The $60-Trillion Equation

From the Model T to the moving assembly line, the 8-track tape player to onboard computers, the U.S. automotive industry has contributed mightily to the nation’s economy. It also greatly accelerated countless industries, encouraged entrepreneurship, and is a major stalwart of America’s manufacturing base.
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the $60-trillion equation
Illustration by David McMacken

* This analysis serves as an estimate of the scope and historical value to the U.S. GDP of Detroit’s auto industry and is not intended to advocate or reject the use of Detroit-directed taxpayer funds now being debated in Washington.

The name “Detroit” long ago became synonymous with motor vehicles. And if ever there was an industry that demonstrates the meaning of “economic impact,” it’s Detroit’s automakers.

Along with its century-old reputation for car-building came the enviable status associated with being the birthplace of the modern, moving, industrialized assembly line. For nearly a century, textbooks have recorded for the ages how Henry Ford’s mass-production process created astonishingly high weekly wages for its workers and, equally appealing but more beneficial to the nation, a permanent reduction in the price of basic transportation across all income classes.

This is a look into the rise of Detroit’s auto industry and an attempt to quantify a portion of the value it added to our nation’s GDP. Here is a summary of many — but by no means all — of the great contributions and accomplishments of a productive, energetic, competitive people with an unbeatable winning spirit. The wealth created in the process has endowed universities, art museums, engineering and medical research centers, libraries, countless community foundations, symphonies, opera houses, and other eleemosynary activities.

The $60-Trillion Analysis

Getting one’s arms around the tangible dimensions of an industry is challenging. In the case of America’s auto industry, which employs more than 2,000,000 people between the Big Three and its suppliers, the task is daunting. The exercise is made easier by systematizing the approach: List the input flows; track the output flows; measure both.

To make cars, trucks, buses — anything from Mars rovers and lunar landers to Navy patrol boats (as Ford did during World War I), the plant must receive numerous raw materials, such as steel, iron, aluminum, copper, brass, zinc, plastic, and rubber. Modern vehicles also require sizable volumes of electronic parts, specialized paint, glass, heating and cooling equipment, fabricated machinery and equipment, textile products, and the services of trucking and warehousing.

Some of these inputs are colossal in terms of overall national demand. To illustrate, motor vehicle output requires 32 percent of all aluminum consumed annually in the United States. Similarly, the auto process absorbs 23 percent of all U.S. zinc and glass; 68 percent of all rubber; and 14 percent of all steel. All told, these so-called “upstream” industries dedicate an estimated 2,900,000 jobs to the domestic auto function.

Once the vehicle comes off the assembly line, it’s typically transported to dealerships. But this is simply the most visible “downstream” employer and user.

With 22,000 dealerships in the United States employing 717,000 people selling new cars and warranties, it’s a giant component of the industry. It’s even more formidable when we recognize that each dealership is serviced by its own cluster of suppliers employing another 490,000 individuals.

To this hub industry, we add functions such as construction workers, truck drivers, those engaged in auto finance and insurance, wholesale and retail trade, advertising, and rail transport. These industries are by no means trivial. Advertisers alone devoted approximately 47,000 workers to automotive, as did the construction industry. In ordinary years, used cars sell three to four times the volume of new cars. There are some 93,000 jobs merely on the used-car side of the industry.

And what about the support industries when the buyer drives off the lot? Consider the more familiar 143,000 auto-repair establishments, with 680,000 workers, and the 43,000 stores selling parts and accessories, with 335,000 jobs. This downstreaming analysis of sold-vehicle operations includes 17,000 tire dealers with 143,000 workers; 14,000 car washes with 138,000 employees; rental services with 144,000 jobs; and parking and valet services with 81,000 jobs.

Other aspects of downstream support for motor vehicle operations are notable, as well. There are 127,000 gasoline stations, and more and more are complemented with convenience stores. These facilities now employ approximately 1,000,000 people across the country. Road and highway construction is bread and butter to more than 290,000 workers. There are more than 42,000 employees in the petroleum-refining industry, dedicated to the automotive sector. After all, 50 percent of each barrel of oil goes to automotive, at one level or another.

Besides using the logic of “upstream and downstream” to organize thinking about the industry’s tentacles and economic clout, we have to realize that many auto links can’t be pigeonholed. Consider recycling (junkyard and scrap) entrepreneurs. Some 46,000 wage, salary, and small-business people find livelihoods this way. Also, there are many independent laboratories engaged in research and development for the auto industry, from safety and environmental matters to futuristic design and energy use, both inside and outside of government. That’s another 44,000 jobs. The auto industry, alone, allocated $18.3 billion to R&D funding in 2000.

It would be double-counting to tally payroll, income, excise, and sales taxes, but we certainly need to add tolls on bridges, ferries, tunnels, and roads in order to develop a comprehensive breadth of economic impact when considering America’s 6,100,000 employees and the $428 billion generated yearly in motor-vehicle, travel-related expenditures. Revenues from gas taxes exceed $100 billion annually.

Assessing Impact

Now, let’s examine how this competitive market scenario expanded the economic pie for Michigan, the United States, and the world.

One measure of the American auto industry’s contribution to the GDP is the value of motor vehicles sold. After all, when customers buy passenger cars, taxis, buses, vans, RVs, light, medium, and heavy-duty trucks and so forth, what they pay must cover, in addition to the raw materials, all the values added by labor, management, capital, and land (all resources entering the final product). That is, in order to continue the product line, the sales price of the vehicle must cover the input costs of all raw materials (e.g., rubber, glass, plastic, iron, steel, aluminum, and copper), plus transportation, dealership, etc. Thousands of such inputs must be worked and reworked, including dies and all the machines, robots, and lasers that now comprise the testing and production of components.

Beyond the raw material and energy inputs is the essential remuneration of borrowed and invested capital; all worker compensation; marketing and advertising services; utilities, R&D, design-testing, legal, insurance, and compliance expenses; tax and tort liabilities; and a veritable encyclopedia of items most car and truck buyers never imagine.

Value by the Decade

In 1900, according to available records, there were some 8,000 vehicles in operation in the United States. By the end of 1930, at the onset of the Great Depression, there were 26.8 million vehicles in operation. Today, registered vehicles exceed one-quarter billion.

Vehicles-in-operation statistics mirror escalating sales volumes. In 1931, admittedly a real GDP-downer for the country, vehicle sales were 2.2 million. By the entrance of the United States into World War II, annual sales had climbed to 4.7 million. Marching forward, total domestic and import vehicle sales hit an impressive eight-year annual plateau of 17 million units between 1999 and 2006.

Taking actual auto sales by decade and multiplying against the average transaction price during the decade enables us to estimate the cumulative GDP contribution of auto sales from the start of the 20th century. That total comes to $18.9 trillion, measured in current dollars. This figure is derived from roughly 676 million units (both domestic and imported) sold since 1900. Taking just the 536 million units of total non-imported domestic vehicle sales, the total comes to approximately $15 trillion worth of cumulative GDP contribution since the origins of America’s auto industry. By comparison, this is nearly one-quarter larger than 2008’s entire GDP.

However, this estimate would need to be doubled in order to account for the industries tied directly to auto manufacturing and sales. Input-output tables from the U.S. Department of Commerce and the Federal Reserve suggest that “doubling” is a reasonable approximation. That is, we need to factor in the business establishments whose livelihoods are inextricably bound up in shipping either to the firms that service automakers or to Detroit’s automakers directly. From 1900-2008, this doubling of employment, payrolls, and the value-added activities brings the size and significance of the auto industry to $30 trillion.

But $30 trillion, while a cumulative estimate, is by no means the end of the true impact analysis. After all, in making a thorough assessment of the purely economic value of vehicle manufacturing to the overall GDP, we must account for the multiplier effects on income and spending emanating from the auto sector and its ancillary industries. The multiplier-effect is defined as the rippling impacts throughout the economy occurring after the initial wave of wages, benefits, bonuses, philanthropic and foundation contributions, or other awards are injected into communities and the nation. These direct and indirect effects typically “multiply” the value of the initial dollar spent.

Economists at the University of Michigan’s Center for Automotive Research, for example, estimate that for every employee directly engaged in the manufacture of an automobile, there are another 6.6 jobs either supplying or awaiting that output. If so, this would constitute an employment multiplier of 7.6. Note that the 7.6 (employment) multiplier is useful as a reference in gauging jobs linked in some way to automotive. But this is not the multiplier used to derive the $60 trillion GDP spending impact.  For ascertaining spending, there are ripple effects (multipliers) when wages and bonuses are paid. Likewise, there are spending multipliers. Normally, the income and spending multipliers range between 1.6 and 2.0, depending on the psychology of the recipient and the economy’s position in the business cycle at the time recipients of these dollars decide to spend or invest.

Using the 2.0 multiplier, the ultimate 109-year contribution to non-wartime, non-import GDP from America’s auto industry is approximately $60 trillion.

When taking a value-added reading of the auto industry, we should never omit one of the truly distinguishing facets of the industry: the fact that the average annual value produced by an American auto industry employee ($292,000 in 2001) is four times the average U.S. job ($73,000). This is an average. The disparity chiefly reflects the heavy capital investment in state-of-the-art tools, machinery, and computer technology placed behind each autoworker. Productivity-enhancing machines must also be compensated via reinvestment and maintenance, lest the comparative advantage of the workers disappears.

As comprehensive as the foregoing overview may seem, it hardly scratches the surface in the minds of veteran autoworkers, car buffs, or an auto industry scholar/historian. How, for instance, can we even hint at the true value of Detroit’s contribution to the technological and cultural building of America? And what extraordinary value, beyond the tanks, bombers, jeeps, or patrol vessels, can we ascribe to the munitions sent to those safeguarding our liberties, living standards, and way of life? After all, virtually no passenger-car output occurred from 1942-1945, yet Detroit became the “Arsenal of Democracy.”

The history of the automobile can be described as an inverted pyramid. Starting with a single point in time that gave birth to the “horseless carriage,” its subsequent execution and decades of development created a host of industries never imagined by the earliest inventors, like technology and design.

Technology and Design

The evolution of auto design went like this: The 1880s was the era that engineers were challenged to make autos go; the 1890s was the decade that engineers made cars go reliably; and the 1900s was when engineers made cars go beautifully. Certainly it was the 20th century that drew the critical mass that became self-sustaining in attracting and retaining automotive geniuses, from business organizers (Alfred Sloan, William C. “Billy” Durant, A.L. Riker), marketers (Ned Jordan, Hugh Chalmers), and financiers to engineering-design specialists (Earl Thompson, Henry Leland, Harley Earl), scientists (Mary Anderson, John Dunlop), inventors (Charles Kettering, Charles Mott), and machinists (Charles Sorensen).

Many breakthroughs in automotive technology thrust Detroit into national economic leadership and showcased its product to the world. Such notoriety arrived early on the scene. Between 1901-1904, David Dunbar Buick perfected the overhead-valve engine, increasing power to the vehicle and largely guaranteeing the success of the internal combustion engine. By the end of that decade (1910), we had “closed” cars to protect passengers from the elements.

In 1914, Delco installed the electric engine-ignition and lighting for the vehicle. Steering wheels were relocated from the right to the left side. Six-cylinder engines became a regular feature. In 1913, the first moving assembly line was born, along with all-steel auto bodies (John and Horace Dodge).

In 1924, four-wheel brakes appeared. Also during the 1920s, Ford’s River Rouge complex demonstrated the advantages of “vertical integration” as a business model. The plant received everything from Minnesota iron to Brazilian rubber. It took 42,000 workers in 90 buildings to produce cars.

In 1934, aerodynamic bodies came into vogue with help from wind tunnel testing. Car radios and independent front suspensions made the scene, as well. The 1930s saw overdrive, rubber engine mounts, and electric windshield wipers introduced. In 1936, hydraulic brake systems and all-steel roofs became fairly standard. In 1939, cars were equipped with the first electric turn signals.

The early 1940s witnessed the convertible, and by the late 1940s, the first automatic transmissions were being offered on U.S. passenger cars (1948).

In 1952, V-8 engines became popular. In 1955, the public got its first four-door, hardtop sedans. The early 1950s brought power-brakes, power-steering, and hydraulic, no-shift driving. In 1965, the late Heinz Prechter supplied sunroofs to vehicles. And, in the late 1970s, front-wheel drive took off.

Since then, the technology of anti-rust, anti-lock braking, anti-pollution fuel and engines, and lighter-weight materials — not to mention microchip and computer-enhanced sensing, diagnostic, and handling improvements — have revolutionized driving and expectations.

Lifestyle

The growth of the auto industry signaled lifestyle changes in many ways. By 1930, 222 American cities with populations over 10,000 people were entirely dependent on auto transport, with motorists enjoying a five- to 35-minute commuting advantage over trolleys, thereby encouraging suburbanization. Time is money.

Unquestionably, there are side effects from mass-production and consumption, enhanced motor-power, personal mobility, and suburbanization. Car injuries and fatalities, pollution, theft, congestion, government regulations, urban decay, and heartaches surrounding bankruptcies and bailouts are partial offsets to technological progress and competitive improvement.

Nevertheless, lessons are learned. Technology and profits give rise to options and solutions. Theft protection, security systems, safety belts, airbags, cruise control, catalytic converters, the installation of phone and GPS navigation and onboard emergency devices — these are responses by automakers to public demand for better, faster, cheaper, and safer.

Defense

Nor is it possible to fully quantify the auto industry’s contribution to the World Wars. Pearl Harbor brought Detroit’s car production to a halt within the first few weeks of 1942. Record conversion to ordnance swept Michigan. Assembly lines built ambulances, heavy trucks, mortar shell-casings, scout planes, medium and heavy bombers, swift patrol boats, ammunition, and aircraft engines. How does one assign price tags to such adept conversion? What if Detroit’s automotive base hadn’t existed at that moment in history? Possibly we’d have no market economy against which to measure size and impact.

Indeed, Detroit’s stars were in alignment. Historian Clarence Burton wrote that the movement of capital, labor, inventors, and management to Detroit (and places like Flint and Lansing) occurred because of “exceptionally good industrial conditions in this city, which was then (1904-10) as now (1930) reflective more of an ‘open shop’ town than any other large industrial center in the country.” Historian Allan Nevins echoed this observation: “Detroit had an international reputation as a city of abundant and docile labor.” Few would accept a “docile” workforce today. However, we’re seeing the pendulum swing away from militancy and work stoppages, thereby acknowledging a greater understanding of today’s global competitive reality.

Times change, but the legacy of Detroit’s rise with the auto industry and its contribution to America and to the world is cast in steel for all of time.

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