The New Deal’s great mistake

Watching the slow-motion disaster that is the US-based auto industry, I think it is worth understanding just how we got into this mess.

Back in the day, before World War II, many viewed the large manufacturing concerns that dominated the economic landscape as basically a collection of machines.  Labor was locked in a titanic struggle with the owners of the machines (called Capitalists) over how to split the profits produced by those machines.  Economic theory treated assembly line labor as an undifferentiated input ("L") and production was measured as undifferentiated output ("Q" for quantity).  The companies that owned the machines were considered to be permanent entities.

The Capitalists had the upper hand in the struggle throughout the late 1800s and very early 1900s, before World War I caused the old order to unravel.  The two rising ideologies were Marxist Communism, which believed that Labor should own the machines directly, and Fascism, which believed in a state-driven socialist corporatism (in addition to some other nasty stuff).  By the early 1940s, continental Europe had fallen under the control of these two forms of government. The US and the UK threaded the needle by adopting elements of socialism while maintaining the dynamism of capitalism.

Of course I think the US got it mostly right.  However the New Deal in the US didn't completely reject the popular Marxist notion that companies are a collection of machines (aka the "means of production"), and it saddled these companies with social obligations that would eventually both do the employees a disservice and put US companies at a competitive disadvantage with foreign firms. 

This was the New Deal's great misake.  Companies are not a collection of machines.  They are evolving entities. Companies operate in a highly competitive, rapidly changing environment, with fickle consumer tastes and volatile business conditions.  Regardless of how powerful a company may seem at any given time, it is destined to disappear someday. 

The evolution of a company and its industry

In a new industry a few innovative companies will get traction with a product.  As the popularity of the product grows with the general public, more companies enter the industry.  Employment in the industry rises during this phase as companies invest in growth.

About halfway through the adoption cycle among the public, growth starts to slow.  The easy money fades and the industry gets more competitive.  Firms start merging with each other or going bankrupt.  Economies of scale start to matter, and companies focus on improving profitability rather than simply investing in growth.  Employment in the industry starts to fall.

When the industry matures (its product is fully penetrated among the public), it has probably consolidated to an oligopoly of 2-3 major companies that compete on product innovation and labor-saving investments.  Eventually, a replacement product comes along that forces the industry into permanent decline.

Given this evolutionary cycle, does it make any sense for retirees to look to a company that they may have worked for 20 years prior to support their retirement and health-care?  Why should companies be in the business of providing retirement investments and health-care in the first place?  Should workers be locked in to spending their whole careers with one company that will care for them all the way to the grave?  Should people live in fear of getting fired and losing their benefits when it is all but certain that employment in all but early-stage industries will decline over time?

Time to rethink the saftey net

The Chrysler and GM situations are this broken system playing out to the extreme.  Back in the day, the unions would threaten to strike for more pay.  Management would kick the can down the road by offering unaffordable retirement promises that would blow up on someone else's watch.  (Not unlike what Congress does with Social Security and Medicare.)  The companies support hundreds of thousands of retirees when they have tens of thousands of employees.  They have traditionally run at overly high levels of production just to support the huge number of obligations they have accrued to employees and dealers.  Today the system has finally blown up.

From the auto manufacturers down to the corner deli, the system makes no sense.  Employees should either be able to shop for their own benefits or the government should provide them.  Ideally, in my view, individuals would shop for benefits from providers that receive strong government oversight.  Either way, the last place employees should be forced to look is to their employer, who is an inherently unstable entity.  Employers get acquired, go bankrupt, and lay people off all the time.  Its hard enough for companies to compete just to survive in the marketplace, let alone to be forced to be in the health care and money management businesses as well.

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