Thursday, March 02, 2006

GM's Woes

I've long been interested in the US auto industry and how they have so consistently been underperforming the Asian car makers. I just read a stat, direct from GM, that totally floored me. According to GM, in 2004, health care and pension costs were a staggering $2223 per car. PER CAR!! Can you freakin' believe that??!! Even worse, because of design, quality and resale issues, GM must undercut foreign builders (mainly Toyota) by an average of $1500 per comparable vehicle. Is it any wonder the domestic auto industry is in deep, deep trouble? And that's not all. Interested in Toyota's per vehicle cost for health care and pension?--$201.

Now I'm not a genius, but I'm here to tell you that unless the big 3 get huge union concessions on their legacy pension and health care costs, they simply won't be big much longer. Once the pride of US manufacturing, it's been more than 40 years since the wine and roses days for the domestic makers. Toyota, Nissan and more recently, Hyundai and Kia have taken leadership positions in the auto market and when the first Chinese-made cars start hitting the market in 2007-2008, you'll have to go through bankruptcy court to get your Ford or GM tuned up.


economicus said...

A few quick comments.

I've read similar statistics and suspect the cost per car figure is substantially true (though I retain some skepticism--"direct from GM"--I think they may have an incentive to exaggerate?)

But what's the context? According to this Reuters article (and I don't think it's seriously in dispute) health care spending was about 16% as a percent of GDP in the U.S. even two years ago. I'm sure it's higher now. So maybe it's not surprising that the cost per car figure could be so high. Other countries *are* at a bit of a competitive advantage because their health care costs are substantially lower. But those health care costs are reflected in the cost of their products from the taxes they pay for the various national health care plans. Taxes from which our corporations, with our work based health care, are exempt.

I *do* think that rise in health care costs to corporations might make some form of national health insurance politcally feasible so in a sense I welcome it. Senator Obama has made an interesting, and politically clever, proposal that the gov't. assume some of the burden of the health costs of the big 3 pensioners in return for stricter environmental standards. It's not going to happen all at once.

I don't doubt that health care costs are a very significant drag on GM. But my own feeling is, that their main problem is that they make sh*tty cars. As reflected in your statement that they need to sell their comparable cars for a lot less to get anywhere at all.

I'll save my comments on pensions for another post. I see people moving away from soap box.

economicus said...

I'm B-A-A-C-K. Here's an informative review article that summarizes what I know about health care policy. Strike that. It makes it sound like they picked my brains and wrote the article. No. What little I know comes from reading things like this. It's a bit long, but not all that long. And they mention GM a few times so it's definitely On Topic.

Anonymous said...

Goodness, I read the review--are we sure that wasn't the entire collection of books? Honestly, the critic must get paid by the word!

Yes, not having a single-payer system (like Canada) is a major impediment to fixing the gross inefficiencies of our multi-layered, fragmented healthcare/insurance system.

And again, yes, we are paying more and more for healthcare benefits on a per-capita basis and as a percentage of GDP than ever before. But as the article mentioned, those increased costs are not occurring in a vacuum--we're seeing real-world improvements in top-end healthcare technology.

The problem is that more and more Americans are unable to afford (mainly due to declining employer contributioins) healthcare insurance so these benefits are primarily available to what's becoming a privileged class. As the article mentions, the odds of a fully-insured cancer patient dying is much, much less than the odds for his unlucky, uninsured neighbor. That's wrong on a lot of levels.

Another problem is that a very small minority of Americans are using up the bulk of our healthcare resources, making it difficult for insurance companies to spread their costs over any given group. Is it fair that that fully-insured person A goes to the emergency room every time he sneezes, while fully-insured person B seeks medical attention only under dire circumstances? Or how about the person who is just genetically prone to all kinds of medical problems versus the lucky person who isn't? Or the person who chooses to lead an unhealthy lifestyle, versus those that do everything they can to stay healthy?

I certainly don't have any brilliant solutions. The only thing I can think of is some kind of universal health savings plan, where you can either apply your premiums toward healthcare expenses, or towards investment income or retirement, depending on how often you need to/choose to use healthcare resources. Of course, that won't be fair, perhaps, for those who have persistent medical problems, but is it fair for the healthy person to pay 20-25% of his income for the same coverage, while not getting equal benefits?

As for GM and other large employers, I ask economicus this question: can the time not be far off when their only option is to set up some kind of self-insurance program, where the insurance companies are cut out altogether and the company pays directly for its employee's actual, not actuarial, costs.

economicus said...

Anonymous, thanks for your thoughtful reply. Good points all. Points to which I don't necessarily have any good answers.

I recommended the article (which was, as I warned! a bit long--but it's a big subject) not necessarily for the policy recommendations, but because I thought it did a good job separating out and describing the distinguishable parts that go into making what we call the health care crisis. What do we mean by crisis? Do we mean that health care costs a lot? do we mean that not everyone is covered? do we mean that there is rationing? do we mean that there's interminable paperwork and hassle in dealing with insurance? or is there not a crisis at all since we're getting great improvements in technology? and so on.

The question you raise: "that a very small minority of Americans are using up the bulk of our healthcare resources, making it difficult for insurance companies to spread their costs over any given group", is certainly one of the central ones. And it seems to me it's partly economic and partly moral. For I'd put the problem somewhat differently: it's not that insurance companies find it difficult to spread the costs, it's that they have a financial incentive, indeed, obligation, as corporations, not to spread the costs across the largest group but to make the group consist entirely of healthy people (that's at it's simplest, of course: there would be different groups of different health)--that's what you hint at when you say 'given group'. That's what the authors call adverse selection.

And there you have the morality as it intersects with the economics and it's exemplified by your mention of the genetics and the behavior and the use of medical services. I suppose if you polled the country there would be widely varying responses about the fairness of supplying equal care to the three groups and yet there would be a single 'right' free market answer. (Even introducing the word "fair" would be anathema to free marketeers: "get the price right", they would say).

I am not a big fan of health savings accounts. They take the form of tax credits or deductions usually, as I understand them. It's not logically obvious to me how they get around the problem of adverse selection--indeed they might even exacerbate it. I have it in the back of my mind that similar plans have been tried in other countries with no noticeable effect beyond tax reductions to people who already have good health care, but I can't find the links right now so maybe I shouldn't bring it up;)

To answer your final query: despite my name (and you can blame my parents for that, not my fault) I don't know enough about the economics of it but I find it extremely implausible that GM, or any employer, would want to undertake that kind of burden. And it gets us back to our old friend "adverse selection": should a genetic predisposition to pancreatic cancer (e.g.) disqualify you for a job at GM? I don't see how it wouldn't given your scenario. Not to mention that employer based solutions do not at all address the question of portablity.

Thanks again for the discussion and your excellent points. Putting one's thoughts down in writing can be very helpful in clarifying them and my thoughts generally run ariot so the degree to which I've had to answer you is the degree to which they've been clarified.