In an astonishing statement this week, Todd Stottlemyer, chairman and chief executive of the National Federation of Independent Business (NFIB) bellowed, “Small businesses owners are adamant: Don’t ask us to send our tax dollars to Detroit to pay for their mistakes without significant restructuring and effective independent oversight.”
It’s easy to understand where he’s coming from. No one likes to see corporations get government handouts, especially a company like General Motors. The huge manufacturer has long been a symbol of corporate arrogance, mismanagement, and greedy trade unions. But this isn’t about corporate management or unions. To quote former President Clinton: “It’s the economy, stupid.”
That was the sign campaign advisor James Carville hung in Clinton’s headquarters to keep everybody “on message” in the 1992 presidential election. Now, as then, this debate is about the economy, and it needs to stay on message. But after two days of Capitol Hill hearings and statements like Stottlemyer’s, among others, the danger is real that misguided intentions and political demagoguery will overwhelm common sense.
If that happens, General Motors, and likely Ford and Chrysler, could be forced into bankruptcy. The already weakened economy would suffer a catastrophic blow that would not just rattle windows on Main Street, but crush tens of thousands of small businesses across the country.
The Center for Automotive Research (CAR), the leading authority on the auto industry, published a compelling report earlier this month that documents just how deeply intertwined the major automakers are in the national economy. The 328,000 people directly employed by the carmakers will be the obvious casualties. But the study also notes that those job losses, coupled with a halt in production, would send aftershocks rippling throughout the economy.
Indirect job losses, known as the “supplier effect,” would sweep up both manufacturing and nonmanufacturing suppliers to the industry as well as suppliers to suppliers. That could cost the economy another 932,000 jobs. Many of those hit would be small businesses. Automakers also are among the largest purchasers of U.S.-manufactured steel, aluminum, iron, copper, plastics, rubber, electronics, computer chips, and countless other products. But it doesn’t end there.
The study also identifies a third wave of job losses from what it calls the “spin-off effect.” These would come from countless small businesses that lose revenue as laid off workers cut back sharply on consumption. “In economic terms, the rapid termination of [Detroit’s Big Three] U.S. operations in 2009 would reduce U.S. personal income by over $150 billion in the first year, and generate a total loss of $398.2 billion over the course of three years,” the study notes.
That would cost the economy another 1.7 million jobs, nearly all likely employed by small businesses — hair salons, dry cleaners, restaurants, theaters, retail stores, service firms — and the companies that supply them.
But wait, the fallout isn’t over yet. The net impact of all three waves of job losses would slam state, local, and federal governments. The loss of tax revenues would total about $156.4 billion over three years. The government, meaning taxpayers, would also be required by law to pick up the unfunded pensions of laid-off workers through the Pension Benefit Guarantee Corporation, as well as the cost of health care.
Taken in that context, the $25 billion bailout — which is actually a bridge loan — would seem to be a small price to pay to keep most plants open during the downturn and to avoid the ripple effects of an industry collapse on the broader economy.
Yet Stottlemeyer and others assert that the bailout is a “misguided attempt” to save companies that are foundering “not because of the credit crisis,” but because of “a long series” of bad corporate decisions. That’s largely untrue. Although domestic automakers have made many strategic blunders in the past, they have recently made tremendous strides to restructure, according to a separate study by the Economic Policy Institute in Washington.
Unfortunately, many of the changes won’t kick in until 2010. For example, new union contracts will take effect in 2010, which will greatly reduce automakers’ many legacy costs. GM’s plug-in hybrid, the Chevy Volt, and other models which will get 45 mpg, are in the pipeline and scheduled to hit showrooms in 2010 as well.
And contrary to much misguided rhetoric, union autoworkers have already taken substantial pay and benefits cuts. Contracts negotiated in 2007 slashed wages for new workers by 50 percent. In addition, new workers will not be guaranteed any retiree health care benefits, and will not participate in the traditional defined-benefit pension plan, according to the Institute’s study.
As for the credit crisis, it is directly responsible for the automakers’ woes. You may recall that in 2006 and 2007 automakers sold more than 16 million light vehicles, a record number. Sales fell in tandem with the growing credit crisis because large numbers of people could no longer get car loans and carmakers could no longer finance leases. And it’s not just U.S. automakers that are suffering.
The collapse in light vehicle sales has hit import and domestic companies. GM sales fell 47 percent in October, but Isuzu’s fell 49 percent. Chrysler sales fell 38 percent; at the same time, low-cost Kia’s sales were falling 40 percent. Ford’s sales were off 33 percent, while Nissan’s fell 36 percent. Overall, domestic sales fell 41 percent, and Asian producers dropped 29 percent. Toyota announced this week that it was stopping all production at its U.S. plants for two days because of falling demand.
As part of the NFIB’s campaign, Stottlemeyer is urging small businesses to write to their congressmen to attach all sorts of conditions on any loans to the automakers. Martin Feldstein, a member of the conservative American Enterprise Institute’s Council of Academic Advisers, is going even further, arguing recently to condition any money on broad and painful austerity measures for all autoworkers, just what the economy doesn’t need in the current downturn.
The huge corporate conglomerates may seem as far removed from Main Street as you can possibly get, but just the opposite is true. The survival of General Motors and the other automakers is not only critical to the nation, but also to the survival of hundreds of thousands of small business across the country. In short, it’s about the economy, stupid.
Congressional leaders need to stay on message and approve the bridge loans to keep the automakers going without entangling restrictions. The broader debate can come later, when we will all be glad that we still have a domestic auto industry to kick around.