And what is to be done about it?
Tomorrow marks the opening of the annual Los Angeles Auto Show, and we’ll be there in person for exciting live (or semi-live) coverage. Normally, the LA show, which is the first big US auto show for the upcoming model year, would be a festive occasion. . . but alas, this is not exactly a typical year in the life of an American automaker, and we expect more than a few glum faces around the Convention Center.
At issue, of course, is the impending bankruptcy of General Motors, Chrysler, or both. GM says it needs some $25 billion in operating capital to stay in business for the short term, and the CEOs of all three Detroit manufacturers are in Washington today, making their case to Congress for a federal rescue package. Thus far, President Bush and Congressional Republicans have been cool to the idea; President-elect Obama and Congressional Democrats are leaning in favor of it, and the result, at least until next January, appears to be a stalemate. GM, however, is warning that it may not be able to stay in business through January absent immediate assistance.
Now, an alternative for GM or Chrysler would be to file Chapter 11 bankruptcy proceedings. But Chapter 11 only really works if the bankrupt company can obtain the necessary credit to continue operations while restructuring, and given the tightness of global credit markets right now, the chances are good that GM would likely be forced into a Chapter 7 proceeding, which would probably serve as a prelude to liquidation. Aye, there’s the rub.
So what would be the likely outcome if, say, either Chrysler or GM went completely belly-up? According to the Center for Automotive Research, a Detroit-based think tank, the best-case scenario would likely be this:
Should one or more of the Detroit Three fail in 2009, initially all US automotive operations would be affected, including international producers and suppliers. In this scenario, the remaining Detroit Three and international producers recover in 2010. The first year total employment impact would be a loss of nearly 2.5 million jobs in the US economy---comprised of 239,341 jobs at the Detroit Three, 795,371 indirect/supplier jobs and over 1.4 million spin-off (expenditure-induced) jobs . . .
In economic terms, a 50-percent cut in Detroit Three US operations would reduce personal income by over $125.1 billion in the first year, and a total loss of $275.7 billion over the course of three years. The impact of this personal income loss on fiscal government operations at the local, state and federal levels include an increase in transfer payments, a reduction in social security receipts and personal income taxes paid. The net impact of all three of these categories results in a loss to state and federal governments of $49.9 billion in 2009, $33.7 billion in 2010, and $24.5 billion in 2011---a total government loss of $108.1 billion over three years.
It is reasonable to expect that a permanent contraction in the US auto industry would negatively impact the auto industries on Canada and Mexico since producers in these regions rely heavily upon US-produced parts and components . . . The decline of Detroit Three production in Canada and Mexico would result in further US losses in employment, income, and government revenues.
And if that wasn’t enough:
Finally, the bankruptcy of any of the Detroit automakers may have serious implications for the pension funds and the level of obligations of the Pension Benefit Guarantee Corporation, as well as funding of the nation's health care system. The Detroit Three are directly and indirectly responsible for funding the health care of 2 million employees, retirees, and dependents of their own companies and their suppliers.
So, should Washington extend a helping hand to GM and/or Chrysler? To us, the answer is a no-brainer, but what do you think? Tell us why, or why not.