Was Marx Right? The Bailout and the Auto Industry

There are two reasons we need to bail out the auto industry. The first, quite simply, is to buy time. Let's say we agree that the American auto industry is doomed, and that a $25 billion bailout does nothing more than delay the inevitable by three years. That is a perfect and entirely persuasive argument in favor of a bailout. Right now, the ripple effects of the loss of a million or two million or three million jobs (no one is quite sure of the number) would be a nuclear bomb detonated in the middle of a national recovery plan. It's not just the consequences for unemployment and health care and pension guarantees and consumer credit, it's the complete devastation of the landscape in which the efforts of the new Obama administration will have to take place. If $25 billion buys us three years for a recovery plan to take effect, that's a bargain. And there are other reasons to buy time. It is almost impossible to overstate the short-sightedness and pigheadedness of the management teams at the Big Three automakers. In the past few years GM executives have repeatedly derided the idea of a business model based on building fuel efficient cars and have pinned much of their hopes on selling luxury vehicles in China. But there are, finally, signs of improvement, including the development of the Chevy Volt. And there are a whole series of changes in the terms of employment under UAW contracts that are described below. But these things will take time to have their positive effects.

That's the first reason we need a bailout: it might turn out to be enough to save the industry, and even if it doesn't it buys us time that we desperately need. But there is a second reason for a bailout that has to do with nothing less than the question of the current economic age: was Marx right?

Was Marx right? The usual answer is "no" with respect to his predictions in the Communist Manifesto. In some ways, to be sure, his arguments seem quite prescient, as in his warnings that capitalism's ever-expanding desire for markets that would lead to the creation of a globalized economy, his predictions that sovereign political systems would come to serve primarily as managing entities for multinational wealth, and his emphasis on the equation of market liberalism with free trade. On the other hand, the standard wisdom is that he was wrong about the consequences of these developments. In particular, it simply was not true that industrial capitalism resulted in ever-downward pressure on the living standards of workers, that the cycle of crises of capitalism continued to get worse and worse (after the global depression of the early 1930s), and above all that the middle economic classes disappeared as industrialization and corporate capitalism expanded. In the U.S. as in all western democracies, some combination of government intervention in the market and/or organization of labor produced counter-pressures that ensured that the immense wealth being created was shared. As a result, contrary to Marx's prediction of society devolving into two opposing classes, these western nations' economies were marked by the appearance of strong and stable working middle classes, a category Marx did not envision at all.

But was Marx wrong, or was the creation of a working middle class merely a temporary exception? It is not news that the American working middle class, especially in the manufacturing sector, has taken a beating over the past two decades, nor that the increase in the gap between rich and poor has been accompanied by a progressive weakening of organized labor. The Europeans and Asians proved Marx wrong by using political authority to reshape capitalist markets. In the U.S. we have tried to do the same thing by turning labor into a market participant. Then we started busting the unions. Which brings us to current discussions about the auto industry.

One type of comment that has become typical among both opponents and supporters of a bailout achieves fairness by blaming both labor and management. On the management side, it's hard to come up with a worse set of executives than those at GM. But the unions, we are told, are also to blame by virtue of their demands for health care and retirements and unrealistically high wages. The auto industry cannot solve its problems until Something Is Done about the unions. Richard Shelby of Alabama has been out in front on this argument, declaring "we have a viable auto industry in the South" in reference to non-union Honda, Toyota, and Mercedes plants located in his home state of Alabama. In a New York Times editorial on November 12 Thomas Friedman called for "tearing up existing contracts with unions, dealers and suppliers, closing some operations and selling others and downsizing the company."

Amity Shales, writing in the Wall Street Journal (Nov. 29th) warns of ominous pro-labor possibilities:

"Lawmakers are considering new labor legislation containing "card check," which would strengthen organized labor and so its wage demands... employees continue to pressure firms to spend on health care, without considering they may be making the company unable to hire an unemployed friend."

(Strangely, Shales' column goes from arguing that New Deal policies were not completely effective in solving the Great Depression -- unemployment rates were only cut in half -- to concluding that a repeat of such policies would cause a new depression, but I gave up expecting logic from editorial pages years ago.)

President Bush and Senator McCain, during his campaign, blame unions for "Cadillac" healthcare plans that encourage frequent doctor visits and preventive care rather than being restricted to late, emergency-based interventions. Are Shelby, Shales, and Friedman right? Is the most or one of the most important things we need to do to break the stranglehold of organized labor so that we can reduce health care benefits and bring down industrial wages?

The basic fact that are presented in favor of these arguments are simple: the average GM worker earns $72 an hour in wages and benefits while a worker in a non-union Toyota plant gets $42 an hour. Except that that's not really true. What is true is that the cost to GM of an hour of work averages $72 per hour. But that's not because GM is paying such high wages. In 2006, for example, GM's research division reported that the top pay for a GM hourly employee was $27 an hour; another $13 per hour comes from night-shift premiums, overtime, holiday and vacation pay. The rest is health-care, pension and other benefits. Now, an hourly wage of $25 per hour at 40 hours of work per week comes to $1,000 per week. So if a person works 48 weeks out of the year with no paid vacation, that's a salary of $48,000, which is an awful lot higher than anything Marx was envisioning but not quite the kind of figures that one hears bruited about.

Line workers in Toyota and Honda plants do not earn less. In 2007, the Center for Automotive Research in Ann Arbor, Mich. found that for the first time a non-union plant, Toyota's largest U.S. plant in Georgetown, Ky., paid better than plants with UAW contracts, averaging $30 per hour with bonuses, and estimates that wages at Toyota's other plants as well as at Honda and Nissan plants in the U.S. were comparable. The source of the difference in labor costs comes in the costs of benefits, especially "legacy costs." It is critical to recognize that the $72/hour figure does not just include benefits to the workers being paid, it includes benefits to retirees. GM, the largest private purchaser of healthcare in the U.S., spent $4.75 billion in 2007 on retirees' medical coverage. Those legacy costs -- including benefits for a lot of workers who went to work as teenagers and took 30-year retirement while they were still young -- is a primary reason that GM is $48 billion in debt. So the "cost" of an hour of labor for GM may be $72, but that does not mean that $72 is going to the worker performing the hour of work.

Those health care and legacy costs are a tremendous burden on American industry. It is estimated that health care and retiree costs add $2,000 to the price of each American vehicle. Toyota, Honda, and Mercedes don't face those kinds of costs. Their American plants are too new to have large numbers of retirees. As for their plants back home... welcome to the competitive benefits of government pensions and single-payer health care. In this country we chose to rely on a market model in which labor and management would negotiate for the most advantageous deal they could obtain from one another. That adversarial system of negotiated social policy has broken down in the face of competition from nations whose social policies are driven by, well, policy-makers. Interestingly, Walter Reuther warned the Big Three about this danger back in the 1940s and urged them to join the unions in supporting national health insurance.

Rep. John Dingell of Michigan began introducing bills for single-payer health insurance in 1933. His son, John Dingell, Jr., introduced a version of the same bill ever year since he took over his father's seat in 1955. But the owners preferred to keep the system private and purchase industrial peace with ever-bigger promises rather than surrender their role as national policymakers. Toyota USA has fewer than 300 retirees; it will not see its first 30-year veteran workers start to retire until 2018. 25 years ago GM had 425,000 employees. Today it has fewer than 80,000 employees... and 500,000 retirees.

Now what? Is the solution simply for the unions to stop being so greedy, stop demanding luxury wages and health plans? We have already seen that the wages paid to unionized U.S. auto workers are not actually any higher than those paid to non-union workers, but that is only part of the story. The other part has to do with the steps UAW has taken to help out the companies in their last periods of crisis: 2005 and 2007. Bob Herbert (New York Times, November 29th) points out that in 2007 the UAW agreed to a contract that froze wages for existing workers for the four year life of the agreement and cut wages for new hires to $14 to $14.61. Herbert could have said a lot more about that contract. Under its terms new hires would also not receive traditional company pensions; instead they would be given access to a 401(k), face hither co-pays on their health care, and give up paid holidays and other benefits that had previously been negotiated in earlier contracts. Money that would have gone to cost of living adjustments; those increases would be diverted to help the company pay for rising health care costs for active workers. In other words, the workers accepted declining salaries in order to help pay for health care. Most importantly, the agreement provided for the union to take over employee health care through a privately managed trust fund to be called the Voluntary Employee Benefits Agreement (VEBA), starting with $29.9 billion in seed money from the company and to be transferred entirely to union control -- and responsibility -- in 2010.

In return, the union got what its members cared about most: continued benefits for current retirees, and job security. More than 3,000 temporary workers were given permanent jobs with traditional wages, and the company committed itself to a moratorium on outsourcing and plant closings. In other words, the UAW did what the U.S. government and GM management has thus far refused to do: insisted on long-term planning, emphasized security over short-term profitability, found a way to relieve an automaker of a significant portion of its health care costs, and demonstrated a willingness to make sacrifices for the sake of the overall enterprise.

That's also the difference between union and non-union plants. Unions have acted as policymakers and created a working middle class. Non-union plants operate for the benefit of current workers only, and cycle those workers at will. Marx called this the "commodification of labor"; his essential point was that the transformation of labor into an abstract commodity subject to competitive markets would be the engine that destroyed the middle class and divided society into rich and poor. Not that Toyota and Honda and Mercedes are heartless capitalists; they are just not used to operating in an environment in which society at large has disclaimed all responsibility for the care of the sick and aged and left the design of national social policy to the outcomes of adversarial negotiations between labor market participants. But what happens when those workers get old, or sick, or become disabled, or are laid off? We decided to rely on union negotiations rather than government policy-making to secure the working middle class, then we let foreign car companies enter our markets without having to carry a share of that burden.

We need a bailout of the auto industry to give the new contracts and the new automotive products a chance. And then we need to address the larger question about the auto industry, and about American industry in general: Was Marx right?

Comments

[Rule Of Law]

Let's get this straight. Auto workers in real hourly wages make LESS than their non-union counterparts at foreign plants built in the South. And new hires, make $14 and hour. I can get a job in a warehouse making that! And, the total amount of the cost of a new car in terms of wages is less than $2,500, so where does the other $20-25,000 we pay for that car come from?

And lets be REAL CLEAR about one thing here---We are not talking about bailing out Auto Workers or their union, we are talking about lending money to Corporations whose Management have made bad decisions for over 30 years! Those who come on these boards and complain about the workers are either Republican union busting shills, or just don't know what they are talking about!

[autobailout]

As a lifelong democrat, I am appalled by my elected reps trying to get these bailouts through. The banks didn't deserve it and the auto industry absolutely doesn't deserve it. Everyone is hurting. I am a small business owner on the UWS of Manhattan and I am eating egg salad from a plastic container every day. These auto workers make $56 an hour and their cost of living is low. It's like making $200 on one of the coasts. Our lawmakers need to start thinking of the people who elect them, not special interests.

Protest the bailout at http://www.autoindustrybailout.com/petition/

Enough with the handouts unless you're going to give them to everyone and not just select groups of people.

Who cares about Marx?

[Kevin Casey]

Who cares about Marx? Anyone with intellectual curiosity. Anyone who understands that eliminating consideration of more than one philosophy or theory results in such narrow-minded attributions as those you have offered.

[StephenBarry]

Marx was correct in identifying the intrinsic nature of the "animal spirits" of Capitalism, a phrase coined by Adam Smith. He also identified the need for labor to struggle in a revolutionary fashion and create an all around dictatorship of the proletariate over the bourgeoisie. Keynes proposed government intervention to save capitalism from itself. This occurred in the middle of the Great Depression when labor and communists were taking to the streets in the USA. FDR implemented the new deal to ameliorate this tendency. Labor unionized and the might of capital was curtailed, although in a controlled but no less revolutionary fashion. Many workers died. Labor previously had not been organized as a 'class for itself' since the dawn of mankind. Marx saw that the inner contradicition driving the ever-changing relationship between privately held capital and the social nature of wage labor was intrinsicly antagonistic. The present crisis could have resulted in a violent struggle between the decimated laboring middle classes against big bureaucrat capital. Hence the mad scramble to to throw 7-10 Trillion dollars at the bailout panacea and maintain the existing capitalist political order. The authorities know Marx was correct and are terrified of the prospect of nationalization of banks and defacto socialism. It is all just an ideological farce now.

[therealredstateblues]

"The first, quite simply, is to buy time. Let's say we agree that the American auto industry is doomed, and that a $25 billion bailout does nothing more than delay the inevitable by three years. That is a perfect and entirely persuasive argument in favor of a bailout. Right now, the ripple effects of the loss of a million or two million or three million jobs (no one is quite sure of the number) would be a nuclear bomb detonated in the middle of a national recovery plan. It's not just the consequences for unemployment and health care and pension guarantees and consumer credit"


This is indeed one of the most compelling arguments in favor. The costs to the taxpayer would be much much greater than the wmount they are asking to borrow. The potential of throwing hundreds of thousands if not millions out of work in an already weakened economy could throw us into a depression, and do permamanent unrecoverable damage to whats left of our manufacturing base.

Simply put - the risks of doing something are much less than the risks of doing nothing.

If they are helped it will buy time for new products to get thru the pipeline, and hopefully credit to ease up and Detroit will come back stonger for it

Allowing them to fail will damage the supply base, that all automakers rely on not just Detroit

[PhilipTaylor]

American Auto makers are automated but to compete they need more and they need to look deeper into every supplier to be sure they are getting the best product at the best price.

The Financial Industry which has NOT Automated adequately needs to automate 80+% of its operations which are defined by mathematical formulas and are easy to program. They need to build in controls to prevent corruption and maximize the value to their customers while also minimizing costs.

Many white collar functions can be automated to reduce cost in most industries and the Internet offers direct links between the customer and the their needs. Why can't customers take rides in autos over the Internet and place their orders for custom cars? Why can't customers do 99% of their banking online including loan applications for homes, vehicles, and college loans?

[research]

American Car companies make cars fine.

It's American Car CEO's that make the big stupid choice to build big stupid cars.

The finical industry was the first industry to automate.

The finical industry is the most automated industry on earth.

95% of all "money" is electronic.

[LuminificHealth]

For the long time I was wondering why no one teaches Marx in us business schools. There is a lot of power in knowing your enemy. Enemy is someone who sees things from different perspective. Knowing your enemy is like knowing yourself – foundation of strengths.

[NearlyNormalWarren]

I have been posting comments about the lack of objectivity and "piling on" attacks against the Big 3 and the UAW. Your analysis is a welcomed exception. We must be honest about what is right and where the real problems are if we are to take advantage of the full potential of an Obama administration - reasoned and capable management to rebuild American manufactoring into an engine of growth in a green economy.

In the final analysis, when our systems (economis, governmental, social, etc.) are failing or are faulty, we need to change them. The systems have no purpose other than to serve the people. The challenge is in breaking the mindset of "that's just the way things are". Breaking the momentum is the challenge.

[therealredstateblues]

Indeed - finally a well reasoned post on this issue.

I am appalled at the near total lack of compassion for working people seen on many posts of this topic on this supposed left leaning site

[Pearlswan]

What about creative destruction? The auto industry cannot oppose it anymore than a body on earth can oppose gravity. Why not use the government money to bail out their legacy costs and to subsidize the retooling costs to modernize the product into one that sells in the environmentally conscious markets of today. Out of job loss will come job creation. And, make Exxon Mobil sell back the patent for the battery of the EV-1 electric car to GM so they can get into the electric car business. That's creative destruction we can believe in. If the economists can't trust capitalism to withstand creative destruction in the auto industry then perhaps Marx is right. We have to act with the courage of our convictions.

[therealredstateblues]

Creative destruction is a bogus concept

It is based on the assumption that obsolete technology is destroyed in favor of new technology

But heres the catch as it pertains to the auto industry - autos are NOT an obsolete technology - autos and their manufacturing processes are the very definition of high tech

And what of the creation part - what new technology do you see on the immediate horizon? and one that can quickly step in to employ hundreds of thousands of people?

Thats the probelm with today's business "leaders" they are good at the destruction part - cutting, slashing, downsizing, outsourcing, the ceatin part - not so much

[Ballot]

Sorry Howard, not buying your thoughts nor will I be buying another American automaker's vehicle. I have already done that and learned my lesson too many times. Now I am being told that I should support and pay for, what is basically a gamble? At US Taxpayer expense? With zero guarantees? I am being told to support failed industries because of their misdeeds, misdirection, and mismanagement? Sorry Howard, no sale on the wholesale of the American corporate welfare nation. Not now, not three years from now.

However, I do enjoy reading your articles.

[therealredstateblues]

Funny how citibank can fly into washington in their private jets on Friday, and Fly out on Monday with 300 billion no questions asked - yet detroit can't borrow a buck for a cup of coffee?

something terribly messed up about our priorities in this country

[PacificGatePost]

Howard,

"...we need to bail out the auto industry. "

Absolutely, and implement a plan with teeth that clears the board of the stifling contracts and agreements that have humbled a great industry.

BAILOUTS ARE COMPLEX BEASTS, but one should be implemented to save the U.S. Auto Industry.

Here is a workable plan with common sense for the U.S. Auto Industry -

http://pacificgatepost.blogspot.com/2008/11/solution-for-detroit-gm-friends.html

Do not leave it to Paulson or Congress to come up with a creative plan or consider taxpayers' interests.

[joebiz]

Way too many fact that do not directly support your thesis.

The American people have spoken. They have not bought American cars because they do not like them, period. Now, you want the government to force the American taxpayer to dole out 25 Billion dollars to support an corrupt and feeble and mismanaged auto industrial complex? Go ahead and pay my share. I'll opt out.

You're wrong about Marx as well. It's evident you have not read or even discussed Marx/Engels or even Hegel. The Big 3 are corporations that the common person can buy shares in, thus you are technically part owner of the company. Just as the UAW and its pension plans are invested in Wall Street and 401Ks and pension plans, they are invested in the Big 3.

The Detroit problem has one solution: bankruptcy of GM and Chrysler. People will lose their jobs and they will find new ones, it happens all the time across this country. Imagine what 25 Billion dollars can do to retrain these workers?

Things that will NOT help Detroit:
"Green Cars" there is not great demand for American "Green Cars";
Reduction in salaries of UAW or management; cutting salaries and working more? Yeah, who wants that?
25 Billion dollars; it's a hungry black hole that must not be fed.
Expensive, ill made, ugly cars with poor resale and high maintenance and recall issues

[45245]

get rid of the union

[mamacita]

get rid of the piss poor overpaid management that doesn't belong to a union, making the decisions that control the worker who does belong to the union.

[HMDMSR]

You must mean Groucho Marx. Karl Marx considered the shares of corporations to be "fictitious capital." By this he meant they did not represent any new addition to real assets in a value sense.
The secondary stock market is a crap shoot. Most ordinary people lack the inside knowledge to profit from it the way professional speculators can. Of course, ordinary workers can only invest some paltry amount into corporate shares anyway. They certainly have no control over the distribution of dividends--profits. From a Marxian point of view this might not matter, since this way of thinking doesn't want leave any business in a profit making state-no matter whether it's owned by any combination of people. Americans don't like the cars Detroit has been offering. That could change.
But if Americans think they'll like what comes after these three failures, I think we should do the experiment. Americans are confused about a great many things.

[joebiz]

I would say they are not confused about the Aztek or Gremlin or Cimarron or Edsel or Pinto, ad nauseum.

As for the fictitious capital, it's lent out everyday to corporations, pension funds, and governments. Entrprenuers build companies and spin-offs off these funds; developers build buildings, governments build infrastructure with these dollars. There are UAW retirees living off the investment funds of these retirement plans. Some plans have allowed them to retire on hundred of thousands of dollars (a good thing).

The Marxian paradigm would foist the laborer/employee as the "ideal" or the "idealized" human in social relations. I doubt, that even the most strident of UAW workers/members see themselves as the pantheon of revolutionary struggle. The have made some Macheavellian arrangements with the Big 3 to continue employment and wages.

Unionization is a wondeful concept that helps middle income folks maintain and "advance" as a group in our capitalist society. But, it works best when management assigns resources to build things that can be sold and even valued.

[twogunmojo]

fro david wilson and 23000 days: if you eliminate the current tax structure in favor of the fair tax and you have everyone pay the same rate for new goods and services how exactly do the rich avoid paying that tax...your brat kid wants a new bmw or hummer for their 16th birthday you avoid the tax how..john and cindy want to buy house #8 they pay the tax..there are no loopholes for them to skate through..i don't want to pay the tax i buy last years hummer that the rich guy traded in for the new one..i smoke $1.00 cigars and i pay $1.30..rush limbaugh wants to smoke $10.00 cigars he pays $13.00..how exactly do either of us avoid paying this tax and how does it unfairly burden me..and no one has yet to tell me how private social security works for chile and it won't work for us..their system is based on ours but they have a positive rate of return versus our negative rate of return on money that doesn't exist in the first place..

[HMDMSR]

Natural selection operates according to physical law. There is no guiding intelligence which selects superior organisms. Economics does not operate solely based upon physical law. The economy is more like a football game. Football is a human invention. True, football players have to abide by physical
laws while they're playing, but they don't have to play in the first place. Do we live for the economy, or do we want an economy that lives for us. We should take over the big three. They can be retooled to make other goods--like vehicles for mass transportation. Don't use the state to perform union busting. Be careful about using social darwinism. It's an ugly idea.

We still live in the age of industry. Circuit boards (like motherboards) are manufactured. Semiconductor materials are mined, purified, and operated on further. All these processes require labor input, raw materials, energy and fixed investment. Does having all this stuff increase productivity? Sometimes. I think we could convince a lot of people it's a mistake to keep throwing so many resources at all of these new inventions. I'm not a Luddite.

[45245]

unions have to go that's all......

[PhilipTaylor]

Thanks for your "open minded" and productive comment!

[PhilipTaylor]

This Bailout is Needed:

The Executives need to demonstrate at minimum the following to Congress:

1. Auto Executives must show cost cutting plan that also allows for producing New Green Cars.
2. Executives (not just top management) making over $250,000 must take a 20+% pay reduction.
3. Workers must be willing to take a 5% Good Faith reduction in the short term until the new contract.
4. Show at least THREE NEW MODELS ready to be produced that exceed the MPG standard.
5. Have a cost and revenue flow plan that shows they will be able to survive for one year.

If they can satisfactorily provide evidence with a "dog and pony show" then Congress and Bush should pass a Bailout Plan.

No Executive taking a Bailout should get more than Toyota USA pays its top people. If the Executives do poorly we should not punish the companies and the workers, but instead replace the Executives.

There are some very talented people at Toyota USA where the TOP EXECUTIVE GETS only $1 million per year who would be willing to fill the void at GM and Ford making $2 million about what Obama's total income as President will be.

[45245]

no bailout ever

[PhilipTaylor]

Thanks for your "open minded" and productive comment!

[felixrandom]

at the beginning of the 20th century a large number of blacksmiths did not become car mechanics. even as GM managed to subvert public transit until one had to buy a car and the railroads carried only freight, the information revolution was beneath notice along with the japanese and german influx. elvis did it to sinatra but GM Ford and Chrysler didn't need any help. they're toast. what ever your outlook may be with or without federal funds, no matter how hard the unions may try to hold on the management has denied the corpse too long. it's really dead. this is another century