Saturday, December 13, 2008
The Auto Bailout:
PART I: What does it all mean? And how much does it all cost?

Years ago, I dated a guy who was a republican with an MBA from Darden. At that time, venerable department stores in downtown Richmond were shutting their doors, and there was a lot of outcry--the stores evoked memories of people's childhoods: the excitement of big department stores, with their escalators, elevator operators, salespersons and atmosphere of luxury. It's a very specific nostalgic feeling that you just can't get at Kmart or Walmart (or even most department stores in malls today)--a sort of multi-sensual experience. But at some point, people began to prefer the bargain experience to the luxury experience--and the big downtown department stores began to fail, to be replaced by malls. To an MBA and free-market radical who believed in Reaganomics, this was a natural evolution of the market; and so, he couldn't understand why the people who abandoned department stores for Walmart were complaining. He didn't understand the nostalgia: people could buy what they wanted at a discount store, for less. Who cares about the shopping experience? Move on.

I understood the people who mourned the loss of Thalhimers and Miller & Rhoads. Markets are not just numbers on paper and the resulting profit/loss. They are comprised of human behaviors, and are woven into and from people's lives. We tend to forget that, when we talk about the economy--we think of the loss of a company in terms of the loss of jobs, but not in terms of the loss to those who have made the decision to buy a company's products and services. But, buying behaviors are very complex. They are simultaneously personal to an individual, and indicative of a society at a given point in time. Our buying/consuming decisions may seem to us to be intelligently and intentionally made, and yet may really be more emotionally-based and unconscious than rational. And when that is the case, people may feel an attachment to a product that goes beyond any rational reason. Remember the old coke/new coke kerfluffle? Know anyone who will argue passionately about Macs versus PCs? [after all, aside from the fact that Macs are clearly superior, it's just a question of what your individual needs are in a computer, right?]

Car-purchasing decisions, almost more than any other consumer behavior, are emotionally driven. People in this country, especially, spend so much time in their cars that they view them as an extension of their selves--an aspect of their identity. They personify their cars, giving them names, ascribing emotions to them. American-made cars have long been a part of Americans' identity. People identify not only with individual models of cars, but with whole automobile companies, declaring themselves to be "chevy men" or "ford men." Songs, movies and books have been written in which an American car is the main protagonist. Cars are also closely identified with American adolescence, because they allowed teens a degree of independence and differentiation from parents that was never possible before the introduction of the automobile. This was due in part because of America's mid-twentieth century affluence, which afforded teens the ability to purchase their own cars (and later, for parents to buy cars just for their children). In the wake of the gas shortages of the 1970's, some consumers began purchasing smaller, more fuel-efficient foreign cars. Others became even more loyal to American cars, viewing their purchase as an indication of national identity. Many persist in viewing an American-car purchase as an act of patriotism, despite the fact that many "foreign" cars are made here, while American cars may be made wholly of parts manufactured in other countries--or even assembled in another country.

This is the context in which the current automobile crisis is playing out. Our identification and our nostalgia are part of what makes it difficult to decide what to do about the American auto-making industry--not just the effects on the economy. Can we really just let such a large part of the American psyche pass into oblivion? Relegate the mustang, the T-bird, the little red corvette, the pink cadillac, to the history museum? Well, really, like the downtown department stores, we already have. Those cars belong to a halcyon past that we celebrate in story and song, but we don't drive them anymore. We drive SUVs, hybrids, minivans. We still choose cars based on emotion and identity, but now our identity may be "green consumer" or "macho man with big [truck]." Do we really need the American auto industry when we can buy a Toyota prius or a Nissan armada?

I'm not any more of a free-market radical now than I was then. But the auto industry is a mess. It's a weird patchwork of protectionism, greed, union demands and compromises, and obsolete assumptions. It's an industry in which a CEO who makes millions of dollars to steer a company that depends on the market can't understand why it might not be a great marketing decision to fly a private jet to Washington when asking for billions in public funds to shore up a failing industry. Can a bloated industry of redundancies and irrelevancies be saved, or does it need the cleansing fire of bankruptcy? Would reorganization under bankruptcy be the end of the industry, or would it force it to become a healthy, relevant, competitive industry? Or, would the foreign automakers who are making cars in the US pick up the slack--both in terms of car sales and jobs--with the population of Detroit moving to Alabama and Mississippi? Might be a good thing for those impoverished states.

WaPo car columnist Warren Brown suggests that the motivation of those who think the American auto industry should not be bailed out is class bias. While our society is chock-full of unconscious/unspoken/covert class bias, and that it plays into the thinking of many people, I think this premise is flawed. For one thing, the whole article is focused on people who are critical of the UAW, not on the criticism of the auto industry, and the executives that got us here.

In fact, the UAW probably has very little to do with the current problems in the industry. Most are the automakers' doing. For instance, consider the "jobs bank." Even UAW workers have a problem with that program, which (depending on who you listen to) was either started as a way to get workers to accept automation, or so that there would always be skilled workers on call when needed. And, what does the job bank really cost? Regardless of cost, though, as an example of how stupid the industry is, the jobs bank can't be beat: paying people to sit on their asses? Why not pay these idle workers to actually do something? For instance, they could, but apparently don't, call them in during peak production (instead paying overtime to regular workers). Or, banked workers could have been volunteering in local schools, coaching youth sports, beautifying detroit, feeding the homeless, getting education/training for new jobs... anything. It's demoralizing to do nothing all day, so it's hardly something people would want, given the choice. Detroit could have dealt with redundancy in a more productive way that would have lead to fewer paid nonworkers.

It is true that non-union Japanese car makers don't pay their workers as much as Detroit does, and they don't have to carry so many retirees. But is this the main reason why Detroit is suffering? First of all, workers don't make all that much: Brown cites $71,000 in combined wages and benefits. The automakers cry that their huge pool of retirees (and the health benefits they pay for them) acts as a drag on Detroit. But lets look a little more closely: Detroit's CEOs function as at least as much of a drag on the industry as the union employees. Consider that Detroit CEOs rake in, not just somewhat more than Japanese auto CEOs, but many multiples more in salaries and bonuses. We're talkin' US CEOs making an average salary of $12 million to Japanese CEOs' $1.3 mil average. But salaries are the least of it. Ford's CEO, Alan Mulally, makes over $20m in salary and compensation. Other executives makes less than the CEO, but there are lots of 'em: I haven't been able to find out how much salary these guys make, but in 2008, Chrysler paid "retention bonuses" to its 50 executives totalling $30m, with the top six execs getting between $1 and $2m each. That doesn't include what they get in salary. Ford's next four top execs' compensation ranged in 2007 from $2 to $8m each. The workers make an average of $71,000 in wages and benefits (or about $34/hour) according to Brown (which comes out to considerably less than the $70/hour being bandied about)--more like $34 per hour. The retirees cost US automakers $12 billion a year total. It takes approximately 30 hours to build a car (if you're Toyota--if you're Detroit, add a couple of hours). Thirty hours to make a car times $34/hour is about $1,000 in labor costs per car.

What does this add up to? Well, each of the big three expects to sell between 11 and 12 million cars next year. That's about 34 million cars. $12 billion in retiree costs divided by 34 million cars is about $250 per car.

NEXT: PART II: Whether and Whither?

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