A Right Turn Back to Making Cars
General Motors took an interesting turn on Monday. It is going back into the automobile business.
Granted, GM has always been in that industry, but it has also become the nation's largest private purchaser of health care. This supposedly secondary role has become
GM has been forced to allow product development, pricing and other decisions to be driven by the need to keep sufficient revenue flowing in so it can flow out in fulfillment of GM's function as a welfare state. GM provides $5.2 billion in health care annually -- more than Harley-Davidson's revenue -- to 1.1 million workers, retirees and dependents. Retirees outnumber current U.S. employees 2.5 to 1. The $4 billion that goes annually to retirees does not go into developing products people want to buy.
Concessions by the United Auto Workers will provide GM with annual savings of $1 billion in health care costs. But GM's hourly workers, who pay no health care deductibles and only nominal co-payments, will still enjoy coverage better than most Americans have. Since 2000, the percentage of American businesses offering any health insurance to workers has declined from 69 to 60.
The UAW's willingness to make concessions regarding a contract that does not expire until 2007 recalls what the UAW did in the recession of 1982. Then, Chrysler was in parlous condition, and the UAW reopened a contract to give back benefits. But today's givebacks are occurring while a humming economy in the fourth year of expansion has lowered unemployment to 5.1 percent.
Largely because of generous benefits won by the UAW in palmier decades, GM's North American auto business is hemorrhaging money -- $1.6 billion in the third quarter. This is in part because its employee-discount-for-everyone pricing has worked, sort of: Until that promotion ended at the beginning of this month, GM was selling lots of vehicles -- but losing more than $1,000 per sale. In the first nine days after the discounts ended, GM's sales plunged 57 percent.
Shortly before Monday's announcement that the UAW agreed to trim GM workers' and retirees' benefits, Delphi, the auto parts company that GM owned until 1999, sought bankruptcy protection. Under terms of the 1999 separation, GM may be liable for up to $12 billion of Delphi's pension and health care benefits, which would offset GM's gains from the UAW concessions.
The bankruptcy of Delphi is another pebble -- a big pebble; Delphi has 185,000 employees worldwide, 33,000 of them unionized Americans -- in an accelerating avalanche of corporate decisions dismantling "defined-benefits America." As a result, intergenerational strife, which has long been anticipated, may at last be at hand: Delphi proposes cutting the compensation -- pay and benefits -- of younger workers from $65 per hour to $20 or less, so it can fulfill the promise to retirees of a fixed percentage of their salaries.
Robert "Steve" Miller, Delphi's chief executive, minces no words, telling the Wall Street Journal that defined-benefit programs are imprudent anachronisms: "The notion of having all your retirement eggs in one basket -- your employer -- is a concentration of risk that is simply inadvisable for anyone in today's fast-moving economy." He calculates that a competitive American industrial compensation cost is about $20 an hour. And to get to a total compensation cost of $20, including health care, retirement and workers' compensation, "which is high in the states we are in like New York, Ohio and Michigan," you have to have a basic hourly wage of $10. Pay at Delphi's plants in China is roughly $3 an hour.
Miller bluntly says that the social contract written after 1945 is being -- must be -- repealed because, given globalization, unskilled manual labor cannot be paid $65 an hour, with the cost passed on to consumers. "When you buy a Hyundai you get a satellite radio as your option, but if you buy a Chevrolet you get social welfare as an option. Long term, the customer is going to desert you if you try to price for your social-welfare costs."
Herb Stein, the University of Chicago economist who served as chairman of President Richard Nixon's Council of Economic Advisers, famously said: If something cannot go on forever, it won't. Delphi's resort to bankruptcy and GM's attempt, with the cooperation of the UAW, to avoid, for now, doing that, suggest that America's welfare state -- its private sector as well as its public-sector components -- is reaching its Herb Stein Moment.