The global economy and Detroit

One of the last bright spots of the U.S. economy -- export growth -- is dimming. So maybe it's not such a great idea to let domestic automakers fend for themselves.

By Andrew Leonard

Published November 18, 2008 5:09PM (EST)

On Thursday, Brad Setser, who follows international money flows more closely than anyone else in the econoblogosphere, noted that September's trade statistics detailed a sharp (month-to-month) 8 percent drop in U.S. exports. This is bad news, as Paul Krugman emphasized on Saturday, because export growth has been one of the few sectors of the American economy performing decently during the recent troubles.

On Monday, economist Menzie Chinn further dissected the numbers, noting with some alarm that the decline in capital goods exports -- 10 percent -- outpaced the overall numbers.

Why focus on capital goods exports (more so than say ag exports), given their volatility? Because they represent foreign demand for goods that can be used to produce things; as demand for capital goods goes down, so too should one's inferences about future growth prospects abroad. And that growth abroad (and the associated U.S. exports) has been what's been keeping the U.S. economy out of recession.

Of course, by now, most economists believe we are already well into a recession. But what I find most disturbing about September's numbers -- and remember, October is when the wheels really started to fall off the global economic bus -- is the suggestion that we are still only at the beginning of what could be a major unraveling of global trade flows. The obvious implication is that stresses on the U.S. economy will continue to grow worse.

Which brings us again to the topic of the week -- the fate of Detroit's Big Three. To bail out or not to bail out? To me the key question with respect to whether the government should attempt to keep these tottering giants standing is not whether they deserve to be saved, or even whether saving them now will prevent their ultimate demise a year or five years from now. The paramount question is what effect would, say, a G.M. bankruptcy have on the overall U.S. economy right now, as we head directly toward ever more perilous waters? As James Surowiecki writes in his Balance Sheet blog, even if "coming to G.M.'s rescue would only delay the inevitable until next summer... it might still make sense to put the twenty-five billion dollars into the company as a way of averting yet another massive trauma to the economy at a time when businesses and consumers are feeling incredibly fragile."

In the New York Times Economix blog this morning, Catherine Rampell explores the question of how many jobs would be lost in the event of a major "contraction" of the U.S. industry. She cites a study released by the Center for Automotive Research on Election Day.

The study... estimates "the economic impact -- in terms of jobs, compensation and tax revenues -- of a major contraction involving one or more of the Detroit Three automakers," under two separate scenarios. In both cases, there would be major short-term shocks to employment; depending on which scenario you use, a contraction of the Detroit Three would result in direct and indirect job losses of 2.5 million to 3 million in 2009.

That's a lot of jobs, right smack in the middle of the worst recession in modern times. I am one who has long believed that U.S. automakers deserved their comeuppance. But now is not the time to extract a Ford Expedition or Chevy Tahoe-size pound of flesh.

Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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Globalization Great Recession How The World Works U.s. Economy