Milton Friedman once said that regulations favor big businesses and put small businesses at a disadvantage. The theory goes that big businesses can afford the lawyers, accountants, and staff to manage complex regulations, as well as the lobbyists to influence regulators and other government bureaucrats, while small businesses and fledgling companies cannot. It should therefore be the case, that in the most heavily regulated industries, you will see some of the largest and most powerful companies.

Of course, large companies sometimes have advantages in other ways (industries with high startup costs, economies of scale, etc.) And also some might say that the regulations are put in place because the companies became too large. Nevertheless, it’s interesting to look at a list of the largest companies in 2008 (by revenue) in the U.S., and to see what industries they represent:

1. Wal-Mart – Retail
2. ExxonMobil – Energy/Oil
3. Chevron – Energy/Oil
4. General Motors – Automobiles
5. ConocoPhillips – Energy/Oil
6. General Electric – Congolmerate
7. Ford Motor – Automobiles
8. Citigroup – Banking
9. Bank of America – Banking
10. AT&T – Telecommunications

So in the top 10 we have companies representing banking, energy/oil, the auto industry, and telecom. Though I haven’t proved anything, I don’t think it’s a coincidence that these are some of the most heavily regulated industries in the country.

Another way of looking at is to look at the age of companies. The idea is that regulations would give the advantage to older, more entrenched corporations. That’s exactly what Brian Gongol has done. His data shows that corporations in countries with heavy regulations tend to be much older. Again, correlation doesn’t imply causation, but the data is interesting nonetheless.

So next time someone suggests that government somehow needs to restrain the size of banks, auto companies, or pharmaceutical companies, so that they don’t become too big (to fail) and powerful, think for a second that the reason those companies are so large may due to government involvement in the first place.

In 2007, General Motors and Toyota both sold the same number of automobiles, about 9.37 million each. But while Toyota’s net profit was about $14 billion, GM lost a jaw-dropping $39 billion. $39….b-b-b-billion! Many are asking the question – does GM need a government bailout, excuse me, a “bridge loan”, to keep it from failing? I disagree with the premise of this question – GM has already failed. Miserably.

It seems that President-elect Barack Obama is asking President Bush to provide further aid to the U.S. automakers.  It seems like the NY Times prefers this route too, because they have painted a bleak short-term picture of what were to happen if any one of the automakers fails. To do this they cited the “Center for Automotive Research”, which has strong connections to organized labor and the auto industry:

The major automakers — G.M., Ford and Chrysler — are each using up their cash at unsustainable rates. The Center for Automotive Research, which is based in Michigan and supported by the industry, released on Election Day an economic analysis of the impact of one or all of them failing. If the Big Three were to collapse, it said, that would cost at least three million jobs, counting autoworkers, suppliers and other businesses dependent on the companies, down to the hot-dog vendors and bartenders next door to their plants.

The center also concluded that the cost to local, state and federal governments would reach to as much as $156.4 billion over three years in lost taxes and higher outlays for things like unemployment and health care assistance. Separately, some economists say the demise of even one of the automakers could tip the current recession toward a depression.

But what about long-term? I hope President Bush will take a stand, and will not increase the aid to the automakers. It is actually the best thing to do to for the long-term future of the US auto industry. One of the Big Three needs to fail for the UAW to get the picture.

I’m a little bit incensed that the government is going to loan the U.S. auto industry $25 billion, and possibly more. I have always thought that these are poorly run companies that design lousy cars, or cars that were too big and fuel-inefficient, and as such they deserve to fail. But I also thought that because of the high labor cost brought about by the United Auto Workers (UAW) union, it was difficult for the U.S. auto companies to be as flexible as they needed to be.

I was recently speaking with a friend who argued that the big problem was management, that the executives at these companies were just plain dumb. It was hard to disagree with that, but after doing a little reading, I can’t really place that much blame on the executives. Ford, GM, and Chrysler have been shuffling through executives in recent years – could they really all be dumb?

It’s really a much more complicated issue than that, and it has to do with the UAW and the Corporate Average Fuel Economy (CAFE) standards. Let’s address the UAW. There are basically two auto industries operating in the U.S. There’s one in Detroit which includes GM, Ford, and Chrysler, where the workers are all UAW. Then there’s one in the southern U.S. which includes Honda, Toyota, and Hyundai. Their workers do not belong to a union and work predominantly for less money (although that is not always the case) and no pension benefits.

Now, the CAFE standard basically mandates that your entire fleet of domestic vehicles has a minimum fuel efficiency, or else you pay a fine based on how much you’re over that minimum. As a result of CAFE, the UAW, and low fuel prices, the U.S. automakers were basically forced to make more SUVs and trucks, because those vehicles have much higher margins, and are much more profitable – at least when they’re selling. But, to meet CAFE, the U.S. automakers also had to offer a line of much lower profit-margin fuel-efficient vehicles. In order to keep costs low, for years the companies skimped on styling, materials, and engineering, to the extent that they lose money on each and every fuel-efficient small and mid-size car they sell.

Instead of letting the free-market dictate the winners and losers in the auto industry, the U.S. government intervened, first through CAFE and now through a generous though not unprecedented lending program. The UAW has huge sway in Washington over our political leaders, and they have Barack Obama as an ally. President-elect Obama also supports the Employee Free Choice Act, which will make it easier for auto industry workers in the southern U.S. to unionize. He also wants to raise tariffs on cars imported from South Korea by renegotiating our trade pact with them. I fear the result of all this will be more expensive, lower-quality cars for the masses. But this isn’t going to hurt the rich, just the lower and middle-class.