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GM Message to Minnesota Business, Government: Middle Class Too Big to Fail

June 03, 2009 By Lee Egerstrom, Economic Development Fellow
Public attention to General Motors' bankruptcy filing and government-induced restructuring plan has focused this week on whether the giant automaker can be saved with taxpayer investment in the new company.

For Minnesotans painfully aware that we are losing the Ford truck assembly plant in St. Paul, far broader questions come into play. What's at stake is finding best ways to support the industrial base of America and our state so we can function in a truly global economy.

Longer term, we should ask ourselves how Minnesota and the nation can have a healthy workforce, a healthy business climate and a healthy economy. The auto industry props up the middle class, and when all is going well, the middle class drives the economy.

To get a handle on the bigger picture, it is useful to visit with Roger Prestwich, professor of international business at Metropolitan State University and a former official of the Minnesota Trade Office. Let's take a walk through historical economic theory and practice to get where we are today, and where we may be going:

Keynesian Economics 
"We can safely say John Maynard Keynes is alive and well," Prestwich said, referring to the 20th Century economist (1883-1946) who advocated macroeconomic theory and interventionist public policies that have come to be known as Keynesian economics.

The public investment in General Motors is about $30 billion, drawn from what's left of a $700 billion package of funds Congress approved earlier to help financial institutions and their investors.

The public now owns large equity stakes in GM, Chrysler (already under Chapter 11 reorganization), and some of America's largest banks and insurance companies. After 30 years in which Keynes has been vilified by economic theorists, Prestwich wonders, "Is it possible to smile when you are turning over in your grave?"

The "Welfare State"
Critics of Keynesian economics have bemoaned the rise of the so-called "welfare state" since the United States and most Western, industrial nations adopted policies to cope with the Great Depression. It wasn't a new concept; the "corporate welfare state" was long established. The new welfare state only extended public benefits to the most needy of citizens.

The American colonies became a welfare state in 1692 when a royal grant from the English monarchy established the public postal service. It supported colonial commerce and the upper classes that were literate at that time; it did little for the immigrants breaking land and building cities from which a great nation could grow.

America was founded as an agricultural and trading nation. The first "farm program" predates national independence by about 30 years. The English governor-general of Virginia intervened in trade and put a floor price under tobacco and cotton being shipped back to Europe. This was actually an early form of corporate welfare, or state-sanctioned privilege. Virginia didn't have "farmers," as we know them in Minnesota; it had plantation owners with large estates that were mostly awarded as land grants from the English crown.   

Much later, public "investment" was extended to helping ordinary farmers opening the frontier. The Homestead Act made land available, and farm-to-market roads and waterways were developed. Minnesota and Nebraska, however, were nearly alone among states that tried to limit such public investment benefits to bona fide family farms.

Eventually, the concept of the common good was extended to people living and working in cities, sometimes with public policy and more often than not, by collective action through unions, mutual associations and cooperatives.

Minimum wage laws were enacted that set a bottom benchmark for how much poverty the public could tolerate. An unofficial benchmark, however, came out of the auto industry and union contracts that effectively established the purchasing power of a rising middle class. Compensation for white collar and blue collar workers in other industries and professions was keyed to what the auto workers were making, up and down from the most recent union contract.  

The American middle class was born. Its purchasing power sustained manufacturers and providers of services and entertainment.
"Free Riders" and the Common Good
Philosophers dating back to Plato and Aristotle wrestled with defining "the common good" and gauging human behavior long before economics and political science were developed as academic disciplines. Out of these thought exercises, however, has come the notion of "free riders," the name given people who take advantage of social or economic benefits at the expense of others.

The spread of Asian and European automakers to low-cost labor states in the U.S., largely at the expense of American automakers and Midwest levels of compensation for labor, offers an example of this ages-old problem. It's not a perfect example, warns business professor Prestwich. Foreign automakers that came into the states to undercut United Auto Workers' contracts have increased standards of living and personal incomes in the states they came to exploit. That is progress for the common good in those states, he said, and, by extension, for the nation at large.

Nonetheless, what has occurred over the past three decades is a self-destructive practice of states' competing against each other with tax avoidance subsidies and outright investments, such as property grants and services. These giveaways reward even more free rider transfers of benefits and shifts greater tax burdens to school districts and local governments. Ultimately, it means children and local property owners subsidize multinational corporations in hopes of realizing some economic benefit.    

The Auto Industry's Health Care
That brings us back to GM and Chrysler's bankruptcies. Autoworkers are becoming major shareholders in the two big companies by taking over obligations for worker and retiree health care costs. This is a big gamble on labor's part, but it might help restore something closer to a level playing field for American cars.

Asian and European automakers don't pay employee and manager's healthcare costs in their home countries. National healthcare systems collect payroll deductions for health insurance, whether that coverage is provided by a national health service or by private insurance companies. Germany, for instance, has had a national healthcare system since 1883 despite constant changes of monarchial, despotic and democratic government structures.

The GM reorganization plan calls for the sale of the Opel subsidiary in Germany and the UK to Canadian auto parts manufacturer Magna International, with investment help from a Russian bank. Saab, GM's Swedish subsidiary, is on the sales block and has until August to find a buyer. Meanwhile, GM is shopping its Saturn and Hummer divisions to potential buyers.

Where all this goes is hard to predict. What is clear, however, is that multinational auto companies don't have to pay healthcare costs for laborers and managers outside the U.S., including in Canada, but they currently do at plants in the United States.

The bold stroke taken by auto company employees to shoulder healthcare benefit costs may tip the competitive scale back in favor of U.S. automakers. Or, the foreign-owned automakers also struggling in the recession will take another run at America's middle class by cutting or eliminating their company health benefits.

The allure of free ridership will be great. Further weakening the American middle class, however, would be disastrous.            

The Minnesota "Social Contract"  
It should be clear to the Obama administration and Congress that the publicly financed rescue of GM and Chrysler cannot work without corresponding investment in a uniform health care system. Such a system would also help foreign automakers that operate plants and provide jobs here as well, but it would stop the erosive destruction of the middle class so needed to buy automobiles, support retailers and keep America's industrial base operating.

Minnesota is not just a bystander while this plays out. Prestwich reminds us that Minnesota had a "social contract" with its people that was more like Northern Europe's until recent decades. Again using early economic terms coined by the philosophers, this contract called for state investments in education, health, welfare, transportation infrastructure and business development that served the common good and allowed business to flourish.

We are cutting back on these investments now, or breaking the social contract. But states such as Massachusetts and even regions, such as the San Francisco Bay area in practically insolvent California, are advancing ideas of universal health care. Keynes and Aristotle, not to mention Hobbes and even Adam Smith, would see a link between common good and our own best interests.

Minnesota does have a state health care plan that should be strengthened, and expanded, not whittled away. Minnesota business and government should look at public investment that lowers total unit production costs and increases productivity, not just lower worker compensation and taxes for free riders.

Forget about banks and automakers for the moment. It's the middle class that is too big to fail. State and national intervention is necessary for the common good.
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