Monday, November 24, 2008

The US Auto Industry

I've written a couple of times about the current problems in Detroit, Bailing Out GM, The $70 Per Hour Lie, and several other posts. There's been something bothering me about this whole bailout thing that has led to come down somewhere in the middle between giving them the money they want and letting them slide into bankruptcy.

I keep hearing that the three Detroit automakers are too interconnected in the US economy to allow them to fail, that the downstream impacts of unemployment, parts suppliers going under, support industries failing, and so on mean that unless the bailout goes through, car manufacturing in the US vanishes.

That's misleading, because there are quite a few auto makers doing quite well here, as Peter Klein writes in his column In Praise of the US Auto Industry:

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.

Klein posits that the real danger of a Detroit bailout is what it could do to the all-important manufacturing base in this country: "...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.”"

So essentially the real damage to the US could be the bailout itself, which could be a killer for free trade. That would last a lot longer than having an economy readjust to operate without three dinosaur companies cranking out the wrong kind of cars.

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