Simple Questions about the Auto Bailout

I was speaking to an extremely well-informed person yesterday who told me that he thought a GM bankruptcy would inevitably become a fire sale liquidation, create a cascade of bankruptcies of the other Detroit auto companies and suppliers, and therefore kill 2 – 3 million jobs. He said that he doesn’t like to exaggerate, but that this would be “Armageddon”. I take his concerns seriously, but there is a distribution of possible outcomes in the event of a Big 3 bankruptcy, and no matter how confident anybody manages to sound about it, the outcome is highly uncertain. I also started to think about what this downside would look like.

An industry think tank developed a (much criticized) study that produced this 3 million jobs lost estimate. Note that the vast majority (2.7 million) of these projected 3 million job losses would be indirect job losses (the so-called “supplier effect”) and spinoff job losses (basically, people lose jobs at 7-Elevens formerly patronized by people who had jobs at the Big 3, and then these former 7-Eleven employees shop less at K-Mart, so other people at K-Mart lose their jobs and so on), and so are dependent on econometric models that are, to put it mildly, not 100% validated. Even in this case, note that within three years, these models estimate that about 1.2 million of these indirect and spinoff jobs would be replaced, so that the longer-term job losses would be more like 1.8 million. These projections assume the Big 3 and all international auto manufacturers (because of the collapse of suppliers) literally cease all U.S. operations for a period of time. They also assume that over time only about 20% of the cars that otherwise would have been sold by Detroit manufacturers would be produced by international manufacturers (or, implicitly, by any other buyer of Detroit’s assets) in the U.S., and the rest would presumably be imported forever.

This study doesn’t make crazy assumptions, but it’s surely about as bad as a rational worst-case scenario can get. If this is the worst-case, here are some simple questions:

1. The U.S. civilian labor force is about 150 million people. 3 million jobs is about 2% of this. The current unemployment rate is 6.7%. Adding three million unemployed would spike the unemployment rate to around 8.6%. In the 81 – 82 recession, unemployment peaked at about 10.8%. So, this would mean getting about halfway between the current unemployment rate and a bad recession. How is this Armageddon?

2. Thought of another way, the U.S. economy shed 533,000 net jobs in November. So, 3 million job losses is the equivalent of 5 – 6 more months like the one we just had. How is this Armageddon?

3. The money used for this purpose is money that is not used somewhere else. The amount that would ultimately be loaned to the Big 3 is unclear, but most observers believe that when all is said and done, it will be much, much more than the $34 billion that the Big 3 have requested. Let’s assume $100 billion. As a pure thought exercise, how many jobs could we create with an extra $100 billion of venture capital? How much more sustainable would these be than jobs in companies that need to come to Washington to beg for capital?