Peter Navarro is a professor at the Paul Merage School of Business, University of California-Irvine, a CNBC contributor, and author of The Coming China Wars. 

He is today’s GUEST COLUMNIST on ManufactureThis.  (As always, we note that guest columns do not necessarily reflect the views of AAM and ManufactureThis, but are provided to help foster a wider debate on manufacturing and U.S. trade policy).

We Must Save Detroit’s Automakers to Save Our Manufacturing Base

We must bail out Detroit’s automakers not just to save a key strategic American industry but to also help preserve what remains of our once mighty manufacturing base.  Without a robust manufacturing base, the U.S. economy will lack the core strength to sustain any robust longer-term economic growth.   This is a critical message not clearly understood by either the Bush Administration or the gaggle of pundits and politicians lining up on both sides to debate this issue.

Consider that the auto industry directly employs almost a million workers and indirectly employs at least another two million in its supply chain.  This supply chain includes both heavy manufacturing industries such as aluminum and steel as well as niche industries ranging from precision metalforming to pressure sensitive tape.  These three million workers constitute fully 20% of the roughly 15 million U.S. manufacturing jobs left in the U.S.

  The critical importance of America’s manufacturing jobs lies in their significant “multiplier effect.” Indeed, of all the major types of jobs in the U.S., manufacturing has the highest “multiplier” –from 4 to 5 depending on the estimate.  This means that for every one job created – or saved! – in manufacturing, an additional four to five jobs are created downstream — from cops, firefighters, and teachers to dry cleaners, insurance agents, plumbers, and real estate brokers.  Moreover, average wages in U.S. manufacturing are higher than in most service sector jobs.  That’s why manufacturing jobs, with their high wages and high multiplier effect, represent the “seed corn” of any prosperous economy.

From these facts, it should be obvious why the U.S. economy in such a mess.  The loss of millions of manufacturing jobs since 2001 has contributed significantly to the more than 10 million Americans now out of work as well as stagnant American incomes.  In this regard, while many of those workers who lost their jobs in manufacturing found new jobs in the service sector, the service sector multiplier is less than half that of the manufacturing job multiplier. 

The broader policy point is simply this: After all of the monetary stimulus the Federal Reserve can possibly apply and after all the fiscal stimulus Congress can muster to address the current short term recession, the U.S. economy will still never return to its former levels of long term growth, glory, and prosperity without a full restoration of its manufacturing base. At this critical point in our history, any first step towards such a restoration must include rescuing Detroit’s Big Three – and the extended supply chain that serves them. 

Yes, such a bailout would perversely reward the myopia and mismanagement of these three struggling corporations over the last several decades. However, the current crisis is not at all of their own making.  That’s ultimately why in this era of big picture bailouts, we need to look past Detroit’s well-known past foibles and see what the real stakes are.

From a big picture perspective, our government is doling out money to the likes of Citigroup and Bank of America not to save these fat cat corporations but rather to rescue the broader banking system. We are likewise lavishing billions of taxpayer dollars on AIG not to prop up this fat cat, derivative-gambling corporation but rather to save the broader insurance system. In this same big picture vein, saving GM, Ford, and Chrysler likewise has a much bigger agenda — preserving a significant chunk of what’s left of America’s vanishing manufacturing base.  So let’s get on with it before GM and Ford and Chrysler burn through so much of their cash and suppliers in their chain are so weakened that a rescue will be moot.

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This entry was posted on Tuesday, December 2nd, 2008 at 9:25 pm and is filed under Manufacturing in the U.S.. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.