Was Marx Right? The Bailout and the Auto Industry

12/30/2008 05:12 am ET | Updated May 25, 2011

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?