Theft In Detroit

In September, 2007 I warned of the impending collapse of the financial markets. I felt a little silly for the next month or so, as the stock market continued to climb. But I was certainly vindicated in the next 15 months. The Dow plunged from well above 14,000 to below 8,000.

Late last year I warned that the next collapse would occur in the Hedge Fund markets. Then we hear about the $50 billion lost by Bernie Madoff. This is more complicated than a simple financial failure, but the results are the same. Hedge fund managers had free reign to alter values (particularly with mortgage securities) to what they wanted them to be. Madoff is one of many.

This time I am going to address the situation in Detroit. According to General Motors documents, in 2006 the total cost per worker is approximately $73.26 per hour, or $146,520 per year. The Associated Press reported that this figure dropped to $69 per hour in 2008. This compares to an hourly cost of $48.00 per hour for Toyota, in this country. For you non-geeks this represents a disparity of $21 per hour, or about $42,000 per year per worker. Yikes! How would you like a $40,000 raise?

U.S. car makers pay an estimated $2,600 per car in excess wages and benefits to current and former UAW employees. This compares to about $300 per car for the Japanese car makers. This means that, before an American car leaves the lot, it must fetch $2,300 more than its competitors to achieve the same profit. Good luck. Unless this disparity vanishes, there is absolutely no hope for the U.S. auto industry.

I estimate that it will take $100 billion or more just to get these companies through the current business downturn. Even then, they will return to marginal profitability, if any, unless serious changes are made.

I don’t blame the unions for negotiating the best deals they could. But things change. Business changes. The world changes. And if companies cannot adapt, they will fail, or at least they should. Many companies have been forced to trim their work force. Some have lowered wages. Many have cut back capital expenditures and closed plants.

The UAW has given back some (little) of its gains, but many of the union contracts still call for exorbitant benefits (and salaries) to be paid to non-workers. Full health care is provided for early retirees. A worker still gets $30,000 per year put into his retirement accounts. Hello. This is the 21st century. These things don’t happen anymore. Do you get $30,000 put away each year into your retirement account?

In December the U.S. government stepped in with a temporary bail-out for U.S. auto makers, worth about $14 billion. This should help them stay in business for a few more months, until our new president can have his say. I fear that we will hear more spin and the problem will linger for years, with the U.S. taxpayer footing the bill.

If we are going to continue to subsidize union workers and inefficient businesses, we should at least understand what this really means to Americans.

Because of this wage disparity, every person who buys a new car will spend $2,000 more than they should, whether they buy American or not. Because of the UAW wage inflation, every competing car manufacturer is able to charge more for their cars and still remain competitive. Basic economics, folks.

Every person who buys a (relatively new) used car will pay more too. Used cars are priced in relation to new cars. If new cars cost more than they should, so will used cars.

Why should ten or fifteen million people per year pay more for their cars, just so UAW workers can keep their huge pension accounts? And why should the U.S. government subsidize this theft?

That’s not all. If Washington provides a long-term, $100 billion bailout, as I fear they will, this represents a $2,000 cost to each of fifty million tax payers. If you pay taxes (Social Security included) then your wallet will be affected. Do you want to send $2,000 to Washington and pay $2,000 extra for your next car, just so some early retiree can have free health care and a line worker will get his $30,000 pension deposit? I thought not.