I just watched the webcast of Paul Krugman’s Nobel Prize lecture (slides here). In it, he laid out his theories of economic geography, which help explain why industries tend to cluster in certain geographical locations.
He ended on a topical note: Detroit. The fact is, he said, that the world as described in his models — "one of circular logic and agglomeration" — actually peaked in the 1920s, at least in the US. Since then, the world has become increasingly classical, and while Krugman’s theories remain relevant, they’re not quite as relevant as they were.
Krugman didn’t go so far as to predict the (further) decline of Detroit, although he hardly needed to. But his theories do suggest what might be needed for Detroit to survive: specialization.
The old GM slogan of "a car for every purpose, a car for every pocketbook" can’t work any more. Back in the 1920s, or even the 1960s, making cars was itself a specialization. Cars were made in Detroit, carpets were made in Georgia, and the two would trade with each other. But now there are so many different types of car, and the global competition in the car industry is so fierce, that there’s no point in Detroit trying to do what it’s bad at.
Specialized car companies can be spectacularly successful: look at Porsche. But when Detroit tries to do that kind of thing, by, say, buying Aston Martin, it never seems to work. It’s just not what Detroit is good at.
What’s more, Detroit knows what it’s good at. For decades now it has railed against any Congressional attempts to mandate increasing fuel economy, and its single biggest success — the SUV — has been the vehicle which did an end-run round fuel-economy standards by classifying itself as a truck. If you try to force us to make more fuel-efficient cars, say the Big Three with monotonous regularity, we’ll lose money. We can’t do it. We don’t have the technology. (And please don’t notice that our European subsidiaries, such as Opel, seem to be very good at such things.)
Right now, the Big Three — Chrysler and GM especially — will say anything which will get them the money they need to avoid declaring bankruptcy. But their declarations that they’ve suddenly got religion when it comes to small, fuel-efficient cars ring hollow. What’s changed since they last protested that they were incapable of manufacturing such things? Why should we believe that Detroit will ever have any kind of comparitive advantage on that front?
Ironically the Big Three might be better off if they stuck to what they’re good at: gas guzzlers. Why is Ford the healthiest of the three? There’s one big reason: the F series pickup truck. And the brightest of GM’s dim bulbs is Cadillac, a marque which has never been known for its fuel economy.
Detroit knows that it needs to get smaller. If it’s going to downsize, it should stick to what it’s good at, rather than try to compete with Japanese and European manufacturers on turf it conceded to them decades ago.
Either that, or persuade the US authorities to adopt European safety standards, thereby allowing Detroit’s successful European models to simply be introduced directly to the US market. If Detroit is going to undergo wrenching reforms, Congress could at least help out a little on the regulatory front.