Congress Must Stand Up for Backbone of Manufacturing and Millions of Jobs

Nov 18, 2008 Issues: Economy

General Motors, Ford and Chrysler account for roughly 70 percent of U.S. auto production and support 5 million jobs across all 50 states. The U.S. auto industry represents almost 4 percent of U.S. gross domestic product and 20 percent of all U.S. retail sales. The three domestic automakers spend a combined $12 billion annually on research and development.

These last years have seen the domestic automakers and their workers pursue an unprecedented restructuring and cost-cutting. Recent UAW contract negotiations have resulted in wage and benefit cuts and the transfer of healthcare obligations from the companies to an independent fund. Each company has made important strides with respect to product quality, fuel efficiency, and advanced technology vehicles. Ford has tied Toyota and Honda in quality, according to Consumer Reports. GM offers twice as many cars at 30 miles per gallon than its nearest competitor. GM’s Chevy Volt changes the rules of the game as a pure electric and zero-emissions vehicle, and Chrysler unveiled three new production-intent advanced technology electric-drive vehicles in September.

Last year, Congress and the carmakers came together around increases in fuel efficiency standards as part of legislation to facilitate energy independence. Last month, Congress followed up on its commitment in the Energy Bill to provide $25 billion in loans for retooling plants to produce the advanced technology vehicles of the future.

Now progress has been overtaken by the global financial crisis. Consumers can’t get credit to purchase vehicles, dealers can’t get credit to move cars through their lots and the car companies can’t access the private credit market. U.S. auto sales in the month of October plummeted 23.4 percent from 2007 to 10.5 million units. The significant slowdown in sales is industry-wide. For example, Toyota sales were down 23 percent, Honda was down 25 percent and Nissan was down 33 percent compared to October 2007.

The Big Three don’t need a bailout; they need a bridge loan so they can weather this global financial crisis and accelerate implementation of plans for restructuring and technological advancements.

This current problem is not unique to the United States. Governments throughout Europe are faced with the same crisis in their automotive sectors and they are moving to provide loans during this global financial crisis.

Failure of Congress to act this week would have dire consequences.

According to the Center for Automotive Research (CAR), should one or more of the Big Three fail in 2009, 2.5 million jobs in the U.S. economy could be lost in that first year.  In economic terms, CAR estimates a 50 percent cut in Big Three U.S. operations would reduce personal income by $275.7 billion over the course of three years and result in a total government tax loss of at least $108 billion over three years.

Those who counsel inaction point to past mistakes by the Big Three and claim that bankruptcy is a better option. Studies are clear that consumers will not buy cars (a family’s second largest purchase) from a bankrupt company. Chapter 11 would likely lead to Chapter 7 liquidation.

The rippling effect of the Lehman Brothers failure on the financial system would pale in comparison to the economic consequences that would result from the demise of even one of our domestic automakers. The supply and dealer chains are all economically interconnected.

Throwing all of this on top of a once-in-a-century financial crisis would be a severe blow to the U.S. economy.

It is not just the production of cars that would be lost. A recent New York Times article detailed one example of the loss of American-based technology: “GM in particular is involved in the development of lithium ion batteries to power the next generation of cars. If GM disappeared, ‘the foreign companies would develop the batteries, but not here,’ Mr. Sean McAlinden, chief economist at CAR predicted. ‘We would lose all the additional development connected to that technology.  It would be technology lost.’”

I believe the Bush administration now has the authority, through the power it was granted in the Emergency Economic Stabilization Act (EESA), to prevent a systemic adverse effect on the economy such as the one the financial crisis has wrought on the automotive sector. If the administration refuses to act, Congress must.

As EESA is amended to mandate action to stabilize the automotive sector we can also make additional improvements in the areas of oversight and taxpayer protections, such as limits on bonuses and dividend payments. We will also make sure that the Big Three continue to detail their plans for restructuring and advanced technology vehicles.

President-elect Barack Obama called the domestic auto industry the “backbone of American manufacturing.” President Bush’s chief spokeswoman said the administration ‘does not want U.S. automakers to fail’ and that ‘the auto industry is an important part of our manufacturing base, and we want the industry to succeed and compete in the global economy.’ The Congress must find common ground this week to provide the domestic automotive industry a bridge to the future.