patrick stephens at psjs.net

Michael Barone has a good article up at U.S. News & World Report, Who is at fault for the decline of the Big Three?

Picking up on Mickey Kaus’s article at Slate, Michael indicts “Wagner Act unionism.”

The problem… is not just the high level of benefits that the United Auto Workers has secured for its members but the work rules—some 5,000 pages of them—it has imposed on the automakers. As Kaus points out, unionism as established by the Wagner Act is inherently adversarial. The union once certified as bargaining agent has a duty not only to negotiate wages and fringe benefits but also to negotiate work rules and to represent workers in constant disputes about work procedures.

From Kaus,

Under the Wagner Act, management manages. What the union does is complain, and negotiate for a rule limiting management’s right to do what the union doesn’t like. A worker protests that his job should be classified as “drilling special and heavy” instead of “drilling general.” The parties butt heads, a decision is reached, and a new rule is deposited like another layer of sediment. At some GM plants, distinct job categories evolved for each spot on the assembly line (e.g., “headlining installer”). In Japanese auto plants, where they spend their time building cars instead of creating job categories, there is only one nonsupervisory job classification: “production.”

The nature of the relationship between union and management corrodes the quality of the manufactured product.  That adversarial relationship polarizes the two sides. Management tries to extract what efficiency it can from labor and labor tries to extract as much wage as it can for as little work as possible. This culminated in the establishment of programs like GM’s job bank, where workers are paid not to work.Barone places the start of the decline in the 1970’s.

So the big UAW demand that year was “30 and out”—assembly line workers could retire after 30 years on the job. This in turn led the union to demand generous retiree benefits. A worker who retired at 51 wouldn’t be eligible for Medicare for 14 years, and therefore the UAW negotiated incredibly generous medical benefits—elective dental work with no copayment is one that sticks in my mind.

The UAW also created a constituency within itself of retirees who have voting rights in union elections just as actual workers do, and there are now something like three times as many GM retirees as GM employees as voting members of the UAW. Retiree benefits account for the lion’s share of the difference between GM’s labor costs and the labor costs of foreign automakers in the United States.

The danger this poses has been obvious for a while, but the adversarial nature of the union/management relationship made it difficult to do anything about it. In Septemeber of ‘07, the UAW finally agreed to absorb the cost of health benefits of retirees–if GM would pony up $30 billion in start-up cash. GM can’t afford that payment, and the bailout from Congress will go–in large measure–to offset that payment.

Kaus sums it all up,

That’s why Democrats are deluding themselves if they think they can save Detroit by mandating that GM and Ford build high-MPG small cars in the U.S.–thanks to inefficient work rules, they’ll be overpriced high-MPG small cars, and badly built high-MPG small cars. That’s why Republicans are deluding themselves if they think a wage cut that saves Ford and GM $800 per car is going to make all the difference–it won’t, if the trim still falls off and the carpets bunch up.

Sen. Corker’s proposed bailout compromise apparently did try to tackle the issue of work rules. But the UAW balked at the Corker requirements (which would also have cut pay to parity with Toyota and Honda’s U.S. factories) and the deal collapsed. That shouldn’t be a surprise. A “web of rules” is what adversarial Wagner Act unions were designed to produce.

The sad fact is that neither GM nor Chrysler (and possibly Ford) can remain competitive in either the global or the domestic market unless they radically increase both the quality of their cars and the efficiency of their factories. The current UAW labor agreements make that almost impossible.

Economics Bailout 08

From Reuters:

President-elect Barack Obama’s team is considering a plan to boost the recession-hit U.S. economy that could be far larger than previous estimates and might reach $1 trillion over two years, the Wall Street Journal reported on Saturday.

Obama aides, who were considering a half-trillion dollar package two weeks ago, now consider $600 billion over two years “a very low-end estimate,” the newspaper said, citing an unidentified person familiar with the matter.

The final size of the stimulus was expected to be significantly higher, possibly between $700 billion and $1 trillion over that period, it said, given the deteriorating state of the U.S. economy.

Because the one thing we really, really need is $1 trillion in more debt.

See the following.

Economics, Politics Bailout 08, Barack Obama

The Auto bailout failed in the Senate…. For now. They’ll be back to try again. Regardless of whether or not you think the U.S. government should be lending money to private companies, it’s clear that the bailout failed for political reasons. The Republicans wanted promises that wages would be cut, the Democrats balked.

Average total current compensation at GM costs about $70 per hour per current employee. Toyota, Nissan, and Honda (the other American auto-makers) average around $48 per hour per current employee. Toyota, Nissan, and Honda make money, they make cars people want to buy, and they’re not begging at our doorstep. For GM to be competitive, they need to cut wages. Nothing else will work. The federal bailout is (and will be, because this will eventually pass, even if they have to wait until Jan. 20) is nothing more or less than a direct subsidy to prop up uncompetitive wages.

From Don Boudreaux,

Bankruptcy doesn’t make assets — such as factories, machines, contractual options to buy raw materials, workers’ skills — disappear. If markets still exist for products produced by these firms, Chapter 11 is the best way to discover this. Some workers might lose their jobs and some suppliers might lose their markets, but there would be no industry-wide collapse of the sort portrayed by the bailout’s cheerleaders.

But what if refusal to bail out these firms results in their complete failure? Even then — especially then — the case for a bailout crashes. Really big firms such as GM, Ford and Chrysler are really big users of productive inputs, like rubber and steel. Almost all of these inputs have alternative uses and could be used by other firms or in other industries.

A government bailout of the Big Three keeps huge amounts of productive inputs in firms that can’t use them efficiently. Forcing taxpayers to subsidize the continued employment of gargantuan quantities of raw materials, labor and capital goods in unproductive pursuits is a recipe for economic stagnation. The popular and politically convenient myth has matters backwards: The bigger the unprofitable firm, the more vital it is that it be allowed to fail.

This long post is my attempt to integrate the problem of subsidies, the nature of local information, and the benefits of creative destruction.

Economics, Politics Bailout 08

I can’t get too worked up over the Blagojevich scandal. You mean the governor expected quid pro quo for doling out power and influence? I’m shocked.

That’s what politicians do. Currying favor, demanding payment and consideration for their largess, that’s what politics is. What makes Blagojevish unusual is that he was so painfully obvious in his attempts to peddle his power.

Steve Horowitz at The Austrian Economists makes this point very well.

I simply do not understand how those who are in favor of giving government all of these new powers because they sincerely believe that doing so will work out the way their blackboard designs intended can keep a straight face. What kind of cognitive dissonance must it take to believe that the people YOU are handing power over to are “not like” Ted Stevens or Rod Blagojevich? How deeply must one be in denial or engage in rationalization to believe that they are “different?” How blind must one be to think that trillions of dollars in bailout money won’t go to the highest bidder (as the lobbyists line up on K Street…) in a process different only in its wink-and-a-nod courtesies than Blagojevich’s auctioning off of a Senate seat?

In other news, it looks like an “agreement” was reached on the bailout. It was being held up by some politicians, but those politicians have now gotten what they wanted. I sure am glad that none of the politicians voting to give the automakers money recieved any contributions from the automakers! That would surely be scandalous.

Economics Bailout 08

What would you call this, I wonder?

Under terms of the draft legislation, which continued to evolve Monday evening, the government would receive warrants for stock equivalent to at least 20% of the loans any company receives. The company also would have to agree to limits on executive compensation and dividend payments, much like those contained in the government’s $700 billion rescue of the financial industry.

In the case of General Motors Corp., such a move could give the government a large stake in the company and may hurt existing shareholders. GM is seeking about $10 billion in short-term loans and has a market capitalization of about $3 billion.

I can think of a few words.

Stupid would be one. Loaning $10 billion to a company worth $3 billion in exchange for stock worth $600 million is… well, it’s not smart.

Nationalization would be another. Fascist is a good one too.

Stupid is my first choice. It’s the kind of stupid that’s contagious.

… the United Auto Workers union is seeking to attach strings to any concessions it makes for the Big Three. Marc McQuillen, president of UAW Local 2404 in Charlotte, N.C., said the union is looking for an equity stake in GM and likely a seat on the company’s board.

Why would the union want this? It’s like the waiters demanding the right to go down with the ship. Equity stake in what?

And this!

Forty-five percent approved and 44 percent were opposed, according to a CBS News poll released Monday. Nearly six in 10 Democrats favored the aid, while nearly the same share of Republicans opposed it.

About seven in 10 said the government should have a say in managing the companies if taxpayers provide assistance, and nearly as many said requiring more alternative fuel vehicles should be a condition of such aid. (emphasis added)

This is the plainest idiocy. We should require them to build cars that people will buy, not require them to build cars that make us feel all warm and gooey inside.

Like I said, it’s the kind of stupid that’s contagious.

Economics Bailout 08