Sunday, September 30, 2007

A Lesson for Wall Street From GM and the UAW

The recent GM-UAW labor agreement, which remains to be ratified by the UAW membership, marks a potentially crucial transition in health insurance. The union will take over the responsibility for providing GM retirees with health insurance, while GM transfers as much as $35 billion to help cover the costs.

GM's motives are simple. It offloads a potentially enormous liability--said to be as much as $51 billion--and puts itself on a more competitive footing with foreign auto manufacturers, whose health care costs are much lower.

The UAW's situation somewhat more complex. GM, as we all know, has recently spent more time losing money than making it. Its continued viability isn't a certainty. If GM goes bankrupt, it might repudiate its union contracts and cut off health insurance for retirees, leaving them to fend for themselves. The assets transferred by GM will go into a type of trust called a voluntary employees' beneficiary association (VEBA). IF GM goes bankrupt after the VEBA is funded, the VEBA remains to provide retiree health insurance. Granted, retirees will probably face higher co-pays and deductibles than before. That's still better than paying for individual policies.

The Chinese have a saying that when enduring difficulties, one "eats bitterness." No doubt many UAW members feel as if they are eating bitterness now. However, the new labor pact also represents one of America's great strengths: its economic flexibility. Health care costs have been rising faster than incomes and inflation. American companies faced with foreign competition have complained loudly about having a disadvantageous cost structure. By shifting the cost of retiree insurance to the UAW-run VEBA, GM's unionized employees have helped to level the playing field. While more of the responsiblity for health care will fall on the union and retirees, more of the responsibility for making the company succeed will fall on GM's management. They've now negotiated away one of their loudest excuses for failure, and it becomes incumbent on them to produce successes instead of making excuses. Recent high ratings for some Buick products suggest that GM may yet be able to accomplish the one thing it must: put out high quality vehicles.

The pressures and risks of the marketplace have fallen heavily on GM and its employees. They have responded, and the company may return to prosperity.

On Wall Street, however, all the talk is about further government indulgence in the form of more Federal Reserve interest rate cuts. The S&P 500 closed higher at the end of the third quarter than where it started, notwithstanding the mortgage mess. The only reason for that level of performance was the Fed's Sept. 18, 2007 interest rate cuts. Perhaps, over the last couple of days, many hedge fundies have high-fived their way through a champagne-soaked weekend as they game out the chances of more Fed cuts. Even though it wasn't the stated purpose of the Fed to bail out financial speculators, you won't convince the speculators of that. They've learned that if they take a lot of risk, the Fed can't afford to let them fail. So all their incentives are to make more money by taking even more risk, knowing that they've got the Fed boxed in. The fact that they might ultimately create an untenable amount of risk and stress in the financial system gets scant attention because, presumably, it can always be deferred another quarter by another Fed rate cut.

With no government bailout in sight, GM and the UAW took private sector action to resolve the health insurance problem that governments in America simply haven't been able to solve. Although the skies over Michigan are dark right now, this could be a beginning of better times. On Wall Street, the weather appears to be clear and sunny. Believing that they've got the Fed to cover their bets, the financial types have no reason to leave the casino. Government subsidies have never brought true prosperity on any industry. But, while the bonuses are good, you'll never get anyone to believe that.

You've been waiting for this: a new stone skipping champion.

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