"Lift Up Your Weary Heart Detroit!"

It's a Sufjan Stevens lyric....

Given the fact that I am a Detroit lover and former long time resident of the great city of Detroit, I wanted to talk about the implications of the recent layoffs of white collar workers at Ford and the general mass buyouts in the auto industry.

The auto industry always offers us incredible lessons in globalization, labor costs, unions, and manufacturing in general in the United States. As the whole country bemoans the loss of manufacturing jobs in the United States, foreign automakers are fighting each other for new sites to build cars in the South and all over this country. What do they know that the American politicians crying foul don't?

One remarkable principal that continues to manifest itself in our economy is the concept of Creative Destruction, introduced to the field of economics by Joseph Schumpeter(sp.). We have see this in the telecom industry which shed 600,000 jobs in three years only to reemerge and begin hiring again. Of course, the industry is faced with multiple challenges, however, we know that parts of the sector are back, investment is up, and the industry was able to reposition itself in as little as three years to combat a different competitive environment. In order to do this they had to "destroy" parts of their old business model. Labor flexibility allowed them to do so.

Let's get back to our situation in Detroit. Robert Stempel and the United Auto Workers signed a contract in the early 90s giving unprecedented salaries and benefits to the UAW employees and creating the now infamous job bank. This concept guaranteed salary and benefits to UAW employees even if the company did not sell enough vehicles to keep these employees busy. Therefore, even if a plant would be closed, the workers would still keep their full salaries and benefits.

Fast forward ten to thirteen years and the US auto industry is struggling again due to labor disadvantages as compared to their Japanese and Korean counterparts. Are the cars from made in the US by the Japanese that much better. Some can argue that they are, but General Motors in particular closed the many quality gaps, redesigned vehicles and have made some headway on product. However, General Motors maintained a capacity to make enough vehicles to take 35-40% market share, when their actual market share was around 27%. Why couldn't the company adjust to a changing competitive environment with 6 large auto companies competing for the world's largest and most competitive market? They lacked labor flexibility and their labor costs are much higher than the rest of the industry.

The Wall Street Journal several months ago did a comparison of two plants in Texas. One plant owned by General Motors that produced highly profitable SUVs such as the GMC Yukon and Chevy Trailblazer had a average hourly cost per worker including retirement benefits and health care of $81 per hour or $1800 per vehicle. 300 miles down the road a new state of the art plant built by Toyota to produce the Toyota Tundra to take away the truck dominance of the domestic auto manufacturers has a labor cost of $30-$40 per hour including benefits and a $800 cost per vehicle.

Back to our faithful motor city, what does this all mean? It means that although Ford and General Motors have had quality, design, and operations problems over the years. However, GM and Ford's management, quality, design and operations are not far enough behind to be the sole problem for the success of the Japanese firms and the Americans failure. The issue comes back to labor flexibility. In order to restruture the social welfare city-state, I mean Metro Detroit, GM and Ford have to make the painful cuts the way the telecom industry did in three years. However, this restructuring has been coming since the early 80s.

Unfortunately, in the short term Detroit and Michigan suffers. Everything from Doctors to Plumbers to Housing will suffer. But when a similar thing happened in the early 80s, Detroit recovered and will recover again. Most people understand that capital has been trapped in the Auto industry. That capital in a different city would be redistributed into other industries. However, again the process of creative destruction is hurt by the lack of labor flexibility.

I want to make the point that unions have built this country in partnership with corporations since they first gained prominence. Their sacrifices and successes cannot be trivialized and the rights they fought for created a better life for the American worker. But in the auto industry and in certain places they pushed too far and lacked the foresight to make changes that would guarantee their potential jobs in the future and help the future of Detroit.

Hopefully, Detroit will reemerge as a new city, with capital redistributed, a stronger and more educated labor force, and more industries with flexible labor forces.