Detroit Auto Industry Problems & Austrian Business Cycle Theory
Even so, the auto industry has also declined sharply. Can this be explained with Austrian theory? Perhaps not with the classic formulations of it, but it can be explained with it through an updated version that applies the logic inherent in the theory on other areas. The distinction between capital goods and consumer goods is in fact not as sharp as many people think. There are some goods which can clearly be classified as consumer goods, such as say fresh fruits which must be more or less immediately consumed, and others which are clearly capital goods such as industrial robots. But for other goods, it is not as obvious whether they should be classified as capital goods or consumer goods. If you for example build a new store, then this will enable consumption of the goods sold in it as soon as it is ready, yet it is considered a investment good. Similarly, houses are considered investment goods even though the purpose of them is to enable people to enjoy housing services. What about the products of GM and Ford, cars, then? They are considered consumer goods even though most of the value in them won't be consumed during the first month, quarter or even year after they're bought. Most cars last for decades, and so they are arguably to some extent capital goods. This is even more evident if you consider that cars are often used for job-related purposes.
And so since cars can be considered as a form of capital goods, the logic inherent in the Austrian business cycle theory that capital goods should be especially cyclical can be applied to the auto industry. As car buyers suffer interest costs (either direct interest costs if they borrow the money, or the opportunity cost if they buy it with their own money), an artificial lowering of interest rates should result in an artificial boom in the auto industry, which will then turn into a bust. And so, the problems of the Detroit auto makers are in fact very much consistent with what the Austrian business cycle theory would predict. Note that this doesn't just apply to cars, it applies to all durable consumer goods.
If you look at the historical data, you can indeed see that durable consumer goods have in fact fallen as a percentage of GDP during recessions and risen during booms. For example between 1972 and 1975, durable consumer goods fell as a percentage of GDP from 8.9% to 8.1%. Between 1979 and 1982, durable consumer goods fell from 8.4% to 7.4%. Between 1989 and 1991 it fell from 8.6% to 7.6%. The 2001 recession saw a very modest decline from 8.8% in 1999 to just 8.7% in 2001, but in the current recession we have seen it decline from 7.8% in Q3 2007 to 7.1% in Q3 2008. A further decline in the fourth quarter seems almost certain.
So to summarize, despite the fact that cars are considered consumer goods, the problems of the car industry are very consistent with Austrian business cycle theory. Another conclusion that can be drawn is that the cyclical fluctuation in savings is even greater than the usual measures of national savings. Since consumers during booms buy durable goods which are consumed during recessions too, the fluctuation in consumption is even smaller than official statistics suggest. But since this has no implication for the value of production, a smaller cyclical fluctuation in consumption implies a greater cyclical fluctuation in savings.