CNSNews.com: Union Workers at Big Three Automakers Average $73 an Hour
The headline may be a little misleading but the article is worth reading:
Union Workers at Big Three Automakers Average $73 an Hour
By Pete Winn, Senior Writer/Editor, CNSNews.com, Tuesday, November 18, 2008
Economists in Michigan, the long-time home of the auto industry, say they don’t support the proposed multi-billion dollar bailout of Big Three automakers Chrysler, GM and Ford.
One reason why, they say, is the ultra-high labor costs for union workers employed by the Big Three. It costs over $73 per hour on average to employ a union auto worker, according to University of Michigan at Flint economist Mark J. Perry.
“Is it right to tax the average worker making $28.50 to bailout workers whose labor cost is over $73 an hour?” Perry asked.
He explained that in 2006, widely available industry and Labor Department statistics placed the average labor cost for UAW-represented workers at the former DaimlerChrysler at $75.86 per hour. For Ford it was $70.51, he said, and for General Motors it was $73.26.
“That includes the hourly pay, plus the benefits they’re receiving and all the other costs to General Motors, Ford and Chrysler, including legacy costs – retirement costs, pensions, and so on – so it’s looking at the total labor costs per hour worked for workers,” Perry said.
For U.S. workers at Toyota, however, the per hour labor cost is around $47.60, around $43 for Honda and around $42 for Nissan, Perry added, for an average of around $44.
“So we’re looking at somewhere around a $29 per hour pay gap between the Big Three and the foreign transplants that are producing cars in the United States,” Perry, chairman of the economics department, told CNSNews.com.
The average union worker at Chrysler, meanwhile, received 150 percent more in compensation than U.S. workers generally.
“Using Bureau of Labor Statistics numbers, the average compensation for manufacturing workers is around $31.50, and the average hourly compensation, including benefits, for the average worker in the U.S. economy is around $28.50,” Perry told CNSNews.com.
Bottom line: unless Chrysler, Ford and GM get a handle on their costs any government bailout is just going to delay the inevitable.
Wall Street Journal: Why Bankruptcy Is the Best Option for GM
Today’s Wall Street Journal has a must read Op Ed column by Michael Levine. Levine examines the problems faced by GM and explains why seeking chapter 11 bankruptcy protection may GM’s best chance for survival.
Why Bankruptcy Is the Best Option for GM
Chapter 11 would better preserve the valuable parts of the company than an ad hoc bailout.
By Michael E. Levine, Wall Street Journal, November 17, 2008
General Motors is a once-great company caught in a web of relationships designed for another era. It should not be fed while still caught, because that will leave it trapped until we get tired of feeding it. Then it will die. The only possibility of saving it is to take the risk of cutting it free. In other words, GM should be allowed to go bankrupt.
Consider the costs of tackling GM’s problems with some kind of bailout plan. After 42 years of eroding U.S. market share (from 53% to 20%) and countless announcements of “change,” GM still has eight U.S. brands (Cadillac, Saab, Buick, Pontiac, GMC, Saturn, Chevrolet and Hummer). As for its more successful competitors, Toyota (19% market share) has three, and Honda (11%) has two.
GM has about 7,000 dealers. Toyota has fewer than 1,500. Honda has about 1,000. These fewer and larger dealers are better able to advertise, stock and service the cars they sell. GM knows it needs fewer brands and dealers, but the dealers are protected from termination by state laws. This makes eliminating them and the brands they sell very expensive. It would cost GM billions of dollars and many years to reduce the number of dealers it has to a number near Toyota’s.
Foreign-owned manufacturers who build cars with American workers pay wages similar to GM’s. But their expenses for benefits are a fraction of GM’s. GM is contractually required to support thousands of workers in the UAW’s “Jobs Bank” program, which guarantees nearly full wages and benefits for workers who lose their jobs due to automation or plant closure. It supports more retirees than current workers. It owns or leases enormous amounts of property for facilities it’s not using and probably will never use again, and is obliged to support revenue bonds for municipalities that issued them to build these facilities. It has other contractual obligations such as health coverage for union retirees. All of these commitments drain its cash every month. Moreover, GM supports myriad suppliers and supports a huge infrastructure of firms and localities that depend on it. Many of them have contractual claims; they all have moral claims. They all want GM to be more or less what it is.
And therein lies the problem: The cost of terminating dealers is only a fraction of what it would cost to rebuild GM to become a company sized and marketed appropriately for its market share. Contracts would have to be bought out. The company would have to shed many of its fixed obligations. Some obligations will be impossible to cut by voluntary agreement. GM will run out of cash and out of time. Read the rest…
The sad truth is any government bailout of the auto industry is only going to delay the inevitable. If GM is going to survive they’re going to have to make a lot of tough choices that they so far have been unable or unwilling to make.
Wall Street Journal: Just Say No to Detroit
There’s an interesting essay by New York University finance professor David Yermack in today’s Wall Street Journal.
Just Say No to Detroit
Given the abysmal performance by Detroit’s Big Three, it would be better to send each employee a check than to waste it on a bailout, says David Yermack.
Before Michael Moore became famous for documentaries like “Fahrenheit 9/11″ and “Sicko,” his first big success came in 1989 with “Roger and Me.” In that film, Mr. Moore followed General Motors chairman and chief executive Roger Smith with a camera crew, asking him why the company was closing plants and producing low-quality vehicles. Mr. Smith looked flustered and inartfully avoided Mr. Moore’s camera crew while it lingered outside his country club or GM’s executive offices.
“Roger and Me” was entertaining, but it missed the real story about Roger Smith, who turned out to be a forward-thinking genius. Mr. Smith made big investments in information technology and satellite communications, acquiring Electronic Data Systems in 1984 for $2.5 billion and Hughes Aircraft in 1985 for $5.2 billion. Mr. Smith’s successors divested those businesses at huge profits — EDS was taken public in 1996 for more than $27 billion, and Hughes, renamed DirecTV, went public in 2003 for more than $23 billion. (The man who sold EDS to Roger Smith at a bargain price was H. Ross Perot, who then convinced many people that the experience qualified him to be president.)
Mr. Smith understood all too well that GM shouldn’t continue investing in its failing automobile business. That was 25 years ago. Today, our government is being asked to put tens of billions of dollars in GM, Ford and Chrysler, but we would be much better off if Washington allowed these companies to go bankrupt and disappear. Read the rest…
From a purely academic point of view professor Yermack’s conclusions are interesting. From a political point of view they’re a non-starter. No politician democrat or republican liberal or conservative is going to allow 3 bellwethers of American industry to fail… Even if that means throwing good after bad.
Video: Congressman Jim Moran Talks About Redistributionism
This should scare the hell out of anyone who works for a living:
We have been guided by a Republican administration who believes in the simplistic notion that people who have wealth are entitled to keep it and they have an antipathy towards redistributing wealth and they may be able to sustain it for a while but it doesn’t work in the long run.
Oh boy… Ed has more at Hot Air.
Audio: Barack Obama’s Cap & Trade Policy is So Aggressive It Will Bankrupt Coal Fired Plants
If Barack Obama’s remarks wealth redistribution didn’t scare you his remarks on energy policy should…
In a January 2008 interview with the San Francisco Chronicle Sen. Obama said that he would impose a Cap & Trade system aggressive that it would bankrupt anyone trying to build a new coal powered plant.
This really just the tip of the iceberg… Ed Morrissey much more on Barack Obama’s energy policies at Hot Air. See:
- Government should send “price signals” on energy?
- Obama: We’ll bankrupt any new coal plants
- Obama: I’ll make energy prices “skyrocket”
Fred Smith: Washington Is the Problem
There’s a great interview with FedEX CEO Fred Smith in today’s Wall Street Journal. The interview covers a lot of ground, the economy, taxes, free trade and even John McCain… It’s well worth reading.
Fred Smith is in an agitated state. He’s just returned from a Washington Redskins game — played in FedEx field in Washington — and the team has been upset by the St. Louis Rams. “It was just awful,” he grouses. “My son’s one of the coaches, and he was ready to jump off the ledge of the stadium.”
There are few better people to ask about our current economic precipice than Mr. Smith — or, as some people call him, “Fred Ex.” His company has $38 billion in sales, employs four football stadiums full of workers, owns 300 jet airplanes, and tens of thousands of trucks and vehicles. FedEx moves an incomprehensible seven million packages each day to every corner of the globe. And the good news is that Fred is optimistic — sort of.
“Oh, the country is going to get through this and the financial markets will stabilize,” he assures me, but only after we go through a period of “trauma and readjustment.”
I ask him just what he means by “trauma.” He attributes the financial crisis to “the intersection of four long-term developments.” Reckless mortgage lending policies; high energy prices; mark-to-market accounting rules; and national policies that favor what he calls “the financial sector over the industrial sector.”
“Rather than in our business where you have to have a dollar of equity for, 10 cents or 15 cents of debt,” he explains, “it’s exactly the opposite in the financial sector where you have one dollar of equity for 10, 25, 50 times risk.” “Things became so flipped upside down,” he explains, that “the assets at these banks became the liabilities and the liabilities became the assets. These people were making these fantastic returns — at places like Fannie Mae and Freddie Mac — but in reality they weren’t adding a lot of value. I have said time and again that there is a fundamental tendency in good times in the financial sector to over-leverage. Our national policies actively encouraged all this debt.”
How so? “The United States has a completely uncompetitive tax structure in general and it has a particularly onerous tax structure for firms that are asset-intensive. If you run an industrial company like FedEx, which employs 290,000 folks, most of whom are blue-collar people, the way we have to run this business is to equip those workers with billions of dollars of assets that allow them to pick up and deliver millions of things around the world.”
His theory is that the tax bias against capital explains why so much top U.S. talent got whisked off to become investment bankers. “Not too many young people coming out of school are studying to be production managers at General Motors.” He says that most of FedEx’s first line managers come not from the top flight universities, but out of community colleges and the military. “The top talent has wanted to go to Wall Street.”
He has come to hold the get-rich-quick Wall Street financiers in more than a little disdain. He views the heroes of the U.S. economy as the companies that actually produce real goods and services. He sees the Wall Street collapse as an inevitable byproduct of investment bankers building multitrillion dollar debt pyramid structures.
So how do we fix this problem and retool our industrial sector in a pro-competitive fashion? “We’ve got to reduce the taxes on equity. Let companies expense their capital purchases.”
He uses an example from FedEx. “Look, our capital budget as we went into this year was about $3 billion. We went out to Boeing in July for our board meeting to see the new triple seven, [the Boeing 777] which we have bought. If we had a lower corporate tax rate with the ability to expense capital expenditures, guess what? We’d buy more triple sevens. We absolutely have to cut the corporate tax. Our current tax rate is about 38%. Even Germany has a 25% rate.” Read the rest…
Smith hits the nail on the head reducing the corporate taxe rate will increase capital investiment and create jobs. John McCain has a compelling argument on taxes but he’s not making it… Sure he mentions tax cuts but he doesn’t the argument and I can’t for the life of me understand why.
Weekend Recap
For the most part I stayed away from the computer and the news this weekend. I did come across a couple of must reads in the Wall Street Journal though.
The first is Brian Carney’s weekend interview with Anna Schwartz, Ms. Schwartz is well known economist and her views on the current economic crisis are quite interesting.
Bernanke Is Fighting the Last War
‘Everything works much better when wrong decisions are punished and good decisions make you rich.’
By BRIAN M. CARNEY
On Aug. 9, 2007, central banks around the world first intervened to stanch what has become a massive credit crunch.
Since then, the Federal Reserve and the Treasury have taken a series of increasingly drastic emergency actions to get lending flowing again. The central bank has lent out hundreds of billions of dollars, accepted collateral that in the past it would never have touched, and opened direct lending to institutions that have never had that privilege. The Treasury has deployed billions more. And yet, “Nothing,” Anna Schwartz says, “seems to have quieted the fears of either the investors in the securities markets or the lenders and would-be borrowers in the credit market.”
The credit markets remain frozen, the stock market continues to get hammered, and deep recession now seems a certainty — if not a reality already.
Most people now living have never seen a credit crunch like the one we are currently enduring. Ms. Schwartz, 92 years old, is one of the exceptions. She’s not only old enough to remember the period from 1929 to 1933, she may know more about monetary history and banking than anyone alive. She co-authored, with Milton Friedman, “A Monetary History of the United States” (1963). It’s the definitive account of how misguided monetary policy turned the stock-market crash of 1929 into the Great Depression.
Since 1941, Ms. Schwartz has reported for work at the National Bureau of Economic Research in New York, where we met Thursday morning for an interview. She is currently using a wheelchair after a recent fall and laments her “many infirmities,” but those are all physical; her mind is as sharp as ever. She speaks with passion and just a hint of resignation about the current financial situation. And looking at how the authorities have handled it so far, she doesn’t like what she sees.
Federal Reserve Chairman Ben Bernanke has called the 888-page “Monetary History” “the leading and most persuasive explanation of the worst economic disaster in American history.” Ms. Schwartz thinks that our central bankers and our Treasury Department are getting it wrong again.
To understand why, one first has to understand the nature of the current “credit market disturbance,” as Ms. Schwartz delicately calls it. We now hear almost every day that banks will not lend to each other, or will do so only at punitive interest rates. Credit spreads — the difference between what it costs the government to borrow and what private-sector borrowers must pay — are at historic highs. Read the rest…
The Second is Scott Gottlieb’s Op Ed on Drug research, Dr. Gottlieb is a practicing physician and a resident fellow at the American Enterprise Institute, his column examines how government policies are stifling research into drugs to treat common medical problems.
How Obama Would Stifle Drug Innovation
If you want cutting-edge health care, don’t make it a cost-controlled commodity.
By SCOTT GOTTLIEB
Pfizer recently said it’s exiting the development of drugs for common conditions like heart disease. This is part of a shift underway in the pharmaceutical industry to give up on routine medical problems in favor of discovering “specialty” drugs for rare diseases and unmet medical needs like cancer.
The shift is driven in part by the industry’s critics in Washington, who have long maligned drug companies for targeting too many routine medical problems with drugs that were “merely” tweaks on existing medicines. Now these same detractors, led by House Democrats, are proposing controls on access to and eventually pricing of the specialty drugs as well. Under a Barack Obama presidency, this is one way they’ll pay for the candidate’s plan to create a Medicare-like program for the under-65 crowd. These new controls — based on a view of medical care as a commodity to be purchased at the lowest price, with little allowance for innovation — could push drug development over a tipping point.
Specialty drugs offer significant health benefits but for a high price, reflecting the difficulty of developing them. The regulatory process for getting them approved is more uncertain, since the diseases are poorly understood or haven’t been tackled before in clinical trials. Enrolling patients with rare conditions is also expensive; they are harder to recruit and often need to undergo more extensive testing to monitor the progress in trials. It can cost less than $5,000 to enroll a single patient in a trial for a primary care drug such as a blood pressure pill, but up to $70,000 for a big cancer study and more than $100,000 for some very rare diseases. Specialty drugs that were once tested on hundreds of patients are now often required by the Food and Drug Administration (FDA) to be tested on thousands.
Success rates are low. On average, a drug stands an 11% chance of making it through clinical trials and reaching patients. Cancer drugs only have a 5% chance of clearing these hurdles. Specialty drugs are also harder to distribute and by definition have a much smaller market for sales. Read the rest…
An Open Letter From Steven Horwitz
Economist Steven Horwitz published this open letter on September 28, 2008, if you haven’t read it you should.
My friends,
In the last week or two, I have heard frequently from you that the current financial mess has been caused by the failures of free markets and deregulation. I have heard from you that the lust after profits, any profits, that is central to free markets is at the core of our problems. And I have heard from you that only significant government intervention into financial markets can cure these problems, perhaps once and for all. I ask of you for the next few minutes to, in the words of Oliver Cromwell, consider that you may be mistaken. Consider that both the diagnosis and the cure might be equally mistaken.
Consider instead that the problems of this mess were caused by the very kinds of government regulation that you now propose. Consider instead that effects of the profit motive that you decry depend upon the incentives that institutions, regulations, and policies create, which in this case led profit-seekers to do great damage. Consider instead that the regulations that may have been the cause were supported by, as they have often been throughout US history, the very firms being regulated, mostly because they worked to said firms’ benefit, even as they screwed the rest of us. Consider all of this as you ask for more of the same in the name of fixing the problem. And finally, consider why you would ever imagine that those with wealth and power wouldn’t rig a new regulatory process in their favor.
One of the biggest confusions in the current mess is the claim that it is the result of greed. The problem with that explanation is that greed is always a feature of human interaction. It always has been. Why, all of a sudden, has greed produced so much harm? And why only in one sector of the economy? After all, isn’t there plenty of greed elsewhere? Firms are indeed profit seekers. And they will seek after profit where the institutional incentives are such that profit is available. In a free market, firms profit by providing the goods that consumers want at prices they are willing to pay. (My friends, don’t stop reading there even if you disagree - now you know how I feel when you claim this mess is a failure of free markets - at least finish this paragraph.) However, regulations and policies and even the rhetoric of powerful political actors can change the incentives to profit. Regulations can make it harder for firms to minimize their risk by requiring that they make loans to marginal borrowers. Government institutions can encourage banks to take on extra risk by offering an implicit government guarantee if those risks fail. Policies can direct self-interest into activities that only serve corporate profits, not the public.
Many of you have rightly criticized the ethanol mandate, which made it profitable for corn growers to switch from growing corn for food to corn for fuel, leading to higher food prices worldwide. What’s interesting is that you rightly blamed the policy and did not blame greed and the profit motive! The current financial mess is precisely analogous.
No free market economist thinks “greed is always good.” What we think is good are institutions that play to the self-interest of private actors by rewarding them for serving the public, not just themselves. We believe that’s what genuinely free markets do. Market exchanges are mutually beneficial. When the law messes up by either poorly defining the rules of the game or trying to override them through regulation, self-interested behavior is no longer economically mutually beneficial. The private sector then profits by serving narrow political ends rather than serving the public. In such cases, greed leads to bad consequences. But it’s bad not because it’s greed/self-interest rather because the institutional context within which it operates channels self-interest in socially unproductive ways.
Bleak Outlook: Economists See Three Straight Quarters of Economic Contraction
From the Wall Street Journal:
The U.S. economy has sunk into a recession and government action is critical to stem the damage, according to economists in the latest Wall Street Journal forecasting survey. On average, the 52 economists surveyed now expect gross domestic product to contract in the third and fourth quarters of this year, as well as the first quarter of 2009. If those predictions bear out, it would mark the first time U.S. GDP — the total value of goods and services produced — has contracted for three consecutive quarters in more than a half century.
100 Economists Warn That Barack Obama’s Tax Proposals Could Throw the US Economy into Recession
I’ve been debating whether to post this all day… Yes, it’s from the McCain campaign but ultimately I think it would be foolish to dismiss the opinion of a group of experienced economists out of hand.
Economists Statement On Barack Obama’s Risky Economic Proposals
100 ECONOMISTS WARN THAT WITH CURRENT WEAK FINANCIAL CONDITIONS BARACK OBAMA’S PROPOSALS RUN A HIGH RISK OF THROWING THE US ECONOMY INTO A DEEP RECESSION
ARLINGTON, VA – Today, McCain-Palin 2008 released the following statement signed by 100 distinguished and experienced economists at major American universities and research organizations, including five Nobel Prize winners Gary Becker, James Buchanan, Robert Mundell, Edward Prescott, and Vernon Smith. The economists explain why Barack Obama’s proposals, including “misguided tax hikes,” would “decrease the number of jobs in America.” The prospects of such tax rate increases under Barack Obama are already harming the economy. The economists conclude that “Barack Obama’s economic proposals are wrong for the American economy.” The proposals “defy both economic reason and economic experience.”
The full economists’ statement on Barack Obama’s economic proposals and a complete list of economists who support it follows:
Barack Obama argues that his proposals to raise tax rates and halt international trade agreements would benefit the American economy. They would do nothing of the sort. Economic analysis and historical experience show that they would do the opposite. They would reduce economic growth and decrease the number of jobs in America. Moreover, with the credit crunch, the housing slump, and high energy prices weakening the U.S. economy, his proposals run a high risk of throwing the economy into a deep recession. It was exactly such misguided tax hikes and protectionism, enacted when the U.S. economy was weak in the early 1930s, that greatly increased the severity of the Great Depression.
We are very concerned with Barack Obama’s opposition to trade agreements such as the pending one with Colombia, the new one with Central America, or the established one with Canada and Mexico. Exports from the United States to other countries create jobs for Americans. Imports make goods available to Americans at lower prices and are a particular benefit to families and individuals with low incomes. International trade is also a powerful source of strength in a weak economy. In the second quarter of this year, for example, increased international trade did far more to stimulate the U.S. economy than the federal government’s “stimulus” package. Read the rest…
For a side by side comparison of the candidates tax proposals visit the Tax Foundation.
As an aside have you ever wondered who pays income taxes? Take a look at this and this for the answer.