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US cars: are higher prices the answer?

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If you think you understand how the economic laws of supply and demand work, consider this: When the US auto industry posted its rebate program in early March, sales flourished. Then, when the industry reduced its cash-discount program, sales plummeted 17 percent. So what does industry leader General Motors do? It boostsm its price an overall average $351 per unit, or 3.5 percent , the fourth price hike on GM's 1981 model year cars. Every GM car will thus go up in cost by at least $100.

It does make one wonder whatever happened to the old free-market system.

The new GM rate hike, coming at a time when the industry is pressuring Washington to reduce Japanese imports, raises troubling questions about the ability of Detroit to show the leadership needed to restore its competitive primacy in the face of major challenges from overseas competitors -- and from a car-buying public shopping for the most fuel-efficient car at the best price.

That the industry is in trouble need hardly be recounted here. Suffice it to note that for at least 18 months now Detroit manufacturers have been economically pummeled, losing $4.2 billion in 1980 alone. While some car analysts believe that industry-giant GM will show a profit for the first quarter of 1981, the other auto manufacturers may well post losses.

For that reason the new deregulatory steps just announced by the Reagan administration should help ease some pressures on the industry as it goes forward with its multibillion-dollar retooling plans to convert from large to small cars. But the deregulatory steps (which will save the industry $1.4 billion in capital costs over the next five years) will not by themselves sell cars. Nor will they solve many of the deeper problems of the industry, including high wage scales and management costs in some firms.

The administration proposes easing or scrapping some 34 safety and air-quality regulations. This adds up to the first significant pullback from increasing regulation of the industry over the past decade and signals the Reagan administration's intent to let market forces, rather than the federal government, guide Detroit in its response to competition.


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