Tuesday, November 18, 2008

Big Three Automakers Would Fair Much Better in a True Free Market

Following the sub-prime mortgage banking crisis of a few weeks ago we are now confronted by a financial crisis that threatens the Big Three automakers, GM, Ford and Chrysler. Detroit’s difficulties are somewhat the result of the business practices that have not changed with the times, outdated product lines, so-called “legacy costs” leftover from the golden age of the industry in the form of costly pension and health care plans for retired employees that contribute billions of dollars of expense, and other difficulties.

Like the sub-prime crisis, however, the auto industry problems have been complicated by policies of the U.S. government. The industry, like all businesses, suffers from high costs of taxation. Taxing business raises prices to American consumers. Yet the tax-and-spenders in Congress cannot understand or will not admit that fact, and continue to maintain that corporations must pay taxes without caring that this makes it harder for their constituents to buy the things they want and need.

In theory, businesses in a free market succeed or fail on their own merits. It is a simple equation: Auto makers make money by producing vehicles and selling them for more than the cost of producing them. When left to work without much interference, it works pretty well. But when the government gets its fingers too deeply into the business of business, as it invariably does, all manner of weird things can happen.

The most significant factor in driving the Big Three to the brink of financial collapse, however, is the United Auto Workers union contract, which contains barriers to cutting costs and downsizing to profitability. Import autos put downward pressure on the price of domestic autos, while high wages, benefits and other elements of the UAW contract put upward pressure on the costs of production, and ultimately cause prices to be high and uncompetitive or, if prices are kept artificially low to be competitive, the companies are unprofitable.

Unions are not universally bad, but some of their practices are reckless and wasteful. The UAW demands are a substantial obstacle for U.S. auto manufacturers that foreign companies do not have to deal with. The vast difference in labor costs between the Big Three’s expensive union workforce and lower-priced non-union workforces-about $25 per hour on average-means that U.S. automakers lose money on every vehicle produced in their northern union shops, while Toyota, Nissan and Honda make money on each vehicle manufactured in non-union southern shops.

By holding labor strikes over the heads of auto companies, the UAW has managed to get them to agree to a monstrosity called a “jobs bank,” a surreal mechanism that pays nearly 15,000 workers to not work building cars while receiving wages and benefits that often reach $100,000 or more per worker per year. Many of these workers do volunteer jobs or go back to school, but the rest must clock time doing nothing at the workplace, and all of them collect a paycheck and waste their employer’s money. Every dollar wasted by the jobs bank adds to the cost of American made vehicles, making the Big Three uncompetitive or unprofitable, or both.

How does the government figure into this idiocy, you may be wondering? Well, government policies favor labor in the labor/management relationship. Belonging to a labor union is a collective decision, rather than a personal decision. If you work in a place with 100 employees and 51 of them vote for union representation, in order to keep your job you must become a union member, even if you voted against the union and don’t want to join. And federal labor laws support this situation. Unions are now promoting so-called “card check” measures in both houses of Congress which would eliminate the sanctity of the secret ballot method of voting for or against union representation. More government meddling in “free market” business operations.

There is strong opposition to the bailouts proposed by the federal government to correct these various economic crises, a major argument against which is that businesses should survive through smart decision making, not through government assistance. If bad business practices have put them where they are today, let them fail, or let them restructure, but government ought not to help them correct these problems.

This view is grossly hypocritical: It takes the position that government must be neutral when the Big Three automakers are in trouble, but ignores government’s role in making it so much more difficult for them to succeed.

Government bears more than a little responsibility for the problems the automakers now face, as it does in the sub-prime mortgage crisis. So it is a fair question to ask if the government does not have a measure of responsibility to help fix the problem.

The federal government is too big, too expensive and too intrusive. Americans ought to demand that government stay out of business operations, except for setting broad principles to guard against abusive practices, and leave them alone to truly succeed or fail on their own merits.

Stop punishing consumers through corporate taxation.

Stop over-regulating business operations. Get out of the way and let employees and employers work out the terms of employment between them.

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