At the Mercy of the Big 3

The Wall Street Journal today is reporting that the government might take stakes in the Big 3 automakers, especially GM which has suffered the most since the financial crisis began. 

The auto industry would undergo a restructuring process akin to bankruptcy reorganization, only with fewer rigors and with the government, not a judge, in control, and with many associated political complications.

The program would be overseen by an official, tapped by President George W. Bush, whom congressional aides and lawmakers describe as an “auto czar.” This person would act as a kind of trustee with authority to bring together labor, management, creditors and parts suppliers to negotiate a restructuring plan. He or she also would be able to review any transaction or contract valued at more than $25 million.

“auto czar” is my favorite term from that entire quote – I think it captures beautifully just how unoriginal the government is at coming up with new euphemisms for corporate despot. 

Throughout all of this I have been absolutely opposed to the government helping the Big 3 in any way. However, I feel like there are at least SOME competent people in government, so I took it upon myself to find out why the auto industry might be worth saving after all.

I came across an article (The automobile industry and monetary policy: an international perspective) that articulated quite well the impact of the auto industry on the state of the national economy. 

The overall message of the article is that the auto industry, even if it accounts for just a few percent of overall GDP, has a disproportionate impact on the overall economy. Just look at a few of the statements from the article, specifically in reference to the economic contraction in the summer of 1993:

  • In fact, in terms of influencing changes in economic activity, few sectors, except perhaps housing, are a primary driver of economic activity to a greater extent than autos. The cyclical tendencies of the sector make autos a key indicator for turning points in the economy and other short-term developments in national activity.
  • the U.S. automotive sector directly contributes approximately 4 percent of total output as measured by gross domestic product (GDP). However, on a quarterly basis the sector can account for more than 40 percent of the change in GDP. The frequent changes in the industry affect many downstream industries and can influence national manufacturing, sometimes to an overwhelming extent.
  • The declines in shipments and industrial production of the motor vehicles and parts component of manufacturing were several times larger than the overall declines in manufacturing. Shipments of autos and parts were down 15.5 percent in July from the March peak — over five times the decline in total manufacturing shipments. Even though the auto industry accounts for slightly less than 10 percent of total shipments, the industry’s decline accounted (on a share-weighted basis) for half of the total decline in manufacturing shipments and for about 85 percent of the decline in durable goods manufacturing.

This is definitely compelling evidence that the auto industry has a much bigger impact on the overall manufacturing sector of the economy than it seems from just a cursory glance.

This is not so suggest that I support a bailout and de-facto nationalization of the industry. However, I can see a stronger case for justifying government intervention, since helping the auto industry means indirectly aiding the entire manufacturing industry, which is weak anyway.


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