Tuesday, August 5, 2008
GM, the UAW and Uncle Sam Play "Chicken"
"Who shot General Motors [GM]? ... [GM] once manufactured half the cars on the American road, but now it sells barely 2 in 10. ... But none of GM's management miscues was so damaging to its long-term fate as the rich pensions and health care that robbed [GM] of its financial flexibility and ultimately, of its cash. ... Detroit was too flush to envision it would ever face a financial strain. ... [GM] got into the dubious habit of steadily increasing worker benefits. In the '90s, the consequences of maintaining a corporate welfare state became too obvious to ignore. ... GM acknowledged it its most recent annual report that from 1993 to 2007 it spent $103 billion 'to fund legacy pensions and retire health care.' ... The sorry decline of [GM] has proved [Walter] Reuther right: The government is the better provider of social insurance", my emphasis, Roger Lowenstein (RL) at the Houston Chronicle, 20 July 2008.
Nonsense. GM began offering pensions in 1950. So? They are deferred compensation. Does RL scream about Richard Fuld's stock options "robbing Lehman of its financial flexibility"? Why are pensions bad and stock options good? What does "robbed GM of its financial flexibility" mean? Any contract does that. As Oliver Wendell Holmes explained: that's what it means to make a contract! Why is a pension worse than a real estate lease? Why is Uncle Sam a "better provider of social insurance"? Because unlike GM, Uncle Sam has Helicoper Ben's printing press!
One tends to ignore what he doesn't account for. Until 1966's APB 8, companies did not account for future pension costs. They used Uncle Sam's "pay as you go method". SFAS 87 replaced APB 8 in 1986, amended in 2006 by SFAS 158, which still in my opinion, does not properly reflect a company's pension liabilities. Why did GM promise its employees pensions? My guess: GM and the UAW believed that sooner or later GM could dump its pension liabilities on Uncle Sam. In short, GM and the UAW have played a 58-year game of chicken with Uncle Sam. I say: let GM file bankruptcy if it "can't" pay its pensions.