Will Obama's Response to the Auto Industry Crisis Be Hamstrung by His Party's Ideology?

Philadelphia Inquirer, November 16, 2008

Last Tuesday's election results represent an exercise in poetic justice in that Barack Obama is inheriting a set of problems largely of his own ideology's making. The kicker is that it's precisely the solutions likely to emerge based on that ideology which make it all too likely that the problems will remain intractable.

The current auto industry panic is instructive of Obama's dilemma. The crisis facing America's big three auto manufacturers has, arguably, a single source: legacy costs resulting from union contracts that were negotiated half a century ago. The financial burden thus incurred weighs down their balance sheets to such a degree that, even if the industry in which they compete were thriving, it would be extremely difficult to maintain long-term profitability.

As automobile manufacturing became a global industry, the foreign manufacturers which expanded their operations into the United States flourished. But while Toyota and Honda, along with relative latecomers Hyundai and Kia, have a significant manufacturing and sales presence in the United States, they don't have the staggering labor-related financial obligations under which GM, Chrysler, and Ford are struggling.

GM, for instance, has some 450,000 retirees - more than three times the number of its current full-time employees - to whom it pays pensions and for whom it provides medical care. By some estimates, medical costs alone add $1,500.00 to the average cost of each GM automobile. And the company is facing an unfunded liability of more than $80 billion, about half its annual pre-downturn gross sales, for future health care costs for employees and retirees and their dependents.
Toyota, on the other hand, having gone to school on the problems looming for American auto companies as it set up U.S. operations, currently has fewer than a thousand retirees. Even when that number balloons into the thousands over the next decade, the company's liabilities for its retirees will remain right where they are today: at $0.00. That's because Toyota has put the responsibility for funding their retirements on the shoulders of the employees themselves, through individual investment accounts to which the company contributes.

Even American automotive technology has suffered because of union labor agreements. As foreign manufacturers entered the U.S. market aggressively in the 1970s and '80s, American car companies, faced with growing labor-related expenses that made drastic cost-cutting necessary, found it necesary to save money by skimping on retooling their manufacturing operations. As a result, their products suffered against the competition in both technological innovation and quality.

Without the balance-sheet-killing albatross resulting from union contracts, foreign manufacturers are doing very well in the United States. And therein lies the rub for the President-elect. If Obama does what might please his ideological supporters and bails out the auto industry by essentially nationalizing GM, Ford, and Chrysler, he'll be putting the burden of saving the industry from the consequences of union contracts negotiated by his leftist political forbears squarely on the shoulders of American taxpayers. In doing so, he'll please the Left while at the same time almost assuring that these companies will either sink into oblivion or become the corporate equivalent of permanent wards of the state.

On the other hand, if he allows them to enter into bankruptcy, the companies might have a fighting chance to reorganize, possibly jettisoning some of the financial baggage resulting from back-end-heavy labor agreements. They might conceivably emerge even stronger as a result. The thought of the howls of protest that would be raised by Obama's leftist base in that event, however, are very likely to prevent the President-elect from pursuing that course of action.

The bottom line is that if Obama ends up bailing out the auto industry, then the American taxpayer ends up underwriting the leftist agenda of the past half century, as manifested in labor agreements antithetical to capitalism. That it's taken so long for this leftist tactic, in tandem with the current exacerbating financial crisis, to finally bring the auto industry to its knees is a testament to the resilience of capitalism. That Obama's "solution" to this crisis might spell the end of American automobile manufacturing should not be lost on those of us who will have to bear the financial burden of "rescuing" it.