The Macroeconomics of the Auto Industry Bailout
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The Auto Industry Bailout
Detroit, Michigan grew up around the automobile industry. At its peak, Detroit was the fifth-largest city in the United States, becoming the home to over 1.8 million people by 1950 (Davey, Monica 2013). The prolific population was due greatly to the success of the auto industry in the city. At that time, Detroit was flying high, its name coined “The Motor City” (americaslibrary.gov), and automobiles greatly impacted commercialization. From transporting goods to hastening production, to selling parts, to manufacturing and selling new automobiles, the auto industry completely transformed Detroit. Things seemed to be going well. Then, in the beginning of the 1980s things started to turn around. From year 2000 to 2010, Detroit’s population dropped another 25 percent, its census coming to only about 713,777 citizens (usatoday.com 2011). The once macro-industrial city revolving around the auto industry, turned into somewhat of a ghost town. Why was there such a downward turn? The downfall began in the 1980s, when the auto industry took a plunge, raising unemployment rates in Detroit (Fein, Zach 2012). This resulted in thousands of empty homes and buildings, as people began to desert the city. The impact had been sizeable and continues to affect the city today; there are many parts of the city that are still not populated (Fein, Zach 2012). As a result Detroit had difficulty offering municipal services, including police and fire protection, good education, garbage collecting, snow removal, and lighting on the streets. This caused an increase in violence and crime since there were not enough police to protect the citizens. This downfall came about because, GM, Chrysler, and Ford were paying a lot more too each worker than the foreign car companies. They were locked into deals with the unions, and had to pay benefits, healthcare, and pension (Hasset, Kevin 2009). This caused an increase in the cost of production of vehicles; which made buying a car more expensive and less affordable. Because of the high spending on unions there wasn’t enough money to advance fuel efficient technology. At the same time there was an oil crisis, in which the price of gas soared. Consumers were more reluctant to purchase fuel wasting cars with prices so high and the future so uncertain. Consumers started to turn to the competitors of the big three for their vehicles, which had more fuel efficient cars, which caused an even further decline in sales. To add to their woes, in the year 2007, The United States went through an extremely difficult financial period called a recession. Many cars were financed through home equity lines of credit, a shocking 24% of sales in 2006 were financed this way. Due to the recession, when many people were not able to pay their mortgages or loans, financing options on vehicles declined. Eventually things started collapsing and people saw the need to cut back on expenses. A popular way to do this was to sell cars, or buy used ones as opposed to new. This greatly impacted auto sales. They dropped 37% in a short time and by 2008; the verdict looked bleak for the auto companies. As a result, in December 2008, the big three major U.S. companies, Ford, G.M., and Chrysler, asked the government for a $34 billion bailout to avoid bankruptcy (scottbourne 2012). They claimed that not receiving this loan would trigger three million layoffs nationwide within the year. President Bush immediately provided $13.4 billion (lordsbaine 2008). The funds were made from The Emergency Economic Stabilization Act of 2008. General Motors received $9.4 billion and Chrysler $4 billion. Then he handed the auto companies’ questionable life expectancy to the new president, Barack Obama, when he lost the 2008 elections (prospect.org 2013). In January of 2009, the federal government approved an additional loan of $85 billion...
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