How Autoworkers Became More Equal Than Others
The Treasury Department has sold the last of its stock in General Motors Co. Even though taxpayers lost $15 billion on the auto bailout (including losses at Chrysler Group LLC and Ally Financial Inc., which offers financing for GM vehicles), the Barack Obama administration put out a statement taking credit for its handling of tax dollars and the Detroit automakers’ success.
Yet the administration shouldn’t be so quick to toot its own horn. The government didn’t need to lose any money on the auto bailout. Had the United Auto Workers not gotten special treatment, taxpayers would have come out ahead.
The administration gave the UAW billions more than bankruptcy law calls for. Typically, bankruptcy reduces union compensation packages to competitive rates. However, GM’s existing union members made few concessions on pay. As the UAW put it, the contract meant “no loss in your base hourly pay, no reduction in your health care, and no reduction in pensions.”
This virtually never happens during bankruptcies at unionized companies, as many unionized airline pilots can attest. As a result, GM still has higher labor costs than every foreign transplant automaker -- almost $60 an hour.
Bankruptcy law further stipulates that all unsecured creditors should recover their debts at the same rate. This, too, didn’t happen. Instead GM’s bondholders recovered less than 30 cents on the dollar; the UAW recovered most of the money owed its retiree health trusts. At Chrysler the UAW recovered a greater proportion of its (unsecured) debt than even secured creditors did.
GM also backstopped the pensions of union workers at Delphi Automotive Plc, its bankrupt parts supplier. New GM had no legal obligation to do this. Nonetheless the company spent $1 billion of bailout funds to preserve their benefits.
These generous subsidies account for more than the entire net cost of the GM and Chrysler bailouts. The excess funds and equity given to the union cost the Treasury $30 billion -- twice what taxpayers lost. Had the administration bailed out the automakers but treated the UAW impartially, taxpayers wouldn’t have lost anything. Instead, the union collected more than the entire U.S. foreign aid budget.
That the union received such a sum is extraordinary. Nonunion workers who were equally worthy of sympathy got far harsher treatment. Delphi’s salaried nonunion employees also had their pensions terminated. Unlike the UAW, they got nothing.
The union’s windfall makes little economic sense. It had no leverage in 2009, and it needed the bailout to survive. A strike would have liquidated the company and eliminated UAW members’ jobs. Like Sheriff Bart in “Blazing Saddles,” the union could only point a gun to its head and threaten to shoot. It had to accept any terms the administration offered.
Further, the government gained nothing from giving the UAW most-favored-special-interest status. Whatever the economic benefits of keeping the automakers afloat, inflating union compensation doesn’t help the economy. Nor did these subsidies reduce welfare costs -- things such as unemployment insurance, Medicaid or food stamps. Only workers who lose their jobs or have very low earnings are eligible for those benefits, not those whose contracts get downgraded but remain well in the middle class. This $30 billion handout provided virtually no public good.
Until recently the administration has ducked responsibility for this largesse, claiming the automakers negotiated these expensive union contracts and the White House simply signed on. To hear the officials tell it, the administration “deferred to General Motors in terms of their business judgment.”
An Inspector General report released last summer shows otherwise. The IG found that GM understood the administration’s auto task force called the shots in the bailout. During negotiations between GM and the UAW, the task force “gave the UAW additional leverage” that enabled it to extract these concessions. The task force made GM restructuring and signing a new union contract within 40 days a condition for future bailout funds. They also informed the UAW of these facts.
As the IG dryly put it: “The UAW understood that GM could not walk away from negotiations and had to reach agreement with it.” Unsurprisingly, the union used this leverage to hold out for as much money as possible.
The UAW rejected GM’s proposals for two days, knowing the company couldn’t walk away, and refused to even discuss modifying its expensive pensions. On the third day, the UAW’s president called the auto task force. The IG reports that President Obama’s auto team “actively negotiated and made the final deal,” which GM subsequently accepted -- a deal that cost taxpayers billions more than necessary to keep the automakers running.
The administration could have avoided losing money in the Detroit bailout. It only had to treat unions impartially. Instead, it gave $30 billion to a politically powerful union. With GM and Chrysler’s recovery, this handout has attracted little attention. But the administration can hardly boast of demanding “responsibility and results.”
- James Sherk is the senior policy analyst in labor economics at the Heritage Foundation.
Originally appeared in Bloomberg.