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Open Debate About Auto Industry Loans Hijacked by Conservatives

SOURCE: AP/Gerald Herbert

UAW President Ron Gettelfinger listens to a question at a news conference during a break in a meeting of UAW officials in Detroit on December 3, 2008. Although attacked by conservatives, unions have already made several concessions to automakers and helped them restructure.

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The government’s likely intervention in the auto industry—announced in a tentative agreement reached this weekend between the White House and Congress—calls for vigorous, honest debate about whether and on what terms the auto companies should be provided government assistance. Unfortunately, the debate has been hijacked by the untrue vitriol of conservative ideologues pushing their pre-existing political agenda to attack workers and their unions. These false charges deflect attention from the real, substantive conversation that the public deserves about the costs and benefits of action, and avoids any discussion of executive compensation or management’s accountability for their business decisions.

Clearly, action is needed. The collapse of the U.S. auto industry would reduce tax revenue by $150 billion per year, according to one estimate, and it would put 3 million American jobs at risk in an economy that has already shed nearly 2 million jobs this year. These severe consequences, in addition to the national security concerns of losing our manufacturing base, the potential to transform the U.S. auto industry into an alternative energy leader, and the need to be consistent and not apply a double standard to the auto industry and the financial sector, make government intervention—on the right terms—the right thing to do.

It is crucial, given the gravity of the consequences, that the conversation move beyond the conservatives’ petty, misleading charges to a more honest discussion of the facts. The truth is the United Auto Workers, or UAW, is not primarily responsible for the current state of the auto industry. Rather, they have been a reasonable, productive partner in the industry’s efforts to restructure.

UAW has already made sweeping concessions

Contract negotiations between the Big Three and the UAW occurred most recently in 2007, during which the union agreed to drastic reductions in its members’ benefits. On salaries, the union approved the creation of a two-tiered wage structure, allowing management to pay newly hired workers just less than half of the current average workers’ wages. The UAW accepted a reduction in the cost of living adjustment, or COLA escalation, an elimination of base wage increases, and an elimination of hundreds of skilled trades job classifications, another move intended to reduce workers’ pay.

On retiree health care benefits, the UAW agreed to assume responsibility for the management of a newly created trust fund, the Voluntary Employee Benefit Association, or VEBA, which is scheduled to take over retiree health care obligations in 2010. The Big Three agreed to endow the fund (which they have yet to do); in return, all retiree health care liabilities, for both current and retired workers, would be removed from the companies’ books. As a result of these changes, General Motors is expected to save $3 billion annually while Ford is expected to save $2 billion annually.

On active workers’ health care coverage, the UAW agreed to new terms requiring workers to assume a higher burden of the costs through monthly premiums, copayments, and deductibles. On job security, the union agreed to restrict the duration of eligibility of JOBS Bank benefits, a program that allows laid-off workers to be paid up to 95 percent of their salaries for up to 24 months.

As recently as last week, UAW President Ron Gettelfinger announced further concessions in light of the circumstances, agreeing to suspend JOBS Bank entirely, and agreeing to allow delays in the Big Three’s contributions to VEBA. In sum, the UAW’s conciliatory gestures demonstrate that they are, in fact, invested partners in the industry’s efforts to cut costs and restructure operations.

Criticisms of the UAW are inaccurate

Conservatives, however, fail to acknowledge the gravity of the union’s concessions. Rather, they disingenuously divert attention to the alleged $70 per hour wage “earned” by UAW members and the alleged inefficiency of unions as institutions. For starters, the $70 an hour figure is inaccurate and grossly misleading. This number includes pension and health care liabilities of all current and retired workers, divided by the number of current workers. It makes no sense to say a UAW member, on average, “earns” $70 an hour when only a fraction of this sum actually goes to that worker.

The average hourly wage of a UAW worker in 2007 was actually estimated to be closer to $28 an hour, which is roughly equivalent to that of a Honda, Nissan, or Toyota employee. According to the International Motor Vehicle Program, active workers’ benefits only account for about $10 of the $42 remaining dollars; the other $32 goes toward benefits for retirees.

Furthermore, as Ron Gettelfinger pointed out last week, labor costs only make up 8 to 10 percent of the total cost of producing a vehicle; the other 90 percent goes toward research and development, parts, advertising, marketing, and management overhead. This statistic is likely shocking to those conservatives clamoring for more lay-offs, pay cuts, and benefit reductions. If anything it should illustrate that reducing labor costs is not a panacea to the industry’s troubles.

According to the latest data from the 2008 Harbour Report, which is an annual study of manufacturing efficiency, 9 out of the 10 most efficient auto assembly plants in North America are union plants, represented by either the UAW or the Canadian Auto Workers, or CAW. Thus, conservative assumptions about union inefficiency are inaccurate. Not to say that there aren’t ways of improving the organization and effectiveness of the UAW, but to claim unequivocally as conservatives do that unions inherently destroy a company’s prospects for profitability is simply false.

Comparisons with U.S.-based Japanese automakers

Conservatives often compare labor costs at the Big Three to those at non-unionized plants owned by their Japanese competitors in order to demonstrate the burdens of an organized workforce. However, any cost advantage the Japanese automakers have is due almost entirely to the fact that these companies have far fewer retirees. Honda, Nissan, and Toyota have been operating in the United States for close to 30 years, while Ford and GM have been around for nearly a century (Chrysler since 1925). It makes sense that the U.S. auto companies face higher legacy costs. However, as workers at the Japanese auto companies have aged, the companies’ cost advantage has diminished. One independent analyst predicts that due to changing demographics and recent modifications to the Big Three’s contract with its workers, this cost advantage will disappear by 2011.

Executive compensation is perhaps a more meaningful barometer of demonstrated priorities and cost structures of the Big Three relative to their Japanese competitors. According to data from 2006, the top three executives at the Big Three earned $26.5 million in salary and bonuses while in the same year, the top 37 executives at Toyota earned a combined $21.6 million (in 2006, Toyota’s top executive Hiroshi Okuda earned only $903,000).

According to the Securities and Exchange Commission, in 2007 Ford’s CEO Alan Mulally was compensated $21.67 million, when in the same year Ford recorded losses of $2.72 billion. GM’s CEO Rick Wagoner earned $15.7 million in compensation in 2007, while the company posted losses of $38.7 billion. The prevailing management philosophy at these (and too many other U.S.) companies, which divorces compensation from business performance, is a more likely culprit of the industry’s troubles than the UAW. It’s also a major reason why any government intervention should include limits on executive compensation and require changes to managements’ backwards stances, including on issues such as opposing state emission standards.

The CEOs of GM, Ford, and Chrysler found themselves at the feet of Congress last week not because of the greed of their workers but because the economy is in a tailspin and their executives implemented ill-advised long-term strategies which failed to take into account the inevitable, foreseeable changes in the industry. Their inability to weather the current global economic crisis is a direct function of their lack of foresight and their bad business practices.

These are extraordinary times demanding serious debate. The United States is in the midst of an economic recession, which indicators tell us is going to get much worse before it gets better. The stakes are too high for misunderstanding. By launching disingenuous attacks against the UAW, conservatives are doing a disservice to the public at a time when our country cannot afford to divert attention from the issues at hand. This is not time to play politics. The public deserves better and the situation demands it.

David Madland is the Director of the American Worker Project at American Progress. Nayla Kazzi is a Research Assistant focusing on economic policy.

Learn more from the Center for American Progress Action Fund’s American Worker Project.

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