Imagine, for a moment, that you woke up to discover that the "Big Three" automakers were in the throes of a "death spiral," a vicious cycle of rising costs and declining market share, until, one by one, they were forced to file for bankruptcy protection. The filings wipe out an ocean of debt, leave millions of retirees without the pensions and the health coverage they were counting on, put networks of suppliers and dealers in jeopardy, and transfer billions of dollars in unfunded liabilities to the government's pension insurance program.
Now ask yourself how you'd feel about it? What impact would it have on the U.S. economy and the competitive stance of American business? Would it be worth it to have the government do something to help the companies pull out of their downward spiral, even if it meant spending some money or taking on some extra risk?
I pose these dilemmas because it is quite possible that, before too long, they're going to be staring us in the face. Despite years of modernization and productivity improvements, and despite a year of near-record sales, two of the three companies lost money on every vehicle they sold here last quarter, while the companies collectively continued to lose market share, as they have nearly every quarter for the last 20 years. Furthermore, their balance sheets are now so weak and their profit prospects so poor that the rating agencies have begun to lower their credit ratings, with the biggest, General Motors, now hovering just above junk-bond status.
There are lots of factors here, not the least of which is chronic global overcapacity in the auto industry. But any fair analysis immediately focuses on "legacy costs," the billions of dollars paid by these companies each year for the pensions and health care costs of retirees. Because of increased longevity and waves of successive layoffs, retirees from the Big Three now outnumber active workers by about 2 to 1.
GM, for example, last year paid out $6.5 billion in pensions and $3.2 billion in health care for its retirees. That's $9.7 billion for a company that had total sales in North America of about $150 billion and is trying to compete against Asian companies with fewer retirees and markedly smaller pension expenditures. For Ford and DaimlerChrysler, the ratios are a bit more favorable, but the competitive handicap is still considerable, amounting to roughly $1,000 per vehicle.
We've seen this story before, of course, most notably with the old-line steel companies and, to a lesser degree, the traditional airlines. And even though the bankruptcy court process eventually allows the industry to be restructured and people and assets to be redeployed, the social and economic costs are substantial. Wouldn't shareholders, employees, retirees, creditors and even taxpayers all be better off if there were a process, long before bankruptcy filings, where they could agree to a plan of shared sacrifice that would reduce legacy costs to manageable levels?
I'm not exactly sure how this would work. But I think it starts with giving the Pension Benefit Guaranty Corp. authority to do some early intervention with financially challenged firms willing to cap their legacy costs going forward, in exchange for extra time -- and maybe even low-cost government loans -- to fully fund the pension and health care obligations they have already incurred.
Free-market types will be quick to point out that such a process would reward companies for their mistakes in providing overly lavish retirement benefits. Fair enough. On the other hand, you could also argue that back in the '60s, when these plans were set up, few could have imagined today's world of global competition, 401(k) benefit plans, 85-year life expectancy and $6,000-per-person retiree health costs.
The question really isn't whether the government should do industrial policy -- with the bankruptcy court process and pension guarantee fund, it's already doing it. But if "preemption" is going to be the new watchword for foreign policy, is there any reason not to consider the same approach to economic policy?
Steven Pearlstein will host a web discussions today at 11 a.m. at washingtonpost.com. He can be reached at email@example.com.