13 July 2009

GM and Chrysler Move On, Rust Belt Doesn't

The operating successor companies for both GM and Chrysler are now operating outside of bankruptcy, while creditors of the legacy companies fight over the pittance of assets that remain. Both companies have substantial union retiree trust and government ownership. Fiat is a major private shareholder of Chrysler. GM private bond holders have taken a 10% stake in the new company. Ford is now the only investor owned, publicly held American automobile manufacturer left.

Both GM and Chrysler are dramatically restructuring their businesses. Non-core businesses like financing arms and recently acquired brands have been jettisoned or are in the process of being jettisoned. Both companies are making dramatic cuts to their dealership networks. GM is selling its Saturn and Opel brands, and discontinuing the Pontiac brand and laying off about a third of its employees, leaving a new company which is only a shadow of its former self.

The Old And New Rust Belt

This means another 20,000 or so lay offs at GM, on top of additional layoffs at Chrysler and automobile industry suppliers and dealerships, with the brunt of the burden concentrated in the Rust Belt, the former hub of American industrial activity, more or less, from Pittsburg to Buffalo and then along the Great Lakes to Milwaukee. Interestingly, many of the workers were lured to the Rust Belt from the South in one of the greatest waves of internal migration ever seen in the United States, at the height of the American industrial era.

The manufacturing industry has been in decline in the United States for about four decades. Manufacturing industry growth, where it has happened at all (almost entirely outside the Big Three American auto makers, often in relatively small businesses), has been centered in the South, in a band from the Carolinas to Mississippi. These states are, accurately, perceived by management as less prone to unionization and environmental activism. the wage scales are lower there, the legacy of past industrial pollution can be avoided, and companies can quickly secure the political privileges that come with becoming dominant employers in the region.

Left In Their Wake

The impact of the automobile industry's most recent stumble have focused on its Detroit hub. But, cities across the Rust Belt have suffered. According to the UAW regional director in Flint, Michigan:

In the late '70s early '80s, there was 80,000 GM workers. Currently, we've got 6,100. That doesn't count the job loss from the supplier-base side[.]

These job losses so far have had a dramatic impact on the City of Flint (emphasis added):

At its peak, Flint was home to General Motors, with a growing population of some 200,000 people . . . . Today, the population is about half what it once was . . . . More than one-third of the homes in Flint have been abandoned. . . . Last month, Flint's acting mayor, Michael Brown, stirred controversy when he spoke publicly about "shutting down quadrants of the city." . . .

Alan Mallach, an urban planner with the Brookings Institution, says the debate in Flint is similar to debates in a number of other Rust Belt cities. . . . "There are certainly thousands of properties that need to be demolished — they're not fit for human habitation. . . . But it doesn't follow that the other residents on the block want to move to some other place. I don't think any city has figured out how to do this yet."

The county treasurer responsible for Flint uses an analogy that I've used before on this blog, Flint "looks like the Lower 9th Ward in New Orleans — a sort of a slow-motion [Hurricane] Katrina."

In Flint, as in Detroit, community gardens are being eyed as one of the most attractive ways to fill land that was once full of abandoned buildings.

In Milwaukee, real estate conditions are so bad in some cases, that lenders are choosing not to foreclose on mortgages that are in default, because the homes that form collateral for their loans have negative value net of liens for property taxes and condemnation issues for the abandoned properties.

Ideas to replace automobile industry jobs abound, but none have really panned out.

Traditional free market economic theory isn't surprised by the demise of the American automobile industry, which production efficiency, off shoring spured by lower foreign labor prices and cheap shipping, and a variety of other factors explain. But, free market economic theory claims that new investment should rush in to make use of cheap land and legions of unemployed people, something that hasn't been happening in real life.


Michael Malak said...

There are legions of unemployed people willing to work at minimum wage in any city, not just Rust Belt cities. Although there may be some advantages of having a minimum wage, the economic truth is that the minimum wage is keeping these people unemployed.

The point is: why set up a factory in Detroit for cheap labor when you can do so on the coasts for the same labor rate (at least for now that's true)?

Andrew Oh-Willeke said...

Nobody sets up factories on the coasts, except the Gulf Coast.