The UAW Strikes Again

Just after the Obama administration took over, his allies arranged a quick "bankruptcy" for GM and Chrysler.  The senior creditors, who were supposed to be paid first based on centuries of bankruptcy law, were summarily wiped out; the United Auto Workers health care trust ended up owning 42% of Chrysler and 17% of Government Motors.  This gift to the unions represented a decent return on the $200 million the unions had spent to help put Mr. Obama in the White House.

In return for the bailout, during which a large number of Republican-leaning car dealers were unilaterally forced out of business, the UAW promised to have their own union trust funds take responsibility for workers' health care.  Instead of being given cash, these trust funds were given GM and Chrysler stock which had been taken from the other investors.

The UAW also agreed to pay cuts for workers.  This made a difference: Chrysler's labor costs are about $49/hr, down from $76 in 2007.  GM's costs are $56/hr and Ford's are $58.  Ford's reward for not needing a public bailout was ending up with the highest labor costs in the domestic industry.

The pay cuts put the Big 3 on a rough par with the highest-cost foreign plants, but they're still at a significant disadvantage.  One of the reasons foreign cars often seem to offer greater value is that they do - the Big 3 have to reduce the value they put into their cars to make up for their higher labor costs.

The cost difference comes either out of product quality or out of profits.  Lower quality means lower sales, lower profits makes it more expensive to raise funds to develop new products.  Either way, higher labor costs are death in the long term.

During the negotiations, we taxpayers were promised that we'd get back all the money we put up to save all those UAW jobs.  President Obama later claimed credit for saving thousands of jobs in Detroit.  He made much of GM paying back part of what they'd been lent by the government.

Taxpayers won't live happily ever after, however.  In June, the White House conceded that taxpayers might lose as much as $14 billion on the bailout even if both Government Motors and Chrysler return to profitability.

As part of the agreement, the UAW promised not to strike either GM or Chrysler for four years, that is, until after the 2012 elections.  They're free to strike Ford, the only one of the Big Three that was in good enough shape not to need a government bailout.

Divine Right to High Wages

Having had their employers survive only because of a $55 billion dollar bail-out from the federal government, you might think that the UAW would have learned a bit about the benefits of keeping their employers' costs in line with their competitors.  You'd be wrong.

Despite all the federal help, despite having turned their members into welfare recipients who're supported at taxpayer expense, the UAW has returned to its traditional method of bargaining.

During the glory years, they'd pick the weakest of the Big 3, threaten a strike, and get what they could.  Then they'd impose that pattern on the other two.  They seem to feel that they have a divine right to high wages no matter what happens to their employers.

This time, Chrysler is the weakest, having continued to lose money since the bailout.  The UAW is smart enough to know they can't actually violate their agreement not to strike Chrysler, it would put them under for the third time.  The taxpayers are no mood for another bailout, so they'd never come back up.  Instead, they have gotten close to a deal with GM, which is in somewhat better shape but still not rude health.

One of the most contentions points at Chrysler is what to do about younger workers who're paid $14.65 per hour instead of the much higher rate of senior UAW members.  The industry's plan was for older, more expensive workers to retire and be replaced by younger, cheaper workers.  Over time, this would have made them more competitive.

12% of the Chrysler workers are lower-paid versus only 4% at GM.  Ford has essentially no lower-paid workers because, lacking the threat of bankruptcy, Ford was not able to get their UAW locals to accept the two-tier wage system.

Rubber Meets Road at Chrysler

Chrysler isn't making a profit despite having the lowest labor costs in the domestic industry.  Even though GM seems to have reached agreement with the UAW leadership, Chrysler has had to extend the negotiating deadline twice.  Chrysler workers are unhappy with what they've heard about the GM agreement.

Because they have the most low-paid workers working with them, the Chrysler UAW members are particularly tetchy about the two-tier wage system.  The Wall Street Journal quoted Brett Ward, an 18-year Chrysler veteran:

"They [the lower-paid workers] are being asked to work at wages that are less than what I was paid 18 years ago.  If it nears the GM contract, I will vote against it and try to do everything I can to get others to vote against it...

Mr. Ward objected that the GM agreement doesn't restore cost of living increases or holidays that were cut during the bailout, forgetting that cost-cutting was needed for his employer to stay in business at all.  Mr. Ward and his colleagues forget that his employer's situation was so desperate that Fiat wasn't required to put up any money in return for its share of Chrysler ownership - it wasn't considered worth anything at the time, compared to the potentially effective management that Fiat brought to the table.

Fiat would obviously love to turn Chrysler around.  They've invested a great deal of time and effort in trying to make that possible, but not much actual cash.  If the UAW doesn't go along with enough cost cutting to make Chrysler competitive, Fiat can walk away without much financial cost.

The latest news states that Chrysler and the UAW are still deadlocked over the cost of lower-paid workers and the cost of health care.  Talks at Ford remain contentious.

Death Sends a Message

Death is one of the best ways to send a truly important message.  Back before the first major Chinese dynasty got off the ground, Confucius pointed out that the Emperor's main job was to find underperforming government employees and chop heads to encourage virtue.

During the first Chrysler bailout, a Japanese friend told me that the Japanese government would have let Chrysler go - there were too many automobile factories in America anyway.  "Big businesses and labor are always asking for government help," he told me.  "The only way to be sure they really need help is to let someone go bust.  After a death in the family, everybody acts a lot more reasonable."

The Obama administration did the UAW a huge favor by bailing out GM and Chrysler at taxpayer expense.  Now that things look a tiny bit better, the UAW's trying to push labor costs back to the same level that brought GM and Chrysler low in the first place.

Wouldn't it have been better just to let Chrysler go last time?