The Economic Case Against Barack Obama, Part Three

Osama Bin Laden is dead, and General Motors is alive. That sales pitch is likely what propelled President Obama to victory in Midwest states such as Ohio and Michigan. But how much credit does President Obama deserve for “keeping General Motors alive” as he claims?

There is an apocryphal tale that you will often hear if you’re around my father or his immediate friends. Once upon a time, the friend owned a Chevy Vega. He never had to change the oil, because the car burned a quart of oil every 100 miles. He had to keep a case of oil in the trunk at all times, regardless of where he went. He could sit in the car and literally hear the car rusting away around him. And when he finally got it up to 60,000 miles and was coming up to a red light, the brake pedal literally broke off and he rear-ended the car in front of him.

Luckily for him, the car in front wasn’t a Ford Pinto. Or they would have both exploded and my ears would have never been graced with the Vega horror story a hundred times over.

I will focus in this article primarily upon the automotive bailouts as opposed to those of the financial sector, partially because I mentioned the banks in Part Two but also because over 90% of the bank bailout money has been paid back. We of course can’t say quite the same about General Motors and Chrysler, companies that have been on the ropes multiple times in the past forty years.

A Brief History of the Big Four

For years, pundits and politicians have talked about the “Big Three” when it comes to the American automotive industry. Although for years there were second-tier manufacturers such as AMC and Packard, they all invariably went under or were bought up by the Big Three by the 1980’s. The Big Three, in modern parlance, consists of General Motors, Ford, and Chrysler. But I would like to add a fourth to that list – the United Auto Workers.

The fortunes of the UAW have waxed and waned in similar fashion to the other Big Three over the decades. Almost all of Detroit’s workers are represented by the UAW. In 1970, UAW membership peaked at 1.5 million and Detroit effortlessly dominated the American auto market. Except for the occasional oddity imports such as Volkswagen hippy vans, most mainstream European cars such as Fiat, Peugeot, and Renault were crowded out of the American market. Detroit literally had the bull by the horns, and they were making money hand over fist.

Today, UAW membership has dropped to 390,000. Detroit, once controlling over 90% of the market share, have dropped to 45%. Toyota is on track to be the sales leader in 2012, despite owning only two additional marquees, Scion and Lexus. I can go on and on about the rebadging and different marquees General Motors has had over the years – Oldsmobile, Cadillac, Buick, GMC, Chevy, Hummer, Saab, Saturn, Pontiac, and others that aren’t off the top of my head. If you go international, the list gets even longer – Opel, Holden, Vauxhall, Asuna… and on and on.

What has brought us to this juncture? If I were to point a finger, it would invariably have to be at the UAW. That’s not to say that GM’s management didn’t have its own share of incompetent and shortsighted decisions that ultimately brought a once-great company to the brink. But it was decades of ceaseless GM-UAW adversarial action that caused Rick Wagoner to fly on his corporate jet, hat in hand, asking Congress for taxpayer dollars.

Go back to the 1950’s. The economy was booming. Millions of post-war veterans returned home, capitalized on their GI Bills to get an education, started families, and began making money. Suburbanization began to take hold with the advent of the Interstate Highways, and suddenly demand for cars skyrocketed as suburban residents had few other feasible ways to get around. Demand, pent-up by wartime rationing, exploded.

What, then, went wrong? The answer lies in the UAW’s ability to extract increasing concessions out of GM management. The middle of the 20th Century was the union’s heyday, and few management teams could stand up to concerted union action before long. This was especially true at companies such as GM, where sales were rising, profits were at record levels, and demand continued to rise. So, GM handed out generous pay and pension packages based on those optimistic predictions of demand for cars continuing to rise.

And for a few decades, it did. GM became relentless in its quest to push more iron out the door, with corresponding declines in build quality. Ask your father or grandfather about the GM car they drove in the 1970’s. Odds are the seats weren’t bolted down correctly, the carpet wasn’t nailed in properly, the vinyl top shredded away after a couple years, or the engine block cracked. Remember, folks, that GM is the company that invented the term “planned obsolescence.” Meaning that your car was deliberately under-engineered, it was guaranteed to break down before long, and you would have no choice but to buy another car.

And buy another car America did. GM production peaked at 15.3 million cars in 1978, even as build quality declined. Meanwhile, the Europeans were driving up and down their mountain roads, developing proper things such as suspension, handling, and brakes. And the Japanese, guided by principles such as kaizen, were perfecting a manufacturing process that, once it gained a foothold, began to slowly eat the Big Three alive (and continues to this day).

The writing has been on the wall since 1973, when the first oil shock hit. While GM built 11 mile-a-gallon Cadillac Fleetwoods and powered them with V8 engines, Honda entered the US market with its Civic, which got an unheard-of 30 miles per gallon. More importantly, its clean-burning CVCC engine didn’t need a $250 catalytic converter to meet the EPA’s emissions standards. This provided Honda with an enormous competitive advantage over domestic compact cars, an edge which Japanese cars retain to this day as they continue to perfect their manufacturing process.

Now, anybody knows that the thin steel of the early imports was so prone to rust that it isn’t even funny. Any old Honda or Toyota compact invariably has enormous amounts of rust near the wheel wells. Those four-bangers aren’t exactly known for being fast either, even if the driver attaches a coffee can to the exhaust in a pitiful attempt to compensate.

But they provided fuel economy and reliability. In the face of ever-increasing GM horror stories, whole generations of Americans began to buy import brands. And GM did little to help its reputation or react properly to the arrival of the imports. Many at management and the union, as hindsight reveals, had big blinders on. I could name you terrible car after terrible car that GM has produced since then – all of which were made after Japanese cars entered the market. Some of the concepts were brilliant in theory but rubbish in execution. Others were fraught with rushed engineering, poor quality control, or perhaps GM simply didn’t have their heart in the program.

The Chevy Citation in the early 1980’s was notorious for its faulty brakes. The Oldsmobile diesels would reach about 90 horsepower before shattering into pieces. Cadillac’s 8-6-4 engine was a disaster. The Ford Taurus was associated with an unusual nickname – the transmission from hell – because they went out every 30,000 miles or so. Early 2000’s Ford Explorers had the same transmission problems as the Taurus. The 2.7 liter V6 engine used in the ~2004 Dodge Intrepid is notorious for collecting oil sludge in the bottom before failing prematurely. More recently, the Chevy Cavalier and Ford Focus are well-known for their electronics woes, especially the dashboard and power windows. The Chevy Sonic (brand new for 2012) is beset by transmission and electronics recalls.

I distinctly remember, back in 2008, renting a brand-new Buick Lucerne with my father to take on a road trip to Myrtle Beach. It only had about 25 miles on the odometer, which leads me to think we were the first people to rent that car. We got about a mile down the road, and I promise you I merely pressed the radio control knob and my finger went straight through.

In the face of these problems, is it surprising that whole generations of car buyers swear off domestic altogether?

Leading Us To Bailouts

Car sales as a whole have declined across the board since the 1970’s. Today’s cars last longer and are far more reliable than the cars of forty years ago – thus holding car sales down even as the absolute number of drivers continues to increase. But nowhere is this decline more precipitous than at General Motors, which was once one of the world’s models for corporate governance.

GM production peaked at 15.3 million in 1978. According to the Wall Street Journal, the entire US market is on track to buy 14 million cars in 2012. And in this shrunken market, GM is only on track to sell 2.5 million cars in the U.S. this year. It doesn’t take a genius to say that GM’s business model – handing out generous pay and retirement benefits to its unionized employees – is doomed to failure.

None of the Japanese or European auto plants in the U.S. are unionized, and the majority of them are located in “right-to-work” states, predominately in the South. The cost of labor in these plants, after factoring in benefits, is roughly $35 an hour.

The cost of labor in a UAW-represented plant is $73 an hour.

Chew on that one for a second.

Now, to be fair, ask any UAW veteran – and they’ll probably tell you they make $20-25 an hour. But they’re forgetting about the health benefits, the guaranteed pension, and the other retiree benefits. That is what is killing GM. Their labor costs are higher, and consequently they can’t make any money on small cars, which have narrow profit margins. Small compact cars were never taken seriously by Detroit, which is why we wound up with so many truly terrible cars over the decades. Their hearts weren’t in them, they weren’t making any money on them, and consequently, they didn’t really want to build them.

GM has known this for decades. This is why they pushed sales of pickup trucks and sport utilities so hard in the early 2000’s – because they could get a nice fat profit margin off those vehicles, the higher trim levels of which approached the price of small houses. In 2001, GM and the UAW unwisely signed an agreement to provide wage and benefit increases totaling 24 percent over the next four years, as if they would sell pickup’s and SUV’s forever.

We know the rest of the story from here on out. Hurricane Katrina helped boost gas prices over $3 a gallon. Sales of large V8 pickups and SUV’s cratered, and GM’s profit margins went with them. They began quickly losing money, and by 2008 had exhausted all available supplies of cash and credit. Judgment Day had come.

Bailouts have worked before in the past. In 1980, as Chrysler was nearing bankruptcy, Congress reluctantly extended a $1.5 billion line of credit in order to buy Chrysler sufficient time in a bad market to roll out new designs. Led by Lee Iacocca, the turnaround was immediate. The lasting legacy of the 1980 bailout was the minivan and a whole line of new, front-wheel drive compact cars that led Detroit’s attempt to push back against Japanese imports. And the bailout money was paid back within two years. Bailouts can work, and you could make a national security argument in favor of keeping a significant automotive industry in the States – after all, that automotive manufacturing expertise is the same skill set needed to produce military vehicles.

I am assuming that a bailout similar to the line of credit the US government extend to Chrysler in 1980 was what former President Bush had in mind when he sought to extend money to GM. Unfortunately, that is not what happened. The taxpayer has just begun to pay for the 2009 bailouts, not only in our pocketbooks, but in our politics and our lost job opportunities.

The problem with the 2009 bailout therefore does not lie in the fundamentals of the bailout, but rather the politics behind it. And it is the underlying politics that causes me to point a finger at the UAW and President Obama when talking about the President’s failed economic policy.

A Shameless UAW Power Grab

The bailout quickly developed as follows: The old GM was allowed to sell off its assets in a controlled bankruptcy, while $50 billion taxpayer dollars were funneled into buying millions of shares of preferred stock in the new GM, which was technically a new legal entity. This gave the US Government a 61% majority ownership of General Motors and 74% of GMAC – the latter of which was GM’s car financing arm. The UAW received the second-largest share (17.5%), followed by the Canadian government and province of Ontario (11.7%). The residue went towards the unsecured bondholders who had just taken a massive haircut.

So, to sum up: The government wins, the union wins, the taxpayers lose, and the investors lose.

A share of GM purchased in 1916 for $1 soared to $1,000 in 2000. And it became completely worthless in 2009.

But it doesn’t end there. The UAW used this opportunity to solidify their position as the sole representative of the workers at all GM plants by quite simply freezing out all other rival unions. The UAW, capitalizing on its political leverage, managed to push through a “job guarantee” for all UAW members if laid off. That meant if a GM plant closed and people were laid off, the former UAW workers would be the first to get their jobs back. The largest of these rival unions, the IUE-CWA, represented some 45,000 employees at GM, Delphi, and other manufacturing companies, largely in central and southern Ohio.

None of these workers have their jobs back, despite GM reclaiming the #1 spot on top of the auto sales chart in the US in 2011. These include the Moraine Assembly (south of Dayton), the Warren Assembly (near Cleveland), and the Inland Plant (Vandalia, Ohio).

The only assembly plant in Ohio still operating, to the best of my knowledge, is in Lordstown, Ohio. It’s the plant that gave us the Chevy Vega. I’ll give you three guesses as to what union represents the workers there, but you’ll only need one.

In addition to jobs, the UAW managed to extract other guarantees for its members. The old Delphi pensions were put under the trust of the PTGT, Pension Trust Guaranty Corporation, an arm of the US government. Current GM workers continue to receive their generous benefits packages, including guaranteed pensions – while new hires make less than $15 an hour without those same benefits.

It gets sweeter from there. General Motors will say that they have posted a profit every year since the bankruptcy, and are in strong financial shape for the future. However, what they don’t tell you is that the IRS is allowing the new GM – which is a new legal entity – to write off the continuing losses from the old GM (now renamed Motors Liquidation Corporation). These extensive write-downs mean that GM has paid zero dollars in Federal taxes since 2009.

Well, if I didn’t pay any taxes, I’d probably be socking away the cash, too.

Enter “cash for clunkers” in 2009, which was ostensibly designed to get all those old gas guzzlers off the road in the name of improving fuel efficiency.

Only thing is, there were two huge problems with Cash for Clunkers.

First, the program required all “clunker” vehicles to be in running condition – and it was now the dealer’s responsibility to ensure that car was rendered inoperable. This meant that millions of older but still serviceable vehicles were taken out of the used-car market altogether. The effect on buyers in the used-car market has been nothing short of disastrous, with good used cars now selling significantly above Edmunds or even Kelley Blue Book figures.

Take just one example, my personal example. In 2007, before Cash for Clunkers, I purchased a base model 2000 Toyota Echo, 5 speed, with 80,000 miles on it, for $4,000.

In 2012, I sold that car after five years. It had been to college, to various jobs, up and down the East Coast I don’t know how many times, around old country roads, mountains, cities, everything. It had 180,000 miles by then. The car had been dinged and dented in various places due to parking on campus all those years. It had certainly seen happier days. And I managed to fetch $3,300 for it.

It’s pretty obvious I depreciated that car a heck of a lot more than $700 in five years. Kelley Blue Book stated that the car was worth about $2,500 – but the classifieds were running twice and even three times that. So, dings and all, the buyer and I agreed $3,300 was a fair price. And it was.

This was great for me, the seller – but terrible for the buyer. And those effects are magnified on millions of low-income families who can ill-afford to drop $3,000+ cash on a good, serviceable car – much less finance payments on a new vehicle.

Second, Cash for Clunkers backfired in an interesting way: not a single bailed-out company had a make or model crack the top 10 list of new cars sold under the program. The top three makes and models sold were: (1) Toyota Corolla; (2) Honda Civic; (3) Toyota Camry. Ford alone among the domestics cracked the top 10 with their Focus – and Ford didn’t take a bailout.

How Does this All Tie Back to President Obama?

The UAW made a power grab and by any objective measure pulled it off. They are in more control of GM’s destiny today then they ever have had in the company’s troubled history. They, through their political fundraising on behalf of Democrats, can match even the most aggressive corporate SuperPAC’s dollar for dollar. The enormous organization provides a lot of on-the-ground muscle for re-election campaigns, staffs rallies, and stages protests outside the opposing candidate’s campaign headquarters. Almost every GM worker today is subject to mandatory union dues being docked from his or her paycheck, regardless of the worker’s personal political beliefs.

The UAW, as an affiliate of the AFL-CIO, has thrown its full weight behind the support of President Obama, his reelection, and his continued political fortune. For his part, the President has returned the favor, by allowing General Motors to avoid paying a single dime on Federal taxes since Obama became President. To this day, the UAW still owns a 17% stake in General Motors – and is the second-largest shareholder after the United States Government.

Will the taxpayer ever get his money back? Unlikely. In order for the taxpayer to break even on his “investment”, the current shares held by the US government would have to appreciate to $55 per share. Although the IPO was for $34 a share, the stock quickly dropped to $23 a share, where it has languished for the past year. This equates to roughly an $11 billion loss for taxpayers – solely to benefit the UAW. There is little reason, barring significant inflation that debases the dollar completely, that GM stock will ever rise to its needed $55.

Don’t be surprised if General Motors goes bankrupt again in a decade or so – their new makes and models continue to lag behind their foreign competitors in build quality, reliability, and most importantly, perception by consumers. But you can guarantee that as long as the UAW enjoys the continued political and economic support of the Obama administration, the UAW will survive. And as long as the UAW survives, it will dump tens of millions of dollars into re-electing President Obama and others of his like.

In Part Four, I will lastly turn to the direct policies and legislation signed by and enacted during the Obama administration, namely the Patient Protection and Affordable Care Act, otherwise known as Obamacare.

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This entry was posted in All Blog Posts, Automotive, Economics and Politics. Bookmark the permalink.

2 Responses to The Economic Case Against Barack Obama, Part Three

  1. Pingback: CarMD Reliability Rankings - Sports cars, sedans, coupes, SUVs, trucks, motorcycles, tickets, dealers, repairs, gasoline, drivers... - City-Data Forum

  2. This was one of the greatest posts on the auto industry I’ve ever read. You make quite a point on how vicious this cycle is that Barack has going. Unfortunately, it was this or sink.

    -David Enabulele

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