that it makes it easier to see where, and how badly, things go wrong.
With the U.S. government taking over GM you'd think that the government would insist that it have some voice in how the company will be run. But no. Nor do there appear to be any plans to bring in new blood. So is it plausible to expect that GM's idiotic management, further insulated from reality, will start making profitable decisions? Most unlikely.
A further problematic issue (in a direction Brooks would never take) is why the government doesn't try to convert, as was done during WWII, shuttered automobile factories into something new. In this case, Green production. High speed rail systems, wind turbines, all sorts of possibilities exist. Michael Moore recently espoused this idea in a persuasive way; a lot of sensible people have been talking about it for a while. Leaving such a conversion job up to Michigan politicians expects too much from them. And, anyway, given the causes of the Great Recession, it's basically Washington's responsibility. Unfortunately, those factories won't be repurposed, because Mr. Stepin Fetchit and his conservative coterie don't believe in industrial policy. Nevertheless, we should note and remember the missed opportunity. It's important for scoring the next election, and for history.
Posted by George Kenney on June 3, 2009 4:54 AM 
« Mr. Coal | Main | Kippers »
Comments
George, one of the best books on economics wasn't even written by an economist but ... Jane Jacobs, the urban theorist.
Her 1984 book, "Cities and the Wealth of Nations," makes a compelling case as to why repurposing factories does not help much economically, even though the GM implosion gives us ample opportunity to do so.
The relevant chapter on factories is "transplants".
One key mistake some economists and policymakers believe is that factories are wealth-producing sources. They are actually an end stage of development. The wealth factories produce comes not from the final product made. Wealth is produced from the financial activities the factory creates: borrowing from local banks, purchasing local real estate, sourcing goods and services from local businesses.
One big reason why the upper Midwest became the Rust Belt was a consequence of transplants. There was once a time where the factories had to be in the Midwest because their function was tied to location. The factories had to either be close to suppliers to close to distribution channels.
As the factories became successful, the business owners no longer were dependent on their locations to succeed. They could transplant the factory function anywhere, and they did. And they do. And they will.
Reopening factories carries the risk of economic activity being a captive to policy. Even repurposing old car factories to produce high-speed train locomotives and cars or green-energy producing equipment becomes can become the equivalent of a transaction of desperation: Building an entire town's economy on a prison or military base just to keep people busy.
[No, doesn't sound right to me. g.]
Posted by: Chris | June 6, 2009 4:53 PM
George, if I may persuade you a bit more.
I told you about Jacobs "Cities ..." (1984) because she also shows many real-world examples of how city regions tried their hands at industrial development and failed.
If you can't hunt down a copy of the book, there's an excellent summary on Zompist called "It's the cities, stupid." It is at http://www.zompist.com/jacobs.html
One of the perils of factory development is illustrated in the example of the Shah of Iran and the helicopter factory.
Zompist summarizes what was in the book:
In 1975, the Shah of Iran signed a contract to build an immense helicopter factory in Isfahan. The chief contractor was Textron, which set up a subsidiary in Euless, Texas, to handle development of the helicopter itself. The factory construction was subcontracted to Jones Construction Co. of Charlotte, North Carolina.
Jones delegated the electrical portion of the factory to Howard P. Foley Co. of Washington DC; Foley in turn employed six electrical wholesalers ... . Jones subcontracted the air conditioning and plumbing to Sam P. Wallace Co. of Dallas, Texas, whose net of sub-subcontractors embraced 150 companies.
The Shah thought he was buying development, making Iran into an advanced nation. But all he was buying was a factory, though an immense one. What he needed in order to actually be developed was what he couldn't buy: the web of thousands of companies that together enabled to US to build that factory.
(In the end he didn't even get his factory-- he was overthrown when it was only a third completed.)
There are also other examples of how sometimes transplants cannot simply be ported. A group of Mexican laborers earned money in Los Angeles and remitted money in hopes of starting a factory in the town they were from. It proved fruitless, as the factory was too far from both vendors and consumers -- and the know-how wasn't there to make such an enterprise work.
I'm not here to argue that the government (federal, state or local) should just leave things alone because it would make things worse. A policy can help, but its scope is ultimately limited.
The government now owns a chunk of GM. Now what? Pretty much everyone is in agreement that the government will be on the hook to manage GM's failure. Liberals, conservatives, libertarians and even socialists all agree that it'll end badly.
When there is rare ideological consensus in a no-confidence vote in the government to turn around GM, why would the aftermath be any better?
Take high-speed rail, something which I am following with keen interest. It would be something that would have profound economic benefits for decades to come.
What would be good industrial policy to get high-speed rail in the U.S.? Paradoxically, the best thing is to throw out Buy America rules.
We don't produce any of the equipment. Other countries (Germany, Japan, Spain, Canada) do. These countries also have the know-how to build the equipment right.
By dictating a unique design to American standards, or by mandating a percentage of American labor, this drives up the costs of production and/or degrades quality.
The U.S. would not get a factory, but we would get wealth. How? For one thing, the trains are going to need parts. We have active parts makers that would be eager to source goods to an imported train. So the jobs are already here, and the lines can be retooled to produce train parts far easier than to convert idle factories to build something completely new.
(This is the exact same process the Japanese carmakers used to set up operations in the U.S. It would happen again.)
Maintenance would have to be done here. Maintenance work is highly valuable, it's apprenticeable, and it's portable. The manufacturers would train workers for local work.
And of course, there would need to be people to operate the trains.
In this light, a big factory starts looking more like a liability than an asset.
And this is a process of import substitution that will generate jobs and ultimately wealth.
[I think it's more useful to ask why the Germans and others make these things. Indeed, Germany has a current account surplus and a pretty healthy industrial sector. That's not "the market" at work, but industrial policy, at both the Federal and state levels. g.]
Posted by: Chris | June 7, 2009 1:08 AM
You are absolutely right about the Germans having a workable industrial policy -- for the industries themselves and the policymakers.
You could say that the U.S. has a weaker industrial policy compared with Germany, primarily because there's a political consensus that the government is not only too feeble to get it right -- it should be too feeble.
The other interesting example of high-speed rail is Canada, of all countries.
Canada, which has a national rail network on par with what the U.S. has, and no prospects of high-speed rail to speak of, is nevertheless one of the biggest high-speed rail players in the world.
Bombardier, a Canadian defense and transport equipment conglomerate, runs a high-speed rail sector strictly for the export market. Its clients are in Europe.
We can probably leverage NAFTA for Bombardier to get the inside track, so to speak, on high-speed rail. Another plus: It has a low-key but significant presence with some manufacturing and parts sourcing in the U.S.
The drawback, though, is that the high-speed rail work is probably all done in Europe, since there's no market for it here ... yet.
Posted by: Chris | June 7, 2009 8:37 AM