FLINT, Mi. — With the Big Three facing serious financial troubles and GM on the verge of bankruptcy, the American taxpayers, via Congress, are being asked for a bailout. Instead, maybe it’s time that GM faces reorganization through bankruptcy court, just like the thousands of other failing businesses that seek protection through Chapter 11.
The financial troubles of the Big Three have gotten increasingly serious lately, but the underlying problems have been getting worse for decades without being adequately addressed by management or the United Auto Workers. A taxpayer bailout would only reward irresponsible behavior.
Many of today’s serious problems can be traced back to the 1970s, when the Big Three sold almost nine out of every 10 cars and the UAW had a monopoly on the labor supply of autoworkers. At that point, neither management nor labor faced any serious competition.
Without the strict discipline of market competition, both sides pursued short-run, self-interested goals in the 1970s that helped create the serious future troubles they both face today.
For example, the UAW consistently negotiated incredibly generous wage and benefit packages for its members that laid the groundwork for major problems decades later, including a $30 per hour pay gap between the UAW (including legacy costs) and nonunion workers for the foreign transplants.
Economic theory suggests that the more successful a union is at achieving above-market compensation in the short-run, the greater the likelihood that those unionized industries or companies will eventually suffer losses in market share, employment and output. This is exactly the situation today; with the Big Three’s market share and UAW membership at all-time lows.
The above-market compensation gains of the UAW led ultimately to long-run losses in union employment, as the UAW gradually priced its overpaid members out of the globally competitive labor market.
In the undisciplined years of the past, GM management could maintain labor peace by conceding to above-market pension and health care benefits for retirees, which didn't affect the bottom line much in the short run, but imposed huge legacy costs on distant future periods.
Those once seemingly distant quarters have arrived, and the overly generous benefits for workers that GM management accepted have mounted to unsustainable levels.
GM spends $5.2 billion on healthcare for more than one-million people, equaling almost $5,000 per person each year, and adding $1,500 to the price tag of every vehicle. Pension costs add almost another $700 per car. This is a clearly an unsustainable, outdated business model that doesn’t deserve taxpayer support.
To the legacy problems, add the increasingly intense global competition of recent decades, and you have all the necessary ingredients for a domestic industry that is now on the verge of bankruptcy.
The UAW has gradually lost its labor monopoly on the supply of autoworkers and must now compete with nonunionized American workers at Toyota, Honda and Nissan, who are paid less, are more productive, and work without cumbersome union work rules. Unions have become increasingly irrelevant and outdated in today's knowledge-based global economy, and bankruptcy will do more to correct that situation than a taxpayer bailout.
In the more static days of the past, the Big Three and the UAW had a business model that worked, but it has now fallen apart as the twin forces of globalization and nonunion labor competition have exposed the flaws of an outdated way of doing business.
It's now time to face reality: the Big Three-UAW business model is bankrupt, the era of above-market compensation for semi-skilled workers is unsustainable, the importance of unions is rapidly fading, and globalization is here to stay.
Simply put, the American taxpayer should not be expected to bailout the excesses and undisciplined behavior of the UAW and the Big Three that has been going on for decades. Bankruptcy and reorganization, not a taxpayer bailout, is the best long-run solution for the Big Three.
Mark J. Perry is a professor of economics at the Flint campus of the University of Michigan. Readers may write him at 4173 White Building, UM-Flint, Flint MI 48502 or e-mail him
mjperry@umich.edu.
