SOLUTIONS/MICCICHE: What should be done to help the Big Three automakers?

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By Frank Micciche

Tough love, in the form of Chapter 11 bankruptcy, may well be the best course for the automotive Big Three. But the catastrophic ripple effect of Ford, Chrysler and GM's insolvency would threaten the economies of several states and the jobs of millions of Americans, including many who have never spent a day in the employ of the woefully mismanaged trio.

It is hard to imagine any incoming administration, never mind one that rode to power on the promise of hope and change, allowing this to be the central economic story of its first 100 days. So the federal government will step in, however dubious the case for a rescue may be.

The crisis offers a rare (if expensive) opportunity to publicly rethink the social contract - the policies and institutions that supported a remarkable postwar boom lasting more than half a century and generating unprecedented levels of broadly shared prosperity - as it applies to individuals and corporations alike. Done right, it could yield much needed reform in both Detroit and Washington.

A frayed social contract and the Big Three's decline are two symptoms of the same disease - a malignant failure to adapt to the remarkable social, economic and technological changes of a fully globalized world and the hard realities these changes mean for corporate America and the country as a whole.

The national mood on this score was grim even before we sank into recession. A July survey by the Rockefeller Foundation had 9 in 10 Americans saying that it was as hard as or harder than ever just to "get by." A quick scan of the landscape would support this sentiment.

Defined-benefit pensions have virtually disappeared, meaning significantly more income volatility for retirees. The number of Americans without health coverage is quickly approaching 50 million, average real wages are stagnant this decade and the percentage of disposable income spent on housing needs has increased by more than 25 percent since 1980.

GM has been on a similarly rough trajectory. In 1965, GM reported earnings for the previous year of $1.7 billion after taxes, the largest corporate profit ever recorded. Today it is losing approximately $2 billion a month, having pioneered inefficient practices such as the "jobs bank" program, which effectively paid inactive workers at near full salary until they were passed on to the Elysian Fields of GM-sponsored retirement.

Meanwhile, a local five-and-dime store owner in Arkansas was launching his own experiment in mass capitalism. Wal-Mart, founded only three years before GM's peak, has since superseded the automaker as the world's largest employer. Their innovative supply-management technology and hard-nosed business practices are legendary. Wal-Mart has also fully embraced both sides of the globalized economy - relentlessly expanding into the same international markets it has relied on for cheap imports to keep prices down. They have even stepped into the health-care void, offering in-store clinics and $3 generic prescription drugs.

So what conclusions can we draw from this comparison and how should they inform the composition of the automakers' federal lifeline?

First, no matter how nostalgic we get for the Motown days of yore, the winners in the 21st-century economy will look a lot more like Wal-Mart and a lot less like GM. Even a pro-labor Obama administration cannot and should not force American companies to take on the crippling labor and retirement costs that have all but sunk the Big Three. In fact, the bailout must include provisions that will allow for a restructuring of these costs and prevent future unsustainable commitments.

Washington can help by recognizing that the ad hoc system built up to support families in their pursuit of economic opportunity and security is ill-suited to the complexities of today's world. Our system of employer-sponsored benefits is antiquated, costly to both sides and hugely inefficient. For example, the percentage of payroll spent on health care has risen from less than 2 percent in 1965 to nearly 10 percent today. And American manufacturers spend 2.5 times per worker on health care than their foreign counterparts. These factors help explain the stagnancy of wages during the most recent economic boom, as well as the competitive difficulties of American companies abroad and the spike in the uninsured.

Experiments in citizen-based benefits, like the health-care reform undertaken in Massachusetts, are a promising start in this direction. Extension of 401(k)-like treatment of private savings, possibly including a government match for lower-income individuals is another possibility. For a less complicated solution, policymakers could eliminate the current tax penalty on savings. In the long term, a more progressive consumption-based tax reform would spur productivity and empower individuals.

Fortunately, we will be renting, at a steep price, a tremendous laboratory for experimenting in these areas with the auto-rescue bill. Lawmakers should take this opportunity to establish innovative pilot programs in health care, pension reform, job training and unemployment assistance for Big Three employees. Progress in these areas would make the bitter pill of a bailout at least slightly more palatable.

• Frank Micciche is deputy director of the Next Social Contract Initiative at the New America Foundation.