TARP Money for Auto Industry Bailout - I Hope So!

Since it looks like the Bush administration will push for TARP money to bailout the auto industry after all, we’ll be hearing a lot more from the rightwing bloviaters and their mainstream media colleagues about overpaid auto workers who make $70 or more per hour. Some have even set the figure as high as $78 an hour because, like the childhood game of telephone, where the message gets more garbled the more times its whispered in the ear of the next player, the hourly wage of the average UAW worker keeps getting higher each time another reporter or blogger reports it. The amount grows exponentially with media exposure. The only problem is it's all wrong. Let’s examine how this myth actually got started.

According to Jonathan Cohn, at TNR, here’s where it began. (And for more to back his assessment up, go to Media Matters too)

But then what's the source of that $70 hourly figure? It didn't come out of thin air. Analysts came up with it by including the cost of all employer-provided benefits--namely, health insurance and pensions--and then dividing by the number of workers. The result, they found, was that benefits for Big Three cost about $42 per hour, per employee. Add that to the wages--again, $28 per hour--and you get the $70 figure. Voila.

Except ... notice something weird about this calculation? It's not as if each active worker is getting health benefits and pensions worth $42 per hour. That would come to nearly twice his or her wages. (Talk about gold-plated coverage!) Instead, each active worker is getting benefits equal only to a fraction of that--probably around $10 per hour, according to estimates from the International Motor Vehicle Program. The number only gets to $70 an hour if you include the cost of benefits for retirees--in other words, the cost of benefits for other people. One of the few people to grasp this was Portfolio.com's Felix Salmon. As he noted yesterday, the claim that workers are getting $70 an hour in compensation is just "not true."

Cohn also points out the main reason the Big Three automakers have such high legacy costs for retirees is that, after being in business on U.S. soil for over a hundred years, domestic car makers simply have more retirees than auto companies that have only been here since 1980. In fact, as of 2007, Toyota only had about 1,000 retirees. Of course, their legacy costs are less. Further, if you factor in Detroit’s overseas competition, foreign workers get their health insurance from single payer plans, so car companies outside the U.S. are more competitive. Domestic manufacturing, in general, is hamstrung by our out of control health care system, which is eating away at profits.

Now that you know the truth, let’s put the recent failure of the Senate to pass a bailout package for the domestic auto industry into its real perspective.

A group of very rightwing, Southern senators, from right to work states with non-union auto factories, simply banded together to obstruct the bailout efforts because they smelled an opportunity to bust the union, more for purely ideological reasons than because the unions are truly draining the corporations of profits. Indeed, there are several other factors that can explain the Big Three automakers current financial problems.

Let’s start with bad management decisions. The car makers simply never diversified and produced a mix of small, fuel efficient cars as well as large, gas guzzling SUVs. In fairness, the SUVs were hot sellers earlier in this decade and not many business people were smart enough to predict the spike in gas prices this past summer. Just as nobody was betting that credit would dry up and our whole financial sector would near collapse. So, just at the time that Detroit’s products were no longer as desirable, even those who wanted to buy them couldn’t get credit. That’s not because consumers necessarily had bad credit ratings but because credit was simply so tight that banks weren’t even lending each other money. It was a liquidity problem, one which crippled GMAC, the financial arm of GM.

Let’s also not forget that while a bunch of Southern senators, from states that paid handsomely to attract foreign, non union car makers to their locales, decided to declare war on Northern workers, nobody should even be criticizing the average CEO salaries and bonuses. For example, Richard Wagoner of GM makes $8.5 million per year, with bonuses. The truth, though, is that the whole domestic auto industry is not the worst transgressor when it comes to inflated salaries and greed. Compared to the hundreds of millions of dollars in salaries, bonuses and perks that Wall Street’s high flyers routinely paid themselves, while bringing the economy crashing down, these guys appear modest in their salary demands.

So, why did the senators from Nissan, Tennessee; Toyota, Kentucky; and Mercedes Benz, Alabama vote to kill the Detroit bailout in the first place?

It could be to enhance the competitiveness of those foreign car manufacturers who were paid so well with tax breaks and other incentives by those respective Southern states to locate there.

But, as Jonathan Cohn and Media Matters point out, all of those foreign companies pay roughly the same wages to their non-union employees ($25 per hour as opposed to $28 for a senior union worker, and with comparable benefits). The danger, however, is that if Detroit and the UAW fold, that could be the signal for those foreign companies to begin slashing wages and benefits. With no threat of union organizing in their own U.S. plants, there would be no reason for foreign manufacturers to honor their wage agreements with non-union employees. Just as the airlines used bankruptcy to slash wages and destroy benefits in that industry, this could lead to the devastation of the entire domestic manufacturing sector.

If the government allows the auto industry to go bankrupt and those good paying manufacturing jobs to vanish, the domino effect on the American economy could be devastating. Perhaps the only wise thing the Bush administration has done in its eight years in power is realize that it doesn’t want the total collapse of the American economy and the end of the middle class as we know it to occur on its watch. It could be the legacy thing for Bush, but for whatever reason, it’s a welcome relief and I hope it happens sooner rather than when it’s too late.