Monday, September 04, 2006

A Long Time Ago in a Galaxy Far Away ...

Ok, it was not a Galaxy that was a Ford car, but it was Detroit and this story is about GM cars, steel and workers. In the in days shortly after WWII, labor was in tight supply. Businesses actually had to compete for workers and started offering incentives that would go beyond simply paying more in wages. And so begins Malcom Gladwell's fascinating article on the economics of employer based pensions and healthcare.


The president of General Motors at the time was Charles E. Wilson, known as Engine Charlie. Wilson was one of the highest-paid corporate executives in America, earning $586,100 (and paying, incidentally, $430,350 in taxes). He was in contract talks with Walter Reuther, the national president of the U.A.W. The two men had already agreed on a cost-of-living allowance. Now Wilson went one step further, and, for the first time, offered every G.M. employee health-care benefits and a pension.


Flash forward to today, and GM and Ford and for that matter just about every company that was around then, is unable to fund its pensions and certainly has stripped the healthcare benefits it once promised to its retired workforce.


America’s private pension system is now in crisis. Over the past few years, American taxpayers have been put at risk of assuming tens of billions of dollars of pension liabilities from once profitable companies. Hundreds of thousands of retired steelworkers and airline employees have seen health-care benefits that were promised to them by their employers vanish. General Motors, the country’s largest automaker, is between forty and fifty billion dollars behind in the money it needs to fulfill its health-care and pension promises. This crisis is sometimes portrayed as the result of corporate America’s excessive generosity in making promises to its workers. But when it comes to retirement, health, disability, and unemployment benefits there is nothing exceptional about the United States: it is average among industrialized countries—more generous than Australia, Canada, Ireland, and Italy, just behind Finland and the United Kingdom, and on a par with the Netherlands and Denmark. The difference is that in most countries the government, or large groups of companies, provides pensions and health insurance. The United States, by contrast, has over the past fifty years followed the lead of Charlie Wilson and the bosses of Toledo and made individual companies responsible for the care of their retirees. It is this fact, as much as any other, that explains the current crisis. In 1950, Charlie Wilson was wrong, and Walter Reuther was right.


American businesses can't compete with the huge financial obligations incurred by the shortsighted business leaders of the past. In macro, this is the problem with the Bush administration policies of spend now/pay later policies that will saddle future workers with outrageous debt to repay (and its bad even now 40% of your tax dollars go to the interest payments on debt incurred by just 3 presidents; Reagan, Bush and Bush)

Innovation mustn't stop with technology. We need smarter solutions to basic problems of how to keep our economy running with the mix of old industries and new industries able to compete globally. Gladwell sums up the problem;


Here, surely, is the absurdity of a system in which individual employers are responsible for providing their own employee benefits. It penalizes companies for doing what they ought to do. General Motors, by American standards, has an old workforce: its average worker is much older than, say, the average worker at Google. That has an immediate effect: health-care costs are a linear function of age. The average cost of health insurance for an employee between the ages of thirty-five and thirty-nine is $3,759 a year, and for someone between the ages of sixty and sixty-four it is $7,622. This goes a long way toward explaining why G.M. has an estimated sixty-two billion dollars in health-care liabilities. The current arrangement discourages employers from hiring or retaining older workers. But don’t we want companies to retain older workers—to hire on the basis of ability and not age? In fact, a system in which companies shoulder their own benefits is ultimately a system that penalizes companies for offering any benefits at all. Many employers have simply decided to let their workers fend for themselves. Given what has so publicly and disastrously happened to companies like General Motors, can you blame them?


The issue of universal healthcare goes beyond what is good for the worker. Its good for business. Short term thinking is what gets companies in trouble. Gladwell's article is long, but worth the entire read, especially on this Labor Day.


New Yorker THE RISK POOL
What’s behind Ireland’s economic miracle—and G.M.’s financial crisis?
, MALCOLM GLADWELL, Issue of 2006-08-28.

28 comments:

Anonymous said...

so , Turrff. should we adopt Ireland's tax policies on estates?

http://www.accountingnet.ie/channels/taxation/taxsummary/inheritance_tax.htm

I'm waiting to see the lefties condemm Ireland as some right wing enclave now!

Anonymous said...

What's happening to Connecticut Democrats? I am hearing that some Democrat State Senators and Senate candidates who supported Malloy said they refuse to put DeStefano signs on their lawns. Is this why DeStefano pulled the endorsement list from his web site?

I am also hearing that some will refuse Ned Lamont signs.

Hello Nancy Dinardo, where are you?

turfgrrl said...

anonymous 9:35- Why drag this back to estate taxes, which have such a negligible impact here in the US. Does anyone credibly think that there are real people who have paid onerous taxes under the previous US estate tax? No, there are no documented cases. A hyped up partisan straw man is the best that the club-for-growth-weeneis come up with. If faux-conservatives spent as much time battling against corporate welfare as they do social welfare programs this country would be in a much better shape. Maybe even competitive instead of ranking last on planet earth yeah, scroll down.

Anonymous said...

Turfgirl, I really agree with you on this one. Underestimating the global effects of under and uninsured is a mistake. As a healthcare professional I have witnessed first hand just how much public money is spent on free care and how much more is passed on to paying consumers. People need to get their heads out of the sand and educate themselves on the economic effects of health insurance to citizens and corporations.

Rick Melita said...

Happy Labor Day. It is a great article that describes how UAW founder Walter Reuther thought the huge corporations were nuts to insitute individual pensions and health care systems rather than instituting a national system, which was anathema to the the corpocrats that ruled America in the mid century. My favorite line in the piece is the last: "It has taken half a century but the world may be finally catching up with Walter Reuther."

Anonymous said...

turffgirl, we all know the Lamonts and Fuscos of the world have gamed the system to avoid paying their fair share. Small less sophisticated people get hosed however with a 50% plus marginal rate since they were too busy building businesses to construct an elaborate shell game of tax avoidance. Suddenly someone with a good run of luck in stock market or some appreciating investment properties like a strip mall becomes Daddy Warbucks in your eyes and that of the URS.

So, is Democrat Governor Tim Kaine
of VA a radical conservative for repealing his state's estate taxes...and does it have anything to do with the skyrocketing affluence of Northern VA?

Genghis Conn said...

Universal health care is supposed to be issue #1 when the General Assembly returns in 2007--no matter who is elected governor.

Anonymous said...

anon 10:55-

How exactly have the Lamonts "gamed the system to avoid paying their fair share"?

Do you have a shred of evidence to support such a claim, or is it just an unsupported attack?

Anonymous said...

GC, much as the Japanese car firms made sure not to do business with the UAW, watch states that adopt "universal health care" lose business to places that didn't

This is the state income tax all over again, big government and big business sending a big bill to wage earners

cgg said...

Turfgrrrl you're on fire this weekend!

Corporations used to share risk with their employees. Now that risk is all on us. Something has got to give, and I think it's time for Government to step in.

Tying healthcare to employment just doesn't make sense. Being laid off is hard enough without having to worry about how you'll pay for Cobra or an actual emergency. It also frees businesses for the burden, and health care has become a giant one for companies large and small.

Anonymous said...

what evidence is there they paid a 55% tax rate upon anyone's death...seems the JP Morgan fortune emerged rather unscatched generations later

Bobby McGee said...

If CT were to remove healthcare (and retirement) from an individual job, wouldn't they attract businesses who want to hire connecticut residents because they don't have to pay as much? Wouldn't this broaden the tax base?

FatGuyinMiddleSeat said...

Hey, speaking of Labor- great parade in Newtown. A town known for its roughhousing.

I couldn't really see what happened, but I saw some sop holding a slightly torn Lamont sign, saying "See! See! This is what the Lieberman people do!" Yelling this and holding up the sign with one hand, with infant in the other.

People, it's an important race, but everyone cut out the pushing and shoving. Especially under the fair giant flag of Newtown.

Those crazy exurbs, I'll tell ya.

Anonymous said...

BMG, repeat after me

there is no free lunch

Winners in "universal health care" will be big businesses unloading legacy costs on the general public.

Small businesses will be taxed thorugh the neck to pay for it

and of course, most of the open borders supporters also want universal health care so the CT taxpayer can take in every sick person across the globe.

Anonymous said...

anon 2:07 -

do you have some evidence that Lamont ancestors didn't pay estate taxes? seems like quite an assertion to make with nothing to back yourself up...

Bobby McGee said...

Anonymous said...
BMG, repeat after me

there is no free lunch

Winners in "universal health care" will be big businesses unloading legacy costs on the general public.

Small businesses will be taxed thorugh the neck to pay for it

and of course, most of the open borders supporters also want universal health care so the CT taxpayer can take in every sick person across the globe.


Why do small businesses need to be taxed to pay for it? Small businesses already weighed down with having to pay unreasonable amounts of money to insure their employees. Wouldn't it keep costs down if these small businesses could buy into the same large pools as larger ones do?

And we're already paying for all the illegals in this country when they are forced to go to an emergency room (which is also the most expensive way of doing it).

Anonymous said...

Bobby, yeah its the elusive "lower cost" paridigm. Perhaps socialised health care will lower cost for medicine they way Wal-Mart lowered the cost of housewares--drive the manufacturers offshore.

The bottom line is Americans consume more health care than they want to pay for. All the cost shifting in the world doesn;t solve that.

truthteller06 said...

Despite being disinvited to the Newtown Labor Day parade by organizers focused on party politics, thousands of Newtown residents welcomed Lieberman to their town with a deluge of handshakes, hugs, and warm wishes. Having spent the afternoon at the Newtown parade in close proximity to both the Democratic contingent and Lieberman’s Team Connecticut contingent, I can tell you that Joe Lieberman found overwhelming support among the people of Connecticut today. In fact, on more than one occasion, parade organizers had to ask him to pick up the pace because supporters were crowding him so much that he couldn’t continue walking. One man saw this and went up to Lieberman and said, “Joe, you take your time. Enjoy this. We love you.” Before the parade even began, one woman walked up and gave him a bouquet of flowers to express her support and appreciation. Also before the parade, dozens of men and women in uniform asked him to take pictures with them and told him how much they appreciated his support over the years. While it might be true that there were more political supporters the group walking with Lamont, it is also true that there were more REAL PEOPLE supporting Lieberman along the streets of Newtown.



There wasn’t a single point along the parade route when Lieberman didn’t hear screams of support. Several of the other parade organizers made sure they went up to Lieberman to say that they were glad he was there. People applauded and yelled things like “Hang in there Joe!” and “We’ve got your back!” and “You’re the only one who can get things done for us Joe!” all along the way. Lieberman quickly took off his jacket, rolled up his sleeves, and stopped and took pictures with the crowds of people. Lieberman met supporters of every party affiliation today…Democrat, Republican and Independent. For Lieberman, the day was about real people, not politics. Of course, that didn’t stop his opponents from playing politics and pulling childish antics here and there. A grown man dressed in a Bush costume and holding up a hateful sign constantly tried to disrupt Lieberman’s interaction with the press and his supporters, but Lieberman was in such a good mood by all the warm wishes he was receiving from his constituents that he just politely ignored them and continued focusing on the people. In fact, at one point, even the Lamont supporter who was constantly throwing a handheld camera into Lieberman’s face in hopes of catching some embarrassing slip-up said to him, “Thank you, Senator. You are being a really good sport. I hope you’re enjoying this day.”



It is borderline stupid to accuse a man of such clear integrity of being involved in or supportive of any act of violence. Because Lieberman had not been able to focus on the reporters while he was walking due to the crowds, he agreed to talk to them for a few minutes at the end of the parade route. A group of reporters were waiting patiently for him to finish shaking hands. After a while, he finished and began taking their questions. A man with a baby and a Lamont sign was making an effort to push his way into the camera shot and a scuffle broke out between him and a few other residents who were encouraging them to be polite and stop trying to push his way into Lieberman’s interview. None of the people involved in the disagreement were paid Lieberman staffers. In fact, I saw a few of the Lieberman staffers try and separate the people who were fighting and calm everyone down. When it became clear that no one was physically hurt, Lieberman returned to the interview that had gotten interrupted.

All in all, it was a fantastic day for Joe Lieberman. It affirmed that when it comes to real people, they’re lining up and marching behind Joe.

Anonymous said...

I must have been at a different parade. While i did see a few people greet Joe, there were certainly not cheers nor other consistent exclamations of support along among the hundreds of people I could see along the straightaway where I was standing. Most didn't seem all that interested in or focused on Joe and the few supporters he had marching with him - in fact, a few people next to me even asked me who he was! One of his supporters was trying to give away Lieberman stickers, which were declined by most of the people I saw. The crowd perked up a bit more prior when Ned passed - although to be fair, i think its because he had a lot of vocal people marching with him who commanded attention - a lot more energy with that crowd than with Joe's. Jodi Rell was smart to hand out to balloons to the kids - they were everywhere.

Bobby McGee said...

I don't think that "socialized" healthcare is what I was advocating. I think we need to first and foremost separate healthcare from any particular job, with businesses providing part of the cost.

People who are now uninsured skip going to primary care-givers when they have a problem, let the problem fester, and then end up in the emergency room at a high cost to taxpayers.

Bobby McGee said...

And what's with the Lieberman press release?

Anonymous said...

Previous poster wasn't at the same parade as me!

Guess he didn't hear people yelling at him to bring the troops home the whole route.

Also guess he didn't notice the 100+ people marching with Lamont, while Joe had a much smaller crowd, who had to delay the whole parade by walking slowly, so it wouldn't look embarassing to have them following the huge Lamont delegation.

Anonymous said...

folks can you imagine if we had "universal nutrition" and "universal shelter" provided for by government auspices.

Think the average guy would eat as well and have as good a house?

Anonymous said...

bobby mcgee said, "People who are now uninsured skip going to primary care-givers when they have a problem, let the problem fester, and then end up in the emergency room at a high cost to taxpayers."

I agree. But you forget to mention that many people who do have insurance do the same thing.

How many people either do not see a doctor on a regular basis or ignore doctor's advice? A lot.

Imagine how much money we could save if people ate healthy, exercised and, in general, just followed the advice of a primary caregiver? (And I am not even talking about getting people to quit smoking.)

What should we do about that?

turfgrrl said...

Big business keeps on dumping their financial obligations on taxpayers anyways, so why not level the playing the field for small businesses with universal healthcare. Let's take a look at the short history of unfunded pensions to see where the unfunded healthcare obligations are going to show up.

From Slate by Daniel Gross:
The cram-down trend started with defined-benefit pension plans, the kind that are prevalent in unionized, old-economy industries. When the 1990s boom ended, many companies with large pension plans began to fail, especially in the steel and airline industries. Not surprisingly, many of these failed companies didn't bother to fully fund their pension plans.
In many instances, bankrupt companies turn over their plans to the Pension Benefit Guaranty Corp. But if you're entitled to more than the maximum that the PBGC insures, tough. For example, the PBGC recently took over the pension plan of bankrupt United Airlines, which was underfunded by $9.8 billion. Since the PBGC would guarantee only $6.6 billion of those benefits, the workers—who had met all their obligations to United—took a $3.2 billion cram down.
Meanwhile, the PBGC itself is in deficit. As of last September, it had only $39 billion in assets to cover the $62.3 billion in guaranteed pension benefits it owes to more than 1 million workers. In other words, it doesn't have the resources to meet even the crammed-down plans. Oh, and the PBGC, which insures pensions for 44 million workers in 31,000 plans, is bracing for more pension failures.


So, the Republican do-nothing position actually results in the taxpayers picking up the tab of uninsured workers and retirees, without any consideration on how to best manage the inevitable. The Democratic create-a-program position is not necessarily the best solution out there, but at least it avoids the head in the sand approach to governance that the current crop of Republicans in Washington have exhibited in the last 5 years.

The issue is not going away, as Madge would say "We're soaking in it." The time is for smart thinking on both sides of the aisle on how best to manage the baby boomer bulge of medical care consumption that laps at the levies of short term thinking.

BRubenstein said...

the federal government ought to provide free universal health care and should force business to 100% fully fund their compnay's pensions..or face the government taking them over for the benfit of workers..

Anonymous said...

you know, someone pays for "free" stuff, Brucie

GMR said...

First, if you think corporate pensions are in bad shape, check out municipal pensions. State and local governments have much looser accounting regulations that corporations use.

While most companies have switched to defined contribution plans, many municipalities have continued to operate defined benefit plans for teachers and other employees.

Projecting costs of pension plans can be quite difficult. If you plege to pay someone $X every month from the time they retire to the time they die, then how long they live will have an impact on how much you need to set aside now. What also impacts this is the return that money will generate between now and when the person dies. Figuring out estimates for these things can be done: that's what actuaries do. However, if you're a little off, you've got major problems (or major windfalls). For instance, if you set aside $1 every year for 35 years, and it grows at 8% per year, you'll have $187 at the end of the period. If it grows 9%, you'll have $236. That difference is a quarter of the amount you'd have at 8%. And if the life expectancy rises a bit, that'll also make pensions much more difficult.

However, these things pale in comparion to what retirement health benefits cost versus what they were projected to be. I can't even begin to fathom what health care costs will be like in 40 years, what therapies they'll have, etc.

On a side note, the reason that Charles E. Wilson had the nickname of "Engine Charlie" was that at the same time, another Charles E. Wilson was CEO of GE. He was known as "Electric Charlie". The 1950s weren't known for their diversity...