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

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/

Wonder since many want auto workers to be CONTRACTUALLY bound to have wages determined by what foreign firms pay, why stop there with auto workers. Let’s PUT ALL on same pay scale as foreign firms, cops on same pay benefits as rent a cops, fire on same as vol fire, all workers in utility on same as those on foreign owned utility, Find and publish all foreign owned plants and business, publish wages and then force ALL workers to get to same level. Along way do same for the “experts” in our ivory tower of higher ed, and abolish tenure, benefits etc as national security demands a educated work force, and now days all to many cannot afford college..
Yep, time we level the playing fields..and about the pay for our gladiators on the various “Playing fields, manipulating some sort of ball, often sponsored by those taking government tax breaks and bailouts.. Time to do something about them.. Lets really drive the nation into poverty level third world wages, all of us, not just a few. The only reason congress is after auto and not Wall St-Banks is that latter owns more shares of congress then the working people.. and the old CSA assured the foreign firms owners, when the open their “Plant-ations” in the old CSA, the (wage) slaves would not be freed, again, by the dreaded “union”. Amusing how well they packaged and sold that one…
USA wages dependent on foreign owned plants wages.. lets all go wave a flag on how truly independent this nation has become.. the flags of course, “MADE IN CHINA”.. What a bunch of envious drooling fools the USA has become, none understand the very little they have left was obtained by unions.. as it seems most slept through that before they dropped out in eighth grade.

Posted by chuck | Report as abusive

like all good republicans… the issue of management pay is not discussed.. the unions give into wage cuts and management gets huge pay raises… lets make it fare… lets say the most a non-union employee is only allowed to make say 100 times the average union wage at the plant… no golden parachute.. no stock option… on bonuses…. then we will talk about wage cuts… the president of gm would lose a couple of million a year in wage ect…. enough to keep 25 union jobs for 5 years…

Posted by mark smith | Report as abusive

Capitalism as practiced in America is a wonderful thing.

Sink or swim,hard work etc and if you fail , well that’s hard luck, try something else.

However if you get to be BIG, like the Banks that got bailed out,the principles change and the tax payer is the looser.

Corruption , greed , stupidity and ignorance displayed by some of the big Corporations is mind boggling.

The plight of GM is definitely brought on by their own actions,
Bloated pay packets, a retirement scheme that is now seen to be full of corruption , as exposed by the New York Times, and now being investigated , have meant that they are far less productive than the Japanese car makers operating in America.

The workers at the Japanese plants are quite well paid and are productive, and seem satisfied with the conditions.

I recall a few years ago, one of the financial “experts” saying that “We now know so much about how control money that there will never be another depression”

USA needs to go back to basics and learn the lessons of the present shambles, and never trust those who have caused it.

Posted by Bruce | Report as abusive

chuck: as I read your statement it made me think this sounds awful familure and it dawned on me YUP……..NASCAR

Posted by Devin | Report as abusive

GM & Chrysler are both going bust.
The only issue is when.

There are two drivers to this happy state of affairs.

The problems were exacerbated when Chrysler was twice rescued instead of being allowed to go bust which had the effect of keeping overcapacity in the industry which with the additional new plants now has far too much.

And Detroit workers have simply priced themselves out of a job.

Nothing new here – but when you cost US $ 78 / hour to build cars that your competitors build for US $ 28 / hour – your a gone burger !

Nothing technically wrong with a Honda Toyota Nissan or Lexus.
In fact many would say they are superior products.

So it’s just a question of when in what is now the USSA of the pollies facing reality.

The world won’t come to an end – unless you hold GM equity or debt.
You can kiss that goodbye.

Even Obama can’t save thyem this time – for the simply reason that people are going to stop buying their cars. Like pushing on rope. It won’t work.

So – this is it ! There gone – perpare for a new USSA without GM.

Just remember you lost Packard, Hudson, Studebaker, Edsel and some 40 others post war – yet no one has a problem buying a car today.

It just won’t be a GM or Chyrsler product.

That’s how markets work !

Posted by John Blundell | Report as abusive

Free trade has bought us the great world-wide leveling. Between slave labor all over the world, illegal aliens and robotics, we can be become the world’s lowest common denominator if we keep trying hard enough. We’re not quite there yet but we can even get back to the desired feudal system once the serfs finish bailing out the nobles.
So long America the Bountiful. Hello America the Busted.

Posted by Ray | Report as abusive

The professor is right on about the unions. Where are we gaining population and congressional seats? The right to work states. Where are we losing population and congressional seats? in the union states like Michigan. The unions are for the unions.They ride on the backs of the\”working man\” and \”the midddle class\”. They represent 8 % of the workforce and they claim to represent \”the working man\”. Even a normal high school graduate could see through this one.

Posted by james glazer | Report as abusive

Capitalism of convenience; communist otherwise. Want a global economy? Become a global player. The playing field levels. Do not want immigrants who drive down the wages? Do not cheap imports because they drive away jobs? Then do not export any goods either as a similar thing happens to the place with receives such imports.

Posted by ploy edison | Report as abusive

Peter, did you hear Toyota lost 1.7 billion dollars. Nissan sales were off 40percent. Honda is currently reevaluating profit (or loss) forecasts for the 4th quarter. All the German manufacturers are reducing production and work hours. Foreign manufacturers aren’t saddled with the cost of health care and now they are about to loose money as well. Just a year ago GM stock traded around 42 dollars, it now hovers around 2 dollars. It will be interesting to see how far Toyota’s or Nissan’s stocks decline in the next year. By the way, was this the standard of performance you had in mind for the American auto manufacturers? Or just maybe the world wide auto industry crisis is a symptom of a much larger problem. Namely globalization and lopsided trade imbalances amongst industrial nations. I should also note the impact energy has had on the auto industry let alone the entire world economy. Perhaps you might consider taking the time to read Jared Diamond’s “Collapse”. I believe there are some useful comparisons to our current dilemma.

Posted by Anubis | Report as abusive

As I read it, the Paulsen plan basically forced the same terms as a pre-arranged DIP bankruptcy — contingent on the negotiations. But the GM and Chrysler execs had to negotiate those terms, with the weight of a loan default as leverage.

Then, before the negotiations even began, Obama destroyed their leverage by saying the union shouldn’t have to bear the burden. So, now the union will do nothing before the deadline assuming Obama will make every other stakeholder compromise except the unions.

Seems like a huge screw-up before he even moves in.

Amusing that some cannot tell the difference betwwen burdened labor rates at some number like $74 or such and salary rates.. and only a fool or B Arnold type would allow USA wages to be set by foreign firms.. as said befoe.. hope ALL get used to it.. as if cuts good enough for auto, then good enough for any USA worker, and perhaps good enough for Congress? Folks you just keep at the unions and watch where you end up, most simply to stupid to understand the jobs they had or have, with benefits came from unions.. The only thing that destroyed USA auto and others was unfair trade and tariff laws so corp greed 101 could be enhanced by another dime or so. Now time that banks and Wall St be held to same standards.. and note the BANKS WILL NOT tell the public where the trillions they got went, used or if even spent.. So amusing to see the herd of sheep bleat about “unions wrecked this and that”… as for most part cannot even get the hourly rates right… so dumbed down, they want to drag all workers down to their levels. Now Toyota and others having troubles and if they CUT their USA wages… then these fools want USA companies to cut wages.. and perhaps next, any USA company to cut if foreign in USA pay less. What a bunch of fools, no wonder USA is falling apart.. Try to import a Buick into Japan.. a real lesson in “Free trade”.

Posted by chuck | Report as abusive

I would like to know what Chuck and other pro-status quo supporters believe is the way out of this situation :

The bottom line is that employers can only afford to pay employees, suppliers, and shareholders if their products can be sold at a profit

To sell GM cars today at a profit would mean that their cars would be a minimum of 20 – 25% more expensive than a comparable car from a non-US manufacturer

Why would a US consumer pay 25% more for what any independant observer would say is an inferior product in terms of design, build quality, technical sophistication, fuel economy….. Sadly, American cars are decades behind their imported challengers ( if you don’t accept this, just look how few US cars sell in competitive markets outside of the US !)

If GM and Chrysler cannot sell their cars at a price which makes a profit then where is the money going to come from ? Does Chuck expect the US govt ( aka the taxpayer!) to continue to pay for the benefits that he and his colleagues receive ?

Or does he expect the US consumer to willingly choose to pay 25% higher prices for the dubious benefit of having a GM car ?

Or does he expect the gov’t to force the Foreign producers to match GM’s lousy cost-structure – in which case again all US consumers will be asked to pay 25% over what they would otherwise have to pay, just so that the union workers can continue to enjoy their lifetme benefits.

The harsh fact of life, as so many (highly unionised) British Auto workers discovered in the 1970′s is that if your company cannot produce a competitive product at a competitive price, then your company has no future. Failure to learn the lessons of histroy means that you will suffer the same fate and GM and Chrysler will go the same way as Jaguar, Austin, Rover, MG, and others .

Bill ( a Brit from Hong Kong.)

Forget ‘Net present values’ and ‘Positive Cash Flows’. Unless these fools get on board with the plug-in electric car they are pretty much screwed. It comes down to basic buyer economics boys. When the electric car is in full swing, and you have the choice between paying through the nose for a polluting fuel or running your vehicle off a power source that is free and unlimited via renewables, guess who wins. The hybrid is only a stepping stone to this reality, and the gas guzzlers are now akin to the horse and cart. Hop onto the Electric Car debate blog and learn something or google it. It’s funny you know. 20 years ago no one thought that the internet would really take off, but now ‘Google’ is part of the English language.
lol :)
Brad

Posted by Brad | Report as abusive

“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.”

You’ve got to love that kind of thinking…. Let’s lower the wages and benefits of Company A rather than expecting to have Company B raise their wages and benefits. What the hell were the governors, senators and representatives thinking when they agreed to all the tax abatements to get Hyundai, Honda and Toyota into their states? Obviously they weren’t thinking of the long term welfare of our nation!

That’s the Republican economic system and it doesn’t work. It creates too big a burden on public health funds, retirement, and social costs. Walmart, anyone???????

Posted by Mike H. | Report as abusive

Since when is the US Government an expert on Efficiency?

The entry of the US Government into the US Auto Industry will lead the industry into hording cash, bankrupting dealerships, laying off a mass of workers and becoming a form of social welfare agency at significantly lower wages incapable of producing competetive quality with any others. Russia never made a good car, why should we think that our new system DAS KAPITAL will do any better?

I think Ford will be the only surviving mark capable of producing a worthy car.

Unfortunately given the catastrophic errors in the Banking Bailout, there won’t be a salesperson [#1 Consumer of American Vehicles] making enough money in any industry to Finance one.

It is an excellent opportunity for European and Indian Brands like FIAT and TATA to re-enter the United States and capture a massive market share.

As an entrepreneur and innovator the United States is providing an increasingly dismal light of excessive and unproductive government interfering with business instead of supporting New Business with Grants and Funding.

An entrepreneur will be pressed to gain a penny for funding an innovative new system or product while the Centrally Planned Government experimental catastrophy doles out a TRILLION DOLLARS in praise of inefficiency and mismanagement. All this while treating the innovators like terrorist threats to the collapsing prehistoric industries that run to the government screaming for aid and protectionist behavior.

The Competition is now a BAD WORD and Government Agencies are working against the Innovator to make certain thei innovations do not compete with ‘preferred businesses’.

I am highly doubtfull that a room full of government functionaires can bring anything new to the US Automotive Industry and its competitive edge will be overtaken permanently by 2010.

By 2015 my guess is we’ll be raving about the quality of a new Russian Car, developed in a competitive environment and financed by a bank headquartered in INDIA.

Rant of December 23, 2008 complete.

Just how are the debt holders going to agree to swap their debt with equity. If an agreement can not be reached at the end, GM will bankrupt and UAW will lost their job and probably their retirement fund. As a bond holder myself, I am ok to lost some money just to watch GM goes bust. It is painful but my life does not depend on it. Other bond holders might have even insured their bonds. Even another group of bond holders are actually China’s car companies, they are very happy to see two or three of their major competitors go bust. So, dear UAW, go bust or lower your salary to keep your job.

Posted by john | Report as abusive

Insofar as Union wages go, a recent group of economists said that if the UAW agreed to work for free it would not bail out GM and the others. Centering on the wage issue is somewhat of an obfuscation when management wages and benefits are not on the table as well. Frankly, the CEO and the board should resign en masse. The direction they have take the company, gas guzzlers, duplicate vehicles with different brand names helped them dig the hole they’re in now. It also should be noted that while paying these so-called outrageous wages, the WORKERS earned GM and the others billions.

Posted by Robert | Report as abusive

the great struggle between capitalism (free markets)and communism (government involved in markets)has cost so many lives in wars. how do we explain that cost to the families that have lost loved ones serving in the various militaries involved? was it all one big joke? if those in government and high business are supposed to know so much and now we know, they know so little, how will the rank & file who are now so jaundiced ever trust them?

Posted by David Sovie | Report as abusive

As I listen to the ad nauseum discussion of the big three auto makers it leaves me wondering do any of these “experts” know anything?

First the auto industry business model is flawed at its core and creates much of the financial problems of today. My Chevy 2500 4X4 extended cab is just fine for what I need and it is a 1991 with 170,000 miles. The auto industry concept that we need a new car every couple years is the flaw and with tighter credit standards people are going to keep what they have 7-10 years. Dramatic long-term over capacity in the auto manufacturing industry is the problem and only a dramatic long-term reduction in capacity is necessary. Compounding the problem is the foreign competition which is good and has taken a share of a shrinking market. Lastly the market is changing for the regulators and consumers and both are moving in directions away from the current transportation model. Global warming, cost of fuel, environmental degradation starting with the extraction of the resource, to its refinement and then the manufacturing process, to the carving the landscape for more pathways to drive on are all becoming controversies.

President Obama before you go tossing tax dollars at the big three, look at the future of transportation in the United States. What is our long-term transportation model? We need the President to see beyond the next election cycle because the fixes the United States needs in its transportation system that address the multitude of problems cannot be built and implemented in four years. What are the values our transportation system should be built on?

* Freedom of movement that is quick and convinient
* Safe and accountable
* Person or freight pays its own way
* Accessable to all

I am sure there are other values especially in the environmental catagories but the time has come to have that discussion and stop wasting everyones time with the big three, they are just companies not icons.

I read lots of great viewpoints on this issue. I’d like to say this industry problem is multi-faceted. Focusing on the labor issue, foreign makers are sucessfully running their business without union labor. I see union labor as a more costly item for domestic manufacturers. I read some details here and there on union contracts and it is unimaginable that business management would agree to such costly contracts without performance clauses basically saying if we do good, you do good, if we don’t do good, you don’t do so good.
On products, the Big 3 have some problems with products, marketing and perception. Foreign makers are not plauged by poor product, vague marketing and poor industry perception. The business models used by foreign makers works! Collectively (as a team) the Big 3 must repair their customer relations, use the same advertising firms the foreign competition uses and start building better products. Not all domestic products are poor, but the perception (and history) tell a different story.
The UAW is an entity that cannot and must no longer be supported. The 20′s, 30′s, and 40′s are history and so should be the UAW.

Posted by dave | Report as abusive

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