How Bad Would Auto Bankruptcies Be?

Just how bad would it get it GM and/or Chrysler declared bankruptcy as the GOP wants them to do? The estimates aren't pretty at all.

Industry experts and economists say the automakers would close plants, fire tens of thousands of workers and cut production. That would cause many of their suppliers to collapse, triggering more job losses, straining the cities and states where the car and parts companies operate, as well as federal safety-net programs.

It would also deliver another psychological blow to consumers and a major shock to Main Street following the crises on Wall Street.

“The auto industry is a key element in the economy,” said Bob Schnorbus, chief economist at J.D. Power & Associates in Troy, Michigan. “Anything that disrupts it is going to slow the economy down more than we have already seen.”

Economists say it’s difficult to estimate the full impact, given the large number of possible scenarios. The outcome hinges on which companies filed for bankruptcy and when, and whether they would be able to continue building cars and trucks while in reorganization -- assuming they don’t go into liquidation.

“It would be unprecedented,” says Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Connecticut. “So it’s hard to say exactly what would happen.”

In other words a bad situation would get significantly worse at minimum. How quickly would that happen after a filing?

Still, a GM or Chrysler bankruptcy “would be the start of a cascade of failures,” says Dennis Virag, president of Automotive Consulting Group in Ann Arbor, Michigan. “The economy will be in chaos within weeks.”

That quickly.

And it won't be just obvious auto jobs that are lost, but millions of non-auto jobs too, especially in communities where auto plants are a primary employer.

If there were just a 50 percent contraction in the auto industry, nearly 2.5 million jobs would be lost in the first year, resulting in $125 billion less in personal income before a partial rebound in later years, according to the Center for Automotive Research in Ann Arbor, Mich. State and federal coffers would lose $50 billion from lost tax dollars, the center said.

"We believe the economy is in such a weakened state right now that adding another possible loss of one million jobs is just something our economy cannot sustain at the moment," White House spokeswoman Dana Perino said Thursday.

Experts say it's not just the obvious — car companies, suppliers and dealers — who'll be affected. Failure of these companies could affect national security, television studios and even sports teams.

"If you knock out these suppliers who are also providing powertrains and axles to the military, what are you supposed to do then?" former Energy Secretary Spencer Abraham said Friday in a phone interview.

The economy is so weak right now that there's no slack to absorb the blow. The system is already stretched to breaking, especially in Big Three auto plant states like Michigan, Ohio, Indiana, and Pennsylvania.

GM is already in talks this weekend with the White House and the Treasury department to try to get something going, so we'll see what happens.