The Fed’s Quantitative Easing keeps the Big Three Building Cars

Posted by PITHOCRATES - December 29th, 2013

Week in Review

Governments love it when people buy houses and cars.  Because building houses and cars generates a lot of economic activity.  So much economic activity that central banks will flood their economies with money to keep interest rates artificially low.  To encourage people to go into great debt and buy these things.  Even if they don’t want them.  Especially if they don’t want them.  Because if you add in people buying things who don’t want them with the people who do that’s a lot of economic activity.  Which is why central banks keep interest rates artificially low.  To get people to buy things even when they don’t want them.  But do because those low interest rates are just too good to pass up.

Automotive jobs are union jobs.  At least with the Big Three.  Which is another reason why the Federal Reserve (America’s central bank) keeps interest rates artificially low.  To save union jobs.  Because they support Democrats.  And the Democrats take care of them.  By enacting legislation that favors union-built cars.  Placing tariffs and quotas on imports.  And doing whatever they can to encourage the Fed to keep interest rates artificially low.  So the Big Three keep building cars with union labor.  Even if they’re not selling the cars they build (see Spending on new cars may break record in December by Joseph Szczesny posted 12/25/2013 on CNBC).

Total vehicle sales are expected to be up at least 4 percent year over year, with the industry anticipating all-time record consumer spending on new vehicles, according to a forecast.

While new car sales started the month slowly, they are expected to finish strong, according to a monthly sales forecast developed jointly by J.D. Power and LMC Automotive. That would be a welcome development for industry planners concerned about a recent bulge in dealer inventories, which has led several manufacturers to trim production…

Vehicle production in North America through November is up 5 percent from the same time frame last year, with nearly 700,000 additional units. Even as inventory has increased, production volume remained strong last month, at 1.4 million units—a 4 percent increase from November 2012.

But there are some concerns that the industry may be turning up production faster than the market can handle. General Motors, Ford Motor and Chrysler continued to build inventories last month, and their combined supply climbed from 87 days at the beginning of November to 93 days by the end…

Some of the buildup can be traced to dealers’ ordering pickup trucks and utility vehicles before the planned shutdowns for model changes at GM and Ford. But those two makers also have decided to take more downtime at some of their plants this month in an effort to reduce excess stock.

Automotive news is often contradictory.  Sales are up they tell us.  Even when inventories are growing.  A sign that sales are not growing.  Because when people buy more cars than they build inventories fall.  But when people buy fewer cars than they build inventories rise.  So when inventories are rising typically that means sales are falling.  So this isn’t a sign of a booming economy.  But one that is likely to slip into recession.  Especially when the Fed finally begins their tapering of their bond buying (i.e., quantitative easing).  The thing that is keeping interest rates artificially low.  And once they do those inventories will really bulge.  As they do during the onset of a recession.

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Free Trade, the Corn Laws and The Economist

Posted by PITHOCRATES - September 8th, 2013

Week in Review

Today the political left attacks capitalism as being unfair.  And mean.  Whereas they laud government intervention into the free market.  To level the playing field.  And to redistribute income.  To help those who can’t be as successful as others.  They support unions.  And oppose free trade.  Because free trade lowers prices for consumers.  By breaking up monopolies.  And giving them choice.  Free trade is an essential element of capitalism.  But the fight to make people’s lives better with free trade wasn’t easy.  As people who got rich with government-protected high prices opposed free trade (see Why did The Economist favour free trade? by C.R. posted 9/6/2013 on The Economist).

IN NINETEENTH century Europe and America, debates over whether tariffs or free trade produced the most economic growth dominated the political scene. Up until the early 1840s, protection appeared to be winning the argument. In Britain, high tariffs were imposed on agricultural imports in 1819, by legislation known as the Corn Laws. The ideas of Friedrich List, a German economist who argued that tariffs boosted industrial development through the protection of infant industries, were gaining ground, particularly in the United States. One Pennsylvanian legislator even joked in 1833 that the dictionary definition of man should be changed to “an animal that makes tariff speeches” so frequently were they heard.

Against this atmosphere, James Wilson founded The Economist in 1843 to campaign for free trade. His first target was to repeal the Corns Laws in Britain. He argued:

They are, in fact, laws passed by the seller to compel the buyer to give him more for his article than it is worth. They are laws enacted by the noble shopkeepers who rule us, to compel the nation to deal at their shop alone.”

The UAW got very generous contracts with the Big Three during the Fifties and the Sixties.  Raising the price of cars.  Which wasn’t a problem when they were the only ones making cars.  But then came the imports.  Which told the people how much more they were paying than these articles were worth.  And started buying the imports.  As they did those generous pay and benefit packages became more difficult to pay.  So the Big Three lobbied for tariffs on those less costly imports.  And got them.  Raising the price of the imports.  Forcing Americans to deal with the Big Three alone.  And buy their more costly cars.

More people bought cars than made them, though.  And the people who made the cars were better paid than most Americans.  So these tariffs forced poorer people to spend more on a car leaving them less for their families.  So richer people could have more.  This is what tariffs do.  They allow fewer people to have more.  While more people have to do with less.  So fewer buy more.  While more buy less.  Because there are more people who buy cars than make them these tariffs, then, reduce economic activity.  And because the Big Three didn’t have to figure out how to give more for less to their customers they didn’t.  Giving their customers ‘rust buckets’ in the Seventies.  Something else that tariffs do.  Lead to inferior goods.  Because if the government forces people to buy from you then the quality of what you sell doesn’t matter.

Wilson believed that protectionism caused “war among the material interests of the world”, in other words, war between nations and classes. A high tariff regime was no longer economically “productive”; Britain was stuck in an economic depression in the early 1840s. In contrast, free trade produced “abundance and employment”. It was appropriate for Britain’s economy where “a large proportion of the population and property depended on commerce and industry alone”. On the other hand, List’s ideas about protection were dismissed as unnecessary “swaddling clothes” for a mature economy, such as Britain’s.

The Economist’s early views on free trade were strongly influenced by the classical economists Adam Smith and David Ricardo, as Ruth Dudley Edwards, a historian, has pointed out. Wilson, like Smith, realised that trade was a two way exchange. Countries needed to “increase imports to increase exports” to boost economic growth. Consumers, Smith argued in the Wealth of Nations, should buy products from where they were cheapest. All protection did was create monopolies, which were “a great enemy to good management”. Ricardo took Smith’s ideas further, arguing that all countries benefit from free trade by producing what they were best at relative to other countries.

That’s what the Big Three wanted.  A monopoly on cars sold in America.  And there is only one way to get one.  The government has to create them.  Hence the Big Three’s request for tariff protection.

David Ricardo’s comparative advantage said nations should make what they can make best and trade for those things they can’t.  For example, if two countries can both make one thing but one can do so at lower costs they can make more of them for the same costs.  Giving them a larger surplus to trade for other things.  While the other nation will consume more resources to build the same quantity leaving less to make the other things they need.  While having fewer things available for export.  So if you try to make things you can’t make efficiently you end up consuming more resources to have less.  Whereas the nation that makes only what it can make best ends up consuming fewer resources that are then available to make other things.  And they have more things to trade.  Leading to a higher standard of living.  And if their trading partners do likewise they, too, experience a higher standard of living.

Free trade leads to greater economic activity.  Which made Britain wealthy.  Allowing them to extend their empire for another 70 years or so.  Despite the warnings of the rich landowners who said repealing the Corn Laws would cause harm.  Instead, repealing the Corn Laws led to greater economic activity.  And less costly food. Allowing people to feed their families more easily.  The only harm suffered was to the profits of the big landowners.  Who lost their monopoly.  And could no longer charge more than their food was worth.

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The UAW and Public Sector Unions devastate Three Michigan Cities

Posted by PITHOCRATES - February 24th, 2013

Week in Review

It’s not been a good year for Detroit.  Well, it’s been more than a year.  It’s been a few bad years.  Actually, it’s been a great many bad years.  Since 1970.  When Ford Motor Company Chairman Henry Ford II joined with other business leaders to form Detroit Renaissance.  To revitalize the City of Detroit.  And some 42 years later, the City of Detroit is still struggling (see Detroit’s Misery Can Be Its Turning Point by Micheline Maynard posted 2/23/2013 on Forbes).

Detroit boosters were dealt a one-two blow this week by the kind of outsiders they have come to resent.

First, a state review panel declared that a financial emergency existed in the city, making it likely that Michigan Gov. Rick Snyder will appoint an emergency financial manager with sweeping powers.

Then, Forbes weighed in by declaring Detroit the nation’s most miserable city, based on a series of criteria that include crime, unemployment, foreclosures and home value…

Although General Motors is based in Detroit, and Chrysler recently opened an office there, the automobile industry is not going to provide the vast numbers of jobs the city needs to become solvent.

And there lies the problem for Detroit.  A city that grew big and rich off of the automobile industry saw a steady exodus and a declining tax base when the automobile industry declined.  Live by the automobile.  Die by the automobile.  And it’s just not Detroit.  A couple of other Michigan cities broke into the top 10 of Forbes’ America’s Most Miserable Cities 2013.

#7 Warren, Mich.

Troy and Farmington Hills are part of the government-defined Warren metro division. Like Detroit, the Warren metro has seen home prices collapse–off 53% the past five years.

#2 Flint, Mich.

Flint has been demolishing homes as the city shrinks with residents leaving in search of jobs. Only Detroit has a higher net out-migration rate. Flint ranks third worst for violent crime, behind Detroit and Memphis.

#1 Detroit, Mich.

Violent crime in the Detroit metro was down 5% in 2011, but it remains the highest in the country with 1,052 violent crimes per 100,000 people, according to the FBI. Home prices were off 35% the past 3 years, which is the biggest drop in the U.S.

If you seek a pleasant peninsula* you’d do better looking for one where the UAW isn’t dominant.  Perhaps Florida.  For the UAW is a city killer based on these Michigan cities.  (*The official state motto of Michigan is “If you seek a pleasant peninsula, look about you.”)

The Big Three dominated these cities.  Where fat pay and benefit packages were passed on to consumers in overpriced vehicles.  The Big Three’s monopoly on car sales allowed them to make fat profits.  And pay enormous amounts of taxes to the cities that had the factories that assembled their cars.  City coffers were so flush with cash city governments grew.  And city workers enjoyed fat pay and benefit packages.  This was the high water mark of the UAW.  Just after public sector unions had joined them on the gravy train.  But then something happened that devastated the UAW.  Consumers got choice.  They no longer had to buy overpriced ‘rust buckets’ the Big Three was putting out during the Seventies.  For the Japanese gave them choice.

And so began the great decline of the Big Three.  Quality and value did them in.  It’s what the people wanted.  While the UAW wanted consumers to pay more and get less.  So they could continue to enjoy their fat pay and benefit packages.  As the jobs went away so do did the taxes.  The cities bloated with all those government workers with their fat pay and benefit packages tried to maintain the size of their governments even while the tax base was declining.  Reducing other government services as they had little money left over after paying those fat pay and benefit packages.

With fewer and fewer jobs available people left these cities.  Empty houses dotted the horizon.  And housing prices fell.  With the tax base continuing to decline.  Poverty rates rose.  As did city services for the impoverished.  Leaving even less for other city services.  Causing a further exodus from the city.  Urban blight followed.  As did crime.  Causing a further decline in property values.

Low interest rates helped boost housing prices.  For awhile.  President Clinton’s Policy Statement on Discrimination in Lending kicked off subprime lending in earnest as lenders bowed to the Clinton Justice Department to put more low-income and minorities into homes they couldn’t afford.  Creating a huge housing bubble.  Built on easy credit.  Artificially low interest rates.  And the adjustable rate mortgage (ARM).  When rates went up all those low-income and minorities who bought houses they couldn’t afford defaulted on their higher mortgage payments.  Creating the subprime mortgage crisis.  Giving us the Great Recession.  Creating a flood of foreclosures.  A free fall in housing prices.  And more of the same that helped put those three Michigan cities into the top ten of Forbes’ America’s Most Miserable Cities 2013.

Michigan recently opted to become a Right-to-Work state.  Greatly angering the UAW and those public sector unions.  But it may be just what Michigan needs to reverse the great decline caused by the UAW and the public sector unions that devastated some of Michigan’s greatest cities.  One thing for sure it can’t get any worse.  Not when being a union state for so long secured three places in the top ten of Forbes’ America’s Most Miserable Cities 2013.

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Detroit’s Public Sector Unions may push the City into the Biggest Municipal Bankruptcy in U.S. History

Posted by PITHOCRATES - December 16th, 2012

Week in Review

Michigan just became a Right to Work state in an effort to lure business into Michigan.  Whose high union costs have chased business away from Michigan.  Detroit, The Motor City, auto capital of the world, home of the Big Three, is a dying city.  While Mercedes, BMW, Toyota, Honda, etc, have built new auto plants in the United States not a one of them built in Michigan.  Because of their high union costs.  So Detroit has the Big Three.  But no one else.  And even two of the Big Three recently filed bankruptcy thanks to those union legacy costs (pensions and health care for retirees who outnumbered the active workforce).

So Michigan is bad.  But Detroit is worse.  They’ve lost so much industry that the number one and two employers in the city are the City of Detroit and the Detroit Public Schools.  Both who have unions doing to the City of Detroit what the unions did to the Big Three (see Detroit has “serious financial problem”: Michigan treasurer by Ann Saphir posted 12/15/2012 on Reuters).

A check of Detroit’s finances has found a “serious financial problem” with the cash-strapped city, a step that could lead to the biggest municipal bankruptcy in U.S. history…

That official would have the power to put the city of 700,000 into Chapter 9 bankruptcy if other rescue plans are not feasible or effective.

Detroit, home of General Motors Co., has been hit by a steep population decline, years of severe budget deficits and escalating employee costs, all of which led state officials to begin an intervention process last year.

Detroit’s population peaked at 1,850,000 in 1950.  The city has since lost over half of its population.  First the jobs left.  Then the people.  During this time the size of city government grew.  As did the public sector union pay and benefit packages for those public sector workers.  The city’s costs soared as their tax base disappeared.  So it’s no surprise that the city is facing perhaps the biggest municipal bankruptcy in U.S. history.

At this point in time it’s probably not a question if Detroit will file bankruptcy.  But a question of when.  They’re going to have to do what the Left wants to do for people underwater in their mortgages.  And for students buried in student loan debt with no job prospects (because they got degrees in Philosophy, Religious Studies, Anthropology, Archeology, Area Ethnic Studies, Civilization Studies, Information Systems, etc.).  Forgive their debt.  So these people can crawl out from underneath their debt and return to some sense of normalcy in their lives.  But the Left will not endorse this same solution for Detroit.  Because the city’s debts just happen to be to the Left’s greatest campaign contributors and constituency.  Public sector unions.  The Left will screw banks and mortgage companies every day of the week.  But when it comes to the public sector unions they’d rather screw the taxpayer.

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Michigan Vote to become Right to Work show a Political Realignment in the Rust Belt?

Posted by PITHOCRATES - December 16th, 2012

Week in Review

First Wisconsin and Indiana and now Michigan.  Something is happening in the Rust Belt states.  These union strongholds appear to be going through a midlife crisis.  The marriage between the unions and the people appears to be not as strong as it once was.  As if the unions can’t satisfy the needs of the people anymore.  Who are looking to get out of a failing marriage (see Snyder Wades Into Angry Debate Over Michigan Union Dues by Chris Christoff & Esme E. Deprez posted 12/12/2012 on Bloomberg).

Republican Governor Rick Snyder, who portrays himself as a pragmatic unifier, plunged Michigan into conflict by signing so-called right-to-work legislation.

Less than a week after Snyder ended his neutrality on the issue, lawmakers yesterday approved two bills that prohibit compulsory union dues for employees in organized workplaces. The governor signed them hours later.

“As a nonpolitician, I don’t respond to political pressure,” Snyder, 54, said at a Lansing news briefing. “I try to do what’s best for the citizens of Michigan.”

His decision to make Michigan the 24th right-to-work state in the U.S. made the self-described nerd and non-ideologue a new nemesis to Democrats and their union allies. Similar fights in Wisconsin and Indiana this year and last brought protesters into the streets, accusing Republicans of trying to gut labor’s power in its Midwestern stronghold…

About 17 percent of Michigan workers belong to unions, according to the U.S. Department of Labor. In the early 1960s, about 40 percent did…

Snyder said unions started the battle when they led an unsuccessful campaign to enshrine collective-bargaining rights in the Michigan constitution. The ballot proposal was defeated Nov. 6, despite a $23 million drive funded mostly by labor…

Supporters said the laws, which affect all government and private employees in organized workplaces except for police and firefighters, let workers withdraw support from unions they view as ineffective or politically unpalatable.

Then again, with only some 17% of the Michigan workforce unionized and an unemployment rate that was north of 10% for almost 3 of the past 4 years one can see why the people would want a divorce.

The interesting thing is that Michigan has a Republican legislature and a Republican governor yet this state voted for President Obama in 2012.  How is that possible?  How do you reject liberal policies at the state level and yet vote for them at the federal level?  Rust Belt states Indiana, Michigan, Ohio, Pennsylvania and Wisconsin all have Republican legislatures AND Republican governors.  And yet all but Indiana voted for President Obama, perhaps the most liberal president in U.S. history.  How does the national election NOT reflect the state elections?

Union supporters in Michigan are saying Governor Snyder ran as a moderate and then bowed to big money on the Right.  Of course that doesn’t explain the Republican legislature.  It would appear there is a political realignment in the Rust Belt.  Perhaps there will be a recall drive in Michigan.  Like there was in Wisconsin.  Of course, before the union spends another $20 million in a recall attempt they should note that Governor Walker won that recall election with a slightly larger margin than the election that brought him to office in the first place.

It could be that the people want jobs.  And to get jobs they need businesses to come to Michigan.  The Big Three (Ford, Chrysler and General Motors) have been in Michigan forever.  They’ve been bastions of union power.  But every new manufacturer since the Big Three chose to build in some state other than Michigan.  Most of them locating in the Right to Work South.  Something no doubt the people in the Rust Belt are tired of seeing.  Especially when your state has an unemployment rate higher than the national average.

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FT106: “You can’t have high paying jobs with generous benefits and low consumer prices.” -Old Pithy

Posted by PITHOCRATES - February 24th, 2012

Fundamental Truth

To give Workers High Wages and Generous Benefits a Business has to sell their Goods at High Prices 

The problem with politics is that voters don’t understand economics.  And they demonstrate this by demanding mutually exclusive things all of the time.  Where having one thing makes it impossible to have the other thing.  Like that old saying that goes like this.  You can’t have your cake and eat it, too.   You can have cake.  Or you can eat cake.  But you can’t have cake after eating it.  Because once you eat your cake it is gone.  And there is nothing to have.  These things, then, are mutually exclusive.  You can have one or the other.  But you can’t have both.

Now let’s transfer this train of thought to economics.  And to its most fundamental element.  The demand curve.  Which represents people in the economy.  Consumers.  And the stuff that they buy.  And at what prices they will buy the stuff that they buy.  Let’s take large flat-screen televisions.  The big ones.  Over 60 inches in size.  If they cost the price of a luxury car few consumers will buy them.  But if they only cost the price of a pack of gum consumers will buy them until they have one for every room in their house.  And consumers will buy various amounts at the prices in between.  But in general this one truth holds true.  People will buy more televisions as their prices fall.  And they will buy fewer televisions as their prices rise.  When we show this graphically by plotting how many televisions they sell at various prices we get a demand curve.

Well, you think, why can’t we just sell televisions at the price of a pack of gum?  More people will have televisions.  That’s good.  Because people just love watching television.  And television makers will make more televisions.  Creating more jobs.  And jobs are good.  Everyone says so.  So why not just sell televisions for the price of a pack of gum.  Well, I suppose if we pay the people who make these televisions a wage and benefit package closer to the price of a pack of gum, we could.  But who wants to work for a paycheck that can only buy a pack of gum?  Which brings us back to wanting mutually exclusive things.  To give workers high wages and generous benefits we have to sell goods at high prices.  Which is mutually exclusive to the low prices consumers demand.

Big Oil’s Exxon Mobil was not as profitable as GE and Apple in 2010

Yes, you can’t have low consumer prices and high pay and generous benefits.  Because, per the demand curve, higher prices mean fewer things sold.   And fewer things sold mean lower sales revenue.  And sales revenue pays for everything in a business.  Including wages and benefits.  Which means lower sales revenue means less money available to pay wages and benefits.  And any company that tries to pay high wages and provide generous benefits has to do one of two things.  Have a product they can sell a lot of at high prices.  Or go bankrupt.  Two of the Big Three Detroit automakers tried to do the former and failed.  So they went bankrupt.  And the government bailed them out.

So to pay employees well these companies need to be profitable.  Unlike the Big Three.  And to be profitable you have to have sales revenue large enough AND prices high enough to generate profits.  Profits so large that they can provide high wages and generous benefits.  Unlike the Big Three.  Because they couldn’t sell enough cars at high enough prices to pay those high union wages and generous union benefits.  But some companies have been profitable.  Including one corporation liberal Democrats love to hate.  Exxon Mobil (a member of a group liberal Democrats derisively call Big Oil).  One company that the current liberal Democrat administration loves and partners with in green energy technology.  General Electric.  And one corporation liberal Democrats just love period.  Until Steve Jobs died, at least.  Apple. 

In the fourth quarter of 2010, the profits for Exxon Mobil, GE and Apple were, respectively, $9.25 billion, $4.46 billion and $4.31 billion.  The first thing that jumps out at you is that Big Oil is making twice as much money as the corporations liberal Democrats love.  Which is why they hate them.  And why they love to bitch about high prices at the gas pump.  While at the same time they are rejoicing about those high prices.  Because those high gasoline prices help push their green energy agenda.  But these profit numbers are misleading.  Because they don’t factor in the cost of producing those profits.  And the most common way we do that is by dividing these profits by the sales revenue that generated them.  Giving us net profit margin.  When we do this for Exxon Mobil, GE and Apple we find their net profit margins on those profits were, respectively, 8.79%, 10.8% and 21.2%.  Of the three Big Oil is the least profitable.  And Apple is the most profitable.  In fact, nearly 2.5 times more profitable than Exxon Mobil.  But no one is demanding that the government step in and lower the price of Apple’s products.  Unlike they do with Big Oil.

The Government’s Regulatory and Compliance Costs increase the Price of Gasoline at the Pump

So why is Big Oil less profitable than those other businesses?  Well, for one, you can’t drill for American oil in China.  Like GE and Apple can build products in China.  And by working in the United States Big Oil is subject to massive regulatory and compliance costs.  And government regulates few things more than the oil industry.  The permitting process alone just to drill an exploratory well can take years for approval.  And millions of dollars.  It wasn’t like this when gas was cheap in America.  Before all of this regulation.  In the days when John D. Rockefeller was refining petroleum no one was complaining about high prices.  In fact, his competition complained about his low prices.  Prices they couldn’t match.  Asking for the government to investigate them for antitrust violations.  Which they did.  And busted up Standard Oil.  So they could sell their products at higher prices.  But when you can manufacture goods in China you can escape all of these regulatory and compliance costs.  And governmental insanity of protecting consumers by raising consumer prices.

Some may counter that the net profit percentage isn’t the important number.  But the dollar amount of their profits.  The same people who say we shouldn’t look at the dollar amount rich people pay in taxes.  But what they pay as a percentage of their income.  Which is an example of a double standard.  Determining how much profit is too much by one standard for Big Oil (dollars).  But determining by another standard how much rich people should pay in taxes (percentage).  It doesn’t make good sense.  But it makes good politics.  Especially when you have nothing but class warfare to rely on to win an election.

The attack on Big Oil is also irrational.  For Big Oil can do one thing that even GE and Apple can’t do.  Provide high wages and generous benefits to American workers.  Because American oil deposits can only be extracted in America.  By American workers.  If only government will cease their attack on Big Oil.  And allow people to drive gas guzzlers if they want to.  Let them fill up those tanks.  Increase the demand for gasoline.  If they did and we got rid of the anti-gasoline policies Big Oil will go after that oil and bring it to market to meet that demand.  Making it inexpensive and plentiful just like John D. Rockefeller did.  Before government stepped in to ‘protect’ consumers.  And added so many regulatory and compliance costs that has since jacked up the price at the pump so much that it is eating away an ever larger share of a family’s budget.  And ultimately reducing their standard of living.  Without even getting any high paying jobs with generous benefits in the bargain.  And if you ask me that’s a pretty sad job of protecting consumers.

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FDR, Wage Ceiling, Arsenal of Democracy, Benefits, Big Three, Japanese Competition, Legacy Costs, Business Cycle and Bailouts

Posted by PITHOCRATES - February 14th, 2012

History 101

After the Arsenal of Democracy defeated Hitler the Wage Ceiling was Gone but Generous Benefits were here to Stay

FDR caused the automotive industry crisis of 2008-2010.  With his progressive/liberal New Deal policies.  He placed a ceiling on employee wages during the Great Depression.  The idea was to keep workers’ wages low so employers would hire more workers.  It didn’t work.  And there was an unintended consequence.  As there always is when government interferes with market forces.  The wage ceiling prevented employers from attracting the best workers by offering higher wages.  Forcing employers to think of other ways to attract the best workers.  And they found it.  Benefits.

Adolf Hitler ended the Great Depression.  His bloodlust cut the chains on American industry as they tooled up to defeat him.  The Arsenal of Democracy.  America’s factories hummed 24/7 making tanks, trucks, ships, airplanes, artillery, ammunition, etc.  The Americans out-produced the Axis.  Giving the Allies marching towards Germany everything they needed to wage modern war.  While in the end the Nazis were using horses for transport power.  This wartime production created so many jobs that they even hired women to work in their factories.  Bringing an end to the Great Depression finally after 12 years of FDR.

The Arsenal of Democracy defeated Hitler.  U.S. servicemen came home.  And the women left the factories and returned home to raise families.  With much of the world’s factories in ruins the U.S. economy continued to hum.  Only they were now making things other than the implements of war.  The auto makers returned to making cars and trucks.  The ceiling on wages was gone.  But those benefits were still there.  Greatly increasing labor costs.  But what did they care?  The American auto manufacturers had a captive audience.  If anyone wanted to buy a car or truck there was only one place to buy it.  From them.  No matter the cost.  So they just passed on those high wages and expensive benefit packages on to the consumer.  Times were good.  The Fifties were happy times.  Good jobs.  Good pay.  Free benefits.  Nice life in the suburbs.  All paid for by expensive vehicle prices.

The Big Three could not Sell Cars when there was Competition because of their Legacy Costs

But it wouldn’t last.  Because it couldn’t last.  For those factories destroyed in the war were up and running again.  And someone noticed those high prices on American cars.  The Japanese.  Who rebuilt their factories.  Which were now humming, too.  And they thought why not enter the automotive industry?  And this changed the business model for the Big Three (GM, Ford and Chrysler) as they knew it.  The Big Three had competition for the first time.  Their captive audience was gone.  For the consumer had a choice.  They could demand better value for their money.  And chose not to buy the ‘rust buckets’ they were selling in the Seventies.  Cars that rusted away after a few snowy winters.  Or a few years near the ocean coast.

The new Japanese competition started about 30 years after U.S. workers began to enjoy all those benefits.  So the U.S. car companies paid their union auto workers more and gave them far more benefits than their Japanese competition.  And those early U.S. workers were now retiring.  Giving a great advantage to the Japanese.  Because those generous benefits provided those U.S. retirees very comfortable pensions.  And all the health care they could use.  All paid for by the Big Three.  Via the price of their cars and trucks.

Well, you can see where this led to.  The Big Three could not sell cars when there was competition.  Because of these legacy costs.  Higher union wages.  Generous pension and health care benefits that workers and retirees did not contribute to.  (By the time GM and Chrysler faced bankruptcy in 2010 there were more retirees than active union workers).  The United Automobile Workers (UAW) jobs bank program where unemployed workers (laid off due to declining sales) collected 95% of their pay and benefits.  (You can find many quotes on line from a Detroit News article stating some 12,000 UAW workers were collecting pay and benefits in 2005 but not working.)  The Japanese had none of these costs.  And could easily build a higher quality vehicle for less.  Which they did.  And consumers bought them.  The Big Three conceded car sales to the Japanese (and the Europeans and South Koreans) and focused on the profitable SUV and truck markets.  To pay these high legacy costs.  Until the gas prices soared to $4/gallon.  And then the Subprime Mortgage Crises kicked off the Great Recession.  Leading to the ‘bankruptcy’ of GM and Chrysler.  And their government bailouts.

The U.S. Automotive Government Bailout cut Wage and Benefits once Set in Stone

The Big Three struggled because they operated outside normal market forces.  Thanks at first to a captive audience.  Then later to friends in government (tariffs on imports, import quotas, union-favorable legislation, etc.).  All of this just delayed the day of reckoning, though.  And making it ever more painful when it came.

During economic downturns (when supply and prices fall) their cost structure did not change.  As it should have.  Because that’s what the business cycle does.  It resets prices and supply to match demand.  With recessions.  Painful but necessary.  Just how painful depends on how fast ‘sticky’ wages can adjust down to new market levels.  And herein lies the problem that plagued the Big Three.  Their wages weren’t sticky.  They were set in stone.  So when the market set the new prices for cars and trucks it was below the cost of the Big Three.  Unable to decrease their labor (wage and benefit) costs, profits turned into losses.  Pension funds went underfunded.  And cash stockpiles disappeared.  Leading the Big Three to the brink of bankruptcy.  And begging for a government bailout.

Well, the bailout came.  The government stepped in.  Gave the union pension fund majority control of the bailed out companies.  Screwing the bondholders (and contract law) in the process.  And created a two-tier labor structure.  They grandfathered older employees at the unsustainable wage and benefit packages.  And hired new employees at wage and benefit packages that the market would bear.  Comparable to their Asian and European transplant auto plants in the right-to-work states in the southern U.S. states.  And put the market back in control of the U.S. auto industry.  For awhile, at least.

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LESSONS LEARNED #45: “The bluest of cities in the bluest of states have the most activist governments, the deepest recessions and the most abject poverty.” -Old Pithy

Posted by PITHOCRATES - December 23rd, 2010

Detroit – The Motor of the World

Detroit.  Do I need say more? 

If you want to see the ultimate destination of liberalism, go to Detroit.  The Motor City.  The birthplace of the assembly line.  Mass production.  The veritable axle of the Industrial Revolution redux.  Detroit put the nation in motion.  In cars.  And in diesel-electric trains.  If it was big and powerful and moved the world, it came from Detroit.  The Arsenal of Democracy.  Detroit could mass produce trucks and tanks and airplanes to win world wars.  And did.  There was nothing Detroit couldn’t do.

Henry Ford.  Thomas Edison.   Albert Kahn.  Some of the greatest names in science and industry called Detroit home.  That place you can point to on your hand.  With pride.  The city grew and became one of the greatest and grandest cities in the nation.

And look at it now. 

Detroit and Government Grow Big

The population of Detroit grew up to and through the 1950s.  That changed in the 1960s.  When Big Government arrived.

Mayor Jerome P. Cavanaugh started it.  He implemented the city income tax in 1964.  The spirit of government spending was in the air.  The Great Society would follow at the federal level.  Government spending upon government spending.  Translation?  High taxes in the city of Detroit.

Then there was all the social engineering.  Lots of rules and regulations.  Some of it good.  But all of it complex.  And costly to business.  Compliance costs and taxes.  Not things that attract businesses.  Not a big deal when the Big Three rule the automobile world.  But that would change.  In fact, that would change because of the compliance costs and taxes.  The Japanese entered the market.  And they were selling better cars for less.  Add all of this together and you get the 1970s.

The Fall of Detroit

Detroit grew to be business unfriendly.  So business left.  And then the people left, following the jobs out of Detroit.  Then some of the social engineering made others leave the city.  School bussing, for one.  Families choose their houses based on the school district the house is in.  Of course, poor families can’t afford to live in those nice neighborhoods with the nice schools.  And Big Government thinks this is just not fair.    So they bussed the poor kids to the nice schools.  And bussed the kids from the nice schools to the not so nice schools.  Thus encouraging the people from the nice neighborhoods to leave Detroit.

They call it white-flight.  A lot of jobs and affluent people left Detroit.  Leaving behind the less affluent in the not so nice neighborhoods with no jobs.  Not good for any city.  Government services grew to help care for the poor.  The Great Society offered Aid to Dependent Children.  Which, according to noted economist Thomas Sowell, destroyed the black family.  Fathers ran away from their responsibilities.  And the state stepped in to raise their children.

Add all this together and you get a lot of people with no money and a lot of idle time on their hands living in rundown neighborhoods wanting for the basic necessities of life.  And that’s never good.  Detroit became infamous.  Crime and drug problems.  Devil’s night arson.  Street gangs.  Murder capital of America.  Crime and drug infested public housing.  Decrepit schools.  Truancy.  Low graduation rates.  And to solve these problems caused by Big Government, one man turned to Big Government.

Culture of Corruption

Coleman A. Young was mayor forever.  From 1974 to 1993.  And he was a Big Government guy.  He took the city from bad to worse.  And he fixed the racism problem.  By implementing racist policies.  After the white-flight, the city was predominately black.  And so would their police, fire department, public sector employees, etc.  They based hiring on color.  Not merit.  This accelerated the white-flight.  And set up a culture of corruption.  Which usually happens when you hire people based on who they know or who they are rather than on merit.

Young was hostile to the suburbs surrounding the city.  He called them hostile suburbs.  Why?  Well, that’s the problem you have with socialism (Young was an admitted socialist).  It just doesn’t work in an open society.  If the tax and compliance costs are too great in Detroit, people can move out of Detroit.  And they did.  Even the city cops didn’t want to live in the city.  They moved out if they could (by concealing their actual residency).  Or they lived clustered together in the city.  The real estate community called one such cluster Copper Alley.  It was near one of those hostile suburbs.  And it was one of the good areas in Detroit to live in.  Young hated this.  And the suburbs that offered safe sanctuary from oppressive, socialist policies.

Detroit was one of the most corrupt cities during Mayor Young’s tenure.  It was crony capitalism at its worst.  Everyone was corrupt.  Even the authorities were forever investigating the mayor.  (A later mayor was doing a lot of the same.  And he went to jail.)  It was during the Young administration that a couple of humorous slogans started to appear on T-shirts.  “Welcome to Detroit.  Now get the hell out.”  And “Detroit.  Where the weak are killed and eaten.”  High praise indeed for the Murder Capital of America.

Detroit’s Future – Returning to the Plow

So what happens after a city suffers at the hands of Big Government for a few decades?  Well, the population declines.  Because no one wants to live in the city.  About a million people have left Detroit since its peak in the 1950s.  And if that ain’t a repudiation of Big Government, I don’t know what is.

So what is the current mayor doing?  Well, the city is broke.  City services are in shambles.  So they’re going to move people out of sparsely populated neighborhoods.  Pack them closer together.   And abandon large tracts of land.  Just let the land return to nature.  Or plow it into farmland.  If anyone wants to buy it.

Ironic, really.  The city that made the world move forward is moving backward.  A sad ending indeed for the Motor City.

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LESSONS LEARNED #43: “If business ain’t selling, business ain’t hiring.” -Old Pithy

Posted by PITHOCRATES - December 9th, 2010

Before Competition, the Big Three were Living Large

President Obama bailed out GM and Chrysler in 2009.  And why did they need financial help?  The same reason any company needs financial help.  They weren’t selling enough.

I had a finance professor who said few companies have a debt problem.  Companies struggle because they have a revenue problem.  They’re simply not selling enough.  And when a company goes into bankruptcy reorganization, they emerge with the same revenue problems.  Which is why so many still fail after reorganizing and slashing their debt costs.

For decades, the Big Three had a monopoly on the automotive market.  Wherever you lived in the world, if you wanted a car you bought a Ford, GM or Chrysler product.  So the Big Three could charge whatever they wanted for their cars.  That is, until the Japanese entered the market.

Unskilled Line Workers Living Better than Doctors

It was their great success that led to their downfall.  Selling cars with fat profits allowed the Big Three to pay fat wage and benefits.  And they did.  Then the UAW got greedy.  An unskilled line worker could own two houses, a boat, 2 new cars, take expensive vacations, own the latest in toys, etc.  They lived better than doctors.  And doctors were highly skilled.  They spent 8 years in medical school.  And spent a decade of their life paying off the debt from that medical school.  And to add insult to injury, doctors worked 80+ hours per week during that decade when they lived like paupers.  Line workers worked only 40.  And lived like kings.

It was nice work if you could get it.  And many did.  Before the Japanese.  But it all started to come apart in the 1970s.  When the Big Three were selling junk.  Cars that rusted out in a few years.  Unreliable.  Ugly.  These just screamed “we just don’t give a damn anymore.”  More money went to the workers.  Less into making quality cars people wanted.  No problem for the UAW.  I mean, who else were you going to buy a car from?

Hello, what’s this?  Honda?  What’s that?  I’m not sure but it costs less.  And looks pretty good.  Nice quality.  So why should I continue to pay more for less and buy this junk from the Big Three?  Or so went the thinking.  Yes, the Japanese had arrived.  And they were selling something the people wanted.

Fat Wage and Benefit Packages come back to Bite the Big Three in the Ass

So that was the beginning of the end.  Those fat wage and benefit packages for unskilled labor required higher sticker prices than the market was willing to pay.  So they sold fewer cars.  And the Japanese (and, in time, the other imports) sold more.

But it got worse.  Not only were their revenues falling, but their costs were rising.  The Big Three were around for awhile.  They had an aging work force that was retiring.  And getting sick.  Pension and health care costs soared.  Costs per car soared.  While the Japanese were enjoying economies of scales (the more you sell the less each unit costs to make), the Big Three were bleeding red ink all over their balance sheets.

I was in a meeting one time on the floor of an assembly plant.  I was staring at the part of the line where a worker threw insulation into the bottom of the trunk.  She threw in a pad.  Walked over to her coworker at the next station.  Chatted a bit.  Walked back to her station.  Talked to someone else.  Then threw a pad into the next car on the line.  I could just see the red ink bleed.

The Big Three screwed themselves.  In order to cover those fat wage and benefit packages for their unskilled workers, they have to sell cars for a whole lot more than their competition was.  And they couldn’t.  Imagine McDonald’s workers receiving the same wage and benefit packages as the UAW.  And cooking hamburgers at the same pace.  You’d have to wait in line for 45 minutes for your burger.  And you’d pay over $20 for a Quarter Pounder with Cheese.

Buying American is not Necessarily American

I often see those bumper stickers that ask, “Unemployed?  Keep buying foreign.”  Or something like that.  What these people don’t understand, or choose not to understand, is that more people buy cars than make cars.  Paying more for less helps the few people that build cars.  While they enjoy a very good life, the greater number of buyers of those cars have to get by on less.  So the economy as a whole gets worse.  To help a group of unskilled workers live a better life than our own.

Is that fair?  Making the majority subsidize a minority elite?  Unless you live in North Korea or Cuba, the answer is, of course, ‘no’.  So we choose to buy what gives us the most value for our money.  Which is why the Japanese upstart Toyota would see the day when they would sell more cars than GM.  And why did they reach this remarkable milestone?  Because they were selling what people were willing to buy.

Interestingly, the GM and Chrysler bailouts were not your run of the mill reorganizations.  By the power the government gave itself, they walked all over the Rule of Law.  These companies didn’t have a debt problem.  Not anymore, at least.  Because the government screwed the bondholders.  And who did they reward?  That’s right, those unskilled UAW line workers.  The reorganization gave them shares in the new company for no other reason other than being politically loyal to the Democrat Party.  They weren’t even in the line of secured creditors, but that didn’t stop them from jumping to the head of that line.  Remarkable, really.  The Rule of Law had become merely a suggestion.

And when the union sold those ‘gift’ shares of stock they funded their unfunded pension liabilities.  While retirees who invested their life savings into GM bonds lost everything and had to get a job at McDonald’s.  Because McDonald’s is always hiring.  Because they are always selling something people want to buy.

McDonald’s can still Hire during Bad Economic Times

Like my finance professor said, no company fails because of a debt/cost problem.  A debt/cost problem happens when something happens to revenue.  And the biggest reason a business has a revenue problem is because of competition.  Someone somewhere is selling more for less.  Giving the people more bang for the buck.

During bad economic times, revenue problems quickly turn into cost problems.  For some.  Auto manufacturers may idle a shift at an assembly plant, laying off hundreds.  Because there’s no point in making cars no one is buying.  And these manufacturers simply cannot afford to pay these fat wage and benefit packages if they’re not selling cars.

But not everyone has the same financial problems during a recession.  Some still hire during bad economic times.  McDonald’s for one.  Why?  A couple of reasons.  Their workers don’t belong to the UAW.  Because of this we can still call McDonald’s fast food.  And your typical McDonald’s worker doesn’t own two houses, two cars and a boat.  So we don’t have to pay $37.50 for a #2 combo meal. 

We’re buying what McDonald’s is selling.  So they can hire people.  Even during bad economic times.

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They Just Don’t Make Villains like George W. Bush Anymore

Posted by PITHOCRATES - October 6th, 2010

It’s Getting Harder to Lie These Days

The angry Left could not draw as many people to their rally in Washington as Glenn Beck did.  Why?  Byron York explains in Why Big Labor couldn’t match Glenn Beck’s rally in a Washington Examiner 10/4/2010 column.  He says Big Labor is “shrinking, aging and divided.”  No big whoop here.  I mean, the days of Big Labor are gone.  Thanks to free trade, consumers no longer have to be their bitch.  For example, once upon a time we had to buy the pieces of crap that the Big Three were selling.  Because they were the only caterer in town.  But thanks to competition from the Japanese imports, the consumers got a little more respect from the Big Three.  They no longer take us for granted.  And they’re building quality again.  Why?  Because someone else was.  That’s the beautiful thing about competition.  It makes everything better.

Included in this column is this disturbing fact:

In January, the Labor Department reported that for the first time in history, there are more union members in the public sector (7.9 million) than there are in the private sector (7.4 million). That’s despite the fact that there are five times more workers in the private sector than in federal, state, and local governments. In percentage terms, just 7.2 percent of private-sector workers belong to a union, while 37.4 percent of public-sector workers are unionized.

Think about this.  The private sector pays for its union pay and benefits with the revenue from the goods and services they sell. Competition for these goods and services provides a restraint on those union pay and benefits.  The taxpayer finances the public sector.  There is no competition for what they do.  And no restraint whatsoever on their pay and benefits.  So is it surprising that there are more union members in the public sector?

That said, the private sector still outnumbers the public sector.  For now, at least.  Yes there is a ruling elite.  And an aristocratic base (college professors, the mainstream media, unions and government workers) that supports them in exchange for their special favors. But the numbers are against them.  When times are bad, the masses will be heard.  And we heard them at Beck’s rally.  Not at the “One Nation Working Together” rally.  Where their silence was deafening.

Here’s a Thought; Try to Stand for Something

The ads for the Democrats this campaign season are interesting for what they don’t say.  They don’t trump their votes for Obamacare, financial reform, Cap and Trade, etc.  No.  The Democrats are not running on their achievements.  Just as they never campaign for higher taxes and more regulation.  Because, unless you’re a public sector union employee, you are just not for higher taxes and more regulation.  So they don’t run ads about their achievements or their policy agendas.  They just attack their opponents.  Dig up some dirt.  Or fabricate it.  Anything but run on their own record or policy agenda.

Of course, such a campaign strategy is difficult when you have the White House, the Senate and the House.  In the good old days there was George W. Bush.  Democrat enemy #1.  With him in the White House, you never had to campaign on your own record.  Or commit to a position.  Whenever asked about a position you just attacked Bush.  Life was simpler then.  Like York wrote:

Finally, the rally lacked a villain. Back in the days of George W. Bush, merely saying the president’s name could elicit angry boos over and over and over again. Every problem in every part of American life could be attributed to Bush and his gang. Now, with a Democratic president and Congress, speakers can denounce Republicans all they want, but everyone knows who is running the U.S. government. That knowledge took a little of the edge off all those denunciations.

Bush has been gone coming up on 2 years now.  And things are worse now under total Democrat rule.  The Democrats have no choice.  They’ll have to be accountable for their actions.  And this is the reason why the Left couldn’t match the Glen Beck rally.  They can no longer blame George W. Bush.  And where’s the fun in that? 

The mess we’re in is their mess.  We know it.  And they know it.  And they’re beginning to know that we know it.  Which makes the lie that much harder to sell.

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