November 18, 2008
Economics Department
If We're Going to Bail Out the Detroit Automakers...
In response to my brief hand-off to Moby Kip's post about why we shouldn't bailout the big three automakers, somebody calling himself an Authentic Connecticut Republican (I'm assuming they're rare there) posted a long pre-written screed, complete with bold text. I was about to delete it when I realized...it wasn't all as crazy as it looked.
Here we go:
While the sanity of blowing cash around and running the national debt up even further is questionable; it seems inevitable - so this time let's target unemployment, create AMERICAN jobs and pump up the economy all at one time.
"Creating jobs" always sounds good, but it's not that easy to do, and it's not really something the government should be trying to do. It's just not a good target for government efforts.
Consider the following:
Manufacturing costs of motor vehicles are 65% labor (i.e.: W-2 income), that's not all direct but due to suppliers. GM alone has over 1300 suppliers. (That's a lot of jobs!)
1 in 10 Americans makes all or part of their income due to the automobile industry.
Money turns over 5 times in a year.
Thus a vehicle with a manufacturing cost of 20K produces 13,500 in W-2 income which in turn becomes a total of 65K in 12 months due to the 5 turnovers. (This isn't magic, it's simply how the economy works.)
I've never understood how these "turnover" and "multipler" effects are supposed to work. They matter when you're managing the money supply---because a slowdown in turnovers is the same as a contraction of the money supply---but I don't understand why it matters where the money goes once the car is built.
The other point is that this kind of math can be done for every industry and company in the U.S. economy. Most of those aren't as big as the auto industry so "saving" them wouldn't help the economy as much, but then again they would also be a lot cheaper to save. Maybe we could save 50 or 100 smaller industries.
For that matter, why not leave the $25 billion in the pockets of the taxpayers? With 150 million people in the labor force, that leaves an extra $160 in everybody's pocket. Won't it turn over five times there too?
Our domestic car makers are saddled with legacy costs, most of which will reduce dramatically in 2010 due to contract changes. They need to survive to get there.
No they don't. The legacy costs also go away today if the automakers go bankrupt today.
Our own over-zealous government with a virtual alphabet soup of regulatory agencies has been no help either.
Foreign competitors have worked off-shore collectively to meet various US gov't. imposed emission and safety standards, thus dramatically reducing those R&D costs. American car companies are prohibited from that by our FTC.
If that's true, it sucks, but why does that mean they should they get my money?
Make no mistake; it's no surprise that once again government has been a major part of the problem.
Here's the solution.
Instead of either shipping cases of cash off to car makers; or sending us all another check:
Send out a voucher for say $1,000 good on a motor vehicle for the percentage of the vehicle that's domestic. (Civic = 70% Ford Explorer=80%)
Let those not interested in a new car sell or give away their vouchers (Ebay would be loaded with them in no time flat) and those that are so inclined can use as many as they can get their hands on up to the full MSRP of the vehicle.
I think that's...a very good idea.
I'd rather we don't bail out the carmakers, but if we're going to do it, this is a pretty good way. The domestic content requirements combined with tradability would mean that the carmakers still get the money, but the allocation among carmakers would still be driven by market forces.
The question of how to allocate the bailout money among the carmakers is a horrible problem that I haven't heard discussed much. I'm not sure that maximizing consumer value is the best approach, but I suspect it's better than whatever the folks in D.C. are planning. If they even tell us the plan.
2 Comments
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Thank you for your kind words.
"The other point is that this kind of math can be done for every industry and company in the U.S. economy. Most of those aren't as big as the auto industry so "saving" them wouldn't help the economy as much, but then again they would also be a lot cheaper to save"
The difference is the total amount of labor as a percentage of consumer dollars spent.
Fast food joints for example typically operate at 17 - 21% labor.
Certainly GM (etc. & et al) doesn't spend 65 cents on their manufacturing dollar on labor. That number is acquired only after factoring in suppliers to around tier 4 or 5 - and that alone is the only reason "saving" Detroit is worth considering.
Most domestic, and ironically many European (including many of those assembled on the other side of the Atlantic) vehicles include parts, systems and assemblies from up to 37 states. The OEM automobile part manufacturing trade is larger than most realize.
More parts that wind up within Bosch parts come out of Connecticut than anywhere else except Europe.
The suppliers of the "big 3" also supply parts for many captive imports (such as Hondas assembled in Ohio).
Bankruptcy of any of the Detroit based automakers could well doom many of these suppliers as well; the net result being a larger catastrophe than anyone wants to consider.
Forget our own ideology
We need to remember the fact that the Dems won and owe the UAW big time; so we might as well forget any of a series of other competing ideas and instead focus directly on how it should be accomplished with a maximum employment (thus positive economic) impact.
"I'd rather we don't bail out the car makers, but if we're going to do it, this is a pretty good way. The domestic content requirements combined with tradability would mean that the car makers still get the money, but the allocation among car makers would still be driven by market forces."
Exactly!
Thanks for commenting. You've obviously done the research and given this a lot of thought.