Chrysler & Capitalism: Dead on Arrival

According to Scott Spreling at the WSJ, the recent Chrysler bailout is “capitalism at work.” While I am not an economist I would have to respectfully disagree. Effective capitalism would support companies that provide products and services that the public wants. Effective capitalism breeds efficiency in corporate structures. And in truth, effective capitalism would have seen Chrysler die out nearly 25 years ago.

The unfortunate truth is that Chrysler stopped making automobiles the public wanted long ago. That, and not the current economic crisis is what put it in the position it is in today. A glance at the most recent Consumer Reports Auto Edition tells the tale. The following are the recommended buys for a variety of brands.
Ford: 14 models
Ford Edge
Ford Escape Hybrid
Ford Escape 4-cyl.
Ford Escape V6
Ford Expedition EL
Ford F-150
Ford Focus AT
Ford Focus MT
Ford Fusion 4-cyl.
Ford Fusion V6
Ford Mustang V6
Ford Mustang V8
Ford Taurus
Ford Taurus X

Honda: 15 models
Honda Accord V6
Honda Accord 4-cyl. AT
Honda Accord 4-cyl. MT
Honda CR-V
Honda Civic Si
Honda Civic EX AT
Honda Civic EX MT
Honda Civic GX CNG
Honda Civic Hybrid
Honda Fit Base AT
Honda Fit Sport MT
Honda Odyssey
Honda Pilot
Honda Ridgeline
Honda S2000

Chrysler: 0 models

That’s right, zero, none, nada. Is it really a win for capitalism when a company that makes cars that don’t sell well and are generally of lower quality than its competitors is propped up by an intrusive federal government for the sake of short term job savings?

Lets put the quality of the product aside for a moment and look at what the company itself is willing to sacrifice to enable survival. When a company fails this miserably one would expect drastic measures in terms of its corporate structures to try and keep it alive. First among those changes would be cost cutting tactics. So one would think the workers along with the CEO’s would be taking a long hard look at compensation as a temporary way to right the ship. However, among the cost-cutting measures being enacted are a suspension of cost-of-living-adjustments and new limits on overtime pay. Chrysler workers will also lose their Easter Monday holiday in 2010 and 2011, according to a union summary. No pay raises? Limits on over time? That’s it? Even the workers themselves are surprised, “the reaction here has been incredibly positive. With many workers saying the plan is not nearly as drastic as they expected.”

Sadly, this is not the first time Chrysler has relied on the largess of the federal government and the American taxpayer. An eerily similar situation occurred 25 years ago. Chrysler chairman, Lee Iacocca, came to Washington in 1980, hat in hand, begging for a government bail out which he got. However, while the public perception was that Iacocca was a corporate savior, the reaction from economists was somewhat different, and very illuminating for our current situation. Below is the reaction from 1983.

The problem with the Chrysler bail-out—in fact, the problem with all “industrial policy”—is that it is necessarily political in nature; the loudest interest groups get the greatest reward, while the scattered and fragmented “invisible constituency” is largely ignored. But a free market is a tangled web of infinite and subtle interaction, in which the full impact of intervention is not always recognized until too late. In the case of the Chrysler bail-out, a big chunk of taxpayer money was committed to a shaky and inappropriate venture. Every American became an involuntary and uncompensated partner in a company whose future is still in doubt. The precedent established is extremely dangerous. On top of this, the bail-out even failed in its purpose.

It is time to pick your favorite cliche. The past is prologue; those who ignore the past are doomed to repeat it; here we go again. Any of these will apply. But is it a win for capitalism? Unfortunately not.