Important Issues: The Price of Economic Polygamy?

EVENT

Over the years, we've been hit by more trains than the coyote in a road runner cartoon. - Andrew Heller, the Flint Journal.

My family and Jessica and anyone who's worn out on me talking about Flint should skip this.

However, I'm putting off reviewing Harry Potter to write it.

I mentioned a bit below (I can't link right now, because this stupid computer won't even let me look at my blog) of the possible large-scale ramifications of local decisions at this moment in history. I'm going to go into more detail now. Please bear in mind that what I am saying is 1) speculative, and 2) while I have an onlooker's familiarity with economics and the auto industry, I have a comprehensive familiarity with neither.

First, to identify the key players. The leading roles are, for the moment, GM, the UAW, and DELPHI. GM was, until recently, the largest corporation in the world (recently surpassed by Toyota). DELPHI was originally part of GM, and was spun off into independence a couple years ago. The UAW is, of course, the Union that represents the rank-and-file of American automakers, as well as numerous other industries. Supporting roles are the city of FLINT, MAYOR DON WILLIAMSON, the CITY COUNCIL, GM CEO RICK WAGONER, former GM CEO ROGER SMITH (ultimate source and font of Michael Moore's fame), and DELPHI CEO STEVE MILLER. And doubtless countless others I've missed.

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GM AND ITS STAKE

Now for the situation. It goes back thirty to fifty years, depending on what you're measuring. The fifties were debatably the high point for American auto manufacturers, though GM maintained both their highest workforce and output well into the seventies. The seventies and eighties hit all domestic automakers hard. The triple punch of the oil embargo, the financial excesses and reforms of the late seventies, and the loosening of import regulations under the Reagan administration dramatically undercut profits for domestic automakers.

Enter Roger Smith. While his most controversial move during his tenure was the closure of multiple plants, outsourcing and subcontracting, the larger restructuring of General Motors was probably more portentious for the long-term viability of the corporation.

Essentially, with the changes and leadership and structure under Roger Smith, GM decided to play a fundamentally different game than the import market. Japanese and German automakers had made an impact by offering affordable, efficient vehicles that appealed to many Americans of a more modest income. GM realized that it still dominated the market for larger vehicles, and that the profit margin was disproportionately large for these vehicles. Moreover, by acquiring shares in profitable military companies or changing its emphesis to flexibility in financing and divesting itself essential constituent operations such as AC Delco, GM could further enhance its profitability. The payoff was short-term: GM was able to weather its financial tribulations during this time without its stock dramatically suffering.

Unfortunately, in the twenty years since, this approach has encouraged an entirely different kind of investment. Where profits are dictated predominantly by the margin of profit on a particular product as opposed to the maintenance and expansion of a customer base, the purchase of shares is more likely to take the form of short-term speculation instead of the slow, steady growth suggestive of a robust, stable company. Just as significantly, with the continued push towards environmentally friendly vehicles in the last decade, and especially the recent increase in fuel prices, the direction of GM's development has been increasingly out of sync with the priorities of the buying public.

Ever since Smith's restructuring, GM has anticipated shrinkage overall. Under auspicious circumstances, this would happen due to attrition and retirement in the domestic workforce which, by now, has a high median age. A lower workforce would enable to corporation to close plants; this decade would represent a natural, but not damaging, trough in their sales cycle. The high profitability per vehicle would sustain the company through this phase. Unfortunately, GM miscalculated... the corporation is shrinking too fast, and it isn't due to workforce attrition nearly as much as a dramatic decline in sales.

Without a dramatic reversal in buying trends (ie. back toward larger vehicles, epitomized by the several-year preponderance of SUVs), GM's profitability in the new mode could not have continued indefinitely.

This year, GM has talked about cutting first 24,000, and then 30,000 jobs, or one-tenth of its total workforce. Share price has been dropping dramatically for the last several quarters. And yet it has to strike someone as obvious that the company is not advertising any sort of hybrid option, or even a vehicle with efficient mileage by today's standards. Saturn used to occupy that role, but each Saturn sold corresponds to a smaller profit than a GMC.

Now we're paying the price.

But I started this off with Flint. GM has only announced the closure of one operation in Flint itself, and one that had already been written off after 2008; certainly not a drop in the bucket, but just a fraction of what they've already cut. Lansing and Toledo are much harder hit by this sweep.

Flint isn't directly decisive in GM strategies at this moment.

Flint is important because of Delphi.

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DELPHI AND THE UAW AND THEIR STAKES

Delphi was originally Delco Electronics and was spun off of General Motors in 1999. For most of the time since, it has been the world's largest independent parts supplier, and it currently employs almost 200,000 people, including over 50,000 in the U.S. Since the spin-off the company has become insolvent, and officially declared bankruptsy on October 8th of this year.

While Delphi is independent from GM, the two companies retain a very close relationship and Delphi manufactured parts are incorporated in every GM vehicle. The way Delphi's bankruptsy plays out, then, will have a huge effect on GM.

The immediate problems center around negotiations between Delphi and the UAW. The debate is already off to a contentious if not openly acrimonious start. Steve Miller, who was brought in specifically to guide Delphi through the bankruptsy, has taken an unapologetically tough stance, asking workers to sacrifice two thirds of accumulated pay (ie. including health and benefits) or face the termination of the under-funded pension plan. This is, needless to say, a bitter medicine to take: imagine your pay at any job being cut by two-thirds. But tension is particularly raised that these cuts coincide with pay incentives being offered at higher levels to attract able businessmen to the company, particularly in the form of controversial "golden parachute" (a sort of blank-check Get-out-of-jail-free provision in the event of catastrophe).

[A moment of editorialism: Miller may be caught between a rock and a hard place, but libertarian-style economists seem to always mess up when they apply "human nature" incentive arguments to white-collar agreements but neglect its applicability to rank-and-file. In other words, of course workers will want to strike.]

Under ordinary circumstances, this would probably be enough to provoke a strike. The one thing that may be holding this at bay is that GM is rumored to be near bankruptsy itself and that Delphi's inability to resolve its issues could be the straw that breaks the camel's back.

[Right now, it's a high-stakes game of chicken.]

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THE BIG PICTURE

So what happens if GM has to declare bankruptsy?

I'm not sure... I'd really like for my father or Tom to weigh in on this.

From my own spotty memory, I can think of a few possibilities. One, perhaps not the most likely, but ironically maybe the most ideal, is that GM would be bought out by another automaker. In fact there's only one that could remotely be in the running: Toyota. Which is fascinating first because it would return GM to sort of its original, pre-1970s status as the automotive conglomerate that had something for everybody, and second because it would be an epic cultural-mind-bender for communities like Flint where Toyotas are generally shunned on principle.

Another possibility is that the federal government would artificially buoy GM's stock at a certain level. In fact this was the response to a crisis Chrysler went through in 1979, given in the form of a billion dollar loan. Such a response is problematic now, partly because GM is much larger than Chrysler, but also because the federal deficit is at a record high.

The effects, however, of bankruptsy would be monumental regardless and could quite possibly be enough to set off a national recession. If you think of GM as being one of America's largest industries, with a workforce worldwide of three million (imagine the city of Chicago declaring bankruptsy all a sudden), the inevitable restructuring to result from bankruptsy would be cataclysmic to some communities and would leave no community unaffected.

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FLINT AND ITS STAKES

Commence editorial:

So where does Flint fit into all of this? Possibly nowhere. I could be full of hot air, and as I said before, this is all speculative.

That said, despite having lost about 80% of local GM employment, Flint remains one of the largest concentrations of both GM and Delphi workers, and GM remains the area's largest employer with some 13,000 on its local payroll.

The possibilities are even more interesting and compelling due to the delicacy of Flint's own situation at this particular moment.

Consider these contrasting profiles:

Flint continues to shrink at an alarming rate, ranking in the top 40 or so U.S. cities each year in percentage of population loss. Flint presently has under 60% of its peak population just fifty years ago. The Flint School District, one of the city's largest employers after GM and Delphi, is losing about 1,000 students or 5% each year. The city currently has the second-highest violent crime rate per capita of large cities in the nation and, with the homicide count already two higher than last year's total, may be first or second for homicide next year. While GM and Delphi together will not cut a majority of the local manufacturing base in the next several years, the number of jobs lost will still stretch into the hundreds or thousands and the jobs lost will be high-paying union jobs from workers with high seniority (almost all making well over $50,000 annually) in a demographic that strongly favors relocation after retirement.

The other profile, however, shows that in terms of community organization, which has tradionally been a model of local incompetance, the city is finally successfully diversifying its economy and utilizing its advantages. There are four local colleges, one with dorms, one soon to build dorms, hosting a total of over 10,000 students. In the case of one, Kettering University, an engineering co-op, a fuel cell facility has recently been installed to research alternative sources of energy, while in the case of the other, U of M, residential units will probably be built in the downtown proper within the next several years. The metro population has remained stable, and collar communities have continued to prosper in the last couple decades. Institutions like the Cultural Center offers the advantages of a larger metro area, while also anchoring property values in key areas of the central city, and the Mott Foundation, the world's twentieth largest and locally based, heavily endows local projects. With the recent emergence of the Kalamazoo Promise there are new precedents for investment in education and culture. The city is strategically located one hour from Detroit at the confluence of major expressways and rail lines. The state is pumping millions of dollars into the community in the form of tax incentives and grants to encourage economic growth.

Most intriguingly, a warped dysfunctionally-functional city government may to be emerging.

I've wasted no time railing against Don Williamson: I think the man is autocratic and crude. Lording it over a city like Flint has to be the definition of a "petty" tyrant. The City Council has also been described by everyone from the Flint Journal to the Uncommon Sense as a sort-of "congress of fools," and my general reaction to both has been frustration and disgust. Both sides of the municipal government have spent the last several years bickering and refusing to compromise, and because the city charter balances power very closely between the two, there's been little resolution of any issue. Which, of course, not only corresponds to wasted court fees (less an incidental expense than you might think), but also the energy and attention of administrators has been tied up in getting each other sued or recalled instead of solving the city's problems.

What's changed?

Don Williamson is a millionaire, and essentially bought a more agreeable city council at the election two weeks ago. Many incumbants were unpopular (for the reasons I've cited above) and their traditional advantage was negated by the funds Williamson pumped into challengers' campaigns. Specifically Williamson has succeeded at replacing six out of nine incumbents with more agreeable challengers. Of the incumbents that retained their seats, one was Willaimson's sole supporter on the last council. The result then, is that the number of councilmen critical of Williamson has dropped from eight to two out of nine.

So while the face of city government is as odious today as its ever been, at least there's the chance to get back to the city's business, and the new relationship has already borne fruit, as Williamson has relinquished his block on $100,000 to explore economic redevelopment of the Buick City industial site.

Here is the clench of possibility:

One of the perennial activities of Flint's municipal government is trying to make the city attractive to manufacturing interests. While this has been woefully insufficient to woo GM, it could have more of an impact on Delphi. As a corporation, Delphi is less than 10% GM's size and a higher percentage of its workers are based in Flint. A supplemental tax break from the state partnered by the city could ease the burden of a more decisive federal intervention. Local institutions such as the Mott Foundation or Kettering assist by offering incentives and opportunities to alleviate some of the sacrifices being asked of UAW members. Interventions and especially nonprofit alleviation of corporate stress has a historically low success-rate in Flint, but the objective would be damage control, not a permanent solution... ultimately, to redistribute the burden on terms more tolerable to all parties involved.

It is reasonable to suggest that any incentives that may be posed by Mayor Don Williamson and the Flint City Council or even the Mott Foundation might be incidental given the scale of problems faced by both General Motors and Delphi Automotive Systems. Delphi is trying to cut expenses numbered in billions of dollars.

However, where all possibilities are balanced so delicately among all parties, and where mutual survival is at a premium for everyone involved, sometimes the sphere of influence is extended beyond what we may consider ordinarily reasonable limits. Revolutions and great victories throughout history have turned on matters as incidental as a squall at sea. Flint certainly has the most to lose of anybody if Delphi and GM are to go out of business.

I will be watching very closely.

END OF POST.