The bankruptcy of Delphi is hometown news for me. When I visit my home state of Michigan, I often drive by the Delphi headquarters on I-75 in Troy. Delphi was spun off from General Motors in 1999; as I understand it, it used to be GM's Delco parts division. Delco, by the way, was the company acquired by GM that brought to the larger corporation Alfred P. Sloan, the longtime GM chairman and architect of what became the dominant U.S. auto company from the 1920s to the 1960s. Sloan's book, My Years With General Motors, was long considered the primer of how to organize and manage a large manufacturing corporation.
When I was growing up in the Detroit area, GM was so successful that people speculated it was trying to hold down sales to protect itself from a government antitrust suit. Now GM is in serious trouble, for the same reasons that Delphi has gone into bankruptcy: the huge legacy costs of pensions and healthcare plans for retirees and the high wages and generous healthcare plans secured by the United Auto Workers in their contracts with GM and Delphi in the decades since World War II. Thomas Bray explains in the Detroit News how these costs have become unsustainable. Harold Meyerson, the left-wing columnist who would like to see unions expand, also provides in the Washington Post a thoughtful take on the situation.
"The Bankruptcy of the Industrial Welfare State" is the headline of Bray's column. How did this come to pass? Most of the leaders of the UAW and the Big Three companies who negotiated these generous contracts were very smart men, and they thought that the costs could be passed along to consumers. For the two decades immediately after World War II, they were, because the Big Three auto companies had no effective competition. Then sales of imported cars started rising. The Big Three executives can be criticized for not responding to this challenge. They, like the UAW, sought to wall themselves off from competition by getting the government to limit imports or to require certain percentages of "domestic content" in autos sold in the United States. But those policies triggered a response by Japanese, German, and ultimately Korean firms: They built plants in the United States, almost all of them with nonunion workforces. Pay was generous, but the costs imposed on companies were much less than those imposed by UAW-Big Three contracts. The workforces of the Big Three are much smaller than they once were, so the companies have many more retirees to provide for than active workers.
In his book The New Industrial State, economist John Kenneth Galbraith argued that companies like the Big Three could stimulate, through advertising, as much demand for their products as they wanted and that high capital costs protected them against competition. That was arguably true in 1967, when Galbraith's book was published. It ceased to be true, at least for the Big Three, shortly afterward. Delphi's bankruptcy raises the question of whether its pension costs will be handed off to the government-backed Pension Benefit Guaranty Corp., as the pension costs of so many steel companies and airlines have been. And it also raises the question of whether GM, Ford, and Chrysler will go into bankruptcy and hand off their pension costs to the PBGC. Such things were unthinkable in the Detroit I grew up in. The era of Big Three dominance seemed sure to go on and on forever. Now that time seems long gone.
The lesson: In a dynamic economy, it's a bad idea for individuals to depend entirely on one large corporation. Large corporations can get smaller.
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