Harry Stonecipher, the tough-talking CEO of McDonnell Douglas
from 1994 to 1997, executed one of the great turnarounds in
corporate history. He made no apologies for failing to provide
greater job protection for employees. As he liked to say, the
aerospace giant could “not afford one more worker than the
minimum needed to satisfy the customer.” Or, more
succinctly still, he would say, “Only the customer can guarantee
your job.”
If having a job depends, ultimately, upon satisfying a
paying customer — a lesson many of us first learned as
school children in mowing lawns, shoveling snow and doing other
chores for neighbors — what is one to think of the
sustainability of the 3.5 million jobs that will supposedly be
created or saved by the $787 billion federal stimulus package?
Still more, what is one to think of the future of the U.S.
domestic auto industry — or some of our leading financial
institutions, which are now on federal life-support?
The key to understanding “Obamanomics” — which is not so much
hard-core socialism as it is wishful thinking masquerading as
pragmatism — is that it is based on a different business model
arising out of childhood experience: not the self-initiated and
arduous tasks undertaken by 10 and 11 year-olds seeking to earn
extra spending money, but the more pleasant if boring job
undertaken by much younger children in setting up a lemonade
stand.
To a child of five or six (or to anyone these days who happens to
be making economic policy in the Obama Administration), there’s
no such thing as real money; it’s all play money,
designed to imbue those who are throwing it around with a
spurious sense of power and authority.
The lemonade stand is subsidized front end and back — with free
inputs of lemons and sugar from parents and the indulgence of
other adults who make a show of acting as discriminating
customers.
Little kids see through the phoniness of thinking of the lemonade
stand as a real business and soon tire of it. But the current
economic crisis — in undermining belief in the efficiency and
fairness of the marketplace — has revived faith in
long-discredited economic nostrums, beginning with the idea that
government is up to the task of restructuring big companies and,
in doing so, turning lemons into lemonade. Thus, we saw the
curious spectacle of four members of the President’s
auto-industry task force parachuting into Detroit last month and
(“Here we go again,” as Ronald Reagan might have said) getting a
cram course on the economics of the automotive industry.
To review what would seem to be a simple story: In holding a
monopoly over the supply of labor, the UAW, over a period of many
decades, has used the threat of strikes to extract unreasonable
pay increases and other benefits from management; in doing so,
the union has been the willing and not exactly unwitting
instrument of its own destruction.
So what did members of the task force learn on their fact-finding
mission that might help them devise a cure for the fatal disease
of excessive union power?
Well, the first thing they learned was that they shouldn’t have
worn suits in visiting auto plants, because that is a sight that
offends the delicate feelings of the working men and women, or at
least it does those of their UAW bosses. And second, they learned
from their UAW hosts that, rather than being concentrated in the
state of Michigan, retired autoworkers are spread out across the
United States — which is somehow supposed to make their fate a
matter of national concern (note to the reader:
though the UAW surely did not go out of its way to emphasize the
point, it is safe to assume that a disproportionate number of
retired autoworkers are living in states such as Arizona and
Florida, where golf is played year around). This second
piece of information caused a soulful Steven Mousener, the
task-force chairman, to confide
in the Wall Street Journal, “At the end of all the
numbers we are generating, there are real people.”
Rattner (excuse me, it’s Rattner, not Mousener) would have
learned even more if he had simply picked up a copy of Roger
Lowenstein’s book While America Aged: How Pension Debts
Ruined General Motors, Stopped the NYC Subways, Bankrupted San
Diego and Loom as the Next Financial Crisis, published in
early 2008. Back in 1973, as Lowenstein recounts, the UAW won
full pensions for early retirees under a “thirty-and-out” plan.
This meant that an autoworker starting at a factory out of high
school could retire with full benefits before the age of fifty —
becoming a permanent ward of the company while still in the prime
of life. What a deal!
As described in Lowenstein’s book, the gushing stream of cash
flow that once went to GM’s shareholders as dividends was thereby
diverted to GM’s current and future retirees:
Over a fifteen-year stretch ending in 2006, GM poured $55
billion into its workers’ pension plan, compared to only $13
billion that it paid out in dividends. In other words, the
company paid its pensioners four times as much — not including
the money that it spent on their generous health care benefits
— as it did to its ostensible owners!
And that explains why the company’s stock has been in continuous
decline — not just over the past few years, but over the past
four decades. GM’s leaders over the years may be described as
quislings for knuckling under to the union’s demands. But there
can be no denying the central part that union has played in the
unraveling of the business. Rattner went to the right place when
he started his visit to Detroit at the UAW’s headquarters. It’s
just too bad that he went hat in hand.
Like the community organizer he once was, President Obama’s
approach to saving Detroit has been keyed to bringing different
people and factions together…and selling them on his
idea of a green and desirable future. He has called for “a set of
sacrifices from all parties involved — management, labor,
shareholders, creditors, suppliers, dealers.” In return for such
“sacrifices,” he promises various subsidies and speaks of a
revitalized Detroit that will “lead the world in building the
next generation of clean cars” and create new jobs that “cannot
be outsourced.”
This is beguiling rhetoric, but it is not the way anyone thinks
(or can afford to think) in running a business. Businesses exist
for the purpose of finding profitable ways to satisfy paying
customers. The essence of private enterprise is that businesses
go out of business if they aren’t up to the task of
earning a decent return on capital deployed while, at the same
time, satisfying their customers (the automakers, unfortunately,
have failed miserably on both counts). The creation of employment
and the enrichment of workers are byproducts of running a
successful business, not ends in their own right.
The lemonade stand that the administration is erecting for
Detroit’s benefit is like that of the kiddies in being rife with
subsidies — with little regard for whether the resulting product
is anything that any real (i.e. independent and
value-conscious) customer would want to pay for. The subsidies
range from government-backed warranties and tax breaks to lower
the price of cars, to elimination of a great deal of outstanding
debt for the auto makers and the provision of federal loans to
cover their working capital needs.
In subsidizing General Motors, the government is effectively
trying to make up for an unfavorable cost differential between GM
and the most efficient producers, and between GM and the
manufacturers of the most highly desired automobiles. Either way,
the subsidies impose both direct and indirect costs upon the
American people (use of taxpayers’ money, firstly, and then
protectionism, disruption of trade, larger, more intrusive
government, reduced return on investment and loss of
productivity), and these are costs that are potentially
open-ended and all too likely to mount over time.
To its credit, the administration seems to have recognized these
dangers. It has acknowledged that it may still be necessary to
hang out a bankruptcy sign — with a possible Chapter 11
reorganization for GM and the further possibility of Chrysler
going into liquidation.
Even this government, it seems, may grow tired of the funny
business of running a lemonade stand.
