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

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.