The Auto Bailout Negotiations Explained

This is a windy post and I apologize in advance for its length. I just needed to write it for the sake of my own understanding.

As I've read about the negotiations going on in DC over the automaker bailout, I've felt there was much more than met the eye underway. The telltale sign to me was that the UAW and management were going hand in hand to congress to beg for cash. It was clear that they had planned this in advance and wanted to preserve the status quo. When the UAW refused to blink on reducing their wages in line with Toyota's, I knew something was up. In terms of my own understanding, I think I've unraveled it enough to explain it, but perhaps not enough to be right.

Here we go. We will use GM to refer to all American automakers for simplicity's sake, but just know that in the following explanation, GM is a shorthand for all of them.

First off, everyone knew that GM's profits came exclusively from big cars, big trucks and big SUVs. Second, eveyone knew that SUV sales are gas-price elastic. That is, as gas prices go up, sales of SUVs go down. Third, once China and India began to industrialize and demand more oil, it became pretty clear that gas prices were going to rise as the production rate of oil is relatively fixed.

Therefore, the downturn in SUV sales was no surprise. The timing of it was always murky, but it was clearly inevitable. That means that both management and the UAW knew they were living on borrowed time.

What has bothered me all along is this. Why was there no contingency planning done? Why did they not prepare for an event they all knew was on the way? The UAW in particular had to know that the goose with the golden eggs was living on borrowed time. I single out the UAW because upper management at GM is far less sensitive to bankruptcy than the workforce as they are more likely to have substantial cash reserves to survive GM's destruction.

My hypothesis is that there were contigency plans made and they consisted of the money in your wallet.

There are three possible explanations for their actions. The first is that GM's labor-management relations are so hostile that they're less like labor contract opponents and more like the Israelis and Palestinians. They didn't care what happened so long as they got their own way. If this is the case, then GM and the UAW should be put out of business as fast as possible so the wreckage can be bought up and restarted by someone new.

The second possiblity is that both GM and the UAW knew this was coming and planned for it, but they made a mistake in predicting the timing. They thought they had longer than they did. The UAW made significant concessions in recent negotiations and because of that, GM will soon have labor costs in line with Toyota.

Click on the image for a readable version.
If this is the case, then the bailout makes partial sense as a true bridge loan to bridge the gap between now and the time when the new contracts take effect. However, it begs the question, "If you saw this coming months ago (and everyone did), why didn't you accelerate the contract timing and get yourself out of this mess?"

The answer to which brings us to option 3. They knew they could squeeze the money out of Congress. They had a blueprint for extortion based on Chrysler's bailout years ago and knew they could play chicken with us. There was no reason to do the hard work they needed to do in emergency contract renegotiations because they knew that in the end, the taxpayers would cough up the money and their little dance could go on as it had. They were able to wreck the company through greed and intrasigence, knowing full well that we would pick up the pieces, put them back together and hand it back over to GM and the UAW to keep playing the same game.

GM and the UAW are not the first management-labor team to have gone through this. Lots of companies have missed the timing of events and faced bankruptcy. The rest have all renegotiated their contracts to save their companies and their jobs. GM and the UAW knew they didn't have to.

How did they know this? They had already been working over Congress and the administration in advance. They knew who they could count on and they knew that even if the Senate Republicans stood their ground, there were elements in the White House that would allow the TARP funds to be given to GM. They also knew that all they needed was enough money to make it into January, whereupon Barack Obama's administration would give them whatever they asked for.

That's why the UAW didn't bother to negotiate their wages in the bailout debates in the Senate. They knew they held all the cards ahead of time.

This explanation is also in line with the past behavior of GM and the UAW. It was a lazy, slovenly, irresponsible solution to their problems, much like their lousy cars and preposterous labor contracts. Whereas a company like Solar Turbines here in San Diego would have solved their problems in house, GM and the UAW never even bothered to try. As the deadline for bankruptcy was clearly approaching, they sauntered down to Washington and played the game they knew they would win in advance.

This is a consistent pattern of behavior for decades from GM and the UAW and once again reveals their greedy, slothful, unimaginative culture. Bailing them out will yield us nothing as the problems go to the core of both.

B-daddy over at The Liberator Today argues that we should not blame the UAW. I stole the chart shown above from him. Mark Perry over at Carpe Diem argues that wages are just part of the problem and that the UAW work rules play at least as big of a role as wages.