Today's Opinions, Tomorrow's Reality 

Sustaining the Unsustainable

By David G. Young

Washington DC, June 2, 2009 --  

The American government's takeover of General Motors is a doomed attempt to keep blue-collar workers in the American middle class.

When the competitive onslaught from Japan, Inc was besieging American auto manufacturers in the 1980s, free market critics had a simple prescription for America's woes: if you can't beat 'em, join 'em. Only by following a national industrial policy like Japan, with close cooperation between the national government and industry, could America hope to compete with the more successful Japanese system.

Two decades later, the critics are getting exactly what they wanted. Yesterday's bankruptcy filing by General Motors, and the American government's plan to take ownership of the company by extending government outlays to $50 billion1 is an act worthy of Japan's infamous Ministry of International Trade and Industry, circa 1989.

Yet unlike two decades ago, the reason for America's venture into national industrial policy has nothing to do with global competitiveness. The Japanese model is widely discredited -- after crashing in 1989, the country's economy has hardly grew at all over the next 15 years, and last quarter experienced the largest decline in over 50 years.2 And even if Japan's economic model weren't discredited, America's automotive industry offers little opportunity for export-driven growth. By all expectations, the most GM can hope for is survival -- as a much smaller company.

So what justifies a bailout of the wealth-killing behemoth?

It's all about jobs -- manufacturing jobs. General Motors is the second biggest manufacturer in the United States after General Electric.3 If its 61,000 hourly jobs disappear4 (along with tens of thousands of more from its suppliers), then it is virtually the nail in the coffin for high-paying blue-collar workers in America. And since the rust belt's "Reagan Democrats" have long since reverted to voting Democratic, it's hardly surprising that a Democratic administration is doing everything possible to save as many high-paying GM jobs as it can.

Yet while the nationalization of General Motors may delay the elimination of these high paying union jobs, it cannot sustain them forever simply because they are unsustainable.

Back during the glory days of Detroit, in the post World War II boom, the United Auto Workers always had over a million members, reaching a peak of 1.5 million in 1979.5 Membership in the union offered the working class the promise of lifetime employment, a generous pension, medical care, and high enough wages to support a family with a middle-class lifestyle.

The gradual death of this blue collar American dream has been bemoaned for the last quarter century as UAW membership has declined by two thirds since its peak.6 Blame for this decline has been typically aimed at America's foreign competitors, particularly Japan. While there is certainly some truth to this (only 46 percent of automobiles sold in April in America were from domestic car companies, 7) , there is a far more important reason that the American working class has fallen behind: it takes significantly more money to be considered middle class than it used to.

The median income of Americans grew by 20 percent between 1980 and 1997, according to the Census Bureau.8 Not so for manufacturing wages -- over the same period, production wages stagnated, according to the Bureau of Labor Statistics.9) The net result of this trend is that the free market is pricing manufacturing workers out of the middle class.

Today, education, not a factory job, is the ticket to a good income. Between 1980 and 2008, the number of Americans over 25 who completed college grew from 17 percent to 29 percent,10 These workers have driven up the median income. Compared with these people, working-class Americans can no longer generate enough value to employers to justify ever-growing middle-class compensation.

This reality has had little bearing at General Motors, where the United Auto Workers employees are an exception to this trend. They've negotiated a very lucrative deal for their themselves, achieving per worker hourly payouts of $28 to $7811 compared to the prevailing manufacturing wage of less than $18.12 These high costs have been no small part of GM's troubles, and bankruptcy is the inevitable result.

Through its foolhardy takeover of GM, the Obama administration can try to keep this party going for some GM employees for a little longer. But the nationalization of the company does nothing to change the fundamental forces at play. If GM manages to survive as a nationalized auto company, it will only be because it is able to jettison its high-cost labor contracts, which are the very purpose of the intervention. Either way, the workers lose. The only question is how far the rest of us will be brought down with them.

Related Web Columns:

Liquidate Them, May 5, 2009

Meddling with Disaster, December 8, 2008


1. Wall Street Journal, GM Collapses Into Government's Arms, June 2, 2009

2. Washington Post, Japan's GDP Continues Rapid Decline, May 20, 2009

3. Industry Week, The IndustryWeek U.S. 500, June 2009

4. CBS News, UAW Trust To Get 17.5% Of GM Shares, May 26, 2009

5. Associated Press, UAW Membership Drops bBelow 500,000, March 30, 2008

6. Ibid.

7. Wall Street Journal, Overview Charts: Auto Sales, May 1, 2009

8. U.S. Census Bureau, Regions of People by Median Income and Sex: 1953 to 2007, June 2009

9. Bureau of Labor Statistics, Average Hourly Earnings of Production Workers, June 2009

10. U.S. Census Bureau, Current Population Survey: Years of School Completed by People 25 Years and Over, by Age and Sex: Selected Years 1940 to 2008, June 2009

11. CNN Money, GM Offers Buyouts to 74,000, February 12 , 2008

12. Bureau of Labor Statistics, Ibid.