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America Needs a Strong, Unionized Auto Industry -- That Requires Government Action

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As the debate over federal help for the auto industry has heated up, we've heard a lot from those who believe that the problem with the auto industry is "bloated union contracts." They see those contracts as a reason not to provide federal loans that could prevent one or more of the "Big Three" from falling into bankruptcy.

In fact, it is precisely this fact -- that unionized automobile manufacturers provide their workers with middle class incomes -- that makes it critical for government to assure the long-term survival of this industry in particular, and the U.S. manufacturing sector in general.

The core failure of the radical-right-Bush economic policy is that the "markets uber alles" economic philosophy led them to lower incomes for most Americans while siphoning off all of the fruits of economic growth for the top two-percent of the population. Of course, that is a terrible outcome because the point of our economy should be to improve the lives of everyone -- not just the gang on Wall Street. But it has also been a disaster because widely-spread income growth is necessary to provide the demand that fuels long-term economic growth in the entire economy.

It's really simple: good economic policy requires that more and more Americans make higher wages, not that more and more Americans make lower wages.

Unfortunately, market forces by themselves do not yield that result. For that to be the case, you have to have strong unions like the United Auto Workers -- whose demands for good wages helped create the American middle class after World War II.

If we allow the unionized American automobile industry to collapse, we will accelerate the reduction of middle class incomes for everyone. That collapse would start a tidal wave of lower wages and, in turn, lower buying power throughout the economy. The auto industry and its suppliers represent a huge chunk of the American manufacturing sector. The collapse of GM or Chrysler would throw hundreds of thousands of workers onto the shrinking job market. It would start a domino effect of bankruptcies and layoffs among suppliers and dealers all over the country.

Any attempt to reorganize one of these companies under the bankruptcy laws would almost certainly result in massive layoffs. Consumers don't by cars from companies that they worry won't be around to service them. The workers that remain would see reduced wages as union contracts are abrogated by the bankruptcy court.

If a foreign manufacturer expanded auto production in the U.S. in order to fill the void, it would no doubt pay lower wages with no guarantee of union representation.

All of this would be bad at any time. But at this precarious time it could serve as the precipitating event that pushes the economy into a long, deep recession. It could easily be remembered as the most foolhardy, risky policy choice in modern economic history.

Should the government make capital available without strings? Absolutely not. The taxpayers should demand a plan that guarantees the American auto industry has long-term viability. But that doesn't mean it should become a low wage industry. Its problems have very little to do with "bloated union contracts." And they certainly were not caused by "overregulation" or the intrusion of government into the decisions of the "private sector."

The economic problems of today's American auto industry are grounded in two catastrophically bad management decisions -- both rooted in the view that unregulated markets always yield correct outcomes. These have been exacerbated by the recent collapse of the financial markets.

1). Following World War II, GM's Chair Charlie Wilson had a major battle with the president of the UAW, Walter Reuther. Reuther wanted the government to set up a federal insurance program to provide health care for all . He also wanted to expand Social Security with a federally administered pension system that was not wholly dependent on the economic health of particular employers.

Wilson -- and other titans of American industry -- fought Reuther tooth and nail. They believed that these programs would undermine the "private market." To head him off, they offered a program of employer-based health and pension benefits. Sixty years later those privately funded health and pension benefits have become an economic albatross. That is not because we are over-generous with health care and pensions in the U.S. In fact, our costs for health care, pensions and unemployment are average for the industrial world. The difference is how we fund them.

In Canada, Europe and Japan, the risks of providing these benefits is spread to everyone through the government. In the U.S. they are associated with specific employers. As the auto industry automated and needed fewer workers to produce a car, it meant that for every car sold, the cost of the benefits -- the "legacy costs" for retirees in particular -- skyrocketed relative to the foreign competition. Health care costs alone now add $1,000 to the cost of every American made car.

In countries where these costs are spread to all through government action, companies are free to succeed or fail based on the qualities of the products and their efficiency -- not the number of their retirees.

Wilson's private sector solution for health care and pensions was a disaster for the long-term health of the auto industry. Reuther's public sector solution must finally be adopted to insure a viable auto industry in the future.

2). Auto industry executives failed to invest in technologies that prepared the industry for the future. They took few steps to eliminate their dependence on hydrocarbon fuels -- and have stubbornly prevented government from imposing tougher emission standards and other regulations that would force them to do so. Now, as we get to the end of the hydrocarbon era, the Big Three are mainly geared to produce huge gas guzzlers.

The major reason for this failure to invest for the future has been the incessant desire for short-term returns. There is very little patient capital in the modern financial marketplace. Private capital is highly mobile. Most investments made by pension funds and large equity investors are securitized as investment instruments (not investments in fixed plant and equipment), so it can move on a moment's notice. There is incredible pressure for immediate high yields. That pressure has been exacerbated by the speculative fever of the last ten years and the bubble it generated.

There was simply more short-term return in big vehicles with gasoline-based combustion engines than there was producing smaller vehicles or in making long-term investments in new propulsion systems. Once again, the market, by itself, failed to generate the decisions that would lead the auto industry to long-term economic health.

3). The collapse of world financial markets and last summer's oil price shock have exacerbated both of these underlying problems. The auto industry's own shortsighted opposition to tougher fuel efficiency standards helped spur the oil price shock, which has been mitigated only temporarily by the current economic collapse. The collapse of the financial market has made it very difficult for these companies to raise capital -- or for their consumers to borrow money to buy cars. That, coupled with the broader economic slowdown, has pushed sales over a cliff. In October car sales dropped 35% from the year previous. That is a recipe for bankruptcy.

Of course everyone now admits that the financial market collapse resulted from the deregulation of financial markets and the failure of government to regulate the international financial system. It flows from exactly the same philosophy of unfettered private markets that lead to the auto industry's underlying problems in the first place.

This week Congress needs to do what is necessary to prevent the short-term collapse of the American auto industry. But over the long term a viable auto industry requires more than capital for auto companies. It requires a federal program to guarantee health care for all, a new approach to private pensions and a crash program to free us from our dependence on oil-powered vehicles.

It will also require a renewed commitment to strong unions and a high-wage economy that grows from the bottom up. After all, the health of every American business is ultimately grounded in the existence of consumers with enough money to buy their products.

Robert Creamer is a long-time political organizer and strategist, and author of the recent book: Stand Up Straight: How Progressives Can Win, available on Amazon.com

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