Economy

Bailout or Bust: How to Save the Big Three From Themselves

Letting Detroit's ailing auto makers fall makes economic sense, but can we afford the social costs?

The American automobile industry occupies a near-mythic status in the nation's cultural and economic imagination. President-elect Barack Obama echoes the sentiments of many when he says that Detroit is "the backbone of American manufacturing." If it is -- Detroit's economic importance is great but now occupies a lesser role than it did before it entered a slow-but-steady decline in the 1970s -- then it suffers from acute and advanced damage that will require major surgery. And like any major surgery, treating Detroit's malaise will be a complicated affair with no assurance of success. However, doing nothing may be worse, especially for the state of Michigan.

According to Bureau of Labor Statistics' figures for September 2008, Michigan's labor force was about 4.9 million, with about 4.5 million holding jobs. That's a significant decline from September 2007, when the labor force numbered just over 5 million, with 4.6 million employed. The state lost roughly 149,000 jobs in the period and saw unemployment rise from 7.3 percent to 8.7 percent, which is 2.2 points higher than the national average. The rate would have been even higher if people hadn't dropped out of the labor force altogether.

The Big Three trimmed thousands of jobs in the state during that period, which no doubt triggered additional job cuts among automotive subcontractors and suppliers, various retailers, and even homebuilders and home improvement firms. These job losses keep politicians, business leaders and citizens up late at night. As Michigan Gov. Jennifer Granholm recently quipped: "Forget 'Drill, baby, drill.' Here it's 'Jobs, baby, jobs.'"

All told, General Motors, Ford and Chrysler employ somewhere around 500,000 people, many of them outside Michigan. However, these figures underestimate the total employment impact, since at least 3 million Americans rely on the U.S. auto industry for their jobs, with the highest concentration in and around Michigan. The Center for Automotive Research calculates much higher estimates: about 7 million jobs directly and indirectly tied to the industry, with 2.5 million hanging in the balance in the event of a 50 percent contraction in output from the Big Three.

This brings us to a simple cost-benefit analysis: $25 billion in loans for the industry that will save millions of jobs and about $150 billion in economic activity in 2009 alone. So it's a no-brainer, right? Well, not exactly.

There is no guarantee that throwing money at Detroit will save these companies and the network of jobs that they sustain. Even if the companies do survive, we can almost certainly anticipate steep job losses anyway. Job losses will be increased if GM and Chrysler's parent company, Cerberus Capital Management, merge. But will cutting jobs now spare jobs in the long run? That question dominates all others in the conversation.

Focusing on jobs moves us from an argument about nostalgia for American manufacturing prowess and bailouts of large, and largely incompetent, firms to the more meaningful conversation about livelihoods. Doing so takes us beyond purely economic analysis, since the value of a job exceeds its economic value to individuals, their families and their communities. Livelihood includes paying for basics like food and shelter, but also touches upon important, if hard to measure, assets like one's sense of identity and the health of neighborhoods and towns.

Applying a cold, hard economic calculus would probably throw cold water on the idea of a bailout for Detroit. First, the companies may well be beyond hope. They have been slow to change, they repeat the same mistakes and they turn out products that too often do not compete successfully with imports. Quality, safety, durability and customer satisfaction numbers remain spotty. Moreover, the so-called "bridge" funding that Detroit hopes to receive may be a bridge to nowhere: It will take years to work off the debts that weigh down consumers and governments, which will constrain spending for several quarters, if not years.

Once we emerge from this hole, Americans may renounce our spendthrift ways, and that could leave the entire automobile market much smaller over time. In short, the demand side of the market may not rebound sufficiently to resuscitate Detroit. The supply side looks no better: Over time, Detroit will face tough competition on many fronts. Japanese, German, Korean -- and it had to happen -- Chinese and Indian automakers will battle American carmakers tooth and nail. Simply put, the amount of money that Detroit can earn over the next 10 years may not cover the "loans" they want from the Feds. Taxpayers will likely end up footing the bill.

But if Detroit doesn't get an infusion of cash, then what? The companies could declare bankruptcy, but so far they have stubbornly refused to consider that possibility -- with good reason. Market research shows that 80 percent of consumers will not buy cars from insolvent firms. Therefore, GM's leadership equates bankruptcy with liquidation. However, this view may well be somewhat overwrought. Bankruptcy would likely allow some leaner, meaner and more durable versions of GM and/or Ford to survive. (Chrysler looks like a dead duck; the only reason GM has any interest in the firm is its $11 billion cash stash.) Overcapacity could be pared back more rapidly under the watchful eye of bankruptcy courts, and the companies could shed various obligations. This bodes ill for livelihoods and communities and must be carefully managed to lessen the damage to both. However, while going the bankruptcy route may make short-term economic sense, it may be too high a price to pay in terms of the devastation it would inflict on jobs, families and communities.

So what to do? No shortage of ideas have floated through the media, the blogosphere (the Huffington Post has been especially active on the subject, including articles by Neil Young, GM family man Ricky van Veen and Raymond J. Learsy), broadcasters' letters' sections, and probably over many a kitchen table conversation, including my own, where friends engaged in a spirited examination of Detroit's tendency to confuse novelty -- releasing "new models" each year -- with genuine innovation.

First, let's put together a careful cost-benefit analysis. To begin with, Detroit must open its books to thorough scrutiny, and that includes the tight-lipped Cerberus. As a taxpayer, I'm sick and tired of the leap-before-you-look approach to taking action. I'm equally exasperated with Detroit's tired claim of "trust us, we're professionals" in demonstrating genuine recalcitrance to changing its organizational culture.

Second, we need to produce a no-holds-barred assessment of the managerial dysfunction at these firms and come to terms with what needs to be done to improve performance and change organizational cultures for the better. Given the track record of these firms, and their reaction to the bad news that immediately had them pulling back on innovation and new product development, I'm not sanguine about the quality or nimbleness of the current leadership. They have to go as part of this process.

Third, jettison utterly hopeless brands and initiatives like Hummer while focusing on integrating innovative ideas into GM's R&D, design and production systems.

Fourth, engage in a thoughtful analysis of what individuals, families and communities lose in an environment of sweeping job losses and what can be done to ease the pain. This is especially important in places like Michigan, which will suffer near-Great Depression levels of unemployment and disruption, at least in the short run.

Fifth, Detroit could become a public-private partnership built around encouraging innovative and viable ideas in transportation technology. This would allow the automakers to readily leverage the research going on in the United States on various fronts and to create systems for developing ideas into commercially viable packages and processes. Even if the Little Two lose some money, they will provide jobs and harness economic benefits that will accrue across the country and even the world.

Finally, if GM and Ford do go into bankruptcy, they probably need to be given some federal support in the form of debtor-in-financing, since financial markets will not back Detroit given the conditions of banks and the auto industry.

My instincts as an economist tell me to cut the Big Three loose, letting them go into bankruptcy so that "the market" can decide their fate, but my heart tells me that we must do something to assure that communities most dependent on the automotive industry and its jobs do not suffer as post-Katrina New Orleans -- or pre-Katrina New Orleans -- has. After all, that city suffered through a century of decline before its final humiliation and abandonment. Parts of Michigan have endured long-term decline as well, and this experiment in market adjustment has produced far too many losers to regard as anything like a successful treatment.

As a nation and as an economy, we probably can survive the loss of cities like Detroit and Flint, but letting that happen will likely bring on human losses that do not show up in economic statistics. As we decide the automobile industry's fate, we need to consider something else in this process: What kind of lives will we consign the people of Michigan to living? What kind of people have we become when we plan for, and perhaps execute, the demise of whole cities and even states? How can we prevent genuine harm from coming about and begin the healing process for those who have been and will continue to be displaced by the shrinking of the U.S. automobile industry? How can we, to borrow a sentiment from Albert Camus, strive our utmost to be healers?

 

Titus Levi, Ph.D., is an economist and media consultant. He is also an adjunct professor at the University of Southern California’s Annenberg School for Communications. He blogs at That's Capital.