CAR Research Memorandum: The Impact on the U.S. Economy of Successful versus Unsuccessful Automaker Bankruptcies

Full Description:

The automotive industry has long been, and continues to be, one of the most important sectors in the U.S. economy. The motor vehicle and parts manufacturing industries employed 597,000 workers directly, as of March 2009, and the Detroit 3 employed 202,8002 hourly and salary workers in the United States, as of February 2009. The international producers employed 107,5003people in the United States in January 2009. The auto industry has one of the largest economic multipliers of any sector of the U.S. economy, and is sufficiently large that its growth or contraction can be detected in changes in the U.S. Gross Domestic Product. In many states, employment in automotive and automotive parts manufacturing ranks among the top three manufacturing industries.

In November, the Center for Automotive Research (CAR) released a memo that examined the potential employment impacts if the Detroit 3 companies should experience significant contractions in employment and production. Sadly, we are now seeing the results of these scenarios becoming reality. In CAR’s November memorandum, we estimated that a full contraction of Detroit 3 production could result in a 2.5 to 3.0 million decline in U.S. employment within a year. It is very apparent that a portion of this employment decline has already occurred. This memorandum updates those scenarios, examines the future short-run employment impacts of the current bankruptcy of Chrysler and the potential restructuring or bankruptcy facing General Motors and estimates the economic impact—in terms of jobs, compensation and tax revenues. CAR believes such an estimate should be a valuable input into the decision by government authorities to ensure the successful restructuring of GM and Chrysler into viable stand-alone motor vehicle firms. The essential question that needs to be answered is, what is the short-term, economic cost of unsuccessful bankruptcies of the two firms compared to the public cost of producing successful bankruptcies?

The long-term benefits of a domestically owned automotive industry are not examined in this memorandum. Such long-term benefits would include the existence of a viable, highly productive U.S. manufacturing sector, a competitive automotive market for consumers, the economic security of possessing an industry capable of developing and producing high technology/high fuel economy vehicles, or the many strategic national security considerations supported by the existence of a large domestic automotive industry. We also do not investigate the potential shock effect on the U.S. economy of major business failures at GM and Chrysler outside of the parameters of our model described below. However, the psychological impact of a complete collapse of these two companies on a potentially recovering U.S. economy in the Fall of 2009 cannot be discounted by any serious economist.