TO: The Hon. Rev. Walter E. Fauntroy
FROM: Norm Kurland
DATE SENT: November 8, 2008
SUBJECT: How Walter Reuther would have saved today's Detroit auto industry
As you know, prior to my joining with Louis Kelso, I served as director of planning for the Citizens Crusade Against Poverty, a liberal establishment private sector counterpart of President Johnson's War on Poverty that was chaired by the late Walter Reuther, then visionary head of the United Auto Workers. I succeeded in bringing Louis Kelso together with Reuther. On February 20, 1967, shortly before his untimely death in an airplane crash, Reuther gave the following testimony to the Joint Economic Committee of Congress:
"Profit sharing in the form of stock distributions to workers would help to democratize the ownership of America's vast corporate wealth which is today appallingly undemocratic and unhealthy.Had Reuther lived and implemented his ownership policy and promoted the complete array of Kelso's "full production" ideas as national economic policy, I am convinced General Motors and the auto industry would not be coming hat-in-hand for a Federal bailout, nor would the US and global economy be in its current financial meltdown, threatening massive unemployment, protectionist trade policies, and rising levels of global poverty, and what David Walker (who remembers favorably the meeting Kelso and I had with him around 1975) calls an "unsustainable debt system."
"If workers had definite assurance of equitable shares in the profits of the corporations that employ them, they would see less need to seek an equitable balance between their gains and soaring profits through augmented increases in basic wage rates. This would be a desirable result from the standpoint of stabilization policy because profit sharing does not increase costs. Since profits are a residual, after all costs have been met, and since their size is not determinable until after customers have paid the prices charged for the firm's products, profit sharing [through wider share ownership] cannot be said to have any inflationary impact on costs and prices." (Extracted from Page 774 of Part 4, Hearings, The 1967 Economic Report of the President, Joint Economic Committee, Nineteenth Congress, First Session.)
Today the Washington Post's lead editorial suggested that President Obama impose strict conditions before approving Detroit auto industry's request for $50 billion in Federal bailout money, including a pre-arranged top-to-bottom corporate reorganization for the companies applying for aid, including a wiping out of the equity shares of existing shareholders, buying out creditors at "pennies for the dollar," and firing current top management. I totally support such conditions, but would add others that would have to be adopted by the United Auto Workers to change the culture in each of the companies that undergo re-organization from the conflictive "wage system" culture to a more synergistic and efficient ownership culture in which all workers and management have a stake in maximizing the efficiencies and bottom-line profits of the companies in which they work. Among the additional conditions we would recommend are:
1. Require that the UAW agree to Reuther's call for ownership sharing and profit sharing for renegotiating future income and benefit for all workers, plus a restructuring of future labor-management relations on the basis of participative management and other refinements of "Justice-Based Management" as described in www.eei-consultants.com and http://www.cesj.org/jbm/articles-jbm/cwp-jbm.htm.
2. Arrange for each of the reorganized auto companies to restructure themselves as S-Corp companies with all new equity shares acquired on a 100% leveraged basis by a tax-sheltered ESOP covering all new management and rehired non-management workers. With all shares held by an ESOP trust, and future pre-tax profits flowing through the tax-exempt trust for the repayment of corporate debt and the payout of dividends to ESOP participants, there would be no taxation of corporate profits, all of which would accrue to the benefit of the worker-shareholders. Distributions from the trust to worker-shareholders would however be subject to Federal and State income taxation, unless below income levels exempted by such tax reforms recommended in the proposed Capital Homestead Act described in the book Capital Homesteading for Every Citizen. (As you know, I orchestrated the first successful 100% leveraged buyout in 1975 of a Steelworker-organized South Bend Lathe, a company months from liquidation, from its parent Amsted Industries of Chicago. http://www.cesj.org/jbm/casestudies-vbm/southbendlathe.html. I later designed the first 100 % bank-financed leveraged buyout of the highly successful Mid-South Building Supply. And UAW members would have acquired 72% of the ownership of Chrysler under the strategy I advocated when Chrysler sought a $1.2 billion Treasury loan guarantee in 1984, but for short-sighted thinking by the UAW Washington Counsel, who settled for the token ownership stake arranged for workers by Senator Long. Without conditioning ESOP benefits to a new ownership culture, union leaders who adopt ESOPs in failing companies often fear that workers will no longer be loyal to them.)
3. Instead of promoting the traditional "conflict model" of industrial relations, however, the UAW as a labor union would be encouraged to transform itself into an "ownership union" covering all non-management workers as well as future outside shareholders. Thus a new model of democratic unionism would become society's primary institutions for promoting a free market version of economic justice, while continuing to negotiate and advance the expanded economic interests, including ownership rights, of a broadened membership constituency resulting in a new check on management accountability and transparency. By broadening their services, negotiating concerns and membership base, unions would also be expanding their revenue base, as well as their contributions to a more just and democratic market economy.
4. The Federal Reserve would adopt a policy to support use of its discount powers to create new asset-backed interest-free money for facilitating member bank loans (subject to competitive transaction fees and risk premiums) for the acceleration of sustainable future growth and the commercialization of advanced energy technologies through new shares issued by Justice-Based Management companies that meet conditions 1-3 above. Such new shares would be offered through leveraged ESOPs to workers and through leveraged Capital Homestead Accounts or leveraged IRAs to other qualified citizens.