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Friday, October 2, 2009

General Motors on Econtalk

So I'm months behind on my Econtalk podcasts. Also, sometimes it's hard to stomach the things my friend Russ says. For example, he invited a Wired writer to comment on his time working at Wal-Mart. The writer went to Wal-Mart to debunk a claim made by another reporter about working at Wal-Mart. Full disclosure: I have read neither the article on which the podcast was based, nor the article which sparked the responsive article. Also, Wal-Mart isn't one of my issues. I think it's part of a larger problem of a petroleum based economy, whereby large supply chains can distribute goods at cheaper cost, but at an ultimate cost to the environment and community.

Anyway, my example is getting longwinded. I take issue with the podcast because it doesn't address the central problem of low wage workers. It's extremely difficult to get by at 30,000 a year. Nothing in the podcast even addressed this point, though the article on which it was based seemed to have been based on that supposition. Moreover, this guy at Wired, he worked at Wal-Mart for one week, than quit to write the article. One week?! One week?! That is the basis for this lengthy defense of Wal-Mart? I'm no enemy to the company, but clearly, this was not an indepth study. And it did not in anyway address the needs and lifestyles of low-wage workers! This is my problem with Econtalk. Very interesting stuff, but often incredibly myopic. (I know, I used the word in my last post , but it's just so goood!)

Anyway, this week was GM.

So we've all heard about how lousy GM's business model was, and how the corporate ideology was ancient and top-down. But they don't ever really talk about GM's legal troubles. So what follows was an email I sent to the gf, reproduced here with some edits.

So they're talking about franchising, and this was important because of what happened to GM over the summer. You recall how there were too many dealerships open to maintain profitability--and you could point them out! Two or three to a town sometimes, even across the street from one another. So there are very interesting franchising laws. Most franchise laws are state, or local law, and so they're made to protect the franchisee. So GM can't close a dealership that bears it's name (or any of it's brandnames) because they don't own the store, and it's illegal in 27 states to do so. So you might say, well, why can't they just cut the product line? Well, written into the franchise contract is a caveat that states, "the line must produce x amount each year."

On top of that, the franchisor also has to pay to advertise for that product. 10 or 20 years ago GM tried to close some of those duplicative dealerships, but they couldn't because of the contract provisions and statelaw. Russ Roberts then asked about the term on the franchise, and the answer, unbelievably, was that in most contracts, the franchisee is the only one who can void the contract unless the franchisor can show cause. Now the next question, I'm not sure I believe. Why does the franchisee have such stringent protections?

Because of the house of representatives. (I know you know this, but the house of reps is the people's house. And so it's mostly local money.) He then went on to make another point slightly off topic--the auto industry only has a few market participants. He even went so far as to call it a cartel (which I would agree with, but which is unusual to hear from a Chicago school economist--in my experience) and stated that cartel's are sluggish and don't respond to market pressure quickly--because they can make profits at much lower rates of demand than can participants in a perfectly free market.

Another facet of the business is this: If the dealers haven't been making any money for the last few years, or lets say that their flow of sales has dwindled to a bare trickle, they can attempt to make up the difference through extremely competitive sharklike tactics with their neighbors and their clients. Then the manufacturer goes into a feedback loop where they keep hearing about how lousy the sales service is--but by then it's too late, because they've already gotten a name for themselves through the shoddy dealings of the dealerships.

And of course, all this is the government's fault. That's what Russ would like to infer. Meaning the protections on the industry at large--and I think he's right to some extent. But that's where the myth of the free market comes to play. No industry is unregulated. The people have protections, and so do the companies. Does this create market inefficiencies? Damn straight--and that requires reform.

To some extent I think laws are cyclical. After a period of intense regulation, I think it's perfectly acceptable to repeal some of those laws. This allows a period of profit clearing, as well as a chance for market innovation. However, when the reigns get pulled out of the government's hands, the horse must be stopped before it runs the carriage off a cliff.

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