Dan

Calabrese

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November 24, 2008

No, Detroit, It’s You Who Doesn’t Understand

Apparently the rest of America just doesn’t understand. So says the Detroit News, the Detroit Free Press, Detroit-area talk show hosts and business and political leaders of all shapes and sizes. Mean old America. Criticizing the Big Three automakers without having our facts straight or understanding the car business.

The car business is indeed difficult to understand from outside the Detroit bubble. It is difficult to understand hundreds of billions of dollars thrown at people and things that contribute nothing to the generation of revenue. It is difficult to understand how a company can believe it deserves to survive, in spite of the consumer market’s mass rejection of its products, because J.D. Power & Associates gave it a “quality award.”

To survive in business, you have to make a profit. Period. Nothing else matters. General Motors, Ford and Chrysler don’t do that, so they deserve to die.

But if you want to understand why they don’t make a profit, all you need to do is look at two schemes concocted along with the United Auto Workers – the Voluntary Employee Beneficiary Association (VEBA) and the UAW Jobs Bank. The two entities work in different ways, but they have one devastating fact in common. Both require the automakers to pay billions to people who don’t do any work for them.

The VEBA, which is actually being hailed by Detroit media and civic leadership as a positive measure, is in reality a way for the UAW to protect its retirees from losing their health benefits in the event of an automaker bankruptcy. Negotiated by GM in 2007, it requires the UAW to administer retiree health benefits beginning in January 2010. That’s the part the industry’s defenders keep pointing to – the notion that it offloads retiree benefits onto the union, as if the union was going to pay these benefits out of its own pocket.

In fact, GM is required to continue spending $1.8 billion a year through the end of 2009 on retiree health benefits, while also bankrolling the VEBA to the tune of an astounding $24.1 billion so the funds are ready for the UAW to begin administering on January 1, 2010.

And that’s not all. GM will be required to make up to 20 additional annual payments of $165 million apiece in order to guarantee that retiree health benefits for UAW members are not reduced at all for 25 years. This is what the Big Three would have us believe amounts to legacy cost relief.

But even that is not as outrageous as the Jobs Bank. Established in 1984, the original purpose of the Jobs Bank was to keep workers available during temporary layoffs when the emerging technology of the time was causing short-term displacement of workers. A worker would receive 95 percent of his or her wage for up to two years – again, through a fund administered by the UAW but funded by the Big Three – until a new job opened up.

Today, of course, with the Big Three’s need for labor a fraction of what it once was, the Jobs Bank has become little more than an extended paid vacation for workers the Big Three would have us believe they have stopped paying. They haven’t. The Jobs Bank has been downsized to only 1,000 workers, compared with a whopping 12,000 as recently as 2005, but it’s still in existence, and still defended by the UAW.

UAW President Ron Gettelfinger, who is predictably coming under fire from all quarters for clinging to these perks, held an astounding news conference late last week in which he insisted that none of this has caused the problem. Again citing the struggling economy and the consumer credit crunch, Gettelfinger began howling, “It’s not our fault! It’s not our fault!”

It was an eye-opening scene, and surely illustrative for anyone who is just now getting introduced to economic thinking, Detroit-style. If my eight-year-old talked like that, I would send him to his room. In Detroit, this passes for community leadership.

Every time a parochial community defender of the Big Three insists that the rest of us just don’t understand the car business, someone really needs to tell them: When you’re desperately running out of cash and may not survive, you need to cut your labor costs now, not in two years. When you can’t make a profit on your products because you spend too much, you need to stop paying people who don’t work for you entirely, not contract out to have someone else do it for you on your dime.

No, Detroit. It’s you who doesn’t understand. Not because people haven’t been trying to warn you for decades that you were marching headlong into economic suicide, but because you didn’t want to hear it. And now your automotive bubble is about to explode and destroy you with it.

Congress would be insane to help sustain the way this industry does business. It is utter madness.

© 2008 North Star Writers Group. May not be republished without permission.

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