Should We Still Make Things?

Susan Helper: Serve the Taxpayer

THE MARKET share of what used to be called the “Big Three” U.S. automakers has been shrinking for years. GM alone had over 50 percent of the U.S. market in the 1960s, but Ford, GM, and Chrysler together can now barely muster 40 percent. Since autumn, sales have been in free fall. GM lost $9.6 billion last quarter, and Chrysler has all but announced it is not viable without a foreign partner. Does the United States need an auto industry?

In the short term, the government should act to prevent a sudden collapse of the Detroit Three. Such a collapse could, due to interlinked supply chains, cause the loss of 1.5 to 3 million jobs (adding 1 to 2 percentage points to an unemployment rate already approaching double digits), and cause such chaos that even Japanese automakers support loans to keep GM and Chrysler afloat. But what about the long term? Why not let the Detroit Three continue to shrink, and allow Americans to buy the cars they prefer, whether they are U.S.-made or not?

It is true that the Detroit Three’s problems go deeper than the current dramatic fall in demand due to the economic crisis. But these problems have potentially correctable causes. The automakers have been managed with an eye to short-term financial gain rather than long-term sustainability. Public policy has also been unfavorable, in three major ways: low gas taxes, which lead to large fluctuations in the price of gas when crude oil prices change; lack of national health care, which penalizes firms responsible enough to offer it; and an insufficient public safety net for retired and laid-off employees, causing firms that shrink to be saddled with very high “legacy costs.” Another problem (primarily for the rest of manufacturing, but also for autos) is trade agreements that don’t protect labor or environmental rights.

It is important to note that the United States faces no fundamental competitive disadvantage in auto manufacturing. Competitive advantage in auto manufacturing is made, not born (in contrast to the case of, say, banana growing, where natural endowments like climate play an important role).

First, we should dispel the notion that auto manufacturing is inherently a low-wage activity. Our major competitors in auto assembly (Germany and Japan) pay wages at least as high as in the United States. Low-wage nations such as China and Mexico have made some inroads into auto supply, providing about 10 percent of the content of the average U.S.-assembled vehicle. But even here, competing with low-wage nations is not as daunting as one might think; research by the Michigan Manufacturing Technology Center suggests that most small manufacturers have costs within 20 percent of their Chinese competitors’. Manufacturers could meet this challenge by adopting a “high-road” production process that harnesses everyone’s knowledge—that of production workers as well as top executives and investors—to achieve innovation, quality, and quick responses to unexpected situations.

Is there a public interest in reversing the industry’s undeniable failures? Why not let all the manufacturing jobs disappear and have an economy of just eBays and Googles? Because we need manufacturing expertise to cope with events that might present huge technical challenges to our habits of daily living (global warming) or leave us unable to buy from abroad (wars).

The auto industry has a critical role to play in meeting these national goals. Take the challenge of climate change. We need to radically increase the efficiency of transport, in part by making incremental changes that reduce the weight of cars, more significant changes to the internal combustion engine, and potentially revolutionary couplings of cars with “smart highways” to dramatically improve traffic flow.

Yes, we could import this technology. But it might not be apt for the U.S. context. (For example, Europe has long favored diesels for their fuel economy, but Americans have deemed diesels’ high emissions of nitrous oxides and particulates to be unacceptable). And we’d need to export a lot of something to pay for this technology—or see continued fall in the value of the dollar, leading to a fall in living standards.

The auto industry has long been known as “the industry of industries,” since making cars absorbs much of the output of industries like machine tools, steel, electronics, even computers, and semiconductors. Innovations pioneered for the auto industry spread to other industries as well (see this article). Thus, maintaining the industry now keeps capabilities alive that may be crucial in meeting crises we have not yet thought of. Traditional trade theory has little room for such “irreversibility”; it assumes that if relative prices change, countries can easily re-enter businesses that they were once uncompetitive in. But, it’s very expensive to recreate the vast assemblages of suppliers, engineers, and skilled workers that go into making cars and other manufactured goods.

We should not assume that the United States will keep “high-skilled” engineering and design jobs even if we lose production jobs. In fact, the reverse may well be true. Asian and European car companies do most of their engineering in their home countries; they manufacture here in part because of the bulkiness of cars. Even the Detroit Three are outsourcing engineering to Europe (for small cars) and India (for computer-aided drafting). In addition, it is difficult to remain competitive for long in design when one doesn’t have the insight gained from actual manufacturing. Another reason to save the auto industry is its role as a model of relative fairness in sharing productivity gains. Allowing a high-wage industry to fail does not guarantee that another high-wage industry will emerge to take its place–in fact, by weakening the institutions and norms that created such an industry, it becomes less likely.

So, the United States needs an auto industry, one that pays fair wages and engages in both engineering and production at a sufficient scale to keep critical industries like machine tools humming. Do “we” need a domestically owned auto industry? This is a harder question. Our “national champions” have not served the United States particularly well in recent decades; consumers have benefited greatly from access to Toyotas and Hondas. Yet, the demise of the Big Three may well lead to negative consequences for all of us—lower wages (since foreign automakers have been hostile to unions) and less R&D in the United States—and therefore we need to make sure we don’t create financially viable firms by sacrificing capabilities and wages. Instead, we should implement government policies, such as creating both demand and supply for fuel-efficient vehicles, and involve unions in training programs for both current and former auto workers. These policies would help create an industry that serves all its stakeholders–including taxpayers.
Read the symposium introduction and contributions from Marcellus Andrews, Dean Baker, and Jeff Madrick

Susan Helper is AT&T Professor of Economics, Weatherhead School of Management, Case Western Reserve University. She is also a Research Associate at the National Bureau of Economic Research and MIT’s International Motor Vehicle Program.