Posted by: dstieglitz | August 29, 2013

LEADERSHIP IN BALANCE

“You can get everything you want in life if you just help enough other people get what they want.”   Zig Ziglar

     The City of Detroit filed for bankruptcy in July – the largest municipal bankruptcy in U.S. history. The Motor City’s drop from the fourth largest city parallels the decline of the U.S. auto industry. After losing more than a million citizens since the 1950s, the city’s tax revenue base has fallen steadily. Win-lose demands and concessions among leaders in the union, the auto companies, and the city government – each demanding more for themselves – caused everyone to lose.

Leadership Out of Balance. At its peak in the 1970s, the United Auto Workers (UAW) had 1.5 million members and was a leader in local and national politics. Without the UAW, Detroit may not have achieved the prosperity it once enjoyed. On the other hand, the union’s decline to 400,000 members is a result of its heavy-handed success in extracting high pay and benefits for members. When the U.S. became uncompetitive in auto manufacturing, thousands of former-UAW workers were unable to find equivalent jobs in other fields. One blogger commented: “If you can’t find a new job at the same pay as your old job, you were overpaid.” The same can be said about out-of-balance leadership in trade associations, Chambers of Commerce, and other special-interest groups.

Joint Decline. It once was said “What’s good for General Motors is good for America” – the inverse also was true. Starting in the 1970s, rising wages and benefits and competition from German and Japanese car makers eroded the profits of U.S. automakers. Even when Volkswagen, Toyota, and other foreign companies opened non-union plants in the U.S. and won market share by offering low prices, the UAW stubbornly demanded wage hikes. At the same time, U.S. automakers built plants in other countries rather than have the UAW build cars in Michigan for export. Some people blame the automakers for trying to increase profits, but that’s like blaming the UAW for seeking higher wages. Both company and union leaders pursued a win-lose strategy for their constituents.

Detroit Becomes a Victim. After World War II roughly 75% of the world’s automobiles was manufactured in the U.S. – today, the figure is under 25%. That cataclysmic decline coupled with decades of misguided leaders and unsustainable financial practices have left Detroit with massive debt. Nearly half the city’s liabilities stem from pension and health care promises to retirees. Like most cities and states, Detroit gives employees a defined-benefit pension based on years of service and final salary. Incidentally, Social Security is the world’s largest defined-benefit program.

Detroit’s Symptoms Spread. Ballooning pension liabilities are partly an adverse side-effect of a fortuitous trend: we live longer! But most of the problem is political. Mayors, governors, Congress and presidents have bought votes by offering fat pensions and deferring the bill to future generations – our children and grandchildren will be paying our Social Security and Medicare benefits until we die. Bankruptcy may save Detroit’s budget, but it won’t fix the core issues of chronic unemployment, declining educational systems, and under investment in infrastructure. It took 50 years of out-of-balance leadership to erase Detroit’s success. How long will it take for Congressional inaction to do the same at the national level?

Denying the Problem. Detroit’s bankruptcy is scary. Not because of its immediate impact, but because political leaders are ignoring the flashing-red warning. When Greece first ran into trouble a few years ago, European leaders were surprised that the problem spread to other countries. American leaders seem to be in a similar state of denial. City, state and Congressional leaders should pay attention. They could end up like Detroit because they have made similarly unsustainable retirement and health care promises and are pretending that the problem doesn’t exist.

Growing Importance of Cities. The survival of Detroit and other cities is critical to the country. Cities have always been a major source of growth and they are even more important in today’s global economy – more than 50% of the world’s population lives in them. The 2010 census showed that the population in U.S. cities is growing faster than suburbs due to job availability and mass transportation. Businesses are being lured back to cities after decades in suburban office parks. For example, consider Apple’s huge new campus being built in Cupertino, California. Mayors are turning to companies to provide the jobs required for economic prosperity. There may be hope for Detroit after all.

Competition among Cities. Of course, businesses are using jobs to negotiate special deals. There is stiff competition among mayors and governors to attract businesses with tax incentives. Many cities are building bicycle paths and garden apartments to attract the knowledge workers that businesses want. The trend is Win-Win-Win. Cities win because businesses rebuild urban areas that were decaying and dangerous. Businesses prosper because of plentiful, low-cost utilities and labor. And citizens win because their quality of life improves.

Supportive Relationships Flourish. Only mutually supportive relationships survive. Is it possible for workers to prosper while their employer goes bankrupt? Is it possible for a business to thrive while its workers and the environment struggle? Is it possible for a government to succeed while its citizens are unemployed and businesses are unprofitable? What alternatives do the UAW and automakers have today? The same win-win alternatives they rejected decades ago when the market share of foreign automakers was of little consequence. The same choices are available to state and federal governments and special-interest groups.

     Potential Fix. Relative to the pension challenge, public pension plans must shift to pay-as-you-go defined-contribution plans like those in the private sector. Promises to those who have already or are close to retirement should be honored, but future liabilities must be contained. Retirees in the private-sector face a different problem. Defined-contribution plans have two risks: (1) declining markets and/or inflation erode savings, and (2) people outlive their savings. So everyone should be encouraged to work longer, save more, and opt into pension plans. The movement of jobs into cities and the baby-boomers’ move to downsize as they retire provides an opportunity to rebuild cities. Only when the severity of the challenge is clear can everyone work together to implement reforms. The sooner we tackle the problem the easier it will be to fix.

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