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Monday, November 24, 2008

Detroit Doesn't Understand Why The Automaker Bailout Must Not Happen

The bailout for the Big Three Automakers is still being dicussed in Congress even though the bill itself is on life-support. This isn't because it's a good idea (it isn't), rather it is because the Democrats have to pay back the support they got from the United Auto Workers and they want Main Street America to pony up the money.

Running alongside this argument is a spotlight that illuminates what is going on in Detroit and why the Big Three Automakers are in trouble. Unfortunately for the UAW, these revelations don't make them look good.

From Dan Calabrese of the North Star Writers Group:

To survive in business, you have to make a profit. Period. Nothing else matters. General Motors, Ford and Chrysler don’t do that, so they deserve to die.

But if you want to understand why they don’t make a profit, all you need to do is look at two schemes concocted along with the United Auto Workers – the Voluntary Employee Beneficiary Association (VEBA) and the UAW Jobs Bank. The two entities work in different ways, but they have one devastating fact in common. Both require the automakers to pay billions to people who don’t do any work for them.

The VEBA, which is actually being hailed by Detroit media and civic leadership as a positive measure, is in reality a way for the UAW to protect its retirees from losing their health benefits in the event of an automaker bankruptcy. Negotiated by GM in 2007, it requires the UAW to administer retiree health benefits beginning in January 2010. That’s the part the industry’s defenders keep pointing to – the notion that it offloads retiree benefits onto the union, as if the union was going to pay these benefits out of its own pocket.

In fact, GM is required to continue spending $1.8 billion a year through the end of 2009 on retiree health benefits, while also bankrolling the VEBA to the tune of an astounding $24.1 billion so the funds are ready for the UAW to begin administering on January 1, 2010.

And that’s not all. GM will be required to make up to 20 additional annual payments of $165 million apiece in order to guarantee that retiree health benefits for UAW members are not reduced at all for 25 years. This is what the Big Three would have us believe amounts to legacy cost relief.

But even that is not as outrageous as the Jobs Bank. Established in 1984, the original purpose of the Jobs Bank was to keep workers available during temporary layoffs when the emerging technology of the time was causing short-term displacement of workers. A worker would receive 95 percent of his or her wage for up to two years – again, through a fund administered by the UAW but funded by the Big Three – until a new job opened up.

As long as the Big Three are throwing money away on these outrageous expenditures on the unions, they will not be able to make money and therefore will not be able to remain competitive in the market. The Big Three need to go into Chapter 11 to break these wasteful contracts.

But, what of the union leadership?

Read on:

UAW President Ron Gettelfinger, who is predictably coming under fire from all quarters for clinging to these perks, held an astounding news conference late last week in which he insisted that none of this has caused the problem. Again citing the struggling economy and the consumer credit crunch, Gettelfinger began howling, “It’s not our fault! It’s not our fault!

It was an eye-opening scene, and surely illustrative for anyone who is just now getting introduced to economic thinking, Detroit-style. If my eight-year-old talked like that, I would send him to his room. In Detroit, this passes for community leadership.

Gettelfinger knows where the groceries are coming from and he knows who is paying for them. As long as he and his union management cronies are making bank off of these deals, they want to keep them in place, even if it means having Joe and Jane Average American pay for it with higher taxes.

You can access the complete column on-line here:

No, Detroit, It’s You Who Doesn’t Understand
Dan Calabrese
North Star Writers Group
November 24, 2008

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