The Causes of the Auto Crisis
While the automobile companies deserve some blame for the problems in their industry, there is blame to spread around. The root cause of the biggest problems is the alliance between big corporations and government which has led to poor decision-making in Washington. It is embarrassing to hear Congress put all the blame on the Detroit triopoly and not acknowledge their irresponsible behavior in bowing to corporate pressures.
Solving the auto industry problems is an opportunity to begin to shape a more effective new economy that changes the relationship between corporations and government as well as share’s the wealth more equitably.
The Causes of the Auto Crisis
Corporate-government created the three major causes of the auto industry crisis: health care, the credit crunch and low efficiency cars.
Health care is an out of control cost where double digit annual price increases are more common than rare. While other industrialized nations have controlled the cost of health care, the United States has not. President Truman called for a single payer national health insurance plan many decades ago, but the Congress has been unable to show the will to face-up to the issue because of the power of the health insurance and pharmaceutical industries. While health insurance is on the Obama-Kennedy agenda, they are still not challenging those industries as they should and not confronting the real problems.
Every business small and large has struggled with paying the health insurance costs of their employees. It has held back hiring and holds back wages. A mega-corporation like General Motors sees those problems amplified. It would not be unfair to describe General Motors as a health insurance provider who happens to make cars. GM spends $5 billion annually on health care for 1.2 million people – only 150,000 of whom work for the company. GM, Ford and Chrysler have a combined unfunded retiree health care obligation of more than $90 billion. Health care adds $1,500 to the cost of each vehicle. This reality alone makes it virtually impossible for GM to have a successful economic model and it is not something GM can fix. Health care is a major problem not only for the auto industry, but the airline and steel industry as well as businesses of all size. The failure of Congress to face up to single payer health care is becoming a threat to the American economy.
The second major cause of the current auto industry crisis is the crash of the credit markets. This has made getting loans to purchase cars more difficult and has resulted in a massive drop in automobile purchases. The U.S. auto market fell 14.8% through the first 10 months of 2008 and sales in October plunged 31.9%. Why? The lack of available credit for potential car buyers. And, on the other end, the industry cannot get loans to cover the dramatic loss in car sales.
The credit crisis is also not the fault of the automobilie industry. The cause of the credit crisis falls back on bad government that allowed the stock market to be turned into an unregulated casino. The Federal Reserve, Treasury Department, Congress and regulators failure to apply basic regulation to the financial markets and money supply are to blame (even free marketer Alan Greenspan now admits this mistake) – but now Congress wants to put the blame on the auto industry rather than accept responsibility for their failure and clean up the mess.
The third cause, inefficient 20th Century automobiles rather than forward looking efficient 21st Century green cars is a shared error of government and the auto industry. The Congress did not have the political will to demand energy efficiency, indeed they provided a tax credit for SUV purchases, and the auto industry lobbied to prevent such standards.
All there of these causes have the same source: corporate controlled government. The health insurance industry did not want the more efficient single payer national health insurance. The finance industry wanted to be free to treat the stock market like a casino, liked the Fed’s easy money and did not want to be regulated. And, the auto industry did not want to be told to build more efficient cars. Corporate-government is the root of the problems we face today.
While the CEO’s who flew in on private jets to beg for money will pay a price if their businesses fail, a bigger price will be paid by their workers, their families and retirees. The Congress has no problem giving $700 billion to white collar Wall Street, but when it comes to blue collar Main Street, the coffers are closed, or more difficult to pry open, even with the risk of a deepening recession and even a depression before them.
Solutions That Can Build a New Economy and Begin to End Corporate-Government
Solving the auto industry financial shortfall is an opportunity to begin to re-make the relationship between corporations and government. While the bailout of Wall Street has rightly enraged Americans, the reality is that hundreds of billions annually is given in corporate welfare to big business every year. The bailout is business as usual brought out in the open. Even wealthy, highly profitable businesses like the oil and pharmaceutical industries are doled out billions in tax payer dollars annually.
Taxpayer support – the common wealth of Americans – has not resulted in a fair sharing of the profits. As a result the wealth divide between the rich and the poor, between CEO’s and employees has grown grotesquely wide. President Obama talked about “sharing the wealth.” President Bush talked about an “ownership society.” In fact, we have neither an ownership society nor equitable sharing of wealth when we should have both.
Corporate welfare needs to be transformed into an equity investment by taxpayers. That is a first step to creating a real ownership society. And, taxpayers need to be treated like major investors. This means a role in setting the direction of the company and a return on their investment, in dividends. Indeed, Chrysler issued a statement on November 17th saying that it expected any loan package to come with conditions "including taxpayers having equity. . . . The Company is open to further discussions with Congress." Some have suggested in the automobile case, “a government-appointed receiver—someone hard-nosed and nonpolitical—should have broad power to revamp GM with a viable business plan and return it to a private operation as soon as possible.”
The suggestion is half right, the taxpayer is already on-line to fund the transition to efficiency with $25 billion and we have been auto industry investors for years through tax payer dollars. Thus, an equity stake is appropriate and will also ensure that the auto industry gets even more on board with the new energy economy that needs to develop. And, if Americans have an equity stake in the industry, it will help U.S. automakers – will Americans be more likely to buy U.S. cars when they profit from doing so?
And, to spur the new auto market, the government could create a consumer auto loan guarantee through 2010 for the purchase of cars that the EPA estimates to get over 30 miles per gallon. This could be coupled with a tax credit that is based on fuel efficiency – the more efficient, the bigger the credit. These should not be limited to purchases from GM, Ford and Chrysler but to any auto company that makes efficient cars as this will encourage an energy efficiency competition and move the U.S. toward the new energy economy that is essential.
Further, one requirement of receiving government funds should be correcting the imbalance in pay, including bonuses, between blue collar and white collar workers. GM’s chairman and chief executive, Rick Wagoner, received a 33% raise for 2008 and equity compensation of at least $1.68 million for his performance in 2007 plus stock and options, in a year for which the auto maker reported a loss of $38.7 billion. The salary increase puts Wagoner’s salary for this year at $2.2 million, compared with $1.65 million in 2007. Wagoner’s overall compensation is down from 2003 when he made $8.3 million in compensation from salary and bonuses alone. Fords’ Alan Mulally received $2 million in base salary, a $4 million bonus and more than $11 million of stock and options in 2007. His base salary was unchanged over 2006. Crysler’s CEO pay is unknown since it is a privately held corporation. However, Chrysler plans to pay retention bonuses promised to executives which pay out in August 2009 at $30 million.
On the blue collar side, UAW members will forgo most pay raises for the next two years keeping their wages at $29.78 an hour plus health care and retirement, which bring the total to $69 per hour (dropping to $62 by 20101). New hires are getting only $14 per hour. Under a recent agreement retirees will pay some of their health care costs totaling $1 billion a year. So, the workers, already paid disproportionately less than executives, are taking cuts in pay.
The corporate-government folks in DC applaud the blue collar worker pay cuts. But, this has been a problem that underlies the failure of the U.S. economy. Even though consumer purchases are the main driver of the economy, the American worker is losing buying power. In fact, real wages in the U.S. declined by 12% between 1974 and 2004. Standard of living has been kept up by having both spouses working, increasing consumer debt (and no savings) and cheap foreign products. None of this is sustainable. In order to have a sustainable economy we need working Americans to see increases in real wages not decreases.
The failure to find a creative solution to the automobile crisis with a taxpayer equity investment risks an already deep recession becoming even deeper and potentially evolving into a depression, especially in the Midwest states that produce autos. And, it is short-sighted. The loss of the big three will be a loss of $156 billion over three years in tax revenue to the federal government. After the immediate crisis, serious consideration should be given to whether having three-too-large-to-fail companies is in the national interest, creates the kind of competition needed and the flexibility needed in a rapidly changing economy.
The auto crisis is the result of years of corporate-controlled government coming home to roost. Over and over, Congress put the interests of big business ahead of sound policy and common sense. Now it is time to turn the relationship between corporations and government on its head and ensure that both corporations and government work for the interest of the people rather than the short term profits of corporations and the re-election of politicians with big business campaign contributions.