General Malaise

The big economic news of the day -- General Motors' announcement of job cuts and plant closings -- can't possibly come as a surprise, can it? Like many other huge American employers, General Motors has, over the years, become something of a welfare state. With each new round of labor negotiations, GM's fixed labor costs inexorably rise. Naturally, though, the UAW denies that it has any responsibility for GM's competitive failures:

"Today's action by General Motors is not only extremely disappointing, unfair and unfortunate, it is devastating to many thousands of workers, their families and their communities," Ron Gettelfinger, the union's president, said in a statement. "While G.M.'s continuing decline in market share is not the fault of workers or our communities, it is these groups that will suffer because of the actions announced today."

While GM's declining market share may not be the fault of any given employee or community, the company's apparent inability to meet contemporary competitive challenges is, in large measure, the unions' fault. Specifically, a tremendous percentage of GM's earnings are tied up in corporate entitlement programs, such as pensions, health care, etc. Those programs drain the very dollars GM would otherwise use to bolster its competitive position, whether through R&D, productivity initiatives, marketing strategies and/or incentive programs. The 30,000 workers who will lose their jobs over the next three years have no one but their Union forbearers to thank. The line worker who retired 20 years ago today draws an enormous pension and enjoys virtually complete medical coverage. If it's left up to him, he will continue to get his checks, regardless of whether today's fathers (and mothers) must be downsized in order to fund them.

Recently, U.A.W. members at G.M. voted to accept modest changes in their health care benefits, which had been virtually free. That agreement is expected to eventually save the company $3 billion in annual expenses before taxes. Despite that, G.M. still faces huge liabilities for retiree health care and pension benefits.

Catch that? A "modest" change that is expected to result in a $3 billion pre-tax savings. How much could GM save by making a significant change? Look, I'm not suggesting that companies shouldn't pay benefits to current and former employees but ask yourself whether, even if they are lucky enough to escape this round of cuts, today's GM employees will ever enjoy the benefits they are compelled to provide those who went before. In order to be benefits, i.e., in order to be beneficial, such things need to be sustainable over the long haul. GM is being eaten alive by so-called benefits because, in the finest of welfare traditions, those who came first ensured that they would reap the largest possible reward. And they left to those who would come later the privilege of footing the bill. GM needs to find its way into Chapter 11 where it can divest itself of obligations that compel current employees to sacrifice their own prosperity and job security.

Also blogging on this topic are Tapscott, who thinks the Unions will blink if presented with a draft Chapter 11 petition, BMEWS, who has a similar take on the retiree versus worker issue, Martini Republic, who pegs GM's debt at a staggering $276 billion, and A Stitch in Haste, who adds:

Like so much of "blue collar" social welfare and government fiscal policy, all that was achieved was to redistribute (not create) income, job security and prosperity, and not from "greedy" businesses such as auto manufacturers, airlines and textile firms, but rather from future employees. The opulence of yesterday's union contracts are being paid for not by white-collar executives, and not even (primarily) by "wealthy" stockholders, but by those blue-collar workers who will lose their jobs today and by those who will never have them tomorrow either.