Good for General Motors, Bad for America
During the Michigan primary in January, Mitt Romney predicted that if the nation did not learn from Michigan’s experiences, it might soon travel down the same precarious economic path. In a twisted way, that prediction may be on the verge of coming true.
Michigan’s self-destructive economic practices have sent ripples of fiscal poison all across the nation in the form of supplier contracts, dealership agreements and financing agreements by, for and with General Motors, Ford and Chrysler.
Thanks to the business malpractice of the Big Three, Michigan has been an economic basket case for years. We’re used to it. But if our well-deserved comeuppance is finally at hand, the rest of the nation should understand that it’s going to suffer a lot of collateral damage. This is not to say it shouldn’t be allowed to happen. Just a word to the wise: Be ready.
These three anachronistic companies now stand on the brink of collapse, threatening to take as many as 3 million jobs down with them. And since they have unsurprisingly come yet again to the federal government with hats in hand – hey, it’s been two whole months since their last federal bailout – Washington now faces a decision between propping up this suicidal economic model or letting a national economic calamity occur.
Some choice. The auto industry’s path to this point is a story that makes the sub-prime mortgage fiasco look like a case study in sound fiscal management.
In 1965, General Motors controlled 50 percent of the U.S. automotive market. Along with its domestic competitors, this corporate monstrosity collaborated with the United Auto Workers to make Michigan manufacturing workers the recipients of the highest wages, the richest benefits, the most generous work rules and the most lucrative retirement packages in history. When Michigan passed its Public Employee Relations Act that same year – the already-dominant force of unions in Michigan became codified into law and expanded to the public sector.
It was truly a team effort. Unions funded their preferred politicians with money collected through compulsory dues, then prevailed on them to pass laws making union membership more and more compulsory. The Big Three offered little resistance. Buying labor peace was always the priority for them, and if accepting life in a union-dominated state was the price they had to pay to keep the assembly lines humming, they would pay it.
Never was this more evident than in the 1980s, when the Big Three signed on to union contracts that committed them not only to soaring wages, but to legacy health care and retirement costs that promised to explode on them less than a generation later – just as vehicle sales were tanking and credit was becoming less accessible not only for their customers, but for the companies as well.
Today, even the sale of a new vehicle at retail cannot produce a profit for the Big Three. Their overhead is so exorbitant that a loss of $2,000 or more on a vehicle sale is simply a fact of life. And while they have cut costs by buying out workers and idling plants, it costs money to pay people not to work, and to maintain and pay taxes on plants that don’t produce anything. Even when they spend less, what they do spend becomes less productive.
Oh, and their sales are plummeting – down 25 percent compared to the same period last year, which was wretched in its own right. As a result, GM is burning through what little cash it has left at a rate of more than $1 billion a month. It is on track to run out of cash by the second half of 2009, and that’s a big deal because its credit rating is junk. It can’t borrow any more money. Its share of the $25 billion the industry is begging from Congress – assuming nothing else changes – would only keep it operating perhaps an extra year.
If ever three companies deserved to go out of business, it is these three. But it’s not that simple. Thousands of suppliers in a multi-tiered supply base depend on the Big Three for the bulk of their income. If the Big Three go, they go too. And while Michigan has more auto suppliers than any other state, an industry collapse would obliterate major manufacturers throughout the country. Those who have smartly diversified their customer base by doing business with transplants or customers in other industries would be in the best position to survive, but far too many suppliers have only talked about diversification while continuing to genuflect before the altar of the Big Three.
And so Michigan has imported its economic insanity throughout the nation. Even in low-tax, right-to-work (in other words, un-Michigan-like) states, jobs are in jeopardy because of an economic model that started in the Workers’ Paradise and caught plenty of otherwise sane companies in its snare.
Would you bail out this racket? With its bloated, unsustainable cost structure – the product of decades of economic denial by management, labor and political leaders alike – the auto industry led an entire state into a depression.
And if you did bail it out, you would surely insist on draconian conditions, no? The cancellation of all union and supplier contracts, new management, new business plans . . . at the very least? President-elect Obama, who is pushing the outgoing Bush Administration to give the automakers the aid, seems concerned only about insisting on the production of more fuel-efficient cars.
That will be a hell of a trick if the companies don’t even survive, and the quickest way to ensure that is not refuse their latest government bailout request, but to prop them up so they can keep doing what they’ve always done. What makes me think they would do that? What makes you think they wouldn’t? Ask any Big Three executive why the companies are in dire straits, all you’ll hear is a bemoaning of the current consumer credit crunch.
Exorbitant union contracts? Cars people don’t want? What are those?
The American auto industry has believed for generations that economic reality does not apply to it. It is too important and too big. One-time GM President Charles Wilson famously declared in the 1950s: “What’s good for General Motors is good for America.”
He really believed that, and so did a lot of other people – some of whom grew up to make Michigan labor laws and represent Michigan in Congress.
Today, what’s good for General Motors is bad for America. GM’s survival may be the only thing worse than its death – and that’s some trick.