


Without competition, Big 3 and UAW made deals causing problems now THE FLINT JOURNAL FIRST EDITION Sunday, October 23, 2005 By Mark J. Perry Michigan's unemployment rate has been the highest in the country almost every month this year, Delphi has declared bankruptcy, and GM's financial problems are mounting as its market share continues to hit all-time low levels and its debt is downgraded to junk status. The source of many of these serious economic problems in Michigan can be traced back to the 1970s, when the Big Three sold almost nine out of every 10 cars and the UAW had a monopoly on the labor supply of autoworkers. Neither side - management nor labor - faced any serious competition. Japanese automakers weren't yet a serious threat to the Big Three, and nonunion autoworkers in the United States were nonexistent. Without the strict discipline of market competition, both sides pursued short-run, self-interested goals and could never have imagined that their actions in the 1970s would create the serious future troubles they both face today. For example, the UAW consistently negotiated incredibly generous wage and benefit packages for its members that advanced worker conditions but laid the groundwork for major problems decades later. Economic theory clearly tells us that the more successful a union is at achieving above-market compensation, the greater the likelihood that those unionized industries or companies will eventually suffer losses in market share, employment and output. This is exactly the situation today, with GM's market share and UAW membership at all-time lows. The above-market compensation gains of the UAW led ultimately to long-run losses in union employment, as the UAW gradually priced its overpaid members out of the globally competitive labor market. In the undisciplined years of the past, GM management could maintain labor peace by conceding to above-market pension and health care benefits for retirees, which didn't affect the bottom line much in the short run, but imposed huge legacy costs on distant future periods. Those once seemingly distant quarters have arrived, and the overly generous benefits for workers that GM management accepted have mounted to the current level of $80 billion in future liabilities just for health care costs alone to cover more than 1 million workers and retirees. The big issue today that is really crippling Michigan automakers, which neither the UAW nor GM could have anticipated in the '70s, is the significant gain in life expectancy. A historically unprecedented 10-year increase in life expectancy, from 66 years in 1970 to the current 76 years, has unfortunately added 10 additional years on average to every retiree's lifetime health care and pension benefits, burdening GM with billions of additional dollars of liabilities that were completely unforeseen in the '70s. If any one single factor eventually drives GM into bankruptcy, it will be the explosion of legacy costs for its aging retirees who will continue to live longer and longer in the future. To these problems, add the increasingly intense global competition of recent years, and you have all the necessary ingredients for a domestic industry that is now in serious trouble. The UAW has gradually lost its labor monopoly on the supply of autoworkers and must now compete with nonunionized American workers at Toyota, Honda and Nissan. Union membership has fallen to a historical low of 8 percent in the private sector, as unions become increasingly irrelevant and outdated in today's knowledge-based global economy. Think of what happened in the long-distance market after ATT lost its monopoly on long-distance phone service and you get an idea of what is happening to the UAW in the face of global competition. In the more static days of the past, GM and the UAW had a business model that worked, but it has now fallen apart as the twin forces of globalization and an aging population have exposed the flaws of an outdated way of doing business. It's now time to face reality: Michigan's old business model is bankrupt, the era of above-market compensation for unskilled workers is ending, the importance of unions is rapidly fading, and globalization is here to stay. Simply put, the excesses and undisciplined behavior of the UAW and GM in the past will no longer be tolerated in today's global economy, to the ultimate benefit of both American consumers and Michigan's long-run economic future. Mark J. Perry is a professor of economics and finance at the University of Michigan-Flint. *** © 2005 Flint Journal. Used with permission Copyright 2005 Michigan Live. All Rights Reserved.