Bush’s auto plan will test Obama’s union loyalties

December 22, 2008

morici– Peter Morici is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.  The opinions expressed are his own. —

President Bush has agreed to lend GM and Chrysler $17.4 billion on the condition these firms complete a plan to accomplish financial viability.

The agreements set goals for automakers: converting two-thirds of their debt into equity; paying company stock to fund one half of the Voluntary Employee Benefits Associations, which fund retiree health care benefits and remove these costs from future liabilities; aligning wages, benefits and work rules with U.S. Nissan, Toyota or Honda operations.

These goals are generally consistent with the conditions I outlined as necessary for the Detroit Three to achieve viability when I testified before the Senate Banking Committee on November 18. For example, laid off workers could no longer sit in the Jobs Banks collecting 90 percent of pay and benefits indefinitely and engaging in productive activities like pinochle.

Financial viability requires projecting a positive net present value, taking into account all current and future costs. It does not require a positive cash flow by March 31. In fact, wage and benefit cuts only need be accomplished by December 31, 2009.

Given the depressed auto market, a positive cash flow cannot be accomplished soon, and GM and Chrysler will be asking for more federal loans when they table their plans by March 31. If the auto market stays depressed into 2010, Ford will likely seek assistance. Given the likely duration of the recession, loans of well over $100 billion will be needed. Much of those could prove gifts, with the loans never truly repaid.

Unless the automakers significantly reduce their debt, jettison retiree legacy liabilities, and align wages, benefits, work rules with those of Japanese transplants, they simply cannot hope to be consistently profitable.

Yet, the agreement permits the automakers to vary from those conditions if they can still demonstrate a net positive present value. Enter the accounting magicians.

UAW contracts are exceedingly complex. GM and UAW leaders have mastered obfuscating the consequences of their pay structure and work rules. Calculations of net present value will importantly hinge on forecasts of future car sales and wages paid by Toyota, Nissan and Honda. A few quick pen strokes and a lousy business plan can be made a winner, with costs to taxpayers in unpaid loans only becoming apparent years later.

Barack Obama owes organized labor a huge debt for his November victory. UAW President Ron Gettelfinger can be expected to try to sell Obama labor agreements that appear to create more concessions than are real and leave the Detroit Three in the red going forward.

Fooling Obama would create loans the Detroit Three never can really repay.  The government could force payment at the expense of the next creditors in line—the large U.S. banks—but the federal government is already subsidizing their losses.

One way or the other ordinary citizens who don’t earn nearly the pay and benefits autoworkers receive would be paying taxes to subsidize their rather generous lifestyles, much as taxpayers are financing the bloated bonuses at large New York banks requiring federal dole to stay afloat.

President Bush has punted the auto mess to his successor, and one of three outcomes is possible:

1. President Obama can require the automakers and UAW to come up with a contract ordinary mortals can understand, eliminate all the foolish job classifications and work rules, and establish pay rates that make the Detroit Three competitive.

2. Obama can push the automakers into a prepackaged Chapter 11, perhaps by providing some financing to ensure suppliers are paid and companies can continue to operate, and let a bankruptcy judge impose the essential conditions of the Bush agreement.

3. He can let the Detroit Three continue their profligate behavior, providing subsidies masquerading as loans.

Obama faces the same kind of tough choice Bush did when he lavished generous subsidies on agriculture at the beginning of his presidency. If Obama caves to union pressures and chooses to subsidize the automakers, other unionized industries will line up. Market discipline will not apply to the eight percent of private workforce represented by unions, and damn the majority that really elected him.

For full coverage of the auto industry, click here.

For previous debate entries by Peter Morici, click here.

25 comments

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Mike H is close to my own sentiment. When direct competition entered a mature market with over 70 years of obligations built into overhead, wage and benefit parity should have been insisted upon. We have similar problems erupting in other areas of manufacture where people frequently have foregone wage increase in favor of longer sighted benefit packages. This has so broad an effect on our stability and culture behoving us all to look in retrospect.
Some of these same states that put up taxpayer cash to lure this competition have done so in the past. Textiles left the northeast for the southeast with adevastating effect on the fabric of northeastern towns and cities. Paper manufacturing held their unions hostage in the late sixties with the threat of moving to Mississippi, Alabama and Georgia.
Disruption of a market by true technological advantage is too easily squashed by corporations and captive politicians. However in a true free market disruption breeds the next group of entrepeneurs. Where have you seen an entrepreneurial exploit that hasn’t been regulated to marginality lately? Can you say DERIVATIVE?
Biggest Ponzi Scheme ever!! Don’t know why no committeeman has seen fit to call a spade a spade. The root problem in the world economy is the ability to aggregate wealth and then create ruses (when is a bet insurance)to avoid transparency.
The banks and financials should have had this whole thing stuffed up their rosey red keisters by now.
If so then rescues directed toward real work and cultural stability while the trials commence for the Financially Fraudulent Frat boys would be moving.
Alas, we will be printing cash, looking for status quo,
experiencing inflation soon (maybe I get a real raise)
Sooo…Deserve it or not Detroit must be supported while policy can be formulated that levels the playing field across the entire country. Social welfare is predicated on encouraging work. Work is only attractive if it pays.
Love to all
Dan O

Posted by DanO | Report as abusive

For the Brit whom has not yet caught on. first the Brit cars were always notorious for falling apart and hanger queens, light years behind the auto technology.. so they only competed on image.. not quality. Second USA Autos CANNOT sell or compete in Asia and even EU due to highly protective fees, “safety requirements and import restrictions” Third Asian auto has some of the most highly organized and worker protections going.. as said, try to export a Buick to Japan or big SUV to China which applies 25% “fee” on “selected models”. Next check out quality in USA autos today, pretty much even with world, note Ford in EU competes very well.. and even bought Jag and Land Rover..and VW and BMW now own the big name high end Rolls etc. which must make the Brit a bit upset.. Even Volvo owned by Ford.. which upset many in Sweden, where if they can get them Camero, Mustang etc very valued.
USA was built by unions and to for out Swineate and House of Reprehensibly led by form CSA states to set our wages to that of Foreign firms is simply not acceptable. Do hope the citizens wake up and note how we have given away (for profits for very few at top) jobs and standard of living for most, sold out the nation and in end will end up like the “British Empire”.. aka needed help to defeat Argentina, Time to stand up for USA and make the changes needed to restore it, and note the auto industry only built the world selling SUV-Trucks that consumers demanded and congress gave nearly 100% tax breaks. all th way to gas price increases.. done by the Hedge funds and speculators, investors.. the ones now demanding union pay be based on foreign firms pay… Our call as to whom runs USA, former CSA slave states or the civilized states.. or we end up as did the Brits.. lots of noise, but not much more.. and do as uncle sugar tells it, as in support Iraq War etc.. Our choice..our pay our futures.. and all the while none demand the banks that sucked up trillions tell us what they did with the funds… and same for Wall St, not to hard to ask whom gets congress support and whom gets pillared by same.. well off or workers, wonder whom wins?

Posted by chuck | Report as abusive

Remember when a Chevy was a Chevy, a Buick was a Buick, etc? As Big 3 accountants weighed in more and more on product design, the product distinction slowly went away along with the customers. As the market competition exploded, where was Big 3 management? Counting their bonuses, stock options, or flying in corporate jets?
It’s unfortunate the UAW continued pushing for more benefits without increasing industry profits and shrinking market share. Bottom line is where did they [Big 3 and UAW] think they were going to end-up? We “customers” stopped buying Big 3 autos, so now as taxpayers we have to give them our money anyway with lax oversight, no thanks, nothing personal it’s just business.

Posted by David | Report as abusive

It’s oh so easy for people to talk about “the 8% in unions” like they were loafers or something. I’m in a union and it’s great to have someone on your side in the workplace. Unions weren’t invented by Lenin. There was a need that unions filled and still fill. Job banks may represent another era and adjustments have to be made; but throwing people out in the street is easier to write about than it is when it’s happening to real people. If a bargain was made with workers, going back is no small thing.

Posted by b kass | Report as abusive

Tell me why do we(government) have to pay for this? I don’t buy their car, I don’t buy their stock, I don’t agree with their business model– they are failing and panhandling us to bail them out. Just because they have a greedy union (that over contribute to politicians) and unqualified CEOs that we have to pay your bills for an extra couple years. Let face it the company only will survive if they file for bankrupt, have a massive laid off, renegotiate with the UAW and reform. Again our so call government is failing us– it yielding our money to large corporations without our consent. When did a capitalist society turn socialist?

Posted by jo | Report as abusive