The need for restructuring a company, an industry, or even an entire economy often exists before people wake up to it. It's easier, and cheaper, to muddle along and make incremental changes to try to deal with any problems that come up. And that approach can be successful for a period of time, sometimes quite a long period. Ultimately, however, if the company/industry/government leaders haven't had the foresight or courage to restructure in good times, a crisis will come along to force the issue.
That seems to be what's happened in a couple of cases before us now. In the financial sector, risk-taking got out of hand and finally collapsed last year, to the point where I don't believe anyone doubts we need thoroughgoing change in many aspects of our banking and loan sectors.
In the automotive industry, U.S. companies got stuck in a time warp, innovating piecemeal and grudgingly, while European or Japanese makers brought new more efficient features to market years, even decades, ahead of Detroit. In this sector too, the economic crisis has finally provided the impetus to restructure. Current efforts may bring that about, but will it be too late?
One of the reasons politicians rushed to "save" Chrysler and GM was ostensibly because it's important to preserve the American manufacturing base. I've tended to share that thinking. From my micro-perspective, if times are tough I might redo my deck myself, or put it off, rather than hiring it done; but if my refrigerator conks out, I can't put off replacing it, or just build my own. So it has always seemed to me that our economy should be better off, especially in times of a downturn, if we were domestically producing a physical "product" rather than just "services."
Ah, but maybe not. For years, economists haven't been particularly alarmed about the increasing share of U.S. GDP coming out of services. Virginia Postrel's column "Macroegonomics" in the April 2009 issue of The Atlantic provides a clue that perhaps I shouldn't be either. Postrel's main focus is on economic stability and the limits of economic policy, but in one paragraph she notes economic studies showing that durable goods are the most volatile segment of the economy, and services the most stable.
This seems counterintuitive to me, and I'm still not certain I buy it 100%, but here's the macro picture that Postrel paints: A small consumer cutback can mean a large cut in a manufacturer's sales. She posits a company with a fleet of 100 trucks, a couple of which need replacing; if the company decides to replace just one rather than two, it's a small percent of its fleet, but the decision is a 50% cut in the order the manufacturer gets. In fact, economists believe that the heavy proportion of services in our economy has actually cushioned the effects of the recession -- it could have been worse!
Which brings us finally to the restructuring of our economy as a whole. If this theory is correct, we may want to reconsider whether "saving" auto manufacture in the U.S. is the correct thing to do. Perhaps our focus should be on shifting even more toward services. The crisis hasn't forced us to think in these broader terms yet, though some signs of it exist in Obama's efforts to create "green" jobs. Nevertheless an article by James Fallows in the same issue of The Atlantic points out that China is using the current economic crisis to restructure its own economy toward higher-end production. We know the Chinese are making cars; could their thrust in that direction pre-doom the efforts we're making now to fix our automotive industry? The history in other areas of manufacturing isn't encouraging.
Incidentally, The Atlantic is an excellent magazine; I've been a subscriber for probably 40 years or more. You can subscribe too, via the link in the right-hand margin.
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