Denpartment of "Huh?" General Motors Bailout Edition

Why oh why can't we have a better press corps? Why oh why do we watch the New York Times in a death spiral? Why does it publish Roger Lowenstein telling us that:

Extravagant Pensions Are Killing General Motors : [N]one of G.M.’s management miscues was so damaging to its long-term fate as the rich pensions and health care that robbed General Motors... of its cash. General Motors established its pension in the “treaty of Detroit,” the five-year contract that it signed with the United Automobile Workers in 1950 that also provided health insurance and other benefits for the company’s workers....

General Motors got into the dubious habit of steadily increasing worker benefits. In 1961, G.M. was able to get away with a skimpy 2.5 percent increase in wages by also guaranteeing a 12 percent rise in pensions.... By the 1980s... General Motors and the U.A.W. were locked in a mutually destructive embrace. G.M., fearing the short-term consequences of a strike, continued to grant large increases in benefits — creating an intolerable gap between its costs and those of its foreign competitors. Union officials feared to face the rank and file without a big contract.

In the ’90s... General Motors poured tens of billions of dollars into its pension fund — an irretrievable loss of opportunity. What else might G.M. have accomplished with that money?...

G.M. acknowledged in its most recent annual report that from 1993 to 2007 it spent $103 billion “to fund legacy pensions and retiree health care — an average of about $7 billion a year — a dramatic competitive and cash-flow disadvantage.” During those 15 years, G.M. paid only $13 billion or so in shareholder dividends. The company has been sending far more money to its retirees than to its owners...

When GM offered the UAW more lavish benefits, it did so in order to induce the UAW to accept less generous wages. The money that GM paid in the 1990s and 2000s to fund pension and retiree health bnefits was offset by wages that GM did not have to pay in the 1960s, 1970s, and 1980s. Lowenstein appears to want to live in a world in which GM (a) gets a break on its wage costs in the 1960s, 1970s, and 1980s; and can do so (b) without having to pay any money to fund pensions in the 1990s and 2000s.

I don't want to live in Roger Lowenstein's world.

Comments

[foo]

And, besides, GM's problems stem from making vehicles that are obsolete, poor quality, and suck. And having no vision to invest appropriately to fix that.

[Ken Houghton]

What foo Said, though I will note that "the GM rule" was adapted specifically BECAUSE GM had never properly accounted for its pension obligations and the (at time) roughly $1B they would have had to allocate would have been seen as impacting their earnings.

It's not the workers faults if GM management for the past sixty years has made commitments without making certain someone could pay for them. But the managers have walked away with excessive compensation based on mythical profits, so now it's time to **** the workers.

[derek]

When will we ever see an article in the so-called liberal media which explains that a company is suffering because its shareholders took too much in profit. Lowenstein complains that "[GM] has been sending far more money to its retirees than to its owners..." as if the owners earned the money and the workers are just skimming it off. The reverse is the case.

[Bernard Yomtov]

""The money that GM paid in the 1990s and 2000s to fund pension and retiree health bnefits was offset by wages that GM did not have to pay in the 1960s, 1970s, and 1980s."

Which is exactly Lowenstein's point."

And Ken Houghton correctly goes where Lowenstein did not, pointing out that GM ought to have set aside the money saved on wages to meet these future obligations. That they did not do so is just one of many examples of their management incompetence.

And why are they paying dividends at all when these retiree obligations are so huge?

Incidentally, I do think the UAW might have been more insistent about funding benefits, possibly at some cost in wage increases.

[bigTom]

I'm not an expert on this by any means, but weren't promising pensions and health care convenient accounting tricks, in that probable future liabilities could be discounted. For any manager facing a (to his career) short term crisis from labor demands, this represented an easy promise to make. It also is a fact that any sort of defined benefit program comes with a large measure of potential risk, i.e. that the funds deemed necessary and set aside to fund the future liabilities may prove inadequate for the task. Defined benefits programs have an effect of amplifying the business cycle, as during good times corporations can mine the apparently overcapitalized plans, only to have to provide extra funding during tough times (when declining equity prices mean their pensions are seen to be undercapitalized). This is a classic positive feedback mechanism, high stock prices (i.e. good times for the market overall), mean major corporations can mine their pension plans, thus further fueling the stock market, while during tough times increasing liabilities further tank stock prices.

[bakho]

GM makes money through its finance division. In their business model, making cars is an inducement for consumers to borrow money from them. The bigger and more expensive the car, the more customers borrow.

This business model sucks when there is an oil shock or economic downturn that drops vehicle purchases. It is even worse in an oil shock recession when not only are people buying fewer vehicles, the vehicles they are buying are not the big, expensive, oversized versions that GM needs to sell to make a profit. In this model, high vehicle cost is not a problem, its a feature (bigger more expensive car = borrow more money). In this model, efforts to conserve energy by building more fuel efficient but smaller (less expensive) cars is counterproductive. The model has perverse incentives that leaves GM badly positioned when energy prices affect the ability of customers to afford what GM sells (borrow money).

[jerry]

You may not wish to live in Lowenstein's world, but yet you favor free trade policies that give enormous incentives to companies to destroy good paying, good benefit jobs and that subsidize countries whose companies do not pay those wages or benefits.

Because of the "benefits" of free trade (and others similar "benefits") how many companies even have defined benefit pensions anymore?

Why do you work so hard to defend a system that acts to rip apart the world you claim to want to live in?

[jerry]

"Defined benefits programs have an effect of amplifying the business cycle, as during good times corporations can mine the apparently overcapitalized plans,"

That's not a problem of defined benefits programs, that's a problem of allowing companies to raid pension plans.

[bigTom]

"That's not a problem of defined benefits programs, that's a problem of allowing companies to raid pension plans."

Thats only partly true, as even without raiding, any sustained period of market underperformance is likely to lead to the underfunded problem. The problem is that there is no foolproof way to obtain an estimate of the amount of funds needed to pay out the future liability. When the blackswan economy happens large numbers of such plans will hit the skids at the same time, worsening any recession.

[David]

Given the choice between investing in GM or not, their promises and the presence of the UAW would certainly make me avoid it like hell. They're asking people to fork over their money, yet seem unwilling to work towards maximizing the return. Why should anyone invest in them? The investor from Asia doesn't care about factory workers in a small American town... and why should he? GM isn't a non-profit organization that you donate to.

According to an article I read the other day, GM may have to raise as much as $15bn soonish or face bankruptcy. I hope for them they find enough people who don't think like I do. Or maybe the people who take better employee compensation over higher returns want to put forward some more money?

[Bernard Yomtov]

Ian Maitland,

I do not see where Lowenstein tells us that the pensions were unfunded in the 50', 60's, etc. He mentions the more recent payments, and bemoans the opportunity cost. He seems oblivious to the fact that these contributions were in effect the repayment of money borrowed by not properly funding the palns earlier. That GM failed to earn a return on the borrowed funds adequate to meet the repayment is an indictment of management.

Lowenstein sems to think that it is somehow unfair that GM has to meet its obligations. It is being "robbed" (his word) of its cash. I disagree.

[save_the_rustbelt]

Actually, the UAW workers received generous wages and generous pensions and generous health care and generous vacation and generous sick pay and every other generous thing.

If GM still had its' 1970 market share this would not be an issue.

But poor design, poor assembly, poor service and an arrogant attitude killed much of GM's market share.

Both sides miscalculated and now there is not much left but the suffering.

(The new health care VEBA is a mechanism by which the underfunding of retiree health benefits can be hidden for 10 - 15 years, when all of the current executives and union leaders will be long gone with safe pensions.)

[howard]

No, ian, that's not what lowenstein is saying about GM in the slightest.

what he is saying about GM is exactly what he said in the first sentence that the prof quoted: that rich pensions and health care "robbed" GM of its cash. i don't know what's not clear about that sentence to you: he is saying that had those awful workers not "robbed" GM of its cash, then GM would still have had the cash to make better cars (or something).

and as the prof points out, that is bullshit, pure and simple. if, for example, GM had listened to walter reuther, then it could have paid its workers for making cars and let the government take care of the social problem of health-care and pensions.

or, alternatively, GM could have said "agreeing to an open-ended benefit, particularly for health-care, would be a mistake, so we'd rather pay your more now."

please explain, if you will, how lowenstein was saying anything else about GM. please be sure to define the word "robbed" in a way that makes sense and takes into account that lowenstein is a careful, professional writer who knows what the word "robbed" means and didn't pick it carelessly out of the air.

[Cranky Observer]

> Lowenstein appears to want to live in a world
> in which GM (a) gets a break on its wage costs
> in the 1960s, 1970s, and 1980s; and can do so
> (b) without having to pay any money to fund
> pensions in the 1990s and 2000s.

Well, that is exactly the world the major airlines have lived in for the last 10 years (with the exception of American), so perhaps GM just wants their turn.

I have said it before here though: GM has been a master of manipulating financial statements since the 1920s; you can rely on their statements for exactly zero predictive value. My guess is that GM will probably not take a trip through bankruptcy, that GM will pick up the remains of Chrysler within 2 years, and that Ford will go into bankruptcy, emerge, fail again, and be taken over by Nissan. GM will survive as long as individual personal transportation is being sold in the USofA.

They will regret killing off their Tech Center and long-term research programs though, and probably also regret selling the locomotive division.

Cranky

[Bernard Yomtov]

Ian Maitland,

Where I differ with Lowenstein is this:

He says that the retiree problem is due to the fact that GM was too generous, in past years, in its promises to retirees.

I, OTOH, have no opinion as to whether the promises were too generous, too stingy, or just right. I simply think that GM could have avoided a lot of problems had it properly funded and accounted for those promises. That would have told it, and the UAW, and the financial markets, whether the promises were too generous to be kept.

Of course, GM could have avoided a lot of problems in other ways as well, most of which involve thinking, which they seem to have been reluctant to do.

[jerry]

Some terrific predictions. And part of me really wants to see them punished for cutting R&D and getting rid of locomotives.

As of last week, I think Mattel had the same market cap as GM, or so I recall reading. I am hopeful, truly hopeful, they will be purchased by Mattel and re-branded as Hot Wheels Grownups.

(It would also be nice to see them purchased as a division of Lego Mindstorms or the iRobot Corporation.)

[BlueStatah]

This assembly has far more expertise in economics than I do. But I agree heartily with Foo: GM cars (and American cars generally) are abysmal and have been since the end of World War II. I once owned a '41 Chevy -- terrific car! But I haven't owned an American car since 1960, and every time I rent a car and have to drive a piece of Detroit iron, the wisdom of this policy is reinforced. Is this because of the greed and incompetence of American workers? Well, there was a time, at least (and this may still be true), that Honda exported some of its US-assembled cars back to Japan, where they competed head-to-head, successfully, with Japanese-assembled Hondas. Same American labor pool as the assemblers of the junk that's been spilling out of Detroit for decades. What's the difference? Savvy Japanese management vs. monumentally incompetent American management. This is not a new problem. Starting in the 1950s, first German and then Japanese (and in future, Korean, I'll bet) manufacturers whaled the daylights out of American cars and continue to do so. The smug, insular, arrogant management culture of American car companies is killing the US car industry. Just look at the product mix of Toyota vs. that of GM. I give those fatheads 10 years tops.

[jerry]

This is all Peter Drucker's fault, but I also recommend the documentary http://www.imdb.com/title/tt0091159/ and a few beers.