Wednesday, May 27, 2009

The Union Between Failure and Inflexibility

As GM heads towards a government deadline, it is scrambling to restructure and avoid bankruptcy. In the process, bondholders are getting the short end of the stick, being cast as the bad guys. The big winners are, of course, the unions which may receive, according to the latest plan up to 20% of the new GM. (See MSNBC report

This is a most unfair solution for the failing auto giant. The United Auto Workers (UAW) and the bondholders share an equal claim to GM’s assets. However, our leftist, pro-union government is demonizing the bondholders and unfairly assisting the union. (See a great editorial by the average American bondholder in the Wall Street Journal

If anything, the situation should be reversed. The UAW has way too much power and control in the auto industry. The worst possible solution is to give the unions even greater control over the failing industry. While not the sole cause of the auto industry’s failures, the unions have profoundly contributed to its current state. Unions, in general, contribute to rigidity in an industry. They prevent jobs from being phased out when no longer necessary. This ultimately undermines research and development and technological growth, causing unionized companies to lag behind those without unions. While it is impossible to know what GM would look like today without unions, it is clear that it would have had greater flexibility to change its business model, modes of production, and more. Instead, the stiffness of the system has forced GM and other auto companies to continue a model that should have been discarded long ago.

In non-unionized industries, companies are rewarded – or fail – based on their innovations and specialized superiority. Competition encourages them to reinvent and routinely redesign themselves. If they fall behind, everyone – management, workers, suppliers, retailers – lose out. However in the rigid system of the auto industry, as consumer demand shifts the auto companies are unable to appropriately shift the business. Workers cannot be let go and plants cannot be shut down. This prevents the company from developing new products and methods that could be more efficiently performed with workers or factories with different abilities. Instead, the company must continue an outdated business model and sell an inferior product.

And so for all their contribution to the downfall of the industry, the unions are being rewarded. Once again they are unjustly being a given a piece of the pie that they do not deserve. If our government wants to save the auto industry, it better think long and hard about the role of the union. The answer is not to reward those who made the system too inflexible to succeed, but to create a new, more competitive company that excludes the rigid structures and players that previously dominated. This approach may save the auto industry- giving the UAW undue ownership will not.


  1. Yeah, I think the Execs were great at leading the companies. We should give them complete control of the failing companies. That would be a model for other companies as well. Maybe even some day we can fork over control of our government to these genius executives as well. Maybe, Some day.

  2. I was, by no means, commending GM's executives. They, of course, share culpability. However, the key point is that if an executive fails to perform his job he can be easily removed. Policies or agreements that lock in vested executive interests are as damaging as the unions, precisely because they prevent flexibility in the system. Unions are innately rigid- that is one of their primary aims, to provide security to union members. Executives, on the other hand, are not by their nature an inflexible part of the system. They are a necessary part of a corporate entity- unions are not. This doesn't, of course, absolve GM's executives from culpability. They should be held accountable for mistakes made and, like any part of a corporate entity, changed or replaced if failing to meet the business goals.

  3. Hmmmm? The reason for unions - to PROTECT the workers from being exploited. Now, we would like to blame the unions for the failure of this company. Did you ever think that the reasons for the failure had to do with a tiny, itty-bitty number of people making a gazillion dollars at the top. Why is it wrong that the union got the workers some real benefits, real hourly wages, real retirement - that ALL the itty-bitty, tiny number of people at the top get ALL THE TIME. Guess the American Dream isn't for the worker, just the top. Oh I forgot, they (top) are highly educated (?), and very well connected (?) of course, they cannot make a car, but that's not their expertise. All of you are so ready to accept your status in life and let others have it all - NO, you cannot work hard enough to make it upstairs - Oh I'm sorry (again) did one maybe two - no all three people from thje floor make it upstairs - Oh well, then - it must be fair, just because over 100,000 others NEVER got the chance. Wake up - spread the wealth and you will have happy people - Just the rich won't be happy, they won't be able to tell their rich without poor.

  4. The unions allege that they're there to protect the workers. Maybe they once did, but now they have their own vested interests. Dues are compulsory, non-union workers are precluded, union bosses propose policies that are in their own interests and not necessarily in the long-run interests of the workers. I believe unions SAY they are trying to help the workers- they may even believe they are helping workers. However, there are much better ways to help workers. Unlike large corporations 70 - 80 years ago, modern managers understand exactly what you point out- that they need to compensate workers fairly. Keeping workers happy in their jobs is essential to creating a productive and efficient product. Look at any modern industry (web companies), none of them are unionized. Why? Because enormous companies like Google know they need to make workers happy to retain talent.
    If this fails to protect workers effective legislation and legal action (antitrust for instance) can serve to effectively combat abuse. Policy should be designed to reduce consolidation- on both sides of the aisle, not increase it. If a market is too consolidated the government should step in to make it more competitive. Unionization fails to solve the problem of market power on the management side. If there were a dozen or two dozen large car companies in America rather than three, workers would have the ability to go to a competitor if GM did not offer acceptable wages and treatment of its workers. The free market would provide what the unions attempt to provide. However, unionization helps to entrench a system of three carmakers, thereby 'necessitating' unions. It is an unfortunate cycle that leads to the economy's over-reliance on a few companies (hence why our government feels the need to bail them out). Unionization is a relic of the past- that may have once been a useful institution but now fails to achieve its stated aims.

  5. How about ONE car company that makes the common sense, already known technology for great mileage - when will you admit that the make believe "competition" theory of Capitalism is a breeding ground for corruption. The very very few do really really well - and the rest of you go for the life-long ride. Gladly accepting your alotted position in the world. You think you live in freedom and really you just get to choose the colors on the car, house - but, not the best, and you consider yourself lucky. Why is there so much fear of a government that views it's role as the conduit for all to succeed. Schools that don't bankrupt the community they are suppose to serve, hospitals that aren't prettier than they are servicing the public where they are located. The Insurance Companies have the best set-up in the entire world - they are faceless, apparently no-one knows them, but they can raise or drop at their whim - no one ever brings them to light -and every corporate top junk can blame them for expensive benefits - I say, bring them forward, have them explain Health costs (really it's salaries, huh, who would have thought) please no lame Canadian stories - must be real sick people there - huh?? Time for a NEW approach - this rich vs poor thing is real tired

  6. Why would one government perform the job any better than one corporation? If you have little faith in corporate managers, why would government managers be any different (they'd probably be the same people anyway). The criticism of unions is precisely that consolidation on any side is bad- whether union, managment, government, consumer, etc. More parties involved means greater fairness to all and less potential for abuse.
    The fact of the matter is that people and organizations need incentives- the right incentives in order to do the best job. As nice as it sounds, most people don't do a good job without rewards and punishments to compel them. Capitalism and competition build risks and rewards directly into the system. Actors in such a system have the incentive to do the best they can because they will receive these rewards; and if they fail they will lose out and receive the punishments (ie. loss of investment, firing etc.). Corruption is something that can, and does, happen in any system. Simply put, it is people trying to cheat the system by gaining more rewards with less risk or avoiding punishments. Corruption is as damaging to capitalism as it is to any other system and should be justly stamped out. But the existence of corrpution does not refute the capitalist model.
    Another necessary factor in a workable capitalist model is the free flow of information. This is where the insurance companies (at least health insurance), as you point out, fail. I don't think the health insurance industry is a good example of capitalism and there are many, many flaws with the model we use. I do plan on writing on healthcare in the next few days or so, so please check back.


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