Nationalizing Detroit? It's a Good Idea

Includes: F, GM
by: Markham Lee

A recent FT article discussing a study by the NY Federal Reserve that estimated that each job within NYC's financial industry was responsible for generating 2.5 additional jobs within the city, got me thinking about the number of jobs that are dependant on the American auto industry. I started to do some research on the subject and wasn’t to find anything tremendously concrete, I found numbers as low as two for specific communities and recall a range of 7-9 being thrown out during a NPR story a few year's back but wasn’t able to find it to confirm.

Still while a specific Wall St. job may carry a higher salary, it's quite possible that auto industry jobs may have a larger economic impact due to the large number of actors involved in producing, selling and maintaining a car, the fact auto industry layoffs occur in large bunches, and are indicative of economic problems (e.g. eroding demand) impacting the industry as a whole.

You don't need to be an economist to realize that a single automotive plan probably has more support staff and ancillary industries dependent on it, than your typical banking office, not to mention the fact that Wall St. layoffs aren't usually the result of the closing down an entire operation the way auto industry plant closings are.

Just think about it:

Eroding demand hurts sales at various dealerships around the country who are then forced to cut back on sales staff, repair staff, etc, less demand means less need for a particular plant, and closing that plant hurts parts manufacturers, the shipping companies that deliver parts, food services, grounds keeping, etc, etc.

You could very well have a situation where a specific community loses two jobs per job lost at the local plant, multiple jobs are lost elsewhere and the whole thing is reflective of job losses (say from dealership closings, demand erosion) that occurred prior to the plant needing to be closed in the first place.

It's also worth noting that the loss of a single job at a company like GM very likely has an adverse effect on people who may not lose their jobs, but may suffer a negative economic consequence just the same. 

So maybe nine (albeit an unconfirmed anecdotal data point) isn't so ridiculous after all.

Detroit has on aggregate (based on the most recent data* I could find) of about 581k employees, which means that the potential for job loss (if Detroit crumbles) within the larger economy is anywhere from 1.1 million to as many as 4.5 million, in addition to the jobs lost  at the actual automaker. As a result the baseline "job risk" is about 1.7 to 5+ million, and that doesn't take into account the people who would keep their jobs but suffer negative consequences, the jobs dependent on the additional jobs lost, etc, etc.

The job loss issue isn't one to be taken lightly, because at the end of the day these are some of the only people who are actually making money within the American auto industry.

I don't know about you but considering the magnitude of the risk (job loss), on top of the jobs, businesses, etc, that have already been lost (or stand to be lost in the future), I think the Government has to be looking at Detroit as a crisis on part with AIG, the Mortgage GSEs, etc. So while I hate to even write these words out, I think that at this point the Government has no choice but to step in and Nationalize Detroit.

When GM's only solution to their problems is desperate ploy to try and merge with Chrysler just to have access to their cash and credit lines, even though it will only exacerbate their medium to long-term problems of too many brands, too much debt, a bloated infrastructure, etc, etc, then you know the end is nigh for Detroit, especially when GM has to beg the Government for money to even pull the deal off in the first place.

The only solution is some combination of bankruptcy and nationalization that allows Detroit to get out from under its debts, continue to operate (and not cause massive damage to the American economy), while they find a way to cut down the bloat, produce better products and refashion themselves as competitive companies.

I would love it if there was another solution but at this point I just don't see one, the Government either has to step in and guarantee that these companies continue to operate for the good of the economy, or allow them to keep mucking around and delaying their inevitable doom.

I think that on an emotional level no one wants to suffer the Black eye to the American business psyche that would occur if Detroit was nationalized, I think that our national pride wants us to believe that Detroit will find a way.

But here is the thing: we simply cannot continue to allow these companies to crumble before our eyes based on hope and nationalism because the risks are just too great, especially in light of the current economic crisis. 


Employee Count Data from Yahoo Finance & Google Finance as of 10/29/2008.

The Financial Times:   "Wall St faces up to 78,000 job losses" -- Daniel Pimlott, October 23, 2008.