Saturday, April 8, 2017

It Can't Be the Unions, Right? Not the Unions! Oh, It's the Unions.

The media is finally reporting what I have been saying for some time - America is competitive when unions are not around.  New KIA factory in Georgia actually exports cars.

Welcome to the New South.   You may think this is a place chock full of racists and Islamophobes.   And yea, we've got our share of them.   So does Indiana and Michigan and Pennsylvania and South Boston.  But what is surprising is, more often than not, how people in the South today are so much not like the stereotypes you used to hear about.

We go out to lunch, and a bunch of "rednecks" come into the restaurant and sit down to eat with their black friends.   It is sort of jarring at first, until you realize that the working class person in Georgia is more likely to have black friends that the Northern "transplant" retired white-collar liberal from New Yawk.

And then you drive by the trailer park and see an interracial couple with their beautiful tan babies and see that no one is raising a fuss about it.   And no, it isn't "black men going after white women" - that is a racist stereotype.  There are just as many white men who marry black women as well.  For some reason, these people never got the memo from the KKK about intolerance and racial mixing.  They just fell in love and decided to start a family.  Good for them!

On the other hand, you are very likely today to see "rebel flags" flying from pickup trucks in Pennsylvania or other rustbelt States - by locals who have no real sense of history.   Racism is gaining traction in these areas as people scapegoat minorities as being the reason their area is in economic decline.   If it wasn't for all those black people on welfare and Mexicans jumping the border, all the union jobs would come back!  A nice theory, it is fundamentally flawed.   Might I suggest instead that you move to where the jobs are?

Of course, the "New South" has been a long time in making.   After the baby boomers graduated from college in 1968, they set about looking for jobs (eventually) and eventually, many moved to the "sun belt" where new opportunities existed and jobs were available.   An entire swath of land from San Diego to Jacksonville Florida, from Houston to Denver, opened up to expansion and settlement by a new generation.   Today, we take it for granted that these are major metropolitan areas and not sleepy Southern or Western towns.

At the same time, in the North, the industrial heartland of America slowly collapsed.   Pittsburgh, PA, once the pollution-choked "Steel City" of America, slowly lost one mill after another.   Factories along the shores of the Great Lakes closed, one after another.  My Dad's plant was bulldozed to the ground.   The 22-acre plant I worked at in Connecticut is now a warehouse.   Hundreds of thousands of people lost their jobs - a trend that started in the 1970's and continues until today.

There are a host of reasons for this transition.   Many of the plants were old and antiquated and putting money into them to modernize seemed a waste of resources, as they were unprofitable.   And they were unprofitable because taxes were high, energy costs were high, and labor costs were high.   Union workers made 2-5 times the prevailing wages, and restrictive work rules meant you had to hire two union workers whereas in a non-union plant, you'd hire one.

In the forge plant at GM we had a rule, "Four hours on, four hours off" - which meant that during an eight-hour day, you worked four hours.   Anyone who tried to break this unwritten rule would find themselves in a world of woe.

Local taxes were high because people in places like New York believed in and loved "big government" which believe it or not was the product of something called "Liberal Republicans" such as Governor Nelson Rockefeller, who promoted the idea of big, efficient, meddling government as a panacea to the State's problems.

And as the economies eroded in the area and it became blighted, people left - they still do.   And the ones that stayed went on welfare, adding to the tax problem and making remaining businesses even less competitive.  People started moving business overseas - and to the South.

Today, Detroit is a wasteland and people are hoping it can recover from the decades of devastation.   Housing stock is old and many are abandoned.  Crime is through the roof.  The cost of doing business is staggering.

Meanwhile, in the Mississippi/Alabama/Georgia production triangle, a number of new car factories have sprung up, along with a plethora of supporting businesses.   Not only are they making cars and engines and body parts cost-effectively, their costs are so low they can competitively export products overseas.  Toyota even exports engines to Mexico.   Still want to built that trade wall?  It wouldn't help the North and it would hurt the South.

Boeing builds airplanes in non-union plants in South Carolina, Airbus in Alabama.   High-technology companies are flocking to the area for cheap land - often free land - low taxes, low wages, and a non-union workforce, the latter being of prime importance.   There is no point in building a factory only to have it taken hostage by organized crime.

Sadly, the Reuters article cited above cites the South as the obstacle to the revival of the rust-belt North, rather than the blueprint.   The South isn't about to close its factories and return to tobacco farming just so Detroit can have a new renaissance.   What the North needs to do is figure out how to emulate this business model and make it work for them.

Why are taxes so high in the North and so low in the South?   Northerners may snicker and say, "Well, the schools down there suck, that's why!"   But this fails to account for the failing grades many Northern school systems are getting, even as they have the highest paid teachers in the country.   Our nation's capital, DC, spends more per capita on education, but has the worst schools and lowest student performance in the country.  Throwing money at things is never the answer.

The answer, like most answers, is not simple, but complex.   We had high taxes in New York not because of one thing, but because of many things.   But they could be summed up as the "Wouldn't it be nice if government did....?" kind of attitude.

But it is also a result of unionism.   Taxes were high there because union government employees and union teachers made far more than the prevailing wages in the area.  This in turn drives up taxes, which drives up costs, which drives away businesses, which lowers the tax base, which increases the tax rates, which drives away more people and, well, it is a vicious cycle.

The problem is, of course, that many on the Left resort to knee-jerk responses when you suggest, based on your actual experience working in union plants and as a union laborer, that unions might, well, you know, suck.   "Without unions we'd all be working 60-hour workweeks, seven days a week!" they cry, failing to understand why non-union and salary people work 40 hours a week - an innovation created by Henry Ford, not the UAW.

"We'd go back to the old days of sweatshops and horrific working conditions!  People would lose their fingers in the milling machines!"  they cry.   Of course, losing your kneecaps to union goons is a better alternative?  And yes, that almost happened to me.  The reality is, unions didn't make the workplace safer, better technology, government regulations, and even our tort litigation system did.  Do people get injured in non-union factories?  Yea, sure, they do.  They also get injured in union factories as well.   And since more and more factories are opening up down South, you are seeing more injuries in this region.   But this is nothing on a par with working conditions in the mills of the 1800's or even the 1930's.   The analogy is not apt.  It is grasping at straws.  It is union propaganda.

In a way, this sort of "cry wolf" argument is what is destroying liberalism in the United States.  In any abortion debate, people on the Left cry, "If abortion is outlawed, women will go back to having back-alley abortions!"   But they fail to recognize that 1967 and 2017 are different times.   There is no "shame" in having a child out of wedlock today as it was back then - when a woman's reputation and prospects in life would be destroyed if she had a child without being married first.   This is not to say that outlawing abortion is a good idea, only that we need to outlaw antiquated arguments that make no sense 50 years on.

With the bankruptcy of GM and Chrysler, some constructive changes have been made.  Two-tier wage contracts mean that wages are finally in line with prevailing rates, allowing companies to hire more.  Restrictive work rules are fewer, meaning labor costs are in line with other, profitable, foreign-owned factories in the USA.   But the delta in costs remains, and the "Big-3" are hardly out of the woods yet.  They've been prospering over the last seven years the same way they did before the bubble burst in the years before 2007 - selling huge profitable overwrought SUVs, whose market will come crashing to the ground when the next oil crises occurs.

GM, Chrysler, and Ford aren't moving small car production to Mexico or importing small cars from China or India just to thwart Donald Trump, they are doing it because you can't build a small car profitably using UAW labor.   The entire house-of-cards is predicated on SUV sales propping up small car sales, and this is what bankrupted GM and Chrysler the last time around - expect Ford to take the plunge this time.

Could this happen?   Well, I sold all my automotive-related stocks last week.   With higher interest rates, increased defaults on the plethora of sub-prime car loans, tighter lending practices, increasing inventories, and rising car prices (sure to rise even faster if Trump enacts a border tax) the Big-3 car companies are going to have a tough time of it as it is.   If we have an oil hiccup, well, it could be all over in a matter of months, particularly with all the debt these companies have taken on.   Remember how quickly GM capitulated the last time around.  At least today, they are not saddled with so much pension debt.

Fiat-Chrysler?  How stable do you think a company is, when its CEO has spent the last five years trying to find someone to buy it - with no takers whatsoever.   He keeps trying to get GM to buy it, which makes no sense.  Frankly, at this point, the smartest thing any company can do would be to wait for the inevitable recession that is coming and snatch it up in a bankruptcy auction - sans liabilities.

The question is no longer "are unions the problem?" but "how do you get rid of them?" because union workers are profoundly different than non-union workers.   Have a beer after work with people from a non-union plant, and they may grouse about how their boss is an asshole or how hard they had to work today or what happened in the plant.    Have the same beer with the union workers and all you'll hear is "the contract" this and "the contract" that.   They spend more time grousing about the contract, the terms of the contract, and whether what they are doing is covered by the contract.

You ask an employee to move a pallet of parts in a non-union plant, they get a fork lift and move them.   In the union plant, they have to consult the contract first - which most folks have memorized.  "That's not in my job description" they'll say, or "That's outside my zone!" or "I'm on my break!"   The mentality is entirely different.   We have contracted for specific labor functions and behaviors and the workers in a union plant will deliver as little as possible which will meet the terms of the contract, and there isn't much you can do about it.   You cannot promote the hard workers, you cannot fire the slackers.

In a way, this problem will eventually solve itself.   Jobs are moving to the sunbelt, where land is free, taxes are low and labor problems don't exist.   People will leave the rust-belt and move away, leaving the slacker and welfare recipients to drag down the rust-belt economy even further.  More and more companies will leave and eventually the tax base will collapse and something will have to be done.  Government employee salaries will have to be cut. Welfare programs will have to be slashed.  Incentives will have to be offered for companies to come back.

But don't expect this to happen any time soon.   It is a process that has been going on for decades, and likely will take decades more to complete.