Evans On The Economy -- Can GM Survive?

May 23, 2005
The automaker's biggest problem is labor costs, and the solution, ultimately, rests with its unions.

It has become fashionable to wonder out loud -- and in print -- about the long-term viability of General Motors Corp. However, this is hardly a recent development. Several years ago in this very column I suggested that in five years, GM would be on the way out. Is GM in fact now on the way out, particularly after a string of recent disasters?

The prevailing opinion, at least among the media, is that GM is run by a bunch of fatheads, from the top down. I have consulted to many companies over the years, including GM, and I always found that the people I dealt with were substantially above average in terms of initiative, brightness and dedication. That isn't the issue. The problem is that none of these eager beavers was able to see the bigger picture, including but not limited to labor costs and Japanese market penetration.

Having said that, the situation at GM is actually much more serious than was the case more than two decades ago at Chrysler when the U.S. government had to bail that automaker out. Chrysler was the victim of some of its own bad management decisions, but also it was facing the most severe U.S. recession since the 1930s, 21% interest rates and a vastly overvalued U.S. dollar. GM, in contrast, now faces a fairly robust economy (although one slowing down), below-average interest rates and a U.S. dollar that is below its equilibrium value. And still GM is in deep trouble. What will happen when interest rates rise further, the U.S. economy tumbles back into recession and Toyota advances it market share to 15%?

GM's top management has put most of the blame for its situation on rising labor costs, including health-care benefits -- the one area in which the executives are willing to admit the company faces a "crisis." The health-care system in the United States clearly is in crisis, but that is not about to change just because of weak sales at GM. The company claims that the money that must be paid out in health-care benefits could be used to develop new, more dynamic lines. If that is the way the executives really do view the situation, we will not see any more exciting new products from GM, and its market share will continue to plunge.

Whether these reasons are valid excuses or not, the situation eventually comes down to the unions. They have a stark choice: They can agree to pay and benefit cuts now and save the company, possibly in return for an equity share, or they can refuse to yield and have their future compensation dictated by a bankruptcy judge. There is no middle ground. At the moment, I'm not betting on union flexibility.

Suppose GM went bankrupt. That would not necessarily be a tragedy. Indeed, what is bad for GM could be good for the U.S. economy.

Twenty-five years ago, Lee Iacocca told Chrysler union workers that he had plenty of jobs at $17 an hour, but none at $20 per hour. The figures are higher now, but the same logic suggests that GM has plenty of jobs at $30 an hour (including fringe benefits) but none at $40 an hour. Bankruptcy would not necessarily cause a loss of jobs. It might even result in more jobs at wages that would become competitive in world markets. Remaining high-priced union workers might also get the idea that they will keep their "good jobs at good wages" only if their companies can remain competitive. And that could mean more jobs for everyone.

One way or the other, labor costs at GM will decline, and production will increase. The only real issue is whether it will happen before or after the unions see the light.

Michael K. Evans is chief economist for American Economics Group, Washington, D.C., and president of the Evans Group, an economics consulting firm in Boca Raton, Fla.

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