MEDIA CONTACT: Dr. Mike Walden, 919.515.4671 or michael_walden@ncsu.edu

YOU DECIDE: Does anything stay the same in economics?

By Dr. Mike Walden
North Carolina Cooperative Extension Service

I have to admit, when I heard about General Motors' decision to close several factories and lay off 30,000 workers, I was sad. I grew up in the 1950s when GM and other U.S. manufacturers dominated the auto market. I remember anxiously awaiting the debut of GM's new cars each fall. I would memorize the styles and models and could recall the information for years to come.

For decades, GM symbolized the U.S. economy. In the 1950s, GM President Charles Wilson was reported to have said, "What's good for GM is good for America." Although his actual statement was "…what was good for the country was good for GM, and vice-versa", the point is that the auto industry was one of the largest and most successful economic entities in the country. Almost 10 percent of the national economy was directly or indirectly tied to the auto industry, and American-made cars were the standard around the world.

It's different today. The stock market barely shrugged on the day of GM's announcement. The simple reason is that the domestic auto industry isn't nearly as important as it once was. Its contribution to the total economy is only half as large as in the 1950s. And in only a few years, a foreign owned producer — Toyota — will likely overtake GM as the largest seller of vehicles in the U.S.

How did this happen? How is it that the once mighty giant GM has come to the edge of bankruptcy?

Many answers have been offered. Unsustainable labor contracts, more generous than for many other auto manufacturers, are cited as one reason. Also, GM produced inadequate vehicle models that didn't successfully adapt to the quick-changing marketplace of consumer preferences. That was another problem.

But behind GM's travails is a bigger idea, an idea that economists say really dictates the ebb and flow of the business world. It's the idea that says nothing really stays the same; there's always change on-going. Economists have a fancy name for the idea — creative destruction .

Think of the economy as a balloon. A balloon that expands evenly on all sides as it is inflated would represent an economy in which all businesses grow over time, and no firm recedes or goes bankrupt. However, a balloon that is pushed to expand on some sides while other sides contract represents creative destruction. Creative destruction means constant churning goes on in the economy. Certain businesses are expanding and new ones are created at the same time that other businesses are ending or downsizing.

In short, the economic world moves in a series of several steps forward and some steps back. The new replaces the old. Cars took the place of wagons, personal computers ousted typewriters, CDs replaced tapes, on-line shopping takes sales from "bricks and mortar" shopping, and the list goes on and on. Clearly, investors and workers associated with the new companies and technologies gain at the expense of those tied to the old way of doing things.

And who dictates the change that comes with creative destruction? Well, it's you and me: consumers. We decide who wins and who loses because we make the purchasing decisions. We compare alternative products and decide which ones best fit our needs and wallet. In the auto market, foreign manufacturers' reputations for quality and performance have led many American consumers to favor their products over those of domestic competitors.

So it shouldn't be surprising that the U.S. auto industry is undergoing change; most industries do. There's also a geographic component to this change, as both U.S. and foreign manufacturers have chosen to build new production facilities in the South. The Midwest's loss may be the South's gain.

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Dr. Mike Walden is a William Neal Reynolds Professor and extension
economist in the Department of Agricultural and Resource Economics of North
Carolina State University's College of Agriculture and Life Sciences. He
teaches and writes on personal finance, economic outlook and public policy.
His You Decide column is provided every two weeks by the Department of
Communication Services. Earlier You Decide columns are available on the Web
at http://www.cals.ncsu.edu/agcomm/writing/walden/decide.htm
Related audio files are at
http://www.ces.ncsu.edu/depts/agcomm/writing/walden/index.html