Preferential Treatment – Jared

Another labor union story, sorry guys.  This one has some good facts though.  Allow me to quote.

Under the proposed scheme, secured creditors owed some $7 billion will recover 28 cents per dollar. Yet an employee health-care trust, operated at arm’s length by the United Auto Workers union, which ranks lower down the capital structure, will receive 43 cents on its $11 billion-odd of claims, as well as a majority stake in the restructured firm.

The many creditors who have acquiesced include banks that themselves rely on the government’s purse. The objectors have been denounced as “speculators” by Barack Obama. The judge overseeing the case has consented to a quick, “prepackaged” bankruptcy, which seems to give little scope for creditors to argue their case or pursue the alternative of liquidating the company’s assets. In effect Chrysler and the government have overridden the legal pecking order to put workers’ health-care benefits above more senior creditors’ claims, and then successfully argued in court that the alternative would be so much worse for creditors that it cannot be seriously considered.

The Treasury has also put a gun to the heads of GM’s lenders. Unsecured creditors owed about $27 billion are being asked to accept a recovery rate of 5 cents, says Barclays Capital, whereas the health-care trust, which ranks equal to them, gets 50 cents as well as a big stake in the restructured firm. If creditors refuse to co-operate, the government will probably seek to squash them using the same fast-track legal process.

This is going to freeze money for unionized firms which may end up killing the firms in the long run though short term they are going to experience greater power with their stakes in their firms.  Union membership has been declining since the 1950s for a reason:  it is not profitable.  If business is not profitable jobs will not be created putting workers in a serious hole.

I will explain with an example.  Let us say we have two markets.  In one market, say the mp3 player market, the businesses are able to make more profits than in the second market, let us say the grocery market.  For example, your iPod probably cost about half as much to make as it did at the cash register.  The grocery market, with many more competitors and less specialized products, cannot mark up prices as much.  If Target decided to mark up milk .50/gallon, Walmart would immediately respond by only marking up less, say only .20/gallon, immediately stealing the milk market.  If you are a business person which industry would you prefer to operate your company in?

The mp3 player market would obviously be the preferred choice.  Why make almost no profit when you could make a pretty penny, or dime for that matter?  How does this apply?  The American automotive industry has been saddled with higher production costs than foreign firms like Honda and Hyundai because the unions raise labor costs.  Higher labor costs are bad for profit which will drive out companies, reducing the influx of cash and new businesses seeking profits.  While this may protect the unions in the long run it will be detrimental because as we have seen in the recent past cars produced by companies without unions (Honda, Hyundai, etc.) are able to include more features in their cars than similar American companies and still charge a lower price, taking business from the American firms.

There are ways to even the playing field and to protect home grown industry, but these options are very bad for the consumer.  Moral of this story?  The unions may survive but they and the government are bleeding the American automotive industry dry.

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One Response to Preferential Treatment – Jared

  1. Pingback: The Budget – Jared « A Slice of Polis

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