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Tuesday, July 20, 2010

Government Mandated Closing of Dealerships

As you probably already know, our government “strongly encouraged” General Motors and Chrysler Corp. to close over 2,000 car dealerships nationwide. South Florida was severely impacted by this as lots of Chrysler, Jeep, Dodge, Saturn, Pontiac, Hummer, Saab, and other GM and Chrysler stores were shut down or told they must by the end of this year.

Last Sunday, a report was released by the Special Inspector of the Troubled Asset Relief Program (TARP), Neil Barofsky, that said “tens of thousands of jobs were lost” as a result of closing over two thousand car dealerships. The report said, “It is not at all clear that the greatly accelerated pace of the dealership closings during one of the most severe economic downturns in our nation’s history was either necessary for the sake of the companies’ (GM and Chrysler) economic survival or prudent for the sake of the nation’s economic recovery”.

Now, my first question is why was it necessary for our government to conduct a study on whether or not closing over two thousand businesses nationwide would result in greater unemployment? My dealership employees 134 people and there are a lot of satellite businesses that rely on my business like parts suppliers, printing companies, janitorial services, etc. If I closed my dealership it would result in more than 134 people being unemployed. If you multiply that by 2,000 it results in at least 268,000 men and women without jobs. I wouldn’t have to conduct a study after I closed my car dealership to tell me what was going to happen to my employees.

Even now, the consequence of this mandate to close down 2,000+ car dealerships is not obvious to our government. The U.S. Treasury department in response to the results of this study said, they “strongly disagree” with the report’s conclusions. They go on to say that closing over 2,000 car dealerships “not only avoided a potentially catastrophic collapse” but also “saved hundreds of thousands of American jobs”. What I want to understand is how closing over 2,000 retail outlets for any product can help the manufacturer of that product. The more locations that a company can offer their product to the consumer, the more product they will sell. Starbucks is a great example of this. McDonalds is another.

Now remember that virtually all car dealerships are not owned by the manufacturers. They are owed by people like me or large companies like Auto Nation or Penske Automotive Group. Closing a retail outlet has very little short or intermediate term cost savings on the manufacturer, but it does reduce the number of cars it sells. There’s a good argument to be made for the negative long term impact of having too many retail outlets. Too many competitors can make it difficult for individual dealers to sell enough cars to maintain the necessary financial strength to compete effectively. The free marketplace tends to mitigate this negative effect because the stronger dealers will survive and the weaker perish. But in the short and intermediate term there was nothing to be gained by this government mandated closing of so many retail outlets for GM and Chrysler. And, it’s the short term that concerns us in this greatest recession since the Great Depression. In fact, this massive dealership closing is causing fewer GM and Chrysler products to be sold. Don’t you agree that McDonald’s would sell fewer hamburgers if it closed 2,000 franchises?

Now, everybody is talking about falling back into another recession. I can’t figure out how we can fall back into another recession when we haven’t come out of this one yet. Nationwide we’re still looking at 10% unemployment in round numbers. For a while everyone said that unemployment was a “trailing indicator”, meaning that everything was going fine and adding jobs would just happen last. Now the pundits are saying it’s not a lagging indicator but a “leading” indicator. That means that when people don’t have a job they don’t buy much. When the consumer stops spending, retail stores stop selling, and manufacturers stop making things.

The one thing that everybody can agree on is that unemployment is a very bad thing and for our government to have caused “tens thousands” of Americans to lose their jobs is also a very bad thing. The bottom line is that our government doesn’t know the first thing about how to run a private business and should keep its nose out.

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