An article in the Automotive Review on Thursday March 10, 2005, noted that General Motors is in serious trouble.
GM, once symbol of everything that is great and good about the American economic system has a credit rating for its bonds of BBB-, one level above ‘junk’. How could this be?
GM was an also-ran auto company when it almost died during the slump after World War I. It was saved by its major shareholder Du Pont and GM powered ahead as an icon of strategic management idolized in business history textbooks. GM’s finest period was in the boom after World War II (with Europe beset by reconstruction pains) when it and Ford catered to a large and increasingly affluent domestic population, subsidized by government-built freeways and cheap oil from Western imperial over-lordship of Middle East oil fields.
By the 1980s, even the giants GM and Ford were in trouble, with the Japanese and European car-makers making serious inroads into the domestic market. The American companies had an arrogant indifference to consumer preferences and a top-down refusal to listen to its workforce (many of whom were non-Anglo). With much learning from the lateral thinking of their competitors, albeit with costly mistakes (GM thought that massive expenditure on robots would solve its problems), GM and Ford recovered their profitability and power in the 1990s.
GM continues to be undermined by Asian and European rivals, especially Toyota, but GM has other problems. According to the Fin Review:
[About half of the cost difference with Toyota comes from] the fact that GM has 2 ½ retirees getting pensions and health benefits for every active worker. Health-care costs are set to hit a record $US5.6 billion this year. [It is estimated that the] retiree portion of GM’s cost disadvantage against rivals will peak in 2007 and disappear in 2015.]
That’s if GM lasts to 2015.
Pensions and health benefits? What’s going on here?
Corporate welfare exists in the US because of the pitiable nature of the American welfare state. When other advanced capitalist countries were building the rudiments of a welfare state in the late nineteenth and early twentieth century, the American elites were sitting on their bum. It would undermine initiative, etc.
In the 1920s some of the largest companies started offering a number of services to favored employees. This wasn’t the corporate philanthropy that had been observed in England by Quaker businessmen like Rowntree and Cadbury. This was a hard-nosed strategy to build loyalty and head off the spread of unionism in company plants.
Came the 1930s Depression and these companies threw in the towel. They said to the federal government – welfare is in the too hard basket; we can’t afford it. Over to you. Thus Roosevelt’s brains trust produced the Social Security Act of 1935, the admirable, if austere, public pension system now under attack by George Bush.
After the war, Roosevelt’s successor Harry Truman promised the continuation of FDR’s New Deal with his own Fair Deal. But a reactionary Congress thought otherwise, and Truman’s Fair Deal got lost with re-directed priorities of fighting communism abroad and at home.
A handful of industrial unions in the core industrial sector had been empowered belatedly by the 1935 Wagner Act. These unions, notably the United Auto Workers and the United Steelworkers, proceeded to use the bargaining power derived from boom conditions to extract a decent share of the growing pie for their workers. With much pressure from authorities on employer-union negotiations to inhibit the inflationary impact of wage bargains, and with a paltry welfare system (effectively non-existent for health care), welfare packages started getting put on the negotiating table. Pattern bargaining spread gains across industries. Later white collar professional-heavy firms like IBM started using welfare packages as an inducement to attract employees.
Thus it came to pass that the corporate giants that defined the American Post-War economic success have accumulated substantial to massive liabilities for the welfare component of employee remuneration. Some companies had been neglecting their funding responsibilities, even during good times. Some companies have pissed them off into thin air with corruption, like Enron. But the driving force of the current corporate welfare crisis has been the undermining of the old American giants by rivals facing lesser or minimal commitments. Steel, airlines and the auto industry have been particularly hit.
American business magazine Business Week had a very informative piece on this problem in its July 19 2004 issue.
The crisis comes to a head especially with bankruptcy or takeover. To save their jobs, unions accept the abolition of welfare entitlements. Companies still in the black are dramatically reducing the generosity of the benefits. A replacement of defined benefit pensions by employee contribution pensions (401(k)) has been a typical response. Forcing employee contribution to health care insurance (gargantuan and untrustworthy in the US) is another.
Even so, according to Business Week:
[there are still [July 2004] 44 million Americans covered by old-fashioned pensions that promise a set payout at retirement. All told, they’re owed more than $1 trillion by 30,000 different companies. Many of those employers have also promised tens of billions of dollars more in health-care coverage for retirees. …
The companies of the Standard & Poor’s 500-stock index, for example, continue to run an aggregate pension deficit of $149 billion.]
All this is up for grabs. A welfare package (especially for health care) tied to one’s job generates enormous insecurities about losing one’s job. Now an employee isn’t even guaranteed the benefits that were established as part of a contract of employment.
Business Week again (rounding numbers, July 2004):
[Nowhere are pension obligations a greater competitive millstone than in Detroit. The U.S. carmakers today have some of the biggest pension obligations and pool of retirees anywhere. By contrast, their Japanese competition only started U.S. manufacturing in the late 1980s, and have far lower costs. General Motors has 514,000 participants in its pension plan, all but 142,600 of whom are retired. Pension and health-care costs for those retirees added up to about $6.2 billion in 2003, or roughly $1800 per vehicle according to Morgan Stanley. Compare that to Toyota’s U.S. plan, which had only 9,600 participants, just two of whom were retired as of Toyota’s latest [tax] filing covering 2001. Toyota’s pension cost is estimated at something less than $200 per vehicle.
The impact on profits is dramatic. Excluding gains from its finance arm, GM earned $144 per vehicle in the U.S. in 2003. GM’s margins are now 0.5%, among the worst in the industry. But without the burden of pension and retiree health-care costs, the auto makers’ global margins would be 5.5% … a lot closer to Asian car makers.]
Crisis-ridden companies can dump their welfare packages with the Pension Benefit Guaranty Corporation, a government agency that functions as an ‘insurer of last resort’, assisted by contributions from surviving corporations. Like receiverships, the PBGC pays out benefits at dramatically reduced rates. The PBGC itself is now in crisis. So it’s a case of privatise the profits, socialise the losses.
Business Week again:
[Even transferring a small part of the burden to individuals or the government can have a profound impact on the corporate bottom line. The decision by Congress to have Medicare cover the cost of prescription drugs [product of the lobbying of Bush by Big Pharma in 2004], for example, will lighten corporate retiree health-care obligations by billions of dollars.]
Nobody knows this better than Wal-Mart, the representative of new American capitalism par excellence. Wal-Mart has built a system of starvation level employee remuneration that is structured around employee dependence on public welfare benefits. A University of California Berkeley study in 2004 tracked Wal-Mart practices:
[The study estimates that low wages force employees to accept $32 million annually in health-related services and $54 million per year in other assistance, such as subsidized school lunches, food stamps and subsidized housing.]
This was in California alone. This little racket contributed to the fortune of the top five individuals of the Walton family to nearly $100 billion. It’s a great system.
The moral of the story? What is happening in the US is a ‘stealth nationalization of retirement’ and other welfare benefits. While the myriad well-funded American think tanks rattle on about the robustness of the free enterprise economy, the system has to be seen as a whole. And the role of governments in the welfare system is inevitable. One may as well do it properly and confront the social character of living standards, rather than pretending that it can be farmed out or ignored.
