The other day I was forwarded a copy of an “issue brief” written by some colleagues who share an interest in analyzing the arms industry. I immediately sent a dissenting letter back. While I will not recycle the entire note here, I will state that I took extreme exception to the title and the argument it conveyed:
Economic Security: We Must Save American Manufacturing (yeesh)
The essay asserts that bailing out Ford, GM, and Chrysler is a matter of national security. Over the past few years, I had a few things from that group that I thought were well considered. This is not one of them. Since that essay was distributed widely, I feel similarly compelled to disseminate my review of it to people I know to be interested in either national security, the automotive industry, or economic policy in general. I wouldn’t want anyone get the impression that the economic analysis in the essay was sound.
Just to be clear, I can find no link between the fates of these three companies and the military capabilities of the United States.
The essence of the remainder of the letter, which concerns this claim of a link to national security, I reproduce below.
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I have heard for many years now that, as you wrote, manufacturing is "the foundation of our economy." This is a meaningless assertion. Why is not agriculture the foundation of our economy? Why not education? Or childcare? Or healthcare? And whose economy? My economic activities do not stop at the borders of the United States. Those borders are an artifice that may contribute to physical security, but they do not directly improve economic growth on either side.
You wrote that "if America loses what's left of its auto industry, or its aerospace industry, or its chemical industry, our superpower status will ebb away too." If it is indeed desirable for me here in Texas that the federal government have superpowers, then I might be alarmed by Chrysler's impending evaporation—if I thought that domestic automotive assembly had anything whatsoever to do with military power. It isn't the 1940s anymore. There are few cars built in the UK, but Britain is one of only a handful of countries with global military capabilities. After all, it is not as though the US federal government needed domestic passenger car assembly facilities for buying blast-protected trucks for its campaigns in Iraq and Afghanistan. Not a single article in the Mine-Resistant, Ambush-Protected (MRAP) vehicle program has come from a factory owned by Ford, GM, or Chrysler. Rather, as I point out in my recent book, Arms and Innovation: Entrepreneurship and Alliances in the 21st Century Defense Industry (University of Chicago Press, 2008), the design concepts were imported from South Africa, after which some very clever American engineers and production workers figured out how to improve upon them. Detroit's only role in that was contract management from an Army Department office up on 11 Mile...
I am also not sure what you mean by "the last three US auto makers". GM makes trucks here in Texas, but so does Toyota—and in Indiana and California, too. Hyundai builds cars in Alabama; Daimler builds trucks there. Nissan makes vehicles in both Alabama and Tennessee. BMW builds several different vehicles in South Carolina. American Honda Motors (note the name) has two assembly plants in Ohio, and one in Alabama. There's that state again: if I were an Alabaman, I'd be downright torqued about this rush to bail out these Michiganders. All of these are domestic companies now: the Toyota Tundras built in San Antonio frequently roll with bumper stickers that say "Born in Texas; Built in Texas". From my perspective here in Lone Star State, that's more domestic than Chrysler or Ford.
So, indeed, there are not three automakers in the US, but nine. Call them the (formerly) Big Three and the Transplant Six. There is nothing fundamentally wrong with running an automotive manufacturing business in this country. It's just that the Three have been doing it very, very poorly. If the Three are nearly bankrupt, it's because their business models have been bankrupt for some time. The Six have sustainable models. The Six have intelligent approaches to managing labor; GM, Ford, and Chrysler's contracts with the UAW are insane. The Six have products that actually meet drivers' demands for reliability; GM and Chrysler's quality problems of the past forty years have had significant cumulative effects on the marketability of their products. Speaking of marketability, the Six have marketing strategies that makes sense: they each have one or two or three brands instead of GM's eight. The Six have channel strategies that makes sense; GM's vast dealer network is a huge problem. The list goes on.
No one who doesn't work there should personally care whether Chrysler, GM, and Ford all disappear as independent companies. They haven't really merited the term "going concern" for some time. If they do implode, the supplier networks that they share with the Six will be strained, but the strain will be necessary to the restructuring. Whatever happens, I will continue buying cars, and Americans will continue building them—or doing something else that makes money. And life, as Donald Rumsfeld used to say, will go on. To use a naval analogy, a sharp recession will be a valuable bottom blow for the boiler of the global economy. GM and Chrysler today are cash-devouring monsters of value destruction, and probably are done. Ford may get another chance, particularly if enough unprofitable factories across the industry are shut down. While building cars in the US can be a good business, there are simply too many companies trying to do so, and some of them will have to go. We all know which ones are on the market's short list, so trying to stand in the way with a five billion dollar band-aid is just not going to work.
There was one thing in your paper with which I did agree—your backhanded assertion that policy-making is not a breeze. Indeed! It takes hard work for economists to estimate which government regulations are the most marginally damaging, and which subsidies are the biggest wastes of money. It takes hard work for legislators to figure out where, in a representative system of government, to expend political capital to roll back growth-inhibiting barriers defended by interest groups. It does not take hard work, however, to write the essay that you published. That was a screed. James Lileks writes screeds, but they're clever ones. Yours was mostly an example, to quote Gary Becker, of confused hostility.
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