Tuesday, December 16, 2008

Labor and the Big Three, part 2A

I wanted to move on to the next point I want to make about the UAW and the Big Three, but need to stop and respond up top to some comments in response to the last two points. A commenter named Peter who identifies himself as a TA at UW made a number of comments, some worthwhile and some off the mark. I generally try to take people's arguments at their face value, but this guy, who demonstrates, at best, a limited understanding, if not fundamental ignorance, of economics, persisted not only in making his points (I never fault anyone for that) but in claiming his intellectual superiority.

As always, I wouldn't bother with him if I didn't think he shows the potential to be a valuable contributor to the local debate.

I think I have at least an average amount of patience, but when some TA whose schtick expresses his frustration at my inability to understand his corrections of my misunderstanding using every tired cliche of the net, including the single words followed by. a. punctuation. mark. and the arrogant command to "read that last sentence" again, I lose my religion.

I can read a financial statement.

I have substantial academic course work in economics, have litigated cases about manufacturing accounting and served for ten years as a member of the senior management team of a manufacturing firm that runs ten plants in five states and five foreign nations. It is a nonunion company but one that pays its employees well and has profit sharing for everyone from the receptionists to the shop employees to the CEO calculated by precisely the same formula.

And what I have said is as follows:

1. The Big Three's problems are not solely attributed to their labor contracts. While I have not yet finished my comments on the subject, I believe tht their labor contracts are part of a larger problem. But the problem went beyond labor.

2. Nevertheless, the labor contracts remain problematic, even after recent UAW concessions. The first issue is whether the current labor cost differential between the Big Three and the Japanese nameplate manufacturers in the US are solely due to legacy costs. It seems clear that they are not entirely explicable by those costs and unclear, at least to me, just how much of the difference is legacy related. Contrary to what some of the commenters say, I do look at the sources that the various sources rely on and, without doing more work than I am prepared to do, my view is that no readily accessible commentator has run the issue to ground and the easily accessed numbers require more explanation. If you dice them one way, it looks like the legacy costs could not be fully included. If you dice them another way, it looks like current costs could not amount to the $75/hr number.
What seems clear is that the costs are high - higher than the competition and higher than the compensation paid to comparable workers in the US.

3. But, to address the issue at hand, this seems to go to the magnitude of the problem and not its nature. Cash compensation for current production line workers averages $74,000 a year accompanied by unusually strong benefits, job security provisions and retirement benefits. Nothing wrong with that - until you want the taxpayers to subsidize it. The Big Three can't afford to pay this. Why should people who make much less be taxed to continue it another day? Even if it were not more than Toyota and Honda, those companies aren't asking you to pay for them.

4. This is so whether or not the UAW contracts "caused" the Big Three's miseries. . But even if we want to believe that the Big Three management should have been able to continue to pay 70% more for labor and still compete successfully, they didn't figure it out and the question remains: why should a teacher in Milwaukee be taxed to pay - even for a while - the much larger compensation of a guy in Flint who fastens bolts.

5. The idea that this is a temporary cash flow problem that requires only a bridge loan awaiting the Keynesian solution of creating something from nothing seems equally silly. The problem is lack of demand? 2005 was a near record year for auto sales. The Big Three got creamed. Their problems are not recent. How old is "Roger and Me?"

6. But even if it is "just" a cash flow problem (just as Mrs. Lincoln's problem was interruption of the play), immediate relief from uncompetitive labor contracts now instead of later will result in ... cash flow. In fact - and I do know something about this - it's the best type of cash flow because it is not accompanied by a corresponding increase in costs. Selling another car requires one to make another car and variable costs are never zero. If you're in a huge cash hole, you can climb out of it easier when you do things that go straight to the bottom line.

7. It's not quite right to regard the legacy costs as unalterable. They are fixed costs in the accounting sense in that they do not vary with production. But that's not the same as being unalterable. Some ERISA protected benefits are functionally unalterable. Others - such as retiree health care - are not. Of course, it would disrupt the retirees' bargain to deny them, but it was the Big Three and not the taxpayer that promised them.


Anonymous said...

It is interesting that at the Becker-Posner blog (http://www.becker-posner-blog.com/) they've been chewing on this same topic. These are two bright guys (Law School students will recognize Posner's name) and they RESPECTFULLY disagree with each other. This is a complex economic question burdened with profound philosophic and ideological aspects.

Anyone who claims they think they have a complete grasp of the question, much less a comprehensive solution has a lot to prove before I drink their Kool-Aid.

sean s.

Anonymous said...

I think you are generous in saying he has the potential to be a valuable contributor. All he contributed to me was a headache. "The problem is not labor costs...it is cash flow" made me bang my head on my desk. The very first and by far the most important line in a cash flow statement is operating profits. Just putting the big 3's average total comp back in line with Toyota, would erase the entire cash flow problem. Obviously they have other structural issues...to many dealerships, ugly legacy costs, etc. But retructuring the UAW contracts would have the important benefit of immediate impact with no capital outlay. Designing better cars, closing dealerships, restructuring their operations all come with significant upfront costs (Cash outflows) with a lag before they generate positive cash flow. Costs that they are not in the position to fund at this time. Of course my CPA, and 25 years of finance experience, don't give me enough insight to understand the logic that must be contained in such a strong argument. You have the patience of a saint.

Anonymous said...

Clearly, you are a man of enormous magnitude.

Interesting take at the Stern on Finance blog, basically calling for a fed-guv DIP loan, working through bank conduits, to GM. I wouldn't be surprised if that's the ultimate end game.

Anonymous said...

Perhaps Doug Melvin and Mark Attanasio are a bit too preoccupied with labor costs as well . . .

Terrence Berres said...

"I think you are generous in saying he has the potential to be a valuable contributor."

Peter says he has just concluded a paper on labor law, possibly a term paper. Perhaps he could post it on one of his blogs and provide the link here.