A big reason the auto-maker bailout failed was the insistence by some Senate Republicans that the United Auto Workers, which represents many of the Big Three’s employees, make concessions on wages and other benefits sooner than they already have. It’s important to note here that the UAW* has made some of these concessions, scheduled to go into effect in a few years. No one knew when that contract was negotiated that the credit crisis would lead to this emergency.
Senator Bob Corker, a Republican from Tennessee, says it’s the UAW’s refusal that is stopping the bill. He insists that they need to cut wages to be more in line with foreign auto-makers’ plants here.
The hourly wages are not as different as is being portrayed. It’s health care costs and pensioners that are killing the American companies. Funnily enough, Tennessee has had a bit of a manufacturing Renaissance in the past few years, pulling it out of the poverty in which its neighbors are still mired. Who’s behind it? Foreign automakers, like Nissan, which opened plants there. Who’s gotten nearly a quarter of a million from the automotive industry during his political career, according to the Center for Responsive Politics? Bob Corker.** More than half of it was in the 2008 cycle. Unfortunately, this doesn’t break down by company, so anyone with info on who’s giving it is welcome to weigh in. I have to say, though, my money’s on the companies that are in his state.
Putting aside for a minute the fight between Corker and the UAW, whose president says they fear they’re being made into a scapegoat, I think it’s clear that the amount of money the Big Three pay their workers isn’t as critical as it’s being made to seem. The companies have a pensioner problem. Part of it stems from the automation of the car-making industry: Many more workers were required per car in the past, which means there are fewer workers per pensioner paying into the system now. But part of it is because, when unions and automakers began negotiating they made individual companies – not industries, states, or the entire country – responsible for the well-being of their employees. That shrinks the risk pool which, in roundabout ways we can explain later, raises costs.
I’d like to say the crisis was a surprise. But some predicted it from the beginning, and it was entirely foreseen by the time Malcolm Gladwell wrote this excellent piece for the New Yorker in 2006:
A year later, the same issue came up in Detroit. The president of General Motors at the time was Charles E. Wilson, known as Engine Charlie. Wilson was one of the highest-paid corporate executives in America, earning $586,100 (and paying, incidentally, $430,350 in taxes). He was in contract talks with Walter Reuther, the national president of the U.A.W. The two men had already agreed on a cost-of-living allowance. Now Wilson went one step further, and, for the first time, offered every G.M. employee health-care benefits and a pension.
Reuther had his doubts. . . . In the nineteen-thirties, unions had launched a number of health-care plans, many of which cut across individual company and industry lines. In the nineteen-forties, they argued for expanding Social Security. In 1945, when President Truman first proposed national health insurance, they cheered. In 1947, when Ford offered its workers a pension, the union voted it down. The labor movement believed that the safest and most efficient way to provide insurance against ill health or old age was to spread the costs and risks of benefits over the biggest and most diverse group possible. Walter Reuther, as Nelson Lichtenstein argues in his definitive biography, believed that risk ought to be broadly collectivized. Charlie Wilson, on the other hand, felt the way the business leaders of Toledo did: that collectivization was a threat to the free market and to the autonomy of business owners. In his view, companies themselves ought to assume the risks of providing insurance.
America’s private pension system is now in crisis. Over the past few years, American taxpayers have been put at risk of assuming tens of billions of dollars of pension liabilities from once profitable companies. Hundreds of thousands of retired steelworkers and airline employees have seen health-care benefits that were promised to them by their employers vanish. General Motors, the country’s largest automaker, is between forty and fifty billion dollars behind in the money it needs to fulfill its health-care and pension promises. This crisis is sometimes portrayed as the result of corporate America’s excessive generosity in making promises to its workers. But when it comes to retirement, health, disability, and unemployment benefits there is nothing exceptional about the United States: it is average among industrialized countries—more generous than Australia, Canada, Ireland, and Italy, just behind Finland and the United Kingdom, and on a par with the Netherlands and Denmark. The difference is that in most countries the government, or large groups of companies, provides pensions and health insurance. The United States, by contrast, has over the past fifty years followed the lead of Charlie Wilson and the bosses of Toledo and made individual companies responsible for the care of their retirees. It is this fact, as much as any other, that explains the current crisis. In 1950, Charlie Wilson was wrong, and Walter Reuther was right.
* Disclosure, I am a member of UAW. I am not an auto-worker. I’ve been member of one union or another in every job I’ve had as an adult, because all of my employers have had existing agreements.
** Though, in fairness, the industry was not among the top five of his contributors.