Saturday, March 25, 2006

U.S. Autos Downward Spiral—and the Lesson

This month Consumer Reports issued its annual automobile ratings based on reliability and safety. For the first time, the top ten picks were all Japanese cars.

At one time, three out of every four vehicles sold in America were made by the Big Three U.S. automakers. GM, the largest manufacturer in the world, had 358,000 employees. Today it has less than half the market share it once had and about 145,000 employees. But only about 137,000 actually work. The others are in a “Jobs Bank,” which pays people their full salaries for not producing automobiles. According to both company and union sources, the Jobs Bank annually costs $100,000 to $130,000 per person for wages and benefits. GM and other U.S. auto manufacturers will pay $1.4 to $2 billion this year for the Jobs Bank, which was supposed to be a stopgap measure until workers could go back to the factories. But the Jobs Bank has twice the number of attendees it did last year, and next year its enrollment is expected to exceed 17,000.

Workers in the Jobs Bank must perform some company-approved activity. This may include volunteer work, attending classes, or simply going to a “rubber room,” where nothing other than one’s presence is required. Classes that are offered include learning crossword puzzles, trivial pursuit, and how to deal blackjack and poker for those who might want to work in casinos.

Besides the enormous direct waste of money and the corrosive effects on individuals, the Jobs Bank creates huge indirect costs for the industry. It encourages the companies to build more vehicles than consumers want. Companies figure it is better to build more cars—even with little or no profit—than to pay people for doing nothing. They also may keep work in-house even though it would be cheaper to outsource it.

The Jobs Bank was actually proposed by GM itself in September 1984 in order to end a strike. GM proposed a 3-year program for employees with 10 years experience. The union sent back a demand for a six-year program for six-year employees. Later, even one-year workers could join. And now there is no limit for how long a person can be in the program and collect benefits. The costs went in only one direction, up.

While the U.S. auto industry’s costs for the Jobs Bank were expanding, its costs for health benefits were growing even faster. Now GM has 137,000 workers, but it is responsible for the health care of 1.1 million current and former employees and their families. Its cars now cost $2,500 more than equivalent Japanese models—even before the cars begin to be built. Through decades of escalating costs and steadily declining market share for U.S. cars, no one seemed overly concerned whether U.S. auto manufacturers could cope in the long run. The long run is now arriving, and future bankruptcy is not out of the question. In 2005 GM lost $10.5 billion, and its credit rating has plummeted to “junk bond” status.

There is a lesson here. The U.S. government has for decades been pursuing a financial trend not unlike that of GM. It has been expanding its expenditures and future obligations without due consideration of how or whether these responsibilities can be met in the future. This month Congress raised the government’s limit on borrowing by $781 billion, then voted to spend well over $100 billion with no offsetting budget cuts. With no brakes on spending, the national debt is now rising at an unprecedented rate. As the government bumped up against the statutory $8.18 trillion spending limit, the Treasury was forced to borrow from employee pension funds to keep the government operating. This led to increasing the debt limit to just under $9 trillion ($896,000,000,000,000), which amounts to $30,000 for every man, woman and child in America. This was the fourth increase in the statutory debt limit in five years.

On March 23rd, President Bush had been in office 1,889 days without exercising his veto power. He approved every one of the 1,091 bills Congress sent to him—costs be damned. Federal spending has grown twice as fast under Bush as under Clinton. Inflation-adjusted federal spending exceeds $22,000 per household, the highest since World War II. And 65 percent of the increase under Bush has been unrelated to national security. Educational spending has increased 100 percent just since 2001. No president had gone so long in office without using his veto power since James Monroe, our fifth president, went 1,888 days before vetoing a toll on the first federal highway. By contrast, President Bush in 2005 signed a $286.4 pork-laden highway bill. He had threatened to veto the bill if it exceeded his proposed $256 billion but then “compromised” by signing the $286.4 bill (See our posting of August 13, "No Politician Left Behind".) Later he said, “One reason I haven’t vetoed any appropriations bills is because they met the benchmarks we’ve set.” (What’s another $30 billion?) The statutory debt limit has risen by more than $3 trillion since Bush took office.

By surpassing Monroe’s record, President Bush’s veto-free performance is exceeded by only that of Thomas Jefferson, who never vetoed a bill in his entire eight years in office.

Like the automobile Jobs Bank, the federal government pays workers not to produce. It spends billions of dollars every year paying farmers not to produce crops. And, just like the Jobs Bank, its $60 billion in subsidies to corporations leads to producing goods and services that consumers don’t want and to keeping people doing work that would be more efficiently outsourced. And just as with GM and the rest of the U.S. auto industry, due consideration is not being given to how or whether future financial obligations created by current policies can be met.

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