Do We Need a Domestic Auto Industry?

A reader asks for my comments on this discussion at the NY Times website, particularly Mark Thoma's contribution. I'll give my general comments first and then specifically comment on Mark's bit.

First, there is some truth to Tyler Cowen's assertion that we should not care where the auto companies are based, after all a job in the US is a job, but he is deliberately narrow minded. To the extent to which the high value added activities of engineering, designing and upper management of the companies happens elsewhere, we are loosing that part of GDP. However, I think the 'these are good jobs and must be protected' attitude of some of the commenters is misguided. The shrinking middle class (or perhaps the declining relative position of the working class) is more about what is happening in the upper parts of the income distribution than what is not in the middle parts. I am not sure protecting and preserving one specific industry is the remedy.

Now to Thoma's argument: that national security considerations mean that we should preserve the auto industry. I was immediately amused, for as an undergrad it he late eighties, I had precisely this debate (then it was about how Japan would soon make everything and us nothing). Well it made little sense to me then and less to me now. To imagine a industrialized war that lasts years and is on a global scale such that we can't get heavy manufactures for elsewhere is wrongheaded. Even if we could make stuff (and I can't see why we could not tool up for such a task) where would the raw materials come from, or more specifically where would the fuel we need come from? The point is that I am no political scientist, but it is hard to imagine a WWII scenario again which is where this attitude comes from, and if such a situation were to arise where we had to be self-sufficient, we have more problems than a lack of auto plants.

My take is that there is no reason we can't be competitive in cars and that management and the US education and technological infrastructure are causing the auto industry to suffer. I think the incentives of top management in US corporations has become far too heavily weighted in short-term performance than long-term and this has seen disastrous results in cars and banking. But the lack of skilled workers and investment in research and development of new technology does bode badly for the future of the US economy. It is not a zero sum game but we want to be at the forefront of the high value added industries and that requires public investment. Transportation is always going to be a top need of humanity and the challenge of the 21st century is to figure out how to do it more efficiently and less harmfully to the earth. The countries that are at the forefront of this new 'auto' industry are poised to reap large rewards - and help humanity in general.

UPDATE: A nice article on the future of the US auto industry can be found in the April 27th New Yorker. (Subscription is required to read the whole thing)

Detroit and Chapter 11

I have argued in earlier posts that the government should allow Detroit to go into Chapter 11 but provide credit to avoid Chapter 7. The White House and Treasury seem to have come to the some conclusion. This news story seems likely to be a trial balloon, we'll see how it flies with the punditocracy and on the mythical 'main street.'

Credit and the US Auto Industry

We all know how badly managed the US auto industry has been, willfully oblivious to the obvious: that huge demand for big trucks and SUVs were not going to last forever and that fuel efficiency was not the the enemy. If they had spend half the time, energy and money into design, R&D and engineering that they devoted to ensuring protection from Washington they would probably not be in this mess (or at least not nearly as bad off).

We also know that they represent a pretty significant part of the manufacturing base in the US, especially with all of the links to suppliers. This makes a pretty compelling case for the government coming to their aid.

But is their trouble all their own fault? It can be argued that the credit crisis hurts their industry much more than most because of the fact that most auto purchases rely heavily on credit. Since traditional consumer credit sources have dried up (including home equity lines of credit), it is possible for them to argue that they are in a special position as sufferers from the credit crisis that the government allowed to happen.

I don't know how much water this argument holds, but I have been interested that this point is not being made much. One thing is for certain, the US auto market has cratered. Above, from Econbrowser, is a chart of US domestic car sales. Look at how far off are current year sales to previous years. Ouch.