December 31, 2008 - WSJ Opinion Story

Let Detroit Build Profitable Cars - In the continuing battle over Detroit, UAW chief Ron Gettelfinger doesn't seem to get the picture. Let's help him.

Let Detroit Build Profitable Cars

In the continuing battle over Detroit, UAW chief Ron Gettelfinger doesn't seem to get the picture. Let's help him.

With shareholders virtually wiped out and debt holders taking a massive haircut, labor is the only stakeholder with anything left to lose. Even a friendly Obama administration will have to acknowledge this. But there is an alternative that would at least take some of the pressure off wages and benefits -- and that's freeing auto makers to build cars for a profit rather than to meet regulatory mandates.

Like all regulatory schemes, Congress's hallowed Corporate Average Fuel Economy rules froze in place a conception of the auto industry as it appeared to the simple minds of Congress in the early 1970s, when three manufacturers dominated the U.S. market, making full lines of vehicles. Today, more than 25 companies sell vehicles here, and the corollary of such diversity, normally, is specialization.

The Big Three, left to their own devices, would surely specialize in those vehicles on which they make money -- i.e., those with hefty price tags and markups relative to their man-hour content. Even at the peak of gas prices, half the vehicles sold in the U.S. were light trucks. In November, amid a collapsed home construction industry and with $4 gasoline fresh in mind, what were the two top sellers? Pickups by Ford and Chevy -- and the Dodge Ram was No. 7.

Shouldn't this be telling us something about how to make the Big Three "viable"?

The fuel-economy rules apply equally to foreign brands, of course, some of which also specialize in big, powerful vehicles. But they afford themselves an out. BMW paid $230 million in CAFE fines from 1983 to 2007 to avoid building small cars at a loss to please Washington. Volvo paid $56 million. Daimler paid $55 million.

Why don't the Big Three take this out? Explains the Government Accountability Office, because they fear the political repercussions of being tagged with "unlawful conduct."

They must be laughing up their sleeves in Stuttgart, having unloaded Chrysler in the nick of time. Democrats had just taken over Congress the previous November, vowing tough new mileage standards. One week before the Chrysler sale, candidate Barack Obama gave an environmental speech harshly critical of the Detroit auto makers. Three weeks after, the Big Three ran up the white flag and agreed not to oppose new fuel economy rules.

This year, Daimler paid one of the biggest CAFE fines ever, $30 million -- or $118 per car, a pittance to Mercedes buyers. By dumping Chrysler, meanwhile, it avoided its share of an estimated $100 billion in unremunerative investments the Big Three will have to make to meet the new fuel-mileage rules.

Mr. Gettelfinger's should be the loudest voice calling for an end to CAFE, an idiotic scheme that has done little to reduce gasoline demand or oil imports. Flexibility to build cars for a profit couldn't help but benefit all of Detroit's stakeholders, including a UAW struggling to preserve an island of high-wage manufacturing (à la Mercedes's German workers) inside what would at least have the possibility of becoming healthy Detroit-based global competitors.

Yes, at the end of the day, the 1935 Wagner Act is still to blame for the auto makers' predicament. But it's misguided to think Sen. Bob Corker (or a new "car czar," or some group hug of Detroit "stakeholders," or even a bankruptcy judge) can fix the problem with a one-time settlement.

For one thing, the Wagner Act would still exist. And altogether too stick-figure is the reasoning that Detroit must match the wages and benefits of the foreign transplants to become "viable." Even the transplants don't match the transplants, as evidenced by new factories from Honda and Kia with starting wages about half those of existing foreign-owned plants. That doesn't mean Toyota and Nissan will be going out of business.

Of course we're wasting our breath here. Mr. Gettelfinger and his union are creatures of government. They can only see one way forward -- a wan hope that Washington will fork up unlimited billions to subsidize both green cars and UAW wages and benefits. Anyone who seriously sizes up the demands being made on the federal budget these days knows this is crazy. Mr. Gettelfinger ought to know it too.

Original Story - Wall Street Journal