Economics and the mid-life crisis have much in common: Both dwell on foregone opportunities

C'est la vie; c'est la guerre; c'est la pomme de terre . . . . . . . . . . . . . email: jpalmer at uwo dot ca

. . . . . . . . . . .Richard Posner should be awarded the next Nobel Prize in Economics . . . . . . . . . . . .

Friday, July 29, 2005

Health Plans and the U.S. Auto Industry

Brian Ferguson has a very long posting at A Canadian Econoview about the current losses being suffered by General Motors. He correctly points out that their negotiated pensions and health plans for retirees are fixed costs even if the media report them as per-car costs. He also makes excellent use of the importance of expectations in decision-making:

GM and the union expected that GM would be able to make a great deal of money for many years. They were wrong. Now what can they do about it?

I know ---- get the taxpayers to pick up the slack. Here is Brian Ferguson's conclusion:
To the market oriented economist the situation is pretty straightforward. The American car manufacturers sat down and calculated the price they thought they could charge for their product and the revenue that they thought they'd bring in at that price. On the basis of those calculations they negotiated wage and benefit agreements with their unions. It turns out that consumers won't pay the price Detroit thought they'd pay for the cars Detroit was producing, so the revenue wasn't there. So they're asking the U.S. government to dip into the pockets of taxpayers, many of whom are earning a lot less than GM's workers are earning, to bring GM back to profitability without its unions having to make significant sacrifices. There is no justification for intervention, and the state of the auto industry certainly provides no basis for advocating national health insurance. The auto industry and its unions dug themselves into this hole, it should be left to them to get themselves out.
Why is GM or Ford stock not selling for just pennies? One reason might be that people expect the gubmnt to bail them out. Why else would someone pay anything for shares in firm with such huge fixed commitments?

What will happen if/when GM and Ford go belly-up? There will be a LOT of retirees whose pensions and health care coverage will be seriously reduced.

If you were retired (or retiring soon) from GM or Ford, wouldn't you be putting a little (or a lot!) extra aside for the future? I sure would.
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