GM bankruptcy won’t solve US carmakers’ biggest disadvantage: health care costs

Now that the inevitable deed is finally done, today’s financial pages–and most especially the opinion sections–are full of indignation over the losses imposed on bond and stock holders and ominous ruminations over the precedent set by government’s assumption of a 60 percent ownership stake in the fatally crippled carmaker. In principle the reorganization of GM and the liquidation of its worst-performing assets is is the right approach.

I’ve argued before–as have many others–that this is essentially what the government should have done with the banks: Start taking your write-down medicine, and the pain and dislocation that come with it, upfront. Get the bad debts off the books and build a foundation for future growth that’s unencumbered by all those crazy, opaque, irredeemable bets placed in the bubble years. This is what Sweden did in the early ’90s and Japan did not do in the late ’80s.

Unfortunately, there is no assurance the strategy will be a success in the case of General Motors. The investor class is all in a lather over the ownership shares of GM and Chrysler that their respective bankruptcy plans accorded to the United Auto Workers, but the near-term pain will be very much shared by workers–another 21,000 of the best-paying union jobs left in the U.S. will be lost in coming months at GM.

But the heart of the continued uncertainty over GM’s fate is a matter of two related long-term problems that are getting short shrift in the heat of the news cycle. The first is the lousy reputation here and worldwide of the cars they build. American automakers spent more than 30 years cementing their inferior status in engineering, reliability and fuel efficiency, and even though the past few years have seen the start of a turnaround in those areas, you don’t undo that kind of damage quickly.

The inertia of the American car companies is typically blamed on laxity in management, a refusal to recognize the world’s changing energy regime, inadequate regulation of mileage standards, the American taste for epic-sized gas guzzlers…. You know the list, and in a sense they’re all ways of saying the same thing: We didn’t notice the world was changing around us.

The tendency, in other words, is to count the downfall of the American car companies as a moral failure and a failure of vision. Who would disagree? But that’s not the whole story. In dollars-and-cents terms, there was another reason the American car companies fell behind the rest of the world in their investments in technology and quality control: health care costs. All through the period of its decline, the U.S. auto industry was forced to spend sums on worker health insurance that were unmatched anywhere else in the industrialized world, because the United States was the only one without a government-sponsored health care system.

And since those costs continue to race out of control, they will likely prove at least as damaging to the new GM as the old–if the new GM is to build its cars in America, that is. And if it’s not, what’s the point?

Links: The best commentary I’ve read so far is by Robert Reich in the Financial Times: “General Motors holds up a mirror to America.” News coverage: “GM seeks bankruptcy and a new start” (NYT); “GM files for Chapter 11 protection” (FT); “New era in autos as GM files for bankruptcy” (WSJ); “Workout will produce shared stress throughout the auto business” (WSJ); “GM to shut 12 more factories to speed bankruptcy exit” (Bloomberg).

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Comments (6)

  1. Submitted by Bernice Vetsch on 06/02/2009 - 01:20 pm.

    Thanks, Mr. Perry. Two numbers recently impressed me —

    1) Cost per car to produce a new energy-efficient hybrid or electric car: $1,300

    2) Cost per car of employee insurance: $1,300

    I have wondered over and over why America’s manufacturing sector refuses to support single-payer, universal health care — the health care system that would relieve them of the health care burden and that would mean workers could change jobs without losing access to health care. Are we as a nation stupid or just ideological market fundamentalists?

  2. Submitted by John Branstad on 06/02/2009 - 03:36 pm.

    “the U.S. auto industry was forced to spend sums on worker health insurance”

    Isn’t “forced” a little strong? I would suspect that insurance amounts were negotiated in contracts. If anything, I would say management made poor long-term decisions by making commitments regarding healthcare for workers (and retirees) in exchange for limiting short-term wages. Most of the folks in management were driven by their own self-interest to raise stock prices in the short-term (therefore lining their own pockets), rather than make decisions that were in the best interest in the long-term viability of the company. Management could tout their ability to control workforce wages, which impressed Wall Street, but those same decision makers gladly kicked healthcare costs down the road because they knew they wouldn’t be around when the bill came due. Now the road is a dead-end and the bill is due. Management is certainly complicit in creating this problem of high healthcare costs.

    Coming from a small business background, it shocks me that the business community isn’t at the forefront of the health care reform issue simply because of the ridiculous costs imposed by the current system.

  3. Submitted by William Pappas on 06/02/2009 - 08:22 pm.

    I’m with you Bernice and John. Why hasn’t the Chamber of Commerce endorsed single payer as well? Can’t they see it would benefit every single business in America? Can you imagine the resources GM woujld save immediately if they didn’t have to offer health insurance? Entire areas of their company could simply disappear and with it the costs.
    In fact single payer health care could be the single biggest factor to lift the middle class out of this recession as well. Unfortunately, it is an idea that Obama fears and is daily receiving large doses of privatized health care from his band of mainstream bubble producing financial advisors. The truth is that the health insurance industry is so powerful that they simply buy the parameters of this debate. How else can you explain their rediculous promises of self restraint taken seriously by so many legislators. Once again the middle class looses out and the policies that enrich the wealthy are perpetuated.

  4. Submitted by Richard Schulze on 06/02/2009 - 08:43 pm.

    What’s striking to me about the WSJ article is that it glosses over exactly how much GM is spending on its retirees.

    Several years ago while working at (can’t say), I was told that GM spent more money covering its retirement program than they spent making cars. This was considered its “dark secret.”

  5. Submitted by James Hamilton on 06/02/2009 - 09:14 pm.

    The auto industry started assuming long term exposure on health care costs long before it had begun to be hurt by competition from abroad or even in foreign markets. In the late ’80’s GM’s ratio of employees to retirees was 1.6/1. That is, the profits on 1.6 employees paid for the retirment benefits for a single retiree. (Sound familiar? Think Social Security.) 20 years ago, GM had to sell 230,000 cars a year to pay for health care benefits. It had to sell 550,000 to pay for its entire benefit package.

    GM had other structural problems as well: a “30 and out” policy which permitted retirement well before the rest of the workforce.

    These problems and the likelihood that they would grow were discussed in some detail in “The Aging of the American Workforce”, a collection of papers based on presentations at a conference held at Wayne State University in Detroit in March 1988.

    Apparently, no one was listening, on either side of the collective bargaining table.

  6. Submitted by Bernice Vetsch on 06/03/2009 - 08:37 am.

    Re: the lousy Mass-Plan clone being pushed by the Congress and the administratin —

    –On May 25, Bloomberg News said of Tom Daschle, “Daschle says health-care reform will not be pain free. Seniors should be more accepting of the conditions that come with age instead of treating them.”

    Is Daschle not aware that the Medicare drug benefit (WRITTEN WITH THE HELP OF THE DRUG AND INSURANCE INDUSTRIES) costs at least $30 billion per year more than it would if Medicare were required instead of forbidden to negotiate drug prices? And that Rep. Billy Tauzin, in whose office the writing took place, now gets $2 million per year as the drug industry’s chief lobbyist?

    –And on May 31 at, see the article “Max Baucus should not be deciding health care for America,” by Kevin Zeese.

    Senator Baucus has received $3,902,785 ($1,826,652 in 2008 alone) from the insurance, health professionals, pharma/health products, health services/HMOs, and hospitals/nursing homes. Donations from these industries to members of his Finance Committee in 2008 were $13,263,986.

    So there we have it. Fight back, ladies and gentlemen.

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