Listening to the Oracle of Delphi
The bankruptcy filing by Delphi Corp. is likely to bring about the wrenching industry restructuring that automakers and their unions have been avoiding for decades. It has set in motion a chain of events that threatens to bring down General Motors, rattle financial markets, cripple the Midwest's economy and saddle taxpayers with unfunded pension obligations.
Coming up with the right response to this challenge means understanding the problem. So let's start by dispelling two popular myths.
The first myth, perpetrated by economists and corporate types, is that trade has not depressed the wages of American workers. As anyone in the auto industry will tell you, it's a big factor and getting bigger, as China and the rest of the world gain access to our technology, our risk capital and our markets.
The second myth, this one favored by the left, is that generous wages and benefits negotiated by the unions created the great middle class and lifted the standard of living for all Americans.
The real story is that those pay packages were negotiated in industries that were either government-regulated and could automatically pass on labor-cost increases to consumers, or were dominated by a handful of large companies that tacitly agreed not to compete on the basis of price. These companies earned excess profits and passed on most of them to employees in the form of generous wages and benefits. It took deregulation and foreign competition to reveal how much airlines, phone companies, automakers and steel manufacturers -- and their employees -- were overcharging the rest of us for their goods and services. Now competition is forcing those pay scales back into line with market realities.
Six years ago, Ford and General Motors took a stab at restructuring by spinning off the factories that made their parts. This might have worked if Visteon and Delphi had not been saddled with the standard UAW contract, with its $65-an-hour labor costs, no-layoff guarantee and skyrocketing obligations for retiree pensions and health benefits.
Instead, what they created was a doomed combination of competitive pricing and uncompetitive cost structures. An ailing Ford has been forced to take back much of Visteon and pump cash into its money-losing operations. And General Motors, already losing money at a rate of $4 billion a year on its North American operations, faces the prospect of having to make good on its promise to backstop billions of dollars in health and pension payments to Delphi retirees.
With Delphi now threatening to impose $10-an-hour wages and wipe out all retiree health benefits, the UAW confronts the biggest challenge in its history.
The union can continue to hold fast to its "no givebacks" mentality and watch as the rest of the industry loses market share to foreign competitors while it runs through the bankruptcy process. That's what happened in the steel industry, which -- while now profitable -- is a shadow of its former self.
Alternatively, the union could use the Delphi bankruptcy process to build a new template for a financial arrangement between the auto industry and its workers.
The starting point for such a deal should be a cost structure that allows U.S. firms to compete in global markets while earning a reasonable profit.
Average pay and benefits of $65 an hour would need to be reduced and made less egalitarian -- $40 for skilled technicians, but maybe only $25 for forklift operators or low-skilled parts assemblers. (Today, the difference between the two is small.) Autoworkers who now get the company to pay for nearly all their health coverage will have to pay 30 percent, like the rest of us. And current workers need to forget about those traditional, defined-benefit pensions -- most other U.S. workers settle for a generous contribution to a bankruptcy-safe 401(k) account.
Retiree benefits will be trickier. Although most retirees have Medicare, which now includes drug coverage, supplemental health benefits will have to be scaled back and capped. And while the funded portion of pension plans is protected, unions will need to exchange the unfunded portion for a first-call on the company's profits -- in effect, swapping pension IOUs of questionable value for preferred stock in a more viable company.
The government could facilitate such a deal by throwing some money into the pension pot. Right now, the Pension Benefit Guaranty Corp. is looking at a series of auto-industry bankruptcies that would force it to assume tens of billions of dollars in unfunded pension liabilities. Wouldn't taxpayers be better off if the government offered to pay 10 cents now to avoid assuming a dollar of unfunded liability later?
Unionized workers would accept such a deal only, of course, if creditors and shareholders also agreed to take significant haircuts. Creditors would have to exchange potentially worthless bonds for the same preferred stock as pensioners. In non-bankrupt firms, shareholders would have to accept the decline in share price and dividends that would accompany the issuance of all that preferred stock.
This is not pie-in-the-sky stuff: It's the kind of workout that goes on in bankruptcy court all the time. The only question is whether the parties will have the good sense to do it now -- before more losses are posted, more pension liabilities are allowed to accrue and more jobs shipped overseas -- or wait for the inevitable bankruptcies that will be more disruptive to the economy, more expensive for the government and less generous to workers.