REED, FOLSOM: The downshift at GM

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By Lawrence Reed and Burton Folsom

COMMENTARY:

Exactly one century ago today, a company was born that came to symbolize the power of American enterprise as none before it - General Motors.

But in tandem with the United Auto Workers, which represents many of its more than a quarter-million workers worldwide, the company's course in recent years has been marked by relentless, painful decline.

When chairman and CEO Rick Wagoner speaks to the Washington Economic Club in the nation's capital today, it will be more fitting for the audience to sing the blues than "Happy Birthday."

The most important lesson here is not quite what one of Mr. Wagoner's predecessors, Charles Wilson, had in mind when he reportedly said in 1952, "What's good for General Motors is good for the country." In fact, what's good for the country - namely, competition in both product and labor markets - turned out to be not so good for General Motors.

Michigan entrepreneur Billy Durant formed the company on Sept. 16, 1908. Unlike Henry Ford, who saw cars as mere utility vehicles, Durant envisioned autos as status symbols. Build more elegant cars for richer Americans and cultivate their taste for extra comfort and glamour, Durant argued. Change models yearly and incorporate improvements.

After Durant, Alfred P. Sloan was the "organization man" who built the GM system that attracted talent, encouraged innovation, and rewarded achievement. Under Sloan's chief researcher Charles Kettering, GM introduced the self-starter and followed that with leaded gasoline (to remove engine knock), four-wheel brakes, automatic transmissions and quick-drying paints.

During the 1920s, GM surged past Ford and sold almost twice as many vehicles as Ford by the end of the decade. Sloan's system of stock dividends for executives and competitive wages for laborers kept them all productive - and GM profitable - even during the Great Depression.

But after Sloan, GM began to coast. With a steady stream of profits flowing in, it lost its creative edge. After World War II, Chrysler, not GM, invented electric windows and power steering and power brakes; the British perfected fuel injection. John DeLorean, an executive with GM in the 1970s, complained bitterly as GM refused to produce smaller, more efficient, cars and lost market share to the Japanese. In his 1979 biography, DeLorean was prescient: "A fault that GM has had ... is its feeling that since it sells more cars and trucks than anyone else in the world and makes far more money than any other automotive company, the GM way is the only way."

GM also underestimated the UAW. For years, Sloan had avoided strikes and unions by paying attractive wages. Then came the sit-down strikes in 1937. Radical UAW members, violating all property rights laws, seized two GM plants and refused to leave. Public sentiment shifted strongly to GM. The reporter for the New York Times who covered the strike concluded that the "overwhelming majority" of GM workers in Michigan, whose wages were 20 percent higher than the U.S. average in manufacturing, wanted the strike to end.

But Sloan capitulated to the UAW and other automakers followed suit. Then decades of nationwide "pattern" agreements gave away the store to the unions, yielding not only unsustainably high wage rates but also costly workplace rules and unaffordable pension and health-care benefits. As recently as 2005, U.S. automakers (led by GM) were paying out a billion dollars a year to 12,000 idled, unneeded workers in a "jobs bank."

Senior economist David Littmann of Michigan's Mackinac Center for Public Policy points out that per-vehicle labor costs for U.S. automakers were as high as $2,500 more than those of foreign competitors, even though those very foreigners were often paying comparable or higher wages and benefits in their U.S. plants.

In free markets, competition is a dynamic, never-ending, leap-frog process; the leader today can become tomorrow's follower. If the leader has a 50 percent market share, as GM did at its peak, it must behave as if it is surrounded by competition or it soon will be. GM, and Ford and Chrysler too, should have seen it coming but didn't, and now are incurring colossal losses while seeking help from a deficit-ridden federal government. GM's market share is down by half. UAW membership is off by two-thirds.

Meanwhile, the UAW's allies in the Democratic Party are pushing hard to enact "card-check" legislation if Barack Obama wins the presidency. By avoiding secret ballots, card check could dramatically boost the coercive powers of organized labor and further erode the competitiveness of many U.S.-based industries in a global economy. Clearly in some quarters, the lesson of GM's decline has not been learned.

As corporate mortality goes, General Motors is lucky to have made it to its centennial. How many more birthdays it will celebrate, however, is not a happy question to contemplate.

Lawrence W. Reed is president of the Foundation for Economic Education. Burton W. Folsom Jr. is professor of history at Hillsdale College and author of "New Deal or Raw Deal" (forthcoming, Simon & Schuster).