The Hidden Risk In Losing GM

This is an interesting article from Susan Helper, an economist at Case Western Reserve University. It appeared in the WSJ Real Time Economics blog. I’m not sure whether Ms. Helper is making a case for GM and its prospects for survival or suggesting they are difficult at best but she does raise some interesting points regarding the complexity of automobile manufacturing.

She points out that one of GM’s chronic problems has been its inability to manufacture cars that the public wants to buy. She puts this down to a lack of capability and questions whether all of the cost cutting is going to further erode it. It’s a question she leaves unanswered but the rest of the article gives one something to think about.

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, computers, and semiconductors. Innovations pioneered for the auto industry spread to other industries as well (See this article). In some cases, it makes sense to deal with capabilities unavailable in the U.S. by buying from abroad — the U.S. has no monopoly on good ideas. But, because of the integrality mentioned above, wholesale importing of capabilities threatens the viability not only of GM but also of U.S. manufacturing.

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.

I’ve seen somewhat the same argument advanced from a national security point of view. I tended to discount it but given the logic she presents have to admit that there is some merit in the concept. The question might be is saving GM the right way to foster our manufacturing infrastructure or would we be better off letting the healthy market participants thrive without GM’s participation.

I don’t have the answer to that one but Ms. Helper raises some good points.

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