In Praise of the US Auto Industry

21 November 2008 at 10:00 am Peter G. Klein 14 comments

| Peter Klein |

The proposed bailout of GM, Ford, and Chrysler overlooks an important fact. The US has one of the most vibrant, dynamic, and efficient automobile industries in the world. It produces several million cars, trucks, and SUVs per year, employing (in 2006) 402,800 Americans at an average salary of $63,358. That’s vehicle assembly alone; the rest of the supply chain employs even more people and generates more income. It’s an industry to be proud of. Its products are among the best in the world. Their names are Toyota, Honda, Nissan, BMW, Mercedes, Hyundai, Mazda, Mitsubishi, and Subaru.

Oh, yes, there’s also a legacy industry, based in Detroit, but it’s rapidly, and thankfully, going the way of the horse-and-buggy business.

I pulled these numbers from Matthew Slaughter’s fine piece in yesterday’s WSJ, “An Auto Bailout Would Be Terrible for Free Trade,” which points out that the US is one of the the world’s largest recipient of Foreign Direct Investment and that an auto industry bailout would surely reduce the flow of FDI, at the expense of the US economy. “Ironically, proponents of a bailout say saving Detroit is necessary to protect the U.S. manufacturing base. But too many such bailouts could erode the number of manufacturers willing to invest here.” Bailouts may also spur retaliatory actions by governments in US export markets, doing further damage to free trade. In short, what the Big Three and their supporters want is the most crass form of protectionism, a blunt demand that US taxpayers, consumers, and producers fork over the cash, now and in the future, to prop up an inefficient, failing industry.

NB: In 2001 I was part of a delegation of US officials visiting Singapore in advance of negotiations over a possible bilateral free trade agreement. The issue was Singapore’s Government-Linked Enterprises (GLCs), nominally private firms partially owned by the Singaporean government. Did these links constitute a trade barrier, putting US firms doing business in Singapore at a competitive disadvantage? We interviewed US executives based in Singapore and learned that the government did not seem to offer the GLCs special favors in input or output markets (though they did benefit from a lower cost of capital). Anyway, as I read Slaughter’s piece I imagined myself as a Singaporean official visiting the US, interviewing foreign executives in the financial-services and, perhaps, automobile industries, asking if they thought US companies got special government protection. To ask this question is to answer it.

Entry filed under: - Klein -, Bailout / Financial Crisis, Business/Economic History, Public Policy / Political Economy.

Entrepreneurship Links Education Quote of the Day

14 Comments Add your own

1. Rafe Champion | 22 November 2008 at 10:52 pm

A few comments on a local blog.

Why bail out Ford, GMH and Chrysler?
2. jonathon | 24 November 2008 at 8:39 pm

Isn’t this an argument for foreign countries and or the auto makers themselves to pitch in on any big 4 bailout?
3. Encinoman | 24 November 2008 at 8:48 pm

If you want to say sayonara to the U.S. industrial base and the cars (and especially trucks) America needs to go to work, as well as the workers, you’re a bigger tool than I thought.
4. Peter Klein | 24 November 2008 at 10:22 pm

Encinoman, you forgot the part about me hating America!
5. Fluid Imagination » Bailout Who For What Again? | 25 November 2008 at 9:51 am

[…] Organization & Market’s In Praise of the US Auto Industry: “The proposed bailout of GM, Ford, and Chrysler overlooks an important fact. The US has one […]
6. James | 25 November 2008 at 10:07 am

You must hate America :)
7. Chad Lindstrom | 25 November 2008 at 10:30 am

Protectionism… this brings up an excellent point.

The US has a history of retaliating to those that offer any apparent or assumed aid that would prove helpful and thus create an unfair competitive advantage.

Example? Softwood Lumber between US and Canada. There was much debate over what or if Canada was subsidizing it’s (already profitable) lumber mills. Making it difficult for the US mills to produce or sell at the same rate.

Sometimes it just comes down to better business planning and resource management (and often a better product). And if you don’t have that, you lose to your competitor. Which is precisely what we’ve seen with GM vs Toyota.

If the big 3 are that poor in business planning and execution, then let them stand (or fall) on their own two feet. Otherwise, risk the wrath of global tariffs when GM|Chrysler|Ford exports their product.
8. Ajax Girl » Blog Archive » QUOTE: The proposed bailout of GM, Ford, and Chrysler | 25 November 2008 at 10:46 am

[…] —Peter Klein (via Andrew Sullivan) […]
9. Tony | 25 November 2008 at 5:31 pm

Very interesting post. Puts into concrete words a sliver of a thought that was bouncing through my head these last several weeks. The big three don’t make horrendous cars, but taking away the natural incentive to compete with the foreign companies isn’t going to improve the quality of their products.
10. more on the auto industry from peter klein « orgtheory.net | 25 November 2008 at 11:34 pm

[…] a comment » Our evil twin, Organizations and Markets, has a post on the auto industry that resonates with what I wrote on Monday: The proposed bailout of GM, Ford, and Chrysler […]
11. Michael Shettig | 25 November 2008 at 11:53 pm

The big 3 are requesting a loan, not bailout. Let the government work with them to keep these jobs alive. GM has stated recently that they are working with their labor unions to reduce their hourly rate to be more in tune with the foreign competitors.
We need to keep jobs in America so that we have an economical base to purchase goods and services. Where do all of these people ( 3 million ) go to work if we let the big 3 fail?
12. V. Jones | 28 November 2008 at 11:51 am

Has anybody, I mean a single economist, actually run the numbers? They must not have because the case FOR an Auto bailout is east to ‘see’. An estimated 2.5 million people are involved. Estimate an ultraconservative average salary of $10 per hour; $20k per year; $1300 per year in taxes paid by each (single, 20k-5400std deduction-3400 personal exemption equals 11250 taxable and yields $1300 in taxes); yielding total federal revenues of $3.25 billion annually; $25 billion bailout would be paid for in federal revenues in 7.7 years. This is a return of over 9%. In this case it is ‘cheaper to keep her’. Anyone who argues otherwise is a moron! Drive your jap car to the unemployment office-idiots!
13. Ty Mackey | 28 November 2008 at 5:45 pm

VJones– Your numbers assume that these 2.5 million people never work again. If they get other jobs at the same wage, they still pay the same taxes. Of course, if they make less at their new jobs, then they will pay less taxes…

Anyone who disagrees with me is a moron and possibly an unamerican tool as well.
14. Peter Klein | 1 December 2008 at 9:53 am

Thanks Ty. I should warn you, however, that I’ve gotten a series of harassing emails from this Mr. Jones, accusing me of ignorance, short-sightedness, and worst of all, “driving an import.” Oh, well, occupational hazard.