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12.01.2008 0

The Not-So-Curious Case of the Big 3 Breakdown

  • On: 12/15/2008 10:47:19
  • In: Economy
  • By Isaac MacMillen

    After Senate Republicans—and a few brave Democrats—blocked the Big 3’s bailout, President Bush suddenly reversed his previously-held stance opposing the use of the $700 billion package passed by Congress for the auto industry. The Treasury Department announced that it “stood ready” to prevent the failure of the automakers.

    But in reality, how wise is it? A cursory look at some of the factors behind the Detroit automakers’ crisis reveals the answer.

    General Motors, Ford, and Chrysler have been mainstays of America for generations. But as overseas competition from countries such as Japan and Germany began to enter the U.S., the three giants found themselves slowly losing ground. One of their most severe handicaps was the excessive contracts each of them had made with the United Auto Workers Union (UAW).

    In order for companies to remain competitive in this day and age, they must be able to assess the situation, determine a course of action, and implement it quickly—in other words, adapt to a changing market. Unfortunately for American automakers, however, their attempts in the early 1980s to adapt to the market by increasing automation was met with resistance by the UAW. Having just suffered the loss of half a million jobs due to the oil embargo, the UAW was keen on stopping any further loss.

    So, the auto industry caved to the UAW’s demand for job banking—the “benefit” of a near-full salary for workers who are laid off. The result? While the Big 3 were able to introduce some automation, both they and the workers that UAW purported to represent were severely disadvantaged for the future.

    The massive drag of this policy was seen in 2005, when it was revealed that up to 12,000 non-working union members were being supported by GM, Ford, Chrysler, and Delphi (a spin-off from GM). At least $20 an hour, that’s almost $2 million per day—not including benefits.

    While those numbers are substantially reduced today, they demonstrate just how far the UAW is willing to go to promote its members while risking their jobs. One can’t help but imagine the consequences if the policy had been enacted before the oil embargo. Just how long would the industry have lasted supporting 500,000 non-workers? Months? Weeks? Days?

    And this is only one of the many benefits which UAW campaigned to procure for its workers at the expense of their profession. Pensions, robust health benefits, paid leave—these are among a number of other high-priced benefits packages which, while nice for employees, are extremely dangerous for a struggling corporation to have to fund.

    Under such restrictive circumstances, what’s a company do to? The “job bank” concept virtually kills any chance the company has of survivability. During a market boom, it hires employees, but during a market slump, it is essentially unable to lay them off (for if it does, it still must continue paying them by the hour, thus hardly saving money). The company then is at risk of failing.

    Chrysler nearly failed in 1979, and that was in spite of a massive spate of layoffs. Many more may have been jobless had they possessed obligations to support non-workers. Even Union apologists admit that downsizing will be necessary for survival. (But how does one downsize when laid-off workers must still remain on the payroll?)

    While in their zeal to protect jobs the unions have all but bankrupted the American auto force, a comparison with non-unionized Toyota shows a far different picture. Last year—as has been noted often—Toyota and GM sold nearly the same number of cars, yet Toyota made $17 billion in profit, while GM took almost $39 billion in losses. (Chrysler and Ford did better, taking in $3 billion and $2 billion in loss, respectively.)

    Yet even Toyota is beginning to feel the UAW’s excessive demands, with the danger that benefits expenses will eventually exceed profits causing the company to look for ways to slow benefit growth. Labor activists who complain about losing benefits in the future would do well to take care that their concern for their own jobs doesn’t kill the very corporations which provide them.

    In his testimony before Congress, GM CEO Rick Wagoner stated that the responsibility for GM’s state lay in its inability “to build sufficient flexibility into our operations and not moving fast enough to invest in smaller, more fuel-efficient vehicles.” By caving to the labor unions and refusing to adapt, GM—as well as Chrysler, and to a slightly lesser extent Ford—crippled themselves.

    And this brings us back to our original question: Is the Bush Administration correct in considering throwing cash from the $700 billion bailout package to the American automakers? Do politicians really think that these companies will be able to turn around on just $15 billion? Do they really think the UAW will not come back for more? And speaking of the UAW, if it is so intent on saving the companies which employ its members, why is it reticent to make the necessary sacrifices to ensure their survival?

    GM, Chrysler, and Ford appear to have reached the point of no return. To give them any money at this point would not only be pointless, but it would be unfair to the U.S. taxpayers, who will eventually have to pay it all back.

    And if they can’t, who will bail them out?

    And that is why the answer to our question is a resounding “No!”

    Isaac MacMillen is a contributing editor of ALG News Bureau.

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