ALG Editor’s Note: As noted by the following featured commentary, it is possible for a business—indeed an entire industry—to fail because it cannot compete if costs (in this case so-called legacy costs) are too high:
Unionized Labor is Killing the American Auto Industry
by Forest Yule
For anyone who has ever studied free market economics, or even simply heard the term “collective bargaining”, it should come as no surprise that the industries dominated by unions are dying a slow and painful death.
Just this month for example, GM announced that it had hemorrhaged more than $2.5 billion (WITH A “B”) in losses last quarter. That same loss over 4 quarters would equal $10B, or close to the total GDP of the Republic of Congo, a country with over 4,000,000 inhabitants. To put this loss in perspective, it means that each of the roughly 266,000 employees of GM would have “added” a net negative value to the company of roughly $36,000 per person! Let’s ponder that for a moment. Essentially, what that means is that each employee of General Motors costs the company $36,000 and returns ZERO value on that investment. Yet, they have the audacity (of hope as it were) to request a tax payer bailout to line the pockets of executives who mismanage, union workers who fail to produce a competitive product at a competitive rate, and shareholders who were dumb enough to buy into this garbage. How anyone can make the argument that the American public needs to be on the hook for one more penny to support these failures is beyond me.
Let’s imagine ourselves for a moment as a huge venture capital group, Uncle Sam Ventures Inc. We control a pool of money that can be used on any number of investments, but that pool is limited, and we must choose where we invest those funds wisely. Our goal is to ensure that those resources we choose to allocate are used to fund ventures that are financially sound, and ultimately will generate enough revenue to justify the initial investment, and eventually, reward us for our prudent investment by delivering profits.
General Motors value proposition to us in this case is as follows. What they are trying to sell here, is the idea that the $36,000 spent per employee per year to yield a $0 return, will improve if we just give them $50 billion dollars to turn things around. At the same rate of efficiency as they currently display, that $50,000,000,000 would yield a result of a loss of $186,000 per year per employee. No VC firm in the world would even let these guys in the door.
The next logical question to ask ourselves is why is GM so inefficient? The simple answer is that they pay too much for labor that is not necessarily differentiated in efficiency, ingenuity, creativity or effectiveness. However, the bigger problem over time is that the union’s workers first loyalty is to the union, and the union bosses, not the overall health and well being of their employer. That adversarial stance has finally broken the back of a once great company, and here is how it happened.
For decades, if the UAW didn’t get the new retirement package they wanted, they would strike. If they didn’t get the mandatory raises for dead-weight clock punching employees, they would strike. If they didn’t get higher overtime benefits, they would strike. This went on and on and resulted in over inflated wages and benefits for the labor forces at the big 3. From the perspective of the union, this should be seen as a win for labor. However, what these union workers and bosses don’t seem willing or able to understand is that they have no long-term BATNA (best alternative to a negotiated agreement). Now, their policies and shakedowns have resulted in bloated organizations that can not sustain themselves through their own efforts due to the unrealistic compensation expectations of their workforces. They can not make enough money on a Chevy Malibu, for example, to offset the costs associated with producing said car. In the end, the irony may be that the best thing that could happen to the US auto industry would be for the big three to go out of business. In a sense, it would be like the strike in Ayn Rand’s ode to capitalism, Atlas Shrugged, when the productive class of society finally refused to support the altruistic efforts of the left, and unplugs from society.
Perhaps through the destruction of a fat and unhealthy system, a newer, more efficient model will emerge, resulting in profits, new jobs and tax revenue. This seems like a much better long term outcome for the consumers and the tax payers.
