General Motors announced on Monday it will be laying off 14,700 workers, closing five factories, and discontinuing several car models. This has caused some soul-searching in the midst of a boom economy. There are three main lessons for policymakers and the public.
One, GM is being too shy about the reasons for the layoffs. President Trump’s tariffs have already cost the company a billion dollars. GM is skirting the topic, possibly to avoid political blowback—a strategy that is already not working.
Two, President Trump is right to want to end GM's government subsidies, but for the wrong reasons.
Three, contrary to popular belief, U.S. manufacturing is healthy, despite GM’s bad news.
GM has publicly cited many reasons for its layoffs and restructuring. Autonomous vehicles are the future, and many of those vehicles will likely not be using gasoline engines. Even a big company like GM only has so many resources available, so it is putting less into traditional cars so it can put more into developing what it thinks people will want in the future.
The other major cited reason is shifting consumer tastes. People are increasingly moving away from sedans and towards SUVs. So GM is discontinuing poor-selling sedans such as the Buick LaCrosse and Chevy Cruze that aren’t as popular as they used to be, as well as the Chevy Volt, an early electric car that car buyers mostly ignored.
Tariffs are conspicuous in their absence from GM’s public statements. President Trump’s steel tariffs alone add an average of $250 to the cost of making a car. Other tariffs affect more than 100 car parts ranging from tires to car batteries, further increasing costs and consumer prices. The billion dollars tariffs will cost GM annually is enough to pay the salaries of 24,000 assembly workers. The layoffs affect about 14,700 workers.
President Trump did not take kindly to the plant closings, tweeting a threat to end GM’s government subsidies as retaliation for the plant closings. Such a proposal would have to pass through a skeptical Congress, and any legislation would be immensely complicated, with provisions ranging from green energy subsidies and labor regulations to trade protectionism that would, implausibly, target GM, but not other companies. The proposal simply will not happen. Still, President Trump is right that GM shouldn’t be getting government subsidies—but neither should any private business.
Unfortunately, this is not what the President has in mind. His subsidy proposal is part of his larger approach of using government to help or harm individual businesses as he sees fit.
In this case, the President’s larger policy goal is to revive American manufacturing. Fortunately, the patient is healthy. Real value-added U.S. manufacturing was $2.125 trillion as of the most recent report, setting a new all-time record—which was previously set in 2007, just before the Great Recession.
Unfortunately, President Trump’s efforts to aid a healthy sector will hurt it instead. His trade policies and other countries’ retaliations decreased last quarter’s growth by as much as 1.8 percentage points—meaning that already-stellar 3.5 percent growth could have been 5.3 percent instead! The new manufacturing output record should have been set even higher.
As the new $200 billion China tariffs take effect and the other new tariffs settle in, the damage will only increase over time. The manufacturing sector will find a way to remain competitive, but current trade policies are making the job harder than it needs to be. Neither manufacturers, their workers, nor consumers will benefit.
GM’s layoff announcement will not be the last bit of bad economic news we’ll see in the next few years. It is important to learn the right lessons now to fix current mistakes and prevent future ones.
Companies and consumers need to be more assertive in standing up against harmful policies. Government needs to dole out fewer subsidies. And despite popular perceptions and harmful policies, U.S. manufacturing is cranking out record output and doesn’t need Washington’s hurtful brand of help.
Originally published at Fox Business.