What's good for GM …

Chief Executive, The, June, 2005 by William J. Holstein

I asked an economist a simple question recently: "Would it make any difference to the U.S. economy if General Motors and Ford were to go out of business?" He said, "No." He is an apostle of free market ideology, and judging from President Bush's own statement (see cover story, page 30), this is the prevalent view in the land. This view holds that, because new entrants such as Toyota and Hyundai are building new plants, a job that disappears in Michigan reappears in Alabama. There's no net loss in national economic terms. We shouldn't care that GM and Ford both now have junk bond status.

That argument doesn't work for me. Don't get me wrong--I believe in the power of markets. But there are times when a nation's leadership must lean against market pressures. What if "market forces" dictated that Michigan and Ohio should cease to exist as manufacturing areas and just slide into the Great Lakes? Clearly, that's not an acceptable outcome in human, social or political terms.

An important element of this debate is the quality of the economic activity conducted by U.S.-based manufacturers as opposed to that of the transplants. Unbeknownst to most economists, there is an entire set of issues to consider:

* Are the assembly jobs in the domestics vs. the transplants really equivalent? The pay scale and benefits packages offered by the domestics are much higher. J.T. Battenberg of Delphi has put that total package at $130,000 a year per worker. We can argue about whether they let their costs get out of control. But the fact remains that a job on the line in Alabama, at $60,000 or $70,000, doesn't pump as much money into the economy as one in Michigan.

* Who handles the high-end design and engineering work? True, there is some design and engineering done by the transplants. Toyota is expanding its design center in Ann Arbor, Mich. But proportionately, the domestics do more.

* What value do we place on hundreds of thousands of white-collar jobs at GM, Ford and their suppliers that are at stake? Some of them might be reabsorbed by the newcomers if current trends continue, but certainly not many.

* What happens to the profits derived from the sale of each vehicle? Some percentage of Toyota's profits are reinvested here. But, again, it seems to me that a higher percentage of the profits remain in the U.S. if they are earned by a domestic.

* Is the U.S. auto industry of strategic value or is it just a sunset industry like textiles that should be allowed to fade away? That question reflects a gross underestimation of how much technology is used to build cars and is incorporated into them. GM and Ford are huge consumers of technology.

I'm obviously convinced that the survival of GM and Ford matters. They are part of what defines the United States as an economic power. I'm not smart enough to have a magic solution. But it seems managements, unions and governments ought to contribute to a long-term fix--because the invisible hand of the market is moving in the wrong direction.