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Obama GM Strategy a Lost Opportunity Pt.2 with Stephen Diamond

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PAUL JAY, SENIOR EDITOR, TRNN: Welcome back to The Real News Network. I’m Paul Jay, coming to you again from Washington. Now joining us again is Stephen Diamond. Thanks for joining us, Stephen.


JAY: Stephen’s an associate professor at Santa Clara University in California and teaches finance and economic issues, labor law, securities law. So in the first part of the interview we talked about the current government strategy towards General Motors and Chrysler and the automobile industry, and I guess the conclusion one would have come to out of the first segment was that this strategy is rather precarious, depends on a real economic recovery. And the possibilities of the government really getting its money out in two years are really–perhaps dubious. But even if their plans come to fruition and they actually do get their money out in two years, I suspect that’s still not the direction you think we should be going in. So talk about what could have been done that wasn’t done.

DIAMOND: [As] I was beginning to discuss earlier, what we really have is a crisis in the infrastructure in this country, and we have a crisis of employment. We have a technology crisis in the sense that we’re trying to transition to new technologies, new sources of energy. And at the heart of this is the automobile industry. And if we don’t restructure the automobile industry correctly, basically, it won’t contribute to that transition. And what we see in the GM IPO [initial public offering] is a company that really wants to move to China and Brazil and doesn’t seem to really care about the heart of the American economy. And I don’t think that’s good for us. I don’t think, in fact, it’s good for Brazil or China, either.

JAY: It’s kind of ironic that the union that now owns so many shares of GM has a kind of conflict of interest, because as a shareholder, the union benefits if it’s economically profitable for GM to move to China and Brazil, even if it cuts back the number of jobs and union members it has. It’s a very odd position the union’s in.

DIAMOND: Yes. Historically, the UAW has avoided having any role in the financial markets in the way that many unions do through their pension funds. And so this was a big shift in the approach of the UAW. Their view was, in the 1950s, that they wanted General Motors and the big three to manage the pension funds, manage health care, and provide for those when workers retire. Now they’re being forced to take those over, and they have to manage these conflicts. And I think the key lesson here is to not mix up the short term and the long term, because in the long term, the question is: what’s going to provide viable, constructive employment opportunities for their members for the next generation? And that is not going to result from the kind of business strategy we see being carried out by the big three, particularly General Motors, as described in their prospectus for the IPO.

JAY: What does this new transportation system look like? And what would Detroit and the auto industry look like?

DIAMOND: Well, if we restructured this and collected the assets into what I call a public trust company–and there are precedents for this. There have been efforts at various points in time to manage government resources in this fashion. It would be managed transparently, with a board of directors from various constituencies, the workers, retirees, management, the governments, and various constituency groups, and you’d plan out how you want to deploy these resources to transition from an automobile-based, gasoline-based economy to more efficient and more environmentally sound transportation methods, including high-speed rail, any number of possibilities that are out there, and to use–. I mean, the main thing here to keep in mind is what General Motors, Ford, and Chrysler are doing is basically destroying a very deep skillset and investment that’s been built up over decades in a workforce and in factories, in communities, that could be transitioned much–. You know, by the way, probably the best precedent for this is in World War II, where the US government made the automobile industry transition from producing cars to producing airplanes and bombers, etc., for the war effort. Harry Truman said that Ford’s River Rouge plant won the war for us in World War II. Now, without getting into the politics of World War II or the defense industry, nonetheless there’s a precedent here. In times of crisis and emergency, the fundamental obligation of the federal government, of government generally, is to provide for the general welfare of the people of the United States. And so I think there’s a basis here to intervene and say, we want these assets preserved, reorganized, and effectively used. Instead, what the big three are doing is using layoffs, using financial engineering, restructuring, and globalization to destroy the heart of industrial America.

JAY: Now, of course, you know the argument from the other side will be government has no idea how to run such things. The government should get out of the way. If the automobile industry can’t stay competitive, let it burn, and something new and more innovative will take its place. And what you’re talking about is kind of like a planned economy. So how do you respond to that?

DIAMOND: Look, you have to unpack this concept of government. I’m for good governance. I’m for democratic governance. That doesn’t necessarily mean that you’ve got a state or an authority that’s controlling things undemocratically. People would be surprised, if you look carefully at how our assets in this country are actually managed. If you look at, for example, the state of California, the nation’s largest public sector pension plan is based in California. It’s called the California Public Employees’ Retirement System. It’s managed by a multi-constituency board of trustees elected by various constituency groups, some of them appointed by the governor. It manages $250 billion of assets very effectively. It’s a very astute investor. So there are plenty of models around for broad forms of transparent and accountable governance that really don’t fit this kind of swear word that people use when they kind of talk about, you know, Obama being a socialist.

JAY: You’re not talking about a tzar in Washington running this new transportation sector.

DIAMOND: That would be a mistake. And I think part of the problem here is that this was–the way this was done was around a tzar, was around a very small group of people who operated fairly in secret. The retirees of the UAW do not know the structure or nature of this VEBA that now manages their health care. They do not know what’s really happening with their pension fund. During the process when the VEBA was being set up, I was receiving phone calls from all over the country from auto workers, retirees, active workers, with complaints about the fact they could not find out the most simple details about what was being proposed in the restructuring. And this is a serious problem. And so I’m not for a small group of people sitting inside the Beltway to manage the automobile industry. I’m for a broader, more transparent and accountable governance structure [snip] don’t need some kind of centralization in order to make decisions. But whatever central authority you create has to be accountable to the constituencies that are involved.

JAY: Now, the UAW went along with this whole plan. The union leadership was very much on board with the Obama administration’s strategy. And they have, I think–what is it?–a couple of seats on the board, and they own a bunch of shares. They don’t seem to be suggesting heading in a different direction.

DIAMOND: Well, the VEBA, which still is a significant shareholder after the IPO–they sold about $3 billion worth of shares, but they have another $10 billion or so left in the company–will have a seat on the board of directors. They have carried out what I would call a kind of strategic retreat, and have elected not to fight, but have elected basically to carve up what they have, and they’ve agreed to these very dramatic wage cuts for new employees, so you now have more junior employees paid very low–relatively low wages, not much above being a barista, and older senior workers with higher wages, and you now have tensions between the retirees and the current employees. So they’ve really bitten off an extremely complicated situation, and there is understandably some concern about that inside the union.

JAY: So I guess they’re all rolling the dice, hoping for some economic recovery, which, it seems, is looking dimmer.

DIAMOND: Yeah, it’s very clear that households–if you look at the macroeconomic picture, households are building up savings, recouping from a credit binge that’s substituted for very modest wage increases over the last 20 years. Businesses are piling up cash for the same reason. Government has been making up the difference to keep GDP at some sustainable level.

JAY: But that’s about to end, especially with the Republicans controlling the House.

DIAMOND: That’s possible. And then the question is: where does the money come from if we’re not going to go into a very severe recession? And unless we restructure the global economy, which would mean, for example, increasing purchasing power of Chinese workers so that they begin to purchase products from us instead of just selling us cheap labor products, that would require a new labor movement to push up wages in China. Unfortunately, what GM is doing is moving to China in order to take advantage of cheap nonunion labor.

JAY: Thanks very much for joining us, Stephen.


JAY: And thank you for joining us on The Real News Network.

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Stephen Diamond is Associate Professor of Law at Santa Clara University School of Law in Silicon Valley. He specializes in corporate finance, securities law, labor law and international economic issues. He has a long history of work with the trade union movement, including a role in advising the AFL-CIO and Change to Win on their capital market strategies. His most recent book is called “From ‘Che’ to China: Labor and Authoritarianism in the New Global Economy” published in 2009.