Auto economics - the future of Chrysler, GM, and other auto manufacturers

On Friday morning, I attended a presentation by Charles Chesbrough, Senior Economist at CSM Worldwide, about the future of the automotive industry. This presentation was part of the Dean's Breakfast series at EMU's College of Business. Overall, the presentation was informative but did contain several major shortcomings.

The interesting:
  1. Overview, I enjoyed the review of metrics used to track economic growth and contraction in general. According to Charles, we should see solid turn-around numbers middle to late this year.
  2. Obama's stimulus bill is larger than all other major U.S. spending projects in history - COMBINED. Using inflation adjusted dollars, the $8.7 trillion available in TARP funds is bigger than the Louisiana Purchase, the New Deal, the Marshal Plan, WW II, Vietnam War, the space program, and Iraq-Afgan War - combined.
  3. Because of #2, the federal deficit may reach 100% of GDP by 2014. Again, the U.S. is reaching an unprecedented area. Either taxes will have to increased dramatically, more money will have to printed (inflation?) or our federal government will go bankrupt.
  4. On the automotive side, expected car sales in countries such as India and China (assuming they continue their current growth) will likely be larger than the U.S. within 30 years. For the companies that can establish a footprint in this two countries, they will likely see excellent growth.
  5. Chrysler will likely have a prolonged death. According to Charles, there are no new technologies in the pipeline for Chrysler. So even with the massive bailout today, in 5 years, Chrysler cars will not be even remotely competitive. Even with its merger with Fiat, its doubtful that anyone in the U.S. will want to buy a Fiat.
  6. Many auto suppliers will go out of business. For the past 20 years, the big 3 have been squeezing the margins of the suppliers. Their profit margins are so low, that many will likely have to file for bankruptcy before the recession is over.
  7. Many of the Asian car manufacturers will weather the recession quite well. Honda and Toyota have lean dealership networks, less overhead, and higher profit margins. While their sales have fallen, it has not been as severe as the big 3. They will likely bounce back quickly after the recession.
The short comings with the presentation:
  1. Although Charles never explicitly admits to being a Keynesian economist, he supports Obama's economic policies and calls Obama's policies Keynesian. Unfortunately, Keynesian has a history of being wrong.
  2. No discussion of inflation potential. With the massive spending of unprecedented scale, their is a real fear of high inflation over the next few years. Charles does not discuss that impact on the recovery.
  3. Charles does not understand the causes of economic growth. As one questioner explicitly challenged the presenter with, Charles assumes the economy must be stimulated. He believes that the government can throw money around and that will fix all the problems. He states that the government needs to create "desire". But these measures must take money away from other sources. Besides being highly inefficient, its profoundly immoral.
  4. And not too surprisingly considering the above, Charles argued for a higher gas tax to force consumers to buy small cars, thereby allowing automotive companies to better predict the future. Nothing like good old fashioned communism economic engineering.
[Update: Fixed factual error on the extent of the spending. Its 8.7 trillion, not billion. And its from the TARP funds, not the stimulus.]


  1. John,
    I appreciate your review and summary of my presentation on May 15, but I must protest two of your statements. "Charles does not understand the causes of economic growth" is a pretty strong statement. You may disagree with my position, but I think this statement is harsh, inaccurate and unfair. Also, please quote me correctly or else folks may actually agree with your statement above. I said the 8.7 TRILLION committed via the bailout TARP money is more than all other big gov't programs combined - it is not 8.7 BILLION stimulus. That is a whole other matter, and the amount is actually $787 billion. And, just to set the record straight, I did mention inflation, but I only had 45 minutes and can't cover everything. Thanks, Charles

  2. Oh, one more thing regarding Keynsian Economics. Increasing government spending and cutting taxes is what Obama is doing to stimulate the economy - very keynsian - no argument. But you know who else did this EXACT same strategy? President Reagan. He cut income taxes and massively increase defense spending in his first term (and ballooned the debt in the process). Thanks, Charles

  3. Charles,
    I've fixed the factual error with regards to the TARP funds. Thank you for pointing that out. And thank you for taking the time to comment on my blog.

    As to the you understanding of economic growth, I'm sure you're an intelligent man and have studied economics in great detail. Although I am no expert in economics, I am familiar with the different schools of economic theory and their philosophic foundations. You never explicitly state the causes of economic growth, but it can be interpreted from your presentation, which falls within the neoclassical/Keynesian traditions. This is highlighted by your statement that Obama should stimulate "desire" in gas efficient cars. In essence, consumer desire causes economic growth. You of course believe you understand the causes of economic growth, according to the traditions you subscribe too. But everything I have observed about businesses and the economy says this basis is false. Neoclassical and Keynesian traditions both use highly artificial foundations to support their theories. They are highly rationalistic and make unwarranted assumptions about human behavior and values. To the extent you agree with those traditions, you do not understand the causes of economic growth. Harsh? Perhaps. However, it is not inaccurate or unfair.

    The economists that best get it right (although they are not perfect) is the Austrian economists. In particular, I find George Reisman's book on economics especially compelling.

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