Sunday, November 22, 2009
Tuesday, November 10, 2009
Shlaes on Hayek
Ms. Shlaes,
I enjoyed your article in Bloomberg today, but disagree with your last point, that Americans will not embrace socialism.
A significant portion of Americans will resist, but an even greater portion will not. When half the US population pays no income tax today, socialism has already set in. Getting something for nothing and having the minority haves pay for the majority have-nots is socialism. Having government bureaucrats decide winners and losers in the economy is socialism.
Socialism sounds like a great panacea in rhetoric and we have a man in the Presidency that is one of the best at rhetoric. Unfortunately socialism's failures take time. It took the Soviet Union decades to fail. It won't be until the standard of living drops to unconscionable levels will there be a revolution to unseat the socialist movement. It is easy to sell the majority of the masses on the rob Peter to pay Paul economy without them giving consideration to the long-term ramifications.
The utopia that Socialism seems to be on paper is one thing, the reality is quite another. Hayek had perfect clarity to this fact.
Respectfully submitted,
Monday, November 9, 2009
Why Would Business Hire New Employees?
Now that employers are mandated to provide coverage it will be prohibitive to hire new employees whose productivity does not warrant the cost of insurance on top of an already high (relatively speaking) minimum wage.
Minimum wage legislation has already forced the unemployment rate of those ages 16-24 over 25%. Health care mandates will make a bad situation even worse. Those people in our economy with few skills are going to experience a very bleak future and will not get the skills and experience needed to move up the economic ladder.
For the party that claims to watch out for those at the bottom of the economic food chain they sure do all they can to harm them.
Sunday, November 1, 2009
Letter To Washington
I am a constituent that is a frequent letter writer to your office. Normally, I am writing to you about a particular issue that is in the headlines, today I am not. Instead, I am writing to give you an idea how the decisions you, and the rest of Congress, are making are paralyzing the economy and business.
While I am not writing the letter on behalf of my company, the issues that I am going to outline drastically effect the decisions made by me and the company that employs me. As a direct result of your actions in Washington, you and the other members of Congress are affecting the competitiveness of our nation and the standard of living that all Americans enjoy today.
My job involves trading a commodity by-product of refineries. These are the refineries that produce transportation and heating fuels that make our economy so productive. State of the art technologies at work in these plants give consumers and businesses the lowest cost energy anywhere in the world. This means that consumers can consume more and business can invest in more machinery that leads to our high, relative standard of living. Congress is threatening this industry with regulation and taxes that will hurt the competitiveness of our domestic refining infrastructure. Whether it is over-reaching environmental legislation or cap-and-trade taxes, this kind of burden adds tremendous cost. This cost must be passed on to consumers or the businesses will close. Either one of these consequences is devastating. Higher costs mean less economic growth and a lower standard of living. Instead of consumers consuming more goods and services, they will be pressed into spending more money on energy. If business cannot pass on these new costs, they will close. This means loss of high-paying jobs in the industrial sector the means so much to the country’s prosperity.
The company I work for is dedicated to following the letter of the law. However, there are so many conflicting and overlapping agencies at all levels of government that it is paralyzing our business and many others. When a business does not know the rules and legal expectations, they are very hesitant to make investments. In addition, they are forced to tie up more capital and resources to maintain compliance thus reducing the investment in plants, property and equipment that to are key to economic growth. Government has to become less burdensome and complex so business feels confident they can make investments that will make our economy more productive.
Congress must also stop subsidizing inefficient businesses in this country with legislation. Inefficient business mean a loss of productivity that is the key to economic growth. Two prime examples are agriculture and shipping, but there are hundreds more examples I could choose. A few examples in the agriculture segment are dairy and sugar farming (not to mention feed grains like corn, wheat and rice).
Today there is a glut of milk on the market. Consequently most dairy farmers are now looking at producing milk at a loss. The reason the price of milk is so low is over supply based on current levels of demand. When this happens in any other industry, the highest cost producers go out of business and the market corrects itself with no help from government. This situation leaves only the very best, most efficient producers operating dairies and redirects the other resources to more efficient areas of the economy. No doubt this creates localized pain when a farmer goes out of business, but why should the taxpayers be left with the burden of supporting that farmer? If that farmer were making paper, furniture or computers the government would not support him. The agriculture lobby has gotten strong because there is money in it. Washington needs to get tough and say no to handouts.
The other example I referred to is sugar. Perhaps no other example is so wrapped up in special interest and government interference. Because of import tariffs and production limits on sugar, US consumers pay two to three times the world market price for sugar. Why? To protect a very small industry, primarily in Florida, with tremendous clout and to support the high price of corn syrup in grain growing regions of the country. No doubt this has saved jobs in these industries, but it has cost many more as consumers had to pay more for sugar than they should have. Industries where sugar is a primary ingredient have moved production overseas because they cannot be profitable paying more than market prices for sugar. This particular situation plays out in any industry where government gets involved. No matter the temptation, government has to stop determining winners and losers in business and let markets decide who succeeds and who fails.
As a taxpayer, I am appalled at what the US Government does in the shipbuilding business. Due to the legislation passed in 1920 known as the Jones Act, the US Shipbuilding business has enjoyed a position in the world market for ships that has made it terribly inefficient and driven the cost of vessel freight between US ports to unreasonable levels. In addition, it has driven the cost of Naval vessels for our own defense to ridiculously high costs for the taxpayers.
I recently received a quote for a vessel that would move the commodity that I trade. If I were to build a Jones Act vessel (one that could move between US ports), the price would be over $100 Million. I can have the same vessel made in Korea today for $30 Million. Not only is the price cheaper, but I can also have it a year sooner. Unfortunately, I cannot take that Korean vessel, loaded, between US Ports due to the Jones Act. This is a terrible outcome for businesses that are trying to compete. I cannot buy and sell with my own countrymen at a price that is competitive with foreign traders in foreign flagged vessels that only move product in or out of the US. To make matters worse, I hear the Navy is buying several high-speed ships at a cost of nearly $400 Million each. I can only imagine how much these vessels would cost if the US Shipbuilders had cost structures that forced them to compete with the Asian builders. The US Taxpayer is getting fleeced only to protect a small industry with very good political connections that have been in place for nearly 100 years.
If the citizens of this country are to continually see our standard of living rise and enjoy the fruits of economic growth, then business has to be allowed to thrive. After all, this is where real jobs are created and real wealth built. There is no better way to do this than to reduce, or even eliminate, corporate income tax. No better stimulus could be designed than a program to eliminate the corporate income tax.
Corporations make capital investment based on after-tax returns. When the government takes nearly 40% of all income on investments, it means that business must have incomes that are 40% higher in order for a capital investment to yield a return that warrants the risk. Imagine all the investment that businesses could make if the return threshold was lowered by 40%! This new investment would mean more jobs for everyone since someone would have to build the new machinery, buildings and transportation networks that new investment would require. Consumers might also enjoy lower prices as the cost of taxes is passed on directly to them. If not, companies would either pay more in dividends (that are taxed as income) or have even more money to invest in productive assets starting this entire cycle over again. A zero tax environment would attract scores of foreign investment, as the US would again be the best place to invest.
Growth in the Federal bureaucracy means more human resources and productive capital are in non-producing, government jobs rather than in production of consumer goods and services. These are jobs that play no role whatsoever in economic growth as they do nothing but force more cost on society. More government jobs mean more taxation on an already stressed private sector. Even worse, this bloated government bureaucracy has over-lapping regulatory authority that complicates all compliance matters as it relates to business. Washington must realize that it is impossible to create greater prosperity and a higher standard of living with a bigger government machine.
The US is losing its competitive edge. It is not too late to stop the decline, but Washington has to make it happen. This is not a Republican or Democrat issue, it is a matter of securing the country’s future. I want my kids to enjoy a better quality of life than mine, just like I enjoy a higher quality of life than my parents. Unfortunately, that history of prosperity and economic growth is now at risk due only to decisions made by politicians catering to special interests. What needs to be done is take the incentive out of lobbying the government for money or special protections, stop having the government determine winners and losers in commerce, and eliminate the tax burden on business. These very simple steps are all that are needed to turn the country around.
Congress is truly destroying the goose that lays the golden eggs and that goose is the entrepreneurial spirit that is historically unique to the United States of America.
Respectfully submitted,
Tuesday, March 17, 2009
We Should All Be Afraid
Sunday, December 28, 2008
Job Creation Math
It is only through productive investment in the private sector will real job growth occur. The government does not know what industries will be successful. If they did I am sure synfuels and ethanol would be huge today. Instead, they are both colossal failures.
Here are some highlights from Bloomberg:
If putting people to work is the goal, we could get rid of all the heavy earth-moving equipment and go back to digging ditches with shovels.
Why stop there? If it takes one man two days to dig a trench three feet deep and 30 feet long with a shovel, how long would it take 100 men using spoons?
You get the point. We can always create jobs by replacing capital with labor, by going backward. The entire history of civilization has been characterized by an effort to move in the opposite direction and become more productive, which is another way of saying produce more with less.
All Aboard
Automation and technological innovation have had the effect of replacing humans with machines. Yet the unemployment rate isn’t perpetually rising. As countries develop, they create new and better jobs, not more of the same old ones. The goal is to raise the standard of living, something that (all economists agree) can only be achieved through higher productivity growth.
That’s something the government can’t provide. It doesn’t “sell” its goods and services to discerning buyers. It isn’t driven by the prospective return on its investment.
Instead, the government requires us to pay taxes in exchange for goods and services -- transportation, education, homeland security -- that may or may not be worth the “cost.”
There’s nothing like a crisis to play on the public’s insecurity and expand the reach of government. There’s nothing like a serious financial crisis to get economists of all persuasions on board.
Tuesday, December 16, 2008
Saturday, December 13, 2008
Spend, Spend, Spend
Many of these government programs involve the "greening" of industry and heavy spending on Federal buildings to make them more efficient. Of course Jimmy Carter tried this. He spent in the neighborhood of $15-20 Billion to find an alternative to oil and we taxpayers have nothing to show for it today. My guess is that B Hussein will spend many multiples of Carter's folly and have a similar result. Why? Because oil is cheap and oil is effective. Even at $143 per barrel, oil is the best energy bargain there is.
B Hussein is trying to force the economy where he wants it to go. In the meantime, he is suffocating business by employing scarce capital and resources into larger government instead of letting it find its way into productive businesses. Government does not create value, it only robs people of their money. Government programs are nothing more than paying people to dig holes and others to fill them in. They might be disguised as something else, but the results are the same. Expensive programs that add nothing to the wealth of society.
No on entity, not even the Federal Government, can force the economy into a direction it does not want to go. For that matter, the Russians could not even accomplish that feat with fear and intimidation. Market forces are unstoppable and the sooner B Hussein realizes that the sooner we will be on the road to actual recovery. This means companies must fail (and government must let them) and the government cannot run unlimited deficits.
Speculation is that B Hussein will propose over $1T in deficit spending when he takes control. This is money the government does not have. They will either raise taxes and/or borrow more money. If they raise taxes (on individuals or businesses), they send the signal that government knows how to use money more effectively that it citizens. If government decides to borrow more money, it robs the private sector of loans to finance expansions or improvements. After all, there is only so much investment capital to go around. What the government takes, private industry losses. Borrowing will much more expensive, as private sector is forced to compete for funds with the government, and return on investments lower since interests rates will be higher. Since returns will be lower, fewer projects will meet private sector hurdle rates thus fewer of them will be completed.
What needs to be done is to close Federal buildings instead of improving them so government can get even bigger. Government spending needs to be balanced with tax receipts, and the corporate tax rates need to be lowered to levels that are competitive against our economic competition around the globe. Lower government spending and lower corporate taxes mean the private sector will grow creating new jobs and industries. These jobs will make society better and new industries will employ workers in areas where there will be improvements in standard of living.
Bigger government means more bureaucracy and more waste. Bigger deficits mean our children and grandchildren will live in a more uncertain world where their economic security is at risk (as if more than 40% of the US Federal Budget to pay interest on debt was not enough today). A program that decreases the size of government, spends less, and lowers taxes will take incredible courage and there will be short-term despair. However, this is the process of economic pruning that will make society more prosperous in the future.
Pianos and Cars
The End of the US Piano Industry
Today the highest-price good that people buy besides their houses is their car, and this reality leads people to believe that we can't possibly let the American car industry die. We couldn't possibly be a real country and a powerful nation without our beloved auto industry, which is so essential to our national well-being. In any case, this is what spokesmen for the big three say.
What about the time before the car? Look at the years between 1870 and 1930. As surprising as this may sound today, the biggest-ticket item on every household budget besides the house itself was its piano. Everyone had to have one. Those who didn't have one aspired to have one. It was a prize, an essential part of life, and they sold by the millions and millions.
That too was new. Americans before 1850 mostly imported their pianos. American manufacturing was nearly nonexistent. After 1850, that changed dramatically with the flowering of what would become a gigantic US piano industry. The Gilded Age saw a vast increase in its popularity. By 1890, Americans fed half the world market for pianos. Between 1890 and 1928, sales ranged from 172,000 to 364,000 per year. It was a case of relentless and astounding growth.
They were used in classrooms everywhere in times when music education was considered to be the foundation of a good education. They were the concert instruments in homes before recorded music and iPods. They were essential for all entertainment. American buyers couldn't get enough, and private enterprise responded.
New York, Boston, and Chicago were the homes of these companies. There was the great Chickering piano made by a company founded in 1823 and which later led the world in beauty and sound. There was Hallet and Davis in Boston, J. and C. Fischer in New York, as well as Strich and Ziedler, Hazelton, William Knabe, Baldwin, Weber, Mason and Hamlin, Decker and Sons, Wurlizer, Steck, Kimball in Chicago, and, finally, Steinway.
The American piano industry was the greatest in the world, not because the Americans came up with any new and great manufacturing techniques, though there were some innovations, but because the economic conditions made it most favorable to be manufactured here.
With the rise of this industry came a vast marketing apparatus. Piano ads were everywhere, as a tour of old magazines shows. It was widely believed that spending money on a piano wasn't really spending. It was an investment. The money you paid would be embedded right there in this beautiful and useful item. You can always sell it for more than you paid for it, and this was generally true. So people would make great sacrifices for these instruments.
With the growth of this manufacturing came an explosion of shops that served the piano market all up and down the industry. Piano tuning was a big-time profession. Retail shops with pianos opened everywhere, and the sheet-music business exploded with them. Ever notice how in big cities the music stores are typically family owned and established 40, 50, and even 100 years ago? This is a surviving remnant of our industrial past.
All of this changed again in 1930, which was the last great year of the American piano. Sales fell and continued to fall when times were tough. The companies that were beloved by all Americans fell on hard times and began to go belly up one by one. After World War II the trend continued, as ever more pianos began to be made overseas.
In 1960, we began to see the first major international challenge to what was left of the US market position. Japan was already manufacturing half as many pianos as the United States. By 1970, a revolution occurred as Japan's production outstripped the United States, and it has been straight down ever since. By 1980, Japan made twice as many as the United States. Then production shifted to Korea. Today China is the center of world piano production. You probably see them in your local hotel bar.
And what happened to the once-beloved and irreplaceable American piano industry? Steinway survives to make luxury instruments that few can afford (a reader notes that Baldwin is still around today too). Mason & Hamilin has made a great comeback in the high-end market. The rest moved overseas under new ownership or were completely wiped out.
Does anyone care that much? Not too many. Have we been devastated as a nation and a people because of it? Not at all. It was just a matter of the economic facts. The demand went down and production costs for the pianos that were wanted were much cheaper elsewhere.
Now, a piano aficionado reading this will say, buddy, you are crass. Listen to the sound of an older model Chickering and you can tell the difference. It was warm and wonderful, nearly symphonic. It is mellow and perfect for the best repertoire. By comparison, this new Chinese piano is sharp and angular and pointed. It sounds like a marimba. You can't play Schubert or Brahms on such junk. No one wants to hear that thing. Bring back the old days when pianos made sounds that sounded like real music!
Well, you can still get that old Chickering sound, even from a piano made in New York. You can buy a Steinway. Of course you have to pay $50,000 plus and even as much as $120,000, but they are there. You say that is unaffordable? Says you. It is all a matter of priorities. You can forego your house and live in a tiny apartment and still own the most gorgeous instrument money can buy. In any case, it makes no economic sense for you to demand a magnificent piano at a very low price when reality does not make that possible.
In the same way, many people will bemoan the loss of the US car industry and wax eloquent on the glory days of the 1957 Chevy or what have you. But we need to deal with the reality that all that is in the past. Economics demands forward motion, a conforming to the facts on the ground and a relentless and realistic assessment of the relationship between cost and price, supply and demand. We must learn to love these forces in society because they are the only things that keep rationality alive in the way we use resources. Without them, there would be nothing but waste and chaos, and eventual starvation and death. We simply cannot live outside economic reality.
Let's say that FDR had initiated a bailout of the piano industry and then even taken it over and nationalized it. The same firms would have made the same pianos for decades and decades. But that wouldn't have stopped the Japanese industry from taking off in the 1960s and '70s. Americans would have far preferred them because they would have been cheaper. American pianos, because they would be state owned, would fall in quality, lower and lower to the point that they would become like a Soviet car in the 1960s. Of course you could set up tariff barriers. That would have forced American pianos on us. Except for one thing: demand would still have collapsed. The pianos still have to have a market. But let's say you find a workaround for that problem by requiring everyone to own a piano. You still can't make people play them and value them.
In the end you have to ask, is it really worth trillions in subsidies, vast tariffs, impositions all around, just to keep what you declare to be an essential industry alive? Well, eventually, as we have learned in the case of pianos, this is not essential. Things come and things go. Such is the world. Such is the course of events. Such is the forward motion of history in a world of relentless progress generated by the free market. Thank goodness that FDR didn't bother saving the US piano industry! As a result, Americans can get a huge range of instruments from all countries in the world at any price they are willing to pay.
Today government is even more arrogant and absurd, and it actually believes that by passing legislation it can save the US car industry. It can subsidize and pay for uneconomic activities, and pay ever more every year. The government can also pay millions of people to make mud pies because mud pies are deemed to be an essential industry. You can do this, but at what cost and what would possibly be the point? Eventually, even the government will have to accord itself to the reality that economics reminds us of on a daily basis.
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Tuesday, December 9, 2008
Another Great LTE
Editor, Baltimore Sun
Dear Editor:
Dan Neil wants to nationalize General Motors, in part because "without big subsidies, there is no way in the near term to build these [electric] vehicles and make a reasonable profit, because of the stubbornly high cost of advanced batteries" ("Let's nationalize GM," Dec. 8).
Neil makes several wrongheaded assumptions. For example, he assumes that the future benefits of such a battery would outweigh the current costs of using them. But there's no way he can know this to be true. These batteries cost a lot today because their production requires an extraordinary amount of resources today. Using these resources to produce an unprofitable battery means that we sacrifice, TODAY, a great deal of profitable outputs and investments in other industries. Perhaps resources artificially forced into advanced-battery development would otherwise have helped cure cancer, or encouraged development of more fuel-efficient jet engines, or deployed to keep millions of retired Americans more financially secure. Neither Neil nor Uncle Sam can know the value of what would never be created as a result of subsidizing unprofitable production in
Sincerely,
Donald J. Boudreaux
Don Boudreaux is the Chairman of the Department of Economics at George Mason University and a Business & Media Institute adviser
Letter To My Congressmen
I understand there will be a vote any day on the Big 3 bailout. As my Senator, I request that you reject this bailout as nothing more than rewarding failure. The management failed to negotiate profitable deals with unions and develop cars people actually wanted to buy. Unions failed by holding companies hostage in good times and running them into the ground in bad times. Government failed as it pushed ridiculous CAFE standards on carmakers that did nothing to curb gasoline consumption.
The entire domestic auto business, as it relates to the Big 3, is a failure and the money thrown at this problem will do nothing to get consumers to buy their products. Let them go bankrupt. There will be investors willing to buy the assets in bankruptcy and produce cars and trucks in these very same plants. Yes the unions will have to make huge concessions and I am sure new owners will change the management teams. This is a good thing and the only thing that will save Detroit.
Just as Pittsburg rebuilt itself after the bust in steel 20 years ago, Detroit will find it’s way too. Reject the bailout and focus on cutting government spending and waste. If the Big 3’s business plans were so good, investors would be buying bonds today. Government is no wiser than the markets and will certainly lose it all for the taxpayers.
Respectfully yours,
XXXXXXX
Saturday, December 6, 2008
Sowell Wisdom
Indeed, many of those who promote compulsory "community service" activities are bitterly opposed to even voluntary military training in high schools or colleges, though many other people regard military training as more of a contribution to society than feeding people who refuse to work.
In other words, people on the left want the right to impose their idea of what is good for society on others-- a right that they vehemently deny to those whose idea of what is good for society differs from their own.
The essence of bigotry is refusing to others the rights that you demand for yourself. Such bigotry is inherently incompatible with freedom, even though many on the left would be shocked to be considered opposed to freedom.
Great Letter
Editor, Baltimore Sun
Dear Editor:
You opine that Detroit automakers "need to explain in detail to Congress how they intend to eliminate thousands of uneconomical dealerships, swiftly bring their labor costs closer to what Toyota pays its workers in this country, and quickly produce more energy-efficient cars that Americans will want to buy" ("Selling American cars," Dec. 4).
No. These companies deserve investment funds only if they're able to make cars that will sell AND can demonstrate this ability to private investors. Congress is manned by people who specialize in winning popularity contests called "elections." These are not people expert in judging business models, or at pondering the pros and cons of different retail-distribution methods, or equipped to accurately discern the nuances of consumer demands for automobiles, or even – judging from their track record – aware of the most elementary principles of finance and economics.
If, say, you're looking for someone to manage your 401(k), would you entrust that job to Sen. Mikulski or Rep. Hoyer? Of course not, for that's not what they do. So why entrust them and other politicians with the job of investing on a vastly larger scale?
Sincerely,
Donald J. Boudreaux
Don Boudreaux is the Chairman of the Department of Economics at George Mason University and a Business & Media Institute adviser.
Thursday, December 4, 2008
If the plan is so good, why not sell bonds?
Sunday, November 30, 2008
What the Chinese Don't Know
Thursday, November 27, 2008
Wednesday, November 19, 2008
A Nation of Thieves
Walter Williams
Monday, November 17, 2008
Union of Socialist Americans (USA)?
The distribution of a trillion dollars by a political institution -- the federal government -- will be nonpolitical? How could it be? Either markets allocate resources, or government -- meaning politics -- allocates them. Now that distrust of markets is high, Americans are supposed to believe that the institution they trust least -- Congress -- will pony up $1 trillion and then passively recede, never putting its 10 thumbs, like a manic Jack Horner, into the pie? Surely Congress will direct the executive branch to show compassion for this, that and the other industry. And it will mandate "socially responsible" spending -- an infinitely elastic term -- by the favored companies.
McCain and Palin, plucky foes of spreading the wealth, must have known that such spreading is most of what Washington does. Here, the Constitution is an afterthought; the supreme law of the land is the principle of concentrated benefits and dispersed costs. Sugar import quotas cost the American people approximately $2 billion a year, but that sum is siphoned from 300 million consumers in small, hidden increments that are not noticed. The few thousand sugar producers on whom billions are thereby conferred do notice and are grateful to the government that bilks the many for the enrichment of the few.
Conservatives rightly think, or once did, that much, indeed most, government spreading of wealth is economically destructive and morally dubious -- destructive because, by directing capital to suboptimum uses, it slows wealth creation; morally dubious because the wealth being spread belongs to those who created it, not government. But if conservatives call all such spreading by government "socialism," that becomes a classification that no longer classifies: It includes almost everything, including the refundable tax credit on which McCain's health-care plan depended.
There entire column here.
Thursday, November 13, 2008
Save the Automakers?
Creative destruction is great for society. Think of it as a cleansing forest fire. Methods that waste precious resources and capital are replaced by efficient means of production. Companies that create products that society no longer values are also victims of creative destruction. Shortly it will be impossible to get a CRT TV. Why? Because people no longer value that technology and prefer the flat screens of Plasma and LCD. Fortunately it also happen with the 8-track tape.
So the real question is then, are the Big 3 really victims of creative destruction? It looks to me like they are. They are manufacturing products that people do not seem to want like big SUVs and trucks. They have employed billions in capital to make those products that no longer have a market suitable to make a profit. Maybe its the wage structure (argued that it is way to high to make cheap, fuel efficient cars), maybe it is the product mix (poor management and strategy) or maybe it better competition that is driving the Big 3 out of business. What ever the cause, they are wasting capital. The solution is not to through more capital at them hoping they will get better. It won't. Saving the Big 3 is like saving the cathode ray tube television or the 8-track tape.
Certainly jobs will be lost in the areas where GM, Ford and Chrysler operate. However preserving those jobs means that other people will not get access to the capital that would create new industries and sectors where American companies can be competitive in the global market. Furthermore, bankruptcy might be the best thing for the already deployed capital in Detroit. Reorganiztion would allow someone else to buy those assets for a market price that just might mean they could make a profit. Bankruptcy does not make assets vaporize. Just look at the airline industry. They have gone bankrupt dozens of times and the planes are all still there.
Two must read blog posts:
Megan McCardle
Carpe Diem
Sunday, November 9, 2008
Youth Unemployment
Unemployment began to creep up the moment it changed this summer. Maybe there was some coincidence with an economic down turn, but higher wages for the same productivity will result in a loss of jobs.
Higher minmum wagers are great for the people that have jobs and actually keep them, but really tough for people that cannot find employment in the first place.
Letter to the Left
One of the biggest confusions in the current mess is the claim that it is the result of greed. The problem with that explanation is that greed is always a feature of human interaction. It always has been. Why, all of a sudden, has greed produced so much harm? And why only in one sector of the economy? After all, isn't there plenty of greed elsewhere? Firms are indeed profit seekers. And they will seek after profit where the institutional incentives are such that profit is available. In a free market, firms profit by providing the goods that consumers want at prices they are willing to pay. (My friends, don't stop reading there even if you disagree - now you know how I feel when you claim this mess is a failure of free markets - at least finish this paragraph.) However, regulations and policies and even the rhetoric of powerful political actors can change the incentives to profit. Regulations can make it harder for firms to minimize their risk by requiring that they make loans to marginal borrowers. Government institutions can encourage banks to take on extra risk by offering an implicit government guarantee if those risks fail. Policies can direct self-interest into activities that only serve corporate profits, not the public.
For starters, Fannie Mae and Freddie Mac are "government sponsored enterprises". Though technically privately owned, they have particular privileges granted by the government, they are overseen by Congress, and, most importantly, they have operated with a clear promise that if they failed, they would be bailed out. Hardly a "free market." All the players in the mortgage market knew this from early on. In the early 1990s, Congress eased Fannie and Freddie's lending requirements (to 1/4th the capital required by regular commercial banks) so as to increase their ability to lend to poor areas. Congress also created a regulatory agency to oversee them, but this agency also had to reapply to Congress for its budget each year (no other financial regulator must do so), assuring that it would tell Congress exactly what it wanted to hear: "things are fine." In 1995, Fannie and Freddie were given permission to enter the subprime market and regulators began to crack down on banks who were not lending enough to distressed areas. Several attempts were made to rein in Fannie and Freddie, but Congress didn't have the votes to do so, especially with both organizations making significant campaign contributions to members of both parties. Even the New York Times as far back as 1999 saw exactly what might happen thanks to this very unfree market, warning of a need to bailout Fannie and Freddie if the housing market dropped.
What I ask of you my friends on the left is to not only continue to work with us to oppose this or any similar bailout, but to consider carefully whether you really want to entrust the same entity who is the predominant cause of this crisis with the power to attempt to cure it. New regulatory powers may look like the solution, but that's what people said when the CRA was passed, or when Fannie and Freddie were given new mandates. And the very firms who are going to be regulated will be first in line to determine how those regulations get written and enforced. You can bet which way that game is going to get rigged.
Letter To My Senators
I am very concerned by two issues. One is the proposed bailout of Detroit automakers and the second is the return to Minority Leader by Sen. Mitch McConnell.
Detroit Automaker deserve no bailout and taxpayer supported relief. For one, these business need to be allowed to fail so they can renegotiate toxic labor agreements that will forever put the Big Three at a competitive disadvantage. The labor monopoly that the UAW has in Detroit will never allow GM, Ford or Chrysler compete globally. In 1998 when Detroit was actually making money selling SUVs, the UAW decided to strike GM costing the company over $2 Billion. GM had not choice but to cave into the wildly insane demands of the union. Caving made Detroit wages over $30/hr higher than the Japanese. Unfortunately Detroit autoworkers are not $30/hr more productive than the Japanese.
Second, Management at the Big Three has failed multiple times over the last 40 years to make good strategic decisions. They missed the small car revolution in the 1970’s and again failed to prepare for fuel the efficient models customers wanted when gasoline prices shot to over $4/gallon. In addition, management teams that failed to pursue value-creating strategies are still in place today.
Finally, government needs to stay out of the car business. The CAFE standards that the US Congress has approved over the years have done little to drive fuel conservation. Putting the onus on automakers to improve efficiency is not going to solve the “problem.” If Congress is serious about fuel economy, raise the gasoline tax. Consumers will demand and buy more fuel-sipping vehicles rather than SUVs.
The additional $50 Billion that Detroit is requesting is an insane figure. That amount of money is over seven times the existing market capitalization of Ford and GM as of Friday. This Government would be better off buying the companies and liquidating them to the highest bidder. Plus, there is no need for a Big Three. Chrysler should have been allowed to fail 25 years ago and if it would have failed, GM and Ford might not be in the perilous situation they are today. To put this number in perspective, you could give every employee of both Ford and GM over $100,000 with $50 Billion. This will cost each American household over $500.
Please allow the market to work through this situation in Detroit. Bankruptcy is a good thing in this case. Some entity will buy these distressed assets and turn the companies around and make them competitive once again. Resist the temptation to do anything and watch what great things will happen.
Finally, I request that you reject Mitch McConnell as Senate Minority Leader. The Republican Party has failed us for the last 8 years. Poor leadership from people like Sen. McConnell transformed the Republican majority into big spending, big government Democrats. Not the fiscally conservative Republicans that most of us support. Poor leadership not only hurt the Republican Party, but America as well as we know have the most liberal member of the US Senate as our President-Elect.
Respectfully submitted,
B Hussein's Cabinet
Gov. Sebelius is against coal burning power plants. In fact, she has vetoed two bills that would have allowed two new clean, coal fired plants in Western Kansas. These plants would have provide cheap, clean power for thousands of American families. The plants would have created thousands of new jobs and used abundant American coal.
Gov. Sebelius was also one of the first to jump on the bandwagon to bash big oil companies for higher gas prices. She was quoted in one meeting saying to oil executives "oh, you are one of those supply and demand people." She has yet to issue any public apology that I have seen since gas prices dropped under $2/gal here in Kansas. I guess the greedy oil companies decided to be less greedy all of a sudden.
Gov. Sebelius has absolutely no experience with energy. Her experience is in insurance, not energy. This kind of consideration is further evidence that B Hussein is not fit for executive branch service. Judgement like this will surely lead our great nation in the wrong direction.
Saturday, November 8, 2008
Bail Out Mania
Bankruptcy would allow the car companies (two out of the three) to restructure debt, redo labor deals and set them up for a successful future. Government aid will just prolong the inevitable. After all, we already bailed out Chrysler once. If Chrysler would have been allowed to fail, Ford and GM might not be having the trouble they do today.
Labor unions are killing GM and Ford. When the were actually making money in 1998, the unions decided to strike at GM costing the company $2 Billion and leaving GM with labor costs that were $30/hr higher than the Japanese. The trouble is the GM workers were not $30/hr more productive than the Japanese. Therefore, GM could not compete long-term and we have the problem of today.
Of course management is not completely blameless. There strategy of larger cars and SUVs was fine with gas less than $1.50/gal. However, at $4 people began to buy other, smaller cars from the Japanese and park the SUVs (like we did). Detroit was not prepared for the abrupt turn in the market and should be penalized for bad strategy.
Finally, government is not blameless either. The ridiculous CAFE regulations for fuel economy are a joke. If the Government really wanted to encourage higher mileage cars, they should have taxed gasoline like the Europeans do. $7-$8/gal gas makes everyone economize, unlike CAFE standards. Washington was too busy getting fat off $0.35/gal in Federal gas tax with SUVs guzzling 15 MPG to want to do anything to stifle consumption.
So here we are with the Feds committing $25B for some electric car subsidy that is sure to be a complete waste and Detroit asking for another $50B in low interest loans. All this so Washington can save overpaid union jobs that will eventually bankrupt these companies any way. If it is so important to save these jobs, why not let the State of Michigan pay for it. Tax any union salary over $20/hr at 50% keep this problem up north.
$50B is over 8 times the market capitalization of Ford and GM today. A better idea might be to give each of the employees at both companies a couple hundred thousand and call it good. It would cost the exact same amount of money.
From AP today.
What Happened?
Friday, November 7, 2008
From David Letterman
'As most of you know I am not a President Bush fan, nor have I ever been, but this is not about Bush, it is about us, as Americans, and it seems to hit the mark.'
'The other day I was reading Newsweek magazine and came across some Poll data I found rather hard to believe. It must be true given the source, right?
The Newsweek poll alleges that 67 percent of Americans are unhappy with the direction the country is headed and 69 percent of the country is unhappy with the performance of the President.. In essence 2/3 of the citizenry just ain't happy and want a change. So being the knuckle dragger I am, I started thinking, 'What are we so unhappy about?'
A. Is it that we have electricity and running water 24 hours a day, 7 Days a week?
B. Is our unhappiness the result of having air conditioning in the summer and heating in the winter?
C. Could it be that 95.4 percent of these unhappy folks have a job?
D. Maybe it is the ability to walk into a grocery store at any time and see more food in moments than Darfur has seen in the last year?
E. Maybe it is the ability to drive our cars and trucks from the Pacific Ocean to the Atlantic Ocean without having to present identification papers as we move through each state.
F. Or possibly the hundreds of clean and safe motels we would find along the way that can provide temporary shelter?
G. I guess having thousands of restaurants with varying cuisine from around the world is just not good enough either.
H. Or could it be that when we wreck our car, emergency workers show up and provide services to help all and even send a helicopter to take you to the hospital.
I. Perhaps you are one of the 70 percent of Americans who own a home.
J. You may be upset with knowing that in the unfortunate case of a fire, a group of trained firefighters will appear in moments and use top notch equipment to extinguish the flames thus saving you, your family, and your belongings.
K. Or if, while at home watching one of your many flat screen TVs, a burglar or prowler intrudes, an officer equipped with a gun and a bullet-proof vest will come to defend you and your family against attack or loss.
L. This all in the backdrop of a neighborhood free of bombs or militias raping and pillaging the residents. Neighborhoods where 90% of teenagers own cell phones and computers.
M. How about the complete religious, social and political freedoms we enjoy that are the envy of everyone in the world?
Maybe that is what has 67% of you folks unhappy.
Fact is, we are the largest group of ungrateful, spoiled brats the world has ever seen. No wonder the world loves the US. , yet has a great disdain for its citizens. They see us for what we are. The most blessed people in the world who do nothing but complain about what we don't have, and what we hate about the country instead of thanking the good Lord we live here.
I know, I know. What about the president who took us into war and has no plan to get us out? The president who has a measly 31 percent approval rating? Is this the same president who guided the nation in the dark days after 9/11? The president that cut taxes to bring an economy out of recession? Could this be the same guy who has been called every name in the book for succeeding in keeping all the spoiled ungrateful brats safe from terrorist attacks? The commander in chief of an all-volunteer army that is out there defending you and me?
Did you hear how bad the President is on the news or talk show? Did this news affect you so much, make you so unhappy you couldn't take a look around for yourself and see all the good things and be glad? Think about it......are you upset at the President because he actually caused you personal pain OR is it because the 'Media' told you he was failing to kiss your sorry ungrateful behind every day.
Make no mistake about it. The troops in Iraq and Afghanistan have volunteered to serve, and in many cases may have died for your freedom. There is currently no draft in this country. They didn't have to go. They are able to refuse to go and end up with either a ''general'' discharge, an 'other than honorable'' discharge or, worst case scenario, a ''dishonorable' discharge after a few days in the brig.
So why then the flat-out discontentment in the minds of 69 percent of Americans?
Say what you want, but I blame it on the media. If it bleeds it leads and they specialize in bad news. Everybody will watch a car crash with blood and guts. How many will watch kids selling lemonade at the corner? The media knows this and media outlets are for-profit corporations. They offer what sells, and when criticized, try to defend their actions by 'justifying' them in one way or another. Just ask why they tried to allow a murderer like O.J. Simpson to write a book about how he didn't kill his wife, but if he did he would have done it this way......Insane!
Turn off the TV, burn Newsweek, and use the New York Times for the bottom of your bird cage. Then start being grateful for all we have as a country. There is exponentially more good than bad. We are among the most blessed people on Earth and should thank God several times a day, or at least be thankful and appreciative.' 'With hurricanes, tornados, fires out of control, mud slides, flooding, severe thunderstorms tearing up the country from one end to another, and with the threat of bird flu and terrorist attacks, 'Are we sure this is a good time to take God out of the Pledge of Allegiance?'
-David Letterman
