Page 2 of 3 US auto rescue - a society health check
By Julian Delasantellis
The common conception was that America used to have lots of competitive
advantages in international trade. Abundant national resources and land, a
fairly educated workforce (at least in comparison with many of its competitors
at the turn of the 20th century) a government that, for the most part, enjoyed
popular legitimacy, and a fairly tranquil domestic society were, it was said,
major contributing factors to America's rise as world industrial powerhouse.
Lately, though, one factor has emerged as a burgeoning source of American
non-competitiveness - its dysfunctional healthcare system.
Should an interplanetary alien land on Earth and inquire as to why the American
healthcare system looks the way it does, on being
told so, our little green friend would have serious doubts as to whether he had
indeed landed on a planet where intelligent life resides.
Suffice to say, America is unique, among the countries with highly
sophisticated health systems as well as those where healthcare is delivered by
shamans and witch doctors, in that healthcare is intimately tied together with
employment.
The roots of this bizarre practice go back to World War ll. As American
industry armed the arsenals of freedom, the factories were running at maximum
capacity and beyond. With 12 million men in uniform, the plants were absolutely
starved for labor, but wartime wage and price controls precluded their offering
higher wages to attract them. However, enhanced benefits were not part of the
wage controls, so, to attract workers, the plants tempted workers onto the
production line with new benefits - such as health benefits.
Following the war, many saw the illogic of this approach, especially as the
European democracies moved to implement national healthcare systems. Many, of
course, except those who benefited from the American system - at that time
doctors and since then the huge new medical-industrial complex. These interests
opposed national healthcare insurance, feeling, probably correctly, that a
single payer, government, financing all of a countries' healthcare bills, would
have tremendous power to drive down remuneration to healthcare providers.
These interests defeated president Harry Truman's national healthcare
initiatives in 1945, and did the same with the few other attempts, such as Bill
Clinton's in 1993-94. (See
The terror of state health care, Asia Times Online, July 24, 2007.)
So, in the United States, healthcare is something companies give to their
employees.
It was in the 1930s that the nascent United Auto Workers union (UAW) and the
American auto industry, in particular the amalgamation of previously
independent car companies that came to be known as General Motors, fought a
series of pitched, brutal, and frequently bloody, battles, culminating with the
1936-37 sit-down strike in Flint, Michigan, over whether the US auto industry
would be unionized.
After the war, the auto industry and the unions decided to play nice. This was
not a sudden breakout of magnanimity or capital/labor bonhomie. There was just
so much money to be made in selling autos to car-crazed postwar America that
nobody wanted to spoil the party with strikes. A pattern was set for very
generous labor settlements between the American auto companies and the UAW.
Obviously, this manifested itself in high wages, but also with generous medical
benefits. These benefits were granted not only to current workers, but to
retirees as well. This was very significant for its time, since Medicare, the
US Federal Government's single-payer healthcare system for the aged, did not
even become law until 1965, and even after it was established, the medical
benefits for retirees negotiated by the UAW were more generous than the
government system.
Of course, as American life expectancy lengthened after World War ll, the seeds
for the current catastrophe were planted. A US autoworker might retire in his
mid-50s or so, and then the auto companies would be on the hook for up to 30
years of his medical bills. The bill for the labor peace the companies bought
in the 1950s and 1960s has now come due with a vengeance, as medical and
retirement benefits going to those former workers are now a significant part of
the cost of building today's cars - on GM's expense ledgers, healthcare is a
greater expense than steel.
Many anti-UAW and anti-union polemicists note that the auto companies' main
problem is its high labor costs; here it is said that, as an example of this,
the average GM worker earns a whopping $77 an hour.
This is highly misleading. No GM worker takes home $3,080 a week (77 x 40) in
his weekly pay packet. The $77 per hour figure comes from dividing total UAW
worker and retiree compensation by total hours worked. Take out the retiree
healthcare costs, and the American nameplate auto companies' worker
compensation expenses are roughly comparable with that at the foreign
transplant factories in the American South.
Of course, life expectancy in Japan is at least equivalent, or probably higher,
than in the United States, but auto factories in Japan do not struggle under
the burden of these retiree health costs, called legacy costs, due to Japan's
superior government healthcare system. At the transplant plants, the
non-unionized workforce has not been granted this type of extensive retiree
benefit; even if they had, the plants have not been operating so long that many
workers have retired from them.
At the UAW/GM contract talks of 2007, the union made a major concession, in
that new employees would no longer be eligible for post-retirement company
health benefits. In addition, a new funding vehicle, called a Voluntary
Employee Benefits Association (VEBA), would be formed that would gradually
shift the responsibility of current retiree and currently eligible worker
health benefits to the UAW. For its part, GM would fund the startup costs of
the VEBA with a $29.9 billion contribution.
GM does currently not have the money to make its next scheduled contribution of
about $10 billion to the VEBA, and, in a major concession, the UAW has assented
to GM's delaying that payment. Still, the issue of the costs of retiree
healthcare illustrates another major reason for the US automakers' current
plight.
I previously described how the recent history of US automakers have made them
unable to compete with the foreign, mostly Japanese, nameplates, on the issue
of the perceived quality of their product, and that forced them to price their
products below that of their competitors.
The legacy costs factor means that, as their costs are higher for a product
that they have to sell for a price lower than their competitors, they're not
going to make a whole lot of money operating this way either. Prior to the VEBA
agreement, one observer noted that, in the purest sense, the US big three
automobile companies aren't really conventional profit-seeking private
enterprises at all; they exist solely as healthcare funding machines. This led
to another disastrous decision that led to the current crisis - Detroit's
recent obsession with the production of big passenger pickup trucks and sports
utility vehicles.
If you're making a flat 20% profit on your product, you sure want to sell more
products costing $40,000 than $10,000. If you're in a desperate struggle with
foreign automakers with both lower cost structures and higher consumer loyalty,
your resolve to make the most money selling each of your products will soon
become an obsession.
Around 1995 or so, Detroit looked out at the world and didn't particularly like
what it saw. Asian automakers, including the relatively new entry into the
market, Hyundai, were eating Detroit's lunch in the small-car market. After the
Big Three's disastrous attempts to compete with Asian companies in the US,
consumers didn't like or trust America's compacts and subcompacts, and Detroit
couldn't price them at a price point that would make it a lot of money
producing them.
At the high end of the market, Americans were choosing BMW and Mercedes Benz,
and, increasingly Lexus and Acura, over the flagship US luxury nameplate,
Cadillac. That storied brand was then burdened with the most gruesome
demographics; a large part of its customer base died or went into nursing homes
before they could make another purchase, and, once their kids sold off Dad's
old Eldorado, they were off to the high-end European dealerships, where their
preferred images of a luxury automobile were sold.
But there was one place where Detroit still seemed to possess a market niche,
in the relatively new mass market for light trucks and SUVs. Detroit had long
possessed almost sole ownership of this market, but in the 1990s it saw that
the demand for these products was moving beyond their traditional consumers.
Light trucks were usually the choice of manual workers such as plumbers and
carpenters who needed space to carry their tools, but now they were being
purchased by white-collar workers who wouldn't know an Allen wrench from a
Woody Allen movie. The modern SUV craze started with surprisingly and sharply
higher sales of American Motors' (purchased by Chrysler in 1987) Jeep Wagoneer
among the cognoscenti in the 1980s. Designed for vigorous off-road use in the
country, they were soon seen as favorites among those whose idea of roughing it
was drinking an American champagne with their duck l'orange.
Whole forests have been felled to produce weighty tomes on why Americans, both
men and women, developed an obsession with driving automobiles far larger, and
with more performance capabilities, than they really needed; my favorite is
this, most likely an escapee from some colloquium of Critical Studies scholars.
It posits that, with the perceived effeminacy of the Bill Clinton 1990s
following on the hyper-masculinity of the Ronald Reagan/George Bush 1980s, SUVs
and light trucks represented a sort of gasoline-powered precursor to Viagra.
What is not in question was the fact that these vehicles were insanely
profitable for Detroit. Japan was slow to get into this market (although by the
early part of this decade Toyota was going after it vigorously with its huge
Tundra truck and Sequoia SUV, along with Honda's massive Ridgeline); also,
these vehicles sold particularly well away from America's cosmopolitan coasts,
in its heartland, where driving a foreign car was still seen by many as
unpatriotic.
Detroit was not generating enough profit to fully fund modernization of its
entire line, from subcompacts to the big trucks, so, it essentially decided to
let its small and medium car lines wither on the vine, to focus almost
exclusively on its big-profit behemoths. By the early years of this decade,
fully half of Ford Motor's profits were being derived from sales of just one
model, the F-150 truck.
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