The Public Policy
Out of Gas
No matter what Congress gives them, the Big Three simply cannot compete with better-managed and UAW-unhindered foreign automakers.
Things didn’t go so well on November 20 when the CEOs of the Big Three automakers came to Congress, tin cups in hand, to make a pitch for another $25 billion.
The first $25 billion loan for the cash-strapped automakers was signed into law last year, for retooling. This time around, the top execs wanted no strings attached, just the money.
On top of offering no plan to the lawmakers for fixing their industry, the CEOs had the distinct disadvantage of asking for money at a time when the public is becoming increasingly skeptical about the government’s escalating multi-trillion dollar handouts.
The total national debt, the accumulation of all the annual federal deficits over the nation’s entire history, stood at $5.7 trillion on the day that George W. Bush took office. We’re almost double that now, adding nearly as much red ink in eight years as the nation accumulated in the previous two centuries.
And that’s not counting the currently snowballing trillions in corporate bailouts, already at over $7 trillion. Just this new $7 trillion in loans and guarantees comes to $23,000 for every man, woman and child in America.
Also uncounted in the aforementioned debt numbers are the trillions the federal government has collected and owes in the Social Security and Medicare “trust funds.” The government doesn’t have a dime of that money. It’s all been spent for things like our new $500 million 1-mile tunnel under the Allegheny River here in Pittsburgh that will connect downtown to the city’s two new ballparks and duplicate the various bridges in town that already do exactly the same job.
Unfortunately, the whole thing collapses if China doesn’t keep lending us the money, so our job this Christmas, more than ever, is to load up our carts at Wal-Mart with those Chinese blinking reindeer.
Offered a second chance at the new $25 billion, the U.S. automakers, going downhill for decades without a strategy for beating Toyota, were given two weeks by Nancy Pelosi and her colleagues to submit their ideas to the business geniuses in Congress on how they’ll use — and pay back — the new handout.
Then the politicians in Congress who’ve been so brilliant at planning and budgeting over the years have allocated a week to themselves to fully evaluate the turnaround plan and render their official judgment.
No matter how good the testimony and color charts presented in Congress this week, the CEOs can’t change the fact that U.S. automakers, in order to buy labor peace over the years, have dug themselves into a hole where it’s nearly impossible for them to compete with their better-managed foreign rivals, even when those foreign firms are producing their BMWs and Hondas in U.S. plants with highly-paid American workers.
A RECENT STUDY by Mark J. Perry, professor of economics and finance at the University of Michigan, shows that the hourly compensation cost, including benefits, for the Big Three automakers in Detroit for 2007-2008 is $73.20 per hour, compared to $48.00 at Toyota.
New two-tier labor agreements between the UAW and Detroit’s car companies have dropped the starting wage for new workers to $14 an hour. Unfortunately, there aren’t enough new hires to fix the companies’ non-competitive wage structures.
In goods producing industries overall in the United States, reports Perry, the average hourly compensation cost, including benefits, is $31.59. For management and professional employees in the U.S., the average hourly cost, with benefits, is $47.57. For all workers, the average hourly wage/benefit cost is $28.48 per hour.
Asks Perry: “Should U.S. taxpayers really be providing billions of dollars to bailout companies (GM, Ford and Chrysler) that compensate their workers 52.5 percent more than the market (Toyota wages and benefits), 54 percent more than management and professional workers, 132 percent more than the average manufacturing wage, and 157 percent more than the average compensation of all American workers?”
Perry’s solution: “Maybe the country would be better off in the long run if we let the Big Three fail, and in the process break the UAW labor monopoly, and then let Toyota, Honda and Volkswagen take over the U.S. auto industry and restore realistic, competitive, market wages to the industry.”
Separate from the current economic downturn, the American automobile companies have been destroying themselves from within for decades. General Motors currently employs half as many salaried and hourly workers as in 2002. The UAW has lost over 200,000 members since 2001, with its total membership now at its lowest level since 1941.
The Big Three’s solution to downsizing and its never-ending job losses? For the past 24 years, all three U.S. automakers had tens of thousands of “workers” sitting in job banks, watching TV, playing cards and collecting 90 percent of their pay. Asks University of Maryland business professor Peter Morici, “Why should a waitress in Indiana have her tax money sent to Detroit to subsidize that?”
About the Author
Ralph R. Reiland is the B. Kenneth Simon professor of free enterprise and an associate professor of economics at Robert Morris University in Pittsburgh.
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Pecos Pete| 12.4.08 @ 7:19AM
Whatever the plan(s) showcased by the Big 3 and the UAW, it will be a plan for failure. Won't matter. Congress will not let the UAW go down in defeat. In the end the survivor(s) will be nationalized and the UAW will be unionizing all other vehicle manufacturers located in the USA.
Jason | 12.4.08 @ 7:35AM
Chapter 11 is the solution. Bailout or not, bankruptcy is coming. Then the contracts with the unions dissolve and the Big 3 can try to become competitive again.
saleboter| 12.4.08 @ 7:49AM
The (not so) big 3 will become just another branch of the US government
Greg| 12.4.08 @ 8:12AM
The "big 3" need to fail, pure and simple. The UAW and their cohorts in the Democratic Party have absolutly RUINED those companies.
If I could get 90% of my $19.64 an hour for 3 years sitting in a job bank, I would finish my PHD and make something of myself...why couldn't the lazy-louts in the UAW do the same? Too lazy?
Brian| 12.4.08 @ 10:34AM
I'll never buy a car or anything else for that matter, built by union workers.
Union products cost more and are of lower quality than cheaper products.
Union labor is even worse. Pay twice as much for surly, incompetent workers who routinely refuse to complete the job.
TJS| 12.4.08 @ 12:06PM
First of all, the big 3 don't "produce" anything anymore, they are nothing but assemblers. If they fail, the only thing we lose are assembly plants owned by them. All we need is some investors' to start a new American "assembly" company to put the cars and trucks together. There are thousands of suppliers here and and in other countries who actually produce the components that make up a vehicle. They would be happy to send parts to a new company that didn't treat them like dirt and ask for 5% price reductions every year from all their suppliers. Let them fail, we can have all the people who would lose their jobs all back working in a fairly short time in a new company (s) that isn't burdened by the inefficiencies and corruption of the unions.
Paul Hoffmann| 12.4.08 @ 12:27PM
I too avoid buying union-built products. Why should my hard-earned money be used for their lavish benefits? Now they want my taxes!
And what about the union dues? What's the total amount of money extracted from union workers (i.e. customers) since, say 1980?
How much of that money has been spent in political elections trying to smear conservatives?
The unions have become a campaign contribution collection system for the democratic party.
The new electric car GM is touting... that's going to save them... that travels only 35 miles a day -- if you don't use the air-conditioning or stereo -- sounds great for a spare car, if you can afford it, but not as your primary car. I predict it will flop.
Have you ever seen how slow union workers work? Watch the baggage handlers at the airport.
Pat| 12.4.08 @ 12:28PM
At the heart of the problem is whether the Big 3 can survive - and survive other than as a permanent welfare recipient dependent on annual taxpayer subsidies in the billions. So far, no one, not Congress, not the American taxpayer has seen a viable plan, just assurances from Big 3 execs they have a "plan". We have millions of expert business people in America, there should be no mystery about this so-called "plan", it should be completely transparent with full disclosure available on the internet and we need a large panel and cross section of experts to review the plan before the bailout is granted. Think that's going to happen?
jaywhite| 12.4.08 @ 12:39PM
The nerve of the "Big 3" to ask for taxpayers to subsidize, their outrageous agreements with unions who are worse than parasites. On a related subect ,while the current Ford Company can't be held to be responsible, I won't cry if the company founded by Henry Ford one of the most despicable haters ever goes under. His anti-semitism , actually influenced Hitler to increase his hatred of Jews. Henry Ford also subsidized Father Coughlin the vile anti-semite prior to WWII. If any union has brought about the downfall of an entire industry , it is the UAW. The world will be a better place if the "Big 3" as in Big 3 parasites, goes out of business.
Stan Redmond| 12.4.08 @ 1:16PM
Let them eat chrome. There is a 100% chance that when (not if) they get this money they will declare bankruptcy.
Danny L. Newton | 12.4.08 @ 1:54PM
One of the things that people don't realize is that the cost of a new car is actually going down when it is inflation adjusted. The length of ownership is increasing and this makes the cost of financing also rise. Fixed costs are rising like taxes, insurance and registration. These facts can be verified by going to the Bureau of Transportation Statistics. They stay about two years behind on their data but the average age of a car is probably close to 9.7 yerars now. Car companies, all of them, not just American, are produing more durable cars. Because of crash survivability strides, it is easier to total a car in a wreck and insurance companies just won't fix an old car. States also pass legislation that makes it hard to salvage a damage car.
Insurance costs in the future should also rise because of the reluctance to build more highway capacity. We don't need more different roads than already exist but we do need additional capacity measured in lane miles on the existing roads. The volume of vehicles and the population is growing faster than the supply of lane miles to operate a car or truck. It has been know for decades that the safety of driving is a function of the ratio of the volume of vehicles carried to the capacity of the road. This means that in the future our roads will become more dangerous. It also means that average speeds will fall, even on the Interstate. A recent plan by the Tennessee Department of Transportation predicts that the time of travel betweem Memphis and Bristol, about 550 miles of Interstate travel, will take place at about 42 miles per hour in the year 2030. This is what they call an upgrade.
It does not matter if you divide the total number of lane miles by the population or the number of vehicles. The distance is shrinking. In 2000, the number of feet between vehicles was 192.3 and in 2005 it was 178.7. Fortunately, we all do not need to get on the road at the same time. This distance between vehicles includes the length of the vehicle plus the safe operating distance between vehicles. We have about 60 years before this shrinkage equals the length of a 18-wheeler.
Much of this shrinkage is due to misguided eco-freaks who think they are saving the planet. The Clinton Administration can also take credit for this when they instigated the Metropolitain and Rural Planning Organizations that disconnected transportation from engineering with performance standards and reconnected it to politicians, the Sierra Club and urban planners. The new fuel efficient cars consume less energy, measured in BTUs per passenger mile, than buses in 8 out of 10 of the more recent years where this data was collected. For some reason, I don't see any push to get rid of buses because they are killing the planet. Airplanes have the best record of BTUs per passenger mile... even better than trains.
Tom| 12.4.08 @ 2:07PM
I don't care if they go out of business. Where is the guraranty for my business. If I don't make it I go out of business. That is the way it works in America. Build what we want for the price we are willing to pay and your problems will solve themselves. Get out of my pocket!
Marc Jeric| 12.4.08 @ 4:59PM
Given sufficient time all unions will fall into the hands of mafia or communists; then they will inevitably destroy their industries - car, steel textile, electronics, education, etc. The stronger the union, the faster the destruction. And boy, the UAW is strong!
Avitar| 12.4.08 @ 5:00PM
First Congress saddles the carmakers with unionized labor. I read the history of this in the Roosevelt Admin and saw pictures of Ford managers being carried out of their own plants by US Marshals. In my book that makes labor expenses Congresses problem
Second Congress caps the gas mileage of cars in the 1960's by limiting the burn temperatures of gasoline engines. This saved LBJ's base in the oil industry from seeing oil use halve as turbine muscle cars came on line but it has cost a lot.
Third without lifting the NO and NO2 limits that cap fuel burn efficiency the Congress passes the CAFE standards in the 1970's eliminating large cars, like station wagons that can carry lots of kids safely.
Fourth, when US families buy trucks built for the commercial market like trucks, SUV and Vans that get fewer MPG than is allowed under CAFE the Congress bans oil exploration and production off 85% of America's shores and issues regulations that make it impossible to produce oil from the oil shale and oil sands economically.
Congress should confess that what they really want is to kill the Americans who drive cars. The little cars that the European politicians have forced their citizens into has resulted in no European country having families big enough for native children to maintain the economically required population.
Howard| 12.4.08 @ 5:01PM
I have no love lost for the Big Three. They have squandered years of opportunities via overpriced labor, unimaginative design, and poor quality. I'm shocked it has taken this many years for them to collapse. My only concern however, is at this time it will be a huge burden on the economy if they shut down. I think a pre-structured bankruptcy would make sense. But giving these clowns money more more of the same is criminal.
bill| 12.4.08 @ 7:02PM
The big three will never compete against other global car manufacturers until they eliminate the UAW and no longer have to pay the health care and outrageous pensions of the retired auto workers. Then Barney Franks and company will force the big three to make expensive "green" cars that very few people will buy. Thus, the big 3 will eventually die and the tax payers will be out 100's of billions.
Democrats will give OUR money not to help the big three but to support the UAW. Therefore, WE, the taxpayers, will support the UAW for the next several generations - UAW retirees who receive nice pensions and 100% health care coverage for life. Too bad 90% of us tax payers will NEVER these benefits.
Morons in government.
American is moving from a country by the people for the people to a country of people ruled by the elite.
The big three should fail. They took the risk. The UAW was unwilling to compromise, they all should pay the ultimate price - bankruptcy. But no WE the tax payers will fund failure.
D.Smith| 12.5.08 @ 1:25PM
Here is why UAW will prevail in the end. Remember a few years back, when their demands were not being met and they commandeered the power room, locked themselves in, shut things down until their demands were met? That was outlaw behavior and it was tolerated.
Employed, they are not a threat to society, laid off, watching TV at home at 98% pay - still OK, but unemployed? Hell hath no fury.
IAM (airline mechanics) on the other hand, face more lay-offs as their work is being out-sourced and we will see no rioting in the streets.
We are pre-emptively mourning the loss of The Big Three. How many airlines do you remember that no longer fly? Start with Pan Am and count forward.
This may be the first time in recorded history that workers throughout the country at every level get to compare their salaries, benefits, etc. with the UAW, who work for companies whose CEO's reap huge bonuses for running failing companies and repeatedly caving in at contract time.
Colony14Author | 12.5.08 @ 8:24PM
They should file bankrupcty and get no federal money. But the Dems in Congress owe the unions too much to let that happen, so we taxpayers will be footing the bill.
And next year they'll be back for more money, because no one in their right mind will buy one of their shoddy UAW-built cars... bail out or not.
Ms. Know| 12.6.08 @ 10:03PM
The left-wing illuminati want us to take our minds off of the drilling they voted down, so they lowered gas, only temporarily.