Dirt Diggers Digest

It took 20 years but Volkswagen is finally going to try making cars in the United States again. Today the German automaker announced plans to invest $1 billion on a production facility in Chattanooga, Tennessee that will turn out vehicles for the North American market. The move is seen as the only way the company can, given the strong euro, hope to increase its meager U.S. market share.

The initial coverage of the announcement I saw did not mention the circumstances under which VW abandoned its previous U.S. manufacturing initiative. In April 1978 the company opened an assembly plant in Pennsylvania to produce its Rabbit model. A few months later, the workers, represented by a newly formed local of the United Auto Workers, shocked the company—as well as their parent union—by staging a wildcat strike to protest the fact that they were being paid less than their counterparts at the plants owned by the Big Three. Stopping production of the Rabbit, the workers chanted “No Money, No Bunny.”

The workers eventually returned to work, but labor relations at the plant remained tense as the UAW, compelled by members of the local, pressured the company to narrow the wage gap. VW was also confronted with a lawsuit charging that it discriminated against black employees. Finally, in 1988, VW gave up and closed the plant.

It appears that VW is being more cautious this time. It has followed in the footsteps of other foreign automakers that have located their U.S. plants in Southern right-to-work states or other areas with low union density. Thus is Toyota in states such as Kentucky, Alabama and Mississippi; Nissan in Tennessee and Mississippi; BMW in South Carolina; Mercedes in Alabama; Kia in Georgia; and Hyundai in Alabama. The scarcity of unions may be the real commonality that Tennessee Gov. Phil Bredesen had in mind when he said today that VW chose his state because of “shared values.”

The Southern states have rewarded foreign car companies not only with non-union labor but also with lavish economic development subsidies—in many cases more than $100 million per plant. Volkswagen’s package from Tennessee is still being negotiated. Gov. Bredesen today said only that the deal is “complicated,” which should probably be taken as code for “extravagant.”

Government giveaways and docile labor: Volkswagen may not have had it so good since the era when the People’s Car was born.

The response to the politically opportunistic call by the Bush Administration and John McCain to expand offshore oil drilling is being framed primarily in environmental terms. The drilling, which would do nothing in the short term to address soaring gasoline prices, would indeed create serious risks for the coastlines of Florida and California and would worsen global warming.

Yet there is another compelling reason to oppose the plan: the federal system of offshore leasing has been characterized by gross mismanagement that has allowed big oil companies to avoid paying billions of dollars in royalties. There is no reason to doubt that an expansion of drilling leases would bring more of the same.

For those who missed this particular scandal, here is some background. Commercial offshore oil drilling was pioneered in the late 1940s by Kerr-McGee Corp. While little thought was given to environmental issues at the time, there were disputes between the federal government and coastal states over which should control the leasing process. The 1953 Outer Continental Shelf Lands Act gave the states control over the first three miles (more for Texas and the Gulf Coast of Florida), and the feds took over after that up to the 200-mile territorial limit.

There wasn’t much controversy over offshore drilling until 1969, when an undersea well off the coast of Santa Barbara, California suffered a blowout and leaked 200,000 gallons of oil that contaminated 35 miles of coastline. This led to state and federal restrictions on offshore drilling in new areas. Periodically over the past 30 years, the oil & gas industry and its allies in Congress have tried to ease the limits but were shot down.

Defeated in its effort to get access to more offshore areas, the industry sought to make its existing drilling more profitable by pressing for reductions in the royalties it had to pay the federal government through the Interior Department’s Minerals Management Service (MMS). In the mid-1990s, when energy prices were relatively low (oil was at about $16 a gallon barrel), Congress gave in to industry pressure and passed legislation in 1995 providing “royalty relief.”

The law contained safeguards to prevent a windfall for drilling companies by terminating the relief when oil prices rose above a certain level, but Clinton Administration officials failed to include those provisions in some 1,000 deepwater leases it signed in 1998 and 1999.

That oversight would come to haunt the federal government. As oil prices rose in 2004 to the point at which royalty relief should have ended on those leases, the cost to the Treasury in lost revenue rose to billions of dollars. Once the situation became publicly known, thanks to reporting by Edmund Andrews of the New York Times, some oil companies agreed to renegotiate the leases, while others such as Exxon Mobil and Chevron refused.

Complicating the situation, Kerr-McGee (now part of Anadarko Petroleum) later brought a legal challenge against the safeguards, making the dubious argument that Congress never intended to give MMS the authority to impose them. Last year the drillers received a favorable ruling in the case, prompting the Government Accountability Office to estimate recently that, if the decision is upheld, the loss of revenue from leases signed from 1996 through 2000 could be as high as $53 billion.

The federal government is also likely being cheated on leases signed after 2000. In 2006, several MMS auditors publicly charged that they had been pressured by their superiors to terminate investigations of underreporting of royalties related to leases not subject to royalty relief.

This is the dysfunctional system that the Republicans want to expand. One is tempted to ask: Is this really about increasing oil supplies—or creating another giveaway for Big Oil?

The overall U.S. economy may be headed for the crapper, but today there were celebrations in South Carolina after BMW announced plans to invest an additional $750 million at its auto assembly plant in Spartanburg County and add 500 new jobs.

These days, any American job creation, especially in manufacturing, is going to be seen as good news. But BMW’s announcement cannot be seen as a vote of confidence in the vitality of the U.S. economy, Instead, it seems to be ploy to take advantage of the cheap dollar—and more importantly, cheap labor. Manufacturing workers in South Carolina earn only about one third of what autoworkers are paid in Germany, where BMW is simultaneously cutting employment by more than 7 percent.

Today BMW officials were praising South Carolina’s distribution infrastructure, but what they were really lauding was the anti-union climate in the state, where only 5.4 percent of manufacturing workers (and none at BMW) are represented by union contracts. Cheap labor and weak or non-existent unions: the U.S. South is looking more like the Global South all the time.

Another similarity is compliant government. Ever since the early 1990s, when BMW chose South Carolina as the location of its U.S. assembly operation, the state has been more than accommodating. The German company was given some $150 million in tax breaks and other subsidies in connection with its initial investment, and its subsequent expansions have been rewarded with many millions more in giveaways. BMW said today it may yet seek job development tax credits in connection with the new expansion. The company is apparently so confident of getting what it wants that it doesn’t bother nailing down the details ahead of time. That’s [Global] Southern hospitality.