Multinational Monitor Editors blog

Thank you, George Bush. The federal government is finally acting to protect the auto industry from failure.

The $17.4 billion in loans for GM and Chrysler is not going to be enough to rescue the industry — but it will keep these companies going until the next administration takes office.

The Big Three will be back for more money soon, and Congress and the Obama administration will have an opportunity to structure an appropriate bailout package.

A very unfortunate consequence of the Congressional debate over the bailout, and the subsequent Bush administration handling of the issue, has been to raise the near-term viability and short-term profitability of the industry as the overriding objective of any bailout.

That’s an unrealistic and undesirable goal. Much better would be to focus on long-term ecological sustainability.

A quick return to profitability is unrealistic, because whatever the deep structural problems of the industry (and they are legion), the proximate cause of its revenue shortfall is the collapse of auto sales and the deepening recession. U.S. auto sales are down by more than a third over the last year, crushing U.S. and Japanese automakers alike. As long as the recession persists, the automakers are going to struggle.

The emphasis on rapid return to viability is undesirable on at least two counts.

First, from Democrats and Republicans alike, it is associated with unfair demands for new rounds of concessions from auto workers. These demands ignore three decades of steady concessions from auto workers, including terms in the 2007 contract that start many new workers at $14 an hour. These demands imply the abrogation of promises made to retired workers, including by slashing existing health insurance benefits and possibly pension payments.

And the demands suggest — explicitly from President Bush and Congressional Republicans — that unionized workers reduce their wage levels to those of non-unionized workers in Japanese company-owned plants in the United States. Not only does this aim to destroy the benefits of unionization, it pushes down the wage structure of working families at a time when economic recovery depends on increasing the buying power especially of debt-burdened low- and middle-income consumers.

The emphasis on viability also threatens what must be the highest priority regarding the auto industry, which is to transform it into providing modes of transportation that do not imperil planetary well-being.

It is true that the long-term viability of the companies certainly rests on their ability to transform their product mix, sell much more fuel efficient cars at a reasonable cost, and undertake major investments in transformative technologies. Ultimately — and in the not-so-distant future — this must mean abandoning the internal combustion engine.

But current market realities are different. In the short term, gas prices are low, and the consumer love affair with hybrids is over (or at least suspended). The Big Three aren’t good at making fuel efficient cars that make them money, and it will take work, time and money for them to learn. And transformative technologies will require major new investments in R&D, and then physical plant; companies being pushed to turn around their balance sheets in a matter of months are in no position to do this.

The United States needs its auto industry. The economic cost of failure to the industrial Midwest and the entire country would be overwhelming. The direct costs to the government (health insurance, unemployment benefits, lost tax revenues) would by far outweigh the costs of bailout. A collapse of the industry would transform the recession into depression. It would vastly worsen the situation on Wall Street. It would worsen the U.S. trade deficit, which is a major source of long-term concern for well-being and even functioning of the global economy.

And the country needs an auto industry for positive reasons: It needs to be able to manage its own transportation needs on an ecologically sustainable basis.

The country, and the world, needs a revolutionized transportation sector. This crisis is the opportunity to achieve that transformation. But it will be an opportunity lost if success is measured by short-term “economic viability” of the Big Three.

When they come back to Washington, the primary demand on the auto companies should not be to show their plan for viability. It should be to work with the government (or under the government, or for the government) to develop a plan to change their product mix and for steady and long-term investments in new technology. Implementing such a plan will take time and large-scale investments, and much of money inevitably will have to come from the public. The government should impose very strict fuel efficiency performance standards, to be followed by medium-term requirements to sell zero-carbon emission cars. The government should have an ongoing role in monitoring and directing auto company investments to ensure these objectives are met. To level the playing field, these contractual arrangements should be accompanied by new fuel efficiency and carbon-free regulatory standards applying to all carmakers.

The financial crisis, the deepening recession and the climate crisis each in their own way require abandoning a belief that unregulated markets can best measure (and reward or punish) economic success. Detroit does need to find a way to be economically viable over time, but the preeminent need is to ensure that auto manufacturing is viable for the planet.

Nancy Pelosi says the Congressional Republicans are playing Russian Roulette with the economy by refusing to agree to an auto industry bailout.

But for that metaphor to work, you have to add that they’ve loaded the gun with six bullets.

The only hope is that someone — Treasury Secretary Henry Paulson or Federal Reserve Chair Ben Bernanke — will come in and prevent the trigger from being pulled. Luckily, it appears they are ready to do so. A statement from the Bush administration this morning signaled that it would find a way to keep the Big Three automakers in business until next year, when a more comprehensive bailout and industry restructuring package can be worked out.

What is remarkable about the Senate Republican refusal to agree to a $15 billion loan deal for the auto industry is that they are not serving any corporate interest. A collapse of the U.S. auto industry would be bad not just for the Big Three, and the supplier networks and auto dealers, but pretty much every sector of the economy, including Wall Street.

Earlier this week, U.S. Chamber of Commerce President and CEO Thomas J. Donohue urged that “Congress must immediately authorize bridge loans to America’s carmakers to prevent the collapse of the U.S. auto industry and the devastating impact it would have on the economy, American workers, and national security.”

The motives for the Republicans appear to be narrow political calculation that the public is tired of industry bailouts (a foolish political read, because if the Republicans permit the auto industry to fall into recession-worsening bankruptcy, they will pay a political price for at least a generation); a hypocritical claim that they oppose government intervention in the economy (contradicted by everything from Republican-approved state tax breaks for Honda and Toyota assembly plants to Ted Stevens’ earmarks, from public insurance and loan guarantees for the nuclear industry to subsidies for weapons exporters); and a vicious anti-unionism and anti-working class bias.

The Republicans say the failure to reach a Congressional deal on the auto bailout rests with the United Auto Workers, who refused to reduce wage scales to match those of non-unionized workers in Japanese auto company plants in the United States.

Actually, Japanese plant wages have always been close to those of the UAW, and the UAW has agreed to cut wages for many new workers almost in half — with many new jobs starting at $14 an hour. (GM says that, for these new hires, overall per-employee costs will decline from the totally misleading $78 per hour to $26 an hour.) But there’s no logic in chasing non-union wages down as a way to be competitive, because the non-union employer can always unilaterally lower them below those reached through collective bargaining.

There is a special cruelty and nastiness in the idea that unionized auto workers, who do very dangerous, physically demanding work with minimal opportunity for creative expression, are excessively compensated or enriched by unreasonably generous health insurance plans.

Here are a few points of comparison with an industry where physical demands and workplace safety hazards are minimal, and where white-collar employees brag about how they are free to be innovative. Like the U.S. auto industry, Wall Street has also fallen on very hard times due to spectacular mismanagement.

+ Auto worker compensation makes up a small cost of manufacturing a car — less than 10 percent. So, you can slash wages as much as you want, but you won’t bring costs down much. By contrast, as you would expect in a service industry, compensation makes up a huge portion of costs for the financial sector. The New York state comptroller lists employee compensation costs as equivalent to more than 60 percent of 2007 revenue for the 7 largest financial firms headquartered in New York City. At Goldman Sachs, employee compensation made up 71 percent of total operating expenses in 2007.

+ UAW contracts give workers the right to retire after 30 years of laboring, with pensions and healthcare. This week, Goldman Sachs announced that, given the hard times, it was considering raising its retirement requirement to the industry standard of the rule of 60 (from Goldman’s current 55). Under that rule, you can retire with nice benefits after any combination of age and service totaling 60. So, if you’ve done 15 years service at age 45, you’re eligible.

+ In 2007, average wage and benefit costs per employee at Goldman Sachs were $661,490. Even using misleading and wildly inflated auto industry claims, UAW workers cost $150,000 a year.

+ Congress has allocated $700 billion to bailout Wall Street, but the overall total is higher by an order of magnitude. Including all of the loans, investments, swaps, guarantees and more, the federal government (including the Federal Reserve) has doled out more than $7 trillion to Wall Street. The auto industry said it was looking for $34 billion, Congress was debating $15 billion, and analysts say the auto companies might ultimately need something like $100 billion.

Most of those funds — for both Wall Street and Detroit — are various kinds of loans that will be paid back, many accompanied by the right to make money if beneficiary stock prices rise in the future.

But some of the money for Wall Street is almost certain to be lost. Notably, the government has agreed to accept losses up to $250 billion on a $306 billion pool of Citigroup mortgage-related assets that are certain to show major losses. So, the government is on the hook to Citigroup, with the certain prospect of enormous losses that are likely to be more — just for this one financial behemoth — than the total amount the auto industry will seek in loans.

With the U.S. government offering trillions of dollars in supports for the financial sector, it is startling to witness the casual way in which many policy makers and opinion leaders suggest the U.S. auto companies should be allowed to go bankrupt.

In considerable part, this attitude reflects an anti-union and anti-blue collar animus. It also reflects the diminished economic power of what was formerly known as the Big Three (General Motors, Ford, Chrysler).

The stakes are too high for policy to be influenced by misinformation and ideological bias. The auto companies need to be saved, on terms that protect workers and communities, and advance public objectives. Congress and the country should be debating those terms, not dithering with unrealistic discussions of bankruptcy or demands to reduce already shrunken union wages and benefits.

How can we look at these issues sensibly?

First, one must note the awesome disparity in treatment for the auto industry and Wall Street. Government agencies have thrown literally trillions of dollars at the financial sector, with very light conditions, and virtually no discussion of industry salary structures (aside from limited restraints on top executive compensation). By contrast, there has been endless fulmination about supposedly excessively generous wages for unionized auto workers (see here, here, here and a critique here), and much more severe financial and oversight conditions proposed for an industry bailout.

Second, the costs of inaction to support the auto industry dwarf the cost of a bailout — even if much more than the requested $25 billion is needed. The industrial Midwest has already been hollowed out by deindustrialization. Auto industry bankruptcy would be a crushing blow. A complete collapse of the U.S. auto companies would cost 3 million jobs — about 240,000 employees of the companies, a million supplier jobs, and 1.7 million jobs lost from the overall economic effect — according to the nonprofit Center for Automotive Research. In this scenario, the federal government would lose $60 billion in tax revenues and other costs in the first year alone. Even assuming something less than a complete collapse, costs would be devastating. And, as economist Thomas Palley has noted, industry bankruptcies would dramatically worsen the financial crisis.

Third, the idea that United Auto Worker members are receiving exorbitant wages putting the U.S. auto companies at competitive disadvantage is a lie.

In general, the Japanese plants in the United States (“transplants”) pay wages comparable to those at unionized U.S. facilities. This has been central to their anti-union strategy. In some recent years, workers at the transplants have actually made more than their counterparts at the Big Three, thanks to profit-sharing deals.

The Big Three employers do have nontrivial healthcare and pension “legacy” costs for retirees, and this is the main employee-related difference in cost structure (the other is more generous healthcare for current Big Three workers).

It is true that, historically, auto industry jobs have paid well. Going forward, however, this will be less and less true. The concessionary UAW 2007 contracts call for many new hires to start at $14 an hour, and the UAW is preparing to offer even further concessions.

Fourth, manufacturing wages and salaries don’t contribute much to the cost of a car. Total labor costs are less than 10 percent of list price. If UAW workers donated their time and all savings were passed on to consumers, it would only lower the cost of a car by $2,400.

Fifth, although the Big Three have done just about everything possible over the last decades to undermine their strength — including making disastrous long-term product mix choices, and fighting against fuel efficiency standards — but the proximate cause of their desperate status is the economic crisis. It is not true, as has been frequently suggested, that the Japanese companies are doing just fine. Overall auto sales in the United States have fallen by more than a third in just a year, and Toyota, Honda and Nissan have seen drops of 27 percent, 22 percent and 35 percent. It is true that the Japanese companies have a stronger base and are better prepared to weather the storm. But the storm is pouring rain on everyone.

Sixth, bankruptcy is no answer for fixing what ails the industry. It is almost certainly true, as the industry argues, that consumers will refuse, or at least be very reluctant, to buy cars from a company in or recently emerged from bankruptcy. Would you?

But at least as important for those who want to see the industry aggressively adopt fuel efficient and zero carbon emission technologies is this: Bankruptcy would limit the automakers’ flexibility, and make it much harder for them to make expensive, long-term investment decisions. This is particularly true while oil prices are depressed. Things were different six months ago (and likely will be again in the not-distant future), but right now the market signals are wrong for investments in energy efficiency.

Focusing on the imperative to rescue the industry, there are two rational policy responses.

One is to give the industry loans and other supports, with tight conditions. Under consideration now in Congress is an oversight structure that would give the government authority to veto any investment over $25 million. In contrast to the free hand given to Wall Street, this would help ensure government funds are not diverted into inappropriate purposes. The existing proposal would also require the government be paid back with interest, and/or the right to benefit from subsequent improvements in company share value.

But more should be done. There should be requirements that the bailout beneficiaries invest in energy efficiency and safety technologies, with demands that they do much more than required by existing law. To give them a level playing field, these improved standards should be adopted as law, and required of all auto companies. And protections should be built in to protect workers’ interests — a key objective should be to preserve good-paying jobs, not drive everyone to Wal-Mart wages.

But more should be done. There should be requirements that the bailout beneficiaries invest in energy efficiency and safety technologies, with demands that they do much more than required by existing law. To give them a level playing field, these improved standards should also be adopted as law, and required of all auto companies. And protections should be built in to protect workers’ interests.

The second rational policy approach is simply to nationalize the companies. General Motors now has a market capitalization of $2.8 billion. Ford’s market value is $6.1 billion. These are relatively small amounts compared to the $25 billion the companies are requesting — and they are likely to come back for more later.

The government has certain advantages over the companies. It can access capital more cheaply, for example.

The biggest advantage of buying the companies is that it would enable the public to exert control over the companies commensurate with its investment. There would be no need to negotiate with management, or carefully monitor managerial actions, to review 9-point plans for viability, or create incentives to have them invest in fuel-efficient technology. It would make it possible to undertake long-term, transformative investments in R&D and new transportation technologies, irrespective of today’s oil price.

It is true that nationalizing the companies implies a commitment to support them despite unknown future challenges. But a commitment of $25 billion itself implies a readiness to do more if necessary, as it likely will be.

On the other hand, nationalizing the companies would entail many complications and difficulties, including managing relations with workers and plants around the world, fair dealing with suppliers and workers at suppliers, and the inherent complexity of running multinational auto companies.

Is a true nationalization the best option? Maybe, maybe not.

But the public would be a lot better off if there could be a serious discussion of the reasonable policy choices, and a lot less breath wasted on overt and disguised attacks on unionized blue-collar workers.