Government Destroyed U.S. Auto Companies

"One of the methods used by statists to destroy capitalism consists in establishing controls that tie a given industry hand and foot, making it unable to solve its problems, then declaring that freedom has failed and stronger controls are necessary." —Ayn Rand

The Detroit automakers were “perfectly viable businesses that have been slowly murdered over 30 years,“ according to Wall Street Journal columnist Holman W. Jenkins, Jr., who follows the industry closely. He was referring to the CAFE (Corporate Average Fuel Economy) standards, which he calls “the most perverse exercise in product regulation in industrial history.” In his view, the recently updated mileage standards will cost the manufacturers $100 billion and “make a mockery of the idea that government money will render the companies profitable, even as the same bailout bill demands that the Big Three drop their legal challenge to a California mileage mandate even more unsustainable than the federal government's.” The California standards would render most auto designs, profit centers and tooling unsalvageable.

CAFE requirements have effectively required the Big Three to lose tens of billions of dollars making small cars in unionized factories. GM and Ford can make small, efficient cars profitably all over the world except in North America. Buick is one of the best sellers in China, and GM president Rick Wagoner testified at a congressional hearing that GM's China operations were profitable. In April 2009, GM sales in China hit a monthly record, up 50 percent from a year earlier. Meanwhile, GM's sales in the U.S. slumped 33 percent from a year earlier, to only 172,150 vehicles. And in July, 2009, GM reported first half sales in China rose 38 percent, to 814,442 vehicles, a record for the company. GM has also been strong in Latin America and, until quite recently, in Europe. Small cars are popular in Europe, where gas is commonly $6 per gallon and has ranged as high as $9. Foreign profits of the Detroit automakers helped to offset their huge losses in the U.S., said Wagoner.

Detroit couldn't make small cars profitably in the U.S. because of ruinous wage contracts with the United Auto Workers resulting from government favoritism. The average hourly cost of Detroit's Big Three prior to the Chrysler and GM bankruptcies was $73 per hour compared to $44.20 for American workers in foreign auto company factories (“transplants”) in the U.S. GM had legacy costs, for health care and pension benefits, of $2,000 for every vehicle it sold. Meanwhile, 12 foreign auto companies were making cars across America's South and Midwest and employing 113,000 workers, who make 54 percent of the cars Americans buy.

The quality of the Big Three's cars in the U.S. fell behind that of the transplant companies because they skimped on them in order to invest in quality and features of the big vehicles (SUVs and trucks) on which they could reap large profits. In return for the companies shoveling money to the unions while incurring losses on the cars being producing, “Washington compensated them with the hothouse, politically protected opportunity to profit from pickups and SUVs....Washington's latest fuel-economy rules actually reward manufacturers for increasing the size and weight of some vehicles,” says Jenkins. In addition, a 25 percent federal tariff on imported trucks, plus other quirks of the fuel-economy regulations, further encouraged the companies to push trucks and SUVs.

The EPA's “two-fleet” rule requires that a company's corporate average fuel efficiency in the U.S. can't include the cars it produces abroad and imports into the U.S. If it did, GM's problems would have been much smaller. That didn't happened because of the Democrats' concern over the votes of the environmentalists and organized labor, which are important for maintaining their political power.

Of course, the fuel-economy rules also apply to foreign brands, some of which make big, powerful vehicles, too. But they have an out. They simply pay fines. From 1983 to 2007, BMW paid $230 million in CAFE fines; Volvo, $56 million; and Daimler, $55 million. In 2008, Daimler paid one of the largest single-year CAFE fines ever, $30 million. But that amounted to only $118 per car, peanuts compared to GM's legacy costs and the tens of billions it has lost by producing small cars that American buyers didn't want. The Government Accountability Office says the Big Three didn't choose to pay the fines because they feared political repercussions and being accused of “unlawful conduct.” And they would also have big problems with the UAW, which makes their big, profitable vehicles. So they just kept making the small cars at a loss in order to be able to average their fuel economy in with that of the big vehicles on which they made a profit.

Until 2008, Detroit's reliance on SUVs and trucks made sense. Fuel costs were low, and Americans liked the larger, more powerful—and safer—vehicles. The Big Three all made money on trucks—as much as $8,000 per vehicle. Mike Jackson, chief executive of AutoNation Inc., the nation's largest dealership chain, says federal rules caused Detroit “to cede the car market and make all their money in trucks. If they had been forced to compete up front, they would not have become overdependent on trucks.”

The UAW collective bargaining agreement with Detroit's Big Three doesn't exist at all in the non-unionized foreign transplants. It's the size of a small telephone book and covers not only work rules but fundamental business decisions, such as selling, closing or spinning-off businesses. Logan Robinson, a law professor with much experience in the auto industry, says both the UAW and the Big Three maintained large staffs of lawyers, contract administrators and financial and human resource representatives at all levels, from factory floor to corporate headquarter. “Typically, each plant or warehouse is a 'bargaining unit' and has a union president and a staff. If the company consolidates its facilities, there will be no need for two presidents and two staffs....As a result, unnecessary facilities are not sold, but kept open, lit and heated, just to preserve a redundant bargaining president and his team.”

Some jobs under union work rules could be performed in 5 or 6 hours. After that workers could sit idle or simply go home and still be paid for 8 hours. If they did any further work, they got paid overtime even though they never worked more than 8 hours. That doesn't happen at the transplant factories.

Another union rule allowed six unexcused absences before a worker could be fired—a rule that still exists in the post-bankruptcy GM. That's another rule the transplant factories don't have.

The Obama administration also favored the UAW by requiring GM to agree to build its compact green car stateside as a condition of exiting bankruptcy. No company, not even the Japanese or Korean ones, makes a compact inside the U.S. Ford plans to make its new Fiesta in Mexico.

According to Robert Crandall and Clifford Winston, senior fellows at the Brookings Institution, Daimler dumped Chrysler and the possible joint venture between GM and Renault-Nissan went nowhere “because the Detroit-based operations could not improve their labor relations measurably and otherwise restructure sufficiently to be competitive.”

Similarly, an article by Paulo Prada and Dan Fitzpatrick notes “Labor flexibility has emerged as a key advantage during the industry downturn, allowing foreign-owned plants to rapidly downshift in ways their unionized U.S. competitors cannot.” For example, BMW laid off workers at its Greer, S.C., plant, and Toyota laid of workers at its Georgetown, Kentucky, factory and shuttered another factory it was planning to open.

The management of the auto companies, GM in particular, has been criticized for having too many brands of automobiles and too many dealerships, far more than Toyota compared to the number of vehicles each sold. But because of government regulations, it was cheaper to keep extra brands and redundant dealerships than to get rid of them. This is where state regulations got into the act. Almost every state has franchise regulations which make it very expensive to close dealerships or eliminate a brand of automobile. When GM eliminated the Oldsmobile brand from its line-up, it cost $1 to $2 billion, and the lawsuits dragged on for four years.

The UAW contract long provided for the infamous “jobs bank,” a euphemism for paying vast numbers of employees when the companies had no work for them. It also extracted health care and pension benefits from the companies that are far more generous than in any other American industry. For every UAW member working at a U.S. car factory, three retirees were collecting benefits. At GM, the ratio was 4.6 to one. Professor Robinson says the auto industry was not capable of dealing effectively with the UAW.

How did the UAW acquire such power? Not through the free market. It's the transplants that operate under free market principles. The UAW acquired its power from FDR's New Deal, specifically, the 1935 National Labor Relations Act, better known as the Wagner Act.

According to Hans Sennholz, Ph.D.:
"This law revolutionized American labor relations. It took labor disputes out of the courts of law and brought them under a newly created Federal agency, the National Labor Relations Board, which became prosecutor, judge, and jury, all in one. Labor union sympathizers on the Board further perverted this law, which already afforded legal immunities and privileges to labor unions. The U. S. thereby abandoned a great achievement of Western civilization, equality under the law.
"The Wagner Act, or National Labor Relations Act, was passed in reaction to the Supreme Court’s voidance of NRA and its labor codes. It aimed at crushing all employer resistance to labor unions. Anything an employer might do in self-defense became an 'unfair labor practice' punishable by the Board. The law not only obliged employers to deal and bargain with the unions designated as the employees’ representative; later Board decisions also made it unlawful to resist the demands of labor union leaders."

Dr. Lawrence W. Reed, president of the Foundation for Economic Education, has written:
"Armed with these sweeping new powers, labor unions went on a militant organizing frenzy. Threats, boycotts, strikes, seizures of plants, and widespread violence pushed productivity down sharply and unemployment up dramatically. Membership in the nation’s labor unions soared: By 1941, there were two and a half times as many Americans in unions as had been the case in 1935. Historian William E. Leuchtenburg, himself no friend of free enterprise, observed, 'Property-minded citizens were scared by the seizure of factories, incensed when strikers interfered with the mails, vexed by the intimidation of non-unionists, and alarmed by flying squadrons of workers who marched, or threatened to march, from city to city.'"

Obama has adopted FDR's economic policies and said he intends to strengthen the union movement, just as FDR did. He said he will sign a “card check” bill if Congress passes it, which will eliminate the secret ballot for workers in voting whether or not to join a union—thus exposing workers to potential intimidation to join.

The president—in just his first six months in office—made unprecedented power-grabbing moves. These included firing the CEO of a private corporation, dictating the makeup of boards of directors, forcing private corporations and their stockholders to surrender shares to the government and other shares to the union, compelling the merger of private companies, and using money appropriated by Congress for the banking industry to instead bail out the automakers. He has also overturned a century of federal bankruptcy law. Where is the legal or Constitutional authority for all these actions? He has also called for imposing new regulations not only on the auto industry but throughout the entire economy.

During his presidential campaign, he spoke often of “fundamentally restructuring” this country. Millions of people who voted enthusiastically for him didn't really know what he meant by that, but it sounded good. Obama was careful not to be too specific, and the media's love affair with the candidate precluded their raising any potentially embarrassing questions on this issue. Now, however, it should obvious that this Marxist president's “fundamental restructuring” means the destruction of capitalism and replacing it with what Jefferson feared when he wrote: “The greatest calamity which could befall us would be submission to a government of unlimited powers.” That will prove economically destructive, but more importantly, it is destructive of something even more precious—that which makes capitalism, economic progress, and our fulfillment as human beings possible—freedom.