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.