How Unions Stop The Cars

Big Labor is a big problem for automakers' survival.

With the late-night demise of legislation containing $14 billion in emergency loans to Detroit's automakers, pressure is once again mounting on President Bush to step in. And he is reportedly thinking of doing just that. But the very thing that doomed this legislation will also doom any effort to rescue the industry: union intransigence. If Bush cares more about taxpayers than kudos, he should decline.

The legislation, backed by Sen. Bob Corker, a Tennessee Republican whose state itself is home to GM facilities, was the industry's best hope to return to health. It stripped some of the green baggage of the House bill that would have consigned Detroit to producing not cars that sell but what eco-warriors want. Nor would the legislation have handed quite as expansive powers of micromanagement to a car czar, forcing companies to obtain approval for basic product and capacity decisions.

Instead, it offered the automakers a way to restructure their massive obligations to labor and debtors, much like a bankruptcy court would do but without the stigma. Bondholders would have been required to accept a 70% loss--the remainder paid in stock, not cash. And Big Labor's main concession (besides accepting some stock instead of cash for its health care trust fund) was that it set a definite date for a pay cut next year.

At that time, its wages and benefits would fall in line with those that Nissan (nasdaq: NSANY - news - people ), Toyota (nyse: TM - news - people ) and other automakers pay their U.S. workers.

But the United Auto Workers reacted as if it had been asked to work in a Third World sweat shop and walked away. Sen. Debbie Stabenow, D-Mich., decried efforts to "sock it" to American workers. Never mind that labor costs make every car rolling out of Detroit $1,500 more expensive to produce than foreign cars made elsewhere in the U.S. Indeed, last year, GM and Toyota sold the same number of cars worldwide, but Toyota turned a healthy profit--while GM posted a $40 billion loss.

But the fact of the matter is that the wage cuts are a necessary condition to give Detroit a fighting chance for survival, but they're not sufficient. Indeed, that would require far more from unions.

Car sales next year are expected to drop 40%. This means that if auto companies are going to use any bailout money to restore viability, they will have to be able to shed some of its quarter-million-strong workforce.

However, if the UAW was unwilling to accept a pay cut, there is no reason to believe that it would compliantly accept such massive layoffs. More likely, it will use taxpayer money to keep every job alive as long as possible--and then return for more a few months later.

Beyond job cuts, the UAW will also have to agree to eliminate a whole host of exceedingly rigid work rules for its remaining constituents. Such rules, for instance, had historically made it difficult to train auto workers for multiple jobs to fulfill multiple needs. No less than labor's extravagant wage demands, these rules have crimped Detroit's adaptability.

Ford recently built a facility in Brazil where it can produce five different vehicle platforms at the same time, on the same line. What's more, many of its suppliers are housed in the facility as well, something that allows them to move parts to the assembly line at a moment's notice. Not only has this lowered Ford's production costs and boosted productivity, it has also given it flexibility to adjust its product mix to shifting market conditions. This is important at any time but is especially crucial now, when volatile oil prices are likely to produce abrupt shifts in consumer demand.

But union rules, with their featherbedding requirements and crabbed job descriptions, make it much harder for such a factory-of-the-future to operate in the U.S.

The irony is that foreign car makers are profitable in America--and the Detroit Three are profitable in every country but America. Only Big Labor can position Detroit carmakers for success in their own country. Bush shouldn't ask already-strapped taxpayers to make sacrifices to pull Detroit back from the precipice when its own key stakeholder won't.

Shikha Dalmia is a senior analyst at the Los Angeles-based Reason Foundation. She can be reached at shikha.dalmia@reason.org.

The House may have passed a rescue package for the auto industry, but Senate Republicans could stop it cold.

Stop The Fear Epidemic

The media need to help foster innovation and entrepreneurship, not squash it.

Sramana Mitra

More By This Author

The first decade of the 21st century has brought us a series of major economic and geopolitical shocks: the dot-com bust, the Sept. 11 attacks on New York, the financial crisis led by the subprime meltdown, and just last week, a fresh bout of terrorist attacks in Mumbai that threatens to destabilize the very significant and growing economy of India.

The most worrisome implication of these successive events is that the world will tailspin into a fear psychosis and all the drivers of progress and prosperity--innovation, entrepreneurship, consumer confidence and reform--will get paralyzed.

I am writing this column on a long flight from San Francisco to Singapore. Among the various books I have read on this flight is Judy Estrin's new book, Closing The Innovation Gap. Estrin, chief executive of JLabs and an adviser on President-elect Barack Obama's transition team, is deeply concerned about this fear psychosis that threatens to stifle innovation. She believes that the "soup" that provides the basis of innovation is currently being poisoned. "The soup starts with some common ingredients, a set of human attitudes and beliefs that are so critical that I call them the five core values of innovation: questioning, risk-taking, openness, patience and trust," Estrin writes. (Here's an excerpt from her book.)

And yet, when the dominant psychological premise of society is fear, how can people access essential factors like openness, risk-taking and trust? Thus, it is of paramount importance right now for us to address the fear issue from taking over human ingenuity.

I've thought long and hard, and watched how the fear epidemic spreads. Just recently, a well-respected Silicon Valley venture capital firm, Sequoia Capital, released a PowerPoint presentation that spread like a plague through the Internet, faster than Obamamania. In it, the esteemed firm made a grand display of irresponsible leadership by circulating the same germs of fear that we desperately need to prevent from spreading.

What did the media do in response? Top bloggers, major business and technology publications and otherwise respectable journalists became willing carriers of the virus. They published the presentation on their blogs and Web sites, and discussed and echoed the very sentiments of negativity that oozed out of Sequoia's presentation.

This is an example of how the epidemic spreads. And this is exactly how the epidemic cannot be allowed to spread going forward. No matter what happens--however dire the world events become--we must not allow fear to rule us like this.

United Parcel Service Inc. is canceling a twice-daily air stop in the central Illinois city of Decatur.

Atlanta-based UPS, the world's largest package delivery company, announced the decision Wednesday. A UPS plane, a Boeing 757, has loaded and unloaded cargo at the Decatur Airport on its way from Louisville, Kentucky, to Rockford. The stops will end in early February.

Bill Clevenger is executive director of the Decatur Park District, which runs the airport. He says the news is a blow to the airport and the community.

UPS spokesman Mike Mangeot says the decision results from the uncertain and declining global economy.

UPS employs about 300 people in the Decatur area. Fourteen affected workers will be offered other UPS jobs.