Friday :: Oct 21, 2005

Blowing The Code Blue Horn - For Naught?

by pessimist

America's healthcare system is dying every bit as fast as King George claims 'terrists' in Iraq are. The only problem is that George's claims are as false as his electoral victories. Mine are not.

Just this week, General Motors managed to make the UAW 'see reality' their way (just like George wants us to 'see reality about 'terrah' his way) and allow GM to gut medical benefits for GM retirees. While GM will see a few dollars more, no one thinks that this windfall will prove to be anything but a band-aid covering one cut while GM continues to slice and dice itself into a dusty historical footnote next to Hudson, Studebaker, Nash, Tucker, and Duesenberg. Considering that these cuts are numerous, maybe they can get the GOP to donate all those leftover convention bandaids - the ones with the Purple Hearts on them. GM is a veteran after all.

Once again, however, the management of GM is going to escape the consequences of their actions. Would GM not attempt to pay attention to the costs of windshield glass and radiators? Why would they not also pay attention to world conditions like the price of oil versus the crappy mileage of their products? While 25,000 GM workers can count on their jobs being gone no later than 2008 (more likely much sooner now), there are few signs that all but the top 5 GM execs are going to suffer anything more painful than the loss of a bonus this year. These 25,000 workers now facing wage and benefit cuts didn't make the decision to continue building SUVs and large pickups anymore than they had the power to grant themselves these benefits in the first place. If these costs were going to prove to be so onerous, why did GM management agree to these benefits in the first place?

Business executives are highly-paid because they (allegedly) have the ability to connect many diverse facts and knowledge about current trends and come up with projections of future business conditions so that informed decisions can be made. While no one can logically expect that they will be right 100% of the time, they are expected to do better than merely getting one right once in a while. How long would such a 'wizard' survive if he led the tribe out into the desert instead of to the Promised Land?

Not long.

However, for all the blather we heard from such 'leaders' about how their workers believe that they are 'entitled' to medical coverage, why is it that we never hear about the expectations of entitlement that executives have? According to one analyst, executives have a compensation system of base pay, bonuses, and 'compensation for increasing the value of the company' - more commonly known as stock options. As our analyst states:

According to economic theory, the marginal worker in a skill class should be paid the value of what that worker is producing. To pay more would erode profits.

I have no problem with executives getting wealthy with options. The problem arises when executives dilute the ownership of investors by getting options even as they are reducing the value of the enterprise.

Following Congressional grants after 9/11, several airlines increased the pay of their executives even as they were asking for wage concessions from their employees. Of course, the argument for such pay is to "keep" the key executives. I would expect a fixed percentage of stock to be provided in the form of options over a period of years. I would use a long period for vesting to "keep" the executive.

Remarkably, airlines continue to function when "key" executives retire. An executive who leaves for other than retirement loses unvested options.

Northwest Airlines executives are attempting to keep their bonuses after laying off 1400 workers and cutting the pay and benefits of their remaining employees. Does this not cound like an attitude of entitlement?

Executive forget that they hire workers so that they don't have to use up all of their time doing mundane or attention-intensive tasks. How much attention could an airline executive pay to negotiating the next fuel-delivery contract if he's flying through a thunderstorm with a full load of passengers? What if he didn't have time to inspect the plane before it took off? This is why they hire pilots, and yet they are being treated like crap along with everyone else working for the airlines. For instance, Delta cut pilot pay 32.5% while Delta CEO Gerald Grinstein will only lose 25% of his pay. Between 7 and 9,000 Delta employees will suffer a 100% pay loss while the bulk of Delta executives will lose 15% of their compensation.

No matter who loses pay, or how much, the entire economy suffers. According to George Vredeveld, director of the University of Cincinnati's Economics Center for Education and Research, every dollar in wages gained or lost by airline workers "equates into $2.5 for the local economy. Using Vredeveld's model, the coming job cuts could have an economic impact of $500 million or more. The pay reductions announced Thursday would add millions of dollars to that impact. University of Cincinnati economics professor George Zinn said those cuts equated to a negative annual impact of $311 million."

That is just how the cuts will cost Cincinnati, Ohio. Think about what they will cost in Atlanta, which is the main hub of Delta Airlines. Similar economic difficulties will ensue in NWA's home port of Minneapolis/St. Paul, or American Airlines domecile of Dallas, Texas as airline layoffs continue.

It is no different in the ground transportation sector. Assuming for the moment that the University of Cincinnati model works the same for each dollar of auto worker wages lost. Detroit istself will be very hard hit, as will the numerous small towns across the Midwest whose fortunes are inextricably tied to the for tunes of GM supplier and former subsidiary Delphi, or Ford's analog Visteon.

As one Delphi worker puts it:

"Who's going to afford to buy these cars? Nobody making $10 or $12 an hour can afford a $30,000 automobile," he said. "Henry Ford said a long, long time ago that people should have enough money to buy my product. Everybody thought that was crazy, but he made it work." [Bill Wineland, a 49-year-old line worker at a Delphi plant in Flint, Mich.]

Delphi is seeking to continue to 'entitle' their executives:

Workers were particularly embittered when Delphi made an 11th-hour move, a day ahead of its filing, to sweeten substantially the severance packages available to 21 top managers. The company said it was a necessary step to retain executives.

How does one retain executives if one is sweetening their severance packages??? Why would one want to, considering their performance? Certainly, the workers afected aren't too pleased with this:

"It's a slap in the face," said Al Coven, president of a union local in Saginaw, Mich. "They've always done stuff like that. Over the years we've had downturns in the economy.
"We give stuff up and they turn around and give their executives big bonuses."

This becomes all the more understandable when one knows that GM debt instruments are now rated as junk. Does not the move by Delphi to 'sweeten' the severance of executives smack of favoritism and entitlement?

It certainly looks that way to me, and I'm not alone:

Even as Delphi execs are being investigated by the Securities and Exchange Commission for fishy accounting practices, the company’s new CEO Robert “Steve” Miller declared it necessary to sweeten the 21 top executives’ pay packages, already worth an average of $1.1 million each. He claimed the old packages were “uncompetitive.”

Six hundred Delphi executives around the world got additional stock, and 486 in the U.S. will get cash bonuses totaling $88 million. [Roughly $180,000 ea - ed]

“When you see the words ‘executive’ and ‘competitive’ in the same sentence, it’s likely management is about to help itself to a generous share of remaining cash on the grounds that their buddies at other companies are doing the same,” says John Case, an economics columnist for this newspaper.

United Auto Workers President Ron Gettelfinger said, “Once again, we see the disgusting spectacle of the people at the top taking care of themselves at the same time they are demanding extraordinary sacrifices from their hourly workers, engineers, administrative support staff, mid-level managers and others.”

It’s clear that Delphi executives followed the now well-established bankruptcy playbook. They drained the company’s resources, overpaid stockholders and CEOs, transferred production overseas, and left thousands of highly skilled workers on the bench. They also refused to support a national health care system that would have addressed rising health care costs.

Delphi has been assured $4.5 billion in financing, even in bankruptcy, from a group of lenders led by JPMorgan Chase and Citigroup Global Markets.

Considering that this situation has only gotten worse rather than better since America entered the world of the Leveraged Bankruptcy System of Mi$management, one has to ask who is benefitting? One columnist does just this:

Why are airlines paying "retention" bonuses to executives no one else would hire?

Every so often, corporate America gives us reason to think that, hey, maybe the Marxists were right about the villainy of capitalists after all. American Airlines has been treating us to a spectacular example in recent weeks. Even as it was using the threat of Chapter 11 to push employees into massive wage cuts, the airline was funneling $41 million into a special bankruptcy-resistant pension trust for 45 executives. And early in 2002, the struggling airline's top six executives were offered "cash retention" bonuses amounting to twice their base salary—just for staying on the job until January 2005. American then hid these sweet payouts until after the unions had voted to cut their own pay. When the news finally broke, it cost American CEO Donald Carty his job—but the executives still get to keep the juiced pension benefits.

Airlines seem particularly fond of the unnecessary executive bonus. Delta Airlines last year also set up special pension trusts for 33 senior executives (neglecting to disclose their existence until this spring) and offered cash retention bonuses to several executives just for showing up to work. Delta noted in its proxy filing that "the business environment presents ongoing risks and creates a significant concern for retention of management personnel."

This would be hilarious if it weren't costing Delta shareholders millions. Who exactly is clamoring to hire Delta or American's top managers? They're lucky to have kept their jobs at all. But it is ridiculous to use retention to justify massive payouts to unaccomplished executives who are working in a wilting industry, which is in turn bound up in a slack economy. (Especially since these are the very stolid company men who didn't even have the moxie to try something new during the boom.) Rather than paying special bonuses to retain executives, American and Delta could have hired back some of the executives who left three years ago at half what they're paying their current clowns.

An executive vice president at American should be feeling the same pressure and fear that American pilots and machinists do. But the unspoken assumption of retention bonuses and benefits for top bosses is that senior managers simply can't be relied upon to work as hard if their salaries are cut, or if their options are underwater. Isn't it time we stopped applying the soft bigotry of low expectations to senior executives?

I say it is indeed time. As it is no longer viable to expect that employers will - or are able - to shoulder the cost burden of healthcare, then there is only one other method by which America's healthcare system can remain operating. But will America face up to this coming crisis?

Maybe not - but the Dutch are:

American Healthcare: the 'Prime Example of How Not To Do It'

While Dutch citizens are worried about the phase-in of a new and revised health care benefits system, we have just received a clear message from the United States: things can always get worse. Much worse even.

A System 'Screaming for Reform'

In the United States, health care benefits for [GM] workers and retirees will be cut to the tune of a $1 billion per year over the next 3 years, as GM cannot sustain the current level of benefits. Every car produced comes with a $1,500 healthcare burden.

GM’s course of action underlines again how dangerous it is when pension and health care benefits all depend on an individual corporation. Employees and the corporation find themselves in the same boat when the company gets into trouble, or closes its gates. The GM issue puts the spotlight again on what has become the American way of organizing healthcare benefits: an impenetrable jungle. That would include the tactical maneuvering: reduce health care benefits by implicitly threatening bankruptcy. The message is perfectly clear: swallow our benefit reductions or there will be no benefits at all anymore.

But these problems are not GM’s alone. Ford and Chrysler (part of the DaimlerChrysler), will follow GM’s lead in reducing benefits.

It is unrealistic to expect that free market economics will automatically work best for healthcare because everyone needs the same access and care. This type of fragmented healthcare delivery system, completely left to the whims of free market forces, is screaming for reform, especially when the costs are increasing much faster than general inflation. A higher portion of the population runs the risk of being shut out of the system.
The latest findings by the American Census Bureau found that 45 million Americans are uninsured. This is almost one sixth of the population!
At the same time, the Americans are spending more on healthcare than any other country in the industrialized world. In 2003 that number stood at 15% of gross domestic product, according to the Organization for Economic Cooperation and Development or OESO.
That is almost twice as much as the yearly average of all other first world countries.
Combine that with the fact that in America, the number of doctors, nurses and intensive care hospital beds is significantly lower than the OESO averages. Simple conclusion: less care, for less people at a decidedly higher cost.

The American example will remain the prime example of how not to do it.

It doesn't matter if the business being examined is the auto manufacturing industry, the airline industry, or medical healthcare, the rest of the world has had to do without for so long that they all came up with better ways of doing things. Their executives had to learn how to operate in the war-forged world of the future.

We here in the United States, on the other hand, grew fat, dumb, and happy with the status quo circa 1945, when we were the only industrial nation left standing unscathed from the ravages of World War II. Or executives had no incentive to stay current with the newest methods and trends, until it was too late to alter course.

As the world took years to rebuild, America sailed blissfully on in an economic sea full of icebergs, only tossing a few over the side beginning in the mid-1960s when the costs of Lyndon Johnson's Iraq I - er, Vietnam, began to make themselves evident. As we sailed deeper into the ice fields during the 1970s, the pace of such load-lightening increased, as did the amount lightened, but the reduction in speed wasn't yet felt as the ship of state sank slowly deeper into the cold economic seas.

It only took on the form of a disaster during the watch of former Navy officer Jimmy Carter.

Once it was clear that the ship of state was in trouble, and no rescue was imminent, former actor Ronald Reagan put on a fantasy designed to distract the passengers from their fate. Second-banana and former Navy pilot George H. W. Bu$h ditched a second time while standing watch. Bill Clinton managed to get the passengers into life jackets, but the passengers traded their life jackets for a share of the first private yacht to arrive on the scene, choosing to believe King George when he claimed that if we opened the Kingston valves and scuttled the ship, the yacht would arrive all the sooner due to the suction of the sinking ship of state.

There was only one problem - there was no yacht. All of the workers who built them had been laid off because their medical costs were too high.

This nation is going down, and all it will take is a major shock to the currency to collapse what remains standing. That shock may come as soon as April, at which time the Japanese are planning on pulling currency out of circulation. The effects of that move on the US aren't clear, but it seems to this non-economist that as Japan's currency-in-circulation is reduced, there will be less available to buy US Treasury Bonds - an item that should be in the junk bin next to GM and Ford notes. This will mean that either the US slips back into recession - from which we finally seem to have emerged after five years of empty Bu$hCo promises - or Bu$hCo will have to prime the economic pump and risk infuriating Alan Greenspan into demanding an increase in his severance package.

As I wrote earlier today, for many reasons Bu$hco is losing its support base, even the evangelicals. There have been reports that the business community is abandoning Bu$hCo as well, and these items and their consequences that I present just might be a major reason why they are doing so.

The only problem: as Bu$hCo goes down, they take us with.

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