Friday, December 26, 2008

Blame the Auto Union!

Recently I had a conversation with some friends about the collapsing auto industry in America. One participant in the conversation was quick to blame lazy union members, for the industries' downfall. I can't say I blame him considering the misinformation that has been flying around. Some Republican members of the House, and right-leaning academics, have suggested that workers at American plants make upwards of $70 an hour, which if you actually think about it is ridiculous (this calculates to an average annual salary of well over $100,000 for a factory worker). It doesn't help that Harvard Economics professor, Gregory Mankiw, author of a popular high school AP Economics textbook, and former economic advisor to Bush Sr., has recently displayed his true colors by perpetuating this lie on his well-read blog. Fortunately, Factcheck and The New Republic investigated this claim and proved it to be bogus. In reality, the average American autoworker makes about $28 an hour, probably about $4 more than the average worker at Honda, Toyota, or Nissan plants in America; Hardly enough to explain the current collapse.

The reality is that management of the Big Three automakers did not have the foresight to budget for "legacy costs"--the costs of retiree benefits--or did, and assumed the government would never let them fail. They should have predicted that the rising number of baby boomer retirees would exceed the current number of people employed and adjusted accordingly. Malcolm Gladwell discusses this "dependency ratio" in depth in his New Yorker piece The Risk Pool. An excerpt,
An employer that promised, back in the nineteen-fifties, to pay for its employees’ health care when they were retired didn’t set aside the money for that while they were working. It just paid the bills as they came in: money generated by current workers was used to pay for the costs of taking care of past workers. Pensions worked roughly the same way. On the day a company set up a pension plan, it was immediately on the hook for all the years of service accumulated by employees up to that point: the worker who was sixty-four when the pension was started got a pension when he retired at sixty-five, even though he had been in the system only a year. That debt is called a “past service” obligation, and in some cases in the nineteen-forties and fifties the past-service obligations facing employers were huge. At Ford, the amount reportedly came to two hundred million dollars, or just under three thousand dollars per employee.
So, if there are less employees now than when the pensions were first created, there is a problem. Big picture: a pension is only as good as a company's ability to maintain a stable "dependency ratio". Obviously, in the case of the Big Three this was not happening.

Gladwell takes this one step farther and connects it to healthcare: "The average cost of health insurance for an employee between the ages of thirty-five and thirty-nine is $3,759 a year, and for someone between the ages of sixty and sixty-four it is $7,622." G.M. has an estimated 62 billion dollars in health care liabilities. Of course, ask the CEO of an American automaker who hedged his bet on Hummers and Tahoes, how he feels about universal healthcare, and he'll reply in opposition.

But, please blame the lazy auto unions.


JP said...

I was always under the impression that the $70 figure included wages AND benefits (including health care what the companies are paying in pensions).

Aren't health care benefits negotiated by the union? Do they not have a say in the pensions as well?

The Cook said...

Ironically, pensions were originally management's idea, and the unions were skeptical because they felt risks should be spread over the largest most diverse group possible (Gladwell's column discusses this). But yes, unions agree to create pensions and thus bear some responsibility (this is not just an auto industry issue as you know).

Ultimately, it takes two parties signing a contract to reach an agreement, so one cannot pin the blame on just management or the auto unions. Personally, I do not blame the auto union for wanting the best possible benefits for its members. I do blame management for writing pension checks that it could not cash, a trend we see too often in corporate America--buy now pay later (an emphasis over short-term vs. long-term).

As for the $70 wage, I fear others have not thought critically about this as you have.

Why were unions needed in the first place? Because management did not treat labor fairly. Well looks like Toyota is treating it's employees ok. So, there may be no need for workers to unionize there. Interestingly enough, there may be a competition brewing between transplant auto companies to treat their employees well.

Siege said...

Makes you glad you have a government retirement plan rather than a corporate one (less of a gamble).

It will be tragic if pensions as we know then survive after the events of the last 5 years (ENRON and this Big 3 mess).

Siege said...

Great line from the Gladwell article..."It’s like the old Borsht-belt joke about the haberdasher who lost money on every hat he made but figured he’d make up the difference on volume."

Love me some haberdasher references. Wonder if Nigel worked for that company?

BTW, the health care issue outlined in the Gladwell article seems like a set up for an argument for universal health care or some other change in how health benefits are offered to employees. Something has to give.

The Cook said...

How awesome would it be to walk into the Rosedale Mall Lids and have Nigel Tufnel sell you a Twins hat? I can imagine him explaining the virtues of flexfit vs. the traditional fitted hat. Classic.