Auto Unions and Bailout
From Zanecorpwiki
I was speaking with a friend recently who had a lot of contempt for the labor unions in general, and in specific, their role in the current troubles at GM, Ford, and Chrysler. I agreed with her 100%. Unions--as they are currently constituted--have ceased to be a good and have become a problem in the modern era. Still, we almost got into an argument (where it not for more civilized minds around the table) because while I shared her views, I think there's a real danger in starting or stopping the analysis of what's wrong with the labor unions. The danger is that we (the public) focus on the labor unions as the big bad and allow other interests who are equally, if not more culpable, get away with it.
There are three other big factors in my mind:
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Where Does the Cost Discrepancy Lie?
First, is the Detroit auto worker really paid as much as people think? Probably not. The figure that floats around is $70-73/hr. That's a lot, that number isn't the average cost of each employee to the company, it's the cost of all employees, past and present, averaged over existing employees. In other words, $15-16 of hourly cost is for retired employees. The average worker pulls in $55/hr in wage and benefits. This is still good, but a lot closer to the average Japanese worker's $46/hr.
So, the unions have negotiated a sweet $9/hr premium over and above what the competition pays, but the larger cost is the $13 differential ($16 vs $3) that the company has to generate to pay for retired workers. That's not the unions' fault, it's simply the case that GM, et. al have been around longer than the Japanese competition and so have more pension costs.
The NYT and others have written on this. I've seen slightly different numbers in other analysis, but they all fall within a few dollars of each other. In summary, the biggest discrepancy in labor costs has to do with retirement and health care costs rather than cash wage costs.
This brings up an important policy question: who's fault is that? No doubt, the workers would not have had as good health and pension benefits without the union, but their benefits are not out of line with those offered by the Japanese companies. In deed, it is probably the case that the Japanese worker gets better quality of benefits at lower cost.
Focusing on the labor unions role here obscures the problems with our health and retirement system in general. I do think it's unfair that companies have to bear this cost more than their foreign competitors, but the unions have nothing to do with this situation. It's a direct effect of our failure to institute any meaningful national health care system and our aging and inadequate national retirement system (social security).
Focusing on the Wage Question
Having said that, there is a wage discrepancy, even if it's not the bulk of the problem. There's no reason to assume, however, that a high wage is a bad thing.
Google high wage economy and you'll find hundreds of articles discussing the idea that the economy and productivity are strongest when wages are highest. This isn't just an American phenomenon, but has been studied in different nations and at different points in time.
The easiest way to see how this would be is by considering Milton Friedman's widely accepted theory of the velocity of money which basically says that for each dollar injected into the economy, you add some multiple to the economy. That's why job loss is so devastating, because a $50K lost job means you lose something like $100-200K out of the economy. Why? Because each dollar gets spent multiple times per year.
Velocity is good, because high velocity money does more for your economy than low velocity money. That's why it's important to keep lower and middle class jobs, and to pay decent wages in those jobs--those are the people that spend their money. Rich folk don't. They invest--which isn't bad, you need that too of course--but the velocity of their money is much lower.
Think about this: if you've got a middle class earner who *has* to spend 60% of his monthly income on bills, expenses, and chooses to spend another 20% (saving the remainder), the more that money goes to people in similar positions, the more each dollar gets spent every single month. The more that money goes to rich folk, the less gets spent (because they don't have to spend near as much of their money on expenses).
The point is: in a weak, deflating economy, shifting money away from wages eliminates a multiple of that money in the economy.
The labor unions of today are corrupt and have run their course. They do little good, and some harm, and short of significant self re-invention, I don't see a place for them in the modern economy. That being said, we should not throw out the baby with the bath water and have to remember that much of America's ascendancy as the greatest nation and most powerful economy on earth coincided with the dramatic increase in lower and middle class wages enabled primarily by the unions. It was the unions, exactly because of the high wages they demanded, that made this nation great in the first place.
None of this is to say that there aren't lean times. Sometimes one has to cut back in order to survive, and paying lower wages is better than going out of business and paying no wages. We shouldn't let this talk, however, confuse us into thinking that low wages are good. It does seem counter intuitive, but the fact is that historically, the empirical evidence is that an economy does best when it pays above average wages.
The Root of the Real Problem
Which brings me to my final point: there's also a culture question here. The CEO's asked and answered the question when they famously showed up to the first auto bailout hearing in their private jets. To the extent that the unions are greedy and overreaching, we have to consider how much of that is the unions fault, and how much of that is the company's fault for being greedy itself?
Culture, in every company, is set by the top down. When you have executives who are so out of touch that they don't see the problem in arriving in $20million jets that cost millions of dollars a year to maintain to say, Help us, we're so poor there's a real problem. Maybe the union/worker is being greedy, but when the boss is being greedy, they kind of have to be or they'll simply be the chump who got taken advantage of.
There's lots of corporate greed, but it starts and is most egregious at the top. There's something to this idea of the greedy unions forcing the auto industry under, but it's also a bit of putting the cart before the horse.
In other words, whatever unfair or inappropriate wage inflation there may be is largely a symptom of the troubles. The cause of both the troubles and inflated wages is a management who is more focused on making money for themselves then in running the company well.
It's not just that the executives are paid more than they're worth--and despite all the arguments the fact that they're companies' have all failed is prima facia evidence that they were paid more than they're worth because for 10's or 100's of millions of dollars a year, I expect the company to survive economic downturn or no. The bigger problem, however, is that when you pay someone that much, they become disconnected from reality.
It's silly to expect a company headed by individuals who don't even associate with people that buy their products, let alone use them themselves, to be able to make a decent product. The product of Detroit is middle class cars, and to win, they need to make the kind of high value vehicles that middle class people need, economic downturn or no.
There is nothing Detroit alone could have done to prevent the current economic situation, but they're philosophy of heavily leverage to maximize investment in high profit centers is an exact mirror of the financial industry. Just as banks were happy to sell and play into the idea that we all need more house than we could afford, the auto industry has focused their efforts in the past years on SUVs and other high dollar/high profit vehicles even at the expense of their own solvency and stability.
Toyota and Honda are now in the exact same economic climate as Ford, GM, and Chrysler, but they aren't running to anyone for help. Why not? Because they make better value cars for the middle class. This strategy probably hurt their bottom line in the boom times, but it's what keeps them healthy.
In Summary
In short, Detroit's troubles--while complex and many faceted--are first and foremost a result of bad management and bad culture. What corruption and greed does exist in the unions is a symptom, and not a cause of the current troubles.
