GM - Foresight or Healthcare

Brad DeLong writes that he thinks GM might go bankrupt in 3 years.

Ezra Klein argues: Reasons This Country is Going to Need to Fix Its Health Care System and Fast.

From the LA Times:

General Motors Corp. on Tuesday posted a first-quarter net loss of $1.1 billion, its worst quarter in 13 years, due to disappointing sales in the crucial North American automotive market and soaring healthcare costs....Other analysts, though, said GM could be holding back as part of its negotiations on healthcare costs with the United Auto Workers. Last week, the union said it had no intention of revising its current labor contract to help the automaker lower medical expenses but would do what it could within the agreement to help lower costs. GM has warned that its U.S. healthcare costs could grow to $5.8 billion this year. Making things look as bleak as possible would help GM persuade the union to pass on some of the company's healthcare costs to its hourly workers, analysts said.... Although healthcare costs are the company's principal long-term concern, getting its product mix right for the competitive U.S. market is the more immediate concern, he said.

Sounds like some corporations are chafing under the weight of health care costs. Now what to do, what to do... "

You'll be hearing a lot about GM and the costs of health care and defined benefit pensions over the next few months. Don't get me wrong. Health care is THE MAJOR CRISIS that we need to deal with because it is inextricably linked with our current account deficit and the looming 'hard landing." (See Bruce Bartlett & Brad DeLong)

But let's face it. GM and Ford have problems that are largely of their own making. A few years ago I saw a statistics that over 50% of American car makers sales were in SUVs and pick-up trucks. Living in Denver I look around and swear it seems like more. The only American cars I see on the road are 10 years old or Hondas and Toyotas (which often have more US content than their 'American' rivals. That was fine for the go-go 90s. But with gas prices soaring the appetite for such vehicles is quickly diminishing and the American manufacturers have done nothing to position themselves for what was an obvious inevitablity. Did everyone truly believe that after the early 1990s we had nipped all future oil crises in the bud? DId everyone truly believe that the day would never come when our estimates of global petroleum reserves would peak? The American car companies (can we include Chrysler in this or not?) have done little to prepare for this day and are poorly positioned for a situation in which the market for over 50% of their cars dries up once people decide they don't want to pay $50 to fill their tank of gas. They make poorly designed cars. They make poorly manufactured cars. For 25 years they have been committed to a car making philosophy of built in obsolescence. Build a car to last 5 years because Americans will be more likely to buy a new one every three years. But the changing economic circumstances of American families mean there are more and more families like mine where we drive one car that is 18 years old (the reliable '87 Honda Accord) and another Japanese car that was bought so we could still be driving our boys (2 now) when they are teenagers. The net present value of holdong onto a car for 10 years rather than 5 over your lifetime (see the Armchair Millionaire) runs in the tens of thousands of dollars. For families such as these reliability is key and the reputation of American cars - to say nothing of their styling -- is abysmal. Ten years (maybe it was more) ago there were some articles about the Chevy Impala. That car was designed not by the designers but by the senior executives who overrode their design team at every turn. In the end the main buyers turned out to be taxi companies and police departments. If they hadn't been interested almost no one would have bought the car. I have no doubt that GMs problems are serious and the health care issue is a major component of them. But the problems of American car manufacturers are largely of their own making.