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October 21, 2005



PAUL GIGOT: Welcome to THE JOURNAL EDITORIAL REPORT. There's a joke with the ring of truth making the rounds this week: when you buy a Hyundai, you get a car with a global positioning system. When you buy one from GM, you get a car with a social welfare system. In fact, GM is so burdened with the cost of health care and other benefits for its workers and its retirees, it's become increasingly difficult for GM to compete against foreign automakers with lower costs. This week, the United Auto Workers made historical concessions to GM, aimed at cutting costs before there are no jobs because there is no GM. As one industrial relations expert told THE WALL STREET JOURNAL, "The union had the choice between bad and worse and it chose bad."

RICH WAGONER (CHAIRMAN AND CEO, GENERAL MOTORS): It's a time of great change in the global auto industry.

Fifty years ago the GM president at the time boasted, "What's good for GM is good for the country."

While GM is no longer the largest company in the US today it ranks just 169th -- what's good for GM still has national and global ramifications.

GM is the largest health insurance buyer in the world. It spends more on health care than on steel -- $1500 per car -- three times, for example, what Toyota spends.

UAW workers receive a benefits package worth about $40 an hour -- the industry norm -- and that's on top of wages. That's helped push up domestic car costs, driving consumers to cheaper imports.

GM hopes that making a deal with the UAW on health benefits, along with other cost cutting measures, will enable GM to compete more effectively against foreign automakers that are not burdened by such high labor, pension and health care costs.

750-thousand GM blue collar workers and retirees and their families enjoy one of the most comprehensive health care plans of any industry. For most, there are no monthly premiums, deductibles or co-payments, except for prescription drugs.

This costs GM $5.6 billion a year, at a time when the company has lost almost $4 billion dollars so far this year.

The deal with the UAW would require workers and retirees to pay a greater share of the health costs: to pay an annual deductible for the first time and higher co-pays.

Most US corporations have already made benefits changes -- some as early as 20 years ago. The new GM/UAW fix will still leave automakers a decade or more behind most big companies, and their employees significantly better off.

GM hopes to save enough to avoid bankruptcy -- something the UAW also desperately wants to avoid -- the so-called nuclear option. Bankruptcy could enable GM to step away from many of its obligations.

So UAW concessions could be saving both GM -- and the health and pension benefits of its members.

PAUL GIGOT: Joining me to discuss all this are Dan Henninger, columnist and deputy editor of THE WALL STREET JOURNAL editorial pages, Paul Ingrassia, who won a Pulitzer Prize for his coverage of the auto industry and is now head of the Dow Jones new wires, and Steve Moore our senior economics writer and a member of the editorial board.

Paul, this sure looks like a watershed moment for the American auto industry and maybe for American manufacturing. How significant is this for the UAW and the future of GM?

PAUL INGRASSIA: Well, it's very significant Paul. It is a watershed for the traditionally unionized portion of the American auto industry which is not the entire American auto industry anymore by far. We can come back to that point. But it's a watershed in the sense that there's some realization that as the clock is about to strike midnight for these companies in trouble they have to get their cost structure under control which is part of the solution that they have to put into place.

PAUL GIGOT: You recently wrote that all of this marks the end of a 75-year way of life in America -- that of the highly paid but unskilled worker. What did you mean by that?

PAUL INGRASSIA: Well basically by living in the '60s, '70s, '80s, you could be an unskilled worker and still make a very highly paid wage. You could be a member of the middle class without any question and that sort of thing. That's really coming to an end now. We have a global economy. Sources of parts and automobiles and lots of other things can be produced much cheaper elsewhere so that to be a member of the middle class in America these days you're going to have to have skills -- real job skills.

PAUL GIGOT: And Steve Miller who was the CEO of Delphi, the auto parts maker that went bankrupt, was candid in saying "Look if you want to give good advice to your children nowadays have them get an education to be competitive."

Dan, management agreed to these benefits didn't they?

DAN HENNINGER: A long time ago.

PAUL GIGOT: A long time, well, the most recent contract is only three years old. Why did it take so long for management to come to grips with this issue?

DAN HENNINGER: There seemed to be no way to step off the merry-go-round. A long time ago management and the unions in the American auto industry made a Faustian bargain. Essentially they had two choices I think; they could either run a welfare state or they could run a business and they chose to essentially run a welfare state. It was described in the piece.

Essentially GM's managers have been running a welfare state, not really running a business. You can't do both. And they've reached the day of reckoning now. Like European businesses or even the European nations you have to decide if you're going to compete in the global economy or simply ride your welfare system over the falls.

PAUL GIGOT: But they did it because they were trying to buy labor peace. They knew that a strike would be very damaging and this was the easiest path to take, right Paul?

PAUL INGRASSIA: Exactly. The whole idea was keep the union happy and buy peace, but the problem was they bought peace at too high of a price. You can overpay for peace and that's what's happened here over time.

PAUL GIGOT: Right, at Delphi for example, they're paying $65 dollars an hour all in for labor.

STEPHEN MOORE: But this is not just a problem for companies, it's actually a problem, Paul, for the workers too because what you're seeing is right now the average wage for an American worker is about $18.00 an hour.

PAUL GIGOT: The wage. That doesn't include benefits.

STEPHEN MOORE: The wage. The benefits are about $8.00 an hour above that and of course health care is a huge component of that. What's happened with the American worker for the last four or five years, and this is only going to get worse, is the wage increases that the American workers are used to getting are being crowded out by these increasing costs of healthcare. So companies can't afford to pay people higher wages because all of the compensation is going into healthcare.

I think the healthcare system is in a death spiral in this country and unless we move away from the employer sponsored program it's going to bad for workers and for companies.

PAUL GIGOT: Well, the government gave the companies and the unions an incentive to go about it this way, did it not? Because it gives a subsidy, a tax code subsidy for companies to provide healthcare.

STEPHEN MOORE: And I ultimately think the way out of this death spiral -- get rid of the tax subsidy. Get the companies out of the healthcare business. The companies give the workers the full $26.00 an hour and then Paul, every worker would go out in America and get the health insurance they want.

PAUL GIGOT: Paul, you mentioned earlier, the American auto industry isn't vanishing. It's not all moving offshore, it's changing. Because there are a lot of foreign companies now who make cars in the United States who didn't. Describe that process.

PAUL INGRASSIA: Well basically virtually every major foreign automobile company, Japanese companies, Korean companies and German companies, now builds cars in America. There are basically 25, give or take a couple, such plants in America that are just assembly plants alone, not counting the whole supporting network of engine plants, transmission plants and component factories. They employ tens of thousands of American workers. They are all non-unionized plants.

PAUL GIGOT: All non-unionized?

PAUL INGRASSIA: Not a single one of them is unionized and they all work very well. They pay basically the same wages that the big three pays, but they have much more flexible work rules and they can run the plants much more efficiently.

PAUL GIGOT: One thing you know in business if you've been in it at all is that you can't do everything on the cost cutting side. You have to build revenues ultimately. You've got to sell something to be able to stay in business. Is the fundamental problem here that GM and Ford just are making cars that unfortunately Americans don't want to buy? Why is that?

PAUL INGRASSIA: Well it's right. What they've basically done is they've really lost touch with the marketplace in a lot of ways, especially in the mainstream part of the market which is sedans and other sorts of vehicles. They ruled the SUV business in the '90s for so long because that was the source of their profits. They didn't really plow money back into cars. I mean the Ford Taurus 20 years ago was the bestselling car in America and Ford Motor Company didn't reinvest to keep that car fresh and updated with the latest technology and that sort of thing.

STEPHEN MOORE: The government isn't making their job easier though because now we've got these corporate average fuel efficiency standards that Congress wants to raise and that tends to put American manufacturing companies, compared to Honda and Toyota, at a big disadvantage.

DAN HENNINGER: And to reinforce Paul's point, it's the Americans. We're speaking here of the plight of GM's workers but it is the American consumer that has blown the whistle on this problem. GM would take $1,500 dollars that it would put into the price of a car and that would go to pay for the healthcare system. Their competitors would take the $1,500 dollars and put it into the 'F' words -- fit, finish and feel and performance. And so the consumer instinctively understood they were getting a better deal from GM's competitors and GM instead was required to put the $1,500 bucks into their health and pension system.

PAUL GIGOT: So you don't have that money for innovation.

PAUL INGRASSIA: Well look, I just got back from the Tokyo Motor Show and Lexus announced they are the, Lexus being the luxury car division of Toyota, announced that its new flagship sedan coming out next year will have an eight speed automatic transmission. Now do you really need an eight speed? No. It does provide some fuel economy and performance benefits, but the best General Motors has right now is a 5-speed automatic. And when you're asking someone to pay $55,000 dollars for a car it's a nice selling point to say hey, mine has eight speeds, theirs has only five speeds.

PAUL GIGOT: What does this tell us Steve about the future of the old, paternalistic industrial model of if you went to work for a single company, they promised you a pension when you retired, they paid your healthcare benefits, you stayed there all the time? That's not what a worker in his 20s or 30s can really look forward to anymore.

STEPHEN MOORE: That's right and I think that gets to the point that Dan was making is that if the cost of the products we're producing in the United States is embedded in that as these raging inflation costs of healthcare, we're not going to be very competitive and I think the single most important thing we could do to improve our competitiveness is get the healthcare system off the back of the employers. Now that doesn't mean to put it on the back of the government as Canada and other countries have, but move towards a more individual choice model. Because the truth is if individual workers have the choice of buying their own healthcare they'll be much more economical in the way they buy it.

PAUL GIGOT: The key to job security is education and skills as you said. The key to financial security in the future, or one key, is being able to take your own pension, be able to negotiate your healthcare policy and take it with you from job to job.

DAN HENNINGER: And to put it bluntly, who would you rather have managing the money for your health or pension system -- you or management? I think the lesson here is management is not very good at it anymore.

STEPHEN MOORE: Just so we're not too negative though about the manufacturing, our manufacturing productivity in the auto industry and steel has gone up very substantially. So if we can get around the healthcare problem I think the future is very bullish for the manufacturing industry.

PAUL GIGOT: Okay, Steve, you get the last word. Next subject.