Then and Now

Not only is the world different now, but what we know of what’s past is often wrong

"It is unfair for us to complain about American jobs in the automotive industry being outsourced to other countries when Japanese, German and Korean automakers are outsourcing their formerly home-done jobs to the United States. There are now 23 foreign-owned car and parts plants operating in North America, and more are coming."

“The biggest drain on GM’s profitability is their welfare system. It is their health care obligations and their pension obligations. The SUV is not killing them, and don’t let the media tell you that — and don’t let a bunch of knucklehead, numbskull, ignoramus activists in the media tell you this — because that’s not what’s causing General Motors’ or Ford’s or Chrysler’s problem.” — Rush Limbaugh, earlier this month

It is unfair to discuss what’s said by brethren in radio, without saying that on many issues I’ve agreed with the positions Rush has taken. I could say the same thing about Al Franken or anyone else on talk radio. No one is right all the time, nor are they wrong all the time.

All that said, in the discussion excerpted about the problems facing Detroit, Rush also quoted a column by George Will, whom Rush agreed with, saying that Will had postulated it is only the exorbitant costs for health care and retirement plans that are breaking the banks in Michigan, not lost market share or a reduction of the high gross profits associated with sport utility vehicles. Rush later added that Social Security should be dumped and replaced by the pre-Great Depression plan: self-saved retirement.

Well, the problem with that is history. It tells us that in that period few individuals managed to save a strong nest egg for their retirement, and then they watched it be completely broken and emptied by the Depression. And in the period before 1929, the American middle class was nowhere near as large as it is today. Only a few jobs paid so well that a person could enjoy a reasonable lifestyle and still have enough left of their weekly paycheck to fund retirement.

I would also take exception to anyone’s classifying people who work full-time and receive payment that includes benefits, such as health care and some form of retirement package, as welfare recipients. That being said, let’s discuss what truly ails Detroit.

Paul Ingrassia, president of Dow Jones Newswire, wrote in a May 17th Wall Street Journal article that what we are witnessing today is not the death of the American automobile industry, but its rebirth. Ingrassia added that it is unfair for us to complain about American jobs in the automotive industry being outsourced to other countries when Japanese, German and Korean automakers are outsourcing their formerly home-done jobs to the United States. There are now 23 foreign-owned car and parts plants operating in North America, and more are coming.

First, let’s take up the issue of Mr. Will’s column and Rush’s quotes from his show, and why they are inaccurate. Last year General Motors earned $3.9 billion — and GM predicted that its health care costs would rise as much as $1 billion in 2005. Government reimbursement for the new Medicare prescription drug benefits would offset much of this premium increase, so the net effect to GM’s bottom line would be far less than $900 million. Under this simple equation, all other things being equal, General Motors should still be well on the way to earning $3 billion in this fiscal year. Of course, GM posted a $1.1 billion loss in the first quarter. So something else is obviously eating at their profits.

Daimler lost about the same amount of money during that period, but I have yet to see anyone claiming that Mercedes could possibly go out of business. No, in the American press, possible Armageddon scenarios are published daily only because Kirk Kerkorian offered to buy 28 million shares of GM’s outstanding stock. But, when Daimler CDO Bodo Uebber admitted a week ago Saturday that outside and possibly unfriendly hedge fund operators have managed to acquire up to 15% of Daimler’s outstanding shares, not a word was said, no punditry quoted.

Now, let’s talk reality. Many of the Japanese importers of automobiles have sold their cars for years without ever once posting a profit on their North American operations. In Mitsubishi’s case, for the period of 1982 to 1997, the company accumulated losses from North American operations totaling $1.7 billion for having had the pleasure of selling their automobiles to you and your neighbors. Acura went over a decade with once turning a net profit here. In fairness, neither of these two firms had but few legacy costs — such as employment benefits — factored into their bottom line. And certainly both companies had huge automotive hits during this period; but selling in North America didn’t make them any money.

So, why did Japanese and Korean automakers decide to enter our market, in many cases knowing that business would be done at a loss for years? It’s the magic of volume production. Because the more cars and trucks any company manufactures, the less each vehicle costs. Last year, when General Motors was running its large SUV plants on overtime, theoretically the cost to produce each vehicle was less than it’s been this year; many SUV plants have been on extended downtime, forcing GM to pay primary earnings to workers while no production was being done. That seriously hurts the gross profit on each vehicle produced.

Additionally, we continue to hear that GM’s costs for health insurance and pension plans are in the neighborhood of $1,500 per car. Again, that figure varies, based on how many cars and trucks GM manufactures in one year. Obviously, if General Motors came up with four new solid-hit vehicles (with volumes in the 250,000 range) in the next couple of years, then GM could amortize its legacy costs over another million units annually, reducing the cost per vehicle dramatically. So, the Japanese in many cases were willing to lose money selling cars here because it increased their overall production, lowering the cost of each vehicle built, which improves the corporation’s bottom line in the long run.

Also hurting automakers are a couple of other factors, which have apparently escaped those discussing Detroit’s current financial problems. One is the loss of America’s blue-collar middle class; the other is the wage structure of entry-level jobs against the price of new cars today. Over the last 25 years, the United Autoworkers have lost right at one million well-paid members. It’s no stretch of the imagination to believe that most of those members purchased GM, Ford or Chrysler products, which today likely loses those companies at least 200,000 – 250,000 sales a year.

Throw in the loss of jobs in the American parts industry, and in steel or glass manufacturing, and one could easily claim that Detroit, while saving billions in labor costs, has also intentionally eliminated the careers of well over a million former loyal customers.

Finally, for those of us in the Baby Boom generation, let’s take a walk back to 1969, when we were listening to KFJZ’s Larry Shannon spinning the Youngbloods’ “Get Together,” while our younger siblings were driving us nuts with “Sugar, Sugar” by the Archies. We worked at local businesses after school at minimum-wage jobs that earned us $3,380 that year. If that sounds horrible today, one should also remember that a brand-new 1969 Ford Mustang convertible listed for just $2,832. Yes, with no overtime whatsoever, if you worked at a minimum-wage job for 12 months in 1969, you could pay cash for a brand-new car — a Mustang convertible, no less.

Today, working the same 40-hour week at minimum wage, one would earn $10,712 — or about $13,853 short of what you’d need to cruise Camp Bowie in your new ragtop Mustang. (As a point of reference, in 1969 a minimum-wage job amounted to 34.02% of the average family’s income; today a minimum-wage job is just 20.6%.) This alone explains the success of low-cost imports such as Hyundai and Kia.

No one disputes that health care and the costs of the pending Baby Boom retirement are a huge drag on every corporation’s bottom line. But they’re no more costly to GM, Ford and Chrysler than to any other large and long term American corporation who employs people with decent wages and a pre-defined retirement package.

Most assuredly, no one working today would agree that being compensated makes you a welfare recipient. Nevertheless, Detroit’s automakers have lost millions of their former customers, some of whom were their own employees, as our blue-collar middle class has shrunk. Meanwhile, the foreign automakers who own factories here have watched their customer bases expand with their own American employees.

At the same time, no one has considered the fact that as minimum-wage workers in the sixties, our purchasing power was infinitely better than that of those bottom wage earners today, which was the biggest incentive for us to become another generation of car lovers. In the end, we still purchase more cars and trucks today, per family, than we have at any time in American history, save the period of 1973 – 1977. So, all is not lost. Detroit simply needs to create more new product that appeals to the new and more upscale demographic of today’s car buyer.

As for Rush: I admire his accomplishments; and if I made $20 million a year, I wouldn’t need health insurance or Social Security either. But most of those reading this column today do.

We worked at local businesses after school at minimum-wage jobs that earned us $3,380 that year. If that sounds horrible today, one should also remember that a brand-new 1969 Ford Mustang convertible listed for just $2,832. Yes, with no overtime whatsoever, if you worked at a minimum-wage job for 12 months in 1969, you could pay cash for a brand-new car — a Mustang convertible, no less.

And TAXES were a whole lot lower then too...funny how that never figures into the equation...

Meanwhile, the foreign automakers who own factories here have watched their customer bases expand with their own American employees.

An nearly all these new factories were build in non-union areas of the country...

I still maintain it is GM's product. I have driven Japanese sedans and SUV's for years and will continue to do so as the US has not contributed anything aesthetically pleasing.

And TAXES were a whole lot lower then too...funny how that never figures into the equation...

That was my thought as well. Back in 1969 and minimum-wage worker probably would not have paid any income tax. In Ontario today, a minimum-wage worker with no dependents pays ~$2k/year (and that is after federal tax was cut by 10% and the provincial tax was cut in half- in 1992 I earned $20k and paid $4k).

Not all that bad when compared to

nearly all these new factories were build in non-union areas of the country...

More accurately, I would say that the workers at those factories chose to remain union-free. Two Japanese automakers expanded their manufacturing operations in Ontario during an era when the governing party and the Ministry of Labour were bought and paid for by trade union bosses. Their workers managed to remain union-free in spite of laws that allow the Minister to certify unions after they were rejected in a secret ballot, severely curtails the free speech of managers during unionization campaigns, does not respect employees' privacy and did not guarantee a secret ballot in matters of contracts, union finances or union officers.

Yes, we have foreigners opening automobile shops right here in the U.S.
On top of it, there are non union shops owned by these foreigners.
Accd. to released figures, the difference is $500- per vehicle in favor of non union.
Since the UAL lost over one million jobs the last 25 years, this addition of another 50,000 just might jog their minds when it comes to those so sacrosanct fringes like health care.
What about agreeing to healths care contributions, and deductibles to shift responsibility to their members, and at the same time support GM's bottom line.
Protecting jobs by keeping GM solvent and, yes, profitable, should have moved to the forefront of the UAL a long time ago.
By the way, why is it that with all those skilled laborers and proficient politicians in Michigan that none of these newcomers opened shop there?
Puzzling?...only to entrenched locals.

Ed's actually pretty independent. His commentary and insight so good Klif gave him his own show to comment and present the news when 911 occurred.
A guy that bought and sold cars and owned his own dealership (capitalist) usually doesn't fit the mold of lefty IMHO

Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.