Lessons from the Big Auto Bailout

The reflexively anti-union, low-wage philosophy of rightist Republicans was spelled out clearly in a December 10 Action Alert sent to GOP senators on the proposed bailout of the U.S.-based auto firms: "Republicans should stand firm and take their first shot against organized labor." Clearly, despite harsh criticism of the Big 3 CEOs voiced by members of the Senate and the House, the ultimate target was the United Auto Workers and, more broadly, working people's economic and political gains won through unionization. The Republicans' fusillade was also launched in part by self-interested senators to promote the cause of Southern-sited Japanese and German auto "transplants"—foreign-owned firms located in the Southern U.S. But their relentless barrage was principally aimed at decimating the UAW whose members and retirees would inevitably be making the most painful sacrifices of any party in the bailout.

Most outrageously, the Bush administration inserted into its long-delayed $25 billion bailout package an outright ban on the right to strikes by the UAW at GM and Chrysler. Laura Flanders in her Nation blog (1/26/09) reports: "The Bush administration's auto bailout called for a reduction in hourly wages and an end to the UAW's 'jobs bank,' which provides assistance to workers on furlough. And that was only the beginning. Deep in the details, General Motors and Chrysler, as part of the loan deal, agreed to accept a ban on strikes. If their workers go on strike both would be in default of their loans and could be forced into bankruptcy."

Of course, the Big 3 provided an easy bullseye with their failure to develop fuel-efficient vehicles, the squandering of vast profits in the 1990s generated by SUV sales, and their resistance to mileage standards. But the industry's crisis was often associated with the UAW, as if the U.S. workers—unlike their counterparts in Germany and elsewhere—had any role in management decisions. Clearly, any punishments imposed on the top executives will barely be noticed. They are so well-insulated in wealth that, for example, reducing GM CEO Rick Waggoner's salary from $15 million to $1 per year will not lead to his home being foreclosed or his children being unable to afford college.

Hypocrisy On Steroids

The Republicans' stance was remarkable in their consistent hypocrisy on key matters of principle. Conservatives managed to swallow much-denounced government intervention to save the financial services industry fairly easily, with right-wing commentator Charles Krauthammer coming up with the most ingenious rationale to the bail out of big finance—"it's kind of a utility." The bailout of the financial industry by the federal government passed with considerable Republican support and little concern over the failed and sometimes fraudulent fruits of financial deregulation that had produced the Wall Street meltdown.

Not only were these opponents of the auto bailout supportive of the Wall Street bailout, but they have supported vast injections of government subsidies into the foreign-owned firms operating in their states. For example, Senator Richard Shelby (R-AL) strenuously opposed any aid to the U.S. automakers despite the three million jobs at stake, as estimated by the Economic Policy Institute. He suggested that the Big 3 be allowed to go under, with the slack picked up by foreign-owned transplants like those who dot his state. "Companies fail every day and others take their place," declared Shelby. "There's not a bank in the country that would loan a dollar to these companies." 

But when it comes to the non-union auto plants in his home state, Shelby would do more than "loan a dollar" to them; he has favored enormous subsidies to insure their success. Most infamously, when German-based Daimler received about $250 million from Alabama, the subsidy for luxury car production was so generous it nearly caused a raid on the state's fund for education, where the state has disastrously lagged for decades. Honda and Hyundai each also hauled in $250 million from Alabama taxpayers. Other senators involved include:

• Republican Senator Mitch McConnell (R-KY) was outspoken in his opposition to support for the U.S. auto industry: "Government help is not the only option. It's not even the best option." McConnell, however, is not on record as opposing the $371 million in Kentucky state subsidies to Toyota since 1986.
  
• Senator Thad Cochrane (R-MS) complained that foreign-owned auto firms would be unfairly shut out of the bailout, neglecting to mention that his state provided $650 million to Toyota and Nissan.
  
• Senator Jim DeMint (R-SC) flatly pronounced, "Government should not be in the auto industry." Except, apparently, when his impoverished state scrapes together $230 million to subsidize luxury carmaker BMW.

By trying to deny government aid that would sustain GM and Chrysler, the Southern Republicans ignored the needs of their constituents. If GM, for example, went out of business, Kentucky, Alabama, Georgia, and Tennessee would all lose 20,000 to 29,400 jobs each, according to Economic Policy Institute estimates.

The GOP senators remained unmoved even when Vice President Dick Cheney warned them that allowing the auto industry to become extinct would make the Republicans "the party of Herbert Hoover" forever. After the House passed a compromise $14 billion "bridge loan," Republican senators blocked passage in the Senate but somehow managed to persuade MSNBC and the Washington Times to incorrectly report that "the UAW blew up the deal." Eventually, the GOP senators' intransigence forced President Bush to initiate the rescue plan which placed onerous conditions on the UAW.

United Steelworkers President Leo Gerard neatly punctured the double standard: "When those Toyota Republicans voted in favor of providing $700 billion for Wall Street—including both of Tennessee's senators, Bob Corker and Lamar Alexander; Kentucky's Mitch McConnell; Georgia's Saxby Chambliss and Johnny Isakson; South Carolina's Lindsey Graham; and Texas' Kay Bailey Hutchinson and John Cornyn—none asked for high-paid white collar workers to take pay cuts or give up their million dollar bonuses.... There was a feeble attempt to limit the pay of chief executives, but that applied only to firms that received federal money under one particular method, and the treasury decided not to hand out the $700 billion that way." 

Normally, conservatives are deeply committed to the sanctity of private contracts. But not so in the case of contracts between the UAW and the Big 3. Before agreeing to any assistance to the auto industry, Senate Republicans like Bob Corker of Tennessee demanded that the UAW accept massive concessions in its contracts with the auto industry by a specific date, with the auto firms and their parts suppliers spared from this condition. 

Big 3 Demotion, Finance Promotion

The Republicans' position reflected in equal parts their indifference to reality and their visceral hatred for unions. First, as part of their strategy to keep their plants non-union, the German, Japanese, and Korean plants have kept their wages fairly close to the levels in UAW plants in order to reduce the incentive to unionize. Pay under UAW contracts averages $27 to $29 an hour in the Big 3, with workers annually earning about $56,000 to $60,000, hardly a huge sum considering the demanding nature and intense pace of assembly-line work. In the transplants, the average wage is not significantly smaller, generally around $24 to $26, according to data from the Center for Automotive Research. Undoubtedly, many Republicans imagined a much larger differential. (Some recently-built transplants, like Honda's factory in Greensburg, Indiana pay $15 an hour.)

Substantial differences in health and retirement benefits, however, do exist between the UAW-organized auto plants and the non-union transplants. Over the past eight decades, the UAW often negotiated for better health care and retirement benefits instead of higher wages, a sacrifice rarely noted by the major media. Health and pension benefits for active workers add approximately another $10 per hour. Moreover, the total benefit costs borne by the Big 3 reflects that they are each a century old and have hundreds of thousands of retired workers and surviving spouses. In contrast, Toyota has less than 1,000 U.S. retirees.

The call for up-front sacrifices from the UAW ignored the truly massive concessions the union granted in its 2007 contracts. The union agreed to a new second-tier wage of just $14 an hour for new workers. The union accepted a new round of plant closings so that GM will have eliminated 85 percent of its blue-collar production jobs since 1990. Finally, the union agreed to a new system of Voluntary Employment Benefit Associations (VEBAs) under which the union takes over management of money set aside for future retired employee benefits, taking a major burden off the auto companies' books and assuming a risk-fraught new responsibility (see Jack Rasmus, Z, December, 2007). 

The auto bailout debate raises a set of critical issues that have rarely been touched upon by the mainstream media. On the one hand, the current and former CEOs of Goldman Sachs, AIG, Bank of America, and other recipients of the original $700 billion TARP bailout were never hauled before any congressional committee to be lectured on their past chicanery and forced to pledge to immediately rectify their past sins by forswearing excess pay and bonuses and immediately lend out the government largesse to revive the flat-lining economy. On the other, with a much smaller sum of $25 billion on the line, the CEOs of the Big 3 auto firms were castigated for their disastrous strategic mistakes and virtually ordered to impose the policies of non-union foreign-owned auto "transplants" operating in the U.S. in place of current contracts with the UAW.

The demotion of the Big 3 in the eyes of public officials is nothing less than breathtaking for anyone alive over the past half-century. In particular, GM was regarded as so central to the economic health of the U.S. that when Treasury Secretary Charlie Wilson declared in 1954, "What's good for GM is good for the country," there was a shock of recognition about government policy but little real dissent.

The U.S. economy has profoundly shifted its center of gravity over the past 50 years. The financial services sector now far outweighs all domestic manufacturing in both economic and political significance. The financial sector produced $313 billion in profits in 2003, compared with just $119 billion for manufacturing, as economist William Tabb (Z, 6/08) has pointed out. Where the financial sector accounted for less than 2 percent of total domestic corporate profits in the mid-1950s, it now provides about 40 percent of all domestic corporate profits. Tabb aptly describes the seeming "magical" process behind the expansion of the financial sector: "Money could be made solely out of money, without the intervention of actual production. The new secret was presumed to be leverage and risk management, which allowed the purchase of assets that promised higher returns even if they carried a higher risk. 

"This was both an economic and political development, as the financial sector gained leverage over the rest of the economy, in effect gaining the power to dictate priorities to debtors, vulnerable corporations, and governments," noted Tabb. "As its power grew, it could demand greater deregulation, allowing it to grow still further and endangering the stability of the larger financial system." 

That moment was reached in mid-September, when the financial industry concentrated on Wall Street could no longer pull an endless stream of rabbits from its hat. The meltdown ignited a widespread call for tighter regulation, but the most important public-policy response was the $700 billon bailout.

The momentous shift in political influence from traditional manufacturers to financial services is suggested by the vast disproportion in campaign contributions from 1990 to 2008: where auto manufacturers (including the foreign-based firms) contributed just over $20 million to federal candidates, the financial, insurance, and real estate sector gave nearly $2.2 billion.

Along with shifting investment from real production to the paper profits of finance, U.S. corporations increasingly globalized their production. Over the past two decades, U.S. firms have increasingly exploited low-wage, high-repression conditions in China, Mexico, Central America, and Indonesia. All three major U.S. auto firms followed this trend. For example, during the 1980s and 1990s, GM increasingly seceded from the U.S., with shattering results for communities like Flint, Michigan, as unforgettably depicted in Michael Moore's film Roger and Me. GM and its subsidiaries became the numero uno private employer in low-wage Mexico. In recent years, GM has tripled its capacity in China, far beyond what the Chinese market can absorb.

GM, along with Ford and Chrysler, enjoyed a massive boom in the 1990s from the sale of high-profit SUVs while gasoline prices were low. But rather than reinvesting a substantial share of the profits to fully pursue the electric car experiment and developing other fuel-efficient alternatives to gas-guzzling vehicles, GM and the others squandered an estimated $10 billion on executive bonuses and stock dividends. Meanwhile, GM joined the shift toward financial services, focusing more effort on pumping up the profits from GMAC, its auto-financing arm, than on designing attractive, efficient cars.

Disproportional Racial Effects

The "realistic" approach to helping the domestic auto industry recover—virtually the only strategy receiving serious attention in the media or in congressional debates—assumes that it must continue to close plants, displace workers, and shut down dealerships. The shrinkage of domestic producers will presumably leave a larger market niche for foreign-based transplants.

But a largely-ignored implication is the displacement of African-American production workers now employed by the Big 3, largely in northern industrial cities, by overwhelmingly white employees selected by the management of the "transplants." The African-American membership of the United Auto Workers in the Big 3 is estimated at roughly 25 to 30 percent, while anecdotal evidence about the transplants suggests a much more miniscule percentage. Curiously, the editorially-conservative Wall Street Journal alone has shown persistent interest in this trend in its news coverage since the late 1980s.

Admittedly, it is difficult to accumulate aggregate figures on the racial composition of the workforces in the approximately 35 auto transplants. Thus far, I have been unable to find any source that either compiles such figures or is willing to disclose them. For example, Honda and the state of Indiana Economic Development Commission both refused to provide figures to this writer on the racial makeup of a new plant in Greensburg, Indiana. Indiana legislators were also refused access to the data. 

However, Honda's hiring policy for the Greensburg plant was widely publicized: the firm established a "hiring zone" of some 20 counties, of which 19 had a combined 4 percent African American population. The 20th county included Indianapolis, about 27 percent black. Although Honda received some $90 million in subsidies from taxpayers all over the state, most taxpayers were declared geographically ineligible to apply for work at Honda. The hiring boundaries excluded areas with large numbers of laid-off, experienced autoworkers including substantial numbers of African-American UAW members.

The apparent motive for Honda's hiring strategy is to avoid unionization by avoiding the hiring of any significant number of African-American workers. "The data on unions is generally that blacks are more likely to join a union if they are able, and blacks, Latinos, and women are less anti-union than rural white workers," points out University of Indiana Labor Studies professor Ruth Needleman. "In general, when companies go to such rural locations, they do so to avoid people with union experience. At the same time, it is a way to avoid hiring blacks." 

This pattern of hiring is especially evident in rural Indiana, where the Ku Klux Klan enrolled a massive membership in the post-WW I era. "The fact is that African-Americans do not live in rural Indiana, but the Klan does," says Needleman.

Honda employed a similar "hiring zone" strategy for its plant in Marysville, Ohio in the 1980s, but the racial impact of the plan was so transparent that even the Reagan-appointed Equal Employment Opportunity Commission was compelled to act. Honda entirely excluded the city of Columbus, which was the only community with any significant number of African-Americans. The EEOC imposed an unusually harsh settlement of $6 million on Honda in 1988.

Myth of the $73 an Hour Wage

The Big 3 bailout debate offered a classic fundamental test for the news media on its ability to portray the issue of economic justice. The result was shockingly atrocious: a perversely-distorted picture of the auto industry's power relations, economics, and worker wages was repeatedly conveyed by many of the media's most respected and "liberal" commentators and outlets. 

As noted above, the fact that foreign-based auto firms were also facing an extremely severe sales slump in the U.S. was rarely mentioned as the immediate context of the Big 3's crisis. (Actually, Ford is in relatively sound shape compared to GM and Chrysler.) The blame for the domestic industry's desperate condition was repeatedly laid exclusively at the companies' and UAW's doorsteps, with little mention of the overall economic crisis afflicting the entire economy during the final year of Bush's regime of deregulation and upward redistribution of wealth.

Second, while autoworkers' wages and benefits account for less than 10 percent of a U.S. automobile's sticker price, the UAW was incessantly portrayed as digging its own grave with "wages of $70 an hour," with some commentators using an even higher figure.

The deceptive figure of $70 per hour was derived from compiling the total personnel costs of both current and past employees and their surviving spouses, and then dividing by the number of current workers.

"At GM, as of 2007, the average worker was paid about $70 an hour, including health care and pension costs," Andrew Sorkin of the New York Times reported in a November 17 column. The same specious figure was amplified in a Times news article (12/1/08): "Some critics have taken aim at the automakers hourly labor costs, which average more than $70 for senior workers, including the wages and the value of benefits like pensions and health costs. Those costs run close to $46 an hour at union plants like Toyota's factory in Georgetown, Kentucky, and are even less at newer plants farther South, where foreign automakers have pegged wages closer to local rates."

With stunningly twisted logic, the New York Times's Adam Bryant (11/30/08) conceded that the UAW had provided an immense economic uplift for working people, but suggested that the "outdated" protections it had won should now be surrendered because of the general economic crisis. In other words, when battered by a major hurricane, give up your only source of shelter: "The United Auto Workers did help lift millions into middle-class lives and those gains are being lost as the union's membership shrinks. But the protections and benefits its workers enjoy seem outdated when so many industries are laying off tens of thousands of workers."

With "verification" by the "liberal" New York Times, the mythical figure of $70 an hour soon spread across the media spectrum. Among those citing the $70 wage were self-styled "working class guy" Chris Matthews of "Hardball" on MSNBC and the supposedly authoritative Wolf Blitzer of CNN, "the most trusted name in news." Blitzer pronounced on December 3, "A union worker makes $73 an hour, on average, when you factor in all the benefits, compared to $48 an hour for nonunion autoworkers here in the United States." Predictably, reactionaries like columnist George Will, the Heritage Foundation's James Gattuso, NPR's Juan Williams, and the Fox News crew echoed this same line. Only on the MSNBC shows hosted by staunch liberals Keith Olbermann and Rachel Maddow did the actual figures emerge with any visibility, although AP ran a story with similar, accurate figures.

The spectacularly ill-informed media debate on auto wages reflects the general inclinations of mainstream media reporters and editors on class-based economic issues. While conservatives ferociously crusade against "the liberal news media," polling data indicates that any liberalism is largely confined to social issues such as racial discrimination and sex roles. As Professor David Croteau of Virginia Commonwealth found in his 1998 survey of 444 Washington journalists, the media community is far to the right of the general public on economic issues. Where 65 percent of journalists believed that the impact of the North American Free Trade Agreement was positive, only 32 percent of the public shared that belief. While just 24 percent of journalists "strongly agreed" that "too much power is hands of corporations, 62 percent of the general public concurred with that position. 

The appalling coverage of the UAW reflects the massive distance of most mainstream journalists from the realities of working class life, to the point that commentators and reporters would imagine that auto workers typically bring home $150,000 a year.

Thinking Small

Thus far, the Big 3 bailout debate has been premised on plans for shrinking GM and Chrysler even further, despite the initial injection of $25 billion. The theory is that the auto firms will have to adjust to a substantially smaller market share, so that means lower pay, fewer workers, and plant closings. In the big picture, the conventional wisdom calls for the economic equivalent of the neutron bomb: the auto firms as institutions will be left standing, but the people will be pretty much vaporized. So this is what the public gets in return for its big investment? 

GM has already shed 85 percent of its blue collar workforce. Will the bailout bring back any of the jobs in China or Mexico where the Big 3 are now producing cars for the U.S. market or are those jobs gone for good? Will tens of billions more be spent on the auto bailout after the first $25 billion outlay?

Rob Weissman argued persuasively in the Huffington Post (12/2/08) that some serious consideration ought to be given to nationalizing the Big 3 to insure future billions are well spent and, at the very least, the public's stake in a healthy domestic auto/transportation industry be underscored. The purchase price would be low: "General Motors now has a market capitalization of $2.8 billion" and "Ford's market value is $6.1 billion," he points out. "The biggest advantage of buying the companies is that it would enable the public to exert control over the companies commensurate with its investment.... There would be no need to negotiate with management, or carefully monitor managerial actions, to review 9-point plans for viability, or create incentives to have them invest in fuel-efficient technology. It would make it possible to undertake long-term, transformative investments in R&D and new transportation technologies, irrespective of today's oil price."

Weissman concedes that nationalization would also bring many complex problems. But this is a policy option that deserves serious evaluation if the public is to wind up with more than mere vestiges of a domestic auto industry in exchange for tens of billions of dollars.

However, regardless of whether the government or management holds formal control, the bailout can be conditioned to maximize the return to the U.S. public. Why not take the opportunity of the current economic crisis to address two problems at once: the shortage of good jobs in the U.S. and the threat to the environment caused by inefficient auto engines and resulting greenhouse gases? Why not re-frame the debate over the auto industry into a discussion on the need for an entirely new transportation industry and policy direction? Now-shuttered Big 3 plants could be re-opened and not only produce more fuel-efficient cars, but also buses and light-rail cars.

For these path-breaking shifts in the domestic auto industry to get off the ground, government at all levels must also fundamentally alter its commitment to cars, trucks, and freeways as the core of its carbon-based transportation system. While freeways need repair, America also needs new urban rail systems and a revitalized, expanding national rail system. For a new transportation-equipment industry to arise where the Big 3 once stood, public officials must end their dependence on road-builders and other powerful interests and provide an assured market for mass-transit equipment. 

From the Obama administration on down, the eagerness to launch new "shovel-ready" infrastructure projects must be tempered by long-term planning to create an entirely new transportation grid that is fast, efficient, inexpensive, appealing (in contrast to Amtrak), and environmentally friendly. At this moment, we have the chance to both save a critical industry and generate hundreds of thousands of new jobs in now-devastated U.S. industrial communities while producing a cleaner environment. Why settle for having a mere shell of an auto industry when we can actually start to solve two huge problems?

Z

Roger Bybee is a freelance journalist who covered the auto industry during his 14 years of editing the Racine Labor weekly serving UAW members. One of his grandfathers spent 33 years as an auto worker and UAW member.