The U.S. auto industry

This symposium at the NYT asks if the U.S. needs an auto industry. Tyler Cowen points out that Japanese and Korean auto companies build cars here, and we are allowed to own stock in those "foreign" companies, so the idea of a "U.S. auto industry" is a little outdated.

Fine. But Cowen (like many of the other symposium participants) focuses so much on the "working-class jobs" side of things that he ignores another important question: why doesn't good high-end auto-industry work get done in the United States?

Look at the computer indstry. Computer hardware is invented in America, Japan, and Korea by Intel, HP, IBM, AMD, Samsung, Sony,Elpida, and some other companies; computers are designed in America, Japan, and Taiwan by Dell, HP, Toshiba, Lenovo, etc.; the components are built by Acer and a bunch of other Taiwanese firms, and the final package is assembled at factories in China, Malaysia, and Thailand. Notice that the really high-end stuff - innovation and design - is often done in America (with Japan a distant second). That high-end stuff, not surprisingly, gets the most money per person; that money is then pumped into our economy and circulates, helping people in all industries.

But for cars, it's a different story. Sure, we do lots of auto-related innovation and design here in the U.S. GM and Ford invent new stuff. But the really new stuff - hybrid engines, lightweight materials - is being invented in Japan. And if GM and Ford collapse, nearly all the innovation and design, good and bad, will be done in Japan (and a little in Germany and Korea). Our factory workers will build the cars, but Japanese high-end employees will be reaping the much bigger rewards.

One reason for this is government spending. Japan spends 3.6% of its GDP on research and development (we spend 2.1%). A lot of that is government spending. A lot of that is in the auto sector. R&D is largely a public good; innovations are eventually copied by rivals (especially domestic rivals), so government spending is often needed to make innovation worthwhile. Here in the U.S., Republican opposition to any kind of government spending hasn't helped. Public goods do exist.

A second problem has been the gross mismatch between U.S. consumer needs and world consumer needs. Due mostly to lax MPG standards and low gas taxes, Americans tend to drive gas-guzzling SUVs and trucks while people in other countries prefer compact sedans. That resulted in GM and Ford focusing their design efforts on making big tough-looking gas-hogs. But big tough-looking gas-hogs don't take as much technical know-how to make as a hybrid engine. And in the long run, America's peculiar needs will become more, not less similar to the rest of the world; rising gas prices will hit us harder because of our lower gas taxes, and we'll start buying more Priuses and fewer Avalanches. This is already happening in a big way, which is one reason our auto companies are collapsing as quickly as they are.

The point here is that bad government policy hamstrung the really high-end part of our auto industry. Stricter MPG standards, higher gas taxes, and more government money for research would have boosted our auto industry. But 30 years of Republican dominance blocked these policies.

Maybe that's not the reason Michigan and Ohio are trending Democratic, but it certainly should be.