GM and the Welfare State
Interesting article at Lew Rockwell about GM's problems. Essentially, the writer says it comes down to this: Starting in the 1950s, GM bought lower wages for workers by giving them great OPEB ("other post-employment benefits"): great pensions and lifetime health care. The workers didn't have to report the benefits as taxable income and GM could deduct the upfront costs. Better yet, GM didn't have to put the looming obligations on its balance sheets, meaning its prospects looked better, its stock price went up, and executives could justify handsome bonuses for themselves. But now, all those OPEDs are killing GM, and there doesn't appear to be a way around it.
In this, the writer says, GM is a mini-welfare state, and the U.S. is mimicking it in many ways with its Medicare and Social Security. Interesting and unsettling stuff. Link. Concluding excerpt:
This report is about GM, insofar as GM is representative of a mindset. Managers have treated GM as a career investment vehicle. Workers have treated it as a rich uncle who will always be there with money. Investors have treated GM as if the company were not subject to the reality of long-term increases in medical care costs.
In retrospect, the experts say all of this was visible years ago. But the share price of GM indicates that nobody paid any attention until it was too late.
This is why I am not impressed by economists who assure the public that Social Security/Medicare are not out of control, that there is time to maneuver.
Nobody in charge ever seems to maneuver until the investment vehicle goes into a skid on an icy road in the mountains. Bad news is dismissed as irrelevant. Statistical reality is deferred by investors until they finally start unloading shares. Then there is not much that the people in charge can do to solve the problem.
If highly sophisticated investors are this naïve about where their money is being invested, why should we expect politicians to tell us the truth about the looming insolvency of Social Security/Medicare?
