Various commentators have tried to blame the dreadful condition of the Big Three automakers on unreasonable union demands, greedy and incompetent management or the government. In truth, these claims are all partially true.
The United Auto Workers have saddled the Big Three with expensive compensation packages making it difficult to compete. University of Michigan economist Mark Perry estimates that in 2007-2008, the Big Three spent an average of $73 in compensation per labor hour, compared to $48 for Toyota and $28 for the average across all industries. It’s no wonder the Big Three can’t turn a profit. The problem, however, isn’t all the fault of a greedy union.
These figures can be misleading because they include pension payments to retirees. Over the years, management chose to pay dividends out of earnings, rather than adequately funding pension obligations. As financial commentator Silas Barta has observed, the arrangement has the flavor of a Ponzi scheme. The Big Three, in effect, were relying on younger workers in the future to generate enough profits to fund the retirement of the older workers.
The federal government itself is partially responsible. Besides the tax and regulatory burdens that chafe all businesses, the government also imposed Corporate Average Fuel Economy standards starting in the 1970s. The regulations require that a given manufacturer’s fleet in a new model year achieves a minimum average miles per gallon. Although intended to reduce dependency on foreign oil, CAFE standards penalize the Big Three, who have a relative advantage in producing heavier vehicles compared to their foreign competitors.
Tax credits for buying fuel-efficient cars would have made more sense. Over time, this would have raised average fuel economy, just as the CAFE standards have mandated. Such incentives would have allowed the Big Three to focus on producing profitable “gas guzzlers” while their foreign competitors could have focused on their specialty of economy cars.
Instead, the Big Three ended up producing economy vehicles at a loss just to reduce their fleets’ average miles-per-gallon. With record gasoline prices and the possibility of a “cap-and-trade” program explicitly designed to raise the price of energy derived from fossil fuels, consumers will be much less eager to buy SUVs and other vehicles that have supported the Detroit automakers. With CAFE and other government regulations, it would be difficult for the Big Three to compete even without the “legacy costs” of past labor agreements.
Though they have little moral authority, some Republican critics make a key point. It is unfair and inefficient to require American taxpayers to bail out large corporations that were poorly run. The U. S. economy will start to recover only when firms stop looking for federal handouts and refocus on cutting costs and pleasing their customers.
Welfare is bad for automobile companies, too
Robert P. Murphy
Various commentators have tried to blame the dreadful condition of the Big Three automakers on unreasonable union demands, greedy and incompetent management or the government. In truth, these claims are all partially true.
The United Auto Workers have saddled the Big Three with expensive compensation packages making it difficult to compete. University of Michigan economist Mark Perry estimates that in 2007-2008, the Big Three spent an average of $73 in compensation per labor hour, compared to $48 for Toyota and $28 for the average across all industries. It’s no wonder the Big Three can’t turn a profit. The problem, however, isn’t all the fault of a greedy union.
These figures can be misleading because they include pension payments to retirees. Over the years, management chose to pay dividends out of earnings, rather than adequately funding pension obligations. As financial commentator Silas Barta has observed, the arrangement has the flavor of a Ponzi scheme. The Big Three, in effect, were relying on younger workers in the future to generate enough profits to fund the retirement of the older workers.
The federal government itself is partially responsible. Besides the tax and regulatory burdens that chafe all businesses, the government also imposed Corporate Average Fuel Economy standards starting in the 1970s. The regulations require that a given manufacturer’s fleet in a new model year achieves a minimum average miles per gallon. Although intended to reduce dependency on foreign oil, CAFE standards penalize the Big Three, who have a relative advantage in producing heavier vehicles compared to their foreign competitors.
Tax credits for buying fuel-efficient cars would have made more sense. Over time, this would have raised average fuel economy, just as the CAFE standards have mandated. Such incentives would have allowed the Big Three to focus on producing profitable “gas guzzlers” while their foreign competitors could have focused on their specialty of economy cars.
Instead, the Big Three ended up producing economy vehicles at a loss just to reduce their fleets’ average miles-per-gallon. With record gasoline prices and the possibility of a “cap-and-trade” program explicitly designed to raise the price of energy derived from fossil fuels, consumers will be much less eager to buy SUVs and other vehicles that have supported the Detroit automakers. With CAFE and other government regulations, it would be difficult for the Big Three to compete even without the “legacy costs” of past labor agreements.
Though they have little moral authority, some Republican critics make a key point. It is unfair and inefficient to require American taxpayers to bail out large corporations that were poorly run. The U. S. economy will start to recover only when firms stop looking for federal handouts and refocus on cutting costs and pleasing their customers.
Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.