Friday, December 12, 2008

Washington Rejects Auto Maker Bail Out

Its just after 9 AM as I'm starting to write this and it appears the markets are going to take a severe hit as news of Washington's failure to bail out GM and Chrysler hits the wires. I'd written about this back on November 26th, "The Auto Sector - To Bail or Not To Bail", and it appears one of my comments is coming to fruition. In that entry I said this:

If the unions balk and refuse to accept substantial wage concessions? Then I think we should simply let the sector fail and hope that Honda and Toyota among others can step in and fill some of the void.

Well it appears that's what's happening, Republicans in the US Senate are justifying their rejection of the bailout based on this very issue. Their contention is that a bail-out can not move forward until the UAW is willing to accept wage parity with American auto workers employed by Japanese manufacturers. It strikes me as a reasonable request, and I suspect there are many who will agree...excepting of course both UAW and CAW workers.

I was listening to CBC radio this morning, and heard an interview with a CAW official. This union representative was giving no quarter when it came to the issue of wage concessions, and was speaking of 'catastrophic' consequences for the overall economy if companies like GM and Chrysler are allowed to fail. It occurred to me that we're witnessing a huge game of chicken going on, with the question being...Who's going to blink first? I don't believe the gentleman being interviewed is far off the mark in his assessment. If the auto giants do indeed fail there would be massive pain across all sectors of the economy. Already in Durham Region just east of Toronto its being reported that housing values are plunging as GM's Oshawa facilities slow down.

I can empathize with a worker accustomed to annual earnings of around $75,000 a year (and more depending on overtime) being angry about being asked to take a massive wage cut. It doesn't matter how much a person earns, typically they build their lifestyle based on that income stream. Its the old adage 'expenses rise to meet income' coming into play...I suspect that there are many auto workers asking themselves if they could get by making $40,000 or so a year...and I'm guessing the majority are likely saying, "no way in hell".

The difficulty here is that we're talking about tax contributed not just by auto workers, but by all sectors of the economy. How does someone earning $10 or $15 per hour feel about his/her taxes going to subsidize someone making $35 or more? And that is what's at stake here, government subsidies. Some will talk of the money being a loan, and that's all well and good...but governments will have to borrow the money first and that means deficits and future taxation.

Unfortunately in this situation there is no 'win win' scenario available. If no wage concessions are made and government assistance isn't forthcoming then everyone loses. Auto workers will lose their jobs and be forced into a job market at the worst possible time, and our economy will take a massive hit. If the government blinks and bails out the auto giants without first gaining wage concessions from the unions, then taxpayers lose. And its fair to ask how competitive companies like GM and Chrysler would be, with foreign based companies operating here in Canada paying substantially less in wages. We aren't hearing anything about Honda or Toyota begging for cash, but then their labour costs are substantially lower.

Even if the unions accept wage concessions there is still going to be pain, but in this case most of it would be borne by workers having to adjust from a lifestyle that costs 75K or more a year, to one affordable with yearly earnings of 40 or so thousand. On top of that our governments (that's everyone) would be on the hook in terms of subsidies and loan guarantees, but at least in theory GM and Chrysler would then be better able to compete with wage costs similar to foreign based competitors.

As I was saying, this is a huge game of chicken, with equally huge stakes. And I'm a GM guy, I own a Cavalier (my 2nd) and have owned other GM cars which I all found to be great, (with the exception of my vette, chevette that is) so I take no pleasure in seeing the company struggle. We can talk all we want about unfair trade with foreign competitors flooding the marketplace here...but that argument was over a long time ago. The reality is that we live in a globally competitive marketplace and we need to ask if companies like GM can be competitive when their wage costs are so out of sync with the global industry. I think we're seeing the answer right now, and the answer is least not without taxpayer help.

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