An interesting post. As a disciple of Smith, Hayek, and Friedman, I can certainly appreciate the "they got what's coming to them" view of workers who bought into the so-called "corporate social contract."

On the other hand, companies like LTV and Bethlehem Steel (and US Air and United and ad infinitum) entered into contracts, written or implied, with their employees. Abusive Chapter 11 filings wrongly negate such contracts, enriching bankruptcy lawyers and entrenched management, but no one else. And such companies then have the nerve to throw the costs off on the PBGC, on the approval of bankrupcty judges who know no better. The plain fact is that such companies don't want to keep their promises.

Screw the worker, it is said. Ronald Reagan would have disagreed. (If anyone thinks I misjudge the late President, let's discuss the matter.)

Personally, having spent many years in the trenches before having the good fortune to get a college degree, I disdain lily-handed academics who categorically advocate jettisoning the corporate social contract.

What is an abusive Chapter 11 filing? Are you alleging that the above referenced companies weren't really insolvent?

What no one is entitled to, and no one should want, is an economy where business is unchangeable. The fundamental fact about capitalism is that it is a gale of destruction. The problem is that there is no viable alternative.

Given the nature of capitalism, it is foolish to think that a multi generational contract can have any meaning.

1. I wonder if it is quite right to say that workers "got caught" in the transition, thereby suggesting that they are passive participants. The companies you mention are subject to labor cartels known as unions, cartels that some of the workers joined voluntarily. These cartels imposed higher than competitive input prices on the firms in question, with predictable results in the steel industry. By contrast, non-union steel companies like Nucor are thriving.

Similarly, the workers at GM and Ford, for instance, gambled that Americans would continue to "buy American" even though each American car includes a labor cartel premium not found in cars from Japan and South Korea, for instance. It looks like some workers lost this gamble. And, of course, there is "a union work rules premium," including the rule that allows employees to smoke on the Assembly line. (Guess who pays when the smoking causes lung cancer?)

2. It would seem to me that any such "social contract" includes as an implicit term the profitability of the enterprise in question. GM lost $8.6 Billion in 2005. Otherwise GM's (other) creditors and shareholders would be required to reach into their pockets each year to bail out those whose cartel activities helped cause the problem in the first place.

3. Imagine if a cartel of creditors had colluded to raise the interest rate that GM had to pay for credit. Would we be saddened to learn that GM had failed and was trying to rengotiate the terms of the credit arrangement? Would we worry about the "transition costs" for the colluding banks who had to downsize because they now had to charge only a market rate of interest?

4. I would, of course, feel sorry for the worker in a "closed shop state" forced to join a union in order to work at GM.

As always, Alan, you raise interesting points. On the issue of "gambling" and voluntariness versus passivity, remember we're talking about retirees at this point. They've already put in their time--in many cases, lots of time. They have few labor market opportunities at this point. Yes, they were beneficiaries of labor cartels, but I'm not sure that distinguishes them from other successful rent seekers in the economy. Should they have seen the writing on the wall when they were still working? Could they have foreseen the effects of global competition? You and I read Schumpeter, but not everyone (ok, almost no one with a real job) does. I'm not defending unions here--I'm just considering the plight of retirees. Maybe union leaders should have had better foresight. Unions are not immune to agency costs. It's not my area of expertise, but I've not seen any writing on that issue.

As for an implied condition of profitability for the social contract, this strikes me as just another incomplete contracting problem. When these deals were struck, no one ever dreamed that GM wouldn't always be the world leader in auto manufacturing (ditto for the steel companies in the 60s and 70s). As conditions changed, it's not hard to imagine why both sides might have been unwilling to acknowledge the economic vulnerability of the employer. What deal would the parties have struck had they been forced to consider it? Hard to know for sure, but it's a stretch to say that workers would be the best risk bearers there. I'd bet they would (or did?) pay diversified investors to bear the risk.

Moreover, I've made no attempt to assign the costs. One interesting feature of the report that I did not mention in my original post is its analysis of the effect of the health insurance tax credit, which was established as part of the Trade Adjustment Act of 2002. The timing of the two bankruptcies fortuitously allowed for consideration of this new tax credit, and the report was generally favorable on the usefulness of the credit to these retirees.

As far as colluding banks? Financial institutions diversify. Bank depositors could diversify, but to spare them (us) this cost, the government offers deposit insurance. Retirees can't easily diversify with respect to their health coverage. Of course, new approaches going forward could and should make workers less dependent on the fortunes of their employer for their retirement benefits. But for today's retirees, that's not helpful.

A company need not be insolvent to file a Chapter 11 petition, and many that do file are not. Bankruptcy proceedings are supposed to reorganize the company while maximizing the recovery by unsecured creditors. All too many Chapter 11 filings fail to do this, because the bankruptcy estate gets consumed by legal fees (over $300 million, for example, in the case of UAL) and excessive retention packages granted to senior management -- who usually are the cause of the company's financial woes. The executive retention packages are set up a so-called "first day" motions that get filed the same day as the bankruptcy petition, and are routinely approved by the bankruptcy judge before there is any organized opposition.

Another abuse is Chapter 11 filings by companies that have no interest in reorganizing, but only an interest in using the automatic stay (the "cheapest injunction in town," as any bankruptcy lawyer will tell you) to halt threatened or pending litigation. The company then drags its Chapter 11 case out for years if necessary, waging a war of attrition against claimants. Outside the bankruptcy system, the claimants can take their cases against the company to trial in a reasonably short time. Inside Chapter 11, on the other hand, the company can drag matters out interminably because most bankruptcy judges are too overworked to manage large cases toward a plan of reorganization expeditiously.

Finally, too many bankruptcy judges rubber-stamp fee applications by the law firms that represent debtor companies and creditors' committees. Quantum meruit is fine. But why should the bankruptcy system be a feeding trough for lawyers?

The 2005 bankruptcy reform legislation was a step in the right direction, but the Chapter 11 reforms did not go far enough to correct such abuses.

A lot can be said about the old business model on the verge of extinction which is, perhaps, a "private" rather than "public" issue. Nevertheless, it is interesting how ERISA has been turned on its head from something intended to protect workers into something that now works almost entirely to the advantage of insurance companies and employers, at the workers' expense. Most striking example is the contrast between ERISA Preemption of "malpractice" claims against HMOs vs. the inexplicable Justice Roberts lead reversal of the Scalia lead good-for-the-gose-is-good-for-the-gander re subrogation. There is also a broader problem, which relates in part to efforts of workers to recover on behalf of their plans, in terms of Article III. What was a Separation of Powers defense to the challenge of Governmental action or inaction has now somehow morphed into a preemptive dismissal of some or all of cases brought against private companies for wrongdoing based on esoteric discussions regarding "injury". (See, e.g., Horvath from 3rd Cir, Central States in 2nd Cir, and Glanton from D.Ariz.) - For more on Politics and the Law, Literature, and What's New in the Courts, including Class Actions, ERISA, Products Liability, Spoliation, and E-Discovery, check out: www.gravierhouse.com.