Another Perspective

The Anatomy of a Lousy Decision

President Bush's imposition of tariffs on imported steel was the easiest way out of a financially and politically dicey situation.

By 5.1.02

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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.

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About the Author

Lawrence Henry writes every week from North Andover, Massachusetts.