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Seven Days: Vermont Car Blog

November 11, 2008

General Motors In Critical Condition

Big_three GM stocks followed a 23% loss on Monday with a 15% loss today. Stocks closed at $2.81, lower than they’ve been since WWII.

The plunge was initiated by a third-quarter operating loss of $2.5 billion announced on Friday. Deutsche Bank’s Rod Lache told investors “Without government assistance, we believe that GM’s collapse would be inevitable”. GM acknowledges that they may run out of capital necessary to continue running the business by the end of the year.

Congress has already approved a $25 billion loan package for the big three American automakers, but that money is for re-tooling, not for a bailout. When GM asked for government assistance for a merger with Chrysler they were denied.

The current $700 billion financial bailout package has so far been limited by Treasury Secretary Paulson to financial institutions. He is being lobbied hard to open it up, not just by the automakers, but also by many politicians including President-elect Obama.

The Center for Automotive Research predicts that if one or more of the US automakers collapsed it could cost the nation up to 2.5 million jobs. This includes the many suppliers, retailers and others who also make their living as part of the US auto industry.

Congress meets next week and may weigh-in with their own package. Given the current crisis and the government’s recent response to it, I imagine that something will be done.

Will it be too little too late? Will it just extend the potentially inevitable collapse of one of the big 3? I guess we’ll find out…


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Geoff Thomas

How Health Insurance Ate Detroit
Geoffrey S. Thomas and Laurie Thomas
Our current system of private health insurance was created by the automotive industry, and now the automotive industry is being strangled by its own creation. Fixing this problem may be the only way to save the industry.

Employer-based health insurance in the United States started during World War II, because of wage controls to fight inflation. Employers couldn’t offer wage increases, so they added the “perk” of health insurance to attract and keep employees. In 1950, General Motors went into the healthcare business, offering to pay 50% of workers’ healthcare costs. By 1964, GM was paying 100% of the healthcare costs of its employees and retirees. United Auto Workers President Walther Reuther originally resisted this company-based provision of health insurance. He felt that workers’ healthcare costs should be spread over many companies or the entire nation. This was not a crazy idea. In 1948, Britain launched its National Health Service, which provided free medical care to everyone, paid for by central taxation.

The disadvantages of using private, for-profit health insurers to pay for medical care have become all too obvious. The private insurers rake off up to 30% of the premium to pay for their profits and overhead. In contrast, the overhead for Medicare is only 3%. As a result, the United States pays more per capita than any other nation for healthcare coverage.

The heavy toll exacted by the private health insurers is strangling American manufacturers. It’s like a protection racket. U.S. manufacturers have to pay high fees to the overhead of the health insurance companies, while their competitors in every other industrialized country get better care for their employees at a much lower cost, paid for through their taxes. As if this weren’t bad enough, foreign automakers, such as Toyota, Hyundai, Honda, BMW, and now Volkswagen, can achieve a serious, sustained competitive advantage simply by setting up nonunion factories here in the United States and hiring young, healthy workers who are cheaper to insure.

Currently, the U.S. automakers are in desperate straights. This is partly because of management’s shortsightedness, partly because of our nation’s disastrous lack of a sensible energy policy, and partly because of the financial disaster that resulted from ideologically driven deregulation of the mortgage lending industry. The challenge for Congress now is to do something that will solve the problem, not make it worse.

The Big Three automakers are now in Washington with their hands out, hoping for the taxpayers to bail them out. During the last contract negotiation cycle, the Big Three conceded to the UAW that they would transfer $50 billion into Voluntary Employee Beneficiary Associations, which are tax-exempt trust funds authorized by the Internal Revenue Code Section 501(c)(9), for retirees’ health care costs. As the VEBAs are still largely unfunded, the Big Three now want low-cost government loans to help them make the required payments. The problem is that money in these trust funds will still have to pass through the hands of the private health insurers, who will take their customary rake-off while providing nothing of value to the workers or their employer. A better solution would be to enroll the autoworkers, current and retired, in a program like that outlined in H.R. 676, which is designed to provide healthcare, not to maximize the profits of private insurers. This would eliminate the problem without huge loans from the taxpayers.

Under H.R. 676, employers and employees will no longer have to pay premiums to private health insurers. Instead, employers will pay a 4.5% payroll tax, in addition to the 1.45% payroll tax they are currently paying toward Medicare. Employees will pay a modest 3.3% payroll tax, in addition to the 1.45% that they are currently paying toward Medicare. Implementation of this plan will mean that 95% of all Americans will pay less for their healthcare than they are currently paying. This plan eliminates the deductibles, co-pays, and nearly all other out-of-pocket costs. Obviously, a plan like this should be available to all Americans, but it can start with the auto workers.

What could this plan mean for the auto workers? For retired employees, it would provide their promised healthcare, without rigamarole from the insurance companies. For workers, it means that the money that would have gone to pay their health insurance premiums would instead go for the payroll tax that supports their health benefit. This may also enable them to keep their jobs, and keep their hometowns from being decimated.

Congress is getting ready to hand over some of the taxpayers’ money to the automakers, so what can taxpayers other than the autoworkers get in return? We can demand much tougher fuel economy standards, ideally an agreement to meet 2015 standards by 2013, and an agreement to a new, much more stringent standard by 2020. This wouldn’t be as sensible as enacting a graduated increase in the gasoline tax, to $1 to $2 per gallon, but it might be easier to accomplish. We can also demand that automakers stop their lawsuits against requirements by the Environmental Protection Agency and state governments to improve emissions and greenhouse gas standards.

Tough times demand bold solutions. Let’s not let the health insurance industry kill the U.S. auto industry. A single-payer health program like that outlined in H.R. 676 would solve this problem more fairly and at a lower cost than any other proposal on the table. It’s time to contact your members of Congress, before they give away the store once more in an unfocused and panic-driven handout that will only perpetuate Detroit’s problems .

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