Labor's love lost

One of the things you hear over and over again from critics of Detroit, especially ones from the left, is that their current woes are all management's fault because they kept making big cars.

Management has made a lot of mistakes.  But making big cars wasn't one of them.  That's because they couldn't profitably make small cars in the United States.  And the reason they couldn't is that their labor costs were too high.  All in, Detroit was paying about $30 more an hour than other companies to make cars.  At that kind of differential, you have to concentrate on large cars with big profit margins, not economy cars where consumers fight to save $15 on the headlight bezels.

That has changed, as Freddie rather vigorously points out in the comments.  But corporate culture is a powerful thing.  One of the fascinating things about mergers is just how resistant corporate culture is to change; you can fire nearly everyone, and as long as there is still a core of old workers, they will fight to the death to keep doing things the old way.  30 years of complacence followed by 30 years of worrying how to meet the UAW's bill left a corporate culture that was not geared towards innovation, nor towards making small, efficient cars. 

Moreover, there was no good way to recruit new talent who might have changed things to a sinking ship.  Very few people set out to work for Detroit these days unless they're serious gearheads, or happen to already live there.  Working for the Big Three magically combines vast corporate bureaucracy and job insecurity in one completely unattractive package.  Even the car freaks would often rather do something else--write about cars, or work for the NHTSA.

Into this mix you have to throw the dealer network, which has as much of a stranglehold on Detroit as the UAW.  As I understand it, until gas hit $4 a gallon and the bottom absolutely dropped out of the market, the dealer network continued to pressure GM and the others to concentrate on high margin SUVs with lots of extras.  Libertarians who get all huffy about the UAW should be even more revolted by the dealers, which have browbeaten state legislatures into giving them ridiculous powers over the auto makers.

The entire thing is a toxic mess, left over from the days when interlocking oligopolies contentedly conspired to suck every last dollar out of captive consumers to whom Detroit would happily have given Flintstones cars if they could have figured out how to do them in two-tone vinyl.  But things that look like lunatic mistakes on the part of management were often quite rational responses to intolerable pressures.  I'm still not clear on why the cars had to be ugly, and all of the indicators cunningly hidden behind the wheel where they wouldn't distract the driver, of course.  Management did many stupid and inexplicable things.

Having driven the companies right up to the verge of bankruptcy, the conceded literally only when it became clear that the union members were about to get their contracts unilaterally rewritten by a judge,  lose their health benefits, and possibly get their pensions crammed down by the PBGC, which maxes out somewhere slightly north of $40K per annum.  Then the unions ever so generously agreed to cut health care costs by 30% in exchange for job security guarantees.  And now that their game of collective bargaining chicken has resulted in the obvious disaster, they want us to pay to save their jobs, at a cost of over $300,000 per.

It seems to me at least as plausible to believe that the unions were behaving like morons in the belief that the government would bail them out, as that the big bankers were.  What is the prudential reason for the rest of us to encourage this sally into the land of moral hazard?  If GM goes bankrupt, my Mini will not suddenly stop working. 

Bailing out the auto industry offers no net gain to society.  It is a straight transfer of resources from one sector to another:  we tax money, or borrow it from a finite pool of capital available to the nation, and spend it on auto workers.  The people who pay the taxes, or the people who would have borrowed that investment capital, now have less to spend.  Whatever they would have bought goes unbought; whoever would have made it goes unemployed. To coin a phrase, what is made on the swings is lost on the roundabouts  We have the illusion of a gain only because that other group of people is invisible.  Even if we don't bail out GM, they will not be visible--we will never know who didn't lose a job or a business because we declined to spend one squillion dollars saving the Chevy Cobalt.

But let's say it was all management's fault.  What's the argument for bailing them out then?  Does someone have tens of thousands of auto engineers, marketers, and senior management buried under a rock somewhere, waiting to replace the incompetent managers?  Because it seems to me that we're just pouring money into the same deep hole that will periodically reward our efforts by coughing up the Pontiac G6.

Presented by

Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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