Thursday, May 08, 2014

How Unions Are Unfairly Scapegoated For Detroit's Woes


There are many reasons for the catastrophic decline of the once-mighty U.S. auto industry over the decades. But it's unfair and inaccurate to point the main finger of blame at unions, the usual scapegoat.

The world's two dominant auto-exporting nations are Germany and Japan. The auto industries in those two nations are heavily unionized. And what's more, unions in Germany and Japan are backed up by strong pro-labor laws that U.S. workers could only dream of.

Although the auto industries of Germany and Japan are heavily unionized, those two nations have absolutely crushed the U.S. auto industry in markets around the world in recent decades. And they've consistently beaten Detroit on its own turf, as well.

In fact, the only reason the U.S. even still has a domestic auto industry at all these days is that Japan Inc. deliberately pulled its punches with "voluntary export restraints" in the 1980s. The latter was a shrewd move by Tokyo to head off moves by the U.S. to raise trade barriers.

Many Conservatives and "free-market" advocates love to scapegoat unions as the cause for Detroit's decline. But as usual, the GOP's simplistic analysis has little to do with the real world.

The fact is, if unions are so bad, then why do the auto industries of Germany and Japan continue to go from strength to strength in conquering world markets? I've done quite a bit of world travel myself and I've seen a number of nations where American cars are a very rare sight on the roads these days. But I have yet to see a country where the roads aren't filled with Volkswagens, BMWs and Toyotas. (It's true that Japan has struggled in China---but that is for political reasons, not competitive reasons).

Although no "free market" U.S. economist would ever admit this, it's clear that unions have actually helped increase the competitiveness of the Japanese and German auto industries.

How? For a start, unions and strong pro-worker labor laws, have essentially forced the auto industries of Germany and Japan to take a very long-term view. By contrast, Detroit (in common with U.S. corporations in general) has always taken a very short-term view.

The likes of General Motors and Ford have simply focused on the next quarter's profits. Meanwhile, the likes of BMW and Toyota have traditionally planned decades ahead.

Unions in Germany offer labor protections that U.S. workers would have a difficult time grasping. The average German worker enjoys an astonishing 6 to 8 weeks of paid vacation. In fact, figures from 2012 show that Germans enjoy among the shortest work hours of any industrialized nation. On average, Germans work around 1,397 hours per year (versus the 1,790 hours that U.S. workers put in). Despite this, Germany vies with China for the title of the world's biggest exporting nation.

Even the supposedly "workaholic" Japanese put in fewer average hours yearly (1,745 hours) than U.S. workers do these days. The fact most Americans feel otherwise is due to stereotypes about the Japanese that are as outdated as the idea that "Made in Japan" is a sign of subpar quality. (In reality, Japanese manufacturers lead the world in the sophistication of their high-tech manufacturing, virtually all of which is done by union labor).

In addition to short working hours, all German auto workers enjoy the protections of two unions: the industry union (the powerful IG Metall), as well as a "works council" union. And unlike U.S. workers, German labor law requires that German workers get representation on companies' board of directors.

And if Germany's labor laws look pretty good for workers, it could be argued that Japanese workers get an even better deal in many ways. After all, in accordance with Japanese law, employees are the top priority for corporations, followed by customers and (in last place) shareholders.

Strong Japanese labor laws make it virtually impossible for large corporations to do mass layoffs. Although the U.S. mainstream media has been declaring the death of so-called "lifetime employment" in Japan, the fact is, the system remains largely intact.

The U.S. mainstream media (particularly the business press) has long criticized the "high wages" of U.S. auto workers as contributing to Detroit's woes.

But this ignores the fact that German and Japanese auto workers get even better pay than U.S. auto workers. However, this reality is often obscured by the U.S. mainstream media, which tends to report the wages of overseas auto workers using the misleading so-called "purchasing power parity" yardstick. According to the latter, Japanese auto workers' wages are often reported as being lower than U.S. auto workers wages, when in fact Japanese workers make among the highest wages in the world when measured by market rates.

Speaking of high wages, the Germans are hardly slouches in that regard, either. In 2011, Forbes magazine reported that the average auto worker in Germany made $67.14 per hour. By contrast, the average U.S. auto worker made $33.77 per hour. Despite this, excluding "transplant" assembly plants, Germany produces more automobiles than the U.S. (5.5 million in 2010, vs. 2.7 million in the U.S.)

How can this be? I believe a good case could be made that unions, as well as smart labor laws, have actually been a big plus for the auto industries of Japan and Germany. As previously mentioned, unions encourage the auto industries of those nations to take a very long-term view.

Take the Toyota Prius hybrid vehicle. Since its introduction in 1997, the Prius, a very high-tech advanced car, has been an enormous home run for Toyota. But it took a very long-range vision and many years of hard work before the first Prius rolled off the assembly line.

In the meantime, Detroit's auto executives scoffed at the idea of hybrids. At first, they claimed that the technology wasn't feasible. Then, they claimed that hybrid cars would never sell. They insisted that consumers were only interested in buying big, gas-guzzling SUVs.

In doing so, Detroit's CEOs were continuing in a long tradition of making the sort of catastrophic decisions that have doomed the U.S. auto industry over the decades.

Detroit's executives have been wrong on just about every major important trend in the global auto industry for decades. They were wrong when they initially rejected air bags, claiming they were impractical and would never sell. They were wrong in the 1960s when they refused to place much emphasis on building the sort of practical, fuel efficient cars that would explode in popularity worldwide during the 1973 oil crisis. (When that crisis hit, Germany and Japan were already well-placed to cash in, thanks to their prowess in building small, fuel-efficient cars).

It's important to note that these disastrous decisions were made by Detroit's CEOs, not by the unions. And what's even more outrageous is that Detroit's CEOs have pulled down pay packages that are vastly larger than German and Japanese auto CEOs.

The latter fact was memorably illustrated during trade talks between Japanese and U.S. automakers back in 1992. The Tokyo negotiators pointed out that U.S. auto executives made vastly larger pay packages than their Japanese counterparts. The U.S. negotiators angrily dismissed this point as a "red herring."

Perhaps it was, but the Japanese had a point that was apparently missed by the U.S. media. That is: why on earth are Detroit's CEOs paid so well in the first place when they've presided over the disastrous decline of the U.S. auto industry over the decades?

Readers with a long memory might recall that the 1992 talks included the infamous incident in which George H. W. Bush collapsed and vomited on the Japanese prime minister, Kiichi Miyazawa. In a way, it was symbolic of the way U.S. workers have been treated since unions were crushed, starting with the Reagan administration.

Today, unions continue to get loads of blame, particularly by the Republicans, for all that is wrong with the U.S. economy.

This "blame the unions" approach dates back to the Reagan years, when "free market" Chicago school economists assured U.S. leaders that if they crushed organized labor and embraced dog-eat-dog capitalism, the U.S. economy would soar. In reality, the only thing that soared was the pay packages of short-sighted CEOs.

Three decades later, unions are vastly weaker. Unions now only represent around 7 percent of the private sector workforce (versus 35 percent back in the 1950s). And yet, America's manufacturing base is at an all-time low. Detroit is in ruins. It's impossible to imagine that the U.S. auto industry will ever again pose a challenge to the mighty auto industries of Germany and Japan.

Side note: much has been written about the successes of the non-unionized auto plants that have sprung up in southern states in recent decades. But the latter hardly represent any sort of real renaissance for the U.S. auto industry.

In fact, these auto plants are doing nothing more than final assembly (which is by far the least sophisticated part of the overall auto manufacturing process). The real heavy lifting, as far as technological know-how, continues to be done in Japan and Germany.

The existence of these assembly plants hardly demonstrates any real strength in U.S. auto industry competitiveness. Rather, they exist because the Germans and Japanese (and increasingly, the Koreans) are happy to farm out low-tech "grunt work" to low wage plants in the U.S. (as well as various other similar facilities in Third World nations across the globe).

Increasingly, it is becoming apparent that the U.S. itself is becoming a Third World nation. And indeed, it is hard to conclude otherwise.

The U.S. auto industry was once the awe and envy of the world. Thanks in large part to the auto industry, the U.S. became the greatest economic national success story in world history (at least, until the recent spectacular rise of China).

There are many reasons for the decline of the U.S. auto industry. Incompetent, short-sighted CEOs. Stupid trade policies. The Reagan administration's embrace of the service economy and the subsequent neglect of America's manufacturing base. A naive embrace by U.S. leaders of the pipe dream called "free trade." A disastrous neglect of America's infrastructure and public schools (even as our nation's bloated military budgets soared into the stratosphere).

But frankly, it's misguided, and wrong, to point the main finger of blame at unions. To be sure, unions aren't entirely blameless. But it's clear that there were many other factors in Detroit's decline. The continued existence of powerful unions and strong pro-worker labor laws in Germany and Japan only confirms this point.