It seems that everyone is an expert on the auto industry these days,
claiming to know what the industry did wrong or what it needs to do
now. From Alabama’s Senator Shelby who thinks the U.S. companies
"are history" and should file for bankruptcy, to President-elect
Obama who says that any bridge loans provided by the government
should be a bridge "to somewhere," the opinions cover the gamut.
With Congress set to bring back the Detroit 3 CEO’s to explain their
plans for financial solvency if granted the loans, the spotlight can
get rather uncomfortable for the leaders of an industry in distress.
Of course, its a blood sport in Washington to kick someone when
they’re down, and the Detroit 3 haven’t always been the best of
friends for many over the years.
But while there’s plenty of criticism the industry may be deserving
of over the past few decades, many critics seem to be stuck
in a time warp, unaware of or refusing to recognize recent history.
The last 5 years have been a time of tremendous change within the
domestic auto industry, with new management and ownership structures,
historic labor contracts, landmark new fuel economy standards, and
sadly, massive industry consolidation and downsizing affecting many
workers and communities throughout the country.
While there is still work to be done, it is puzzling, and even
somewhat offensive, to hear critics suggest that the industry "must
change its ways" if it expects to get government aid. Have they been
asleep, or just bringing up old grudges I wonder.
For example, for those that say we need to condition any new loans on
requiring the auto companies to bring out more fuel-efficient cars,
uhh, did you forget that Congress just passed the most vigorous new
fuel economy standards of the last 30 years? In response to the new
law, as well as last year’s spike in gasoline prices, the companies
have been investing billions to retool engine and transmission plants
and to bring to market new fuel efficient vehicle designs. The
government estimates that meeting the new standards will cost the
industry upwards of $100 billion over the next 10 years.
The only problem is, auto sales have bottomed out during the current
credit crisis and cash reserves (and favorable lending rates) have
evaporated along with it. How are the companies going to bring on
new fuel-efficient cars without any cash to make these critical new
investments?
For those who say, the auto companies need to cut costs and get out
of expensive labor agreements before they get aid, uhh, did you
perhaps miss last year’s historic labor contract with the UAW, or the
repeated notices of employee layoffs and buyout offers?
Faced with intense competition from lower cost foreign competitors
and legacy costs for retiree health care that other firms could
avoid, the UAW agreed to contract concessions that included slashing
starting pay for new hires in half as well as cutting in half retiree
health care liabilities through the creation of an employee-run
health care fund. And if this wasn’t enough, both blue-collar and
salaried employees have shed hundreds of thousands of jobs at Detroit
3 companies alone, with ripple effects even more severe throughout
the supplier companies and communities where plants have been shut-
down or idled. Faced with possible bankruptcy, these impacts are
just be the tip of the iceberg.
And finally, for those who say there should have been a plan before
Detroit automakers bothered coming to DC, well that’s a good point,
except where were you during the recent Wall Street bailouts? (See
this great post: http://oxdown.firedoglake.com/diary/2125/) In
those cases, Congress appropriated $700 billion here, $125 billion
there, with authority granted to the Treasury’s Hank Paulson to work
out the details. Are the countries’ automakers somehow less worthy
than our financial institutions who, by the way, got us into this
credit mess in the first place? Hmmm, somewhere I detect a double-
standard.
So yes, lets ensure accountability and put reasonable conditions on
any loans, including limits on executive pay. But let’s leave out
the self-righteous "know better than thou" attitude. We need a
domestic auto industry, not only for the essential jobs and economic
activity it provides, but also for helping us meet our national
energy and climate goals.
13 Comments
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FLINT, MICH. — EDITOR’S NOTE: The writer is answering the question: Should Congress bail out the Big Three automakers?
With the Big Three facing serious financial troubles and GM on the verge of bankruptcy, the American taxpayers, via Congress, are being asked for a bailout. Instead, maybe it’s time that GM faces reorganization through bankruptcy court, just like the thousands of other failing businesses that seek protection through Chapter 11.
The financial troubles of the Big Three have gotten increasingly serious lately, but the underlying problems have been getting worse for decades without being adequately addressed by management or the United Auto Workers. A taxpayer bailout would only reward irresponsible behavior.
Many of today’s serious problems can be traced back to the 1970s, when the Big Three sold almost nine out of every 10 cars and the UAW had a monopoly on the labor supply of autoworkers. At that point, neither management nor labor faced any serious competition.
Without strict discipline of market competition, both sides pursued short-run, self-interested goals in the 1970s that helped create the serious troubles they face today.
For example, the UAW consistently negotiated incredibly generous wage and benefit packages for its members that laid the groundwork for major problems decades later, including a $30 per hour pay gap between the UAW (including legacy costs) and nonunion workers for the foreign transplants.
Economic theory suggests that the more successful a union is at achieving above-market compensation in the short-run, the greater the likelihood that those unionized companies will eventually suffer losses in market share, employment and output. This is the situation today; with the Big Three’s market share and UAW membership at all-time lows.
The above-market compensation gains of the UAW led ultimately to long-run losses in union employment, as the UAW gradually priced its overpaid members out of the globally competitive labor market.
In the undisciplined years of the past, GM management could maintain labor peace by conceding to above-market pension and health care benefits for retirees, which didn’t affect the bottom line much in the short run but imposed huge legacy costs on distant future periods.
Those once-seemingly distant quarters have arrived, and the overly generous benefits for workers that GM management accepted have mounted to unsustainable levels.
GM spends $5.2 billion on health care for more than 1 million people, equaling almost $5,000 per person each year, and adding $1,500 to the price tag of every vehicle. Pension costs add almost an additional $700 per car. This is a clearly an unsustainable, outdated business model that doesn’t deserve taxpayer support.
To the legacy problems, add the increasingly intense global competition of recent decades, and you have all the necessary ingredients for a domestic industry that is on the verge of bankruptcy.
The UAW has gradually lost its labor monopoly on the supply of autoworkers and must now compete with nonunionized American workers at Toyota, Honda and Nissan, who are paid less, are more productive and work without cumbersome union work rules. Unions have become increasingly irrelevant and outdated in today’s knowledge-based global economy, and bankruptcy will do more to correct that situation than a taxpayer bailout.
In the more static days of the past, the Big Three and the UAW had a business model that worked, but it has fallen apart as the twin forces of globalization and non-union labor competition have exposed the flaws of an outdated way of doing business.
It’s time to face reality: the Big Three-UAW business model is bankrupt, the era of above-market compensation for semi-skilled workers is unsustainable, the importance of unions is rapidly fading and globalization is here to stay.
Simply put, the American taxpayer should not be expected to bailout the excesses and undisciplined behavior of the UAW and the Big Three that has been going on for decades. Bankruptcy and reorganization, not a taxpayer bailout, is the best long-run solution for the Big Three.
Mark J. Perry is a professor of economics at the Flint campus of the University of Michigan. Write to him at 4173 White Building, UM-Flint, Flint, Mich. 48502, or e-mail him mjperryumich.edu.
Thank you for this.
If there is a link to this material, it would be great to have it posted in this thread.
a one sided arguement
unions must exist, they should be the default protocol not the exception, just as industry does not set the price for their steal nor can they set the price for their labor
there must be negotiations so the labor force gets fair return on their assets, there can of course be competitive unions but there must be unions
when a product enters this country having the benefit of not paying their bills, ie, they do not have collective bargaining for their work force, then that product must absoulutely be tariffed
the tariff must realize the costs that the industry has refused to pay by avoiding the collective bargaining process
this should not be seen as “taxing” or “protectionsims” it needs to be seen as “forcing industry to pay their own bills”
now, american auto companies have been quite competitive until recently, they only thing they did wrong was invest in the wrong product line
THAT’S ALL THEY DID WRONG
their mistake was NOT paying their own bills by having a union work force, they were plenty competitive before this oil crunch.
the loan needs to have strings as you say and assets need to be attacched to those loans so the middle class isn’t left giving charity but the answer is simple;
“all funds must be used to retool for the final goal of energy independance”
this is simple stuff here
I want to add something further, I wish I could post this to the author of that article as well;
first of all, that’s clearly code for “unions are the bad guy”h
second of all, here’s what’s unsustainable;
corporations paying UNDER fair value for their product and doing it because there is no union and they have the bully pulpit.
the reasons are two fold, obviously it’s more important for a labor force to have living wage then it is for executives to enjoy million dollar retirements.
the second important point is the fact that when a laborer does not earn a living wage then those who do earn a living wage wind up paying bills for those who cannot afford the necessities to survive
I don’t want to pay the emergency bill when this laborer’s kid breaks his arm, I don’t want to pay the for the operation when this guys wife gets cancer and I DON’T want to pay to support this man when he’s too old to work and has no assets to retire.
people like the author of this piece are simply corporatists who think industry should not have to pay it’s own bills, should not have to broker an adaquate fair value deal for their labor force and they are union busters with a fancy bow
here’s the link and the comment page;
http://gazettextra.com/news/20…../#comments
I posted my response to this author which was a cut and paste of what I posted here, I hope he has the nerve to respond
ps
if you go there to post a comment it seems the board does not accept double spacing so puntuate with indents instead of double space
The author of this response clearly did not read my post because his assumptions are that nothing has changed within the industry in recent years. While I don’t agree with the author’s perspective on unions, the fact is that the UAW and domestic automakers have a totally new contract now that, for better or worse, brings it largely in line with its foreign competitors. They have also attempted to deal with the problem of legacy costs that other automakers don’t have to deal with by creating an employee-run health care fund. This wouldn’t be a problem at all if the U.S. had a national health care system similar to the countries where European and Japanese automakers are based.
Once again, I think most people are not paying attention to recent events and are simply clinging to their ideological positions. We’re not in the 1970’s anymore. The auto companies are going through a period of profound change and need our support. Now is not the time to abandon ship.
I hope Professor Perry Doesn’t have tenure at U. of M. Flint. I am sure that he will be joining all the other Flint residents on the bread line.
I would like to know the real figure of what health care costs gm for each worker.
I am under the opinion every employer should be providing health care but it’s hard to believe the cost per person is 5,000 dollars.
does anyone have that figure verified?
thoughts on ‘auto bailout’..
media hype about “private jets”..
A) what did bank execs use to fly to DC to pray for money..
Answer.. they didn’t have to fly, DC came to them via their own boy (paulson) firmly ensconced in the whitehouse.
Why the economic powers want the big three dead..
A) each owns many patents that the banks want to own..
B) GM, alone has an enormous retirement fund they administer. When everyone else was giving their money to the investors.. er, investing in fast growth ’safe’ stocks, GM decreed the investments were too risky to enable them to ensure maintenance of their retirement fund & kept their funds safe. Big Investors want this money.. The first thing to go will be this fund. SS is good enough for the blighters.. many under 65.. Oh, well, so they have to go to work again.. This is good.. more workers helps to ‘lower the cost of labor’ & that’s good, right? Well, not to the workers, who still have to feed families & pay bills.. You know, all the things the wealthy (money manipulators) don’t have to worry about..
C) When a bank with no assets fails, the investors loose their pants.. When a company with physical assets fails, the material assets can be sold off to make the banks richer.. This IS the meaning of life in the U.S., eh? Who cares that auto manufacturing will move completely off shore? That simply means more unemployed workers & the cost of labor drops even more! To big business, this is a win-win situation!
Remember, Cheney said he was going to do this to america… He said he was going to run the country like a business.. & in the U.S., that means to sell off all the assets, pocket the money & throw away the burning hulk.. Looks like he won.
To all who welcomed Cheney to the feed trough, I say you deserve this.. The rest of us don’t.
bingo
Hi CharlesG, very nice post you have done here.
I was just going to write the same thing — so I’ll ditto it. GREAT Discussion — extremely informative. If the first poster isn’t a shill for you, then you should recruit him. Playing off the opposite side provided plenty of answers to knotty questions, quickly.
Bravo!