Detroit - Drop Dead

We all have witnessed the begging; it continues today before the Senate Banking Comm.. Yesterday GM took this behavior offshore, pleading for a billion-euro credit guarantee from the German government to help its Opel subsidiary. Too much.

And, we all know the story: All three vehicle companies were heavily into producing trucks and SUV's when the sharp run up in gas prices induced consumers to shift to smaller and more fuel-efficient cars. Yet the huge cost resulting from the big three’s obsequious, compliant response to UAW demands made it impossible for the companies to sell for a profit ANYTHING BUT the big cars and SUVs that, after gas prices hit $4 a gallon last spring, almost no one wanted to buy.

The only money GM for example made recently came not from car production but from its automobile credit business - GMAC. The financial crisis has dried up the money available to auto financing companies and hence eliminated the major source of their income.

From Gary Becker, Univ of Chicago econ prof and ‘92 Nobel recipient: "The main problem with American auto companies is that during the good times of the 1970s, 1980s and 1990s, they made overly generous settlements with the United Auto workers (UAW) on wages, pensions, and health benefits. Only a couple of years ago, GM was paying $5 billion per year in health benefits to retirees and current employees because their plans had wide health coverage with minimal co-payments and deductibility on health claims by present and retired employees." They caved to the UAW parasites because they could pass the cost right on to us. Now they’re broke and want $25 bln more than the $25 bln loan negotiated in September.

"Keeping the Detroit Three in their present form, with their extravagant health care benefits and the union's 5,000 pages of work rules, is an exercise in preserving in amber the America of the past," Mike Barone explains. It is not that cars cannot be produced profitably with American workers for goodness sake: the American plants of Toyota and other Japanese companies, and of German auto manufacturers, have been profitable for many years. The foreign companies have achieved this mainly by setting up their factories in Southern and border states where they could avoid the UAW and thereby introduce efficient methods of production. Their workers have been paid well but not excessively, and these companies have kept their pension and health obligations under control while still maintaining good morale among their employees.

Will taxpayers allow Pelosi, Obama and the rest to reward the UAW for its political support and permanently damage America’s economy in doing so? Will politics trump sound economics? Let us hope not. As we argued earlier, allowing GM to go bankrupt would enable the courts to order changes in the company's onerous labor and supplier contracts. Meanwhile, just as the airlines continued to fly while in bankruptcy, GM could continue to produce such cars as it might be able to sell. But the status quo clearly won’t work, and, every literate American knows it. A study by the Center for Automotive Research found that UAW compensation is 68 percent higher than the average for the U.S. manufacturing sector. And some 40 million American taxpayers who do not have health insurance, some because they can't afford it are not pleased at the prospect of watching their tax dollars finance the lavish health-care plan that the UAW extracted from a compliant General Motors in the good old days.

Finally, recall that the big three make fewer than half the new vehicles sold in the United States. If one or two were to fail the big foreign makers are established enough, many experts say, to take control of the industry and its supplier network, perhaps more quickly than is widely understood. Then the new kings of the auto industry would presumably be Toyota, Honda, Nissan, Volkswagen, Daimler, Bayerische Motoren Werke and Hyundai-Kia. (Volkswagen has not yet opened a plant in the United States, and BMW and Hyundai each have one plant.)

So sorry Big Three, it’s been good to know ya but it’s time to go. Nothing personal. There should be some decent public provision for the losers and there is: unemployment benefits, welfare. But welcome to the healthy process of creative destruction. We are a nation of risk takers and adventurers, taking our chances with life and fate. As one observer put it, when we stop being that, we become some smug, placid welfarist haven of security and egalitarianism — a big Sweden.

Robert Craven