It's been incredibly slow here at Shark and Shepherd. This past week presented one enormous (but not bad) distraction and one smaller one as we cope with a new canine addition to the Esenberg family compound. My bipolar blogging identity (here and on the Marquette University Law School Faculty Blog) has now muted into full scale multiple personality disorder as I take my first guest stint on PrawfsBlawg. There will be a storm of crossposting for me this Christmas season.
But, for now and here, I want to comment on John Nichols' column suggesting that the UAW is in need of bailout because it has devoted some of its considerable resources to causes that he - and, with respect to some of them, even people like me - like.
But this ignores the economic reality of the matter. The UAW negotiated sweet contracts for its members during an era that the Big Three enjoyed an oligopoly in the US auto market and it extended the cost of those contracts far into the future by securing outsized pension and retiree health care benefits.
But we need to understand the narrative correctly. It wasn't that the UAW took advantage of the auto companies. It was that the auto companies were taking advantage of us because they lacked competition. Sharing some of the swag with the UAW in order to buy industrial peace made perfect sense. Think of them as cohorts.
And cohorts they remain. When I was a kid, we talked about planned obsolescence in the auto industry. American cars weren't very good because they didn't have to be. Management, shareholders and labor put it to us.
But the foreign manufacturers came in and raised the bar. There was no more free ride but, for too long and even now, the UAW and Big Three management wanted to act as if there was. You can't compete by paying production line workers total compensation in excess of six figures while your competition is paying roughly half that. It's not that the only problem with the American companies is their labor costs but their labor costs are an inextricable part of the problem.
We can't just bail out the auto companies. Their union contracts must be repudiated because they can no longer afford them. If the shareholders have lost value, tough. Management should be fired, but at the direction of the owners (even if those come to be the creditors) and not the government. That is what would happen in bankruptcy. If bankruptcy, which has worked for a number of other companies, is somehow thought to be impossible for car companies, then the alternative should not leave any stakeholder - labor or owner or management - better off than bankruptcy would have.
If there is a bailout, it should be in the form of an imposed bankruptcy adjudication. Contractual obligations (including executive salaries and bonuses) are restructured. Shareholders take a hit and are free to exact their revenge on management.
But throwing money at failure is silly.
7 comments:
It's more than just the UAW and the hubris of the Big3.
Talk to ANYONE--anyone at all, who manages industrials, and you'll find that the Big3 have a white/blue collar ratio which exceeds fantasy.
Detroit is truly a culture akin to that found in DC (or Madison); simply add bodies, instead of adding capabilities.
Your take is 100% correct: BK them and re-organize. There's plenty of VC/hedgefund money available for strategic buys of the pieces and parts which will come available.
What about the impact of bankruptcy on Main Street businesses, like Zachow's tavern in Janesville where the GM assembly line workers would go to have two or three beers during their breaks?
Terrence's post was tongue-in-cheek, obviously. But it invokes a common syllogism that needs to be debunked. That is, bankruptcy = every employee losing his or her job = many people in the surrounding economy losing their jobs, too.
Today, far more than twenty or thirty years ago, Chapter 11 tends to result in a change of control. Productive assets remain in use, and many (though not all) people remain employed, but they are working for someone else. It has become the norm rather than the exception in Chapter 11 for the assets to be auctioned off to the highest bidder. And that is, generally, a good thing.
I don't know why so many people are of the view that a bankruptcy filing for GM would be catastrophic. Yes, a filing under which Rick Wagoner keeps his job and tries to keep the empire together probably would be catastrophic. But if GM hired a "Chief Restructuring Officer" -- the norm these days in larger Chapter 11 cases, whether or not the CEO is canned -- and put its assets on the auction block, and hired Goldman Sachs to court prospective purchasers for pieces of the empire, in a few months the various pieces of the empire would be sold. Buyers would find a way to fund warranty claims, to keep the value of the brands intact. And people would be just as willing -- make that more willing -- to buy a Chevy truck built by Toyota than one built by GM.
From what's going on in DC today, it looks like some out-of-court government-supervised process analogous to bankruptcy is going to play out. There's no reason this couldn't play out in bankruptcy court, with judges and personnel familiar with the process in similar situations in charge. But given the amount of money the feds are being asked to put up, they seem to want to be the overseers themselves, and perhaps that's a legitimate consideration.
But back to Terrence's post. If GM files BK and its Janesville plant gets sold, there will be some spillover effect. A lot less beer will be getting spilled at Zachow's, since Toyota, or any competent owner, wouldn't be letting its employees go to Zachow's tavern for a couple pops during breaks. Maybe Zachow's will go under. But long term the Janesville economy would be better off with somebody other than GM owning that plant.
There is a risk, of course, that no one will bid for the Janesville plant -- that no buyer will want a plant whose work force is accustomed to working under the influence. There may be too much capacity right now in the US automotive manufacturing industry. If that's the case, then it's best to let the creative destruction of the capitalist economy work, and redeploy the assets as well as the employees to a more productive use.
My post did not "invoke[] a common syllogism that needs to be debunked." On the other hand, I've read that "While the direct impact on the national economy would be relatively modest, the Midwest would be hit hard by the combination of job losses at GM and its suppliers and benefits cuts for the company's retirees." What If GM Did Go Bankrupt..., Business Week, December 12, 2005.
And that's for a successful Chapter 11. The chance of success seems lower three years on.
Terrence: I'm not quite sure what your point is, with regard to the impact of bankruptcy on the broader economy. GM bonds are trading at 19.75% of par value. GM is bankrupt; it just hasn't filed yet. Are you suggesting that the taxpayers pour money down the rathole that is GM in its current configuration, so that workers will continue to be able to buy a few beers at Zachow's (and pensioners continue to get their pensions, etc.)? This isn't sustainable and doesn't make sense. It merely delays the inevitable (and beneficial) redeployment of assets and people to more productive uses.
Twenty years ago, Chrysler closed its assembly plant in Kenosha and laid off 5500 of its 6500 employees there. There were recriminations, gnashing of teeth, and undoubtedly real economic pain. But today there are condos, a marina, and museums where the lakefront assembly plant used to be; Kenosha's population has grown; and Abbott Labs is the largest employer of Kenosha residents and has bought a 400-acre parcel there for expansion.
Bankruptcy facilitates the redeployment of productive assets. Stockholders, creditors, employees, retirees, and vendors take a hit in the process. It is not a process that is without pain. But when your public debt is trading at twenty cents on the buck, yet your CEO made $22 million last year and until the other day was flying on a private jet, the team needs a new coach and new owners, and maybe some of the players should be released.
Terry, the BizWeek article has a questionable conclusion based on speculative thinking.
First off, most automobile warranties are NOT financed by the manufacturer; rather, they are insured (maybe by AIG?)...so in most cases, the warranty work will be performed. There may be a slight upfront cost (say 15%) that is the insured deductible. And maybe not...who knows for sure?
Secondly, the question of GM's sales of new vehicles is almost moot, BK or no. But the most profitable business--parts--will continue; meaning that there will be a lot of very busy GM plants AND supplier plants. You think I can't buy a Chevy starter unless I go to a dealer? C'mon!
Rental-car companies already sell their used-cars directly; that would increase, sure. So?
Janesville actually could re-open, depending on the physical capabilities of the plant. It took a while, but the Gilman/Madison plant is utilized; so is the old K&T plant in Milwaukee. No, they aren't doing what they used to do...but they employ people.
The biggest dislocation will be in the white-collar ranks in Detroit. Sorry to say so, but that group is waaaaaayyyyyyyyy too large, anyway.
The Midwest may benefit, too, Terry. After all, we still have most of the knowledgeable metal-benders up here...
Zachow's Bar a/k/a Zoxx 411 Club has been family owned and operated since 1968.
They are open 7 days a week and although they do appreciate their GM Employee customers; they also have numerous customers who are not employed by GM.
Zoxx 411 Club offers free darts on Mondays and $2 beer everyday, all day.
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