Monday, December 10, 2012
A Cautionary Tale
Detroit was one of my favorite destinations when I first began to travel on business. It was truly a bold, brash, bright, optimistic chrome and glass miracle of capitalism. And this essay is about how such success as Detroit once enjoyed can be wiped away in a flash of greed.
Detroit started to grow right after World War Two. Our economic engine of progress started to hum there when our focus as a country began to turn away from winning a war and toward winning the peace. Before long blue collar workers were earning enough in Detroit to buy the quintessential 3-bedroom, 2-bath home, have an average of 2.3 children and a boat at the lake house. GM, Ford and Chrysler enjoyed a virtual monopoly on auto production. GM had a more than 51% market share alone. Volkswagen and Datsun (Nissan) and M-B and Toyota weren't even on the radar. And through this growth the United Auto Workers began to clamor for ever-higher wages and benefits, which the car companies' management begrudgingly gave them. Over and over. Avoiding labor strife was management's primary objective. Just ahead of quality, as the future would unfortunately prove.
It wasn't long before the cost of producing autos grew ever more expensive in order to pay for rapidly-escalating wages and retiree benefits. Hourly wages for line production workers averaged more than $75.00 just a few years ago. GM reported that every new car it produced back then carried with it a burden of more than $1,500 to cover retiree health care costs alone. These increased costs resulted in higher sticker prices and decreased quality of manufacture. And this "perfect storm" left the door open for foreign manufacturers to gain an ever-expanding foothold. This, coupled with the fact that off-shore manufacturers had chosen to position their U.S. plants in right-to-work states, so they weren't burdened by having to pay union prevailing wages, gave them an almost insurmountable advantage.
The bloom was coming off Detroit's bush. What had been a modern, bustling city was dying. The Big Three were running out of money. And of time. Ford chose to hire a new CEO and to borrow everything it possibly could, $25 Billion as it turned out, to weather the impending nightmare. It even borrowed $100 Milliion on the value of its iconic "Blue Oval" symbol. GM and Chrysler took a different tack. They came to D.C. with their hats in their hands and begged the Government to bail them out.
Mitt Romney, who had run for President in 2008, counseled against it, preferring rather to permit the companies to go through an orderly, managed bankruptcy. He believed that this process would enable the car companies to abrogate their overly generous labor contracts, thus leaving the taxpayers on the hook for less. President Obama chose a different tack. He appointed Steve Rattner as Car Czar. Interestingly, Rattner's previous job was as a sports reporter for the New York Times (!). Oh, and as a fund raiser for the Democrat National Committee. But I repeat myself. Obama started by firing GM's Chairman (can presidents do that?). He then seized the two companies from their bond and stockholders and redistributed their primary ownership to the UAW.
Let me say that again. Since stock trading first began under a spreading Oak tree in the front yard of Independence Hall back in the mid-1700's, corporate bondholders have been sacrosanct. They get paid first in the event of a bankruptcy. And then stockholders. And then unsecured lenders. And then vendors. And lastly, employees. Obama unconstitutionally turned all of that on its ear with the auto bailout. And we as taxpayers are still paying for that illegal folly today.
Despite our having been told by the newly-minted GM and Chrysler that they have paid back all of their obligations to American taxpayers, which forked over more than $85 Billion in bailouts, we are still owed more than $25 Billion we'll likely never see again. The U.S. of A. still owns more than 500 million GM shares, which are trading at 70% less than their original offering price. We're still owed billions by then-GMAC, now-Ally Bank, which we'll never see again. Chrysler is controlled not by Ford, or one of the many off-shore car companies that have invested years and billions in our American economy, but by Fiat! Fiat? Obama gave Chrysler to Fiat. What part of this makes any sense at all? And GM's profits are now down from a year ago. And they've been given a ten-year, no-taxes reprieve. President Obama has told us GM is "roaring back." I don't know about you, but I could a little less of that "roaring" thing.
And what has become of Detroit? From a high of 1.7 million residents in 1950, arguably the high point in Detroit's lustrous history, only 708,000 live there today. 85,000 are now employed there making cars. That's down from more than 380,000 at its peak a decade ago. Vast areas of Detroit look more like a war zone. Gangs roam free and unimpeded by their much diminished police force. Thousands of homes and buildings are empty and crumbling, windows broken and doors kicked in, infested by legions of druggies. Detroit tried to sell many of them for $1 apiece, but there were no takers. More than 5,500 acres inside the city limits, an area the size of Costa Mesa, CA has just been leased to a Michigan farming corporation. This area will be razed and replaced with crops of corn and beans and alfalfa. Imagine. From unimproved, to improved, to unimproved in just a single lifetime. What a sad commentary.
And to give you an idea of just how much the unions are to blame for this situation, allow me to report on a news release just provided by the Michigan Capitol Confidential. The Detroit Water and Sewerage Department (DWSD) employs a full-time farrier, or "horseshoer," at a salary of $29,245, plus more than $27,000 in annual benefits. There's only one problem. The DWSD has no horses, and hasn't since Lyndon Johnson was president. The position, you see, cannot be eliminated due to union rules.
Yes, the unions controlling Detroit are private. And their numbers are dwindling from a high just prior to WWII of 35% to fewer than 7% today. But while private unions have tanked, public-sector unions have flourished. Approximately one-third of public employees are unionized, and that includes not a single Federal worker (it's illegal for them to unionize!). But their impact on the health of the cities they work for is equally as corrosive as their private-sector brethren. Take a look at Stockton and Vallejo and San Bernardino and San Diego and San Jose if you need proof. And that's just in California.
This is a cautionary tale. When you put the inmates in charge of the asylum, things can get out of control, and fast. We owe it to ourselves and our heirs to take great care of our town and its finances. We need to elect the most competent leaders and hire only the very best managers. And we need to find a way to keep the unions in check. If we don't, we can wind up as a small Detroit. And nobody, including union members or their leadership, should want that to happen.