Damn right

US Economy, US Politics

Read John Judis on how the Republicans torpedoed the auto bailout.

4 Comments

3 Comments

  1. Robert Gentel  •  Dec 12, 2008 @10:54 pm

    The Republicans have it right here. These are failing companies, and giving them taxpayer money while they continue with compensation plans that are not viable is to toss our money down the drain.

    Bailing them out for an initial $15 billion without such concessions is to piss our money away. $15 billion isn’t going to save them, nor would $30 billion, they are going through billions a month right now.

    The financial bleeding needs to stop, and there aren’t a lot of ways to stop the bleeding without reducing payroll costs one way or another. It would be reckless to bail them out without getting assurances that they will take the drastic steps they need to survive the next few years (even with a bailout). Without this concession on their compensation, I don’t believe bailing out the big 3 would be money well spent.

  2. nimh  •  Dec 13, 2008 @9:09 am

    Hi Robert. When it comes to the payroll costs and “unviable” compensation plans at the big three, there are a lot of claims out there about the supposedly unrealistic wages there that are not backed up by the data. It has become a truism of sorts to say that the auto makers’ financial problems are largely due to the unions having forced through outrageous pay schemes, but the reality is a lot more nuanced.

    David Leonhardt, for example, graphed out the labor costs at Ford and at Japanese automakers in the US in the NY Times. The difference is a staggering enough $22/hour – $71 vs $49. But it turns out to mostly ($13 of the $22) be in pension and health care payments to retirees. As Leonhardt points out, this difference

    isn’t mainly a reflection of how generous the retiree benefits are. It’s a reflection of how many retirees there are. The Big Three built up a huge pool of retirees long before Honda and Toyota opened plants in this country.

    Basically, Leonhardt writes, “the Big Three and the U.A.W. had the bad luck of helping to create the middle class in a country where individual companies — as opposed to all of society — must shoulder much of the burden of paying for retirement.” And in a 2007 deal with the U.A.W. already in place that will take effect in 2010, the trade union will actually take over the costs of the health care payments to retirees.

    The difference between Ford and the Japanese automakers in the US in actual wages and benefits to workers [EDIT: as well as training costs and payroll taxes], meanwhile, is relatively small: $55/hour to $46/hour. This, Leonhardt points out, is probably about the least of the automakers’ problems: all the labor costs put together, “for all the attention they have been receiving, make up only about 10 percent of the cost of making a vehicle.”

    In short, reducing the wages and benefits to Ford’s workers to the level of Japanese automakers would save 12% ($9 out of $73) of costs that themselves make up just 10% of the production costs – and thus reduce the price of a Ford car by all of … 1.2%.

    It’s basically a red herring. As Leonhardt also points out, “the Big Three already often sell their cars for about $2,500 less than equivalent cars from Japanese companies, analysts at the International Motor Vehicle Program say”, so an extra 1.2% reduction will make nary a difference in the appeal of their cars. And that’s where the real problem is.

    Having for too long dragged its feet on technological innovation, the production of consumer-friendly, fuel-saving and greener cars that better fit with the time, the Big Three have given themselves a bad name that is not overcome with a price cut here and there, and which will take time to be overcome even if they have improved their lines significantly in the last few years. That’s the real source of the “financial bleeding”. By trying to blame the unionized workers’ wages for the failure of the Big Three to compete, the Republicans are basically just playing politics.

    It’s still reasonable to disagree about whether the by definition uncertain chances that the image of the Big Three’s cars will improve soon enough warrants the gamble of a bailout bill (even if those chances should be helped along by the requirements for changed management policies that can be attached to the bill). Leonhardt certainly is doubtful about it. But that has relatively little to do with the compensation plans workers at these factories currently have.

    I happen to think it’s more than worth it – if anything because of the well-documented, massive impact that a failure of the Big Three would have. A myriad of small and medium businesses depend on them as well, after all, and would fail in their wake since they lack the capital (and considering the credit crunch would be unable to borrow it) to weather them over until other players might (or might not) be able to rebuild some of this capital-intensive industry. If the knock-on effect the failure of this and that Wall Street investment bank would have had was worth hundreds of billions of government bailout money, certainly the countless jobs and businesses at stake here are worth some tens of billions.

    And yeah, I suppose that this would have been a better blog post than my original one :-)

  3. Robert Gentel  •  Dec 13, 2008 @5:49 pm

    No matter how you want to portray the numbers they are significantly above their competitor’s wage rates, and they are the best paid factory workers in the country. Even if you use your own “relatively small” difference, that’s a 20% (rounded) difference in compensation rates and this is when you spin it the nicest way you can for them. Sure, if they reduce their costs by $800 per car that’s not going to make them suddenly sell like crazy, but that isn’t the entire point and that argument is misleading. They are operating at a net loss per vehicle of about that much and cutting compensation is the only guaranteed way we can stop that bleeding. Selling more cars is the ideal solution, but that’s not something we can just will to happen and it will take years, and they need to downsize in the mean time. They also need to improve their manufacturing processes, their competitors make the cars faster and use better processes. This too will take time. But one of the things they can do through wage concessions is minimize the current loss per vehicle they operate at. They’ve typically operated their manufacturing at a loss, and made up their money though their financing companies while their competitors are making their vehicles at a profit. An $800 difference per vehicle is close to enough to make them break even on manufacturing.

    And as to the theory that they need to be bailed out at all I disagree with that as well. The airlines emerged from bancrupcies as healthier and more viable companies. The things that happen to a company in bankrupcy are things that the big 3 already needs to go through, and I see no reason to give them a bailout without them conceeding the tough concessions we all know they will need to make to survive. Bailing them out for $34 billion just doesn’t make sense. Their market capitalization combined is only a fraction of that, and if we think they are such a good gamble we should be just buying them outright (which can be done for under $10 billion) and reprivatizing them later.

    Otherwise I say let them go through bankrupcy. They won’t disappear, they’ll just have to downsize and make these concessions that they need to make anyway to survive. And if the jobs are your concern, I’d rather give the money to public programs like an expansion of unemployment insurance, “New Deal” job creation, loans to small businesses to make payroll or just about anything other than feeding it into companies that are loosing billions a month and have been promising my whole lifetime that they are about to turn it around and change their ways. I don’t want to bank on that. If they aren’t willing to slim down all around to get public money then let’s let bankruptcy force the diet.

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