The NLRB nay not allow Boeing to build a plant in the Nonunion South but Airbus Can

Posted by PITHOCRATES - June 30th, 2012

Week in Review

Airbus is opening an assembly plant in the U.S.  Why?  Because they can make planes cheaper in America than they can in Europe (see Reports: Airbus to open plant in Alabama by Nancy Trejos posted 6/28/2012 on USA Today).

In taking the plunge into the United States, Airbus is betting that American airlines, many of which have large fleets of aging jets, will be enticed to consider an A320 that was “made in America” over Boeing’s competing 737. By assembling the planes with nonunion American workers, and in using dollars, Airbus also stands to reduce production costs.

It’s the high wages and benefits of European unions.  The high taxes that fund their social democracies.  And the depreciated dollar.  Add them all up and what you get is an economic advantage building airplanes in the nonunion south.

Boeing wanted to build a plant in the south to manufacture their new Dreamliner.  But the National Labor Relations Board (NLRB) told Boeing they couldn’t.  They said they had to build those planes with union labor.  Lucky for Airbus that they have the freedom to build in the nonunion south.  Where they will build planes cheaper than Boeing can. 

Pity Boeing didn’t have that same freedom in this country.     

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Boeing Posts Record Revenue but U.S. Defense Spending Cuts, Rising Pension Costs and Higher Taxes are on the Horizon

Posted by PITHOCRATES - January 29th, 2012

Week in Review

In Keynesian economics the government plays a large role in the economy.  By buying a lot of stuff.  And by hiring lots of government workers at all levels of government who buy lots of consumer goods.  Keynesians say these government expenditures are important.  Especially during bad economic times.  For when no one else is spending only the government can step in and sustain spending.  Even if it’s paying someone to dig a ditch.  And then fill it back in.  Because the wages for that person doing that useless activity will be used to buy consumer goods.  And it will stimulate the economy.

Interestingly, this love of government spending does not extend to military personnel.  Or defense spending.  Which, according to Keynesian economics, are just what the economic doctor ordered.  But, alas, they are always the first government spending to be cut to pay for other government spending.  Why?  Well, military personnel tend to vote Republican.  And defense spending tends to feed a lot of money to large corporations (see Boeing faced with strong headwinds by Tim Devaney posted 1/25/2012 on The Washington Times).

The Chicago-based plane-maker announced a 20 percent increase in earnings and record revenue gains in 2011…

But Boeing now faces likely cuts in U.S. defense spending, rising pension costs and a higher tax rate…

The company’s tax rate is expected to increase to 35 percent in 2012 from 33 percent last year, which will cost the company an additional $92 million, or 12 cents per share.

The Democrats use class warfare.  For they have little success with their policies and can’t run on successful track records during elections.  And in class warfare you need enemies.  Old rich people.  And, of course, evil corporations.  Hence the attacks on the industrial military complex.  Which Democrats are all in favor of.

And note that increase in their taxes.  That’s not an increase to $92 million.  That’s an additional $92 million.  Here I thought Boeing’s job was to build and sell airplanes.  When apparently they are nothing more than a cash piñata for the government to whack open to pay for more government spending.  That isn’t spent on, of course, defense spending.  Or Republicans.

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Nancy Pelosi Hates Nonunion Workers because She Can’t Collect Tribute from Them Like She Can from Union Workers

Posted by PITHOCRATES - November 6th, 2011

Week in Review

Nancy Pelosi believes there is such a thing as a bad job.  And I’m not talking about flipping burgers.  I’m talking about building jet planes.  Normally good.  As jet planes dominate U.S. exports.  But these jobs are only good jobs when they are in Seattle.  Not in nonunion South Carolina (see Pelosi Vs. Boeing — And Jobs posted 11/1/2011 on Investors.com).

“Do you think it’s right that Boeing has to close down that plant in South Carolina because it’s nonunion?” asked host Maria Bartiromo.

Pelosi’s quick answer was “yes.”

Pelosi said she preferred the plant in the right-to-work state would unionize; failing that, the National Labor Relations Board is right to shut down the plant where Boeing hopes to build its Dreamliner passenger aircraft.

So instead of adding jobs to the economy Ms. Pelosi would prefer these people collect unemployment checks.  Why?

Union representation must be forced on them so they can be forced to pay union dues, a big chunk of which is funneled into Democratic campaign coffers. Over the past two years, the [International Association of Machinists] donated $1.98 million to Democratic candidates and $34,000 to Republicans.

Similarly, the trillion dollars in wasted stimulus and other legislation have gone mostly to projects using union workers, in particular teacher and construction unions. Stimulus money has also gone to failing but politically connected firms like Solyndra, whose major investors are big Democratic donors.

Nancy and her Democrat colleagues are greedy.  And pine for the days when people like them ruled over others.  Simply by being born into the nobility.  With democracy putting the kibosh on aristocracy they have come up with this clever ruse to put taxpayer dollars into their pockets.

They still steal it.  But not directly.  They give it to someone else.  Who then gives some of it back to them.  If this sounds familiar you may have seen this in the movies.  We call it ‘money laundering’.  She calls it tribute.  The proper respect paid to her privileged class.

This is what it’s all about in the Democrat party.  The money.  So when you hear them talk about creating jobs and stimulating the economy it’s what we call in politics ‘lying’.

They just want the money.  And could care less whether or not they create a job.  If you disagree answer me this.  After 5 years of Pelosi/Obama and all of that stimulus, where are the jobs?

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Economic Recovery Requires less Keynesian Spending and more Cutting the Cost of Employment

Posted by PITHOCRATES - September 26th, 2011

The Structural Defect in Keynesian Economics is that Sustained Inflation Creates Asset Bubbles that Must Burst

More bad news for the housing market.  And the American economy (see New-home sales fell in August for 4th month by Derek Kravitz posted 9/26/2011 on the Associated Press).

Sales of new homes fell to a six-month low in August. The fourth straight monthly decline during the peak buying season suggests the housing market is years away from a recovery…

New-homes sales are on pace for the worst year since the government began keeping records a half century ago…

Last year was also the fifth straight year that sales have fallen. It followed five straight years of record highs, when housing was booming.

The housing market is bad.  There’s no denying that.  And this affects everyone.  Not just homeowners.  Because where the housing market goes the economy follows.

While new homes represent less than one-fifth of the housing market, they have an outsize impact on the economy. Each home built creates an average of three jobs for a year and generates about $90,000 in taxes, according to the National Association of Home Builders.

Jobs and taxes.  Both of which the government is having trouble generating these days.  That’s why they are desperately trying to stimulate the housing market with all that easy monetary policy.  Getting interest rates to their lowest in years.  If not of all time.  Because new houses equals jobs.  And tax revenue.  Especially when housing values increase over time.

Home prices have dropped more since the recession started, on a percentage basis, than during the Great Depression of the 1930s. It took 19 years for prices to fully recover after the Depression.

But not so much when they don’t.

Worse than the Great Depression.  Now there’s something you don’t hear every day.

One of the missions of the Federal Reserve was to prevent another Great Depression.  In particular, preventing a devastating deflationary spiral.  Such as we’re seeing in home prices now.  Looks like they’ve failed.  Or rather, Keynesian Economics has failed.

The problem is the dependence on Keynesian Economics.  Which uses monetary policy to maintain economic growth.  By having permanent but ‘sustainable’ inflation.  But the structural defect in this model is that sustained inflation creates asset bubbles.  As people bid up the prices of these assets.  Like houses prior to the subprime mortgage crisis.  And when these bubbles burst these asset prices have to fall back to market levels.  Like house prices are doing right now.  And apparently will do for another 19 years.  Give or take.

It is the High Cost of Labor that is Hurting the Advanced Economies

Manufacturing has been better than the housing market.  But it’s not looking too promising right now (see U.S. manufacturing slowdown: 4 cities at most risk posted 9/26/2011 on CNN Money).

U.S. manufacturing has been one of the rare bright spots in an otherwise annoyingly slow economic recovery…

But expectations of slower growth could threaten the rebound and cities that have gained from it. The ongoing European debt crisis and efforts to curb worries over inflation in China have analysts predicting lower demand for everything from American-made electronics to machinery.

U.S. manufacturing grew 6% during the economic recovery after declining 13% following the financial crisis in 2007. IHS Global Insight economist Tom Runiewicz says the industry has grown 4.5% so far this year. While that’s still robust growth, he expects manufacturing growth to slow to 2.9% next year.

The American consumer may not have been buying but consumers in other countries were.  A good example of American exports is the delivery of the first Boeing 787 to ANA.  And Boeing’s 747-8, too.   Though the largest U.S. exporter, Boeing won’t be able to fix the economy alone.  Especially when they’re competing against Airbus.

It is the high cost of labor that is hurting the advanced economies.  The Europeans subsidize some of their industries to make up for this economic disadvantage.  Boeing charges Airbus with getting subsidies that lets them compete unfairly.  And Airbus, of course, accuses Boeing of the same.   To help gain a competitive edge over Airbus, Boeing wanted to expand production in South Carolina.  A right to work state.  Which the Obama administration has opposed.  In support of their union donors.

The lesson of the Boeing-Airbus rivalry is this.  They’d be able to sell more planes if they could cut their labor costs.

Listening to the Private Sector turned around the German Economy and is why they can Bail Out the Euro

Germany’s high cost of labor was crippling her economy.  BMW and Mercedes-Benz built plants in America to escape their high cost of labor.  But things are different in Germany these days.  In fact, the country is so rich that the hopes of saving the Euro common currency falls on the German economy.  The only European economy rich enough to save the Euro.  So how did they make this turnaround?  Through reforms (see Getting People Back to Work by Matt Mitchell posted 9/26/2011 on Mercatus Center at George Mason University).

Germany’s unemployment rate is only 6.2 percent today. This is pretty remarkable given the severity of the recent recession, the slow growth of Germany’s trade partners (including the U.S.) and the unfolding fiscal crisis in the Eurozone.

NPR’s Caitlin Kenney attributes Germany’s relative success to a number of reforms adopted a decade ago. Kenney reports:

To figure out how Germany got where it is today, you need to go back 10 years. In 2002, Germany looked a lot like the United States does now, they had no economic growth and their unemployment rate was 8.7 percent and climbing. The country needed help, so the top man in Germany at the time, Gerhard Schroder, the German chancellor, made in an emergency call to a trusted friend.

So who did he turn to?  A government bureaucrat?  Or someone from the private sector?

The friend was Peter Hartz, a former HR director whom Schroder knew from his VW days. Schroder put Hartz in charge of a commission, the mission of which was to find a way to make Germany’s labor market more flexible. The Hartz commission made it easier to hire someone for a low-paying, temporary job, a so-called “mini job”:

A mini-job isn’t that great of a deal for workers. In these jobs, they can work as many hours as the employer wants them to, but the maximum they can earn is 400 Euros per month. On the plus side, they get to keep it all. They don’t pay any taxes on the money. And they do still get some government assistance.

He went to the private sector.  To get advice of how to create jobs in the private sector.  And he listened to what they said.  The cost of labor and regulatory costs were crippling job creation.

Generous unemployment insurance and regulations that add to the cost of employment tend to make for a static, unhealthy labor market. Though designed to make life better for workers, these policies may do them more harm than good.

Listening to the private sector turned around the German economy.  Made it the dynamo it is today.  And it is why that the German economy is the only economy that can bail out the Euro.

Economic Recovery Requires New Jobs

The economy still looks like it’s going to get worse before it gets better.  Whereas the Germans are doing so well that they may single-handedly bailout the Eurozone from their sovereign debt crisis.  And a lot of Americans are saying that should be us.  Not the bailing out the Eurozone part.  But having the ability to do that.

And that could have been us.  And should have been.  Like it used to be.  When America led the world in creating jobs.  So what happened?  The same thing that had happened in Germany.  The cost of employment grew.  And as it grew new job creation declined.

Economic recovery requires new jobs.  The Germans understood that.  And they did something about it.  So should we.  And the sooner we do the sooner we will see that economic recovery.

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President Obama uses Class Warfare to Increase Spending and Reward Political Cronies

Posted by PITHOCRATES - September 19th, 2011

They have Learned in the UK that Government can’t Pay for Everything

China may be subsidizing high-speed rail.  But in the UK, the government is moving the other way.  Because it is just too costly (see Arriva Trains: Fare rise in Wales 2% lower than England posted 9/19/2011 on the BBC News Wales).

The Welsh Government has told Arriva Trains Wales it can increase prices by 1% above the inflation rate.

Last month the UK government announced an average increase in England of 3% over inflation…

Tony Miles, from Modern Railways magazine, said the decision was good news for Welsh commuters but it would impact on the Welsh Government’s budget.

He said: “This is a policy decision by the Welsh Government, which is very much in line with their outlook that the burden of financing public transport should fall more on taxpayers centrally than on the individual passengers…

“The UK Government wants to shift the cost of the railways more away from taxpayers and towards users.

The UK went farther down the socialist road than the Americans.  They nationalized a lot of their industries.  Nationalized their health care.  And, of course, their transportation.  Now there are efforts to reverse this.  Continuing on the work of the great Margaret Thatcher.

There are some in the UK that have a novel idea.  To let people pay for a train ticket.  If they want a train ticket.  Imagine that.  Paying your own way.  How fair.  And rational.  But not all are keen on the idea.  For in Wales they want everyone to pitch in and pay for train tickets.  Even those who don’t ride on the train.

They have learned in the UK that government can’t pay for everything.  And some are now trying to undo years of government growth.  In transportation.  And elsewhere.  To unleash more free market capitalism.  That they were so kind to introduce to the Western World all those years ago.

Was the Great Depression the Worst Economy Ever before Obama Took Office?

In America, though, government continues to grow.  Even with election losses.  And economic malaise (see End of Recession Doesn’t Mean Good Times Return Right Away by David Johnson posted 9/19/2011 on Random Samplings).

Numbers just released by the Census Bureau, however, illustrate that while the recession may technically be over, household economic conditions did not improve…

During the 2010 calendar year, median household income was $49,445, 2.3 percent lower than in 2009 after adjusting for inflation.

The Obama administration’s Recovery Summer ended the Bush recession in 2010.  Or so they say.  The unemployment rate is still above 9%.  If you factor in the underemployed and those who’ve given up looking for a job it’s closer to 16%.  And real household income is down 2.3%.

But just imagine how bad things would have been if Obama didn’t end the Bush Recession with his Recovery Summer.  People would be saying that the Great Depression was the worst economy ever.  Until Obama took office.

To end the Bush recession Obama spent $800 billion in ‘stimulus’ spending.  Which failed.  Because he’s asking for another $450 billion stimulus package.  Despite the first one failing.  Well, it may have failed to stimulate the economy.  But it did stimulate government.

Only Union Jobs are Good Jobs in the Obama Admin because only Union Jobs Fill Democrat Coffers

So we know that their stimulus spending fails to stimulate the economy.  But why?  Is it because they don’t understand things economic?  Or is it because their stimulus has more political goals than economic?  Perhaps it’s both (see Illinois among worst states to do business: Survey by Ameet Sachdev posted 9/19/2011 on the Chicago Tribune).

Illinois ranked among the three worst states for business, according to a survey of U.S. corporate executives released Monday…

Taxes and high costs were among the factors that contributed to the state’s poor showing in the survey. California was deemed to have the worst business climate, followed by New York and Illinois.

So California, Illinois and New York have the worst business climates.  Because of taxes and high costs.  No surprise, really.  For these are big blue Democrat states.  With big blue Democrat cities.  And big public sector unions.  At both the state and municipal levels.  Which is why they have such high taxes and costs.  Those public sector pension and health care benefits are absolutely killing their economies with the high taxes required to fund them.

The Democrats can say what they want.  But they are not business-friendly.  They are only friendly to political allies.  Unions.  Teachers.  And public sector employees.  Which is why businesses want to leave these Democrat areas.  Not to exploit cheap labor.  But to stop their own exploitation by these Democrat strongholds.

Illinois recently increased its income tax rate, which has prompted several companies, including Chicago-based CME Group, to consider leaving the state.

Texas, North Carolina and South Carolina were viewed as having the best business climates, according to the survey.

Boeing built their new 787 Dreamliner plant in South Carolina.  But the Obama administration is trying to shut that plant down.  Why?  Because they don’t like South Carolina.  Or its people.

You see, all jobs are not good jobs.  As the Obama administration sees it.  And these new South Carolinian jobs are not good jobs.  Because they are nonunion jobs.  No union means no union dues.  And no money to flow into Democrat coffers.  So the Obama administration has nothing to gain politically.  And that’s why they are using the power of the National Labor Relations Board to shut that plant down.  And make Boeing expand production in Seattle.  Where the jobs will be union jobs.  And union money will flow into Democrat coffers.  Via union dues.

President Obama and the Democrats Prefer Crony Capitalism over Free Market Capitalism

We call this crony capitalism.  Some may even say extortion.

Crony capitalism is the opposite of free market capitalism.  Where merit wins the day.  In crony capitalism, though, it’s who you know.  And what kind of political power you have (see Obama administration ‘pressured Air Force general to change testimony’ by Toby Harnden posted 9/16/2011 on The Telegraph).

According to Republicans on Capitol Hill, General William Shelton, head of Air Force Space Command, told them in a closed session the White House urged him to alter his testimony about the Pentagon’s concerns about a new wireless project by a satellite broadband company…

LightSquared, based in Virginia, is funded by the multi-millionaire Philip Falcone, a frequent donor to Democrats. The satellite and broadband communications company plans to build a nationwide, 4G phone network that many generals believe would seriously hinder the effectiveness of high-precision GPS receiver systems used by the military…

The row over the allegedly improper intervention came as a Republican-controlled House of Representatives Committee investigated a federal loan guarantee to Solyndra, a solar firm also tied to a major Democratic contributor, which failed after receiving a half-billion US government loan guarantee.

A spokesman for Gen Shelton said that his testimony was “his own, supported by and focused purely on documented tested results”.

LightSquared insisted it had not sought to interfere with the properly regulatory process. The White House said reviewing congressional testimony was routine.

Interesting.  The White House says this is just routine.  Which it apparently is.  Whether you’re funneling tax dollars to a green energy company.  Connected to a rich Democrat donor.  Or trying to throw a contract to a communications company.  Also connected to a rich Democrat donor.  Even if it compromises national security.

It’s just business.  And our politicians are just business people.  In the business of rewarding political friends.  In return for generous campaign contributions.

So much for hope, change and transparency.

If You Confiscated all the Rich’s Income it would Wipe out Obama’s Deficit…for One Year

Crony capitalism.  A little extortion.  Mixed in with a generous helping of class warfare.  In other words, Obama politics (see Obama calls for broad tax increases by Stephen Dinan posted 9/18/2011 on The Washington Times).

President Obama on Monday proposed a deficit reduction plan that calls for about $3 in new tax increases for every dollar in additional spending cuts as he seeks to put his imprint on the ongoing talks with Congress over reducing the government’s staggering debt…

“This is not class warfare, it’s math,” Mr. Obama said in the White House’s Rose Garden as he laid out the outlines. “The money’s got to come from some place.”

Real incomes are down.  Unemployment is still above 9%.  If you count the underemployed and those who have given up looking for work the actual number is closer to 16%.  So how best to create more jobs to help people go back to work?  And boost those real incomes?  Well, if you’re a member of the Obama administration, you raise taxes.

But this won’t help the employment numbers.  So why do it?  Because it is class warfare.  Despite the president’s denial that it is.  For there is no other reason to do this.  It won’t help the economy.  And it won’t help reduce the debt.

If you took all income from those earning $200,000 or more you’ll be lucky to get $2 trillion.  At least this is all they had in 2008.

(Source:  SOI Tax Stats – Individual Income Tax Rates and Tax Shares)

See?  You can raise tax rates to 100% on the rich but it won’t help.  If you confiscated all their income you’d raise a lot of money, yes.  Enough to wipe out the Obama’s $1.6 trillion deficit.  For one year.  But it will be $1.6 trillion the following year.  Unless you cut spending.  Because you can take this money only once.  Unless these people agree to keep producing all this wealth as indentured servants.  Which I don’t see happening.

So Broke that We Must Raise Taxes but not too Broke that We can’t Throw $7 Billion to the USPS

So it is class warfare.  And cronyism.  Helping those who help them.  With taxpayer dollars.  Which is why they need to raise taxes.  Not to retire the debt.  But to help their political supporters (see President Obama deficit plans back ending Saturday mail by Ed O’Keefe posted 9/19/2011 on The Washington Post).

The White House is also calling on Congress to return $7 billion that USPS paid into a federal retirement fund to the delivery service to help pay for other retirement and health-care costs. Obama’s plans also would allow the Postal Service to raise stamp prices beyond the rate of inflation to better match the cost of delivery…

Though the Postal Service is a self-funding entity that doesn’t accept taxpayer dollars, it is a significant piece of the unified federal budget because its workers and retirees draw benefits from federal workers’ compensation, retirement and health-care accounts.

The country is so broke that it must raise taxes.  But it is not too broke that it can’t throw $7 billion to Obama’s friends in the USPS.

We are Regressing back to the Totalitarian Regimes of the Old World

All this talk about balance approach to deficit reduction?  And getting the rich to pay their fair share?  It’s all class warfare. To increase taxes.  To keep funding important political constituencies.  It has nothing to do with deficit reduction.  The numbers are just too large to be able to reduce the deficit with taxes alone.  You have to cut spending.

And this just isn’t going to happen with Democrats in power.  Because government spending is their lifeblood.  Their economic policies don’t work.  And they’re not designed to work.  They have but one purpose.  Politics.  Rewarding political favors.  With taxpayer dollars.

And they will sacrifice anything to keep spending.  The economy.  Our real incomes.  Our national security.  Even the American Dream.  Our liberty.  For we are regressing back to the totalitarian regimes of the Old World.  Where, if you’re not politically connected, you are fast becoming a second class citizen.

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What the Big Planes can teach us about Free Market Capitalism

Posted by PITHOCRATES - June 20th, 2011

The Big Planes are Nimble in the Sky but Clumsy and Dangerous on the Ground

In airplane parlance, the Boeing 747 is a big-ass plane.  And the Airbus A380 is an even bigger-ass plane.  Too big some say.  Like a lot of airport administrators.  With a full-length upper deck, boarding requires a two-story passenger boarding bridge (PBB).  Something no airport had prior to the A380.  The 747 has a smaller upper deck and passengers get there by a set of stairs inside the plane.  Which allows the 747 to fit any wide-body gate.  Not the case with the A380.

The A380 also has something the 747 doesn’t.  The world’s longest wingspan on a commercial passenger jet.  The A380 is big.  And heavy.  It takes for big turbofan jet engines and lots of wing area to heft that incredible bulk into the air.  This causes an even bigger problem than the 2-story PBB.  Because it’s not easy to widen taxiways or runways.  Or move buildings and other infrastructure out of the way.  Which makes them a hazard when taxiing.  Which is when a plane is most vulnerable.  And dangerous.  More accidents happen while taxiing than flying.  Even the greatest aviation disaster of all time occurred on the ground.  When a KLM 747 on its takeoff roll crashed into a taxiing Pan Am 747 at Tenerife.  Killing 583 passengers.

So airport people are nervous about planes driving around their airports.  Especially the big ones.  With long wingspans.  Because things like this can happen (see Not again! World’s biggest airliner loses wingtip after striking building at Paris Air Show – two months after doing the same thing in New York by Daily Mail Reporter posted 6/20/2011 on the Daily Mail).

An Airbus 380 lost its wingtip in a taxiing collision with a building, just two months after another superjumbo was grounded for striking a private jet in New York.

The A380 superjumbo was grounded after the smash at slow-speed at the Le Bourget airport, where the Paris Air Show is taking place.

The collision mirrored an incident at JFK airport earlier this year when a private jet was spun round after it was hit by the wing of an A380.

And someone caught that JFK accident and posted it to YouTube.

The big planes soar majestically through the skies.  But they’re clumsy as an ox on the ground.  And dangerous.  But they’re also something else.  Profitable.  Because the more people you can put into a plane the lower your per-passenger costs are and the greater your profits can be.

Big Dollars and thin Margins

‘Can’ being the operative word.  Because it takes a lot of money to make money in the airline business.  Because airplanes are very expensive.  And the business is ultra sensitive to oil prices and recessions (see Aircraft Makers Not Put Off by Excess Capacity by Daniel Solon posted 6/20/2011 on The New York Times).

The carriers are being squeezed between high oil prices — expected to average $110 per barrel this year, against $96 in 2010 — and an overly rapid expansion of capacity relative to demand. Global airline capacity this year is slated to rise by 5.8 percent, while demand is expected to expand by only 4.7 percent.

“But with a dismal 0.7 percent margin, there is little buffer left against further shocks,” I.A.T.A.’s director general, Giovanni Bisignani, said at the annual meeting, referring to the $4 billion profit on projected revenue of $598 billion.

Despite these paper-thin margins some still have confidence in the air transportation industry.  And they’re making big bets.  Some 33,500 in all.

Looking ahead over the next 20 years, Mr. [James] Albaugh [chief executive of Boeing’s commercial airplane unit] forecast global demand for 33,500 new commercial aircraft, worth nearly $4 trillion, of which $1.7 trillion worth would be in the 100- to 200-passenger 737/A320 size range.

That’s a lot of money.  $4 trillion dollars.  It’s bigger than the annual GDP of Germany, France and the UK.  And every other country except the U.S., Japan and China.  It’s more than the sum total of all economic activity in most countries.  But for Boeing it’s just a sales projection.  Incredible.  How do they do it?  How do they do business in a world with such large numbers and such large risks?  Do they get special help from the government?  No.  They have a simpler business model.  They try to deliver what their customers want better than their competitors do.

Airline mergers — like United with Continental, Delta with Northwest, Air France with KLM and British Airways with Iberia — mean that fewer decision makers will be controlling larger purchases as the combined fleets are renewed or expanded. This has major potential consequences for both the large manufacturers in cases where the existing fleets include both Boeing (Continental, British Airways) and Airbus (United, Northwest and Iberia) planes.

Near-term, this may offer Airbus an edge in orders for its A320 New Engine Option, or A320neo, which could cut average fuel consumption immediately while allowing airline managers more time to evaluate the eventual Boeing response. At mid-June, A320 new orders totaled 362, with Airbus’s sales and marketing chief John Leahy targeting 500 by the end of the air show.

On the sidelines of a recent meeting of the chief executives of Star Alliance airlines, Harry Hohmeister, chairman and director general of Swiss, said the flexibility of engine choice offered by Airbus, between Pratt & Whitney’s 1100B and CFM International’s Leap-X, made it easier for him to opt for the A320 neo.

It’s a very complex industry.  Each part of it has its own concerns.  But no one is managing the overall industry.  The market is.  Airlines want to buy planes that cut operating costs.  So they can sell tickets at prices passengers can afford.  Manufacturers want to sell planes.  So they try to make planes that cut operating costs.  Each does their own part.  In response to market forces.  This is Adam Smith‘s invisible hand.  Everybody working independently to maximize their own interests.  And this benefits everyone in the aggregate.  Because planes with low operating costs are brought to market so airlines can buy them in turn allowing them to sell tickets that passengers can afford.

Surely, you ask, wouldn’t it be more efficient if one entity did all this coordinating?  Wouldn’t it improve market efficiencies?  Reduce redundancies?  Make sure we use resources to maximize their value?  To have someone tell the manufactures what to build.  Someone to tell the airlines what to buy?  So the passengers get the lowest possible price?  Actually, it’s been tried. 

The Soviet Economy Collapsed because of too much Government

And it doesn’t work.  And never has worked.  Nor will it ever work.  Because one person or entity cannot be smarter than the millions of decision makers working to maximize their own interests.  Because a business prospers when it sells.  But to sell someone must buy.  Hence a business does best when it best pleases a buyer.  And that’s something a bureaucrat just can’t do.  For if he or she could, the Soviet Union would still be here.  And her GDP would be greater than the U.S., Japan, China, Germany, the U.K., France and every other nation on the planet. 

Well, the Soviet Union is no more.  Many probably don’t even remember the Cold War or the war between capitalism and communism.  (For those of you who don’t, capitalism won.)  Boris Yeltsin‘s right-hand man recounts the events of August 1991, the beginning of the end of the Soviet Union in Foreign Policy.  Key to her collapse was the state-managed economy (see Meltdown by Gennady Burbulis and Michele A. Berdy posted 6/20/2011 on Foreign Policy).

For months we had half-expected something like this. By the summer of 1991, the Soviet Union was falling apart at the seams. The economy was imploding, the deficit was ballooning, hard currency and gold reserves had been decimated, and Gorbachev’s stopgap reforms had only exacerbated the crisis…

…Yeltsin and the other democratic candidates had been elected to the Russian parliament in 1990 with the goal of securing more legally protected rights and freedoms, as well as a market economy, and Yeltsin had been elected president of Russia in June 1991 with almost 60 percent of the vote. But while we were secure in our popular mandate, we were utterly powerless to deal with the greatest threat to Russia: economic collapse. More than 93 percent of the economy, by our estimation, was controlled by the Soviet government. Yeltsin and those of us in his circle of closest associates soon came to believe that unless we were to content ourselves with being nothing more than a ceremonial body, we had to change the legal and economic bases of the union itself.

The government controlled 93% of the economy.  And it was falling apart at the seams.  Because bureaucrats are bad businessmen.  As demonstrated in the Soviet Union.  However, bureaucrats are good at something.  Being a bureaucrat.  And maintaining power.  The Soviet communists resisted the market reforms.  In fact, that August, the old hard-line communists effected a coup d’état.  To resist the Westernization of their country.  To hold on to their power.  At the expense of a suffering citizenry.  But Boris Yeltsin prevailed.  And the Soviet Union is no more.

Of course, it was not an easy road.  The rule of law did not quite catch up to the market reforms.  So there was a lot of corruption.  And crony capitalism.  Which is something that China saw.  And they are being very careful with their market reforms to avoid a similar fate.  But China, too, is rife with corruption and crony capitalism.  But these two nations are shaking off their communist lethargy and are becoming serious competitors in the global economy.  And China will soon be building commercial aircraft to compete against Boeing and Airbus.

Free Market Capitalism provides the Path to Success

Aircraft manufacturers are doing big and bold things.  Because they can.  By providing what the market wants.  It can do this despite the huge dollars involved.  And they don’t need any help from the government telling them what they need to build.  Or buy.

Government is full of bureaucrats who don’t know the first thing about business.  In fact, their involvement only hurts business.  Case in point:  the Soviet Union.  But that doesn’t stop bureaucrats from sticking their nose in where it doesn’t belong.  Especially in the aviation industry.  They see all that money.  And they want a piece of it to bail out their budget deficits.  The latest scheme by the Europeans is to tax carbon emissions in an Emissions Trading Scheme.  Not only are they going to tax themselves, but they’re going to tax any airline flying into the EU for their carbon emissions.  Some are concerned that this may result in a trade war.  Probably because it will.  But that’s government.  They want the money first.  Then they’ll consider the economic damage their policies cause.

One has to marvel when looking at a 747 or an A380.  Incredible examples of what private enterprise can do.  One can only imagine what other great things people could do if they didn’t have to spend so much time and money fighting their governments.  And we can only scratch our heads when we see emerging economies move towards capitalism (to emulate the success of others) while established economies with bloated bureaucracies move away from capitalism (to emulate the failures of others).

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Remembering D-Day and the Fight for/against Democracy

Posted by PITHOCRATES - June 6th, 2011

D-Day

It happened 67 years ago today.  The beginning of the end of Nazi GermanyJoseph Stalin finally got his second front.   After a couple of years of hell on earth.  The Eastern Front.  Where the war was the cruelest and most savage.  Killing people by the millions.  The Soviet Union fought and sacrificed to throw the Nazi invader out of their homeland.  A horrific price indeed for their nonaggression pact with Nazi Germany that gave Adolf Hitler the green light to launch World War II.

After years of total war most European countries lay in ruins or were conquered.  Yet they still had armies in the fight.  But by 1944, the Americans would take over and lead the fight.  Untouched by war (other than Pearl Harbor), the world’s largest economy was intact.  Took over war production for the Allies.  And American men volunteered to fight.  Including Hollywood greats like Jimmy Stewart who piloted B-24s.  The most dangerous place to be in World War II.  Before the P-51 Mustang entered service with her drop tanks to provide fighter protection all the way to and from their targets.

The second front opened with the greatest amphibious assault of all time.  The Canadians were making their second assault against Fortress Europe.  Their first, at Dieppe some two years earlier, ended badly.  Most were killed or captured.  But the Germans were tested.  And the knowledge put to use in 1944.  They and the Americans assaulted those beaches not to repel Nazi aggression from their soil.  But to help other nations to throw out the Nazi aggressors from their soil.  They didn’t fight to conquer.  They fought to liberate.  A rather new concept.  Even our then ally the Soviet Union didn’t quite do this.  They did liberate Eastern Europe from Nazi aggression, but they paid themselves handsomely for their efforts.  By taking Eastern Europe as spoils.  Exchanging the Nazi oppressor for a Soviet oppressor.

A lot of men died on this day in 1944.  And many more would die in the following year.  Their deaths helped keep liberty alive for millions.  Let’s not forget them today.  Let’s remember their selfless acts of courage.  For we live free today because they gave their lives for an ideal.  General Matthew Ridgeway, commander of the 82nd Airborne Division, reflected on the promise God made to Joshua on the eve of battle.  “I will not fail thee, nor forsake thee.”  The planners projected that 9 out of 10 paratroopers would die in battle on D-Day.  Thankfully, their losses were not that bad.  God did not fail them.  Nor forsake them.  And nor should we.

Recession?  What recession?

Of course, not everyone serves for an ideal.  A lot do it for the money.  As is evidenced during the worst recession since the Great Depression.  Because while the rest of the country suffers, the communities in and around Washington are doing just fine.  Home to 5 of the top ten richest counties in America (see Meet America’s Richest Counties by Nathan Vardi, Forbes.com, posted 5/13/2011 on Yahoo! Real Estate).

It’s No. 1, but it isn’t alone. In fact, four of the top ten richest counties in the nation are concentrated in the Virginia suburbs of Washington, and a fifth, Howard County, Md., is equidistant between Washington and Baltimore.

In recent decades northern Virginia has become an economic dynamo, driven by a private sector that feasts on government contracting. These counties are also home to corporate lobbyists, lawyers and consultants who work in or around the nation’s capital, soaking up federal government spending. And government-related hiring manages to keep the unemployment rate in places like Falls Church City down to 5.7%.

Recession?  What recession?

So while home values continue to fall throughout America and the national unemployment rate hovers at or above 9%, U.S. tax money is still flowing out from Washington as if there is no recession.  Government contracts.  Corporate lobbyists.  Lawyers and Consultants.  Feeding on all of that government spending.  This is not the ideal that men stormed beaches and jumped out of airplanes for in 1944.  To make people rich off of taxpayers struggling through difficult times.  God may not have failed these men.  But perhaps we did.

Inadequate Demand causes Unemployment, not Cheaper Workers in China and India

It would appear that Washington is more interested in the money than the people they represent.  And they’ve grown tired of the people they represent.  That uneducated rabble.  They don’t know how to vote (based on the 2010 midterm elections).  And they don’t understand monetary policy.  There are some who are tiring of this charade we call democracy.  Because what good is a democracy if the people are too stupid to know what’s best for them? 

And it’s just not the voters.  It’s those in Congress with an ‘R’ next to their name, too.  An Obama Fed nominee was shot down by the Republican opposition.  And he wrote an Op-Ed piece about it.  In it you can feel his exasperation of those less smart that he (see When a Nobel Prize Isn’t Enough by Peter A. Diamond posted on 6/5/2011 on The New York Times).

But understanding the labor market — and the process by which workers and jobs come together and separate — is critical to devising an effective monetary policy. The financial crisis has led to continuing high unemployment. The Fed has to properly assess the nature of that unemployment to be able to lower it as much as possible while avoiding inflation. If much of the unemployment is related to the business cycle — caused by a lack of adequate demand — the Fed can act to reduce it without touching off inflation. If instead the unemployment is primarily structural — caused by mismatches between the skills that companies need and the skills that workers have — aggressive Fed action to reduce it could be misguided.

In my Nobel acceptance speech in December, I discussed in detail the patterns of hiring in the American economy, and concluded that structural unemployment and issues of mismatch were not important in the slow recovery we have been experiencing, and thus not a reason to stop an accommodative monetary policy — a policy of keeping short-term interest rates exceptionally low and buying Treasury securities to keep long-term rates down. Analysis of the labor market is in fact central to monetary policy.

Well pahdon me while I play the grahnd piahno.  Nobel acceptance speech.  You can see why Obama nominated him.  He’s a good Keynesian economist that will toe the Obama line.  And encourage government growth.

These Keynesian policy wonks can’t see the forest for the trees, though.  Their answer to every recession is more government spending to correct for the lack of adequate demand.  Despite the fact that it was excessive government spending that gave us the mess we’re in.  Easy money from the Fed.  Which created the subprime mortgage crisis.  Well that and bad policy putting people into homes they couldn’t afford.  There’s the root cause for this never ending recession.  It wasn’t inadequate demand.  Or a mismatch between jobs and worker skills.  It was bad policy.  Fiscal, monetary, regulatory, etc.  This is what sends jobs to China and India.  Not inadequate demand.

Quantitative easing (QE) has not helped.  Unless you were a Wall Street investor borrowing money for free to invest.  They did okay during QE.  But it didn’t help anyone else.  In fact, it hurt everyone else.  Because there is inflation now.  It’s what pushed gas over $4/gallon again.  And made food prices go up.  Inflation courtesy of that QE.

But we should all worry about how distorted the confirmation process has become, and how little understanding of monetary policy there is among some of those responsible for its Congressional oversight. We need to preserve the independence of the Fed from efforts to politicize monetary policy and to limit the Fed’s ability to regulate financial firms…

Analytical expertise is needed to accomplish this, to make government more effective and efficient. Skilled analytical thinking should not be drowned out by mistaken, ideologically driven views that more is always better or less is always better. I had hoped to bring some of my own expertise and experience to the Fed. Now I hope someone else can.

The problem is that there are apparently too many dumb people.  And too much democracy.  Monetary policy and financial regulation should be in the hands of unelected experts chosen by people from the ‘correct’ political party.  Because these people know what’s best for us.  And the economy.

The NLRB goes after Boeing, helping Competitor Airbus

Or do they?

Boeing employs over 160,000 people.  To build all those planes.  Which is the leading export of the United States.  They’re not doing as well as they once did with Airbus on the scene.  Because Airbus doesn’t play fair.  They get government subsidies.  While Airbus claims Boeing does, too.  Planes are expensive to make.  And with Airbus taking such a large chunk of the market from Boeing, one would believe that the reason for this has to be cost.  And if Airbus planes are cheaper it’s probably because their governments subsidize them.

But that’s neither here nor there.  The point is that Boeing is a huge part of the U.S. economy.  It’s an economic juggernaut.  And you’d think government would do everything to help them to keep those 160,000 people employed.  And to keep exporting all of those airplanes.  So what does the Obama administration do?  They’re taking action against Boeing to make them less competitive.  They’re trying to prevent them from using a new factory in North Charleston, South Carolina.  Where they will use non-union labor (see Spat over Boeing plant sparks political firestorm by Allison Linn posted 6/6/2011 on msnbc).

The new factory is set to open in July. But in April the NLRB, a government agency charged with safeguarding union rights, filed a complaint accusing Boeing of violating labor law in its motive for locating the work in South Carolina.

The NLRB isn’t asking Boeing to close the new facility, but it does want the company to make a temporary production line in Washington state permanent.

Yes, Boeing is trying to be more productive.  They’re tired of fighting subsidized Airbus AND the high cost of union labor AND the costs of labor strikes.  Because they’re losing too many sales to Airbus.  Seems like a reasonable thing for Boeing to do.  But the National Labor Relations Board disagrees.  Because union dues support Democrat candidates.  And Barack Obama.  And even though “skilled analytical thinking should not be drowned out by mistaken, ideologically driven views,” it is.  For ideology always trumps analytical thinking when it favors Democrats.

“U.S. tax and regulatory policies already make it more attractive for many companies to build new manufacturing capacity overseas. That’s something the administration has said it wants to change and is taking steps to address. It appears that message hasn’t made it to the front offices of the NLRB,” McNerney wrote.

Boeing spokesman Tim Neale said the editorial should not be read as a threat that Boeing, the nation’s largest exporter and a major domestic employer, will mo[v]e operations overseas.

Moving manufacturing oversees results in higher unemployment.  So higher unemployment can result from U.S. tax and regulatory policies.  Because it moves manufacturing overseas.  Interesting.  Because there are some who believe unemployment is caused by inadequate demand.  Or a mismatch between jobs and worker skills.  And they would never entertain the thought that government policy caused this unemployment.  Because that’s just silly.  For government is full of experts using skilled analytical thinking.  Who know that in the ideal world they would be proven right.  And the only reason their policies fail is because the world isn’t ideal.  Yet.

Again, not quite the ideal that men stormed beaches and jumped out of airplanes for in 1944.

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A Limping U.S. Economy gets no help from WTO Ruling, Inflation or Entitlement Spending

Posted by PITHOCRATES - May 18th, 2011

The WTO Rules against the US/Boeing in favor of EU/Airbus

Government subsidies are costly.  In more ways than one (see WTO Airbus ruling leaves both sides claiming victory by the BBC posted 5/18/2011 on the BBC News Business).

“This report confirms for decades the European Union… [has] provided massive amounts of market-distorting launch aid and other subsidies that are inconsistent with WTO rules.”

However, Airbus’ Mr Enders claimed the decision meant Germany, France, the UK and Spain could continue providing funding for Airbus via public-private partnership arrangements…

Earlier this month in a separate case, Boeing was found guilty of receiving over $5bn of unlawful subsidies from Washington.

Ever price a Boeing 747?  If you’re looking to buy one today it’ll set you back some $300 million.  Each.  It’s a big plane with a big price tag.  But it’s a money maker.  Once upon a time she ruled the skies.  It was every airline’s long-haul choice.  Because it could carry more people than anything else out there.  And the more people you pack into an airplane the more money you make.  Economies of scale.  That’s why the Concorde is no longer in service.  It didn’t make money.  Seating only 100 people it couldn’t charge enough in ticket prices to offset the great costs of flying it and make a profit.  So it was only a prestige thing for British Air and Air France.  And a toy for the super rich.

The 747 soon faced competition from Airbus.  First the A330 and A340.  Then the double-decker A380Boeing lost sales to Airbus.  And not always fairly.  According to them.  The consortia that made up Airbus (Germany, France, the UK and Spain) subsidized Airbus.  Thus making Airbus planes more cost competitive than those from rival Boeing.  Why does this matter?  Look again at the price of a 747.  It’s the biggest U.S. export product.  And in a nation with a declining manufacturing base and an increasing trade deficit, anything that reduces sales of Boeing planes hits their balance of trade hard.  So much so that even the U.S. government tries to subsidize Boeing to help them compete against Airbus.

With the WTO ruling, Airbus subsidies will continue.  Cutting more into U.S. manufacturing.  And increasing the trade deficit.  Not good economic news for the Americans.  Among other bad news.

Unemployment and now Inflation

Ben Bernanke has been trying to resuscitate a flat-lining U.S. economy with free money.  Hasn’t improved the numbers much.  The unemployment rate just went up.  The economy isn’t looking good.  And now this (see Inflation concerns dominate April Fed meeting by the Associated Press posted 5/18/2011 on the Los Angeles Times).

The Federal Reserve last month began debating how it should start reversing policies that pumped billions of dollars into the economy during the recession. Some members said the Fed might need to start boosting interest rates this year to guard against inflation…

Some members thought the Fed would need to start signaling that record-low interest rates would need to rise. A few members believed the Fed might need to boost its key interest rate or start to sell some of the assets in its portfolio later this year. Both moves would lead to tighter credit and higher rates on consumer loans.

Inflation.  Like the Americans didn’t have enough to worry about with a declining manufacturing base, a growing trade deficit, high unemployment and a recession that doesn’t end.  And if that wasn’t bad enough, entitlement spending just keeps piling on the woe in large deficits.  That adds to the debt.  Forcing the Americans to borrow ever more.  So much so that Standard and Poor’s took notice and lowered their outlook for the U.S. economy.  Not a good thing when you’re trying to sell treasury bonds.  Things are getting a little difficult in the United States.

Entitlement Spending Heralding the end of the Republic?

Thankfully, America has a representative republic.  Where there are responsible, disinterested wise people between the people and the treasury.  Because the masses don’t understand public finance as well as these wise people, the wise can step in and protect the people from themselves.  For as Benjamin Franklin warned, once the people learn they can vote themselves the treasury it will herald the end of the republic.  So they, the wise, will step in and address the entitlement spending problem.  Per the responsible, disinterested Founding Fathers‘ design (see Healthcare ills infect 2012-bound Republicans by Patricia Zengerle posted 5/18/2011 on Reuters).

The Republican budget plan passed by the House of Representatives last month would repeal the Obama healthcare law, scale back spending on the state/federal Medicaid healthcare program for the poor and implement the plan from Ryan, chairman of the House Budget Committee.

With polls showing two-thirds of Americans prefer to keep Medicare in its current form, Democrats have been rushing to take political advantage…

“Candidates already are capitalizing on this issue and using it to say Republicans are outside the mainstream,” said Darrell West of the Brookings Institution think tank.

Or not.  Some will take the low road.  And politicize the crisis for personal gain.  Even knowing full well that today’s gains could very well destroy Social Security, Medicare and Medicaid for future recipients.  This would be the polar opposite of the selfless Founding Fathers.  Who tried to build a nation that would stand the test of time.  Unlike the selfish of today who are just looking out for themselves.

The Here and Now versus Tomorrow

Everyone knows there is an entitlement spending problem.  And some are more than willing to trade a hard future for an easier today (see FEULNER: Saving the American dream by Ed Feulner posted 5/16/2011 on The Washington Times).

America is on the verge of becoming a country in decline – economically stagnant and permanently debt-bound, heavily regulated and bureaucratic, less self-governing and less free…

To get our fiscal house in order, we must address Social Security, Medicare and Medicaid, the three so-called “entitlement” programs that together account for 43 percent of federal spending…

Almost half of the federal budget is entitlement spending.  And it’s growing.  Baby boomers are now retiring.  Living far longer into retirement than anyone guessed.  And because they’re living longer into retirement they’ve consuming far more health care than anyone guessed.  They cannot sustain this spending.  It’s why GM went bankrupt.  It was those generous union contracts that did her in.  Pensions and health care.  Spent on people no longer working.  Now America is GM writ large.  And anyone who thinks it can end differently is in denial.

Edmund Burke reminds us to think of our time on this earth not as an individual and temporary event, but rather as a partnership “between those who are living, those who are dead and those who are yet to be born.”

Those in Washington are not looking to the past or the future.  Apparently, all they care about is the here and now.  And as long as they get theirs they don’t care about tomorrow.  If you listen closely, that sound you hear is the tears of the Founding Fathers.  Or the cursing.  For I understand that George Washington had quite the temper.

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LESSONS LEARNED #56: “It’s competition in the private sector that makes life better. Not government regulation.” -Old Pithy

Posted by PITHOCRATES - March 10th, 2011

Deregulation makes Air Travel Cheaper and Safer

A lot of people bitched about the deregulation of the airlines.  Mostly union people.  Because before they were deregulated it was very expensive to fly.  Ticket prices were out of the reach of most of middle class America.  But, with those high prices, the airlines made a lot of money.  And the unions got a lot of that money.  Union members warned about safety with deregulation.  If they lowered ticket prices so anyone could fly there wouldn’t be enough money to maintain the highly skilled personnel to fly and maintain the airplanes.  If you put profits before safety planes could start falling out of the sky.

Well, they deregulated the airlines in 1974.  Government no longer controlled the price of tickets, air traffic routes or the number of airlines allowed to operate.  Ticket prices fell.  More airlines began operations.  More cities built airports.  More people were flying than ever before.  All people.  Not just the rich.  Deregulation was a huge success.  Except for unions.  For them it wasn’t quite the gravy train it was before deregulation.  So did safety suffer?  No.  Quite the contrary.

In 1959 there were 40 fatal accidents per million departures (at the beginning of the jet age).  That number fell to about 10 in 1960.  During the Sixties it was at or below 5.  The number fell by approximately half during the Seventies.  It fell to about 1 after the Seventies with a spike of about 1.5 in 1988.

At the beginning of the jet age, few in the government bureaucracy knew anything about jets.  So it was mostly the manufacturers and the airlines policing themselves as they developed jetliner travel.  And they did a pretty good job.  After deregulation air travel exploded with the new jets.  They were safe enough that people weren’t afraid to fly on them.  And they did.

Boeing and Douglas lead the way in the Jet Age

Competition drove early jet travel.  Air travel was growing and the airlines needed planes that could carry more people, fly farther and faster.  If they had the planes they could fly the people.  Two of America’s manufacturers stood up in a big way.  Boeing built the 707.  And Douglas built the DC-8.  This competition produced two jetliners that were safe to fly and they moved more people farther than any propeller plane.  There were some accidents in the beginning but they were less compared to the propeller planes they replaced. 

Air travel continued to grow.  There was a demand for bigger airplanes.  A bigger plane could move more people at a lower cost per person.  This meant even lower ticket prices.  And made air travel more affordable to the less rich.  Boeing rolled out the 747.  McDonnell Douglas (the merger of Douglas with McDonnell Aircraft Corporation) rolled out the DC-10.  The first of the wide-bodies.  The Boeing 747 went on to become a huge success with an incredible safety record.  It still flies today.  Few airplanes make people feel safer.  The DC-10, on the other hand, did not make people feel as safe.  For a period of time.  And that marked the beginning of the end of McDonnell Douglas.

McDonnell Douglas was a very successful company.  They built thousands of DC-9s and MD-80/90s.  Over 2,000.  These are very reliable and safe aircrafts.  The DC-9 had only 0.76 fatal accidents per million departures (PMD).  The MD-80/90s had only 0.31 fatal accidents PMD.  You’ll still see a lot of these flying today.  It has proven to be a very reliable airframe.  The DC-10, though, had a bumpier road with less than 500 built.  It, too, was a good airplane.  But it was involved with some very high-profile accidents.  And it got a reputation as an unsafe design.

A Close Call with the Cargo Hold Door of a DC-10

The cargo hold door on the DC-10 opened outward.  This allowed room for more cargo.  Doors that open in take up cargo space.  Which reduces revenue.  The more cargo you can carry, the more revenue you make and the lower ticket prices can be.  It’s just one in many ways to reduce the cost of air travel.  And it was yet another thing that made the DC-10 profitable to fly.

Airlines bought the DC-10 and put it into service.  It performed well.  But that cargo door would become an issue.  Doors on an airplane typically open inward.  For a good reason.  Once a plane reaches an altitude of 10,000 feet, it has to be pressurized so people can breathe normally.  That places a lot of pressure inside the passenger and cargo compartments.  The only ‘holes’ in the aircraft have doors that seal tighter at these higher interior pressures.  Because they open inward.  The cargo door on the DC-10, though, needed a special latching mechanism to withstand those pressures without opening in flight.  Because it opened outward.

Closed properly there was no problem.  But sometimes it wasn’t.  In 1972, a DC-10 departing from Detroit suffered an explosive decompression as it climbed above 10,000 feet.  The cargo door failed.  The sudden decompression collapsed the passenger floor and damaged the aircraft’s control cables and hydraulics.  The rudder was deflected full left.  The engines throttle levels slammed back to idle.  The tail-mounted engine control cables were severed completely.  The elevator provided little control.  The pilots varied the thrust on the wing-mounted engines to maneuver the aircraft back to the airport.  They compensated for the deflected rudder with asymmetric thrust on the wing engines.  Without a functioning elevator the nose dropped at lower speeds.  So they landed at a higher speed than normal.  As they slowed the force of the rudder declined and the asymmetric thrust took over, pulling the aircraft off the runway.  It was a tremendous piece of flying by the crew that brought that plane back without loss of life.

A Pair of Crashes Threaten the DC-10 and McDonnell Douglas

The rear cargo door was studied and some changes were made.  Issues with floor strength in the new wide-bodies were questioned.  They just started flying.  This was new territory for everyone.   No significant change was made.  Other DC-10s were flying safely.  This may have just been an isolated incident of human error (closing the cargo door incorrectly).  Then, in 1974, it happened again.  In a series of human errors that doomed a Turkish Airlines plane leaving Paris for London.  A different seat configuration put more people over the floor that collapsed on the Detroit flight.  The explosive decompression tore through the cabin floor, causing greater damage to the control cables and hydraulics than on the Detroit flight.  There was nothing the flight crew could do.  The plane was uncontrollable.  It crashed, killing all 346 aboard.  The largest loss of life to date.  And the first crash of a new wide body.

The subsequent investigation painted the DC-10 as unsafe.  Then in 1979 another catastrophic accident at Chicago’s O’Hare airport.  During takeoff.  After passing V1 (the speed the aircraft could no longer abort and stop safely on the runway) the left wing-mounted engine and pylon tore away from the wing.  The pilots had no idea what had happened other that an engine had lost all thrust.  They couldn’t see the wing from the flight deck.  So they followed procedures for a two-engine takeoff.  But the damage to the leading edge of the left wing was severe.  The leading edge slats retracted with the severing of the hydraulic lines.  The left wing now had a slower stall speed than the right wing.  But they didn’t know.  And they had no indication in the cockpit.  The plane was flying.  They climbed out per procedure.  They powered back from take-off power.  And when they did, the left wing started to dip.  In the few seconds they had to understand what was happening it was too late.  The wing stalled.  The plane rolled left and pitched down.  And crashed.  Killing all 271 aboard.

Was this a design flaw?  No.  Again, it was human error.  The maintenance crew did not follow published maintenance procedures.  The left engine and pylon was replaced after routine maintenance.  The maintenance manual called for the engine removal first.  Then the engine pylon.  Some airlines were replacing the engine and pylon as an assembly.  This saved maintenance hours (and cut costs).  And was safer because it reduced the number of fuel, hydraulic and electrical wiring that had to be disconnected and reconnected.  Or so they thought.  Lifting the engine and pylon assembly to the underside of the wing attachment point was a delicate procedure, though.  That’s a lot of mass pressed against the mounting flange.  And in this case, they pushed the assembly up too high into the flange, deforming it and causing a fracture.  No one knew this as they accelerated down that O’Hare runway.  As they approached take off speed the flange broke completely, sending that engine up and over the wing.

Plane Crashes don’t help Sell Planes or Tickets

With these high-profile accidents the DC-10 got a reputation for being unsafe.  Orders fell.  While orders for the Boeing 747 remained strong.  Even though they had similar safety records.  The early 747s had 1.41 fatal accidents per PMD (the later 747-400 had 0.19 fatal accidents per PMD).  The DC-10 had 1.36 fatal accidents per PMD.  It was as safe if not safer as the 747s that were flying during the same time.  But the public relations damage was done.  Boeing sales grew.  McDonnell Douglas sales fell.  The business founded by Donald Douglas in 1921 is no more.  Unable to compete with Boeing (or Airbus) any longer, McDonnell Douglas merged with Boeing.

McDonnell Douglas had a very successful run.  But the Boeing 747 went on to dominate the wide-body market.  And one wide-body paid a lot more bills than a bunch of narrow-bodies.  Commercial planes have only gotten bigger.  The Airbus 380 is a double decker that can carry over 800 passengers.  And is giving the Boeing 747 a run for its money.  Who knows what might have happened if not for these high-profile accidents.  McDonnell Douglas had even floated the idea of a double decker airplane.  By that time, though, it was too late.

Competition between Boeing and Douglas introduced the jet age.  Their continued competition gave us wide-body jetliners.  Average people could fly anywhere in the world.  And air travel got safer through the years.  Government regulation didn’t make this happen.  Yes, the government made some planes safer.  But not until after a crash.  And they were few and far between.  The vast majority of commercial aviation flew safely.  Because manufacturers and airlines have a vested interest in being safe.  For a very good reason.  Plane crashes don’t help you sell planes.  Or tickets.  But they can put you out of business.  Even if they aren’t your fault.  Something McDonnell Douglas knows only too well.

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FUNDAMENTAL TRUTH #11: “Before you condemn capitalism, imagine a world without professional sports, movies, cell phones and tampons.” -Old Pithy

Posted by PITHOCRATES - April 27th, 2010

PEOPLE HAVE SOME strong opinions about capitalism.  Both good and bad.  So what is it?  What is capitalism?

Merriman Webster OnLine defines it as:

An economic system characterized by private or corporate ownership of capital goods, by investments that are determined by private decision, and by prices, production, and the distribution of goods that are determined mainly by competition in a free market.

To explain this let’s start by explaining what it replaced.  In fact, let’s go further back.  A few hundred years when life truly sucked by our standards.  During the Middle Ages, people barely lived.  People worked very hard and had little time off.  When they did they usually spent it sleeping, being sick, dying or being dead.  You grew or killed what you ate.  You built your own house.  You made your own clothes.  You died probably no further than a short walk from where you were born.  And you worked your whole life somewhere in between.

Think of peasant or serf.  That’s what most were.  Tied to the land.  You had no choices.  If you were born on the land you worked the land.  Until you died.  The land owned you and someone owned the land.  You worked the land at the grace of the owner.  You helped produce his food and, in return, he let you have a small parcel of land to grow your food.  There was a bond of loyalty between landlord and tenant.  Land and protection in exchange for backbreaking, never-ending labor.  Doesn’t sound good until you consider the alternative.  Death by famine.  Or death by murder at the hands of roving bands of outlaws.

Improvements in farming led to more food production.  Eventually, there were food surpluses.  This meant not everyone had to farm.  Some could do other things.  And did.  They became specialists.  Artisans.  Craftsmen.  Cities grew in response to commerce.  People went to market to trade for things they wanted.  Then they started using money, which made getting the things they wanted easier (it’s easier to go to the market with a coin purse than with a sack of grain or a side of beef).  Life got better.  People enjoyed some of it.

THUS BEGAN THE rise of a middle class.  Those city folk making things or doing something.  They were good at what they did and people gladly paid for what they did.  These specialists then improved what they did and thought of new things to do.  They created things to make their work easier.  These individual specialists grew into manufacturing shops.  The cost of production only limited their output.  And banking solved that problem.

Alexander Hamilton, one of America’s Founding Fathers, was a capitalist.  And he thought big.  Money is nice but what can it get you?  A few things for the home?  Something for the wife?  Maybe some new farm tools.  Good stuff, yes, but nothing big.  Lots of little sums of money all over the place can buy lots of little things.  But when you pool lots of little sums of money you get one big-ass pile of it.  That money is now capital.  And you can do big things with it.

And that’s what banking has given us.  People with ideas, entrepreneurs, could now borrow money to bring their ideas to market.  And this is, in a nutshell, capitalism.  The free flow of ideas and capital to make life better.  Making life better wasn’t necessarily the objective; it’s just the natural consequence of people mutually partaking in a free market.

BUT WHAT ABOUT the Soviet Union?  Didn’t they do big things, too?  They built jetliners.  They had a space program.  They had factories.  They did these and other things without capitalism.  They did these things for the good of the people, not for profits.  Isn’t that better?

Talk to someone who wiped their ass with Soviet-era toilet paper.  Let me save you the trouble.  It didn’t feel good.  Unless you enjoy the feel of sandpaper back there.  And to add insult to injury, you had to wait in line to get that toilet paper.  If it was available.

When you think of the Soviet economy you have to think of stores with empty shelves and warehouses full of stuff no one wants.  This is what a command economy does for you.  Some bureaucrat, not the consumer, determines what to sell.  And one person simply cannot figure out what a hundred million plus want.  To get an idea of how difficult this is, pick a movie that 4 of your friends would love to see.  Pick a couple of guys and a couple of girls.  For diversity.  And remove the possibility of sex completely from the equation.  Now pick.  Not so easy, is it?  Now try to pick a movie a hundred million people would love to see.  Can’t do it, can you?  No one can.  Because people are diverse.  One size doesn’t fit all.

Soviet president Mikhail Gorbachev asked Margaret Thatcher how she made sure her people had enough food to eat.  The Soviets were having difficulty feeding theirs.  In fact, they were importing grain from their archenemy.  The United States.  The answer to Gorbachev’s answer was that Thatcher did nothing to feed her people.  The free market fed her people.  Capitalism.

As far as those other big things the Soviets did, they acquired a lot of the knowledge to do those things through an elaborate network of espionage.  They stole technology and copied it.  And they were the first into space because their captured Nazi rocket scientists did it before our captured Nazi rocket scientists did.  (The seed of the space industry was the Nazi V-2 rocket that reigned terror on London and other cities during World War II).

(Lest you think that I’m ripping on the Soviet/Russian people, I’m not.  Just their economic system during the Soviet era.  Their people have suffered.  And persevered.  It was them after all who first threw back Napoleon in Europe.  And it was them who first threw back the Nazis in Europe.  They gave us Pyotr Ilyich Tchaikovsky, Sergei Rachmaninoff, Leo Tolstoy, Fyodor Dostoyevsky, Mikhail Dolivo-Dobrovolsky and, of course, Maria Sharapova to name just a few of the greats.  Good people.  Just sometimes bad government.  As in most nations.  Even in the U.S.)

SO WHAT IS the basic difference between capitalism and a command economy like that of the former Soviet Union?  Probably the freedom to take and accept risk.  Bankers take a risk in loaning money.  They analyze the risk.  If the return on the loan is greater than the risk, they’ll make the loan.  It’s their call.  And they’re pretty good.  Their successes are far greater than their failures.

Some loans are riskier than others.  There’s a greater chance of failure.  But it could also be the next, say, Microsoft.  Or Apple.  If so, even though there’s great risk, the potential of reward is so great that people will want to loan money.  They’ll buy junk bonds (high risk/high yield) or an initial public offering of stock.  They’ll risk their money for a greater return on their investment.  If it pays off.  And they don’t always do.  But good ideas with potential typically find financing.  And investors typically make more money than they lose.  It’s a pretty good system.  Capitalism.

WHEN YOU HAVE risk takers who choose to participate in the free flow of ideas and capital, great things happen.  Modern AC electrical power that we take for granted is invented (thank you Nikola Tesla for the genius and George Westinghouse for taking the risk).  You develop modern commercial jet aviation (thank you Boeing for the 707, 727, 737, 747, well, you get the picture).  You transform the world when you add impurities to semiconducting material and sandwich them together (thank you John Bardeen, Walter H. Brattain and William B. Shockley for the transistor).

These great things, along with others, give us professional sports (stadiums, transportation to and from the stadium, jetliners to take teams to other stadiums, oil exploration and refining for jet and car fuel, etc.).  They give us movies (financing, cameras and production equipment, special effects, theaters, popcorn, DVDs for home viewing, etc.).  They give us cell phones (cellular towers, switching networks, compact and long lasting batteries, interactive handheld devices, voicemail, email, texting, etc.).  And they liberated women to do whatever they want wherever they want by making feminine hygiene protection portable and plentiful (mass production, rail and truck transport, retail and vending outlets, etc.) and by providing convenient privacy (public toilet facilities with vending machines and disposal bins). 

Imagine any of these things provided by the same people who renew our driver’s license.  Do you think any of it would be as good?  Or do you think it would be more like Soviet-era life?  There’s so much we take for granted in capitalism because we can.  It’s a system that works on basic human nature.  It doesn’t require sacrifice.  It doesn’t depend on consensus.  It just needs the free flow of ideas and capital.  And great things follow.

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