The administration’s special treatment of UAW cost taxpayers $26.5 billion

Dustin Siggins Contributor
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On Wednesday morning, The Heritage Foundation released a paper by Center for Data Analysis Senior Fellow James Sherk on the cost of the 2009 auto bailout. The Treasury Department estimates that the auto bailout will end up costing taxpayers $23 billion and, according to Sherk, all of those losses are the result of the Obama administration’s special treatment of the United Auto Workers (UAW) union. In the paper, Sherk pegs the eventual cost of that special treatment at $26.5 billion — $3.5 billion more than the auto bailout’s estimated net cost.

I sat down with Sherk last week for a phone interview to discuss the report. [Full disclosure: I was a contract employee for the Center for Data Analysis in 2010, and I did some work with Sherk during that time.]

Dustin Siggins: The entire taxpayer investment in GM and Chrysler was about $80 billion, and obviously included a variety of aspects to it. Were there other components of the bailout that could have been done better to save the same amount of money?

James Sherk: It’s harder to quantify if [the administration] could have been cost-conscious elsewhere in the bankruptcy process. It’s obvious where they spent too much on the UAW because of the treatment they received in opposition to traditional bankruptcy law. For example, other unsecured creditors were not treated as well at the UAW Voluntary Employee Beneficiary Association, despite having equally strong claims as the UAW legally. They may well have been able to do other aspects better, or perhaps not, but that is not as obvious.

DS: Some will say this paper is meant to be anti-union. Is that the case?

JS: This is an issue of special treatment for one union in particular, over and above members of other unions as well as non-union employees. In Delphi, for example, the International Union of Electrical Workers did not get their pensions topped up the way the UAW did. An Ohio plant with the IUE workers had GM transfer their work to other plants … and in the bankruptcy these union members were forbidden to transfer to plants run by the UAW. So while GM is hiring again, members of the smaller unions are frozen out of the recovery. The well-connected UAW exerted its influence for its members at the expense of investors and non-UAW employees alike.

DS: In the paper you say UAW employees at the domestic auto companies were “highly paid” workers. You also say those paychecks must be earned. What do you mean by “must be earned”? And does “highly paid” include benefits?

JS: To answer in reverse order: Yes, “highly paid” does include benefits. Before the bankruptcy, the labor of UAW employees cost the Big Three between $70 and $75 per hour. About $40 of that was for cash wages, the rest in benefits. Even after the bankruptcy, the non-entry-level UAW members at GM are still making about $60 an hour in wages and benefits. This is twice the compensation of the average American worker.

Regarding the other point, we should want everyone to make $60 per hour if their productivity sustains that pay. If an employee can earn $60 an hour because they create that much value for their company, that is fantastic. More power to them. I wish everyone could make that much. However, if their productivity cannot support their high compensation and that is one of the reasons their company goes bankrupt, they shouldn’t be able to tax other Americans, to take from another American’s paycheck, to pay for their high-end pay and benefits. This is especially true when most Americans make half of what the UAW members do.

DS: Liberals always talk about executive pay. Was that even a factor here, insofar as executives make more than $70 per hour?

JS: Not executive compensation as such. The executives certainly made a lot of mistakes, so you could argue that paying them anything was too much, but financially the level of compensation wasn’t much of a factor contributing to the Detroit automakers’ lack of competitiveness. That said, [former General Motors CEO] Rick Wagoner is not making anything from GM now — and rightly so.

DS: In your report you cite both Congressional Budget Office (CBO) and Treasury estimates regarding the final net cost of the auto bailout. Why did you primarily use the Treasury numbers instead of the CBO numbers?

JS: We relied on the Treasury estimate because it was more recent and used better data. The CBO report came out back in December. The Treasury estimate is also the administration’s own estimate. We didn’t want to get bogged down with critics arguing we were misstating the estimated cost of the bailout. So we went with the president’s numbers. Finally, we didn’t want to cherry-pick data as you can always find numbers to back your view, and the Treasury estimate of the final costs — which was $23 billion instead of the CBO’s $20 billion — actually puts the UAW in a better light.

DS: Can you expound upon this last point?

The cost of the UAW’s special treatment is known: Our calculations show it totals $26.5 billion. So if we took the CBO’s estimate, it would have meant the UAW’s share of the net total cost of the bailout was 133%. Using Treasury numbers, the total share of the net total cost that can be blamed on the UAW is 115%.

Of course, we won’t know the actual cost of the bailout until the administration recovers everything it can. But we did want to give the administration the benefit of the doubt in this particular area.

DS: You do give the administration quite a bit of credit in this paper …

JS: They did a lot right. They required Chrysler to file for bankruptcy prior to a bailout, over the calls from the companies for a direct taxpayer bailout. Was government funding necessary? Possibly not, but setting that question aside and assuming they were going to put money in, doing it through the bankruptcy process was the right call and the right way to do it. The automakers needed to restructure in bankruptcy, and they were required to do so.

What the administration did wrong, of course, was politicize the bankruptcy process and help out special interests instead of following traditional bankruptcy law. That decision cost taxpayers over $26 billion.

DS: You say at one point that the UAW made some concessions. Speaking as a layperson in this area, they look significant, but you also point out “they left most of the existing members’ compensation structure.” What does that mean?

JS: The UAW made concessions, but the concessions for current workers were quite modest — especially compared to the sacrifices normally made in bankruptcy. Instead, the UAW agreed to huge pay cuts for new hires, the so-called Tier 2 workers. Those employees are making about $33 per hour in pay and benefits — slightly more than the average worker in America but less than Toyota and the other transplant auto companies. Their benefits and retirement programs are much less extensive than what the UAW members who were already with the automakers when they went bankrupt — Tier 1 employees — make.

Tier 1 workers did make some concessions, such as eliminating the JOBS bank that paid laid-off workers to stand around and do nothing. Additionally, they changed overtime pay from being calculated upon working more than eight hours in a day (even if one worked only 40 hours in a week) to being calculated upon working more than 40 hours in a week. They also suspended cost-of-living adjustments and performance bonuses.

But for existing members, pay and pension benefits weren’t reduced. This is not normal in bankruptcy. While unfortunate and painful, typically employee pay and benefits are brought down to competitive rates and levels in bankruptcy. That did not happen at GM. Even Steven Rattner, the president’s former “car czar,” admitted that was a mistake.

DS: You say in the paper that preferential treatment for UAW was not necessary. Can you elaborate?

JS: The argument was that the UAW was a business partner, and they needed special treatment to keep cooperation going. This was not the case. UAW leaders were not going to strike in 2009, for example. Even if they had, they knew GM and Chrysler would have no problem filling entry-level positions. With markets so illiquid, the UAW leadership was in no place to make things difficult for GM and Chrysler should the normal bankruptcy process have been followed. The $26 billion the UAW received was not necessary to keep the companies running or to keep factories open. It went purely to sustain the above-market pay and benefits of UAW members. Such spending does not serve the public good.

Dustin Siggins is a policy and politics blogger who regularly contributes to HotAir.com’s Green Room, Race42012.com, and RightWingNews.com. He is the co-author of a forthcoming book on the national debt with William Beach of The Heritage Foundation.