Who Lost Delphi?

For those of you still transfixed by hurricanes and Supreme Court nominations, here's a more important issue: Who lost Delphi?

Dell Who?  Delphi Corporation, the former parts division of General Motors, isn't exactly a household word. Its predecessor, Delco Electric, was a division of General Motors. GM hived it off and it changed its name in hopes of being able to drive a harder bargain with it, and also to enable it to bid for business with other automobile manufacturers. But Delphi filed for Chapter 11 bankruptcy on October 8, 2005.  And that means that its workers could be facing wage cuts, and its retirees pension and health care benefit cuts. Management has just announced substantial pay cuts for itself, including a $1 a year deal for the CEO.

The pension cuts could be serious.  'We pay hourly workers three times the market rate; salaried staff are paid a market rate and execs are paid below market,' said Delphi CEO Steve Miller.  He proposes to cut hourly wages by 63 percent.  United Auto Workers President Ron Gettelfinger responded by accusing Miller of using 'scare tactics.'

How could Delphi have gotten into a position where it can't pay the pensions it promised?  Who is to blame?  Is it greedy management?  Is it greedy unions? 
Is it the FASB?  Is it Congress?  Or is it all due to the inattention of President Bush? 

It's important to get out in front in the blame game because the Delphi bankruptcy could set a precedent for bigger bankruptcies coming down the road.  Like General Motors. Unless something radically changes, General Motors will be dragged down by the same forces: high wages, high medical expenses, and high pension costs. Yesterday, GM and the United Auto Workers announced a deal to cut health care expenses by a billion dollars a year, asking workers and retirees for the first time ever to accept a deductible and higher co—pays. But workers get to vote on the deal.

When we get to the bankruptcy of General Motors, even the sluggish minds of the mainstream media will sit up and take notice.  It took an agonizing two days for them to decide that the mess of Hurricane Katrina was all President Bush's fault.  It is unlikely that they will take as long to come to a decision when GM goes broke.  It is important to establish a narrative now, so that when the great minds at the MSM grab for their ledes on Detroit's Black Monday, the American people won't find themselves on the hook for the mother of all bailouts.

Who is to blame?  London's Economist blames the managements of

'older manufacturing firms with (at least until recently) large workforces and unions strong enough to negotiate generous retirement benefits.' 

The United Auto Workers demanded 'More' and management gave it to them. 

Well, it's not quite that simple. Wages are fairly high for the Big Three automobile manufacturers, but not much, if at all, higher than the wages paid by Japanese, Korean, and German manufacturers to their American workers in Georgetown, KY, Marysville, OH, and many other communities hosting foreign—owned automobile assembly plants. And workers in Germany producing cars for the American market earn even higher wages.

It is the medical benefits for both workers and retirees, and the massive number of retirees receiving monthly checks that really pull down the Big Three's economic competitiveness. As their market share has tumbled, and as they employ fewer workers per vehicle, the relative weight of Big Three retiree benefits in total wage costs has skyrocketed. There are two and a half times more retirees than active workers drawing money from General Motors right now.

When these contracts were written, management offered money today, and the promise of more money to come in the future. In other words, part of what workers got was a promise to pay them their benefits out of future earnings. Now it turns out that there aren't going to be enough, or maybe any earnings.  Delphi lost $741 million on revenue of $13.9 billion in the first half of 2005. GM is in the red to the tune of almost $4 billion this year.

What an outrage!  How dare they renege on their promises!  That is what the politician and the activist in each of us might say.  How could Detroit have made extravagant promises and then passed the bills off for the next generation to pay?

The answer is that nobody stopped them.

The union leadership bears its share of responsibility here. Rather than pressing for compensation in the present, so that workers could fund their own pensions and medical plans, they were content to rely on the corporations to always be there to make good on their promises. And then, the same union leaders insisted on continuing their rich pay and benefit packages even as evidence mounted that the Big Three were losing market share and economic viability.

What on earth would give unions and management the confidence that there would always be money available to make good on all those promises?

When a corporation creates a successful new product, or pioneers a business process and creates a new 'global best practice,' it gets to enjoy extraordinary profits for a while, until the rest of the world catches up.  Economists call these benefits that can be wrung out of the marketplace due to the lack of alternatives economic 'rent.'  Investors and speculators clamber aboard for the ride, and other rent seekers—employees organized into labor unions—also demand their piece of the action.

The auto manufacturers of Detroit were the most productive in the world from the introduction of the Model T until the heyday of the magnificent land yachts of the 1950s and early 60s.  They spewed out cash in every direction: to investors, to managers, to government, and to organized labor. 

Then along came Volkswagen, with its cheap and reliable beetle, proving that others could make cars, even if they were  homely (or cute, depending on your aesthetics) and somewhat limited in appeal. Detroit paid little heed. But then along came Toyota, Nissan, and the other Japanese manufacturers. The oil crisis of 1973 made their fuel—efficient small cars into hits, and the Japanese makers swam upscale as quickly as they could manage. Toyota became the 'global best practice' automaker, and the rent started drying up.

In response, the automakers improved their products, eventually.  But they did not reduce the promises and the rent payments first established when the Rocket V—8 and the Turbo—Hydramatic were the wonders of the world.  For one thing, the United Auto Workers refused to let them.

Twenty—five years later, everyone is complaining about the mess.  It seems that corporations everywhere are going into Chapter 11 bankruptcy, tanking their labor agreements, shuffling their pension obligations off onto the Pension Benefit Guaranty Corporation (PBGC), and, freed from their obligations, obtaining an unfair advantage over their competitors.

But there's another angle to the story.  In the airline bankruptcies, the workers and shareholders have submitted to the Chapter 11 process rather meekly.  The shareholders get wiped out; the pension beneficiaries get a haircut from the PBGC, the unions get their above—market wages thrown in the toilet, and we hardly hear a peep. Will the Delphi stakeholders agree to go under the knife so quietly?  We'll soon find out.

The Pension Benefit Guaranty Corporation, despite the appearance of the word 'guaranty' in its name, does not guarantee that recipients receive their full promised benefits. It is supposed to be self—financing,  based on contributions from employers, but it is already $23 billion in the hole, and that figure can only climb with major future bankruptcies all but certain.

As the number of retirees experiencing serious pain increases, expect a demand that the federal government bail out the PBGC. This would mean that the rest of us, most of whom enjoy no such retirement benefit promises, would be called on to subsidize the retirement benefits of workers from big companies who were promised more than their employers could deliver.  Think about what that would mean.  Big Auto promises the earth and sky to its employees and retirees and then, years later, reneges on its promises.  What happens?  The taxpayers get to make good on Big Auto's broken promises.

The best scenario we can imagine is a smooth Delphi bankruptcy, with management blamed, shareholders wiped out, and the workers and retirees given a really close shave, maybe even some bloody nicks and cuts, but no amputations. The worst scenario would involve demands for federal money on the order of the charity lavished on Hurricane Katrina victims. Either approach would set the rules for the upcoming General Motors bankruptcy.

Meanwhile it's time for Congress to get to work. One bill has been reported out of committee in the House. Much more public debate is needed. The issue is too important to be negotiated by interest groups operating on Capitol Hill.

Christopher Chantrill  blogs here. His book, Road to the Middle Class, is forthcoming. Thomas Lifson is the editor and publisher of The American Thinker.

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