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InsiderOnline Blog: December 2008

Detroit’s Fanciful Estimates

Detroit’s big three automakers claim that unless they get $34 billion in assistance from the taxpayers, 3.3 million workers will be out of a job. According to a new report from the Heritage Foundation’s Center for Data Analysis, that estimate is about seven times too big.

The claim of the automakers is based on a study by the Michigan-based Center for Automotive Research that estimates how a complete shutdown of automaker operations would ripple throughout the economy. In the CDA paper, Karen Campbell and Paul Winfree point out a number of unrealistic assumptions of the model used by the CAR. The most obvious problem is that a Chapter 11 bankruptcy does not mean a complete shutdown of operations. In Chapter 11, the automakers would still continue to make cars. The CAR report also fails to incorporate realistic assumptions about how consumers would react to fewer—or, as the CAR report assumes, no—domestically produced cars. Some consumers, for instance, would buy in the used car market, and that would create jobs in body shops and in producing parts for the aftermarket. Also, increased imports of foreign cars would put downward pressure on the dollar which would increase exports of other U.S. goods and services and jobs gains in those sectors would offset some of the jobs lost in the auto making sector.  

Using an alternative model—The Global Insight Short Term U.S. Macroeconomic model—that uses more realistic assumptions, Campbell and Winfree estimate that chapter 11 for all three automakers would lead to 453,000 jobs being lost in the first year. That’s about 86 percent less that the estimate being thrown around by the automakers.

Posted on 12/08/08 06:58 PM by Alex Adrianson

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