The UAW's Awakening

September 29, 2007; Page A8
http://www.opinionjournal.com/weekend/hottopic/?id=110010668

This week's deal between General Motors and the United Auto Workers is being hailed as a new era for Detroit, and for once that advertising may be justified. The UAW in particular made historic concessions that show a new awareness of global competition. What's less encouraging is how much this reality-based compromise still contrasts with the policies that unions and their political friends are promoting in the unreal world of Washington, D.C.

Our friends in the AFL-CIO often think we're too critical, but we're not responsible for taking union membership down to 7.4% of the non-government American labor force last year. (See nearby chart.) The reality of a dynamic world economy did that, assisted by the failure to adapt by union leaders and corporate managers. These columns support collective bargaining, and our belief has long been that if a company's workers vote to join a union, they and the company deserve what they get.

The problem with unions is not all that dissimilar to that posed by entrenched management: Once they win comfortable contracts, they often become impediments to the kind of innovation and flexibility essential to success in today's economy.

So in the name of "job security," they undermine a company's -- or a nation's -- competitiveness. The result, over time, is less job security for everyone, especially the union workforce. There's no better example of this than GM, where the UAW now represents about 74,000 hourly workers, compared to 246,000 in 1994. Some security.

The new GM-UAW contract is a belated recognition that the choice has now become change, or Chapter 11. Under the deal, wages are frozen, save for bonuses and some lump-sum payments. GM in turn promises to invest in American plants with UAW workers, though of course it will also keep investing abroad.

In what seems to be the most creative stroke, GM will pay some $35 billion toward a new health-care trust fund to be administered by the union. That's a big initial cash flow, but it means the company can divest itself of some $50 billion in long-term liabilities, which would only have grown as health-care costs rose and retirees lived longer. Investors loved it, driving up GM stock by around 7% for the week.

The UAW now gains ownership of its members' health-care resources, in effect becoming a financial manager of a giant Health Savings Account for auto workers. If the union is creative, it will rethink its coverage plans, using the new generation of consumer-driven health-care options (such as personal health savings accounts) to encourage and reward more careful spending by beneficiaries. UAW President Ron Gettelfinger has told his members the trust fund will last 80 years, and the union's job now is to make sure it does.
A similar arrangement at Caterpillar Inc. didn't work because the money ran out in six years.

This new Treaty of Detroit in the marketplace is all the more notable when you consider how little the union political agenda has changed. The AFL-CIO famously split in 2005 over the priority of organizing over politics. But organized labor's share of the private workforce has kept falling.

We had a friendly visit not too long ago with Andy Stern, the Service Employees International Union President and perhaps the most successful modern labor leader. He is a shrewd man, but his main message seemed to be that union salvation lies in America adopting the work rules and income redistribution of Europe. He says companies need to pass their health-care costs onto government, meaning taxpayers. And while he recognizes that unions can't secede from the global economy, the trade rules need to be changed -- that is, restricted or managed -- so that the pace of change is less disruptive and wealth more equally shared.

With Democrats now running Congress, and ahead in the Presidential polls, Mr. Stern and his union mates are closer than they've been in decades to seeing that agenda implemented. But they also reveal their own lack of faith in the appeal of unions when they support a ban on secret-ballot elections at work sites. And of course they still benefit -- unlike anyone else in American politics -- from being able to coerce the payment of dues.

The larger irony is that Europe is now learning the hard way that Mr. Stern's "social contract" is itself deeply flawed. French President Nicolas Sarkozy was elected this year in part because he acknowledged that even France can't sustain the French model any longer. Health-care expenses represent a huge chunk of the tax burden in France, where restrictive work rules and such union demands as the 35-hour week have led to far higher joblessness and far less prosperity than in the U.S.

Mr. Sarkozy is now pushing American-style reforms precisely when Mr. Stern and Democrats are promoting French policies. Our guess is that economic reality will in the end limit Mr. Stern's political ambitions in the same way that global competition has finally awakened the UAW.