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Thursday, July 10, 2008

The "Treaty of Detroit"

Will General Motors survive?:

Siphoning G.M.’s Future, by Roger Lowenstein, Commentary, NY Times: ...General Motors ... stock is at its lowest level in 50 years, and its market valuation has plunged... The automaker is weighing yet another round of layoffs — and maybe even a fire sale of venerable brands like Buick and Pontiac. ... Bankruptcy is not unthinkable... The immediate cause of G.M.’s distress, of course, is the surging price of oil, which has put a chill on the sale of gas-guzzling sport utility vehicles and trucks. The company’s failure to invest early enough in hybrids is another culprit. Years of poor car design is another.

But none of G.M.’s management miscues was so damaging to its long-term fate as the rich pensions and health care that robbed General Motors of its financial flexibility and, ultimately, of its cash.

General Motors established its pension in the “treaty of Detroit,” the five-year contract that it signed with the United Automobile Workers in 1950 that also provided health insurance and other benefits for the company’s workers. Walter Reuther, the union’s captain, would have preferred that the government provide pensions and health care to all citizens. He urged the automakers to “go down to Washington and fight with us” for federal benefits.

But the automakers wanted no part of socialized care. They seemed not to notice, as a union expert wrote, that if Washington didn’t provide social insurance it would be “sought from employers across the collective bargaining table.”

Detroit was too flush to envision that it would ever face a financial strain. Ford and Chrysler signed identical pacts with labor, so all three automakers were able to pass on their costs to customers. Besides, the industry’s work force was so young that few workers would be collecting a pension any time soon.

But pension commitments last forever. They far outlived Detroit’s prosperity. General Motors got into the dubious habit of steadily increasing worker benefits. In 1961, G.M. was able to get away with a skimpy 2.5 percent increase in wages by also guaranteeing a 12 percent rise in pensions. ...

By the 1980s, it was clear that the Big Three automakers faced a serious threat from Japan. ...

In the ’90s, the consequences of maintaining a corporate welfare state became too obvious to ignore. ...

The sorry decline of General Motors has proved Reuther right: the government is the better provider of social insurance. Let industry worry about selling products.

Unhappily, however, the fate of many public-sector pension plans is even worse than G.M.’s. Responding to the same temptation to offload expenses into the future, public employers have committed to trillions of dollars in future liabilities. ...

Just as G.M.’s shareholders bore the burdens of its pensions, states and cities will have to force taxpayers to sacrifice in the form of service cuts, tax increases or both.

It is too late to restore G.M. to its former grandeur. But if public officials do not show courage by quickly funding the pensions they have promised to their workers, taxpayers will soon find themselves in an even worse crisis than the one G.M.’s shareholders are facing now.

For arguments that management was at fault, see here, here, here, here, and here.

    Posted by on Thursday, July 10, 2008 at 12:33 AM in Economics | Permalink  TrackBack (0)  Comments (64)


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