TCS Daily

The Oracle That Is Delphi

By Duane D. Freese - October 25, 2005 12:00 AM

A half century ago, Al Capp mocked General Motors Chairman Charles E. Wilson's quote, "What's good for America is good for General Motors, and what's good for General Motors is good for America," by having his ruthless capitalist, General Bullmoose, bluster, "What's good for General Bullmoose is good for the USA."

However funny Capp may have made it seem then, it's not funny any more. Not with the bankruptcy of GM's auto parts spin off, Delphi Corp., and GM itself and other American auto makers such as Ford facing perhaps their biggest restructuring challenges ever.

Predictably, of course, the left is blaming capitalism -- in the form of free trade and private health care -- for their troubles.

Jesse Jackson argues that the "global economy is shafting" American workers, and you have New York Times columnist and Princeton economist Paul Krugman proclaiming, "Something must be done." Jackson's solution: protectionism; Krugman's solution: nationalized health care. Though, if that doesn't work, Krugman has this caveat: "When corporate executives say that they have to cut wages to meet foreign competition, workers have every right to ask why we don't cut the foreign competition instead."

As a Detroiter with family roots in the auto sector, including a grandfather who worked on the line, an uncle who was a line supervisor in Ypsilanti, a father who made it as an executive in Ford's Dearborn glass house, and several other family members today working in dealerships and other auto related jobs, I know how hard people in the industry work, and I would like nothing more than to see the U.S. auto industry succeed, spreading wealth through its workers to the communities in which it is located.

But not at the cost of making the whole nation worse off.

Protectionism has been tried. In the early 1980s, there were quotas on auto imports. They allowed U.S. automobile prices to rise 41% between 1980 and 1984. This "saved" 22,000 jobs, as long as you didn't count a cut of 1 million in sales, that led to a loss of 50,000 jobs. It also hurt the Big Three and UAW over time, as foreign companies, to get around quotas, built non-union plants here, picking up more sales of high end vehicles at U.S. makers' expense.

As to health insurance, nationalized health care only "works" in other countries by rationing care and delaying treatment -- until death in some cases. America is the safety valve for the development of new treatments, technologies, pharmaceuticals and health advances precisely because care isn't rationed, health care information flows freely and prices aren't controlled.

If the U.S. auto industry is going to get out from under its problems, it's going to have to get to the root of them. And that root is not foreign competition and private health care; it's in a system that has tied too many benefits to the job, and not enough responsibility in the hands of individuals.

The worst thing that happened to manufacturing in this country may have been when government decided to exempt its provision of pensions and health insurance from taxation.

The Revenue Act of 1913, implementing income taxation after the passage of the 16th Amendment allowing it, exempted pension trusts from taxation, encouraging the development of such plans over personal saving and investment. Then in World War II, FDR's wage and price board allowed employers to get around the controls put in place for the war by allowing exceptions for both pension trusts and health insurance.

So it was the "ruthless" Wilson, mocked by Capp, who used the loophole to create the first modern pensions when he encouraged investment of GM's pension funds in all stocks, not just GM's. And the connection between employment and health insurance was cemented by the Internal Revenue Service in 1954, when it stipulated that employer contributions to health insurance plans for their employees were to be excluded from employee taxable income.

The result of these tax favors was to boost benefits' share of costs from 20% of compensation to more than 40%. And while it relieved workers and retirees of worrying about their retirement income and their health care needs, it also stopped them thinking hard about it as well -- an oversight that contributes to a low national savings rate and skyrocketing health care costs.

Protectionism or nationalization won't get rid of those problems.

One answer to them is, as Tom Walsh of the Detroit Free Press wrote, "Two words: 'defined contribution.'

        "A defined-contribution approach is a sharp departure from the defined-benefits 
        model that was the bedrock foundation for pension and health care provisions 
        of the UAW auto industry contracts over many decades. A defined-benefit 
        health care plan promises an employee or retiree that specific medical needs 
        will be covered, no matter how much health care inflation skyrockets. In a 
        defined-contribution model, a company like GM knows what it has promised to pay
        and can budget accordingly. If health care insurance premiums skyrocket, an 
        individual worker would either pay a bigger portion of the premium or cut back on 
        services provided. In a defined-benefit plan, the company is vulnerable to 
        wild swings in health care costs, which have escalated much more rapidly than 
        the general inflation rate in recent years."

It has been a shift to defined contribution plans that has helped other industries avoid many of the problems the problems afflicting U.S. auto makers and their key suppliers, such as Delphi. GM appears headed in that direction with the UAW just a week after Delphi's bankruptcy announcement to cut some $15 billion from its $70 billion-plus health care obligations.

But also having a major impact are rising energy and materials costs, due in part to environmentalists' opposition to drilling for natural gas on the outer Continental shelf and for oil in places such as the Alaskan National Wildlife Refuge. And then there are other important factors, outlined two years ago by the National Association of Manufacturers in a study. They include U.S. corporate profits taxes that are 25% higher on average than in other industrial countries; regulatory costs that have doubled since 1990; and American tort liability costs that doubles the legal charges U.S. businesses face compared with other nations. Those costs are estimated at $230 billion a year.

And then there are the threats that lie ahead, such as dealing with out-of-control asbestos litigation and the threat of additional hikes to payroll taxes for Social Security and Medicare, the employer share of which now equals 8% of wages compared to less than 3% in the 1950s.

If Congress wants to help the auto industry, those are some good places to start. And it needs to get started, learning itself from the auto industry's travails. For as Robert Miller Jr., the new head of Delphi warns, "What is happening at Delphi is simply a flash point, a test case, for all the economic and social trends that are on a collision course in our country and around the globe."

And that's no Bullmoose.


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