Thursday, November 18, 2010

The quick bankruptcy of the automakers saved more than a million jobs

As the Federal government recovered nearly half of its emergency investment in General Motors yesterday, the Center for Automotive Research reported that the Obama administration's actions saved more than one million jobs in 2009 and just over 300,000 jobs in 2010.
Government assistance to General Motors and Chrysler enabled orderly bankruptcy proceedings and led to the saving of more than 1.14 million jobs in 2009 alone, according to a recently released Research Memorandum published by the Center for Automotive Research, (CAR), an Ann Arbor-based nonprofit research organization. The memorandum examines the magnitude of the economic impact of the U.S. policy to provide aid to the auto industry in 2008 and 2009 and weighs the public and private benefits against the public cost.
In addition, the administration's actions helped to avoid about $29 billion in other revenue losses that would have occured, lowering the net cost to the treasury.

The two unattractive choices at the time were quick government-financed and negotiated bankruptcies for GM and Chrystler or longer, drawn-out private bankruptcies. The CAR analysis compares these scenarios.

President Bush (the "great decider") punted the choice to the Obama administration. The Bush administration provided a temporary bail-out but did not make any of the wrenching choices regarding longer term support or restructuring.

Despite the assistance from the government, the restructuring was painful. Jobs and dealerships were lost. GM and Chrystler stockholders were wiped out. The analysis shows, however, that the outcome could have been more than a million jobs and nearly $100 billion dollars worse.

The Obama administration's tough decision was the right one, helping to avoid enormous additional job and income losses, while setting the stage for the automakers' eventual recovery.

5 comments:

pino said...

As the Federal government recovered nearly half of its emergency investment in General Motors yesterday, the Center for Automotive Research reported that the Obama administration's actions saved more than one million jobs in 2009 and just over 300,000 jobs in 2010.

If GM and Chrysler had been allowed to "fail", would the demand for cars diminished? Or would that demand have remained the same had GM/Chrysler been in business?

If you answer that the demand would remain the same, it's reasonable to argue that the existing companies post "failure" would have had to expand to meet that demand.

Or, if they didn't, then the employees required to meet that demand could reasonably be considered extra and not needed.

It is certainly a stretch to claim that a company going through or not going through this process "saved" jobs.

Dave Ribar said...

Pino:

There would have been a tremendous supply shock as GM, Chrystler, their dealers, and many of their parts suppliers failed. None of the other producers would have been able to immediately ramp up production, pick up the suppliers, hire the dealers, etc. It would have been a tremendous disruption.

Given the collapse in the financial sector at the time, it's doubtful that financing to replace the production could have been arranged in any reasonable amount of time.

GM and Chrystler did downsize. The analysis by the CAR, however, shows that in the absence of government assistance, 1.4 million more jobs would have been lost at GM and Chryster and downstream.

pino said...

There would have been a tremendous supply shock as GM, Chrystler, their dealers, and many of their parts suppliers failed. None of the other producers would have been able to immediately ramp up production, pick up the suppliers, hire the dealers, etc. It would have been a tremendous disruption.

Hi Dave, thanks for the reply.

How are car companies different than say airlines? How can airlines manage to fly a full schedule, or fail, without domestic air travel coming to a standstill?

pino said...

How are car companies different than say airlines? How can airlines manage to fly a full schedule, or fail, without domestic air travel coming to a standstill?

Sorry, typo:

How can car companies fly a full schedule while making their way through bankruptcy, or failing completely, without domestic air travel coming to a standstill?

Dave Ribar said...

Pino:

Airlines don't always fly a full schedule when they fail; it has depended on the bankruptcy. For instance, Skybus shut down with no warning leaving many passengers and businesses stranded.

A difference with the airlines has been much less concentration than U.S. auto production. Despite some recent merges, I believe that the largest U.S. carrier has less than 1/6 of the market share.

The auto sector is also larger. On the manufacturing side, there are about twice as many auto employees as passenger airline employees. If you add autodealers, the difference is even larger.

Finally, there are huge differences in the size and nature of the two supply chains. If an airline company goes plunk, it mostly affects itself and a few suppliers and servicers. There are bad effects and disruptions, but not on the same scale as the auto companies.

That said, a widespread disruption in air service would be devastating for the economy (recall the repercussions from the temporary shutdown of air travel following 9/11). If two or three major carriers had to shut down and if there was simultaneously almost no immediate prospect of financing, it would likely tip the economy back into recession.