MOTHER OF ALL LOGJAMS
The following statement by Wall Street Journal op-ed columnist Holman Jenkins, gets my vote for the pithiest observation of the week. In a piece titled "Chrysler's New Masters", he states:
"With the collapse of the DaimlerChrysler experiment, it might be useful to stop referring to "domestic" and "foreign" auto makers.
The important distinction is between auto makers bound by UAW contracts and those that aren't."
The piece is one of the most succinct descriptions I've seen of how the world-leading U.S. auto industry has come to be overcome by "foreign" competitors.
It goes a long way to explaining why the combined market caps of the Big Three today is far less than $50 billion, as compared to the $190 billion market cap of Toyota Motors alone.
And the genesis of course, goes to the unintended consequences of a significant piece of legislation passed in 1935. It's a long, convoluted, drawn out, political drama, with huge stakes, that evolved over many years. Intrigued, but don't have the time to wade through it all?
No problem. Here's the encapsulation from the WSJ piece:
"How it got this way is no longer interesting -- the tired debate over which stick figure, "labor" or "management," is responsible for Detroit's uncompetitive labor deals.
Both operated under the incentives of the Wagner Act, the 1935 labor law that entrenched the UAW as the monopoly labor supplier to the Big Three."
It's about HOW we got to the current situation, described again, with commendable brevity by Mr. Jenkins:
"Chrysler's labor costs are $30 an hour higher than Toyota's, headed for a gap of $45 by 2009. Chrysler pays the same wage to UAW janitors and skilled craftsmen. It carries idle workers on its books when no jobs are available.
Most of all, it's on the hook for the untrammeled health-care spending of 134,000 unionized workers, retirees and dependents -- an $18 billion liability that Toyota, Honda and Nissan don't face. This alone adds a cost of $1,500 per car."
The piece then goes onto explain, how Cerebrus, the private equity firm that's taking Chrysler off the hands of Daimler, could potentially fix this particular cost differential, and make a tidy return for it's investors, at the same time.
But this post is not just about Chrysler and the U.S. Auto industry.
It's really about the unintended consequences of well-meaning legislation, and the utterly unforeseen, and catastrophic results that potentially ensue for the U.S. economy and it's citizens, generations later.
To paraphrase Winston Churchill, we're only starting to get to the 'End of the Beginning" of the next major chapter, in the illustrious history of the U.S. auto industry (see Pixar/Disney's "Cars" for a refresher on the culture it's given us--image source here).
We have some other pieces of historic legislation passed in the first half of the previous century, that have given us the substantial, almost intractable problems we're facing today with the nation's Health-care and Social Security systems.
It's resulted in our current sorry condition, where political candidates still only debate over whether or not to institute tax cuts or tax increases, but dare not address how we spend all those receipts.
The system won't allow any politician to even begin to deal with the 80% plus of the U.S. government spending that is "untouchable" because of these baked in entitlements, without committing political suicide.
When one talks about our health care and Social Security systems, we've barely begun to leave the Beginning of the Beginning.
This state of affairs was pithily addressed yesterday by my former boss Hank Paulson, the current Secretary of the Treasury, who was interviewed in another great WSJ piece:
"...it's frustrating to see issues where the policy solution is pretty easy but there are big political obstacles..."
Today's health care and social security problems will be solved some day, with major concessions likely from all the constituents.
And more likely than not, in the middle of it, will be one or more private investment entity, that'll take on the risks, trials and tribulations. Hopefully for a little return.
Those future private equity entrepreneurs have hopefully just been born, within our borders or not.
P.S. Apologies for the length of this post. I still aspire to attain the brevity and pithiness I refer to above.
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