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Halftime in America? Stockman Doesn’t Buy Auto Recovery Story

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More than three years after it took a hard fall, there are signs that America's industrial economy is getting back on its feet and regaining a bit of its lost swagger. New orders at factories rose smartly in December, and were up 12.1 percent in 2011 from 2010 (see Table 2). Last Friday's employment report showed that the manufacturing sector added 50,000 jobs in January, and has added 235,000 positions in the past 12 months.

Check out the news flow coming out of the auto industry. In January, U.S. auto sales blew past expectations, rising 11 percent from January 2011 and checking in at an annualized rate not seen since August 2009, when the Cash for Clunkers goosed demand. One of the most talked-about advertisements on Sunday night's Super Bowl broadcast was Chrysler's "Halftime in America" ad, which featured Clint Eastwood. On Monday morning, the Wall Street Journal led with a front —page article asserting that General Motors, still a partial ward of the state, could earn a $10 billion profit in 2012 ($ required).

Of course, there are two ways of looking at half-time: either the game is half-over, or half has yet to play. David Stockman, the former Michigan Congressman, Office of Management and Budget Director in the Reagan administration, and private equity executive, believes the glass is half-empty. By virtue of his background and experience, Stockman knows a good deal about the auto industry. He voted against the 1979 Chrysler bailout when he represented a Congressional district in Chrysler's home state.

"If you look at the sweep of things, [the January auto sales data] this was kind of a blip in the sub-basement," he tells me and Aaron Task in the accompanying video. Even if car sales run at an annual rate of 14 million, Stockman argues, that's still at a much lower rate than several years ago. And the industry is still dependent on the free and easy extension of credit.

Stockman believes that, while Chrysler and General Motors have both returned to profitability, the bailouts that enabled them to survive were misguided. "The bailouts of GM and Chryslers were totally unnecessary, and we wouldn't be in any different position than we are today," he says. Stockman argues that if GM and Chrysler had been forced to liquidate or to shrink even more than they did in 2009 and 2010, that demand would simply have shifted to other automakers based in the U.S. Suppliers to GM and Chrysler would have picked up more work supplying to Nissan, Toyota, and Ford. "What was at stake was UAW voting jobs in certain voting districts in the upper Midwest," he said.

Of course, this line of argument overlooks the state of the auto industry and the auto market in 2009. With demand for autos plummeting so sharply — annual sales fell from 16.5 million in 2006 to 10.2 million in 2009 — and with financing unavailable for companies, it's likely Chrysler and many of its domestic suppliers would simply have liquidated or closed. And the companies that went out of business would not have been around to participate in the recovery.

Stockman believes the bailouts of GM and Chryslers, and the ongoing recovery of the auto industry, are likely to benefit President Obama in his re-election campaign. But in his mind, that doesn't make them defensible. "This is the reason we're in a huge deficit," Stockman said. "Politicians of both parties go around subsidizing different parts of the economy to win votes."

Daniel Gross is economics editor at Yahoo! Finance

Follow him on Twitter @grossdm; email him at grossdaniel11@yahoo.com

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