Saturday, December 13, 2008

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'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.


Catzmaw said...

Great post, Karen.

I was listening to a call in show last night on the radio and was struck by one caller who lambasted the people talking about legacy costs and pointed out that the foreign car manufacturers who produce cars here are charging MORE for their vehicles than our domestic manufacturers and have very modest legacy costs, yet the cars are selling well. He said "the reason these manufacturers are failing is because their cars suck, they lack imagination, they've had incredibly poor planning, and they've developed a bad reputation with the public for having crappy cars. Get rid of management," he argued.

I couldn't argue with the man. Look at where the domestic manufacturers have focused their efforts in past years.

AnonymousIsAWoman said...

Exactly right, Catzmaw. And let's not forget that the auto manufacturers lobbied strongly against CAFE standards, which would have encouraged more fuel-efficient cars.

Any bailout package should include strong incentives to restructure and produce better, more fuel efficient cars. But it should not penalize workers, who, after all, had nothing to do with the engineering and design decisions of the companies.

Anne said...

Good post.

The $70 per hour figure may also be explained as the hourly labor cost associated with car manufacturing. One of the simplest and roughest methods of guess-timating labor cost is to double an employee's salary and round up to the next dollar. The doubling accounts for overhead, benefits, etc. - the costs associated with employing a person over and above what you pay them. Too many commentators have confused this concept with salary. The employee is not walking out of the factory with $70/hour wages.

As far as business decisions, if Detroit made a car I wanted to buy, then I would buy American. Unfortunately, they insist on focusing on trucks and SUVs. I don't need an urban assault vehicle. I ride a bike or walk most places, for crying out loud. I go out of my way not to waste fuel and not to pollute. (Besides, I like exercise.) I keep my house at 62 in winter. (The one thing I agreed with President Carter about. I turn it down to conserve a non-renewable power source.)

I want a vehicle that gets great mileage, fits in a standard parking space and that is safe and I prefer something that is very low on emissions. So I drive a Hyundai Elantra, which gets 32 mpg highway, has fine standard safety features, comes with a good warranty (with roaside assistance) and that is a ULEV (ultra-low emitting vehicle). If Detroit made the same car for the same price with the same reliability, then I would happily buy that car. They simply don't. But that's not the worker's fault. That's not the UAW's fault. That's the management's fault because they decide which cars to put on the production line.

I could go for a bailout that is a loan to the automakers. If they cannot make themselves financially viable, then we'd just be prolonging the inevitable. Losing the American automotive industry would be catastrophic, I believe. I also believe that the industry can make themselves viable. But they can make themselve viable with a loan that they have to fully pay back at the end of a reasonable term.

It's interesting to be me, btw. As you know, I'm a Republican. I'm also a union member. I'm actually an elected officer in a union. I guess I have a somewhat different perspective from some in my party?

AnonymousIsAWoman said...

Ann, great comment. There's nothing I can add to it.

Further, I've known other union members and even officers who are Republicans. In fact, I knew somebody from one of the maritme unions who was contemplating running for office as a Republican. He wanted to show that the two loyalties are not mutally exclusive.

In places like New York, New Jersey, Michigan, and Ohio there are others like you two. There is no reason, other than hard right or extreme libertarian views, that Democrats should have a monopoly on union loyalty.

It also might interest readers to know that the right to collective bargaining was once viewed as a basic human right and was promoted as such by the U.S. during the Cold War. Workers behind the Iron Curtain actually did not enjoy that right and it was part of the anti-communist arsenal to remind the world of that. And the union movement played a major role in ending of communism in Poland - it was the shipyard union, Solidarity, led by Lech Walesa that challenged and ultimately overcame the Communist Party in Poland and contributed to the Iron Curtain crumbling.

Anne said...

Actually, a family friend who was former president of a police union back home in Massachusetts ran for office as a Republican and was elected to the state house a few years back.

In Virginia (my "adopted" home), I find that the anti-union sentiment runs too deep in the party. I am not used to that. Too many people have a visceral reaction to any suggestion that unions might do right now and again. I find it maddening. (Especially since I am from a stereotypical Irish Catholic family full of cops and firefighters.) Granted, I like to torment the more extreme people by reminding them that two of their favorite "conservative icons" - Ronald Reagan and Charlton Heston - both served as union presidents. In Virginia, my party is definitely more "hard right" than I am used to. Truly, that bothers me.

I do believe people should never be forced to join a union; at the same time, I think workers should always have the opportunity to unionize if they want to. All unionizing does is put the workers in a better and more equal bargaining position and that seems awfully fair to me!

Oh, and indeed: "Solidarnosc!" Odd but true: I actually have a teddy bear named "Lech."

Sven Ortmann said...

The retiree cost problem i revealing:

There would be ZERO retiree costs today if the big 3 would (and had) pay for what they get immediately.
They could have paid into a fund during the 80's and this fund could now pay for the retirees.

Instead, they did what governments do; they accepted obligations, but chose to pay for them later.

In short: They delayed their financial troubles from the 80's/90's till today, and now they're not competitive any more.

This is interesting because it might happen to governments in 10-30 years as well.

The retiree costs and debt payments strangle the big 3 - the present state of affairs would be mediocre -not bad- without the financial sins of the past.

Sven Ortmann said...

About unions:

Everyone should have the free choice to found/join a union.
The union should be allowed to launch strikes when the last terms end.
No-one on strike should fear repercussions.

Politics should protect these rights and work for a balance of power. Power asymmetry is always unfair and suboptimal for the fair settlement of disputes.