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Bailout provides lifeline - but no guarantees - to troubled auto industry

This article first appeared in the St. Louis Beacon, Dec. 22, 2008 - WASHINGTON - Now that an assistance package is finally on the way to Detroit's automakers, after weeks of pleading from the Big Three and plenty of heated political rhetoric from both sides of the congressional aisle, a fundamental question remains:

Will this save the U.S. auto industry?

Secondly, are the autoworkers and their union responsible in a significant way for the industry's woes? And if so, is their reluctance to make deeper concessions -- as demanded by the band of Republican senators whose opposition to a bailout forced the White House to take action -- imperiling the industry's future?

On the first question, it's important to understand that the $17.4 billion "bridge loan" the administration approved Friday won't, by itself, turn General Motors, Chrysler or Ford into thriving enterprises. That's because a lack of capital isn't their problem but rather is a symptom of their real problems: short-sighted management and a product line that doesn't appeal to enough consumers.

But the loan does provide a lifeline to keep the two most endangered companies -- GM and Chrysler -- afloat until March 31. Without it, the domestic auto industry would likely have collapsed.

President George W. Bush clearly did not want his administration to end with that kind of exclamation point to an already reeling economy. Giving the auto companies a few months to restructure, with compromises from all stakeholders, is meant to "shield the American people from a harsh economic blow at a vulnerable time," Bush said in his weekly radio address Saturday.

The federal actions give the automakers a chance they wouldn't otherwise have to restructure to become "viable" businesses as per the loan's stipulations, says Edward Lazear, chairman of the Council of Economic Advisers.

Opponents of federal help, including Sen. Richard Shelby, R-Ala., counter that it's pouring good money after bad. A better course, they say, would be to allow the carmakers to go into bankruptcy and then engage in the restructuring that would be required.

But there's plenty of evidence that consumers would refrain from making their second-biggest purchase - after a house - from companies teetering on the edge of financial ruin. After all, how confident could a buyer be about getting necessary parts or service down the road?

The destruction of the auto industry, which constitutes much of America's remaining industrial base, would have sent shock waves through the economy, well beyond the carmakers themselves and the quarter-million workers directly affected. The Big Three, for example, are the largest single purchaser of American-made steel, rubber and other raw materials that go into automobiles. The industry is particularly important in states that have been leaders in auto production, including Michigan, Indiana and Missouri.

While the loan is necessary to the survival of the Big Three, it's clearly not sufficient. What the automakers must do by March 31 is threefold: restructure internally to become more efficient, go to more fuel-efficient cars and away from the gas guzzlers that were big moneymakers at a time of reliably cheap fuel, and generally take a longer-term view of the industry.

Skeptics point out that Detroit hasn't done these things despite decades of warnings and ask why it will now. But it's also true that nothing sobers a person so much as a near-trip to the gallows. And for all their shortcomings, the Big Three wouldn't be in such dire straits today had the overall economy not hit the rocks and the credit market not dried up. Some internal changes in the U.S. auto industry coupled with a rebounding economy, most likely to occur sometime in 2010, would go a long way toward restoring viability for carmakers.

His free-market beliefs notwithstanding, Bush clearly did not want to be seen as the second coming of Herbert Hoover, whose stand-offish attitude helped usher in the Great Depression -- haunting the GOP for decades.

"The president decided specifically that he wanted to try to deal with it and not preside over the collapse of the automobile industry just as he goes out of office," Vice President Dick Cheney said Friday.

Ironically, Washington's willingness to help might jeopardize the likelihood of any real changes in Detroit -- by sparking complacency in the corporate suites. It's known that some industry leaders resisted Republican-urged reforms out of confidence that if Congress refused to act, the White House would. Moreover, it's clear that as president, Barack Obama will be even more prone to act on behalf of the auto industry -- and he's already stated that concessions shouldn't be forced on the United Auto Workers and its members.

Which leads to the second question: How responsible are the autoworkers and their union for the plight of the Big Three? The answer: By most accounts, far less than many people think.

Union critics, as well as southern Republican legislators with foreign transplants in their states, tend to blame labor contracts for most of the industry's problems. Richard Berman, who heads the anti-labor Center for Union Facts in Washington, contends that only by sharply reducing labor costs can the automakers survive.

"GM has only one serious controllable expenditure -- labor costs," Berman says. "The automaker is operating under disastrous wage and benefits contracts."

But such attacks miss the mark, says Harley Shaiken, auto industry expert at the University of California. Management's "strategic errors," not worker wages, got the carmakers into their present fix, Shaiken says.

Moreover, the UAW already has made major concessions in recent years. Today's auto workers start at $14.20 an hour, with no pension. An auto worker job once was "an entree to the middle class; now it's the entree to the working poor," Shaiken says.

Economists point out that labor accounts for only 10 percent of the cost of building a car. And differences between UAW-represented workers and those employed by the foreign transplants (such as Toyota and Honda) are relatively small. Veteran workers for U.S. automakers earn about $55 an hour in wages and benefits, about $8 an hour more than their counterparts at foreign transplants.

Most of the difference in labor costs is due to so-called "legacy costs" that largely result from the health-care burden for retirees assumed by the Big Three -- but not by Japanese or German or Swedish carmakers, whose governments provide health care.

There's an irony here, in that many of the sharpest critics of the labor expense borne by the Big Three are the very people who most vigorously oppose national health care in the United States.

James Gattuso, a regulatory expert at the Heritage Foundation, cites worker costs as a major problem for Detroit. Asked whether he would support national health care as a way to equalize the playing field with foreign automakers, Gattuso said, "No. National health care has its own problems."

Philip Dine is the author of "State of the Unions: How Labor Can Strengthen the Middle Class, Improve Our Economy, and Regain Political Influence." 

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