Journalists have a tendency to present overly-simple explanations of current events that often turn out to be completely false as well. Part of this is due to journalists trying to present a clear, digestible story to readers, and part is due to the fact that most of them have no formal training or particular expertise on the subjects they write about. Case in point is Barry C. Lynn’s latest piece in The American Prospect, which alleges that concentration of the auto parts manufacturing sector was primarily responsible for Detroit’s current financial woes. Lynn is perhaps best known for authoring the anti-free trade book End of the Line: The Rise and Coming Fall of the Global Corporation, which revolved around several flawed theses, including that historic U.S. trade protectionism was designed to prevent global economic shocks (it wasn’t and it didn’t). A sample:
In the case of our automotive industry — and most of the complex industrial activities where we have seen bottom-up monopolization — we can choose between two ways of making these systems once again financially and physically stable.
One is to treat these industries as the semi-monopolized utilities they now are and create a single sovereign body to regulate them from the top down, in a way that ensures their physical and financial stability. Such a regulator can be public (the government) or it can be private (a cartel of leading firms tasked with ensuring that all players share all costs fairly).
The alternative is to reform the various legal regimes (including trade and corporate governance as well as antitrust) that determine how corporate managers structure the industrial systems on which we depend, in order to ensure real “competition” both among giant lead firms like Ford and Toyota and among the companies that manufacture components for them. The immediate goal would be to guarantee that no group, either a private business corporation or a nation state, can ever seize control of any industrial activity on which we depend, no matter how small. The natural byproduct of such a system would be redundancy and resiliency.
Nowhere does Lynn mention how consumers can benefit when firms take advantage of economies of scale, the unsustainable labor contracts endemic in the U.S. auto industry, increased barriers to entry resulting from government regulation, the steadily declining relevance of domestic industry concentration and antitrust law in a globalizing world; all things that should be addressed before tackling this complicated issue. Instead, he proposes “we” either create new stringent and arbitrary competition regulations that would likely drive more U.S. industry overseas, or attempt to implement an incredibly politically-infeasible and economically-disastrous trade regime.
Moreover, his flawed analysis ignores the historical correlation between monopoly/oligopoly industries and government protection (e.g., telecommunications and commercial air travel), that antitrust laws which penalize firms for efficiency gains are counterproductive (and just plain stupid), and that these firms rarely sustain their market power in the long-run without government protection.
Lynn also fails to note how difficult it is to determine the optimal level of competition within a given industry, let alone the global economy. Take, for example, an insurer, which requires a large risk pool to operate in an actuarially sound manner. Given that generating the initial financing for said pools is a significant natural barrier to entry, it follows that industry concentration would likely be higher than those industries with less entry friction. This determination would need to take place for every industry, and be constantly re-evaluated given market dynamics. Those who didn’t sleep through their introductory econ courses should see how ridiculous Lynn’s “solution” is.
Lynn does dance around an important point: that the Big 3 have been failing miserably at efficiently managing their production processes for decades. But how this suggests that the United States (and the rest of the world) should rewrite the law and increase protectionism for their benefit is beyond me.