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civitas

Government Failure vs. Market Failure

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Last night I was involved in a small group discussion regarding the American automotive industry. A major parts supplier said that there are 100-150 parts suppliers that are close to bankrupt and are getting life-support from the OEM manufacturers (they would fail without OEM financial support). Most of these companies are in Michigan. These manufacturers are forced to help these companies because they cannot afford the failure of a parts supplier and especially so with just-in-time delivery practices. The loss of one part can shut down the plant. These struggling suppliers have hundreds of other companies that are dependent on their success.

Chrysler may be for sale soon and Ford is in deep trouble. GM struggles with the rest of them and union issues prevent successful foreign manufacturers from having much interest in Michigan production facilities. Michigan is, therefore, deeply dependent on the success of the American auto industry.

The Brookings Institute has just published a new study titled, "Government Failure versus Market Failure - Microeconomics Policy Research and Government Performance." Their web site description says, "Markets "fail" when it is possible to make one person better off without making someone else worse off, thus indicating some degree of inefficiency. In economics parlance, Pareto optimality has not been achieved. On the other hand, governments "fail" when an economic intervention proves to be unwarranted, either because markets are performing adequately or public policy does not correct a market failure efficiently. In such cases, government intervention may actually exacerbate a problem or produce unintended negative results. Winston concludes that the cost of government failure may actually be considerably greater than the cost of market failure: "My search of the evidence is not limited to policy failures. I will report success stories, but few of them emerged." Government failure may result in missed opportunities, wasted resources, and waning public support."

By their definition, the failure of Ford would not be a global market failure because other companies would benefit. It may, however, be a Michigan market failure. Government will and should attempt to intervene, but does so at the risk of failure that "may actually be considerably greater than the cost of market failure."

I came away from the discussion last night very concerned for the economic future of Michigan. This is more critical than I ever imagined. Someone will be elected governor soon and will be looked at for leadership in this area. Can government help without making things worse? In the big picture, should an obsolete production system be allowed to continue?

The only good news last night was the suggestion that GM is so big that, if it is dying, it will take it forever to actually die. Doesn't anyone have a more promising perspective?

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What a great post! Thank you for a diversion of reading about our horrible Gov race.

I have frequent talks and discussions with a growing number of people that feel for the big 3 to actually get better, they ultimately are going to have to fully implode first so that the business model literally can be re-written. I fall on the side that poor management, design and labor agreements are at the "ROOT CAUSE" of their sickness; therefore, we might need to let the market flush them out so they can start over.

Again, great post Civitas, I would love to learn more about others thoughts.

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Some automotive suppliers are given life support, but the ones that are not on the verge of bankruptcy are hammered for cost concessions and often get driven towards bankruptcy. So they end up needing life support as well.

The Big Three (now starting to be called the Detroit Three with their market share whittling away) have a health care cost/burden on the order of $1000 more per vehicle than their competitors. So they look to suppliers to make up for that disadvantage.

I think anything that can be done to diversify the economy and increasing a skilled workforce to match is a good thing.

UPDATE: Here is the depressing article on the cost of health care for General Motors: Detroit News: Stranglehold

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Some automotive suppliers are given life support, but the ones that are not on the verge of bankruptcy are hammered for cost concessions and often get driven towards bankruptcy. So they end up needing life support as well.

The Big Three (now starting to be called the Detroit Three with their market share whittling away) have a health care cost/burden on the order of $1000 more per vehicle than their competitors. So they look to suppliers to make up for that disadvantage.

I think anything that can be done to diversify the economy and increasing a skilled workforce to match is a good thing.

UPDATE: Here is the depressing article on the cost of health care for General Motors: Detroit News: Stranglehold

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Couple of thoughts

1. Our "Health Care System" is not what has caused them to become a medical office/pharmacy company who makes and sells cars on the side to fund the primary core business of providing employee health benefits. It was years and years of systemic management and labor not having the vision or staying power to say "no more". I completely put this at the feet of the bargaining players at each and every contract negotiations. And I do mean BOTH management and labor. This is a primary reason why I personally would be against a government intervention for the auto industry. The market MUST be allowed to work and the model re-done.

2. Lets ponder the "origin" of health benefits. They used to be just that - a benefit employers offered to attract and retain great workers. IMHO, somewhere it moved from being a "benefit" to a expectation or right. It would be one heck of a market correction and not without pain, but what if we drew a line in the sand somewhere and companies made the decision to put all efforts into producing/selling their prospective wigits and GOT OUT OF THE HEALTH CARE business? Would the market not be allowed to work then? I want to point out that I KNOW this is way more complicated, but we have got to start somewhere.

3. Finally, I truly have never understood why the UAW bashes government that we need universal health care? If we moved to universal health care, would that not remove one of their biggest bargaining chips? Again, I never have figured out why they would support everyone getting equal benefits.

Hats off again too you Civitas for a great debate!

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Couple of thoughts

2. Lets ponder the "origin" of health benefits. They used to be just that - a benefit employers offered to attract and retain great workers. IMHO, somewhere it moved from being a "benefit" to a expectation or right. It would be one heck of a market correction and not without pain, but what if we drew a line in the sand somewhere and companies made the decision to put all efforts into producing/selling their prospective wigits and GOT OUT OF THE HEALTH CARE business? Would the market not be allowed to work then? I want to point out that I KNOW this is way more complicated, but we have got to start somewhere.

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Couple of thoughts

Lets ponder the "origin" of health benefits. They used to be just that - a benefit employers offered to attract and retain great workers. IMHO, somewhere it moved from being a "benefit" to a expectation or right. It would be one heck of a market correction and not without pain, but what if we drew a line in the sand somewhere and companies made the decision to put all efforts into producing/selling their prospective wigits and GOT OUT OF THE HEALTH CARE business?

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Couple of thoughts

2. Lets ponder the "origin" of health benefits? They used to be just that - a benefit employers offered to attract and retain great workers. IMHO, somewhere it moved from being a "benefit" to a expectation or right. It would be one heck of a market correction and not without pain, but what if we drew a line in the sand somewhere and companies made the decision to put all efforts into producing/selling their prospective wigits and GOT OUT OF THE HEALTH CARE business? Would the market not be allowed to work then? I want to point out that I KNOW this is way more complicated, but we have got to start somewhere.

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Why not look at the healthcare industiry itself? The reason workers want healthcare benefits is because the cost of healthcare is rediculously expencive. If a family lacking health care insurance has a major medical emergancy, chances are good they will end up in bankruptcy court or paying expencive medical bills for years to come. Even a family with health care benefits is not amune to this scenerio. On the employer's side, the big three in this case, costs are mounting big time and thus placing them at a disadvantage campared to foreign auto makers when it comes to competing in a the cut throat auto industry. Some preach universal health care as a cure all. That's a nice fairytale. But again the rising cost of healthcare would kill such fancible ideas in a heartbeat and drag state and federal budgets into red ink in quick order. The way I see it, the soaring cost of healthcare and the underlaying cause, what ever that may be, is to be blamed and dealth with.

Why does healthcare have to be so expencive? One answer is that it costs providers big time to have the latest and greatest medicines and technologies. It also costs to have scienctists looking for the next big cure. Thoses things are great to have. But instead of searching for the next big break through why not invest some time and energy on making what we got now more affordable. How can the cost of medicine be reduced? How can major surgery be made affordable? What kind of financial plans can be implimented to enable individuals and families to pay off medical bills without compramising quality of life? Inshort how can healthcare be made affordable to the masses, employers, and government? Otherwise what good is all of the wonderful tachnology and science going into our healthcare system if nobody can afford to be healed and mended by it?

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healthcare is so expensive because the govt has their destructive, meddling hands in it.

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a market will become less efficient (and eventually fail) when more and more restrictions, tariffs, or laws are placed on them. Can you think of a market with more intervention then medicene. Doctors are afraid to do medicene because they will be sued, cheaper drugs cannot be imported, and competition restricted, allowing hospitals to charge whatever they want and getting it.

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While that's true, and I would generally agree with a Laissez-faire economic policy, I would argue that a lot of those regulations are in place for a good reason: they deal with peoples' lives! There are instances where government regulation is necessary because the free market will fail. In the rush to bring new products to market and beat the competition safety would take a back seat. This is not only true with drugs, but with equipment and the software that runs it.

You could argue that the free market would support the safer products and companies, but you'd be wrong. :)

-nb

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It only takes one bad company ruin it for the rest of us. Public oversight is necessary for some things. Perhaps there are ways red tape and unnecessary regulations could be cut, but I'd be careful. Usually there was a reason regulations were put in place in the first place. Maybe some didn't achieve the desired effect or solved a problem that didn't exist. It would make sense to take a cautious approach.

-nb

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If one fails, they both fail. The key is for the public sector and the private sector to work in unison. However right now, Government over regulates and sometimes over compensates the some market sectors. Government needs to reduce many of the unnecessary regulations (such as price caps and minimum wedge) and let the market do its thing.

The minimum wage reduces productivity or increases prices to compensate for lost revenue. A price ceiling limits production because of lost revenue and limited available gains. In both cases it is a government-control shift in the equilibrium point to a higher price or reduced productivity which results in less consumer spending. This hurts or limits the given market.

Markets fail when government gets too involved. But governments fail when markets fail.

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It only takes one bad company ruin it for the rest of us. Public oversight is necessary for some things. Perhaps there are ways red tape and unnecessary regulations could be cut, but I'd be careful. Usually there was a reason regulations were put in place in the first place. Maybe some didn't achieve the desired effect or solved a problem that didn't exist. It would make sense to take a cautious approach.

-nb

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which goes back to the point, the cautious approach is the expensive one

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Interestingly, the big 3 are largely responsible for the supplier issues. Between the auction system they often use to get low bids on parts to simply dictating that suppliers have to charge prices where they have little or no margins. When these suppliers are going full speed they can make a 3 or 4 percent margin work, but when auto makers cut production, and hense the need for parts, the ripple effect is that those minimal margins now don't cover overhead. I know a few companies that have completely dropped contracts with GM because they would barely break even if they aggreed to GM's terms. From what I've seen, the big 3 have been unwilling to stand up to their unions at contract time out of fear of what a strike would do to them and then simply pass on these added costs to their suppliers. Kind of ironic that they are now supplimenting the companies that they have low-balled with unrealistic contracts for years. In simple terms, they've been robbing Peter to pay Paul.

Compounding the issue was a change in accounting rules related to accounts receivable and the poor credit ratings of GM and Ford which dealt a huge blow to suppliers with their banks. This happening at the exact same time auto makers cut back their production put everyone on the edge.

How do u fix it? It has already started with these buyouts that are in the news. Thinning out the active workforce and eliminating all the layed off workers that are drawing huge unemployment suppliments and full health care for basicly doing nothing should help a lot. If they can get their credit ratings respectable again and do a better job of negotiating the union contracts next summer it should all work out. The only role govt has in this is related to health care and this would obviously help all of us. God only knows the right direction to take on that issue though.

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There is a necessity to preserve and protect the American public against harm -- after all it's the protection that will preserve the market. If there was a blatant disregard for the safety of the market, it would eventually collapse. It goes back to that idea that too much of one thing... It goes the other way too.

It's obvious that in some of these discussions ideology transcends into economic theory. One believes Unions are the protectors of economic starvation while the other believes government is the way to prosperity. I'm guessing it's a little bit of both. That's just what my gut tells me.

I might be wrong, but when looking at forces of perceived Good and Bad I equate that with a two cylinder engine. You have one piston in pull and one in push -- just let them be. It's about that delicate balance of two forces that keeps the things we thrive on "running." You can't blame economic disparities solely on Unions, nor can you simply blame them on government control.

One fails when one overcomes the other, no matter which side. Anyone agree to this effect?

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There is a necessity to preserve and protect the American public against harm -- after all it's the protection that will preserve the market. If there was a blatant disregard for the safety of the market, it would eventually collapse. It goes back to that idea that too much of one thing... It goes the other way too.

It's obvious that in some of these discussions ideology transcends into economic theory. One believes Unions are the protectors of economic starvation while the other believes government is the way to prosperity. I'm guessing it's a little bit of both. That's just what my gut tells me.

I might be wrong, but when looking at forces of perceived Good and Bad I equate that with a two cylinder engine. You have one piston in pull and one in push -- just let them be. It's about that delicate balance of two forces that keeps the things we thrive on "running." You can't blame economic disparities solely on Unions, nor can you simply blame them on government control.

One fails when one overcomes the other, no matter which side. Anyone agree to this effect?

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