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The Global Manufacturer: The Auto Bailout and US Manufacturing: A House Still Divided

June 6, 2014
Brief insights on two debates: Should we have bailed out Chrysler and GM? Should we be optimistic about the future of U.S. manufacturing?  

Five years ago, in the depths of the Great Recession, the Obama Administration decided to spend billions to rescue General Motors and Chrysler. They were controversial moves, not just because of the massive spending but also because many believed propping up these industrial behemoths was throwing good money after bad.

Last month, there was a fascinating discussion at the Brookings Institution on two basic questions: Did we do the right thing in bailing out the two auto companies? And, should we be optimistic or pessimistic about the future of manufacturing in the United States?

In Cliff Winston's view, the auto bailout was a very expensive Band-Aid on a gaping, long-term wound. The Brookings economist pointed out that the Big Three's market share ratcheted down from 85% in the 1970s to about 45% today. Rather than a bailout, he says, there could have been a sell-off of GM's and Chrysler's most valuable assets -- light trucks and SUVs. Ford and other carmakers would have built more vehicles and the world would have gone on.

Sean McAlinden, chief economist for the Center for Automotive Research, painted a startlingly different picture. McAlinden said there was not financing available for other manufacturers to buy the assets of GM or Chrysler, and that the production capacity lost would not have been replaced for years. Idling GM and Chrysler would have forced "hundreds, if not thousands" of auto parts suppliers into bankruptcy.

The macro impact of no bailout, McAlinden estimated, would have been "a loss of 2.6 million jobs in 2009 and a loss of 1.5 million jobs in 2010, a total loss of $284 billion in personal income in those two years, a total loss to the federal and state budgets of $105 billion in 2010 in the form of higher transfer payments, lower Social Security receipts, lower personal income and property tax collections."

The debate over the future of manufacturing focused on employment, given that much of the impetus for government intervention was to save jobs. Steve Rattner, a member of the Obama Administration's auto task force, said he was pessimistic that the country could produce either a lot of manufacturing jobs or jobs that were going to pay well.

He pointed out that the U.S. lost 6 million manufacturing jobs from 2000 to 2009 and has regained only 600,000. Moreover, in some cases those jobs pay lower wages than the ones they replaced. He noted that "we've actually gained back jobs in manufacturing at a slower rate than the overall gain in jobs in the economy." U.S manufacturing jobs are unlikely to grow significantly, he said, when other countries are manufacturing at increasingly high quality levels and doing so with cheaper labor.

Scott Paul, president of the Alliance for American Manufacturers, said the main drivers of American manufacturing's decline have been the "emergence of China that we were ill-equipped to deal with, and monetary policy, which essentially cheapens imports and makes our exports much more expensive." But Paul said that with "the emerging natural gas advantage" and better efforts at matching workers with available jobs, it would be possible to "grow the size and scope of manufacturing employment."

Paul said policy would play a crucial role in U.S. manufacturing's future. He cited the current trade negotiations over the Trans-Pacific Partnership as "an important test case."

"I think there's a lot of buyer's remorse over Korea and the lack of market access that our companies are getting to the Korean market," Paul said. "And I think if we make the same mistake in the TPP, particularly with regard to Japan, we will regret it."

Clearly, opinions on U.S. manufacturing and the role of government remain deeply divided. But if the bailout is still controversial, there was more agreement voiced at Brookings that the federal government could address a host of major issues that would support American manufacturing, including tax reform, immigration reform and infrastructure investment. Bold and decisive movement on those fronts would help manufacturers immensely, but then, that would take politicians more concerned with progress than with polls.

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