The Multiplier Effect

The Multiplier Effect

Top execs from the Big Three automakers come to Washington this week to make a pitch for a federal infusion of cash to save their companies. Whether you think the government should prop those companies up or let them fall — and the NAM has come out in favor of providing some relief — their successes and failures have long had a ripple effect on the American economy. The auto industry's gone as far as to develop a video detailing the many Americans who rely on that industry for their livelihoods.

While autos represent our largest manufacturing industry, they're not the only U.S. manufacturers with a sizable ripple effect on the economy. In a study done several years ago, NAM showed that manufacturing's multiplier effect — the economic impact that making $1 worth of products has on the rest of the economy — is greater than that of any other sector. This includes the jobs created to supply manufacturers with raw and intermediate products, jobs created to service all these industries, and jobs created to distribute products at wholesale and retail.

In other words, when one of our electrical manufacturers reduces its footprint in this country (or goes out of business), the impact is far greater than policymakers or the public realize. Not only does that company have to cut staff, those who supply parts and materials and those who service that company must find new business or reduce their staff as well. Distributors and the retailers are affected downstream. Tax collections from all these sources fall. And ultimately, living standards do the same.

Food for thought as we enter difficult economic times and the next Administration and Congress wrestle with what to do to help or hinder the private sector.

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