By Steven Pearlstein
Wednesday, February 18, 2009
The Detroit autoworker and the Wall Street investment banker live in totally different economic realities -- or so it seems to just about everyone.
One is unionized, the other not. One is semi-skilled, most likely with a high school diploma, the other an MBA from some fancy school. One is middle class, dependent on generous hourly wages and benefits, the other reliant on lavish performance bonuses that have put him squarely in the economic elite.
Yet in some important ways, the autoworker and the investment banker are really variations on the same story -- a story that in both instances has reached a crucial turning point.
From the 1950s until -- well, until just now -- the unionized workers at General Motors, Ford and Chrysler were the aristocrats of the blue-collar workforce, earning well above what others made with similar skills and education. In the 1950s and '60s, before the advent of foreign competition, their companies competed in almost every way except price, earning above-average profit margins. And thanks to a strong union, favorable labor laws and a generally paternalistic attitude on the part of corporate America, autoworkers captured a significant portion of those above-market returns.
Over the past 30 years, the returns have gradually disappeared under the pressure of foreign and domestic competition. Yet despite the gradual decline in the power of the union movement, autoworkers have nonetheless been able to negotiate pay and benefits, job security and work rules that have remained significantly more favorable than those at nonunionized factories run by foreign firms in the United States. Now, as General Motors and Chrysler enter the final phase of what amounts to a bankruptcy-like reorganization under the auspices of the U.S. Treasury, that unsustainable old model is at long last being put to rest.
Instead, a new model is emerging that follows the outline of earlier restructurings in the steel and other heavily unionized industries. Under such a model, Detroit's Big Three customers would finally be treated to cars that offer competitive performance and styling to go along with the competitive pricing of recent years.
Employees would be forced to accept lower base pay and benefits, in exchange for a reasonable share of company profits through a combination of performance bonuses and company stock held by the union health and retirement fund.
Patient shareholders -- most of them former creditors forced to trade loans for equity -- would reap the benefit of long-term investments in new technology, new products and new ways of doing business.
And so it will be with the investment bankers, traders and whizzes of structured finance.
For years, Wall Street has earned above-average returns by taking advantage of customers, hiding behind regulations and competing with rivals on the basis of anything other than price. And for years, Wall Street firms have passed along the lion's share of these outsized profits to executives and employees in the form of astronomical bonuses that bear no relationship to the pay of workers in other industries with similar skills and work ethics.
Indeed, just as the unionized autoworkers were the aristocrats of the blue-collar world, Wall Street traders and investment bankers were the aristocrats of the white-collar world. Both came to look on their above-market pay not just as the result of hard work and good fortune, but as an entitlement. In time, this sense of entitlement led firms to pursue strategies that drained the companies of financial strength and led them to the brink of a collapse that now requires a massive government rescue.
At the most fundamental level, what did in Citigroup was the same thing that did in General Motors -- an arrogant and insular business culture that failed to put the customer first, failed to rein in employee pay and failed to make the difficult decisions necessary for the survival of the enterprise.
The government is still trying to fashion a restructuring plan for Wall Street, but the principles that now govern the auto bailout are likely to apply there as well.
Excessive, above-market compensation will be reined in -- in Wall Street's case by reducing the reliance on outsized performance bonuses that encourage short-term thinking and undue risk-taking.
Customers will be afforded greater protection through more aggressive regulation, greater transparency and higher capital requirements.
Shareholders and creditors will benefit from a moderation of the boom-and-bust cycle that has wiped out most of their winnings even as it has enriched many employees and top executives.
It would be premature to declare that all of this adds up to a new model for American-style capitalism, one that achieves a fairer and more stable balance among the interests of customers, employees and shareholders. The one bit of good news from the current crisis, however, is that it is pushing us quickly in that direction.