Wednesday, December 24, 2008

David Friedman on $70 Per Hour UAW Labor Cost

David Friedman responds to Eric Boehlert's article "The Media Myth: Detroit's $70-an-hour Autoworker":

A good deal of Boehlert's indignation is based on the fact that labor costs as calculated include pension and medical benefits to retired workers. He regards this as obviously wrong, since the money isn't being paid to the current workers. But it isn't that simple. The cost of pensions is incurred when the worker is employed but paid when he retires. If labor costs only count what is currently paid to current workers, the cost of pensions will be left out, substantially understating both the benefit to the auto worker and the cost to the company.

Ideally, the calculation should be done using costs when incurred. But pension and medical costs are not known when they are incurred, since at that point the company does not know when the worker will retire, how long he will live thereafter or what his medical costs will be. So the choice is either to use a current estimate of the future cost of benefits to current employees or a current figure for current cost of benefits to past employees. Neither gives a reliable figure for the future cost currently being incurred and it is not obvious which is better.

27 Comments:

At 12/24/2008 12:20 PM, Blogger David said...

"So the choice is either to use a current estimate of the future cost of benefits to current employees or a current figure for current cost of benefits to past employees"...only the first of these is consistent with proper accounting practice, which calls for the matching of costs and revenues.

It is not correct to say that future benefit costs are unknowable, at least as far as retirement costs go--they can be made fixed by purchasing an annuity.

 
At 12/24/2008 1:42 PM, Blogger save_the_rustbelt said...

Cost accounting is flexible enough to allow all sorts of calculations and all of the calcs can be valid for one purpose of another.

The objection is that the $70 (or $71 or $73, depends on source) is being used in a misleading manner.

And no one is talking much about what happens when Toyota and Honda workers get to retirement age (or disability) with depleted 401(k) accounts, you know that little problem on Wall Street.

 
At 12/24/2008 2:04 PM, Blogger bobble said...

"So the choice is either to use a current estimate of the future cost of benefits to current employees or a current figure for current cost of benefits to past employees. Neither gives a reliable figure for the future cost currently being incurred and it is not obvious which is better. "

it's very obvious to management which is better. don't fund pensions now so profits are (appear to be) higher now. this increases management bonus's and the value of stock options. but it's poor (fraudulent?) accounting practice.

in any case it's extremely misleading to say this is the current cost of labor.

 
At 12/24/2008 2:09 PM, Anonymous Anonymous said...

David, how can you purchase an annuity for medical insurance for a retire that won't retire for 30 years? How could you know the cost of the insurance or medical costs to know how much of annuity to buy?

 
At 12/24/2008 4:55 PM, Blogger spencer said...

I suggest you run this article past any actuary and see what their reaction will be.

Insurance companies do these type of calculations every day.

The real point is that management gamed the system to deliberately underfund pension and health obligations and used the difference to inflate profits. The unfunded liabilities should be a charge against stockholders equity, not a charge against labor.

 
At 12/24/2008 6:59 PM, Anonymous Machiavelli999 said...

Labor costs are a fraction of the operating costs for an auto manufacturer. Again, people are using their idealogy, which is predisposed against unions, to make their argument. Instead of actually discussing facts.

 
At 12/24/2008 7:14 PM, Anonymous Anonymous said...

Wont the market sort it all out. Let the car makers go broke and then the workers will know what there best option would have been.

 
At 12/25/2008 11:23 AM, Blogger Michael Smith said...

In the first place, as Boehlert admits in his article, comparing the Big Three's average labor cost (not average wage) of $72/hour to Honda and Toyota's figure of about $45/hour is NOT misleading.

But more importantly, it doesn’t matter what they are paid. Nothing justifies the notion that the mistakes or misfortunes of some should be paid for by others -- others who had absolutely no role in the making of those mistakes and did absolutely nothing to create or contribute to the misfortune.

Bankruptcy is the only proper and just destination for the Big Three.

 
At 12/25/2008 11:30 AM, Blogger Michael Smith said...

Machiavelli wrote:

"Again, people are using their idealogy,"

Ah, yes, a philosophical pragmatist -- a man that consistently promotes the idea that it is wrong to consistently promote ideas.

 
At 12/25/2008 12:54 PM, Anonymous Anonymous said...

Ideological bias against labor unions? Isn't ideological bias and political clout of labor why we are bailing out the car companies?

 
At 12/25/2008 4:12 PM, Anonymous Machiavelli999 said...

Michael Smith,

We are using your tax dollars to establish police and fire departments. These police and fire departments help people who have had misfortunes or even made mistakes. However, it is possible that these institutions can abuse their power so as to hurt society. In fact, the history of corrupt police departments is long.

So...explain to me why we shouldn't get rid of police and fire departments?

 
At 12/25/2008 4:19 PM, Anonymous Machiavelli999 said...

Anonymous,

No, we are not bailing them out because labor unions have political clout. We are bailing them out because they are a systemic risk and their failure in the current environment could adversely effect the financial system. Now obviously I don't have all the facts in front of me like the Treasury department does, but I am sure they did an analysis and determined that the companies are too intertwined in the financial system to allow them to fail.

This is really not all that surprising because of their large size and large financing arms.

 
At 12/25/2008 6:16 PM, Blogger Michael Smith said...

So...explain to me why we shouldn't get rid of police and fire departments?

The only legitimate function of government is to protect our rights against those who would violate them by initiating force or fraud. To accomplish that, government needs to consist of three things: police (including a criminal justice system)to protect men from criminals, a civil court system to resolve commercial and contractual disputes and an armed forces to protect the nation from foreign invaders.

A government stripped down to those functions would be tiny compared to the monster that currently eats something like 40% of our GDP. It could be paid for by charging fees for government services.

For instance, the government could charge a fee -- like an insurance premium -- on each commercial contract to pay for access to the court system. Since many billions of dollars in transactions take place under contracts, and since the great majority of businesses want the option of seeking relief in the courts in the event of unilateral breach by the other party or some other disagreement, a fee consisting of a percentage of the contract value would provide billions in funding. Note that this fee would be strictly voluntary -- no one would be forced to pay, but those that do not agree to pay it when the contract is initiated will not be able to make use of the courts. It is likely the overwhelming majority would choose to pay the fee because a contract that cannot be enforced is not worth much.

For a fuller discussion of how to finance a government without violating the rights of the citizens through taxation, see the article by Ayn Rand, "Government Financing in a Free Society" in her book, "The Virtue of Selfishness".

I will also say that taking my money to pay the police to capture and punish a criminal that has harmed someone else is a fundamentally different thing than a bailout. It is generally in my interest to see criminals everywhere caught and punished. I would gladly volunteer to pay whatever fee is required of me to keep the police in existence. The bailout, however, is not at all in my interest.

I do not buy this claim:

Now obviously I don't have all the facts in front of me like the Treasury department does, but I am sure they did an analysis and determined that the companies are too intertwined in the financial system to allow them to fail.

This claim is nothing more than a version of the "broken window" fallacy. It looks at all the jobs that will be lost when the UAW workers get laid off and employees at the suppliers get laid off, etc. etc. But it ignores the fact that when money is taken from the taxpayers to pay for this bailout, then the taxpayers no longer have that money to spend and all the jobs that were previously supported by that taxpayer spending are then lost. Because the loss of auto industry jobs is so immediately obvious -- while the latter are spread across an entire $15 trillion a year economy --everyone pays attention to the first and ignores the second. But the second is every bit as real.

Getting rid of companies that are losing money and thus wasting enormous sums of capital is a good thing. Sucking the taxpayers dry so the losses and the waste can continue is a bad thing.

 
At 12/25/2008 7:32 PM, Blogger bobble said...

jeez. how many Carpe Diem posts focusing on the Big 3 bailout and the (totally misleading) $70+/hr UAW labor cost are we going to get?

[disclosure: i'm rather inclined towards a prepackaged bankruptcy filing for the big three, that would leave at least two of them still in business and more competitive]

a big 3 bailout would cost taxpayers $25 billion. big whup. this is a drop in the bucket compared to the tax dollars thrown willy nilly at wall street, $350 billion and growing. shouldn't these overpaid morons ($425/hr on average) go out of business also?

given the choice i'd rather just throw $25 billion at the big three and save the taxpayers $325 billion. plus, the UAW workers need the money. wall street workers apparently don't.

i understand folks here are concerned that the big three and the UAW are in no way competitive (in the united states) and thus should not be bailed out by the taxpayers. but, doesn't making bad financial decisions also earn a financial company a stop in bankruptcy court? where's the passion on those tax dollars?

 
At 12/26/2008 12:43 AM, Blogger OBloodyHell said...

> with depleted 401(k) accounts, you know that little problem on Wall Street.

I will HAPPILY trade every dollar I have in the SS "lockbox" for a dollar in YOUR 401k, as long as I get control over the future of the 401k dollars in question.

In the 20 years before I retire, that 401k will vastly outperform that SS "lockbox".

Everyone under 40 with the slightest clue who actually expects to see anything more than chump change our of their SS payments is a damnfool idiot.

 
At 12/26/2008 12:45 AM, Blogger OBloodyHell said...

> The unfunded liabilities should be a charge against stockholders equity, not a charge against labor.

It SHOULD be a charge of culpable negligence on the part of labor management when they didn't insist on a system which would reliably cover their members at the bargaining table.

 
At 12/26/2008 2:25 AM, Anonymous Machiavelli999 said...

The only legitimate function of government is to protect our rights against those who would violate them by initiating force or fraud.

Even if I agreed, what is "fraud"? Is mindlessly leveraging up bad investments and putting our banking system in danger "fraud" or "incompetence"? Also, what are our "rights"? Is it my right to breathe in clean air and clean water or is that a privilege?

But it ignores the fact that when money is taken from the taxpayers to pay for this bailout, then the taxpayers no longer have that money to spend and all the jobs that were previously supported by that taxpayer spending are then lost.

In normal circumstance this would be correct. It is the old argument that large amounts of public spending crowd out private spending. But this is not true right now. People would not spend that money in any other way. They would probably hoard it. As an example, look at the best performing investment right now. Treasuries! What does this mean? It means that people would rather lend money to the government right now rather than invest in any private enterprise. Is this rational? No, but everyone is looking for safety above all else.

How does government finance these bailouts? It issues Treasuries. So, the money used to do all these bailouts is not forcibly being sucked out of the economy as a whole. The economy has no confidence and the only thing it has confidence in is giving its money to the government.

The hope is that all these bailouts/stimulus measures increase demand and restore confidence, so that businesses and people begin to spend again rather than hoard.

 
At 12/26/2008 10:42 AM, Anonymous Anonymous said...

Mach:

If people hoard money, where do they hoard it? In the mattress?

No! They keep it in the bank or pay off debt!

Paying off debt has it's advantages, and keeping money in the bank means the bank will invest that money on it's own! If I hold onto $30,000 in my savings, my bank will be able to use whatever percentage of that $30,000 for it's own investments.

Hoarding money CAN have some positive effects!

 
At 12/26/2008 11:59 AM, Blogger wcw said...

There'd be no calculation issue if we socialized medicine and retirement. I get the idea that that inside our host, under that gruff bloggy exterior lurks a big, cuddly socialist.

Kudos, my man. It takes real courage to be a socialist in this crowd.

 
At 12/26/2008 1:12 PM, Anonymous Mika said...

(1) Throughout the entire national discussion on the Big 3 crisis, the prevailing assumption has been that "they" brought this upon themselves via excessive worker greed and mismanagement, AND, if only they did things like the foreign car industry, they'd have no problem.

Perhaps most rushed to judgment prematurely? Today my newspaper headlines, "Japan Posts Worse Auto Output Drop Since 67". A few days ago it reported: "Toyota's Red Ink Symptom of Tight Credit" and "Foreign Transplants Downshift Output".

And so, it seems the battered auto execs were correct when they tried to tell a do-nothing congress that their primary problem is a horrendous economy in which no one wants to buy (anybody's) cars.

(2) Bobble and Mach are right on in this discussion.

(3) By the way, O'Bloody, I have both 401-K's and SS checks. Guess which one is paying my bills and will continue to do so for at least the next five years? Most retirees are fortunate they aren't having to rely on those wonderful free market equities for subsistence.

 
At 12/26/2008 2:39 PM, Blogger Paul said...

"Guess which one is paying my bills and will continue to do so for at least the next five years? "

Congratulations, you got into the ponzi scheme early enough. Many of us did not. Enjoy!

 
At 12/27/2008 12:59 PM, Anonymous Mika said...

Yes, Paul, I can certainly understand why you - and others in this forum - are tempted to characterize SS as a "Ponzi Scheme", since more is now being paid out vs. what's being paid in. I'd be less benevolent about it if I were in my 20's.

But for many decades in "pay-ins" exceeded, and then equaled the payouts, so it wasn't a fraudulent endeavor, and it was sincerely well-intentioned. So it's not really fair to assign nefarious intentions on the part of those developed it. They were expecting a perpetually larger labor force, less population longevity, and never anticipated the gargantuan fleecing of America via the health care systems.

The nation must to do whatever it takes to ensure that everyone who pays in gets a fair return on their investment. If nothing more, citizens should receive a refund of their contributions, which now would be better than the market is giving.

 
At 12/28/2008 1:18 AM, Blogger OBloodyHell said...

> Is mindlessly leveraging up bad investments and putting our banking system in danger "fraud" or "incompetence"?

That would depend on the motive and the nature of the action -- the most obvious example would be Gorelick and Raines, who blatantly falsified GSE numbers so as to guarantee their six-figure bonuses for 2003. If a private business did that (can you say "Enron"? I knew ya could), they'd be pilloried in the press and brought to trial.

Hear that? It's called "silence". I wonder why? Where are the calls for Gorelick and Raines to be brought to trial?

OTOH, if the numbers are falsified or misreported by people lower down, or if the numbers are inflated by overly optimistic projections as to the amount of risk being taken, then that is incompetence. Evidence suggests that this is the most obvious description applicable to most of the current credit situation.

A more straightforward example:
================================
If your name is "Madoff", it's fraud.
If you recommended "Madoff", and lost money yourself, it's incompetence.

 
At 12/28/2008 1:26 AM, Blogger OBloodyHell said...

> But for many decades in "pay-ins" exceeded, and then equaled the payouts, so it wasn't a fraudulent endeavor, and it was sincerely well-intentioned.

What the HELL has that got to do with it?

Your description is EXACTLY that of a CLASSIC Ponzi scheme -- early "investors" get money, later "investors" get the shaft.

And "sincerely well-intentioned"...?

Is THAT all one needs to do to avoid a criminal charge, these days?

"Well, your honor, I didn't MEAN to kill all those kids, I really meant for those toys I manufactured to be fun for them to play with..."

"Well, your honor, I didn't REALLY intend to kill those women. I thought after I forced them to have sex with me, they'd find they enjoyed it..."

"Well, your honor, I didn't mean to kill my wife, I just wanted to teach her a lesson about annoying me when I'm in a bad mood..."

Interesting standard. Go ahead, use it in court the next time you wind up there. Report back to us on your level of success.


Anyone EXCEPT the government runs a scheme like SS, they wind up in jail, at least they do if they don't flee the country for someplace without extradition.

And no, it doesn't matter if they "meant well".

 
At 12/28/2008 1:42 AM, Blogger OBloodyHell said...

> (3) By the way, O'Bloody, I have both 401-K's and SS checks. Guess which one is paying my bills and will continue to do so for at least the next five years? Most retirees are fortunate they aren't having to rely on those wonderful free market equities for subsistence.

If you started your 401-k only 5-10 years ago, then yeah, you've lost more than you gained. If you started it before then, then you managed it astoundingly poorly, since if it's been around for 20-odd years it would be paying out a hell of a lot better than the social security -- especially if you had done as you should have done about 5+years ago (assuming you are/were at retirement age) and shifted the bulk of its value (at or near the stock market's peak) into less volatile things like CDs and T-bills. That's BASIC economic sense that any advisor should have provided (early on, you do riskier things with your money. Later, you put it into safer things with less risk but less opportunity to really pay off)

The facts are simple: Invest a 401-k into rational investments over the same *long* time frame as SS generally is, and it will present far better returns -- even WITH serious downturns like the current one.

20 years ago, the stock market was ONE THIRD of what it is TODAY.

So the value of your principle, even if you did NOT shift funds as you neared retirement several years ago, would still have netted you an ROI over 20 years time of a simple-annualized 10%.

That is FAR better a return than SS has given you in the same time frame, AND, further, it's REAL MONEY which you can pass on to your heirs and assigns -- it doesn't "disappear into the ether" when you die.

Learn how to read the numbers, rather than looking at some idiotic apples-oranges comparison. Before you could even possibly justify the notion that your 401-k was a worse investment than SS, you'd have to lay out a lot more information than you have (or likely should) divulge.

But without that, it's impossible to demonstrate to you why you're so ignorantly wrong as to be a fool to express an opinion.

Have someone who's an actual investment advisor break it down for you -- take to them your SS payment history, and your 401-k history, and have them show you how the same money that went into SS, if it had been placed into suitable instruments in the same time frames, would have certainly netted you far more money than the SS is giving you each month... and still left you with something to leave to your heirs (or, if you have none, then to the charity of your choice)

 
At 12/29/2008 8:09 AM, Blogger 1 said...

west coast whiner yet again steps in it: "There'd be no calculation issue if we socialized medicine and retirement"...

Ahhh, the inability of the socialist to come to grips with reality...

If one thinks that social nanny state program for medical and retirement are such a great idea then a visit to your nearest VA hospital should be the order of the day...

Interestingly Professor Mark is quoted in this CNSNews story...

Anyway none of this will matter if the party of the Seditious & Sleazy gets their way and foists what Robert Samuelson calls 'Cap-and-Tax' crapola onto the American economy...

 
At 1/04/2009 2:10 PM, Anonymous t jefferson said...

The claim that UAW members at the Detroit Three make $73 per hour isn’t a mistaken impression. There’s no mistake about it. It’s a grossly distorted fabrication spoon fed to power point parrots, sometimes known as “reporters”.

The deception is willful, premeditated, and malicious.

The inflated figure is based on a false analogy derived by transferring the companies’ legacy debts to active workers’ pay scales.

In essence, it is no different than a Ponzi scheme.

It’s a lie.

The assertion that hourly workers cost $73 per hour is fraud.

Power point parrots, too lazy to question or analyze, aid and abet the crime

 

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