General Motors Takes the UAW's Bullet

Nobody - not even our famously feckless Congress - now doubts that General Motors and Chrysler are in deep trouble.  It's also perfectly clear how they got into trouble, and their experience offers a number of lessons.

The forces of nature have a habit of repeating a lesson if you don't learn the first time; we got a taste of GM's troubles when Studebaker went bankrupt in the early 1960's and failed to learn much from the experience.  It will be most interesting to see whether anyone learns anything from GM's fall from profitability or whether we have to repeat the lesson again, and again, and again.

False Myths

Today's pundits have criticized Detroit for "not making cars that Americans want to buy."  This is clearly false, despite being the media's favorite drumbeat, as the New York Post pointed out recently.

Some years ago, GM offered major price cuts; people bought their cars, and a great many folks have been happy with them.  GM didn't want to cut prices and called their discounts "incentives," but the bottom line was that you could get a GM vehicle more cheaply than before the incentives were offered - and Americans in their thousands flocked to the lots to do so.

Any number of observers say American cars are unpopular because they are unreliable and badly made, but that's not true either.  Just the other year, the most reliable car on the road wasn't from Japan, or even Germany: it was a Buick, as backward-looking and traditionally American a car as you could possibly imagine.

Yes, some American cars have problems.  So do many of the foreigners: neither Mercedes nor BMW are anywhere near the top of the Consumer Reports reliability list at the moment, Mercedes in particular having suffered a precipitous fall from grace, but nobody on Capitol Hill is calling for heads to roll in Bonn.

No, lots of people have bought, and are happy with, GM cars.  The problem is not that GM doesn't make cars that Americans want to buy.  The problem is that GM can't make a profit selling cars Americans want to buy at a price Americans are willing to pay.

What Went Wrong

There was a time when General Motors made more money than any other corporation in the world.  Now it's losing a billion dollars a month and will go out of business any day now without government help.  What went wrong?

Although a number of factors are involved, the core problem is based on a simple fact of human nature - we're all inclined to put disagreeable decisions off until later.  When the United Auto Workers threatened to go on strike, GM, Chrysler, and Ford promised increased pensions rather than the vast wage increases the unions demanded.

Of course, workers want a raise regardless, so they still got a raise every year.  But instead of the preposterous raises the UAW always wanted, instead they got a generous wage, and a tremendously lavish pension program.  Of the two, though, only the wages had to be paid now.  The pensions would come due someday far down the road, when the executives in charge at the time would themselves be retired.

Keeping wages lower than otherwise was demanded allowed the Big Three's leadership the pleasure of declaring profits, paying dividends and funding management bonuses while the pain of meeting their pension obligations would be put off until later, on somebody else's watch.

Unfortunately, pension costs went up faster than cash flow.  Between 1950 and 1990, for example, the monthly pension promised to retired auto workers went up eight times while the price of a car went up only four times.  In addition, GM lost market share which reduced their cash flow considerably, as well as the number of current workers.

Meanwhile, union negotiations allowed workers to retire at younger and younger ages.  People were also living longer and longer.  Instead of a worker retiring at 65 and collecting pensions for 10 years as was expected in the 1950s and 60s, workers today can retire at 55 and collect for 30 years - or even more.  Having each worker collect a higher pension than had been expected for three times as many years as had been assumed threw cost estimates off just a teensy bit.

Then the accounting standards were changed so that GM had to report whether their pension obligations were fully funded or not, on a strict actuarial basis.  They weren't, to the tune of billions; GM was forced to transfer huge sums into its pension system.  The proceeds from selling EDS and Hughes Electronics, GM subsidiaries which were sold at vast profit, disappeared.

During the 1990's, GM put enough money into its pension system to have bought half of Toyota Motor Corp.  Imagine what they could have done if they'd put that money into product development or into manufacturing productivity!

More recently, in an act of desperation, GM has transferred its retiree health insurance system to the UAW.  This has the long-term theoretical advantage that GM will no longer be responsible for a totally open-ended risk; but again, the change sucked up vast amounts of money GM didn't have, as well as giving the union even more tremendous financial clout than it had before.

Funding the total compensation packages negotiated over a half century of union dominance has eaten up the cash which GM could have used to develop new models and to pay stockholders.  GM stock is now essentially worthless; nobody will lend them any money because all the money they receive goes into pensions or health care, and GM doesn't have the money to develop new models.  Management has essentially conveyed all of the value of the company from the stockholders to former workers and lost its ability to keep up with its competitors.

The bottom line is that GM sales are not sufficient to cover their salary, health care, and pension obligations and, at the same time, to make enough of a profit to keep the business going.  They can increase sales by cutting prices, but selling cars at break-even doesn't help anything except job figures; it doesn't do a bit of good for GM's bottom line as a company.

If You Shoot At Someone, They Might Shoot Back

Meanwhile, though, the UAW has been receiving pricey union dues from hundreds of thousands of unionized workers for half a century, as well as various fees for administering union pensions and now retiree health care.  Union bosses don't just reign over a city-full of blue-collar workers; they sit atop a vast pile of plundered cash, far more than is needed even for their lavish personal lifestyle and private jets.

Instead, they've wisely invested the money in electing liberal Democrats.  The Los Angeles Times provided a revealing statistical chart about campaign donations: the UAW not only donates more money to politics than the corporate Big Three combined, but a full 99% of it goes to Democrats.

When the Detroit bailout passed the US House of Representatives, newspapers speculated that the money might be held up in the US Senate.  Sure enough, Senator Corker (R, TN) insisted that the UAW cut their compensation so that GM had the same labor costs as Toyota.

The union said that they'd consider cuts when their contract runs out in 2011, but that they wouldn't give an inch in 2009.  Correctly recognizing that cuts deferred are no cuts at all and that without labor parity, Detroit can't survive without permanent government aid, the Republicans scuttled the bailout.

The UAW was adamant about not cutting their compensation, both at the Congressional hearings and in their public rhetoric.  The Washington Post quoted United Auto Workers President Ronald A. Gettelfinger as saying, "If we work for nothing, it wouldn't help them limp into January."

If Mr. Gettelfinger actually believes that, he's even more ignorant of economics than John McCain.  The union people in fact understand this issue very well; the UAW has been demanding that the company CEOs work without pay.  If the bosses should work for free, why not the workers?

The whole reason GM needs government money is that banks, stockholders, and other investors won't give them another dime.  Why not?  Because, just as Sen. Corker realized, any money GM gets will be sucked into the giant, insatiable maw of union pensions and health care.  If you won't ever get the money back, why lend to GM?

If, however, Mr. Gettelfinger's guys offered to work real cheap for a while as Mazda employees did when their firm got in trouble, and to get up to parity with the other car companies only when the business had recovered a bit, investors would realize that GM could come roaring back.  They already make pretty good cars, some of which are ranked tops in quality.  With sustainable labor costs, they'd make money.

The Democrats didn't want to offend the UAW and they had no problem pouring our tax money into keeping uneconomical union jobs going; after all, lots of the money would come back to them in campaign contributions and other forms of help during the next election cycle.  The Republicans saw the bailout as a union attempt to use taxpayer money to drive another stake through the heart of the Republican party, and quite naturally voted against it.

We now see the airwaves filled with union members complaining that Republicans are trying to wipe out the unions by not voting for the bailout.  Ya think?  Having done their best to put the Republicans out of business during the last election cycle, why are the unions surprised to see the Republicans trying to return the favor?

When you go to war, don't be surprised if the other guy shoots back.  The only surprising aspect is that, for once, the Republicans might possibly manage to do in an enemy - more by accident than design, to be sure.

The American car companies must either destroy the UAW, or be permanent wards of the State; there is no other alternative for which the math adds up.  The only way to bring the UAW to heel, of course, is by not passing a bailout, and letting Chapter 11 bankruptcy take its course.

Bring on the bankruptcy judge!