I will gladly pay you Tuesday…

…for a hamburger today. Isn’t that what Wimpy used to say in the old Popeye comic strip?

Here’s Daniel Gross writing in Slate:

“On Saturday, Delphi, the giant auto-parts company, filed for bankruptcy, kicking off what is sure to be one of the great cram-downs in American history. In a series of interviews with the New York Times, the Wall Street Journal, and the Financial Times, Delphi CEO Steve Miller offered unionized workers a choice: They can accept pay cuts of about two-thirds or face the termination of their pension plan, which is underfunded by several billion dollars.”

Dean Baker on MaxSpeak observes:

“Since the punditry will no doubt applaud Mr. Miller’s courage, let’s get some facts on the table. Delphi did make generous commitments to earlier retirees. Of course it also paid substantial sums to shareholders in the form of dividends and also paid rich salaries to its top executives. In principle, Delphi’s current workers could go to war against either Delphi shareholders or its higher paid managers to keep their current paychecks. They could require them to repay some of the dividends or fat salaries earned over the last two decades. But, Mr. Miller and his colleagues have set up institutional structures that leave the incomes of these groups beyond the reach of Delphi’s workers.”

Brad DeLong adds:

“At the corporate-structure level, the big problem is that retirees (like workers, stockholders, and bondholders) have claims on corporate cash flows. Workers’ claims at a company like Delphi are secured by the fact that if they don’t show up, nothing gets made and there are no cash flows: Delphi’s jobs are very highly-skilled indeed, and replacing any significant chunk of the workforce with people off the street is not a realistic option. Stockholders’ claims are secured by the fact that they vote for the executives of the company–and can throw out the executives if they don’t like what the executives do. Bondholders’ claims are secured by their ability to throw the company into bankruptcy if they are not satisfied and by bankruptcy judges’ mandate to protect their interests.”

To which Megan McArdle adds:

“That’s one way of looking at it. Another way of looking at it is that unlike stockholders, management, and current employees, retirees have claims on the company that are unrelated to current income. They are guaranteed a certain amount of pension and pretty much unlimited health care regardless of the company’s earnings.”

C’mon, Megan. These retirees are the workers with whom management contracted 10, 20, or 30 years ago to pay on these terms when they retired. Management was not forced to do it. They chose these terms over whatever other alternatives were available. Just say it: management screwed up and should be held accountable.

They ate the hamburger and now it’s Tuesday. Pay up or cough up the burger.

Unfortunately, Uncle Sugar in the form of the PBGC will wind up picking up the tab. Which means you and me and everybody else who actually pays taxes. Assuming you pay taxes, that is.

7 comments… add one
  • They weren’t forced to pay?

    Isn’t that exactly what the union did was force them into paying that kinda dough?

  • No, Bithead. Unless there was a threat of violence it was negotiation.

  • TW Link

    actually only a fraction of the cost will be picked up through the PBGC. most of the burden will fall on the retirees, and by extension on their families, creditors, and ultimately federal & state welfare programs for the indigent elderly. those costs will never be explicitly accounted for, making it that much easier to ignore them.

    i stopped surfing on the MSNBC SquawkBox show the other morning because they were discussing this story (predictably, with a Wall Street Journal reporter who was praising Miller for having the “guts” to stand up to this “systemic” problem). it seemed like a clear majority of the talking heads were actually offended by Miller’s actions, and wanted to come out & say they had a problem with it. but each of them in turn kind threw out a comment about Miller’s hypocrisy & the cruelty of it all, and then just went silent – like you couldn’t even venture to put in words that Delphi ought to do something else, or be required to do something else. “Such a shame, but what are you gonna do?”

    i’m stumped: could they really not think of anything, or were they hamstrung by the pieties of business reporting (that extend ridiculous deference to CEOs and tend to regard cost cutting as an intrinsic good)?

  • “No, Bithead. Unless there was a threat of violence it was negotiation. ”

    This is a union we’re talking about here. Of course there was a threat of violence at the negotiation.

    What else could they possibly use as leverage? They threaten to go on strike. Management could just fire them all and hire new workers. Or they could if those new workers weren’t scared off by…. threats of violence.

    It’s the way unions have operated since the very beginning. It’s the only way (short of having a government threaten violence on your behalf, which has also happened) to maintain a labor cartel and keep collecting monopoly prices long-term.

  • You’re mistaking a technical argument for a moral one. Brad De Long is arguing that the problem with pensions is institutional: retirees lack the power that other stakeholders have to enforce their claims. In bankruptcy court, that’s true, because the bankruptcy court’s primary job is to salvage the company, which means that unsecured creditors and pensioners, who cannot gut the company the way current workers and secured creditors can, get the cram down.

    My point was that prior to the bankruptcy, the real problem is that the duration of the obligations is both long and uncapped, which is bad financial mojo. I was not making a moral statement about whether companies should pay their pension obligations–of course they should fulfill the promises they made to their workers. The problem is, the companies we were discussing *can’t*.

  • You may well be right, Megan. I thought I was making a technical argument (based on contracts). As I see it GM management undertook a contract with labor (not a figurative contract—an actual paper contract): take part of your pay now and part of it in the future as pension benefits. Management accepted the benefits of the contract and the stockholders rewarded them for it (in the form of increased salary and stock options).

    Now we’ll indemnify GM management against the results of their own stupidity. As I see it we’re letting them off the hook far too easily. Whitecollar salaries should be reduced to cover the shortfalls in the payments to bluecollar workers’s pension funds starting at the top. Even in GM’s reduced circumstances there are probably thousands of top tier manager who make several multiples of what guys on the factory floor are making. And they should be raking back some compensation to past top management to the extent that they can on the grounds of nonfeasance arguing that the nonfeasance only came to light recently. GM should join the UAW in a suit against the past management.

    None of this will happen, of course.

    Some secondary effects of this that are being ignored is that renegng on pension benefit promises may take a valuable bargaining tool out of the hands of managers (the promise of future pay) and, consequently, may put upwards pressure on wages. I know if I were a union boss I wouldn’t take future promises too seriously.

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