What If There is No Auto Bailout?

The bankruptcy and liquidation of any of the Big Three automakers would represent a serious body blow to an already weak and declining economy. To understand the possible impact of an automaker collapse, let’s begin with some basic employment numbers.

In November 2008 about 830,000 U.S. workers were employed in auto assembly plants and businesses involved with supplying parts for new cars and trucks. Of these, a little less than a quarter of a million workers were employed directly by the Big Three. The other workers were employed in auto parts supply businesses and in foreign nameplate assembly plants. Tens of thousands of additional workers who are usually employed in assembly plants and parts factories are on temporary or indefinite layoff. Many of these workers hope to be recalled to their jobs when the auto market recovers.

In addition to the workers engaged in making cars, more than a million U.S. workers are employed in new car dealerships and in the distribution of new cars and trucks. An unknown percentage of these workers is employed in the distribution of cars and trucks produced by the Big Three. Based on automakers’ market shares over the past three years, it’s plausible that well over half of the workers in the sales distribution chain have jobs that depend on the Big Three.

In total, over 2 million people hold jobs that are directly linked to the production, distribution, and sale of new cars and trucks. Well over half of these depend on continued production and sale of Big Three cars and trucks. A conservative estimate of the direct impact of the failure of all of the Big Three automakers would be the immediate loss of at least a million jobs. Thus, the direct impact of the liquidation of the Big Three would add almost a percentage point to the current unemployment rate.

The indirect but short-term effects of the collapse of the Big Three would add to this toll. Many auto parts suppliers will probably enter bankruptcy if the Big Three fail. This will hurt production of foreign-nameplate cars in the United States, because foreign assembly plants also depend on U.S. auto parts suppliers for many of the inputs that go into making their cars. Production interruptions at foreign-nameplate factories may in turn reduce employment in foreign assembly plants and in factories that supply auto parts for those plants.

Finally, hundreds of thousands of workers in retail stores, banks, and service-producing companies will lose their jobs in communities where auto assembly plants and auto parts factories are located. The workers in auto assembly and parts factories earn wages that are one-quarter higher than those paid to average production workers. The indirect impacts of auto plant closings on local employment would therefore be greater than effects that would accompany the loss of other kinds of jobs.

If the federal government does not offer the Big Three loans or loan guarantees, it is very unlikely that private lenders will step forward to offer them credit, either before or after a formal bankruptcy. This implies that bankruptcy would soon be followed by liquidation of the automakers’ plants and assets. In the long run, when U.S. demand for new cars recovers, foreign-nameplate automakers would expand production in the United States, and some of the job losses in the auto parts supply business would be reversed. However, an overwhelming share of the physical and human capital investment that has gone into the U.S. auto industry will be lost.

I have always believed that this loss is too staggering for the nation to permit all of the Big Three to disappear in the next year. In a previous submission I described conditions that should be imposed on the Big Three if the government is to provide loans or loan guarantees. Congress should pass a law that makes loans available to the automakers under broad guidelines, but specific terms of the loan agreement should be negotiated and enforced by a federal board charged with overseeing the loans. Loans should only go to companies that offer a business plan mapping out a credible route to company profitability. Unless there is an unexpected recovery in the economy next year, I expect the ultimate recovery of the automakers will require loans that amount to substantially more than the $34 billion the carmakers asked for last week.

The November unemployment numbers provide additional evidence it would be reckless to allow all of the Big Three to fail. The latest job report shows that payrolls dropped by 1.2 million in the past 3 months. The pace of job loss is accelerating. A major reason is the sharp falloff in consumer demand. Not only have sales plunged in new car showrooms, consumers are also spending less money in department and discount stores. In an environment of extremely fragile consumer and investor confidence, it would be foolhardy to injure confidence still further by permitting the collapse of the Detroit-based carmakers.