Daily Archives: 31 January 2012

On Creative Destruction in a Free Market

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Here is an example of the creative destruction that a free market, especially one free of government interference, can generate [emphasis added].

In 2011, auto makers sold fewer than 13 million cars and light trucks in the U.S., and this year’s sales are expected to approach 14 million, levels that once would have been considered catastrophic for the U.S. auto industry.

Instead, the industry’s major players are steaming ahead.  A much leaner Chrysler Group LLC next week is expected to report $2 billion in operating profit for 2011.

“Not too many years ago, the U.S. industry looked at [sales of] 16 million [vehicles a year] as a permanent fixture in the landscape,” Chrysler CEO Sergio Marchionne said earlier this month at a conference sponsored by Automotive News.

“We can survive at 10 million” a year, he said. “The U.S. recession provided critical impetus to address the critical issues that the industry had dragged behind it for years.”  Last year Chrysler sold 1.37 million vehicles in the U.S., 26% more than in 2010 but again well below the 2.14 million it sold in 2006.

Peter Nesvold, a financial analyst at Jeffries & Co. in New York, said the turning point for the industry was closing and downsizing plants, which took out about 30% of its production capacity and eased the pressure to keep making cars even when customers aren’t buying.

“Supply and demand are roughly equal, and that’s healthy,” he said.

Notice that.  Excess production was eliminated, and while in this case there was a net job loss, because the company is now competitive, it has a chance of surviving, and the majority of the company’s employees are able to stay in their jobs.  Furthermore, today’s Fords, GMs, and Chryslers are better cars with more gee-gaws, like GPS navigation and touch screen dashboards; hybrid versions exist today, too, that were not available before the recession forced a sorting out, and were not going to be available any time soon before that sorting.

The President’s Republican Plans

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President Obama, in his State of the Union address, spoke passionately of bringing manufacturing back to the US, of bringing in particular high-tech manufacturing back.

An America that attracts a new generation of high-tech manufacturing and high-paying jobs. … So we have a huge opportunity, at this moment, to bring manufacturing back. But we have to seize it….  It’s not fair when foreign manufacturers have a leg up on ours only because they’re heavily subsidized. … And this Congress should make sure that no foreign company has an advantage over American manufacturing when it comes to accessing finance or new markets like Russia. Our workers are the most productive on Earth, and if the playing field is level, I promise you—America will always win.

Republicans have been pushing for this—both manufacturing and dealing with economic cheaters—for quite some time.

And

…if you’re an American manufacturer, you should get a bigger tax cut. If you’re a high-tech manufacturer, we should double the tax deduction you get for making products here.

This has been a campaign theme of Senator Rick Santorum, in particular, for some time (although, let’s not forget that Obama’s tax plans aren’t entirely beneficial—he still demands to raise taxes on those groups of which he disapproves).

He also wants to boost domestic energy production.

Nowhere is the promise of innovation greater than in American-made energy. Over the last three years, we’ve opened millions of new acres for oil and gas exploration, and tonight, I’m directing my Administration to open more than 75 percent of our potential offshore oil and gas resources. Right now, American oil production is the highest that it’s been in eight years. That’s right—eight years. Not only that—last year, we relied less on foreign oil than in any of the past sixteen years.
But with only 2 percent of the world’s oil reserves, oil isn’t enough.

This has been the push of Republicans for years.  The complaint has been about the Obama administration actively interfering with domestic energy production, from slow-walking offshore drilling permits (after an outright ban following the BP spill) to nixing the Keystone XL pipeline that would have brought Canadian oil into the US—North American, if not domestic.

I won’t go (far) into fact checking Obama’s claims in that segment (like that 2% claim, which actually refers to the amount of oil that is recoverable at current prices and under lands currently available by Federal fiat for development.  In fact, according to the Institute for Energy Research, the US has more than 1.4 trillion barrels of recoverable oil, more than the rest of the world (excluding North America) combined).  It’s enough that Obama is, apparently, embracing another Republican policy.

All this comes against the backdrop of Obama’s failed economic policies.  He chose not to address the budget disaster in his SOTUS, and he’s chosen to ignore it in his re-election campaign these last several months.  Beyond this, Obama’s Progressive Congress approved $4 trillion worth of economic stimulus via deficit spending, spending which has supported historically high unemployment rates for historically long periods, and which spending has suppressed the cyclical economic recovery that’s been struggling since spring 2009 when the present recession “ended.”  Further, in these last three years the national debt has exploded to more than $15 trillion, equal to the nation’s whole GDP.

Hmm….