Detroit Broke City

In his column today, CNet’s Declan McCullagh makes a good case against bailing out the Detroit Big Three. As he rightly points out, decades of extremely generous union contracts have yielded huge liabilities in what have become known as “legacy costs,” which include such things as pensions and retiree health insurance.

In recent years, these legacy costs have become an enormous burden on GM, Ford and Chrysler, who face increased competition from foreign automakers, most of whom have lower labor costs thanks to much lower levels of unionization. One particularly lavish benefit is the United Auto Workers’ employer-funded “Jobs Bank,” which pays laid-off auto workers get paid their full salary for not working. McCullagh writes:

A beneficiary of that program was someone named Jerry Mellon, who worked for GM until his division merged with another in 2000 and he was no longer needed. Except for a brief period in 2001, Mellon received his full salary for not working, which reached $64,500 a year by 2006. Include benefits, and the annual cost to GM exceeds $100,000.

Nice work — or lack thereof — if you can get it! McCullagh goes on:

The United Auto Workers union and Detroit executives concocted the Jobs Bank idea in the early 1980s. Now these same economic whizzes are lobbying for handouts in the form of your tax dollars. UAW President Ron Gettelfinger said in a statement last week that the Feds must “provide liquidity to auto manufacturers so they can get through the difficulties caused by an across-the-board decline in auto sales.”

Not quite. Detroit’s problems aren’t caused by a one-time slump. They can’t be fixed by another infusion of cash. One cause is that union labor and legacy costs are too high and make the so-called Big Three companies uncompetitive.

Try as they may, neither Washington nor Detroit can put off the the Big Three finally coming into the 21st century if they are to survive as profitable companies. The once seemingly solid UAW-Big Three labor compact was forged in a world that no longer exists — one of very limited competition, especially foreign competition.

The similar plights of the airline and steel industries illustrate this change. After the Second World War, the U.S. auto industry stood alone — the auto industries of Europe were literally devastated, while Japan’s was not even nascent yet. Ditto for steel. And the Civil Aeronautics Board allowed U.S. airlines to operate within a system of cartelized routes.

In that kind of environment, it was easier to pass increased labor costs on to the consumer, rather than risk extremely costly disruptions due to work stoppages — but enter foreign competition for autos and steel, and deregulation for airlines, and that arrangement can no longer be sustained.

As a solution, McCullagh proposes letting the Big Three declare bankruptcy, since “Chapter 11 also would let a judge alter gold-plated union contracts and benefits that have hamstrung the Big Three and crippled their ability to compete against Japanese and European car makers.” Indeed, several major airlines have operated during Chapter 11 restructuting and have emerged from it.

There may be other ways to address Detroit’s problems, but whatever Congress and the Bush administration do, the last we taxpayers need is our money propping up boondoggles like the UAW Jobs Bank.