Delayed Market Shifts

Conservative TreehouseFollowing major drops in the sedan sector of the U.S. automotive market, General Motors CEO Mary Barra announced plans to halt production next year at three assembly plants: Lordstown, Ohio; Hamtramck, Michigan; and Oshawa, Ontario. GM will fully stop production on several models assembled at those plants: Chevrolet Cruze, Cadillac CT6 and the Buick LaCrosse. [Not mentioned here, the Volt will also be canceled]

Why would GM be canceling a lot of its sedans now? Well, I remember a few articles last year about a massive glut of vehicles at dealers that just weren't selling. Manufacturers were making a ton of them and they weren't selling. This was causing some market distortions until the hurricane came in and made a lot of them insurance write-offs. But why would GM (and other manufacturers) be making lots of cars that weren't selling?

The government fuel economy standards set a target for MPG ratings across the entire fleet of vehicles.

If customers are buying big trucks, with low MPG, GM has to make a lot of sedans with high MPG to keep the average in compliance. Even if the sedans don't sell. Bonus points for making electric vehicles, which really pull down the fleet average.

Why would GM suddenly stop manufacturing sedans that they were having trouble selling?

Trump is changing the fuel economy regulations. In particular, he's freezing fuel economy standards at 2020. That means car manufacturers can keep their current models and mix if they want to, while taking the huge future increases in fuel economy mandated by the EPA under Obama off the table. This is more important than it seems, because there is a law of diminishing returns at work -- we've already got all the easy fuel economy gains to be had, and each additional gain comes at a higher and higher cost -- in effort, in lighter cars, in cars that don't perform as well, in cars that are less safe for passengers. Electric cars are a way around some of that, but they come with their own flaws. By removing future mandates that were effectively impossible to meet while making cars people wanted to buy, Trump allows the manufacturers to alter their future plans.

Is this good or bad for the economy? Obviously, it's bad for the specific people being laid off, and the community where factories are closing.

But for the economy as a whole, it's good. Why?

GM is no longer making cars people don't want.

They might become profitable (or more profitable, if they are already). They might increase production of cars (well, trucks) people do want. Different factories and locations, perhaps, but still new jobs. The people they let go will have some difficulty, but will likely find new jobs doing things people want more. Some of them may be with GM, making different vehicles. Some of them may not. I'm neither attacking nor defending GM for how they are handling this change. I'm just addressing the larger economic effects.

Fewer cars people don't want is a win.

This entry was published Thu Nov 29 08:47:19 CST 2018 by TriggerFinger and last updated 2018-11-26 17:31:44.0. [Tweet]

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