Have you heard? People everywhere (except Europe) are buying cars again. Automotive News reports that June’s U.S. auto sales are up for six consecutive years. They project 16 million for the full year. Further, they report that each of the Detroit Big 3 gained market share in the first six months of 2013.
That’s a far cry from the reports out of Detroit a few years ago.
More interesting is that foreign manufacturers are locating more factories here in the U.S. Is that a good thing? You bet. When companies from another country invest here it creates jobs no matter what the nameplate on the car. Indeed, Nissan, Mercedes, Toyota, Honda, BMW and the rest are exporting cars from their U.S. factories to the rest of the world.
Bloomberg recently ranked the U.S. as the third most attractive country to locate a business behind Hong Kong and the Netherlands. China? They’re number 19.
How can that be? Here’s how. While it’s true that the weaker dollar has caused the effective labor cost to drop, what’s more important is that the U.S. is well integrated into the global economy through its transportation and communications systems, has the wealthiest consumer base and is a rules-based economy.
Global investors – business owners, corporate executives, shareholders -- are more likely to put their money into a venture governed by a reliable set of regulations, taxes, policies, etc. “The rule of law” is very important to them.
Rule of law is a confusing term and, used in other than economic contexts, can be construed as “rule according to law” or “rule under the law”. Dictionary.com provides a concise definition thusly: “the principle that all people and institutions are subject to and accountable to law that is fairly applied and enforced; the principle of government by law.”
Was the rule of law abandoned a few years ago when the automakers were circling the toilet for the third time? Fearful that hundreds of thousands of jobs would be flushed along with the shareholders money, the government intervened, first under the Bush administration, to loan TARP money the automakers and, then under the Obama administration, to engineer a restructuring of both GM and Chrysler through bankruptcy proceedings.
Critics howled but fear ruled the day. So, what would have happened if the government hadn’t stepped in? Many of my friends and colleagues have speculated that private investors would have acquired the assets through a Section 363 sale in bankruptcy court. GM could probably have been had for about $10 billion, chump change for the private equity industry.
But, I am not so sure. We were all in a panic in the first half of 2009. No one was quite sure what would happen next. Investors like a stable environment in which they can place their bets. 2009 was anything but stable. Mike Jackson, CEO of AutoNation (NYSE:AN) the nation’s largest auto dealer, has often said, “it’s pains me as a conservative Republican to say this…” but the U.S automakers would not have survived if the government hadn’t taken action. He goes on to support the oft-reported view that the a GM liquidation would have unraveled the supply chain and brought down many other companies in the industry, causing not only job losses but also disruption of the global economy. And, this was at a time when the U.S. Federal Reserve was still putting the Humpty-Dumpty financial services industry together again.
Principles are important. Our leaders, both Republicans and Democrats, violated so many sound principles of capitalism during the nine-month span between the Lehman bankruptcy and the GM bankruptcy that it’s hard to keep track. The most prolific of the Austrian school of economics, Friedrich Hayek, in his most important work The Road to Serfdom, said, “nothing distinguishes more clearly conditions in a free country from those in a country under arbitrary government than the observance in the former of the great principles known as the Rule of Law”.
But, there is no line in the sand that can distinguish between actions that satisfy the principles of the rule of law. Both the President and the Chair of the Federal Reserve are given a great deal of discretion. Here’s what George W. Bush told CNN in December 2008, a month before he turned the reins of government over to his successor. "I've abandoned free-market principles to save the free-market system, to make sure the economy doesn't collapse."
We’ll never know what might have happened if the government hadn’t exercised its discretion. But, no President wants to preside over the collapse of the economy.
WHO WILL LEAD?