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August 22, 2006

It's Not What GM Did Wrong, It's What It Did Right

These are crucially important points by Malcolm Gladwell in an article on pension and health care plans I'll have much more to say about later. For now, the money quote:

Looking at General Motors and the old-line steel companies in demographic terms substantially changes the way we understand their problems. It is a commonplace assumption, for instance, that they were undone by overly generous union contracts. But, when dependency ratios start getting up into the 3-to-1 to 7-to-1 range, the issue is not so much what you are paying each dependent as how many dependents you are paying. “There is this notion that there is a Cadillac being provided to all these retirees,” Ron Bloom, a senior official at the United Steelworkers, says. “It’s not true. The truth is seventy-five-year-old widows living on less than three hundred dollars to four hundred dollars a month. It’s just that there’s a lot of them.”

A second common assumption is that fading industrial giants like G.M. and Bethlehem are victims of their own managerial incompetence. In various ways, they undoubtedly are. But, with respect to the staggering burden of benefit obligations, what got them in trouble isn’t what they did wrong; it is what they did right. They got in trouble in the nineteen-nineties because they were around in the nineteen-fifties—and survived to pay for the retirement of the workers they hired forty years ago.[...]

Under the circumstances, one of the great mysteries of contemporary American politics is why [GM CEO] Wagoner isn’t the nation’s leading proponent of universal health care and expanded social welfare. That’s the only way out of G.M.’s dilemma. But, from Wagoner’s reticence on the issue, you’d think that it was still 1950, or that Wagoner believes he’s the Prime Minister of Ireland. “One thing I’ve learned is that corporate America has got much more class solidarity than we do—meaning union people,” the U.S.W.’s Ron Bloom says. “They really are afraid of getting thrown out of their country clubs, even though their objective ought to be maximizing value for their shareholders.”

August 22, 2006 | Permalink



One, Gladwell puts the lede right at the top of his piece. It is not buried, but you skip past it for your pullquote. The problem is not that GM was too successful in 1950 (simply running some numbers would demonstrate that, but Gladwell is more interested in making an offhand rhetorical point later, so he doesn't do it). The problem is that GM and the rest of corporate America resisted the well-meaning attempts of CIO typed to collectivize pensions and healthcare. GM, like US Steel before it, is now reaping what it sowed. Germany and Japan, for all their problems, are in much better shape for the simple reason that their industries do not individually labor under the burden of paying for collective obligations.

Two, Gladwell in focusing on dependency ratios alone makes the major mistake that underlies the GOP's call for Social Security privatization and the general (and mistaken) fright across developed countries that We Are In Trouble. He brings up productivity just once in his entire article, when he explains what happened to the steel industry. Simply thinking about what pensions are and what productivity increases mean for society's ability to support them should be enough for you, and for him, but it does tend to undercut the fearmongering. On the broad scale, pension obligations are always paid out of current production. Everything else is accounting.

Forgive me for not caring very much about GM's accounting.

(Well, okay, I care a little, but only because I short the stock now and then.)

Posted by: wcw | Aug 21, 2006 11:44:20 PM

wcw beat me to it. The Gladwell piece seems to really overapply the dependency ratio statistic. I get that laying off a worker and turning him into a retiree leads to a worse dependency ratio. But Gladwell totally ignores why the worker was laid off -- it's not like the company suddenly decided it wanted to make less revenue. It's that the industry changed, productivity increased, and the cost of continuing to pay the worker for unneeded work was more expensive than starting to pay his pension.

The overall conclusions seem sound, but Gladwell's pretending that the dependency ratio tells the entire story. I'm no economist -- perhaps in the case of countries it does. But it's pretty clearly inappropriate to explaining what happened to these industries. Gladwell's account assumes that companies fired newly-productive people for no reason, and that doing so made them less profitable.

Perhaps this would make sense for small companies, where vast increases in productivity wouldn't noticeably affect levels of demand, meaning that when one man is suddenly able to do the job of four, the firm can just make four times as much product and profit. But in the cases of huge industries like steel and cars, that seems unlikely to be applicable.

Posted by: tom | Aug 22, 2006 12:16:59 AM

"The problem is not that GM was too successful in 1950 (simply running some numbers would demonstrate that...)"

I think you miss Gladwell's point rather badly.

GM's error is doing so well that it survived long enough as a big company to face a tsunami of retiree obligations.

If GM had faded away like Studebaker, or gone bankrupt like Bethlehem Steel, it wouldn't face the problems it currently faces. (And likewise, it wouldn't face the problems it faces if it had been a new startup 10 years ago.)

Posted by: Petey | Aug 22, 2006 1:39:20 AM

I didn't miss Gladwell's point. On this portion of his analysis he is simply and plainly wrong. Rather than lecture him by proxy through you, let me ask simply: why GM and not IBM?

Gladwell should have written about the PBGC. Instead of talking to unions and company flacks (and apparently swallowing whole various self-serving portions of either's party line), he might have talked to real experts and written a less screwy article.

Also, don't be so sure GM isn't going bankrupt. Then, I am partial, as I disclosed above.

Posted by: wcw | Aug 22, 2006 2:19:35 AM

"let me ask simply: why GM and not IBM?"

I'm not fully sure of the answer to that. But the better question: why autos and steel and not computers?

I suspect the difference has something to do with the economic differences between skilled and unskilled labor.

"Gladwell should have written about the PBGC."

Why? That would have been an article on something very different than Gladwell's topic, which is why having employee benefits tied to individual companies is very bad for workers, and has distorting effects on the economy that dramatically reduce economic efficiency.

Gladwell is writing a much more interesting article than one about the PBGC. He is writing about something that is simultaneously bad for labor and bad for economic growth. That's a man-bites-dog story. The best pullquotes:

Drucker simply couldn’t see how the pension plans on the table at companies like G.M. could ever work. “For such a plan to give real security, the financial strength of the company and its economic success must be reasonably secure for the next forty years,” Drucker wrote. “But is there any one company or any one industry whose future can be predicted with certainty for even ten years ahead?” He concluded, “The recent pension plans thus offer no more security against the big bad wolf of old age than the little piggy’s house of straw.”


in the free-market system it makes little sense for the burdens of insurance to be borne by one company. If the risks of providing for health care and old-age pensions are shared by all of us, then companies can succeed or fail based on what they do and not on the number of their retirees.


Bethlehem made promises to its employees, years ago, to give them medical insurance in exchange for their labor, and when the company ran into trouble those promises simply evaporated. “Every country against which we compete has universal health care,” he said. “That means we probably face a fifteen-per-cent cost disadvantage versus foreigners for no other reason than historical accident.

Posted by: Petey | Aug 22, 2006 8:48:59 AM

Making retiree pension and healthcare benefits obligations of society instead of individual companies is no guarantee of long term sustainability either. Over the intermediate to longer term, we are virtually certain to reduce the generosity of Social Security and Medicare because the ultimate tax increase likely to be required to fund current promises will not be tolerated.

As for the auto and steel industries, after World War II, they were basically the only game in town as much of the European and Japanese industrial infrastructure was destroyed or damaged. Both industries faced little competition for years. In effect both industries struck a deal with their unions that provided for generous wages and benefits in exchange for labor peace with the costs to be passed on to the consumer by raising prices as much as necessary. At least in the case of steel, that turned out to be persistently somewhat more than general inflation. As steel became more expensive relative to other goods and services, the chemical and aluminum industries developed new materials that could replace steel at lower cost in many applications. The integrated steel producers were also slow to embrace new technology and turned up their noses at mini-mills which produced steel by melting scrap in electric arc furnaces.

The auto industry, for its part, ignored the competitive threat from imports for years and failed to address quality issues until it was too late. As the auto industry treated its customers as a captive market with no other place to go for cars while steel slowly but surely priced itself out of the market, it is small wonder that its active workforce shrank while its retiree population rose. There was plenty of management failure (and union greed) in both industries.

Finally, the pension plans of the remaining old line companies in these industries are not severely underfunded, especially compared to state and local governments. Healhcare is another matter with huge unfunded liabilities, especially in the auto sector.

Posted by: BC | Aug 22, 2006 9:14:38 AM

Why GM and not IBM? Maybe it has something to do with the shift into information services, which is a labor-intensive line of work. Combine a slower decline in the size of the workforce with the fact that its peak workforce was somewhere in the 60's and 70's, and it lines up. IBM is also active in helping employees that want to find second or third careers after retiring from IBM ... for example, as math and science teachers ... which probably also helps a bit at the margin.

Posted by: BruceMcF | Aug 22, 2006 9:27:55 AM

"Over the intermediate to longer term, we are virtually certain to reduce the generosity of Social Security and Medicare because the ultimate tax increase likely to be required to fund current promises will not be tolerated."


I know you can hear voices repeat this endlessly, but it's still not true.

With reasonable economic assumptions, both SS and Medicare (absent Part D) are basically solvent as far as the eye can see. Part D, after reforming the giveaway to Pharma, should also be solvent.

"Making retiree pension and healthcare benefits obligations of society instead of individual companies is no guarantee of long term sustainability either."

Spreading the risk among the entire society, rather than just the balance sheet of a single company, offers a much better outcome for workers. And it also offers the benefit of helping overall economic efficiency.

I can usually walk in the other side's shoes, but I have a hard time imagining any reasonable arguments on the other side of widely spreading pension and healthcare risk.

Posted by: Petey | Aug 22, 2006 9:33:50 AM

GM CEO was all over the country in 2005 calling for Socialized Medicine. GM would love to dump their future healthcare liabilities onto the backs of Americans taxpayers.

Its funny you bring this up because I was advertising on WJR, the Boomer, in Detroit during Black October '05, the worst month in auto manufacturing history, on Rush Limbaugh's radio show. Since our commercials GM's CEO Rick has quit calling for Socialized Medicine in public. Here is what one spot said:

MASSIVE LAYOFFS, HIGHEST UNEMPLOYMENT, companies restructuring and going BROKE. And what is to blame? Healthcare? Some large company CEO's are calling for SOCIALIZED MEDICINE. President Bush knows better, he supports low cost HSA health insurance combined with a tax free HSA.....

After those spots Rick stopped calling for Socialized Medicine in public. Now its a secret. But Hillary Clinton wrote a letter to President Bush wanting American taxpayers to pay for over-priced union auto workers' health insurance. President Bush sent Sec. Snow to the Detroit Economic Club and told them, "NO." Then Sec Snow told those motor-heads that the Tax Free HSA is like a SuperCharged IRA.

Delphi's CEO Miller told Senators in DC the long pitiful history of these promised health care benefits to union employees. Miller's ending was good. "Tax Free HSAs are part of the solution and its TIME for bold moves." Then Oakland County, one of America's richest, announced they were the first county in America offering HSA to employees. Its all too late and a dollar short for GM and Ford.

This blog is not advertising no matter what some John Edwards people say. If you want GM CEO Wagner to hear your message I suggest paying $500 a minute, 10 times a week, and put your message on Rush (America's largest radio show) on WJR in Detroit. I like to always put Socialized Medicine in the spot too because WJR can be heard by millions of Canadians.

Another spot said: "If you're in a union you can't go tax free with an HSA." That spot is no good now because GM started offering HSA to employees.

ezra: Yesterday I enrolled a self-employed guy and member of a schoolboard in Ohio into a tax free HSA. No, he wasn't reading this blog but was responding to real HSA advertising in Youngstown. He said he gave his union teachers the HSA option this year. His is the second Ohio schoolboard to do so.

Also ezra: HSA deposit maximums for singles will be $2,850 per year starting on 1/1/07. That's good because now a 25-year-old, or employer, making a $2,850 HSA deposit will have over $1,000,000 HSA balance at Social Security eligibility age with 8% annual rate of return. Remember ezra, every 6 years we wait to reform Social Security, a ponzi scheme, your PSA balance at 67 will be cut in half. I think we should wait 18 years so ezra's balance will be just a fraction of what it could be. My HSA is the oldest so I have put my HSA balance in just one stock. No, I didn't choose GM. My HSA is in AIZ. Why? Because AIZ has cornered the North American market on tax free HSAs, trust me.

In the future you don't have to be smart to be smart, you just have to know who to trust.

Posted by: Ron Greiner | Aug 22, 2006 10:00:19 AM

You, I trust as far as my 94-year-old grandmother in Austria can throw you. Unlike you, I have seen socialized medicine in the developed world. Socialized medicine in Austria cared for my grandparents, cares for that grandmother still, and keeps my uncle, aunt and cousins healthy. It isn't perfect, but if Limbaugh's listeners understood what they stood to gain with Austria's or France's healthcare system instead of their own, they would adopt it in a heartbeat.

If they knew you were the one paying for those radio spots, they might tar and feather you, too, but perhaps I have too low an opinion of them. Perhaps, in time, they can learn to forgive you.

As for the rest:
- Petey, Gladwell writes very well about perverse economic incentives, which the current structure of the PBGC presents in spades. Moreover, he could have written all of the good parts of this article using its existence as a springboard, and as I said he would have spoken to actual experts rather than flacks, and might have avoided his more egregious errors (like ignoring the effects of productivity growth on society's ability to fund social insurance).
- BC, you make the same mistake Gladwell does. Run some numbers. The demography is no mystery, immigration is pretty predictable, and pick a couple reasonable assumptions for health costs and productivity increases. Get back with a spreadsheet that says what you do, and I'll show you where you went wrong.
- BMcF, my point was that screwing up your pension funding is management's responsibility. IBM's is no prize (viz the switch to cash-balance plans), but they wrestled with and overcame precisely the problems that GM and the steel industry didn't. This gets back to the PBGC; allowing individual companies to fund pensions (and to profit from them in some cases, viz again IBM) is a moral hazard, the kind of thing about which Gladwell writes well.

I reall wish he'd refocused this article.

I also really wish Dante's hell existed, so people like Greiner could get some nice, punch-to-the-gut justice someday. Ron, I bet you're a loving husband and father, but in your work, you just plain do evil. Congratulations.

Posted by: wcw | Aug 22, 2006 10:48:34 AM

The problem with HSAs is that they don't addsress the health care issues of the poor. It's all great that they can be a solution for even millions of Americans but it does not address that issue for the majority of those effected by the health care crisis. For many millions of Americans it is still just insurance they (or I) cannot afford.

Posted by: DuWayne | Aug 22, 2006 10:50:26 AM

DuWayne, President Bush says 40% of HSAs had no previous health insurance. Governor Jeb Bush has made HSAs an option for Medicaid in Florida. The poor get free HSA insurance then the state deposits money into the tax free HSA which may be saved or spent.

wcw, you will have to explain why portable individual health insurance from America's oldest health insurance company is as you say, EVIL.

That's the new buzz words at whitehouse.gov on healthcare reform: PORTABLE HSA POLICIES.

Also wcw: We are knee deep in Europeons here in Florida. Their Socialized Medicine is not World Wide Coverage like ours. See the difference. World Wide Coverage is not evil wcw. Where do you come up with this stuff? Notice how George Harrison didn't go to Austria when he died. Harrison did seek medical care in the United States.

When Arafat checked into French Socialized Medicine I knew he was a dead man.

Posted by: Ron Greiner | Aug 22, 2006 11:22:15 AM

First, I don't, as a rule just blithely believe everything bush says. Show me figures not arrived at by the bush regime. Single payer, universal health care is also "portable" as you say, and works regardless of your income.

Posted by: DuWayne | Aug 22, 2006 11:32:05 AM

Bizarre. An HSA troll.

Posted by: Col Bat Guano | Aug 22, 2006 11:45:27 AM

DuWayne: These SnowBirds from Canada don't have health insurance coverage in Florida. Canada's Socialized Medicine is not too portable south of the border. Canadians come and pay cash.

Employer-based health insurance is not portable and Socialized Medicine is unconstitutional so it's time to have some new ideas. ezra is working on them so if you have any, cough 'em up. We asked the Edwards people for ideas on healthcare but they didn't have any.

Posted by: Ron Greiner | Aug 22, 2006 11:51:02 AM

How, pray tell, is socialized medicine un-constitutional?

The reason I come to this blog is because Ezra is "working on them." And I like a lot of the ideas that Ezra has talked about. I am very keen on single payer, for example. That said, I am far from being a health care wonk. I just know the system is broken beyond repair - we need to build something better. I do not, however, think the notion of learning everything one needs to know about medicine to become an educated consumer of health care. Doctors go to med school so everyone doesn't need to.

Posted by: DuWayne | Aug 22, 2006 12:04:56 PM

It was the Canadian courts who declared that single-payor Socialized Medicine is unconstitution last year.

I thought everybody knew that. Ezra does.

Posted by: Ron Greiner | Aug 22, 2006 12:22:43 PM

Maybe this helps: //APA members who favor a universal coverage, single-payer health care plan received a [[long-overdue reality check]] from the Canadian Supreme Court on June 9, as described in an article in the August 5 issue. Canada's highly overidealized health care system was ruled woefully inadequate, and the ban on private medical insurance was declared unconstitutional.

The Canadian health care service has slowly tortured Canadians for years. With no alternative to the government-run, single-payer plan, Canadians, except those able to travel to the United States, experienced limited access to cutting-edge medical technologies, limited referrals to specialists, limited drug formularies, and very long waits for treatment. Canadian Chief Justice Beverly McLachlin wrote, "Access to a waiting list is not access to health care."//


Posted by: Ron Greiner | Aug 22, 2006 12:31:46 PM

Um, Canada has one Constitution, and we have another. They say different things.

I thought everybody knew that. Ezra does.

Posted by: JRoth | Aug 22, 2006 12:37:00 PM

"It was the Canadian courts who declared that single-payor Socialized Medicine is unconstitution last year.

I thought everybody knew that. Ezra does."

I certainly hope Ezra doesn't know that, because a) I believe Ezra is in the habit of believe factually correct, properly spelled things, and b) the Canadian courts never called "single-payor" "unconstitution".

The Chaoulli decision - which I have to assume is what you're talking about, Ron - simply said that two of Quebec's health insurance laws violated Quebec's (provincial) charter of rights. The decision said nothing about the national charter, constitution, or the Canada Health Act generally.

These facts are easily available to anyone with a brain and an internet connection. Come back when you've actually read up on the truth, Ron.

Posted by: john | Aug 22, 2006 12:58:09 PM

Ron, I did not call HSA's evil, I said that I trusted you about as far as my grandmother can throw you, and that in your work you do evil. Let me spell out the reasoning:
- "in your work" (quoting me) you place advertisements that demonize socialized medicine and proudly note their potential to chill policies that might encourage same
- socialized medicine in the developed world takes care not of aging, multimillionaire rock stars, but of my grandmother; the current US healthcare system would not, or at least would do so very poorly
- your advertisements, then, chill policies that might improve the care of my grandmother, if she lived here, not to mention of the scores of millions who lack good insurance
- knowingly and proudly contributing to the continued failure of the richest country in the world to provide competent health care for all its residents is just plain evil

Quod erat, etc etc.

Posted by: wcw | Aug 22, 2006 1:11:42 PM

Autos and steel got into trouble in 1967-69, when they negotiated almost incredibly generous union contracts, rather than accept a strike in the midst of the Vietnam war boom. Those contracts, for the first time, went well above the trend in growth of manufacturing wages generally. You can actually see the the bump that they created in the average wage trendline.

By hiking the ratio of auto/steel wages to the general U.S. wage, they significantly undermined the U.S. comparative advantage in autos and steel, and the floodgates opened to international trade in autos and steel.

Trade in autos and steel would have risen anyway without those huge wage increases, but the growth in imports would have been slower, and might have been offset by a rise in exports. Without those inflated wage rates, the U.S. retained and retains comparative advantage in autos and in steel (particularly in steel produced by certain methods), as shown by the subsequent growth in auto production by foreign companies in the U.S.

Closely related to the inordinate wage increases of the late 1960's was the decline in the effectiveness of management, which was reflected in a significant decline in quality control. The decline in auto quality control in the late 1960's was a scandal, which attracted major press attention (grabbing even the covers of Life and Look!)

Inordinately high wages (relative to U.S. norms) and poor quality control set up the conditions for the Japanese invasion of the late 1970's and 1980's.

Posted by: Bruce Wilder | Aug 22, 2006 3:26:21 PM

John: You just need to find a politician who feels the way you do. Do you know any? John you and Canada's Chief Justice are not in agreement.

Canadian Chief Justice Beverly McLachlin wrote, "Access to a waiting list is not access to health care."

In America poodles have shorter waiting times for MRIs than Canadian citizens up in the frozen tundra.

Posted by: Ron Greiner | Aug 22, 2006 3:37:56 PM

What Bruce, wcw and the others miss is Gladwell doesn't care how well financially GM and the other industries did, what he cares about is sharing the burden of healthcare and pensions through out the working population and not tying benefits to the employer. I don't know why this isn't discussed more.

How much money companies make, and what kind of contracts they sign with unions during boom times are moot points, when things were booming we should have developed a strong universal health and pension program, it's not too late to do it now.

Posted by: jbou | Aug 22, 2006 3:39:18 PM

I agree that when the obligation to provide pensions and healthcare to retirees is socialized, the benefits are more secure than when a single company is responsible for providing them (because of the federal and state government's power to tax). The problem is removing market discipline from determining the level of benefits. A glaring example of this is the New York State legislature's habit of passing enhanced pension benefits for various favored groups of New York City employees (usually in an election year) and handing the bill to New York City taxpayers even after City officials complained before the fact that they could not afford the benefit increases. Most state and local governments, until very recently, had no idea of the magnitude of unfunded pension and healthcare liabilities they incurred from past promises. It is only now with a new accounting rule (GASB 45) slated to take effect next year that efforts to quantify the liabilities are underway. In the past, politicians had an incentive to agree to generous pensions and improvements in those pensions in exchange for short term labor peace and manageable wage increases secure in the knowledge that they day of reckoning can be pushed off until they have left office.

At least Social Security is financed with a dedicated tax paid by all wage earners with ultimate benefits based on each individual's earnings record. Both costs to taxpayers and benefits to each individual are transparent. There is some semblenace of market discipline here. Indeed, future benefits were reigned in as part of the 1983 Greenspan Commission reforms, mainly by phasing in an increase in the retirement age starting in 2003 and taxing benefits above a certain level. Medicare is financed by a combination of payroll taxes (2.9% uncapped), general revenues and beneficiary premiums. There is an element of market discipline but less transparency than with Social Security. Also, program costs continue to escalate considerably faster than general inflation.

Suppose we doubled both Social Security benefits and payroll tax rates while eliminating private and public sector pensions for future service. And, suppose we extended Medicare to the entire population except the poor while keeping them on Medicaid and shifted the money currently spent on employer provided healthcare to higher wages instead. We would then have supposedly secure pension and health benefits, along with a Social Security payroll tax of 24.8% on the first $94,000 (vs 12.4% now) and health insurance taxes of probably 12% of total income (including interest, dividends, capital gains, etc.) at least plus the taxes required to finance the rest of federal, state and local government. Do you really think most Americans would be prepared to accept this? I don't.

Posted by: BC | Aug 22, 2006 4:09:15 PM

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