Auto Rescue, Take Two‏

December 4, 2008

by Faiz Shakir, Amanda Terkel, Satyam Khanna, Matt Corley, Benjamin Armbruster, Ali Frick, and Ryan Powers

ECONOMY

Auto Rescue, Take Two

Last month, the CEOs from Detroit's Big Three automakers -- General Motors (GM), Ford, and Chrysler -- came to Washington, D.C. to ask Congress for a $25 billion loan to help their struggling companies stay afloat and avoid potential collapse. However, what began as a legitimate call for help turned into a fiasco, starting with the revelation that the companies' chief executives traveled to the nation's capital in private jets -- separately. Moreover, none had an actual plan of what he would do with the requested funds. As House Speaker Nancy Pelosi (D-CA) explained, "Until they show us the plan, we cannot show them the money." Just yesterday, Senate Majority Leader Harry Reid (D-NV) expressed pessimism that Congress would dole out the funds to Detroit. "I just don't think we have the votes to do that now," he said. Indeed, a new CNN poll out yesterday found that 61 percent of Americans oppose any taxpayer rescue. But today, the Big Three's leaders return to Capitol Hill, this time having submitted detailed plans of action. They even ditched their private jets, instead opting to drive to Washington in their respective companies' hybrid cars (a move one political commentator called "a little hokey"). Their combined plans call for nearly $10 billion more than the amount previously sought, with GM and Chrysler asking for $4 and $7 billion respectively now just to stay above water. Ford has indicated it can survive through 2009 but that it wanted $9 billion in loans to draw upon if necessary." Nevertheless, Detroit has shown some progress. The Big Three plan to cut jobs, reduce employee benefits, eliminate factories and dealerships and purge or sell unsuccessful brands (for example, the Hummer). The CEOs also agreed to work for $1 per year and reduce executive pay. But for any rescue to be awarded and successful, the federal government should work to address rising health care costs and Detroit's automakers must make good on promises to increase fuel economy and adhere to strict environmental standards.

UNIONS TO MAKE CONCESSIONS: Last month, United Automobile Workers (UAW) President Ron Gettelfinger noted that labor costs make up just 8 percent to 10 percent of the cost of a vehicle and that the focus of an auto industry rescue "has to be on the economy as a whole as opposed to a UAW contract." But in a major shift, he said yesterday that the UAW is willing to make major concessions in its contracts to help the Big Three lobby Congress for the $34 billion in aid, a move that could swing some in Congress to sign on. Gettelfinger said "the union would suspend the much-criticized 'jobs bank' program, which allows laid-off workers to continue drawing nearly full wages." "This should be interpreted as a meaningful and a painful sacrifice," said Harley Shaiken, a labor relations professor at the University of California at Berkeley. The jobs bank was "something the union worked over decades to achieve." Because health care represents a significant portion of U.S. automakers' costs, Gettelfinger also said the UAW would "agree to delay the multibillion-dollar payments to a new retiree health care fund that the automakers were scheduled to start making next year."

DETROIT'S HEALTH CARE BURDEN: The growing burden of providing health care benefits has contributed significantly to U.S. automakers' dwindling profits. Health care costs add $1,525 to the price tag of every GM vehicle. In 2007, the company paid more for health care than it did for steel. Indeed, billionaire businessman and philanthropist Warren Buffet has called GM "a health and benefits company with an auto company attached." Detroit's soaring health care costs make American automobiles less competitive because companies such as Toyota and Honda benefit from Japan's universal health care system. For example, Toyota "paid $1,400 less per vehicle on health care" and makes $2,400 more per car than American manufacturers. In fact, in June 2005, despite strong competition from U.S. states, the company chose to locate a new plant in Ontario, Canada, citing the country's national health service serving as a "big selling point." The fractured U.S. health care system inflates health care costs and expects U.S. automakers and other businesses to pick up the tab. Thus, this system not only reduces profitability, but decreases competitive advantages and drives away jobs.

THE GREEN CHALLENGE: Last month, Reid and Pelosi argued that any federal aid to the Big Three automakers should come with "strong conditions" such as requirements that automakers manufacture more fuel efficient vehicles. As a result, in their plans submitted to Congress this week, Ford and GM offered ideas to significantly increase their fleets' fuel economy; Chrysler's plan was less detailed. Ford committed to increase the fuel economy of its entire fleet by more than one-third by 2016. While GM plans to focus on hybrid and electric vehicles to increase its cars' mileage, the company's strategy also relies heavily on flex fuel technology, developing cars that can run on gasoline or E85 -- a mix of 85 percent ethanol and 15 percent gasoline. While this will reduce greenhouse gas emissions and dependence of foreign oil in theory, the reality is that E85 is mostly unavailable throughout most of the country. Any such plan would have to be accompanied by a pledge by oil companies to dramatically increase E85 availability. In its plan, Ford called for a nationwide fuel economy standard, which is code for opposition to California's groundbreaking greenhouse gas emission standards that would reduce pollution in the state 30 percent by 2016. Sixteen other states have adopted California's rule. Ford argues that the patchwork of standards raises costs "with little or no environmental benefit." As Center for American Progress Action Fund Senior Fellow Daniel J. Weiss noted, the Big Three should adopt California's standard because its program "would spur innovations that further reduce vehicle emissions. There would be worldwide demand for such super-clean cars, creating new marketing opportunities."