THE MAJOR AMERICAN auto companies have told their dealers that they can expect car prices to rise when the new models are introduced in September. General Motors has taken the lead, indicating that it will probably increase prices by an average of more than 2 1/2 percent. All the companies are reducing rebates and low- cost financing arrangements, while raising the prices of most options.
If the patterns of earlier years are repeated, analysts say, additional price increases will follow during the year, even though the auto companies have just announced second quarter profits totalling $1.8 billion, including $1 billion at GM alone.
Instead of accepting this in silence, the public should be urging the auto companies to lower prices and profits, and to join in a national effort to improve the country's competitive position. In similar situations, Japanese companies have always chosen to go for higher volumes of production, a bigger share of the market and more jobs instead of higher profit margins. In fact, the late esteemed president of the United Auto Workers union, Walter Reuther, advocated this same approach 25 years ago.
Yet no consumer organization, no blue ribbon group of financiers and bankers, no labor union, no defender of the poor, and no representative of the Federal Reserve Bank or the Reagan administration has suggested that auto price increases now might hurt America's effort to retain industrial jobs and compete more effectively with the Japanese in the U.S. market.
There is something bewildering about this silence when auto company profits are rising, unemployment remains high and middle class car buyers are still suffering from "sticker shock." This would seem to be an excellent opportunity for American companies to regain a larger share of the market lost to Japan in the 1970s. Because of the "voluntary" quotas on Japanese auto imports, Japanese cars are in strong demand here -- so much so that many U.S. dealers have been casually raising the price of these cars to consumers. Now is the time, one would think, for aggressive price cuts by American automakers.
But that, apparently, isn't in the cards.
Proponents of price increases on American cars have been arguing that a 2 to 4 percent price increase is not large and therefore not inflationary. But this is untrue. Even at present price levels, big profits are potentially inflationary. They create strong pressures for wage increases which could spread through the economy despite high unemployment.
The UAW at Chrysler this summer sought to reopen talks on its existing contract in order to recapture concessions worth $2 per hour in wages that it made to the company when Chrysler was fighting for survival last year. When the company refused, the union made clear it would renew the demand when the Chrysler contract expires in January.
Auto workers at Ford and GM, whose contracts run out in November 1984, also want to get back everything they gave up when the companies were in trouble, and more. And with profits at current levels, it will be hard for the auto companies to resist these wage pressures.
As usual, the unions and the companies have the option of solving their dispute at the expense of the American consumer and other American workers and businesses. History suggests that they will take this option. Auto prices have risen by 30 to 50 percent since 1979, and the auto unions got a 30 percent three-year contract increase in 1980. Both these developments were clearly inflationary and were only possible because neither wages nor prices reflect the real competitive position of the auto industry.
If nothing is done this year to head off price and wage increases in this industry, higher profits will, once again, be divided between the companies and the auto workers with jobs. The auto industry will lose a chance to regain market share from imports, over 200,000 auto workers still on lay-off will be sacrificed to the interests of those who are working, and companies and workers in other industries will have new and inflationary profit margins and wage standards to emulate.
As inflation gathers force, government will either step in again as it did in 1980 to create a recession in order to bring inflation under control, or the United States will go the way of countries like Argentina, where price and wage changes in heavily protected smokestack industries have lost all relationship to the requirements of a competitive market.
It is true, of course, that factors other than prices contributed to the phenomenol inroads that foreign auto companies, especially Japanese, made in the U.S. market in the 1970s. U.S. imports of Japanese cars rose from 690,000 in 1975 to more than 1.9 million in 1981. The fuel efficiency, quality and wide selection of imports were all factors that gave the foreign companies a competitive edge. Lower Japanese labor costs (estimated by the U.S. Department of Transportation in 1980 to be in the range of $1,500 lower for subcompact cars) were also a help.
But now these advantages have largely disappeared. The fuel efficiency and quality of American small cars have all been improving, and the U.S. companies now offer consumers a wider selection of compacts and subcompacts to choose from. Meanwhile, the difference in U.S. and American labor costs has narrowed.
In other words, price is likely to be a much larger factor in the competitive position of Japanese and American companies in the 1980s than it was in the 1970s.
If this opportunity is missed, it will be small businesses, and workers who do not have the backing of strong unions in a protected industry, who will pay the price of the deal between the auto companies and the union.
Americans who want economic growth, more jobs, and a revival of American hopes for the future cannot afford to be complacent now about the way the auto industry sets prices and wages. The only question is how to assert the public interest in practical and effective ways that also are politically acceptable.
It is the U.S. auto industry's major competitor, Japan, which provides the best model for dealing with this issue. Japanese companies and unions in a number of industries, including autos, have consistently chosen to increase their volumes and expand their share of markets rather than raise prices and wages at times like the present.
This strategy has been an underpinning of the whole Japanese success story. And it has been made possible by the explicit willingness of Japanese unions to accept wage settlements intended to promote more employment rather than just higher wages for those with jobs.
The Japanese government has encouraged this strategy consistently since the war by helping to keep interest rates low. Rates there are currently 51/2 percent, about half our own. Low interest rates allow companies to borrow capital to pay for their expansion, instead of paying for it by accumulating large profits, which only encourage unions to ask for more.
Part of the quid pro quo for the wage restraint shown by Japanese labor unions has been that country's fabled job security. But job security is more than just a social compact between companies and unions. It has been made possible by the overall Japanese strategy of emphasizing volume and growing market share instead of short- term profits. Even in Japan, where the principle of life- time or long-term employment is deeply embedded in major industries, there are still layoffs when markets shrink, as they have in some sectors recently.
Clearly, it in the interest of American workers who treasure job security to support a U.S. strategy stressing long-term competitiveness ahead of short-term benefits.
One esteemed former union leader, the late Walter Reuther, would have understood the arguments being made here very well, and he would have supported every one of them. It is interesting to readmar Reuther's testimony before congressional committees in 1958, at the end of another recession. He argued then, as I have argued here, for a new split of the pie between companies, unions and the public.
He urged auto companies to cut prices instead of raising them, and to derive their profits from increased sales instead of higher markups. He promised that if they would do so, he would curb the wage demands of his members. Even then, before the era of fierce foreign competition, Reuther figured that higher volumes of production, made possible by reasonable prices, would create more jobs. To Reuther this was as important as higher pay for those already working. He saw that growth was the key to prosperity and job security for his members and the country.
Unfortunately, the auto companies and the public did not see the strengths of Walter Reuther's proposals in 1958. Had they done so, the Japanese might not have over 20 percent of the U.S. auto market today. But it may not be too late for those who want an American industrial revival to call for price cuts and wage restraint as the economy strengthens.
This approach should not be limited to the auto industry here any more than it is in Japan. But the auto industry is the key at this time.
Other industries and other unions ought to be encouraging the auto companies and unions to adopt a new strategy. Steel, rubber, plastics, machinery and electrical manufacturers and their unions, to name only a few, have a major interest in an auto industry that grows larger, not fatter.
Small business organizations should demand that the auto industry play its part now in controlling inflation. If small business speaks out, high interest rates can become a thing of the past. If it does not, as Walter Reuther recognized, it will not be large industries such as autos which will be priced out and crowded out of credit markets.
Farmers and homebuilders, to name only two affected groups, have an interest in lower interest rates, lower prices and the growth they would encourage.
If the profit-wage spiral can be stopped in its tracks now by all those who have an interest in it, a lasting recovery will be possible. If not, Detroit and the other big industries that follow its lead will bear a heavy responsibility for the recession that is sure to come.