The Collapse of GM.
The creative destruction of General Motors continues, with news of a dramatic buyout offer to be extended to workers at GM and Delphi.

As you might expect, both the Detroit News and Detroit Free Press are running multiple articles on the recent developments.

What follows is a recap of the stories, with some commentary mixed in. There's not as much commentary as I would like, but here's the quick story: this has been a long-time coming. An oligopoly of employers (GM, Ford, Chrysler) and a monopoly of workers (the UAW) have, over the years, created a business climate that extracted superior returns (wages 69 percent higher than for the average for manufacturing jobs) that could not be sustained. A tax system that favors employer-paid health insurance and defined-benefit pension plans, along with environmental regulations (CAFE) pumped up industry costs. An inflexible labor policy delivered through a union contract lead to the absurdity of the "jobs bank," paying people to not work--and delaying the inevitable contraction of the labor force. Meanwhile, the rise of automotive manufacturing in Japan, Korea, and even Mexico have made the "good old days" of the 1950s unsustainable.

Create destructions, friends. The old regime is being destroyed, the new one is not yet created.


First, the Detroit News.

In Remaking GM: Plan is a bold step to solving Delphi puzzle, Daniel Howes offers praise for the company:

This poster child of automotive ineptitude, if the conventional wisdom is any guide, is doing anything but marking time.

What has the company done right lately? Redo its lineup; sold stakes in foreign companies (presumably to get cash and refocus corporate energy); cut white collar staffing; closed superfluous plants; got the UAW to agree to historic (though modest) concessions on health care, and now, offer a sweeping buyout plan.

Not bad for a bureaucracy derided as congenitally incompetent, unable to change or grasp how quickly the world is moving away from it. These look as much like the actions of a distressed company selling everything that isn't nailed down as they do a stressed company doing what it should have done long ago to fix the business.

He warns that the most dramatic change has yet to occur: a drastic reduction in wages at Delphi, GM's former in-house supplier.

The next [deal] will be bigger, tougher and more wrenching for all sides because they won't be giving away money to go away. They'll be taking money away to stay and do the same work for fewer dollars per hour in a post-bankruptcy Delphi. Big difference.

Automaker's downsizing aims to ensure survival points us to the numbers:

by offering a wide range of retirement and buyout options to its 113,000 hourly workers, GM can now move in earnest toward its goal of cutting 30,000 manufacturing jobs and shutting six assembly plants by 2008.

The plan, which could cost up to $4.6 billion, is a way to reduce costs at GM directly, and indirectly. Directly, by reducing headcount. Indirectly, by freeing up slots that could go to workers at Delphi. GM spun Delphi off a few years ago, but still has some financial obligations as a result.

Delphi showdown threatens gives the backstory alluded to above: it's not just headcount at GM that is the problem, it's the financial situation of its parts supplier. Delphi is in bankruptcy, and wants to cut costs dramatically:

The Troy-based supplier, which filed for bankruptcy in October, contends that the $27-per-hour wages inherited in its 1999 spin-off from GM have put the company at a competitive disadvantage with other U.S. suppliers, where wages are $13-$14 an hour.

Sending some of those jobs back to GM--a possibility in the various agreements to date--would save the company some dough. The GM buyout offer is extended to 13,000 Delphi workers, and 5,000 Delphi workers could "float back" to GM.

Oh yes, be sure to catch the line worker who is holding out for a buyout package of $300,000.

Buyout a mixed deal for UAW looks at the financial and political fallout to the union from industry shrinkage. Active membership is at 600,000, down from a peak of 1.6 million. To borrow an old phrase, what's good for GM is good for the UAW, and union leaders have come to recognize that.

Praise, caution greet deal is a "what do the workers" think piece. It points out that a large buyout could help some laid-off workers regain their status as active workers--though given the huge oversupply of labor, that is a questionable statement.

This article points out that some workers who would retire soon anyway--within 3 years--are going to get a nice bonus:

The chance for workers, on average, to be paid $2,900 a month to stay home and do what they want until they reach the 30-year mark will be attractive to many.

About the offers on the table gives the details:
[The] Special Attrition Program offers $35,000 to anyone who retires with at least 30 years of service.

...

Mutually Satisfactory Retirement : This is for employees at least 50 years old with 10 years or more of credited service.

...
Pre-retirement: A sliding payment scale allows workers with 27, 28 or 29 years of service to retire now and receive a monthly salary (between $2,800 and $2,900) until hitting the 30-year mark, then retiring.

Workers who agree to give up any claim to health care benefits will receive cash payouts. Their pension rights will be unchanged.

10 or more years of service: $140,000
less than 10 years: $70,000

For some workers, this could be a very good deal.


To take the deal or not to take the deal: That is the question is a decent rundown of the choices that workers must face. The offer is very good for those close to retirement. But,

If you can't afford to quit working, you need to decide how much of a risk you're running by staying on the GM/Delphi payroll. If too few of your union brethren and sistren take the incentives to leave, your job could be cut and you'd end up in the jobs bank.

Oh yes, the infamous jobs bank. At least that is due for negotiation when the contract expires next year. Think it will be extended?

The article also points out that some people may have to move to less expensive digs to make the offer work for them. For some, that will be an acceptable choice. Others may take their chances.


Editorial: GM buyouts reduce costs, but more reforms needed says

Give the company credit for offering a generous program to convince workers to leave. ... The United Auto Workers should be grateful for this good-faith gesture by the world's largest automaker. GM and Delphi could have insisted on harsher measures.

The editorial points out that the long-term success of the company depends on adjusting to changes in customer tastes, and changes in the union contract--including, first of all, the jobs bank.


Meanwhile, here's the line up at the Detroit Free Press.

For GM, this is merely a first step, by Tom Walsh, runs with a "take your medicine" approach:

Expensive? Incredibly so. Billions of dollars so far, and the weary GM number crunchers are still counting.

Mind-boggling? Absolutely. Paying an army of healthy workers up to $140,000 apiece to just go away?

Yes, it's expensive, mind-boggling and absolutely necessary if GM, Delphi, the UAW and the rest of Michigan's traditional auto industry are to survive and be relevant.

Susan Tompor, a financial columnist for the paper, says that Choice could be risky:

"The loss of benefits, such as life insurance or health care in retirement, can be huge. Many workers may underestimate how much they're giving up."

True, GM wouldn't offer the deal they didn't think it was a way to save money. Then again, the alternative may be bankruptcy and the voiding of labor contracts. Either way, workers are taking a gamble: will the buy-out sums be good enough to tide them over to another job? Or should they hope that their own jobs will hold out long enough until retirement?

Oh yeah, don't forget that you're going to have to pay taxes on that lump sum--perhaps $40,000. She runs through some of the basics such as return on investment and asking questions about future expenses.

The people with the easiest decision to make may be those near retirement (take the money and run) and younger folks (take the money and retool). It's those with 15-20 years of service who face the most uncertainties. Will the job be there 10 years from now? How difficult will it be to find another job? (Forget getting a job that pays as much).

Worker Reactions: Offers look good takes us through a range of thoughts.

Willie Jenkins, 51, is ready to retire with 30 years of service. He says "This is fantastic. I can't wait to get out!"

Speaking of younger workers who aren't sure what to do, he says "" ... if I were them, I'd take it. Because we just don't know if this place will be here next week, or next year."

No, they certainly don't.

Another worker says "At 55, I'm not ready to retire." Perhaps not--especially with a huge tax bill waiting. Another says "It's hard to give up what you've been doing for a lifetime."

Meet "creative destruction," friends.

Timeline of GM, Delphi's travails offers what you'd expect: when Delphi was spun off from GM, when X number of jobs were eliminated, and so forth.

March 2001: 11,500 jobs.
October 2003: 8,500 jobs.
November 2005: 30,000 jobs.

June 2005: "There is no reason at the present time why Delphi has to seriously consider a bankruptcy." -- Delphi CEO Steve Miller.

October 2005: Delphi files for bankruptcy protection.

Questions and Answers offers a rehash of the details. It points out that the "jobs bank" will still go on. It has to; it's in the contract. If you think about it, buy-outs are also a way of paying people to not work. But they are more rational: they are a recognition that the company can no longer support such a large workforce.

Labels: American automakers, Health care, Pensions

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Retirement and Health Care Plans: At a Tipping Point Towards Individual Control?
The era of Big Employer and Big Daddy is coming to an end--or perhaps just ramping up.

Unless you are living in a cardboard box, you probably have some combination of the following: homeowners insurance, renters insurance, and auto insurance. And you most likely bought them in the private market, on your own, and not through a government program or an employer. Having such insurance is either can, in addition to being good financial sense, be a requirement of a third party in the private sector (the company, if any, that holds the loan on your house or car.) Government gets involved when you wish to drive that car on public roads, when it requires auto insurance. But it does not tell you where to buy that insurance, or (beyond what is usually a minimal amount) how much to buy.

If you have children, minor children, you may be stashing away some money for their college education--again, probably not through your employer, though perhaps through a voluntarily entered-into government program known as a 529 plan.

What do auto insurance, homeowners insurance, and saving for college have in common? Planning for possible expenses incurred in the future, which is for the most part undertaken by the individual.

Now think about the two fiscal timebombs that threaten the economy: retirement savings and health care.

Here we have the heavy involvement of government and private sector third parties. Call the first the Big Daddy approach, and the other the Big Employer approach.

In retirement planning, each worker must surrender one dollar out of 7 to a government-designed, managed, and run program that will run out of money within a decade or so. In health care, Medicare (old people) and Medicaid (poor and perhaps not so old people) threaten federal and state budgets.

One theme common to these programs, and problems: individual citizens have no say in what goes on. Your social security "account" is not your property, and its "tax Peter to cut a check to Paul's grandmother" model robs citizens of thousands of dollars that would come from true investment accounts. In health care, why should anyone in a government program be a smart consumer of health care? It isn't there money, after all. And without having control over the power of the purse, they often get poor quality. (Ask your doctor: would he prefer to be a Medicaid patient?)

But it isn't only government that separates people from responsibility, power, and potential rewards of individual planning for the future. World War II-era compensation policy works the same way. If government is

Because government can't "go broke" in the same way that corporations can and do, the unsustainable nature of the Bigs will cause changes in Big Employer long before it brings changes in Big Daddy.

Companies have already started dumping traditional pension plans ("defined benefit") in which the risk and rewards of planning for retirement rest with the employer. In "defined contribution" plans, such as 401(k)s, people choose how much of their compensation goes into retirement funding, and how that money will be invested--far different from defined benefit.

More recently, but still in its early stage, is a move towards consumer-directed health care. In the purest form of consumer-directed care (not in place in many places if at all), companies give the cash value of insurance to employees and say "Good luck, boys. Go find your own insurance." There are several obstacles in that path, including the federal tax code and government regulations of insurance plans.

All this comes to mind as I watch the changes afflicting this country's Big Employers from the World War II. "Organization Man" has long since left the psyche of the American worker, and his compensation policy--someone else plans for retirement and health care as well--is changing as well.

Thanks to the problem of moral hazard, employers are dumping pension obligations on you and me, federal taxpayers, in the form of the Pension Benefit Guarantee Corporation, through the bankruptcy code. And corporate health care plans, in which employees have little stake, are being scaled back.

Simply put, government and corporate policy have for a long time fostered a corporate cost structure (and government cost structure) that cannot be sustained any longer.

Steel companies got out of this structure through the bankruptcy court. Airlines are going through it now. Many people speculate that the "Big 3" (now Big 2) auto makers will go next. (Contracts between the UAW and GM, Ford, and Chrysler have long been the exemplar of Big Employer benefits.)

The Wall Street Journal has a fine article on the subject today (link for subscribers).

Excerpts:
A larger number of companies are closing pension plans to new hires or to younger workers, including Motorola Inc., Lockheed Martin Corp., Hewlett-Packard Co., Aon Corp. and NCR Corp. Many have, at the same time, expanded defined-contribution retirement plans, such as 401(k) plans. In such plans, employees themselves contribute to retirement investment pools -- often supplemented by employer contributions -- and elect how to invest these savings. Employees, not employers, bear the risk of inflation, sour markets or outliving their savings. Total assets in private-sector defined-contribution plans first exceeded those of defined-benefit plans in 1997.

---
When they were very profitable, companies with stable, often unionized, work forces promised pensions. When markets turned, it became clear that some hadn't set aside enough money to fulfill those promises.


Detroit got away with this practice for years because of the near-lock that an oligopolistic industry had on the U.S. market. But the manufacture of automobiles is no something that the U.S. has an overwhelming advantage in, and consumers enjoy having the choices and quality available elsewhere.

The adjustments will be brutal.

Meanwhile, GM Chairman Rick Wagoner hints at an endorsement of socialized medicine, suggesting that Toyota and such have an advantage because they don't have to pay for health insurance. But this is self-serving verbiage. It's not just the Big 2 that compete against companies based in countries where the taxpayers as a whole assume the burden of health care for their employees. But the Big 2 were part of a small portion of U.S. companies that pursued an unsustainable labor policy for decades on end. (The Journal article makes no mention of this point, and gives great credence to Wagoner's remarks.)

Meanwhile, the U.S. Congress is set to make things worse when it comes to retirement, by increasing the moral hazard:

"Congress currently is contemplating contentious legislation to force some companies, particularly financially weak ones, to put more money aside for defined-benefit pensions and to pay more to support the PBGC."

Labels: Health care, Medicaid, Pensions

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Bribe Me to Be Stupid?
Health insurance, pensions, and Social Security all three major problems in public policy today. And all three carry a common thread, according to two short letters in today's Wall Street Journal.

According to the first writer, defined benefit plans are inherently unstable:

Arthur Levitt Jr. calls for "accuracy, transparency and accountability" in pension accounting and reform of "the regulatory incentives and accounting rules that encourage employers to make, and employees to accept, promises that can't be kept" ("Pensions Unplugged," editorial page, Nov. 10).

"Promises that can't be kept" are inherent in defined-benefit plans, which call for payments in the never-never, not the here and now. Instead of trying to fix defined-benefit plans, we should encourage defined-contribution plans, where contributions are made in the here and now. There is no "promise that can't be kept." There is no promise at all. The employer has no pension assets or liabilities. The employee does not look to his employer for his pension. He looks to a company in the business of administering money, not making cars or running an airline. Ideally, the account is portable, meaning the employee owns it, and the plan may give the employee broad-brush authority to allocate assets.

Universities provide portable, defined-contribution pensions through TIAA-CREF. Yet professors, many with seven-figure accounts, tend to favor a political party that opposes the same arrangement for Social Security. That opposition would presumably extend to pensions for auto and airline workers. The university elite may not consider free choice and the assumption of responsibility appropriate for those less gifted. Worse, portable defined-benefit pensions might turn workers into capitalists. How shocking.

S. Paul Posner
New York

And the second reminds us of the values of diversification--something that is actually discouraged by current tax laws.

Mr. Levitt outlines serious problems in both private and public employee pension plans, but his proposals are palliatives that miss the main point.

Any Wall Street Journal reader knows the need to diversify asset holdings, yet almost all of us rely on a single provider, our employer, for our wages, health care and pensions. (Even if employees directly contribute much of the funding, the employer usually is or selects the manager.) Why do we do that? Because our tax structure -- in which employers deduct benefit costs when paid and employees receive benefits tax free or tax delayed until retirement -- bribes us to be stupid.

No amount of regulation, especially by a federal government whose Social Security and Medicare benefit promises are far more unfunded than almost anything in the private or state and local government sectors, can be a true fix. The true solution is tax reform that removes the stupidity bribe and encourages people to provide for their own retirement and health care, either individually or in groups not connected with their employer.

Roger Nils Folsom
Professor Emeritus of Economics
San Jose State University
San Jose, Calif.

The common thread? Employer-based provision of a person's health and welfare.

Labels: Health care, Pensions

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Is There Hope for Michigan and Detroit?
Detroit, and to some extent, Michigan, has been in trouble for quite a while. Is it going to have to get worse before it gets better?

Though the auto industry is not as important to the state and metro region as it used to be, it's still a player. But the prospect for long-term success is challenging, at best.

Auto manufacturing is a mature industry; cars can be made in a lot of different countries, many times at a lower cost than in the U.S.

Costs for retirement and health benefits (and health benefits for retirees) are a significant burden on companies in the industry. If you want to look at the problems caused by third-party payment of health insurance costs, look no further.

The recent bankruptcy of auto supplier Delphi (a company spun off a few years ago by GM, in an attempt to get out from under some of the heavy legacy costs) suggests that current and former workers may have some "downshifting" to do in expectations for pay and benefits.

Who or what is responsible for the mess? There are a lot of possibilities, most of which can be lumped under "stupid management" and "overly generous union contracts." Don't forget federal tax and regulatory policy, which encouraged the third-party payer system for health insurance and the defined benefit approach for retirement planning. Add in environmental and safety regulations that drive up the price of vehicles, encouraging people to delay purchases. Subtract the benefit of those regulations, which raise the barrier to entry from other countries. (Companies in India can make autos, but they won't pass U.S. legal requirements.)

How lawmakers and the public respond to these problems will affect the state and region for years to come. The Democratic governor has dabbled in economic development fads such as "Cool Cities," and her Republican predecessor spent the latter part of his 12-year tenure plumping for government-directed economic development projects. Neither approach is promising.

Unions, of course, are important in the political system of the state, and not just unions in the auto industry. Include the MEA (the teachers union) and other government employee unions, and you've got a lot of people who have an incentive to lobby for traditional policies that may have worked for a while, but cannot last in an increasingly competitive economy. But the pressure for continued dependence and expansion of the regulatory, welfare, government-influenced economy is likely to continue if not increase.

The Rust Belt may rust some more--as has happened in upper New York State. I fear it's going to get worse before it gets better. Old ways of thinking die hard.

Labels: American automakers, Cool cities fad, Health care, Pensions

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Retirement Funding: Away from Pensions to 401(k)s
The Wall Street Journal reports ("One more reason to quite your job," November 25) that the money in 401(k) plans now exceeds the money in pension plans: $1.95 trillion to $1.59 trillion. Predictions that the rise of the "investor class" would change politics and policy may be overstated, but the scope of the class--people who actively participate in shaping their own financial future--cannot be denied. Overall, it's an encouraging development.

Labels: Pensions

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