Detroit is a Metaphor for the United States
The travails of Detroit, the once great Big Three that forged the industrial heart land of America, are not unique to the auto industry. Indeed, they symbolize the economic risks facing America; the problems are the same.
Too much social services dependent upon too small a revenue base.
At its peak, one of every six workers in America derived their living from Detroit. The nation’s great steel mills, rubber factories, glass companies, machine tool and dye companies, textile mills, owed their existence to Detroit. The auto plants were in every large state, including Michigan, Ohio, Illinois, Indiana, Kansas, Kentucky, Tennessee, Maryland, Massachusetts, Minnesota, Missouri, Nebraska, New York, New Jersey, Georgia, Texas, California, Wisconsin, Virginia, Delaware, and Oklahoma. The wealth was spread around.
The United Auto Workers, working with GM, Ford, and Chrysler, built the nation’s great middle class.
The UAW became the premier union in America.
The magnificent public universities of the Midwest were funded by the auto industry. Even three appliance companies were owned by the automobile manufacturers: GM/Frigidaire, Ford/Philco, and Nash/Kelvinator. GMAC, FMCC, and Chrysler Financial were among the largest finance companies in the world.
Detroit’s plants spanned the globe with large operations in Canada, Mexico, Europe, Africa, Australia, and Latin America.
The future seemed even brighter in the 1960’s. And then, slowly by surely, sometimes seemingly imperceptibly, Detroit lost its way.
For Detroit stopped being an industry driven by market pressures to maximize profits by building a competitive product at a competitive price.
The economics scholars of the 1960’s erroneously fixated on oligopolies and their ability to administer prices. Consumers would have no choice but to purchase their products. The UAW and the Big 3 bought into this idea and acted accordingly.
Detroit turned into a private social services agency protecting about 3 million Americans thorough employment, gold plated medical plans, retirement, and even unemployment. A vast private welfare system, dependent upon the sale of uncompetitive vehicles, was doomed to failure in the long term. The recent surge in gas prices is the catalyst that has caused the final collapse.
GM in essence switched from being a profit generating corporation to a social welfare organization for 2 million Americans, sustained by the sale of automobiles. Prices kept rising while quality tumbled. All the while market forces were chipping away at the Big Three, first in small incursions by Volkswagen and then ever larger by Toyota, Honda, and Datsun/Nissan. Accura, BMW, Lexus, Mercedes seized the luxury market. Through the power of compound interest the trickle became a torrent.
Detroit could no longer market competitive cars. The Chevy, Ford, and Plymouth lovers defected to Camry’s, Accords, and Altimas. The demands on the Big Three to provide services kept growing as the resource base shrank.
The social services grew as follows. First came unionization during the Great Depression, necessary for the country. Wages rose, followed by medical insurance, almost as good as that offered members of Congress, and retirement plans. Two other additions added to the burden on Detroit. First came an annual cost of living increase of 3% in addition to whatever might be negotiated during the regular triennial collective bargaining. Then in the 1984 came the jobs bank. Workers laid off by the Big Three and the unionized parts manufacturers, purportedly by improved technology, would report daily to a jobs bank, play cards, fill in crossword puzzles, watch TV, and collect 95% of their regular pay. As an alternative, they could do community service. Until recent modifications, workers could stay in the jobs bank forever. In short, workers were paid not to work. And that is the day the music died.
GM lost a 67 day strike in 1970. 400,000 UAW workers received full retirement after 30 years, regardless of age, and even greater medical benefits. GM, and thus Detroit, was about to head blindly into two oil cutoffs, from which it never recovered.
GM’s share of the US auto market shrank from almost 60% at its peak in the 1960’s to just 22% last month.
So how is this market failure of a company and an industry a metaphor for the United States?
Government, federal, state and local, liberal or conservative, Republican or Democrat, has followed the same path by promising ever more to citizens on a limited resource/revenue base. The needs are infinite, but the resources are finite. The desire to spend, to provide is politically irresistible. For example, the demands of teacher unions and prison guards are irresistible in California.
When revenues are exhausted, then debt becomes the instrument of choice. Schools even bond for routine maintenance. The federal government can print money, but the states lack this option. They must borrow.
Spending can take the path of entitlements, the vast bulk of government spending, or discretionary spending, such as for public safety, recreation, and higher education.
Detroit offerred entitlements by contract; government by legislation.
The entitlements, such as medicare, medicaid, and social security, are on auto pilot so they keep rising irrespective of the underlying economy.
Employees receive high salaries, great medical benefits, and highly favorable, indexed pension plans, often allowing retirement at relatively young ages.
Unlike Detroit, government does not answer to the strict discipline of the market. Business has to adjust to market conditions, or go bankrupt. Modern government grows faster than the underlying revenue base.
Government has difficulty laying off or cutting back, either employment or programs. Thus, it tries to resist budgetary pressures by raising taxes, borrowing ever larger sums, and engaging in budgetary gimmicks. Thus, even before the current recession, California had a structural deficit of $5 billion annually. Los Angeles was running a $400 million deficit prior to the collapse. The federal government, under a conservative president, is somewhere up to $11 trillion in debt, plus untold sums in guarantees and off the books accounting.
Government becomes weaker as it supplies greater resources on a dwindling revenue base. For example, large taxation in the Blue states drives entrepreneurs to the Red states (especially Florida, Georgia, and Texas), leaving behind an ever greater number of residents dependent upon the state for their welfare. The great city of Detroit has shrunk in half from its 1950 population of 1,850,000 to just over 900,000 today, 1/3 of whom live below the poverty line. Almost all of Detroit’s residents are dependent upon government employment or programs. Elected officials must respond to their needs.
Private citizens, you and me, have engaged in similar practices through credit card debt, consumer finance, mortgage refinancing to cash out, home equity loans, leases, student loans, life insurance loans, or payday loans.
Debt is debt is debt, leverage is leverage, whether it be called bills and notes, bonds, debentures, mortgages, personal notes, commercial paper, factoring, cdo’s, senior, junior, subordinated, secured or unsecured.
The problem for Detroit and for America today is that private investors are unwilling to provide additional credit, especially to profligate borrowers.