A Stitch in Haste

There’s a remarkably fierce — in a Kissingerian “university politics” sense — feud among some bloggers and columnists about just how much autoworkers are paid per hour.

On the one hand there are what might be called the “top-down” group, chief among them Will Wilkinson, Mark J. Perry and Megan McArdle. They derive the infamous $73/hour (give or take) figure by looking at General Motor’s total labor cost and dividing it by the total number of hours work. Seems appropriate enough.

On the other hand are Felix Salmon and Jim Henley, who insist on a “bottom-up” approach, looking at bona fide wages, then adding on the health, pension and other benefit costs of current employees. This number is far lower than the $73/hour proffered by the top-down commentators. The fact-checking site Media Matters also insists upon this methodology.

The rest of each group’s respective blogging consists mostly of calling the other group idiots.

I see two issues, somewhat interrelated, causing the differential between top-down and bottom-up estimates of Big Three labor costs.

First is the fact that the current cost of a car includes expenses related to retirees as well as to current employees. The top-down group sees no reason to exclude such costs and the bottom-up group sees no reason to include them.

Here the top-down group is absolutely correct and the bottom-up group is, quite frankly, simply wrong. The cash cost of a vehicle attributable to labor is, um, the cash cost of a vehicle attributable to labor. Whether the cash cost today goes to a worker today or instead includes an intergenerational element makes no difference — it is still a cash cost.

Consider the analogy of Social Security taxes. The taxes I pay today can be viewed as a transfer to current retirees, or it can be viewed as the purchase of future (unvested) benefits for myself. Either perspective is, bottom line, entirely valid, at least conceptually and in isolation. But arguing for one perspective over the other in no way changes the fact that I am indeed paying actual cash taxes. How those taxes appear on my income statement, or the government’s, doesn’t cease to make them cash taxes — outlays that affect my behavior, as all taxes do.

Same with cash costs for employee benefits. It makes not one whiff of difference whether those cash outlays nominally go to current employees today, or to current retirees today. They are still being paid today, affecting the cost of a vehicle today and therefore driving consumer behavior today. All else is accountants’ quibbles.

The second source for the disagreement is over the treatment of fixed labor costs — is it appropriate to average those costs out into a pro forma hourly metric?

Here the question is a bit more nebulous and I think both sides have a point. It is indeed an Econ. 101 truth that a firm’s production decisions should be based exclusively on marginal costs, not fixed costs. It is also true, as Henley rushes to note, that as General Motors reduces its staffing, its fixed labor costs will actually result in “average labor costs” rising (due to a smaller denominator). But that’s obviously not the same as saying, “GM would be paying its workers more.”

All true — but is it relevant? Another Econ. 101 truth is that if a firm cannot cover its fixed costs, then it should shut down. And isn’t that exactly the debate we are having? The question facing both the blogosphere and Washington is not whether the Big Three should increase or decrease production (of, recall, cars that people are not buying), but rather whether the Big Three should shut down, slough off its fixed costs (mostly to the Pension Benefit Guaranty Corporation) and start again via bankruptcy and reorganization? So to suggest that “fixed costs don’t count” is bizarre in the extreme.

Finally, let me reiterate that this debate is, at the end of the day (or, if you prefer, at the end of the product life cycle), much ado about nothing. There are only two basic alternatives regarding Detroit: (1) a direct taxpayer bailout of the Big Three, as is being discussed in Congresses present and future, or (2) an indirect bailout via bankruptcy — a move that will result in the Big Three’s pension obligations being transferred to the PBGC, which is utterly unable to absorb those liabilities and will itself need a taxpayer rescue. All roads lead to bailout.

As I have already noted: At least with an old-fashioned Chapter 11 bankruptcy, you get a restructuring out of it. That alone makes it the better, or less bad, alternative.

Previously:
–On the Calls for an Auto Industry Bailout
–Mitt Romney Was For Detroit Before He Was Against It

Filed under: Activist Legislators & Nanny Statists, Economics & Finance, Taxation & Fiscal Policy