Saturday, December 20, 2008

UAW troubles a harbinger of things to come

While we watch the slow death of the big three from the weight of massive liabilities due to excessively generous pension and health care benefits, it should be noted that the automakers are just an illustration of what will be happening at an even larger scale across the company with another large segment of the workforce:   government employees. 

State employees have pension and health care benefits comparable to what the UAW has extorted from the Big 3.  However, the key difference is that state employees have near iron clad job security.  The Detroit News had a great report on how the Michigan Teachers' Pension plan will bankrupt many districts from their overly generous benefits (see here, here, here).  This is not just a Michigan problem.   Almost every state has this issue, and it will get worse over time.  Most governments will not tackle this because of the power of the state employees unions (see the budget crisis in California and how there are no layoffs, just tax increases).

The difference between the Big 3 and the state governments is that we have no choice in funding the state employees.   We do not have the option to not pay taxes.   The solution has a ton of up front costs and would ensure a huge political and legal fight.   The fair way to deal with this is to convert all defined benefit plans into defined contribution plans (e.g. 401(k)).  It would apply to all workers under a certain age or seniority.   Current retirees or those close to retirement would be exempted.   The same actuaries that run the pension plan would figure out for each plan contributor what their current pension would be if they retired on the conversion date, and the state would pay a lump sum into their 401(k) equal to the amount necessary to buy an annuity at conversion date rates to fund that.   From that point on, the risks are transferred to the employees from the taxpayers.   This would need to be coupled with a plan that makes retirees responsible for their own health care expenses at retirement (like pretty well everyone else who is not a union/government employee).   

This would be the mother of knock down/drag out fights, with legal challenges galore - but it has to be done.  During these tough times, perhaps some forward looking state politicians will start demanding change before the structural costs cripple the economy.

UAW bailout - debating point du jour

I have been listening to a lot of talk radio about the auto bailout the past few weeks, and it is always interesting when I hear some of the arguments made by UAW members as to why their perks should be subsidized by the American taxpayer.   One that I have heard a few times is that it is OK for the Feds to bail out the big three because Southern States have been giving tax money to the foreign automakers to build in their states.
Is it true that foreign car makers get unfair tax incentives from Southern state governments?   This is kind of half true.   Now, for the record, I am not in principle a big fan of "targeted tax relief" in the form of incentives, as it reeks of state governments picking winners and losers.  Plus, I think sound tax policy focuses on making taxes as low as possible for all business, not just big ones looking to invest in your state.     That being said, it is true that Tennessee, Alabama, Georgia, Mississippi, and South Carolina have been very aggressive in putting together attractive tax packages to lure factories in their states.  
But what is also true is that the Big three have been playing this game for years in the Mid-West and Canada.  When Chrysler mulled expanding Jeep production, the State of Ohio and the City of Toledo made sure that there were ample incentives to expand on their existing site there.   When the automakers consider scaling back production in Ontario.   The Canadian government and the province of Ontario are there with massive packages of tax credits and loan guarantees.  The state of Michigan and the City of Detroit gave some generous tax breaks when GM bought and moved its headquarters into the Renaissance center. So, when your UAW flack talks about the "unfair" tax subsidies that foreign automakers got to locate in the South, tell them they were just following the lead of the big three.