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The Morning Dump: 16 Tons.

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December 11, 2008 – Comments (4)

GM is blamed loudly and often for failing to be competitive. Despite being number one in car sales for this decade they are blamed specifically for not building good cars that "people want to buy". Which also conflicts with them being blamed for catering to North American consumers for building the big SUV's that people wanted and selling them for profit. They are also blamed for not shiftiing production to smaller high mpg cars despite having built over 20 models with better than 30 mpg, and that they will be at 30 over 30mpg in 2009. They are blamed for not building quality cars, despite JD Powers saying otherwise.

Is that a reason to lend them money? No, but it helps to jump off the populist BS bandwagon and have a look around.

They are also blamed for honoring contracts with the labor unions that have put them at a labor cost disadvantage. As though honoring a contract is a bad thing. In the decades after the great depression, labor unions grew stronger as people wanted protection from what they perceived as worker abuses by employers. Having organized they gained the ability to affect their employers income, just as their employer could affect theirs. Kind of a balance of power. Alot was gained by the workers. Just as their employer had a clean office, they could have safer work areas. Eventually labor unions grew to represent 20% of US workers by 1939, and peaked at 35% in 1945. For four decades from the 1940's through the 1970's unions represented around 30% of US workers. During that time the unions were infiltrated by Communists, which gained some influence but were eventually discredited and ousted. Because non-union employers had to compete with unionized worker opportunitys, even non-union workers saw pay increases, costing their employers about 20% less than union workers. Because the union jobs paid better they were more valued by workers and had better quality more reliable workers, which some argued gave the employer back 15% in value, keeping the cost gap very close. When you see a Cialis commercial on television, it is these now retired workers that can afford and enjoy a comfortable retirement funded by SSI and pensions. It was also their incomes that paid for travel agencys, tourism, new cars, pools, better schools, the Vietnam war etc. They were the fuel for the growth engine that was America. They were the customers. Today China is considered an "investment opportunity" because of the growth of the middle class. That growth engine in the US is badly broken.

Back to GM and the unions.Through the 60's and 70's GM grew into the worlds largets car manufacturer with union workers assembling every car. The contracts were not a disabling issue for GM even into the 80's. Toyota arrived in the 70's with a car thought worse of than a Yugo. They redisgned and went with a small car that was inexpensive and caught a break when the OPEC oil embargo  caused a shortage of gasoline in the US and increased the value of low weight, high mpg cars. Able to gain a foothold, in 1986 they built their first US assembled car. The unions, which had proven so powerful in the 60's and 70's were unable to organize Toyota in the 80's. Toyota workers were well paid, they had to be to compete for the more reliable workers to come over and work for them. The percentage of unionized employees in the US had averaged close to 30% for 4 decades, but their numbers had dropped to 18.9% in 1985 and declined to 15% by the end of the 90's. There were two major events that caused the declined. The corruption of the Teamsters Union at the hands of Jimmy Hoffa painted all unions badly, just as Tom Delay painted all Republicans badly, and Blagojevich will paint all Democrats badly today. By 1975 unions represented 26% of workers, down from the 30% of the previous four decades. The more precipitous decline was caused by Government policy. In 1981 Ronald Reagan and the Free Marketeers broke the unions by withdrawing Government support and firing 10,000 striking air traffic controllers. Interestingly the Professional Air Traffic Controllers Organization had endorsed Ronald Reagans 1980 candidacy. The Republicans also supported policys that weakened organized labor to favor corporate interests. They did it intentionally and declared it loudly. Do not mistake the influence of business upon Gov't as an "invisible hand". There is no such thing.

Toyota's arrival in the USA in the 80's may have been opportunistic or just lucky. You would have to ask Mr. Toyoda to know. The labor advantage was real and as GM's retired employee costs grew, the younger Toyota's advantage increased. GM had entered into binding legal agreements, which it could not just discard. Eventually GM began to lose money and they were able to convince the unions to renegotiate for lower wages and benefits. All business's were able to take advantage. Just as the higher union wages had increased the value of workers, so did the breaking of unions lower their value and their relative income and benefits. GM has worked diligently for the last decade to default and get out of their union contracts for the last decade. They have slowly accomplished that goal and will be on a labor cost basis equal to Toyota in 2010.

 There is an additional consequence of the decline of labor unions and the loss of the higher wages they brought to the USA. The redistribution of wealth out of the hands of the middle class has in only 15 years, caused incomes to have stagnated and then decline. In the late 90's Americans were sold on borrowing to replace missing income in the expectation that future higher wages would allow them to pay off the debt even as wages were in decline. Enough were foolish and bought this idea that higher costs came to us all. For the vast majority the higher wages have not materialized, in fact wages have declined and the debts cannot be paid. TARP is a tool to disguise and collect the lost interest as taxes. I will not call this consequence "unintended". I do not know the minds of Reagans, and Bushes, and Clintons advisors. But the consequence is real. Many of the customers are tapped out. The majority of your children will graduate college in debt and with fewer and lower paying jobs to look forward to. Almost half the employees that GM has are college graduates. Debt slavery has happened before, and is happening again right now. Will the wage decline be stopped? Yes. The question is where.

Should GM be bailed out with a bridge loan from the USA? I say yes. The first and lesser reason is because the changing labor policys of the federal gov't gave Toyota and Nissan and Honda their N American labor advantage. GM was in the wrong stage of growth at the wrong time.

The second reason is because of what likely happens if we do not. GM fails and its factorys are bought out of bankruptcy by the very same financial advisors whose advice is bankrupting you.

It is the interest we cannot afford, not the Gov't programs.

Some sources:

http://www.workinglife.org/wiki/index.php?page=Union+vs.+Nonunion%3A+Wages+(2004)

http://eh.net/encyclopedia/article/friedman.unions.us

http://encarta.msn.com/encyclopedia_761576185_3/Labor_Unions_in_the_United_States.html

 

4 Comments – Post Your Own

#1) On December 11, 2008 at 2:58 PM, DemonDoug (92.48) wrote:

They have slowly accomplished that goal and will be on a labor cost basis equal to Toyota in 2010.

That is what they say.

Do you believe it?  I don't.  I do not believe a word that any auto company has said in the past 5 years.  Or financial company, or almost all politicians.  They are all at the same time incompetent and dishonest.

I do not believe we should bailout GM, but my perspective is not specific to the auto industry - I believe we should not bail out GM because I believe we should not be bailing out anybody.

Should GM be bailed out with a bridge loan from the USA? I say yes. The first and lesser reason is because the changing labor policys of the federal gov't gave Toyota and Nissan and Honda their N American labor advantage. GM was in the wrong stage of growth at the wrong time.

And because I don't believe any of the auto industry execs (why should I? They have either lied or have been honestly wrong for the past decade or more, or, go check out who killed the electric car, they had their chance and blew it [ie incompetence]), this "bridge loan" will be nothing more than a black hole that will never be seen again in the vortex of the lying, incompetent, US auto industry.

BTW, JD Power might like their cars, but I remember searching the NHTSA site a few years ago and comparing similar model cars in terms of complaints and recalls.  There were a s-ton more more complaints on US cars than similar Japanese cars (with similar sales numbers).  I just did a search, right now - My car, a 2001 Toyota, had 110 complaints.  Similar GM-based car? With less sales as i understand than mine? 651.

So go stick it to your JD Power. 

The second reason is because of what likely happens if we do not. GM fails and its factorys are bought out of bankruptcy by the very same financial advisors whose advice is bankrupting you.

Here is where I will get a little salty.  Get a freaking clue.  GM is going bankrupt.  The factories will be sold/bought out by somebody, at some price, somewhere.  Or maybe not and they will be left to rot.  Also, I have no idea who would be giving bankrupting advice and then go buy an auto manufacturing plant.  Is Cramer going to buy a plant?  Kudlow?  Bill Miller?  Sam Zell?  Ben Bernanke?  John Thain?  Are these guys going to buy Detroit/midwest area auto plants?  It makes no sense, but in any case, GM and Chrysler are toast, they are burning in a pit of molten lava, I would not be sticking my hand into that lava to pull them out, because all it's going to do is burn off my hand.

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#2) On December 11, 2008 at 3:03 PM, devoish (99.07) wrote:

Toyota arrived in the 70's with a car thought worse of than a Yugo

I meant to correct that and missed. Blame the editor (me).

Toyota arrives here in 1957 with a car thought worse of than the Yugo. The Tyopet Crown.

They developed and brought the Toyota Corona here in 1965. It was a small lightweight cheap car. It was bigger than a beer bottle. It was the car they got lucky with just in time for the 1970 OPEC embargo.

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#3) On December 11, 2008 at 3:29 PM, DemonDoug (92.48) wrote:

They developed and brought the Toyota Corona here in 1965. It was a small lightweight cheap car. It was bigger than a beer bottle. It was the car they got lucky with just in time for the 1970 OPEC embargo.

Ummm... 5 years of sales that allowed a company to stay in business, likely they made money, and you call that lucky?  Opportunistic, maybe, but they targeted a market, built cars for that market, built quality cars for that maket (despite the Tyopet Crown), and you call that lucky?

I still see no relevance to a current GM bailout.  You stick your hand into the lava - just leave me out of it.

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#4) On December 11, 2008 at 5:32 PM, devoish (99.07) wrote:

The Corona limped along until the embargo gave the corona a sales boost. Before the embargo it may have made money but it was not selling like hot cakes. The land cruiser was doing better and keeping them in business. Toyota brought the corona here to try to compete for low end car sales. I wrote what you copied poorly. They got lucky that the embargo raised the value of small cars. If there had been an oil find in Ca instead, it would have taken them longer to grow sales. If you want to make the case that they were opportunistic, go ahead. If you want to make the case they knew the embargo was coming, go ahead. Could they have stayed in business for 5 years losing money without the Land cruiser? I think Yugo's lasted longer than that on their financing. Anyway, happy 50th toyota. (now 51st).

As to relevance: I have read countless posts on this board and others, listened to newscasts beyond number, all blaming labor and GM management for the higher cost of labor they have had. Not one person has mentioned the union busting begun by Reagan and the Republicans. And those efforts are what gave Toyota its low cost labor advantage.

If you had asked me before AIG, before the first stimulus and the first bank bailout, I would have been right with you saying no bailouts. This "bailout" however is the only one that is a "loan" and not a gift. The "no bailouts" principle is lost beyond recall. At least if this money is loaned to GM it will be spent by some employees and hopefully circulate through the "real" economy a little before it disappears into the black hole of investment bank paper losses.

Will GM go bankrupt. More than likely. But if this money was going to TARP it will be lost, just more quickly.

As far as quality goes that is a pretty individual decision. As a mechanic I knew GM and Ford quality has been on the upswing and Tm slipping for years. JMHO and all that, JD Powers was late to make the call.

Trust it or not the information that GM will have a labor cost advantage in 2 years comes from this Center for Automotive Research report. This is the same report that has been misquoted as saying current GM's workers make $78.00/hour. GM's labor costs were $78/hour including costs of every retired worker divided by todays workers hours. Todays workers do not make $78./hour.

And the likelyhood is that without Reagan and the union busting, Toyota would probably be union today. They would have done well building good cars. They would not have had a $1000./car labor headstart. That was a gift from the Federal Gov't. and that I think is relevant, even if it is not in Miltons book. The fall of the unions lead directly to the fall of incomes. And that lead to borrowing and debt. And here we are today. Less customers with enough money to buy cars, toys, dinners, PC's, TMF newsletters, etc.

And I am not arguing in favor of that. I do not think free markets will level it out on their own, ever. It is not what they do.

Maybe things will improve. But more likely the impoverished 15% will become the impoverished  20%. And there is one thing that all Free Marketeers need. Paying customers. Let me know when you see some new ones with money.

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