Auto union drove GM to trouble

Marketplace Staff Mar 30, 2009
HTML EMBED:
COPY

Auto union drove GM to trouble

Marketplace Staff Mar 30, 2009
HTML EMBED:
COPY

TEXT OF COMMENTARY

Tess Vigeland: As we discussed earlier, the Obama administration forced General Motors CEO Rick Wagoner to resign this weekend as part of the government’s effort to save the ailing automaker. The firing-by-any-other-name was positioned as being in the best interests of GM’s future. But with or without Wagoner, GM’s future remains in question. Commentator Kevin Hassett says there may be more politics than economics at work here.


KEVIN HASSETT: President Obama has a huge political debt to the unions and that’s why he’s avoiding the obvious solution to the auto crisis.

Historically, failing American companies like GM have entered bankruptcy. In bankruptcy, they either liquidate or, if the firm is worth saving, reorganize.

Bankruptcy reorganizations are painful for stakeholders. Hard-nosed judges give workers, managers and debtors severe haircuts in order to reshape a firm into a new organism that can thrive again. But bankruptcy can work. Most everyone has flown on an airline that has emerged from a successful bankruptcy.

This economic crisis is unique in history in that troubled firms have sought protection from politicians, rather than bankruptcy courts. Why? Because if you’re politically connected, you can expect a much better deal from politicians than you would ever get from a worldly and experienced bankruptcy judge.

GM is in deep trouble mostly because the United Auto Workers have festooned the company with rigid work rules and extravagant costs. The 2007 collective-bargaining agreement, for example, required the automaker to pay up to $140,000 in severance to a worker whose position was eliminated. And that is nothing compared to the enormous health-care costs these companies are laden with. The average cost of employing a worker at the Big Three, including benefits, was nearly twice that of Japanese automakers. No wonder the automakers are hemorrhaging cash.

A bankruptcy judge would bring some reason to labor costs and create a GM that could emerge stronger. But the unions have a better idea. They plan to use taxpayer money to fund their juicy compensation. And they know they can count on Obama and the Democrats to help them. All told, organized labor contributed over $74 million in the 2008 campaign cycle, 92 percent of that went to Democrats.

History will tell a simple story about GM: Union bosses successfully negotiated sweetheart packages that destroyed GM’s competitiveness. If Obama was serious about creating an enterprise that can thrive in the future, he would have demanded that the union bosses resign along with Wagoner. Instead, it’s payback time.

VIGELAND: Kevin Hassett is the director of economic studies at the American Enterprise Institute in Washington, D.C.

As a nonprofit news organization, our future depends on listeners like you who believe in the power of public service journalism.

Your investment in Marketplace helps us remain paywall-free and ensures everyone has access to trustworthy, unbiased news and information, regardless of their ability to pay.

Donate today — in any amount — to become a Marketplace Investor. Now more than ever, your commitment makes a difference.

Raise a glass to Marketplace!

Just $7/month gets you a limited edition KaiPA pint glass. Plus bragging rights that you support independent journalism.
Donate today to get yours!