Tuesday, March 31, 2009

Legacy of Failure?

FiveThirtyEight has an insightful post on GM's problems. Obviously, they have quite a few, but the legacy costs the automaker faces are daunting:
"GM was willing to cut its employees some very attractive deals in the 1950s through the 1980s -- provided that they took them in the form of retirement benefits rather than salary, which wouldn't hit GM's books until much later and which until 1992 weren't even required to be carried on its balance sheets all, making its financial statements (superficially) more appealing to its shareholders. That health care costs have risen so substantially in the United States have made a bad matter worse.

"This issue is wrongly portrayed by both the liberal and the conservative media as one of management versus labor, when really it is a battle between General Motors past and General Motors present. In the 50s, 60s and 70s, everyone benefited: GM and its shareholders got the benefit of higher profit margins, and meanwhile, its employees benefited from GM's willingness to cut a bad deal -- for every dollar they were giving up in salary, those employees were getting a dollar and change back in retirement benefits. But now, everyone is hurting.
"
I'm sure glad the U.S. doesn't have national healthcare. Of course, you could argue that GM didn't need to offer such generous health benefits in the first place, even if they were doing it in exchange for lower salaries.

9 comments:

  1. Gordon,

    You have missed the issue on the final analysis. As firms calculate their cost of production, the relevant factor when assessing labor costs is total compensation. Workers today are paid a combination of cash wages and benefits such as healthcare. This total compensation package is what matters for a firm's bottom line.

    Let's assume for a moment that General Motors is unable to compete with Asian or European rivals because of healthcare costs paid to GM workers. The common refrain goes that if GM were able to shift costs of healthcare to the federal government via a system of single-payer national health insurance, GM would be able to complete more effectively. This analysis makes a substantial error.

    GM would only be able to lower production costs insofar as the company is able to permanently reduce total employee compensation (cash + benefits). The call to shift healthcare costs to the state makes sense only if you feel GM workers are overcompensated. To see why this is the case, imagine now that GM has cut healthcare from its compensation package. In the immediate term, costs of production at GM would fall because overall compensation has fallen. GM would be more competitive. After a while though, the UAW would grow tired of GM workers receiving lower wages verses the period prior to the point when healthcare became a state responsibility. The UAW would demand higher cash compensation to offset the loss of healthcare and GM would be right back to the same level of total compensation.

    The fastest way to see the truth in this line of thinking is the fact that some of the most vocal support of single-payer health insurance comes from corporate America. It is exactly their hope that workers will not realize they are accepting a lower total wage when they forego employer-provided health insurance.

    In conclusion, the problem GM faces with employee healthcare is nothing more than the fact that GM pays its employees wages that are unsustainable. Anyone who argues that healthcare costs are the main reason, needs to realize that they are saying GM workers should accept a pay cut.

    Perhaps now you might agree with me that removal of Mr. Wagoner should have been accompanied by removal of Mr. Gettelfinger?

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  2. Rob, I'm not necessarily disagreeing, but you have to admit that few people foresaw how dramatically healthcare costs would skyrocket in the U.S. I think if GM and the unions realized this way back when, the compensation package might have looked different.

    But I think it's a reasonable argument to make that if GM hadn't thrown healthcare in, wages would have picked up some of the slack. (I don't think you can argue that the costs would be exactly the same; you'd have to be paying autoworkers about $700/hour for current wages to make up for GM's healthcare costs.) After all, GM included healthcare to keep wages lower and the total compensation package off the books. But it's also reasonable to say GM, even with union pressure, could have controlled wages a lot better than they could control healthcare costs.

    But let me pull back and look at the bigger picture. Is it fair to say our embrace of globalization has made it difficult for corporations like GM to pay American industrial workers a decent wage? After all, there are lots of other places where people can make cars and pay the workers a lot less. That's why industry is disappearing in the U.S.

    The payoff was supposed to be super low costs for consumer goods in America, and a growth in non-industrial sectors like, well, finance — which mainly involve shuffling paper — in the U.S. Well, that's not working out so well. In fact, our embrace of the financial sector has led us to the brink of a worldwide depression.

    So somebody remind me again why globalization is so great for the U.S. I mean besides the low cost of imported stuff at Wal Mart, which doesn't mean much if you're unemployed. And why protecting our industrial sector so lots of workers could make decent money, is so bad?

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  3. why does it seem like these posts regarding the U.S. auto industry keep going in circles?

    -Save them to keep industry in the U.S. vs. let them tank and let Capitalism run it's course....

    -Unions are too strong vs. Executives are HUGELY overpaid...

    -Big 3 didn't make cars that people wanted (ie. not fuel efficient) and lost competition to foreign companys vs. Big 3 had cars in top ratings by auto magazines and sold LOTS of SUVs.

    -Globalization is good for stocks vs. bad for jobs at home (we've known about that one since Perot ran for office)... anyone hearing that sucking sound.... it's also your money going down the drain.

    I don't feel like there's any answers... this blog is starting to feel like a Philosophy course.

    "Show me the way to go home. I'm tired and I want to go to bed" :)

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  4. Agreed. I have to admit my favorite subjects on the blog are old Flint bars.

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  5. Talking as one who has put in his time at "Generous Motors" as non G.M. people liked to call it. The reasons we got the higher wages was not just because of union negotiations. Human rights come into play. A sign over the entrance to G.M. Powertrain in Bay City Michigan stated "Your Rights End Here". You may think this is a joke but I swear it is true. I worked there. If you have ever read the history of the working conditions in the early auto factory's and how shocked the nation was with the $5.00 a day wage Ford started offering was not out of the kindness of his heart. He could not keep workers in the plant. Working on an assembly line is a mind numbing job not to mention "back breaking" and degrading. G.M. has always been the worst offender as far as the caste system. I read an article back in the early 80's that said "out of the big 3 General Motors is the only big corporation still treating their workers like it was the 30's".If you have ever read a supervisors guide book given too new recruits you would know how the common man is to be treated, Inside and outside the workplace. An example "A supervisor may not step down in his position to mingle with a worker beneath his station such as a weekend barbecue etc. but a lower worker may step up to your station in life and therefore maybe better one's self". Now is that a load? I have Blue cross which has slowly been whittled away since the 80's. I truly would love to see a national health care system (see Moore's film Sicko). If the small business's or common man did not have to worry about this expense I believe job's would be popping up everywhere. As far as what the media say's about Americans wanting their cheap goods from China just zero in on the word "CHEAP". Chinese goods may cost less than the good old U.S made stuff but have you noticed that the junk from Asia is just that "JUNK". When was the last time you used a good old made in China tool. It bent in half, am I right? What about the worst offender? The Tv's and VHS / DVD players. Since the early 90's a VHS machine last's as long as the smell of a good fart. And trying to find a machine that will play a DVD or CD without freezing up or skipping is near impossible. What happened to the day when you could just change a vacuum tube in your old Zenith and make it last 20 to 30 years. And let's not forget Mexico. I have a Frigidaire from 1953 that still works. Whats the life span now? Maybe that's why we have become a "throw away society". Now that I got that off my chest on to a better subject. This ones for you Gordon. I sure had a love affair with those Flint bars also.

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  6. I agree. Speaking of old Flint bars, AlliBabas(sp?) on Pierson Rd was a great place to meet and greet. One of the really good looking waitresses was in love with my buddy. He wasn't that good looking and didn't have much of a line. We never figured out his secret. But we were certianly impressed.

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  7. Rob:

    Your analysis of health care costs and wages assumes that once a benefit shifts from a corporation responsibility to a governmental responsibility, the worth of said insurance becomes zero. That would not be the case.

    Presently General Motors has to carry the cost of health insurance, meaning health insurance is reflected in the cost of the car/truck/SUV. With a group of young, healthy workers it's a light burden, but when the workforce ages and is minimally replenished with younger workers (as has happened over the past thirty-plus years) the burden on the company (and thus the customers) becomes heavy. Add in retirees, and things get ugly.

    Granted, a single-payer insurance plan would need to be financed by taxes (corporate, income and sales taxes, as sin taxes would be unable to cover the whole cost), so it would be a nonissue to note that take-home wages for Automobile Workers would be lower under a single-payer system (assuming no agreed-upon wage adjustment for the tax during labor negotiations). Allowing for a level of efficiency and care closer to France or Canada than to Britain, however, and health care benefits would be greater to the larger portion of the population than costs and drop-off in level of care to the American Auto Worker.

    So yes, under a single-payer system the American Auto Worker would take cuts (both service-wise and wages-wise), but people like me (who pay for their own insurance out-of-pocket w/o aid or tax relief) would gain overall and a wal-mart worker on food stamps (thanks to the company giving him only 28 hours after five years) would gain much more than they lose in taxes.

    And with the introduction of a group of younger, healthier people into what would become the national insurance pool, costs per person would drop (especially if you include a certain level of financial responsibility for everything above basic medical stuff, as they do in France). So Auto Workers may not do as bad as it would seem at first glance.

    Besides, I've yet to hear of a mass movement in Canada to cancel single-payer. I'm sure that if a mass movement to cancel single-payer were to happen (even if it were fifteen well-placed voices in lock-step with the Chicago School of Economics), we'd hear no end of it in the American Press.

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  8. I totally agree with you Rob. The main point I try to make is that the system we now have in place is rotten from the top down. If everyone paid their fair share and the CEO's of the large company's would stop gouging the people things would certainly improve. Is there any good reason why 70 years ago the average head of a company made 10% more than his workers and is now over 400%? And why is it that when I have to pay for a procedure at the hospital I pay 100% compared to the hospital accepting 1 third from Blue Cross? The newest news that got me was Richard Wagoner from G.M. getting a $23,000,000 pension when the company is in such dire straits? That is the greed that needs to be addressed. And don't even get me started on the bankers and drug company's. My generation was so cocky that we thought revolution was going to be easy and solve all the worlds problems "Well we failed everyone" and are now the very group causing the problem. Nixon and his group setting up HMO knowing full well it was not intended to help people but to only dig into their pockets was really disgusting but what have we done to improve anything "NOTHING". We waste way to many taxpayer dollars on keeping our empire in place around the world since WW II and maybe it's time we just worry about us. Maybe that's why other nations can afford their national health care. I heard the saying "shoot all lawyers" but I would add lobbyist's. Now I don't agree very often with Bill Maher even though I find him entertaining but the part about legalizing marijuana to regulate and tax just like tobacco and alcohol would go a long way in helping this economy. We do not have enough places left to lock up all the killers let alone the people locked up for pot offenses. The reason the rich do what they do is because they know full well they will get away with it. The double standard in the world of the ones with money getting away with murder, fraud and any crime they think is worth their time ,while a regular person can be jailed for contempt of court is insane. I know I'm all over the board with my thoughts but I really get a bad felling about how my generation failed and got in lockstep with the previous generation. Anyway you hang in there Rob and maybe "you" can make a difference. As far as bars in Flint, I mostly hung out at the real dives that pop up around auto factories. Take care..Gerry Godin

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