Motor City Madness—and Gov't's Role in It

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Wash Post columnist Sebastian Mallaby has an excellent col on why U.S. automakers (and their vassal-like suppliers such as Delphi) suck when it comes to economic performance:

Hourly pay may be a little high: It averages about $27 at GM and Delphi, compared with the $17 average for American manufacturing. But health and pension benefits are the real killers. Once you've counted those, workers cost $74 an hour at GM and $65 an hour at Delphi.

But Mallaby's larger point is not simply that "dumb managers" screwed things up by producing "clunky designs" and giving away the store in terms of worker compensation. He rightly calls attention to the massively distorting effects of government policies that give firms incentives to load up on "non-wage carrots" including health care and pensions that escape most or all taxation:

Companies provide benefits nonetheless because government encourages them to do so. Historically, it did this by imposing wage controls, forcing employers to find non-wage carrots to lure workers. More recently, government has pushed the same way by sheltering pension contributions and health premiums from taxes. The resulting company-based welfare system is widely accepted as the way things ought to be. But it's based on a myth of lifetime employment at one firm. And its tax breaks are unfair to self-employed workers who don't get them.

Why did carmakers get to the point where they not only offer pensions and health care, but where these benefits account for the majority of workers' total compensation? Again, the answer has to do with government. The law allows firms to reward workers with valuable benefit promises today, but pay for these promises later. In the car industry, just as in other industries facing a cash crunch, this promise-now, pay-later option has proved irresistible.

Among many other things–all of them bad–this arrangement leads to employees (or retirees) getting screwed down the line, when the firms are no longer competitive (due in large part to legacy commitments) and then either go bankrupt or cut benefits to retirees at the moment they're likely to cash in on deferred benefits. Last week, for instance, GM forced its pensioners to suck up major cuts in benefits.

Well worth reading. More here.

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  1. Isn’t this like the mortgage interest expense deduction is to the real estate bubble?

  2. Good piece all the way around. Too, there is in my mind a humongous failing of union leadership. If you were to make a checklist of things that unions preferred to negotiate for their membership, you would see the same themes coming up over and over again – i.e. if the company doesn’t want to do it, it must be good for us.

    Unions consistently negotiate high defined benefits (like an old timey pension) and low defined contributions (like a 401k) to their retirement plans. They oppose health savings accounts. They oppose anything that puts assets in a trust owned by their membership, because they feel that their people aren’t ‘being taken care of’ under those arrangements. Well, live by the actuary, die by the actuary, I guess.

  3. Any word on GM/Delphi executives benefits/compensation?

  4. Yet another perfectly good industry ruined by unions. And of course, unions ruined a perfectly good industry because man is inherently stupid and chooses the short term (high pay) over the long term (a career in a thriving American auto company). Autos in the US are quickly going the way of steel, textiles, etc…

  5. I don’t buy it. Japanes automakers are even more generous in their compensation American companies.

  6. Question:

    Did GM lobby for the tax structures now being complained of? Did it lobby against them? Did GM even have lobbyists back then?

  7. Isn’t this like the mortgage interest expense deduction is to the real estate bubble?

    You mean something that the relevant industry lobbied to achieve and now regrets? Maybe.

  8. “I don’t buy it. Japanes automakers are even more generous in their compensation American companies.”

    They were at one point. They are not now. For the same reasons. Toyota manufacturers here in the states offer a simple deal to the American work force. We will pay you tons of cash and work you like a dog. You get a 401k and insurance until you retire. It is worth noting that no one fights harder to keep unions out of the shop than the Japanese auto manufacturer.

  9. If the companies can’t pay the full amount promised to pensioners then they can’t pay it. No amount of sleight-of-hand can change that.

    But the corporations did indeed make legally binding promises, and so they should pay as much as they can toward those promises.

    So, it would seem that the logical thing to do is sell off the assets and spread out the money among those who were promised pensions, starting with the oldest (first promised, first paid). They can invest the money they get. The current management would probably receive very little under this solution. Which is fine: They weren’t hired as recently as the pensioners.

    A new company, one unburdened by those promises, can then make use of the factories and machinery, probably hiring back many of the old workers.

    Is this a pleasant solution? No. Will some people get screwed? Yes. But if there’s not enough money to pay off those promises, then there’s not enough money to pay off those promises. Nothing can change that.

    What I would oppose is allowing the company to declare bankruptcy and start over. Management screwed up by making promises they couldn’t keep. Investors made a mistake by investing in a company with unsustainable obligations. Under my proposal, the investors can’t lose anything more than they invested, since this is a corporation. With limited liability comes known risk, and they should accept that risk. Also, under my plan management won’t lose anything that they already have, but they won’t receive any future salary from the company.

    I really don’t see why people with limited liability (the owners of a corporation) also need bankruptcy protection.

  10. I really don’t see why people with limited liability (the owners of a corporation) also need bankruptcy protection.

    Any Reason writers looking around for article ideas for next issue?

  11. Why don’t we see any small automobile companies crop up – 100 employees, 50,000 cars/year?

    Especially at the basic transportation end of the market, you’d think there’d be room for a lean n mean “mouse.”

  12. Under the classic economic model, encouraging companies to pay workers with “non-cash carrots” should result in a shift from cash to non-cash compensation, but not a higher overall compensation. If the promise of pensions didn’t result in lower wages, then something else must have been happening. The (government backed?) strength of unions is one possibility. But ultimately, management made the decision to provide the compensation it did, even if under the threat of strikes. Unless one counts some sort of psychological market distortion from government intereference (union strengthening?), it seems like it comes down to incorrect long-range planning by management.

  13. Why don’t we see any small automobile companies crop up – 100 employees, 50,000 cars/year?

    In the case of my company, the problem is that battery powered cars are not yet popular enough to sell 50,000.

    It would be nice if Toronto would take steps to make the urban streets more amenable to electric vehicles, but neither the gov’t nor the moneyed interests in the lobbying sector seem too ready for this quite yet.

    We might not need the help, except that battery powered cars are still expensive and limited in range and power. Its okay, hopefully the patents will secure us all a living when the oil runs out.

  14. Under the classic economic model, encouraging companies to pay workers with “non-cash carrots” should result in a shift from cash to non-cash compensation, but not a higher overall compensation.

    Maybe the managers were not thinking so much of the long run (circa now), but rather thinking more of the bonuses and raises they could earn back in the 1980s. This kind of discontinuity in the managing personnel can make otherwise rational business behave highly unrationally.

  15. Electric Cars are just a fantasy without a source of electricity. Where is the electricity going to come from ?

    When the green’s are shutting down dams and nuke’s – and you can’t build a wind mill within sight of Ted Kennedy’s yacht – so I guess it’s coal!!!

  16. thoreau:

    The bankruptcy protection is kind of like the bail out. It is viewed as a public good to save the jobs. At least, that is the argument companies always make.

  17. fyodor:

    Part of what happened is that a big chunk of benefits carrots that had been negotiated were dependent on actuarial assumptions about market performance, average length of retirement age, and healthcare costs. You could double or triple your outlays if any of those assumptions turn out to be wrong.

  18. Jason-

    Yeah, I know. I still think it’s a bad idea. And while the “save the jobs” argument carries emotional weight, how much emotional weight does it carry if management is allowed to default on promises to pensioners? Wouldn’t it be better to sell as many assets as possible, pay as many obligations as possible, dissolve the company (without severance pay for top managers), and let somebody else create jobs with those assets?

    Indeed, one could see a scenario where another company buys the factories and equipment for a sum equal to the present value of expected future profits (profits without obligations, hence the expectations are higher), and hires back many of the current employees. Meanwhile, the sale value based on projections of higher profits could be used to partially secure a lot of current pensioners and establish IRAs for people due to retire soon.

    Really, my scenario is far more compassionate than allowing the current management to declare bankruptcy and start over fresh, having defaulted on a bunch of promises.

  19. When the green’s are shutting down dams and nuke’s

    C’mon. Some long run thinking here (don’t make GM’s mistake!). When Alaska overtakes the rest of the US economy and Don Young decides who we fight (instead of Cheney), all those left coast environmentalists will respond to the changing circumstances in a predictable way. Electric cars are already considered kind of a liberal thing although I see them more as a national security issue. I’d rather deal with ELF than Al Queda. I’d rather deal with Canada than Israel.

  20. “Why don’t we see any small automobile companies crop up – 100 employees, 50,000 cars/year?

    Especially at the basic transportation end of the market, you’d think there’d be room for a lean n mean “mouse.””

    It didn’t work for me. Joe are you familiar with how many regulations their are with regard to automaking ? Let’s not even get into the labor piece of it.

  21. allowing the current management to declare bankruptcy

    I am always coming on here and saying that the antitrust laws need to be enforced so that powerful private companies don’t start writing our laws for us.

    This is a really great example of that bad process happening.

  22. Dave W:

    I think you have it backwards. The powerful companies get this protection by appeal to populism. In that great cinematic masterpiece, president “Dave” explains that everyone has a right to a good job. It’s kind of like that.

  23. I learned about a nice little scam the car manufacturers run while I was living in Detroit. How’s this for the worst of Big Corporate and Big Government?

    A factory lineman working in the Chrysler Engine plant can make around $75,000-$80,000 per year with overtime. And overtime is usually available. Unless the company expects some losses coming that will upset stockholders. In that case, they have a scheduled shut-down for a day to a month. During that time, all the employees are “laid off” and go on unemployment, so that taxpayers get to help the company save money. Nice, huh?

  24. “The powerful companies get this protection by appeal to populism”

    Such has it always been – the U.S. was only briefly what can be characterized as “laissez-faire”. It quickly devolved into mercantilism, had a brief flirtation of getting back to basics, only to be totally crushed by Lincoln and his “American System” with it’s “improvements”. We’ve never looked back, and the vast majority no longer even question whether government should be involved in subsidizing “necessary” business. So it is very easy for big business to spin corporate welfare as a populist message.

    Thoreau – you’ve yet again hit the nail on the head. This bankruptcy stuff is just a different take on the protectionist sentiment – if company X goes out of business, that market will dry up and the jobs will go out of existence. In reality, the demand will still be there, with less supply – hence an opportunity for some entrepreneur to do it better. Some inefficient jobs may be “lost”, but the capital saved will be put to more efficient use, resulting in more jobs in other sectors. And most of the jobs will be reborn in a new company.

  25. Somewhere on this thread
    It needs to be said:

    Whang-dang sweet poontang.

  26. Somewhere on this thread
    Nugent catchphrase must be said
    Whang-dang sweet poontang

    Sorry — now it’s a proper haiku.

  27. I think you have it backwards. The powerful companies get this protection by appeal to populism. In that great cinematic masterpiece, president “Dave” explains that everyone has a right to a good job. It’s kind of like that.

    Name a US pol who has lost an election from failure to bail out a big company. Big companies do a good job of PR when they get a bailout, or a favorable bankruptcy law or other corp welfare, but don’t mistake the Astroturf roots type PR with actual grassroots conviction.

    I don’t believe everyone has a right to a job, but I also fully agree with Thoreau that bankruptcy laws have been rewritten, reinterptreted and court-packed to the point that big companies, and the ppl who run them, don’t feel the sting that bankruptcy can and should provide.

  28. Another factor about the retirement issue: the defined-benefit pension plan made sense when most employees only lived 5-10 years beyond retirement. But now, you got geezers who retired from GM in the ’60s and ’70s who are still drawing pension benefits. No plan could survive under such a burden. And both GM and the UAW are too fossilized to adapt–especially when they can just push the problem off on the government.

    As far as GM goes, however, their problems only start at worker or executive compensation. GM has not managed to design leading-edge products since the 1960s, long before their current financial problems hit. Remember the Chevy Vega? That’s almost the precise point at which GM jumped the shark. When they had 60% of the U.S. market, they became a bunch of smug idiots that decided they could throw together any old crap on four wheels and America would buy it. For awhile, they were right.

  29. Another factor about the retirement issue: the defined-benefit pension plan made sense when most employees only lived 5-10 years beyond retirement. But now, you got geezers who retired from GM in the ’60s and ’70s who are still drawing pension benefits.

    How come GM didn’t predict this? How short-sighted are they allowed to be?

  30. So, if we must allow corporations to declare bankruptcy, in order to protect the jobs, then here’s what I propose:

    When a company can no longer cover its expenses (and nobody will loan it money to keep going until they return to profitability), the people who controlled the company cede control to their creditors (the people that they promised money to but then failed to pay). Top management is fired without severance pay, and shareholders lose their shares. (Limited liability means accepting the risk of losing your investment. Deal with 8it.)

    The shares are transferred to creditors in proportion to the amount owed. The principal of “first promised, first paid” is factored in by applying interest to old debts, and a discount rate to future debts (i.e. present value). Young workers promised pensions in 30 years get a few shares under present value, people retiring tomorrow get more shares. (Use standard actuarial methods to determine the expected pension.)

    The new owners (i.e. the former creditors) have a choice: They can install new managers who might return the company to profitability (and then the new owners get to collect the debts via dividends), they can sell their shares, or they can dissolve the company, sell off assets, and collect on the sales in proportion to their shares. Two of those three options leave jobs in place.

    I know some people will probably say that my proposed corporate bankruptcy law is very anti-business, but I see it as a matter of responsibility: If you make a bad investment (i.e. put money into a company that can’t turn a profit), you lose your investment. You don’t get to have the company absolved of responsibility for its debts. And if you run a company into the ground you don’t get severance pay, because there are no profits from which to collect any pay.

    Libertarians are supposed to be big on responsibility, right?

  31. What if I come down with a case of Cat Scratch Fever?

    Will my insurance cover it?

  32. I think the comments on bankruptcy are a little off base.

    You’ve basically got 3 constituencies: stockholders, managers, and creditors. If a company is filing the worst kind of bankruptcy, it’s really a matter of what the creditors want. If they want to liquidate and take as much as they can, then that’s what they do. If they think there is some value left somewhere in the company’s operations, then they take what they can in assets, and leave the rest running. Generally, what happens is that the old stockholders get zilch, and the old creditors replace some of the debt with equity in the new company – they become the new shareholders.

    Management’s role is just a product of what the creditors want – they are the one’s who are owed money & they are the new shareholders. Frequently, they decide to keep management on board to run the newly organized company – but it’s really their decision.

    There are a ton of issues we could get into about how management tends to be too powerful, or overpaid. But, management is a different group than ownership. The owners (stockholders) are probably getting nothing. The management is probably getting a decent deal that looks greedy from the outside. But, you have to think about the perspective from the inside. If the creditors think there is a salvageable business, and they need someone to run it, they have to pay the going rate for management talent. They can’t go into the management labor markets & say that they need some good leadership, but that you can’t actually be expected to be paid well for it, because there are so many laborers who are taking a hit because of the bankruptcy. You wouldn’t get any takers. There aren’t a whole lot of qualified managers out there looking for a thankless and difficult job of repositioning a bloated company who are willing to do it for nothing.

    These corporate bankruptcies aren’t like personal bankruptcies, where it’s just about forgiving some debts. It’s about a change of ownership to the creditors, and the process is more about the management of that transition – which may include liquidation, or may not.
    Kebko

  33. I think the comments on bankruptcy are a little off base.

    You’ve basically got 3 constituencies: stockholders, managers, and creditors. If a company is filing the worst kind of bankruptcy, it’s really a matter of what the creditors want. If they want to liquidate and take as much as they can, then that’s what they do. If they think there is some value left somewhere in the company’s operations, then they take what they can in assets, and leave the rest running. Generally, what happens is that the old stockholders get zilch, and the old creditors replace some of the debt with equity in the new company – they become the new shareholders.

    Management’s role is just a product of what the creditors want – they are the one’s who are owed money & they are the new shareholders. Frequently, they decide to keep management on board to run the newly organized company – but it’s really their decision.

    There are a ton of issues we could get into about how management tends to be too powerful, or overpaid. But, management is a different group than ownership. The owners (stockholders) are probably getting nothing. The management is probably getting a decent deal that looks greedy from the outside. But, you have to think about the perspective from the inside. If the creditors think there is a salvageable business, and they need someone to run it, they have to pay the going rate for management talent. They can’t go into the management labor markets & say that they need some good leadership, but that you can’t actually be expected to be paid well for it, because there are so many laborers who are taking a hit because of the bankruptcy. You wouldn’t get any takers. There aren’t a whole lot of qualified managers out there looking for a thankless and difficult job of repositioning a bloated company who are willing to do it for nothing.

    These corporate bankruptcies aren’t like personal bankruptcies, where it’s just about forgiving some debts. It’s about a change of ownership to the creditors, and the process is more about the management of that transition – which may include liquidation, or may not.
    Kebko

  34. I think the comments on bankruptcy are a little off base.

    You’ve basically got 3 constituencies: stockholders, managers, and creditors. If a company is filing the worst kind of bankruptcy, it’s really a matter of what the creditors want. If they want to liquidate and take as much as they can, then that’s what they do. If they think there is some value left somewhere in the company’s operations, then they take what they can in assets, and leave the rest running. Generally, what happens is that the old stockholders get zilch, and the old creditors replace some of the debt with equity in the new company – they become the new shareholders.

    Management’s role is just a product of what the creditors want – they are the one’s who are owed money & they are the new shareholders. Frequently, they decide to keep management on board to run the newly organized company – but it’s really their decision.

    There are a ton of issues we could get into about how management tends to be too powerful, or overpaid. But, management is a different group than ownership. The owners (stockholders) are probably getting nothing. The management is probably getting a decent deal that looks greedy from the outside. But, you have to think about the perspective from the inside. If the creditors think there is a salvageable business, and they need someone to run it, they have to pay the going rate for management talent. They can’t go into the management labor markets & say that they need some good leadership, but that you can’t actually be expected to be paid well for it, because there are so many laborers who are taking a hit because of the bankruptcy. You wouldn’t get any takers. There aren’t a whole lot of qualified managers out there looking for a thankless and difficult job of repositioning a bloated company who are willing to do it for nothing.

    These corporate bankruptcies aren’t like personal bankruptcies, where it’s just about forgiving some debts. It’s about a change of ownership to the creditors, and the process is more about the management of that transition – which may include liquidation, or may not.
    Kebko

  35. I think the comments on bankruptcy are a little off base.

    You’ve basically got 3 constituencies: stockholders, managers, and creditors. If a company is filing the worst kind of bankruptcy, it’s really a matter of what the creditors want. If they want to liquidate and take as much as they can, then that’s what they do. If they think there is some value left somewhere in the company’s operations, then they take what they can in assets, and leave the rest running. Generally, what happens is that the old stockholders get zilch, and the old creditors replace some of the debt with equity in the new company – they become the new shareholders.

    Management’s role is just a product of what the creditors want – they are the one’s who are owed money & they are the new shareholders. Frequently, they decide to keep management on board to run the newly organized company – but it’s really their decision.

    There are a ton of issues we could get into about how management tends to be too powerful, or overpaid. But, management is a different group than ownership. The owners (stockholders) are probably getting nothing. The management is probably getting a decent deal that looks greedy from the outside. But, you have to think about the perspective from the inside. If the creditors think there is a salvageable business, and they need someone to run it, they have to pay the going rate for management talent. They can’t go into the management labor markets & say that they need some good leadership, but that you can’t actually be expected to be paid well for it, because there are so many laborers who are taking a hit because of the bankruptcy. You wouldn’t get any takers. There aren’t a whole lot of qualified managers out there looking for a thankless and difficult job of repositioning a bloated company who are willing to do it for nothing.

    These corporate bankruptcies aren’t like personal bankruptcies, where it’s just about forgiving some debts. It’s about a change of ownership to the creditors, and the process is more about the management of that transition – which may include liquidation, or may not.

  36. Shit….sorry about the multiple posts. D’oh!

    Thoreau…your last post basically describes bankruptcies as they currently happen, except that nobody is going to take a management position in a turnaround situation if the law says they will have to give up their benefits as a result of doing their job (taking a dead company into bankruptcy).

  37. Thank you for the info, Kebko.

    Just one question: What happens if some of the creditors are pensioners or soon-to-be pensioners? Do those creditors also get some say in the transition?

  38. As far as severance pay, I can see the point: It would suck if the old, incompetent boss resigns and collects his severance pay just before the storm hits. The new guy comes in, tries to deal with the mess that he inherited, and gets punished with loss of pay.

    I guess the solution would be that top management contracts are subject to re-negotiation. If the creditors see the current boss as the right guy to get this ship back on course they can reward him. If they see him as the cause of the problem they can sack him without severance pay.

  39. If the creditors . . .

    Do you mean the employees and fmr employees holding worthless pensions, or are you referring to a different set of creditors?

  40. How come GM didn’t predict this? How short-sighted are they allowed to be?

    I’m sure their actuaries could have seen it coming a long time ago, based on the increase in public health in the ’50s and ’60s, as well as dramatic lifespan increases that were already occuring then over previous decades. And these problems are endemic to all older American companies, not just GM or the auto industry.

    But even assuming they could not have predicted the problems inherent in their defined-benefit plans, their inability to adapt is the bigger issue. GM’s pension liability issues are only going to get worse. Think how long today’s 65-and-out retiree is going to draw on the plan–no fewer than two decades.

    And anyway, if the company was making any hot products, they’d most likely be able to weather this storm.

  41. Well, I would say that in any bankruptcy, the court is going to handle all the claims in a case by case basis. It’s basically a product of legal and contractual contexts. There is a pecking order of who gets what. Stockholders are generally last on the list, so in a complete bankruptcy, they won’t get anything. As far as where pensions fall as compared to preferred stockholders, secured creditors, unsecured creditors, etc., I don’t know precisely. I can tell you they will certainly have a seat at the table.

    But, in the end, while their position is somewhat predetermined by law and previously negotiated positions in the pecking order, in each individual case it’s basically going to be a result of negotiations between the creditors (including pensioners). In most cases, I think, the pensions have assets that are protected and predesignated for that purpose. I think the trouble comes when defined benefit pensions have underperformed their assumptions. In normal circumstances, the company might hope to have a few years of overperformance to rebalance the fund, or maybe even to take a write off to transfer funds into the pension to make up for a shortfall. But, in the bankruptcy situation, if the pension assets are currently a under target, you’ve got to take what you’ve got as of now.

  42. It did occur to me the other day that we might be seeing the end of private sector unions. Between the airlines & the auto industry, it seems like the few unions left with any size have finally bankrupted their industries. It’s kind of like a virulent parasite. It’s tough to survive when you keep killing the host. With globalization where it is today, I don’t see how they can get a foothold anywhere except in public sectors.
    If your local public school starts linking to Indian science teachers via the internet, look out. It will never happen, but wouldn’t that be cool?

    Kebko

  43. Well, I would say that in any bankruptcy, the court is going to handle all the claims in a case by case basis. It’s basically a product of legal and contractual contexts. There is a pecking order of who gets what. Stockholders are generally last on the list, so in a complete bankruptcy, they won’t get anything. As far as where pensions fall as compared to preferred stockholders, secured creditors, unsecured creditors, etc., I don’t know precisely. I can tell you they will certainly have a seat at the table.

    But, in the end, while their position is somewhat predetermined by law and previously negotiated positions in the pecking order, in each individual case it’s basically going to be a result of negotiations between the creditors (including pensioners).

    Maybe these are the details where the Devil resides, then?

  44. MC Madman – No, that’s a senryu. You didn’t make any reference to the seasons, so it’s not a haiku.

    joe raises a really interesting question. It’s noteworthy that there are small motorcycle manufacturers. However, they all seem to be at the luxury end of the market, probably because if you can only make and sell a few thousand a year, you’re better off selling a few thousand at $25k+ than a few thousand at $5k. I have also heard that most cars are sold at a loss or near-loss these days, and the manufacturers really make their money on the financing (which is why they hate it when you pay cash or arrange other financing). That’s probably less of an option for smaller, less established firms.

  45. JD-

    I’ve also heard that manufacturers make a lot of money on parts. One reason why American cars are built to break?

  46. “How come GM didn’t predict this? How short-sighted are they allowed to be?”

    Ahh. Here’s the thing. The government sets minimum funding requirements for defined benefit plans. Actuaries employed at companies follow those guidelines pretty much to the letter on the grounds that a lawsuit would have to argue that the government standard was inappropriate.

  47. Dave W.-

    I don’t know how to get in touch with you off the forum. The email address on my handle is real if you remove the part about spam. Got a question for you, but there’s no need to clutter the forum.

  48. MC Madman – No, that’s a senryu. You didn’t make any reference to the seasons, so it’s not a haiku.

    Oops.

    Somewhere, in this thread
    In this autumn, it must be said
    Whang-dang sweet poontang.

  49. I have also heard that most cars are sold at a loss or near-loss these days, and the manufacturers really make their money on the financing (which is why they hate it when you pay cash or arrange other financing). That’s probably less of an option for smaller, less established firms.

    There are smaller boutique car manufacturers, but like motorcycles, they produce high-dollar sports cars. Think the modern incarnation of Bugatti. Ferrari and Lamborghini were that way also, but they were both bought out by major manufacturers, I believe.

    I have heard of the idea that you could sell mass-market vehicles on a more ‘made-to-order’ basis that would not require such massive manufacturing capacity, but the problem is that making automobiles is extremely capital-intensive, even if not so labor-intensive as it used to be. The price of entry just to make a single car is extremely high. If you are selling a $300,000 sports car and your profit margin is huge, then you can get away with it, but I doubt that would work for an everyman’s car.

    Perhaps part of the problem with having smaller manufacturing is that the traditional model of local independent dealers requires that manufacturers crank out inventory, regardless of evidence of immediate demand. If manufacturers could legally sell directly (which they cannot currently do under the laws of every state), perhaps they could tailor a more flexible business model that would allow smaller companies to enter the fray.

  50. Forgive my ignorance of contract law, but can’t GM pay off these old pensioners with a lump payment and get them off the books? How hard is this? I suspect that ol’ GM is covering up a lot of management incompetence, such as letting the UAW into Saturn (and therefore ruining that line), with some clever obfuscation, meaning current management didn’t cause these problems, they inhereted them, etc., so please don’t fire our asses. No wonder GM has been lobbying for a national health care system to get these obligations off their books.

  51. The International Longshore Workers Union will still have a Stranglehold Baby on west coast ports long after we’ve done our last Wango Tango.

  52. Forgive my ignorance of contract law, but can’t GM pay off these old pensioners with a lump payment and get them off the books? How hard is this?

    Doubtful. Retirement benefits are heavily regulated under federal law, and though I’m not up on all of it, I’m sure that some statutory provision or other would bar this. Interestingly, more and more retirees who have the option (including my dad) are taking a smaller lump-sum payment rather than a monthly payout in their defined-benefit plans. In fact, if I were a pending GM retiree, that’s DEFINITELY an offer I’d be looking for a way to make to the company. Of course, the unions pretty much make that impossible.

    However, I agree that GM is blaming its benefits obligations way too much for its current troubles. As I’ve said, if GM could design a couple of cars that people really really wanted, they wouldn’t be in this mess.

  53. Leaving aside the legalities, if the present value of their liabilities exceeds their profits then lump sum payouts wouldn’t work anyway.

  54. By the way, the contradiction in my above post (fed. law would bar lump payout vs. fact that my dad gets one) is unintentional. Unquestionably, employers can offer that choice to current employees, but I doubt they could unilaterally convert monthly payouts to lump payoffs in plans that do not contain a provision for such.

  55. Ahh. Here’s the thing. The government sets minimum funding requirements for defined benefit plans. Actuaries employed at companies follow those guidelines pretty much to the letter on the grounds that a lawsuit would have to argue that the government standard was inappropriate.

    I am not sure if I understand this response. Are you saying that GM executives (back in the 60s 70s and 80s) were not merely making unrealistic promises to employees, but rather were making promises where the gov’t would later have an important role determine the $$$ level of payments to be made?

    If this is indeed what you are saying, it makes those GM execs sound even more short-sighted, not less.

  56. Hurricane season
    The battering storms come soon
    Whang-dang typhoon

  57. Dave W:

    I’m saying that, as usual, government guidance supercedes common sense when it comes to minimum funding.

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