Stop the Bailout of the Big Three


Tuesday’s papers carried an Associated Press (AP) story indicating that a $25 Billion bailout of the Big Three automakers was unlikely this year. The blame (or credit as I prefer to view it) goes to President Bush who opposes it. After being asleep at the switch over the last several years as Democrats pushed Fannie Mae, Freddie Mac and the nation’s other lenders to provide loans (subprime, no credit check, and no equity loans) to people who could not afford to repay them, President Bush now appears to be standing on principle in denying what would surely be an annual bailout event for an industry that refuses to correct its core problems.

The reason that the Democrats are anxious to help the Big Three automakers is not because they need to retool, expand, or modernize. Not because they are on the cutting edge of developing “green” transportation. Not because they are facing voracious competition from foreign manufacturers who are heavily subsidized by their own countries. No, the reasons is to bail these automotive morons out from having to pay exorbitant amounts for health and pension plans to their union workers and retirees.

It is easy to point the finger at the “greedy unions” but, in this case, that falls far short of the mark as to who is really to blame. In this case, it is a steady stream of incompetent senior managers who were complicit in creating this mess.

In order to understand this, one must understand the difference between a competitive environment and a quasi-monopoly environment.

For years the Big Three automakers dominated the American automobile market. Yes, there were other manufacturers but, in most instances, those manufacturers were either put out of business or absorbed into one of the Big Three. There was fierce competition amongst the Big Three in all but one area — wages and benefits for workers.

The Big Three were all unionized with the primary union being the United Autoworkers (UAW). The union took turns in targeting each of the Big Three during the labor negotiations but there was always the implicit agreement that the unions would not settle with one automaker for a contract that was more favorable than those negotiated with the other automakers. The net effect was that the management and the unions removed the competitive advantage or disadvantage for a major element of each automakers costs — wages and benefits for workers.

At the same time, the Big Three so dominated the domestic market that they could pass on these “levelized” wages and benefits to a consuming public who did not have any real choices. It was either purchase a Big Three automobile or go without.

There was no incentive for management to bargain hard to hold down the labor costs because there was no competitive advantage or disadvantage. In fact, the incentives were quite the opposite. For publicly traded companies, management incentives are most generally measured in the next quarter or end of year results. Little attention is paid to the long term impacts of current decisions. Avoiding a strike to enhance short-term financial goals was more important than dealing with the long-term monster of inflated wages and gilded benefit packages.

As a result, American autoworkers became some of the best paid workers in the world — both as to base pay and enriched benefits. And the effect was invisible because there was no competition amongst the Big Three as to cost of labor. The American consumer paid an additional $1,000 to $3,000 per vehicle to finance the failure of the automakers’ management to bargain hard for reasonable wages and benefits and that was just for the benefits portion of the wage structure.

But then came the Japanese, and then the Koreans, and a host of other manufacturers who were not a part of this cabal of union/management negotiation structures. They came to the market without high wages and enhanced benefits. And they came to the market with a distinct competitive advantage in the overall cost of their vehicles because of the wage and benefits differential.

It was the beginning of the globalization of the market place. Foreign companies, using foreign labor and foreign production could provide products that were comparable in quality and superior in price. The inability of the American labor unions to organize foreign manufacturing facilities and impose “levelized” wages and benefits meant that those American manufacturers who remained unionized and declined to bargain for wage and benefit concession faced a slow but sure slide into economic ruin.

The management of the Big Three automakers knew that. A third grader with an abacus would know that. But the management teams of the Big Three automakers were never ones to make tough decisions and their reward structure (again based on quarterly or end of year results) did not incent them to make such decisions. In fact, the Big Three automakers found other lines of business (GMAC, Ford Credit, etc.) to supplement their bottom lines and forestall the inevitability of a slide into bankruptcy. They acquired interests in a series of foreign automakers who remained competitive by avoiding the crushing costs imposed by the unions and agreed to by those same managers domestically.

In the meantime, the senior management of the Big Three automakers were richly rewarded while actually neglecting the business. While Ford was losing billions of dollars, President and CEO Alan Mullaly was given (I decline to say “earned”) nearly $23 million dollars according to April 4, 2008 report in Forbes. And General Motors — the automaker crying the loudest about the bailout — rewarded its CEO, Rick Wagoner, nearly $83 million dollars.

But the real problem here is that the $25 Billion bailout that the automakers want won’t bail them out. The $25 Billion is to pay for recurring obligations — to fund pension and healthcare benefits. When this $25 Billion is gone, they will be back again asking for another bailout of even greater proportions.

The best course of action is to refuse to bail these companies and let them file for bankruptcy. All of this talk about the number of workers who will lose their jobs is nonsense. These three automakers are not going to go out of business; they are simply going to reorganize these businesses and shed some of the grossly wasteful practices that a complacent management let occur. One would only hope that in the process of the bankruptcy, the trustees in bankruptcy and the bankruptcy court will require the dismissal of the senior management teams that contributed to this mess and, thereafter will void the current obligations for the pension and healthcare benefits so that new ones can be renegotiated with an eye towards market realities and competitiveness.

It is time to take the politics out of the bailouts and allow the marketplace to impose its own harsh but sustainable competitive realities.

And for those of you looking for a “Life’s Lesson” out of all of this, the exact same thing is happening with government and the public employee unions. There is no competitive alternative for government and, therefore, no incentive for the managers of government to bargain hard with the public employee unions to hold down costs. In fact, the incentives are quite the opposite. In the case of most of the senior management of state government (those elected to office), they owe their election in large part to the endless supply of campaign contributions from the public employee unions, and the vast armies of public employee union “volunteers” during each election cycle. Don’t like it? Tough! You still have to pay your taxes.

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Posted by at 06:00 | Posted in Measure 37 | 11 Comments |Email This Post Email This Post |Print This Post Print This Post
  • Rupert in Springfield

    Sustainable competitiveness. I like it.

    Unfortunately our government with its renewed fascination with subsidies for green technologies, bailouts which have now eclipsed Bush 2’s wildest social spending and general growth of government itself is heading in exactly the opposite direction. Where there is innovation and entrepreneurship, that is to be stifled, through increasing taxes and penalizing investment through capitol gains. Work that there should be less of is to be encouraged, through massive growth of the government. Work that there should be more of is to be made less appetizing, through increasing illegal immigration and the following wage suppression. It would seem the zeitgeist now would be full reverse thrust rather than change course.

    Smoot-Hawley was seen only in retrospect as the exact wrong thing to do at the time. I have a feeling we are in the process of creating another case for the economics textbooks of the future. Given the recent response of the stock market, which was predicted by myself and others given Obama’s attitude towards capitol gains, I see nothing but reinforcement of that.

  • Anonymous

    There is one bright spot. If the Liberals, nationally, become the sole control, headed up by Nancy Reid and Obama. Just maybe the people of America will wake up and realize the ‘dems’ are not the angels they claim to be. Going to be rough, but maybe that’s what this country needs.

    Tighten your belts, lock your purse strings and hang on. We are winners, if we do so.

  • Jerry

    If they are going to bail out the auto companies, then why not bail out strip clubs that are having a hard time?

    • BoNo

      Or bailout big tobacco!

  • Esoppigiply

    Отличная статья Спасибо огромное

  • Anonymous

    I’m not suggesting this should happen but it’s much easier to make a case for bailing out home builders.

    There are many thousands of them nationwide, employing millions more than the auto makers, with countless millions others employed by suppliers, realtors, planners, appariasers etc.

    So why are the banks being bailed out while the Home building “factories” across the America are left to close their doors?

    Could it be that they have no UAW equivalent driving up the cost of housing resulting in their own demise?

    No bailout, period.

    • dean

      The home builders ARE ALREADY being bailed out through the $700B package that includes buying up bad mortgages to free up capital. Plus the funds directed into the banks to free up loans includes loans to home buyers who buy homes from home builders.

  • Anonymous

    dean,

    dumb,, very dumb.
    Bailing out the banks is not bailing home homebuilders.
    By you nonsense the automakers are also being bailed out by the bank bailout. dumb

    Can you give me a name of any home builder big or small who is getting bailed out?

    And how about in the context of the proposed automaker bailout?

    You’re the most contriving and diverting poster to any blog I read.

    • dean

      Yes….and you remain the insulter with no name. Hard to have a dialogue with an insulter with no name. The $700 Billion dollar bailout bill is designed, such as it is, to buy down, buy out, or buy up bad mortgage debt, not bad car debt. Reducing bad mortgage debt is presumed to eventually stablalize housing prices, thus making it possible for builders to build once again. Since the homebuilding industry is decentralized and is basically thousands of mostly small businesses, it is unlike an industry with 3 producers.

      Duh!

  • lw

    Larry, I agree with several parts of your post. But, why is it that domestic vehicles comparable in size category, features, horsepower, etc. that is priced lower than most foreign cars still have lower market share? There is more going on than what you cite, and I won’t make a list of why this market share difference exists.

  • Anonymous

    come on dean
    The banking bailout is not relieving any homebuilders of their mortgage and other debt obligations. And the the bailout is not preventing foreclosures they face.
    Yet you claimed “The home builders ARE ALREADY being bailed out”.
    Nonsense.
    If you are not dumb, are you simply confused? What is it?

    And in the context of the point I made, that the big 3 bailout could more easily justified if it were extened to the homebuilding industry.
    I was comparing that BIG 3 proposal.

    Not some presumptive, sort of, imaginary bail out you offered is suppposedly already happening to buildser.
    Wake up.

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