President Bush’s decision in March to impose a 30 percent tariff
on imported steel has drawn wide-ranging criticism, some of it
notably fierce. “Bush’s Folly,” headlined the March 7 edition of
“The Times” of the UK. Certainly, the decision seemed to contradict
Bush’s championing of free trade as a matter of policy. Most
commentators have criticized Bush for the fundamental error of
imposing a tariff — protecting 160,000 steelworkers while raising
costs for 12 million workers in steel consuming industries, for
example — just to win votes in steel-producing states.
The decision may indeed have been a bad one. But making it may
not have been the one-dimensional political calculation virtually
all critics have described. Bush may instead have found himself
squeezed between easily explainable costs — the tariff — and
nearly impossible-to-explain measures to contain future costs,
namely the pensions and retiree health-care benefits of the workers
in a dying industry. These are the so-called “legacy costs” of the
steel companies. And given the tendency in the press (and in
Democrat political rhetoric) to go for the easy jugular, Bush may
have decided to take the short-term hit, and deny his political
enemies a big target.
The current economic environment has dealt pension funds in
general what many industry observers have called a “double whammy”:
increased liabilities and decreased ability to generate the rate of
return required to support their debts. Pensions calculate their
future obligation to retirees based on a discount rate, which is in
turn based on some common interest rate benchmark, like the 30-year
Treasury or an index of Double A corporate bond rates. When
interest rates are low, the future value of monetary obligations is
high — i.e., those obligations don’t stand to get eroded much by
inflation.
At the same time, after six or more years of double-digit growth
because of stock market gains, the typical corporate pension fund
lost six percent last year. That’s the asset side, a downer.
Against that backdrop, an old, decaying rust-belt industry like
steel looks especially vulnerable. It has a heavy tail of pension
obligations wagging an old, sick dog of a core business. In
contrast to more competitive industries, steel has postponed a
necessary leaning and meaning seemingly indefinitely, through its
historic political clout. This is the subject of a scathing
monograph by William H. Barringer and Kenneth J. Pierce of the
American Institute for International Steel, Inc., a Washington,
D.C.-based free trade advocacy group, called “Paying the Price for
Big Steel” (located here on the web).
In the United States, steel companies have chosen, generally, to
go bankrupt rather than go for a straight sale. Why? Because a
straight buyout would involve taking over pension obligations,
which a corporate buyer would not want to do. In bankruptcy, by
contrast, those obligations get picked up in part by the insurance
program of the Pension Benefits Guaranty Corporation, a government
agency formed by the Employment Retirement Income Security Act of
1974. That’s ERISA, the governing law of pensions in the U.S.
The Barringer-Pierce article claims that, since 1975, the PBGC
has paid out $3.61 billion in constant 1999 dollars to pension
plans of bankrupt steel firms. And indeed, it’s instructive to note
that the PBGC took over the pension plan of LTV Corporation of
Cleveland, the third-largest steel company ever to go bankrupt, at
just about the time President Bush was making the tariff decision.
The PBGC will cover pension obligations of 82,000 LTV workers and
retirees, covering what the PBGC itself says is a $2.2 billion
shortfall in the company’s pension funds.
Place LTV’s worker and retiree population of 82,000 against the
estimated current U.S. steel workforce of 160,000, and you begin to
get an idea of the dimensions of the potential problems. Note as
well that the PBGC does not cover retiree health care costs, which
rise far faster than inflation. Workers and retirees generally end
up holding the bag on those, with some shorter-term help from the
federal government’s COBRA program.
It’s important to emphasize that PBGC takeover of a bankrupt
company’s pension plan is not a bailout. The PBGC runs an insurance
company, into which all pension plans pay premiums. LTV is simply
collecting what it is rightly owed, by virtue of having paid its
premiums over the years.
But that is not to say that a bailout couldn’t take place, or
hasn’t in fact been put on the table somewhere already. Steel
industry “legacy” bills are a staple on both House and Senate
calendars. Last year’s House measure, The Steel Revitalization Act
(HR 808), has apparently died. The hotter current proposed bill is
West Virginia Sen. Jay Rockefeller’s “Save the American Steel
Industry Act of 2001,” introduced just about a year ago. The
Rockefeller bill would create a new PBGC-like agency, the
“Steelworker Retiree Health Care Board,” in the Department of Labor
to administer “a newly-created Health Care Benefit Costs Assistance
Program,” according to a press release from the Senator’s
office.
Depending on where the money came from, that would be a
bailout.
As well, the industry could urge — and may well already have
urged — that the PBGC or some other new agency, take over retiree
obligations not only of bankrupt steel companies, but of companies
that are not bankrupt. And that would be a bailout, too, for the
same financial reason as the Rockefeller bill would: Insurance
premiums cannot be levied retroactively on the potential
beneficiaries of that self-same insurance program.
In short, this March, President Bush may have surveyed the
landscape of American steel and found himself facing one lousy
decision or another, especially in the political sense. The Bush
Administration had already turned down a giant merger scheme
proposed by the four largest companies in the steel industry in
December of last year. To embrace a steel industry pension bailout
— or, perhaps more important, a plan covering the burgeoning costs
of retiree health care — would have meant…well, lots of
things, all of them bad: a public acknowledgment that the industry
was dying, the specter of a Chrysler-style bailout, charges of
corporate cronyism, creating a new federal agency, setting a
precedent for propping up failed business, etc.
Imposing a tariff on imported steel may have been a lousy
decision by President Bush. It may have been the least lousy
decision he had.
It also may have been the least lousy one to have to defend.
