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Generous Motors No More

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Generous Motors No More

If the auto giant wants to keep jobs in the country, it can’t go back to offering rich benefits to union workers. September 17, 2019
Economy, finance, and budgets

“G.M. Workers Say They Sacrificed, and Now They Want Their Due,” a headline in the New York Times declares. Another explains, “For G.M. Workers, U.A.W. Strike Is Chance for Overdue Payback.” The gist of both stories is that workers suffered enormously during the General Motors government bailout and subsequent bankruptcy, and now that times are flush, they want to be made whole. As the United Auto Workers said about their strike against GM, which began on Monday, the union is looking for “fair wages, affordable healthcare, our share of profits.”

The union must be hoping that everyone forgets recent history. After all, Washington’s 2008 bailout of the auto giant saved not only tens of thousands of jobs but also rescued employee pensions. Workers currently pay far less for health care than the average private-sector employee. And GM production workers have received billions of dollars of profit-sharing over the past several years. Now, the company is negotiating with the UAW in a bid to remain flexible in the face of a weakening auto market, while the UAW is looking for a contract that reflects the old days—when GM’s fixed personnel costs provided benefits for workers to cherish but gave the automaker little room to maneuver in the face of declining sales. It’s a battle of the old unionized industrial economy versus a new one that’s trying to emerge. Saving industrial jobs in the U.S. probably requires that the newer model succeed.

General Motors lost a combined $70 billion in 2007 and 2008. By 2009, auto sales in the United States had plummeted by 40 percent, leaving industry experts to wonder if GM could ever recover. The company’s disadvantages versus its competitors, including foreign automakers now manufacturing in the U.S., were enormous. Counting salaries, benefits, and so-called legacy costs (that is, the pension and health-care obligations that the company had racked up for workers now retired), GM’s labor costs were 45 percent higher than those of its foreign competition, including for cars made in the U.S. by those firms. Among other perks that GM had agreed to over the years, the company paid production workers 95 percent of their salaries when they were temporarily laid off for assembly-line shutdowns. With arrangements like that, GM had little chance back in 2008 of cutting costs fast enough to cope with the decline in sales—or slashing prices enough to stimulate demand.

The federal government was unwilling to let GM fail, given its size and the multitude of suppliers with whom it did business. Washington stepped in with a series of rescue operations that proved expensive, though not sufficient to save the company from bankruptcy. In exchange for billions of dollars of loans and aid, GM trimmed its workforce and reduced costs. Under pressure, the UAW agreed that new workers would start at $15 an hour, about half of what current employees were earning, with the prospect of raising their pay over eight years to $29 an hour. Current workers got to keep their defined-benefit pensions, but new employees received 401(k)s resembling those of most private-worker retirement plans. Crucially, workers retained an attractive health-care package, paying on average of just 3 percent to 4 percent of total costs. Shareholders and bondholders, meanwhile, took it on the chin. When the company filed for bankruptcy in March 2009, stockholders were wiped out. Bondholders received shares in the new company that emerged from Chapter 11, though they took a “haircut” in the exchange, getting less on the dollar than they were owed. Though GM did pay back the government’s loans, the company wound up with an $11 billion taxpayer bailout.

That money was crucial to the subsequent success of the new company, which has earned $35 billion over the last three years, sharing a chunk of that with workers. Since 2010, according to Automotive News, General Motors’ hourly workers have earned $80,500 each in bonuses. In 2018, profit-sharing amounted to nearly $11,000 per worker. But the economy is cyclical, and good times are never permanent. The company’s earnings fell by 9 percent in the second quarter this year, and the slump is expected to continue through 2020. GM has seen this coming: its long-term strategy is to retool its production to focus less on passenger cars and more on SUVs and trucks, and it has begun working to cut costs by idling several plants, including one that manufactured the ill-fated Chevy Volt hybrid.

Those cutbacks, amounting to 2,800 production jobs, have earned the ire of not only the union but also President Trump, who confronted CEO Mary Barra last year and issued a thinly veiled threat: “I heard you’re closing your plant. It’s not going to be closed for long, I hope, Mary, because if it is, you have a problem.” He later questioned whether it was appropriate for a firm bailed out by taxpayers to close plants in the U.S. By contrast, investment banker Steven Rattner, who helped negotiate the government deal with GM, called the cutbacks “a rational response to many worrisome factors.”

GM’s negotiations with the UAW are an effort to cut costs further. It wants union members to contribute up to 15 percent of the cost of health insurance, which would still be only about half of what the average private-sector worker pays for employer-based insurance. The union is resisting. It wants GM to increase pay for workers hired after the bankruptcy to bring them up to par with older workers and to provide a path to permanent employment for some temporary workers filling in on the production line. The union is also pressuring the company to reopen at least one of the shut-down plants.

Essentially, the union believes that the concessions it made during the bankruptcy were temporary, and that the contract negotiations are a chance to reclaim lost ground. They’ve been buoyed somewhat by Trump, who has visited industrial sites around the country, urging manufacturers to keep jobs here and bring outsourced jobs back home. It’s a popular theme, but the question remains: keep them here at what cost, and under what model? The UAW is vying for the old, legacy model. I’m not sure that even Trump, on his best days, can justify a U.S. manufacturing economy that operates on those terms.

Photo by Bill Pugliano/Getty Images

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