The Road to Bankruptcy
It is better to be fired by General Motors than it is to be hired by most companies. Remember this when you are rightly ridiculing the riotous French who have successfully insisted that even workers under 26 should have property rights to their jobs. Remember because the accelerating crisis of private-sector welfare states such as GM prefigures the coming crisis of the public sector's entitlements.
France has been convulsed by young people whose sense of entitlement was affronted by a law -- now withdrawn in a triumph of mob rule -- that would have allowed employers to fire a young worker in the first two years of employment. Detroit's crisis also involves an entitlement mentality.
Under contracts negotiated, beginning in 1984, with the United Auto Workers (UAW), there are about 14,700 laid-off autoworkers in the "Jobs Bank." About 7,500 of them are from GM. They get paid most of their wages and benefits -- between $100,000 and $130,000 a year, for an annual cost to GM of $750 million to $900 million.
The former workers -- expected to be 17,000 by next year -- are required to do nothing that adds value to the auto companies. Some attend classes given by GM. The Wall Street Journal reports that one worker took a class in which he learned how to play Trivial Pursuit.
The French idea that a worker should have a property right in a job is a product of statism and scarcity: Government supposedly is responsible for allocating jobs, which, in a collectivist society disdainful of capitalism, are presumed to be permanently scarce. That presumption is self-fulfilling: The more difficult it is to fire an employee, the more reluctant employers are to hire.
Detroit's Jobs Bank, which was GM's idea, is a product of an oligopoly's -- the Big Three domestic automakers still were such in 1984 -- misplaced sense of permanent abundance: They assumed that layoffs, if any, would be brief because expansion of demand for their products would generally be automatic. This mentality was self-defeating. It caused management to focus not on producing desirable products but on running private-sector welfare states, allocating much of the supposedly ensured cash flow to fund employees' benefits. And labor's myopic focus was on extracting benefits from the corporation-as-welfare-state, not on the long-term vitality of the corporate employer.
The crisis engulfing the UAW and the companies entered a new stage with last year's bankruptcy of Delphi, the nation's largest manufacturer of automobile parts. That was the pebble that presaged an avalanche.
The avalanche may mean two large things; it certainly means one. Perhaps it means the bankruptcy of GM. Certainly it means, for the UAW and for organized labor generally, the worst crisis since the National Labor Relations Act of 1935 enabled private-sector unionization. In 1969 the UAW's active membership peaked at 1.53 million. Today it is 640,000 and, depending on the success of the buyout incentives and continuing failure to stabilize the domestic automakers' market share, might dip below 600,000.
A current GM commercial, featuring cars from the 1950s, 1960s and today, ends with three words on the television screen: "Then. Now. Always." The third word is the commercial's point. It aims to reassure customers that GM will always be here. The message is: Do not be deterred when the word "bankruptcy" is bandied.
Simultaneously, however, GM is hoping that more than 40,000 of its employees -- and Delphi's; GM owned Delphi until 1999 and still has obligations to many Delphi workers -- will accept buyouts ranging from $35,000 to $140,000. But for most employees, the buyout proposals make economic sense only if they believe there is a likelihood of something worse: bankruptcy, which would terminate their entitlements.
Were GM to use bankruptcy to end contracts and lower compensation costs, what would become of Ford, whose costs are now similar to GM's? Jay Palmer of Barron's says Ford cannot win concessions from workers by credibly threatening bankruptcy because "CEO Bill Ford and other descendants of founder Henry Ford own roughly 40% of the company's voting equity. A bankruptcy would in one stroke eliminate a huge chunk of their fortune and effectively sever the family's ties with the company."
Bankruptcy -- seeking judicial permission to shred contracts improvidently entered into -- should be so costly that it cannot become a routine management tool for private-sector welfare states. And America's welfare state cannot seek what is called "bankruptcy protection." Detroit today is having what Washington will eventually have -- a wrenching rendezvous with promises that seemed compassionate, or at least convenient, when originally made but that cannot be kept without ruinous consequences.