How The US Auto Companies Got Into This Mess 2

The following story is my own conjecture based on observations made during the time this all was happening. Call this part of Greenbergonomics.

I believe that the big three auto companies agreed to the retirement benefits that the UAW wanted because times were good. There was really no economic excuse that seemed plausible enough to deny these benefits in order to head off a prolonged strike.

Any fiscally responsible Chief Financial Officer would look at this future retirement obligation and manage it by building up the proper funding for it. A CFO knows that there will be economic slowdowns in the future, so cash needs to be set aside and invested so that the company won’t have to use current earnings to pay then current retiree benefits.

Well there was one problem that crept up with this scenario at the advent of unregulated Reagonomics. (Maybe it even started with Carteronomics or Nixinomics.)  If there was a lot of money set aside to fund future retirement obligations, a corporate raider could make a hostile takeover of the company and use the retirement money that had been set aside to instead pay off the debt the raider incurred to take over the company.

There were enough examples of these hostile takeovers that no sane CEO would dare to fully fund the company’s future retirement obligations. All they could manage was to fund the obligation to the government mandated minimum that no raider would be able to use to fund a takeover.

Given this unregulated, free market environment, you end up with a company that must continually grow in order to fund its growing current retirement obligations on a pay-as-you-go basis. (Sort of like what people think Social Security is now. Bush has even tried a hostile takeover of Social Security because it has not yet fallen to the pay-as-you-go basis.)

When competition starts to eat into your market share, perhaps the only strategy that you can think of is to move upscale to large, gas guzzling SUVs. These vehicles are very profitable on a per unit basis if you can sell enough of them. For many years this strategy worked.

If Detroit had based its fleet on small, fuel efficient cars, it could not have made enough money to pay for its growing current retirement obligations. It would have had to sell many more units of these than it had to sell of trucks and SUVs. The foreign competition did not have the magnitude of future retirement obligations and did not live under the hostile takeover threat.

If the government had changed the rules on funding retirement obligations, Detroit would not have found itself in this situation. Maybe they would not have fought more stringent fuel efficiency requirements if they could have thought of a business model where they didn’t have to grow or die. As we can see downsizing only leads to the inability to pay for current and future retirement benefits. Downsizing a Detroit auto company does not help to weather an economic storm anymore.

With a slight change in rules, we could have avoided the energy crisis, international terrorism, the war in Iraq, and this economic mess. It’s amazing what a little foresight could have accomplished.