CREATIVE DESTRUCTION IN ACTION:

A Successful Turn: The U.S. auto industry is smaller but healthier. (Daniel Gross, Sept. 2, 2010, Slate)

Yes, all things being equal, we'd like Detroit to sell more cars because the industry creates a great deal of economic activity. But what good is selling 16 million cars if you're losing money on each one? What's the point of maintaining high production if the only way you can clear inventory is by extending credit on reckless terms and offering huge rebates? Has anybody noticed that Ford's stock today is much higher than it was in 2006 and 2007, when industry-wide sales were much higher? Here's a five-year chart of Ford's stock. In 2006, Ford had North American sales of 3.05 million but lost billions of dollars. Its North American sales fell to 2.89 million in 2007 and 2.33 million in 2008, and again to 1.96 million in 2009. And yet its profits, balance sheet, and stock have improved significantly.

With Ford's restructuring, and the bankruptcies of General Motors and Chrysler, the U.S. auto industry has shrunk and cut costs to the point at which it can make money on a smaller, more realistic number of sales. So far this year, auto sales have risen in spite of tighter credit, an absence of artificial government support and slack overall demand. They're being spurred by the demand that arises naturally from people who need and want to replace cars—not by the demand that arises artificially when lenders, dealers, manufacturers, and the government offer bribes. In large measure, the activity in the car market is mimicking that of the overall economy, one in which retail sales are rising even as credit card use declines and savings increase.