Wealth of Nations January 2006

Ford's Rough Ride

In a couple of ways, government policies helped Ford's managers and unions make the mistakes they did.
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In most of Europe, when a big traditional manufacturer—a major employer, regarded within living memory as a national industrial champion—announces that it will close several factories and cut a quarter of its workforce, there is an outcry. If the announcement were to come just days before the country's leader made his big annual speech on the state of the nation, its timing would be seen as a gift to the political opposition and as an effort to force some kind of expensive, ill-judged policy in response. Such a response, in fact, would usually follow.

On Monday, Ford announced that it was closing seven plants and cutting its payroll by up to 30,000. It was no more than a middle-size story on the day, and its political implications are likely to be minimal. No connection has been drawn, so far as I know, with George W. Bush's forthcoming State of the Union message. There is no demand, no presumption, that he must address the issue—or even mention it, in fact. The president is quite likely to say, with little fear of the derision that would greet him in such circumstances in Europe, that the economy is actually performing well—as if Ford had never made its announcement. Democrats will challenge the claim that the economy is strong, of course ("What about stagnant living standards?" they will say); but they are not going to demand that Ford must be helped, as their counterparts in Europe would have done without hesitation.

Well, by most standards, especially in comparison with Europe, the American economy is performing well—and the reaction, or lack of it, to Ford's announcement shows why. In some ways, Ford, the archetypal American enterprise, is like a little corner of Europe, with intransigent unions keeping pay and benefits higher than the market will stand, undermining competitiveness, and, in the end, destroying jobs. And voters know this. They know that Ford's problems are almost entirely self-inflicted, with the blame shared over the relevant time span between the unions and their ultimately unaffordable demands and the managers who acceded to them. So this is not a matter for the government.

Yes, like General Motors (which announced big cuts of its own just weeks ago), Ford is saddled with heavy "legacy costs" in the form of health and pension liabilities owed to past and present workers. But who agreed to those terms in the first place? And who demanded them of the company? Those costs have not been inflicted on the firm by globalization or some other sinister outside player, but by its own managers and by the workers' representatives. It cannot be anybody else's responsibility, least of all that of taxpayers at large, to spare the company and its people the consequences of those decisions. But, as I say, Americans know that.

Legacy costs, Americans also understand, are only one cause of Ford's difficulty. As the company more or less admits, it has made plenty of other mistakes as well, such as building cars that people do not especially want to buy. "We've grown too conservative, too hierarchical, too resistant to change and new ideas; and frankly, true accountability has not been our strong suit," investors were told this week by Mark Fields, the executive who devised the company's North American restructuring plan.

American consumers are aware, as well, that the cars they prefer to those made by Ford or GM are mostly built by American workers in the United States in domestic plants operated by Toyota and other successful, supposedly foreign, companies. Lately, Ford has been beaten not by foreign competition but by the domestic kind.

America's un-European willingness to accept the market test—that firms must beat the competition or go under—has a lot to do with the remarkable vitality of its economy. And yet, I did just say that Ford's problems are almost entirely self-inflicted.

In a couple of ways, even if at the margin, the unintended result of government policy was to help Ford's managers and unions make the mistakes they did—and to worsen the consequences of those errors, once made. Coincidentally, the policies in question are more than likely going to be featured in the State of the Union address. But you can bet that the right connection will not be made and that no conclusions (or else the wrong conclusions) for policy will be drawn.

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