Let Them Die?, Ctd.

A reader writes:

I can certainly understand the logic behind letting GM, Ford, and Chrysler die. These three corporations have spent years denying reality, to the point of willful blindness. I tell my engineering students here at Ohio State that Rick Wagoner, the CEO of GM, should have been fired the morning after stating that GM's customers "don't worry about the price of gasoline". That sort of idiotic, arrogant thinking has directly resulted in the mess these companies are in. However, before we allow them to go down the tubes, I think we need to stop and think about what their demise will mean to Michigan, Ohio, and Indiana.

Our states have already been devastated by the loss of manufacturing jobs, as everyone knows. But you should get out of DC and take a tour along the Great Lakes to actually see what's happened. The great industrial cities - Cleveland, Youngstown, Akron, Toledo, Detroit - are essentially ghost towns already. If the US pulls the plug on the Big Three, it's going to be a catastrophe for us here. Yes, Honda is very strong in Ohio, but Honda alone is not enough. We need to keep the auto industry afloat, somehow - but at the same time, we need to make absolutely sure that the morons in Detroit who created this mess are not rewarded in the same way the morons on Wall Street have been. Accountability has to start at the boardroom, not just at the union hall or on the factory floor. There's certainly plenty of blame to go around (I worked as a tool and die maker at GM for eight years, so I know what it's like in the plants) but for once, the people at the top need to pay for their boneheaded mistakes.

Another reader adds:

I have to disagree with you on letting GM, Ford and Chrysler die. True, the Detroit 3 aren't what they used to be, but they still have a tremendous impact on the U.S. economy, and letting them go under would be the shortest, fastest road from recession to depression.

No one who understands the auto industry believes that a Chapter 11 restructuring is feasible for the automakers. As one leading auto analyst, Mary Ann Keller, notes: "In this world, you don't go Chapter 11 reorganization. You go Chapter 7 liquidation.''

Mark Oline, an analyst with Fitch, says: "Strategic bankruptcy is not an option for GM. This is an issue of operating or not operating.''

What's the economic impact if the Detroit 3 ceased operations now? A new study by the Center for Automotive Research estimates that 2.9 million U.S. jobs would be lost in the first year. It would reduce U.S. personal income by over $150 billion in the first year; $398 billion over the course of 3 years. The loss of state, local and federal taxes coupled with the increase in transfer payments (unemployment benefits, etc.) would cost government $60 billion in 2009, $54 billion in 2010, and $42 billion in 2011, for a total of about $156 billion over 3 years.

The impact on Michigan, Ohio, Indiana would be devastating - but the loss of jobs would also be felt in states not usually thought of as auto-manufacturing states, including Kansas, Tennessee, Kentucky, Maryland, Virginia, Illinois, Texas, and New York - all of which have Detroit 3 manufacturing facilities. Also, keep in mind that there are independent auto parts manufacturing plants in virtually every state, and some 14,000 GM/Ford/Chrysler dealerships.

The ripple effect would be felt by small businesses, school districts, police and fire departments, and on and on.

This issue really touches a nerve with me. I live in Pleasant Ridge, Mich. (an old suburb of Detroit) and am the former communications director for the UAW. I know it's easy to say, 'They did it to themselves.' - though not entirely accurate, in my opinion. But, that said, there's no denying the severe widespread economic impact of "Letting them die." The cost to taxpayers of "letting them die" would be significantly greater than the short-term cost of helping the domestic auto industry survive the current economic crisis.