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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Cars and Drugs kill more People than Guns

Posted by PITHOCRATES - May 4th, 2013

Week in Review

The Obama administration and those on the left are making a full-court press to enact some kind of gun control legislation.  Because of the epidemic of gun violence.  As proven by the Sandy Hook Elementary School massacre.  The Aurora movie theater massacre.  The Virginia Tech massacre.  Etc.  It’s a killing field out there.  All because of guns.  The deadliest threat people face today.  Or so they would have you believe (see Highway Deaths in U.S. Rise After Six Years of Declines by Angela Greiling Keane posted 5/3/2013 on Bloomberg).

The number of people killed on U.S. highways rose in 2012 to end a run of six consecutive declines, the longest streak in the nation’s history.

Crash fatalities rose 5.3 percent to an estimated 34,080 from a year earlier, the U.S. National Highway Traffic Safety Administration said today in a report.

If you do the math that comes to 32,365 deaths in 2011.  According to the CDC this exceeds the number of deaths by firearms in 2011 (the latest numbers available—see Table 2. Deaths, death rates, and age-adjusted death rates for 113 selected causes, Injury by firearms, Drug-induced Injury at work, and Enterocolitis due to Clostridium difficile: United States, final 2010 and preliminary 2011, page 19).  Deaths by firearms in 2011 totaled 32,163.  Cars killed more people than guns in 2011.  Yet all we hear about is restrictions in gun ownership.  Even limiting the capacity of magazines to make guns safer.  But we hear nothing about making cars bigger, heavier and safer to protect their occupants in a car crash.  Why?  Apparently the government doesn’t care about 32,000+ dying a year in car crashes.  Seeing that as a small price to pay to make cars more environmentally friendly.  These people are just collateral damage in the war to save the planet from carbon emissions.

Killing even more people in 2011 were drugs.  Drugs killed 40,239 people in 2011.  And here we are.  Decriminalizing marijuana in a few of our states.  Which may be only a prelude to decriminalizing harder drugs.  For drugs like prostitution is a victimless crime, yes?  If people want to use drugs in the privacy of their own home what business is it of government?  So what if drugs kill more people than cars.  Or guns.  It’s time we stop passing judgment on others.  Unless, that is, they want to own a gun.

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Waterwheel, Rotational Motion, Reciprocal Motion, Steam Engine, Internal Combustion Engine and Hydraulic Brakes

Posted by PITHOCRATES - December 5th, 2012

Technology 101

To Keep People on Trains they Undercharge Passengers and make up the Difference with Government Subsidies

We built some of our first factories on or near a river.  Where we could use that river’s current to turn a waterwheel.  To provide a rotational motion that could do work for us.  We transmitted that rotational motion via a main drive shaft through a factory where it could drive machinery via belts and pulleys.  Once we developed the steam engine to provide that rotational motion we could move our factories anywhere.  Not just on or near a river.  Giving us greater freedom.  And permitting greater economic growth.  As we put those steam engines onto rails.  That transported freight and people all across the country.

Trains are nice.  But expensive.  To go anywhere on a train you need train tracks going there.  But train tracks are incredibly expensive to lay.  And maintain.  If you ever stared at a set of train tracks you probably noticed something.  There aren’t a lot of trains going by on them.  When a train stops you when you’re running late or bringing home dinner it may feel like trains are always stopping you.  But if you parked at those same tracks for a few hours you wouldn’t see a lot of trains.  Because even the most polished rails (the more train traffic the more polished the rails) are unused more than they are used.

This is why trains are very expensive.  Tracks cost a lot of money to lay and maintain.  Costs that a railroad has to recoup from trains using those rails.  And when you don’t have a lot of trains on those rails you have to charge a lot for the trains that do travel on them.  A mile-long train pulling heavy freight can pay a lot of revenue.  And make a railroad profitable.  But passenger trains are not a mile long.  And carry few people.  Which means to make money on a passenger train you’d have to charge more for a ticket than people would pay.  To keep people on trains, then, they have to undercharge passengers.  And make up the difference with government subsidies.

A Crank Shaft and Combustion Timing takes Reciprocal Motion of Pistons and Converts it into Rotational Motion

This is why people drive places instead of taking the train.  It’s far less expensive to take the car.  And there are roads everywhere.  Built and maintained by gas taxes, licenses and fees.  And if you’ve ever driven on a road you probably noticed that there are a lot of cars, motorcycles, trucks and buses around you.  With so many vehicles on the roads they each can pay a small amount to build and maintain them.  Which is something the railroads can’t do.  Only trains can travel on train tracks.  But cars, motorcycles, trucks and buses can all travel on roads.  This is why driving a car is such a bargain.  Economies of scale.

To operate a train requires a massive infrastructure.  Dispatchers control the movement of every train.  Tracks are broken down into blocks.  The dispatchers allow only one train in a block at a time.  They do this for a couple of reasons.  Trains don’t have steering wheels.  And can take up to a mile to stop.  So to operate trains safely requires keeping them as far apart from each other as possible.  Traveling on roads is a different story.  There are no dispatchers separating traffic.  Cars, motorcycles, trucks and buses travel very close together.  Starting and stopping often.  Traveling up to high speeds between traffic lights.  With motorcycles and cars weaving in and out among trucks and buses.  Avoiding traffic and accidents by speeding up and slowing down.  And steering.

Driving a car today is something just about anyone 16 and older can do.  Thanks to the remarkable technology that makes a car.  Starting with the internal combustion engine.  The source of power that makes everything possible.  Just like those early waterwheels the source of that power is rotational motion.  But instead of a river providing the energy an internal combustion engine combusts gasoline to push pistons.  A crank shaft and combustion timing takes that reciprocal motion of the pistons and converts it into rotational motion.  Spinning a drive shaft that provides power to drive the car.  As well as power all of its accessories.

The Friction of Brake Shoe or Pad on Steel slows the Car converting Kinetic Energy into Heat

The first cars required a lot of man-power.  It took great strength to rotate the hand-crank to start the engine.  Sometimes the engine would spit and cough.  And kick back.  Breaking the occasional wrist.  Once started it took some leg-power to depress the clutch to shift gears.  It took a little upper body strength to turn the steering wheel.  And some additional leg-power to apply the brakes to stop the car.  In time we replaced the hand-crank with the electric starter.  We replaced the clutch and gearbox with the automatic transmission.  We added power steering and power breaks to further reduce the amount of man-power needed to drive a car.  Today a young lady in high heels and a miniskirt can drive a car as easily and as expertly as the first pioneers who risked bodily harm to drive our first cars.

The internal combustion engine can spin a crankshaft very fast and accelerate a car to great speeds.  Which is good for darting in and out of traffic.  But traffic occasional has to stop.  Which is easier said than done.  For a heavy car moving at speed has a lot of kinetic energy.  You can’t destroy energy.  You can only convert it.  And in the case of slowing down a car you have to convert that kinetic energy into heat.  When you press the brake pedal you force hydraulic fluid from a master cylinder to small cylinders at each wheel.  As fluids cannot compress when you apply a force to the fluid that force is transmitted to something than can move.  In the case of stopping a car it is either a brake shoe that presses against the inside of the car’s wheels.  Or a caliper that clamps down on a disc.  The friction of brake shoe or pad on steel slows the car.  Converting that kinetic energy into heat.  In some cases of excessive braking (on a train or a plane) the heat can be so excessive that the wheels or discs glow red.

So as the internal combustion engine and the brakes play their little games of speeding up and slowing down a car the rotational power of the crankshaft drives other accessories.  Such as power steering.  Where a belt and pulley transfers that rotational power to a power steering pump.  The pump pushes fluid to the steering gear to assist in turns.  Another belt and pulley connects an alternator to the crankshaft to produce electricity to provide power for the car’s electrical systems.  And to charge the battery so it can spin the automatic starter.  Another belt and pulley connects another compressor to the crankshaft.  This one for air conditioning.  That allows us to alight from our cars shower-fresh on the hottest and most humid days of the year.  And, finally, antifreeze removes the heat of combustion from the internal combustion engine and transfers it to a heating core inside the passenger compartment.  Allowing a warm and comfortable drive home during the coldest of days.  As well as keeping our windows free of snow and ice so we can see to drive safely on our way home.  Through bumper to bumper traffic.  Something we do day after day with the ease of doing the laundry.  Thanks to the remarkable technology that we take for granted that makes a car.

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FT127: “Obamacare is a lot like the Smoot-Hawley Tariff in terms of scaring the bejesus out of businesses.” -Old Pithy

Posted by PITHOCRATES - July 20th, 2012

Fundamental Truth

The Roaring Twenties gave us Automobiles, Electric Power, Radio, Movies, Telephones and Air travel

In 1921 there were 9 million automobile registrations.  That jumped to 23 million by 1929.  An increase of 156%.  That’s a lot more cars on the roads.  In the Roaring Twenties we made cars out of steel, paint and glass.  Inside we fitted them with lumber, cotton and leather.  We put rubber tires on them.  And filled their fuel tanks with gasoline.  So this surge in car ownership created a surge in all of these industries.  Extraction of raw materials.  Factories and manufacturing plants to build the equipment to extract those raw materials.  As well as the machinery to build these automobile components.  And the moving assembly lines in assembly plants to assemble these automobiles.  The plants, warehouses and automobile dealers created a surge in the construction industry.  And all the industries that fed the construction industry.  Including the housing industry to house all these gainfully employed workers.

And this was just the auto industry.  Which wasn’t the only industry that was booming during the Roaring Twenties.  Thanks to the hands-off government policies of the administrations of Warren G. Harding and Calvin Coolidge businesses introduced us to the modern world.  Electric power came into its own.  By 1929 about 80% of all installed horsepower was electrical.  And it entered our homes.  Electric lighting and electric appliances.  Vacuum cleaners.  Washing machines.  Refrigerators.  All of this required even more raw material extraction from the ground.  More manufacturing equipment and plants.  More wholesale and retail construction.  And more housing to house all of these workers earning a healthy paycheck.

And there was more.  The Roaring Twenties gave us broadcast radio in our electric-powered homes.  Free entertainment, sports broadcasts and news.  Paid for by the new industry of advertising.  Competing with radio was another growing industry.  Motion pictures.  That by the end of the Roaring Twenties were talkies.  And speaking of talking there was a lot of that on the new telephone.  In our homes.  Interconnecting all of these industries was ship, rail and truck transportation.  Even air travel took off during the Twenties.  More raw material extraction.  More equipment.  More manufacturing.  More construction.  And jobs.  More and more jobs.  The hands-off government policies of the Harding and Coolidge administrations created the great Bull Market of the Twenties.  Explosive economic activity.  Real economic growth.  Creating low-cost consumer goods to modernize America.  Increase her productivity.  Making her the dominant economic power in the world.  The Europeans were so worried about America’s economic prowess that they met in 1927 at the International Economic Conference in Geneva to discuss the American problem.  And how they were going to compete with the American economic juggernaut.  Because the free market capitalism of the New World was leaving the Old World in the dust.

Herbert Hoover was a Republican in Name Only that FDR once Admired but Calvin Coolidge Despised

This was real economic growth.  It was not speculation.  This wasn’t artificially low interest rates creating an asset bubble.  Working Americans bought homes and cars.  And furnishings.  Businesses produced these to meet that demand.  They had growing sales.  And growing profits.  Which increased their stock prices.  Investors wanted to own their stocks because these companies were making money.  And with the world modernizing these stock prices weren’t going anywhere but up in the foreseeable future.  Unless something changed the business environment.  Well, something did.

Despite the roaring economy Calvin Coolidge did not run for a second term.  Which was a pity.  For his successor, Herbert Hoover, was a Republican in name only.  He was a big time progressive.  Who wanted to use the power of government to make the world perfect.  A devout believer in the benevolence of Big Government.  He added about 2,000 bureaucrats to the Department of Commerce.  FDR at one time admired him (before he ran against him for president).  Coolidge despised him.  Under Hoover the federal government intruded into the private sector.  His economics were Keynesian.  He, too, worshipped at the altar of demand.  He believed high wages were the key to prosperity.  For people with more money buy more.  And all that buying created demand for businesses to meet.  Even during a recession he believed wages should not fall.  Despite the fact that’s what recessions do on the back side of the business cycle.  Lower prices and wages.  And lay off people.

By the Twenties American farmers were mechanizing their farms.  Allowing them to grow more food than ever before.  Agriculture prices fell.  At first this wasn’t a problem as there were export markets for their bumper crops.  Thanks to a war-devastated Europe.  But eventually the European soldiers returned to the farm.  And the Europeans didn’t need the American food anymore.  Even places tariffs on U.S. imports to their countries to help their farmers get back on their feet.  Add in a bad winter that killed livestock.  Some bad insect infestation in the summer.  Add all this together and you had the beginning of the great farm crisis.  Debt defaults.  Bank failures.  And the contraction of the money supply.  Which the Federal Reserve (the Fed) did not step in to compensate for by expanding the money supply.  Which was sort of their purpose for being in existence.  As there was less money to borrow business could longer borrow to continue their growth.  Because of the time factor in the stages of production to expand production required borrowing money.  To make matters worse the Fed was actually pulling more money out of circulation.  Because they looked at the rising stock prices and concluded that speculators were borrowing money to invest in the stock market.  Thus inflating stock prices.  But it wasn’t speculators running up those prices.  It was an economic boom that was running up those stock prices.  Until the government put a stop to that, at least.

Bad Government Policy didn’t Create the Roaring Twenties but Bad Government Policy ended Them

The Smoot-Hawley Tariff was close to becoming law in the fall of 1929.  It was moving through committees on its way to becoming law.  This tariff would raise the tax on all imports by about 30%.  The idea was to protect domestic supplies and manufacturers.  But even in 1929 it was a global economy.  A lot of imports entered the stages of production.  Which meant costs would be increasing throughout the stages of productions.  Greatly increasing the input costs of all those businesses enjoying those high stock prices.  Which would raise their prices (to cover those higher input costs).  Reducing their sales.  And slashing their profits.  Add this to the contracting money supply and it painted a very bleak picture for business.

With demand sure to fall due to a massive new tariff that was about to become law businesses cut back.  To get rid of what was about to become excess capacity.  For they were smart.  And understood what affected their businesses.  And you know who else were smart?  Investors.  Who looked at this tariff and saw a locomotive engineer about to slam on the brakes.  And if Congress passed this into law after 1928 Coolidge wasn’t going to be there to veto the law.  So they all came to the same conclusions.  The bull market was coming to an end.  And they wanted to sell their stock to lock in their stock gains.  Which caused the great sell-off of 1929.  And the stock market crash.  Starting the Great Depression.

People still debate the cause of the Great Depression.  A popular argument is that greedy investors caused it by speculating in the stock market.  Or that greedy businesses out-produced demand.  But the economics of the Roaring Twenties don’t support this.  This wasn’t people buying big houses because interest rates were low.  This was the electrification of America.  Cars.  Telephones.  Radio.  Movies.  Air travel.  This was broad and real economic growth.  Bad government policy didn’t create it.  But bad government policy ended them.  And it was the expectations of even worse government policies that yanked the rug out from underneath the economy.  By causing a business contraction and stock market sell-off.  Much like Obamacare is doing to businesses today.  Scaring the bejesus out of them.  For they have no idea what their future costs will be under Obamacare.  So they are doing their best to prepare for it.  By not expanding their businesses.  By not hiring anyone.  And sitting on their cash.  To prepare for the worst.  Much like businesses did in 1928.  Which explains why the Great Recession lingers on.

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Californians hate their Environmental Policies so much they buy Chevy Volts to Cheat the System

Posted by PITHOCRATES - June 9th, 2012

Week in Review

Buses are cheaper than trains.  Because all a bus needs is fuel in its tanks and firm ground to drive on.  A train on the other hand is very expensive.  Because wherever a train goes you need a dedicated road (i.e., railroad tracks).  A massive infrastructure wherever that road goes.  And an army of people to maintain and operate it.  Subways are even more expensive.  Because they are underground.  Which makes everything more costly.

California has spent a fortune on their trains in the greater Los Angeles area.  So let us compare a few statistics on both buses and trains.  Buses are more numerous.  They have 183 bus routes covering 1,433 square miles.  While they have 5 rail lines for a total of 79.1 rail miles in service.   Their buses have average weekday boardings of approximately 1,125,840.  While their trains have average weekday boardings of approximately 319,883.  (These numbers are approximate because one train line’s boardings are included in the Metro Bus ridership numbers for some reason). 

It is clear their trains are not moving anywhere near the number of people their buses are moving.  And for all that investment it hasn’t even helped to remove cars from the road or cut pollution.  Because the roads are still so congested that they have High Occupancy Vehicle (HOV) or car pool lanes on their expressways.  To encourage people to save the planet.  By jamming as many people into a car as possible for their commutes to work.  For if they do they can take the less congested HOV lanes and cut an hour or so off of their drive time.  Well, it turns out that not only do Californians hate taking the bus and train they also hate car pooling.  Enter the Chevy Volt.  The answer to all of their dreams (see Volt sales surge in California thanks to car-pool access by Peter Valdes-Dapena posted 6/7/2012 on CNN Money).

Sales of General Motors’ Chevrolet Volt plug-in car, which had been dwindling in recent months, are enjoying a big resurgence in California, a state with some of the highest gas prices in the nation.

But the uptick in Volt sales isn’t about saving gas; it’s more about saving time.

Despite being incredibly fuel efficient, the Volt’s emissions when operating on gasoline weren’t clean enough to qualify it to drive in California’s car-pools lanes, relegating Volt owners to the whims of grueling California traffic.

But now, thanks to some new engineering tweaks to fix that issue, 2012 model year Volts sold in California can drive in those free-flowing HOV (high occupancy vehicle) lanes — even with only one person in the car…

California car buyers will jump at any opportunity to drive in HOV lanes.

Those lanes flow much more smoothly than other traffic-choked lanes on California highways, especially at rush hour, O’Dell said.

O’Dell owns a car with an HOV-lane sticker and says that when he’s driving that car, he gets to work in about an hour. When he’s driving a car without the sticker it takes him from two to two-and-a-half hours, he said.

In addition to HOV-lane access, the Volt is also eligible for a $1,500 state tax rebate in California on top of a $7,500 federal tax credit. Some local governments in California offer additional benefits for plug-in car buyers, as well.

The Chevy Volt allows these people do what they want to do.  Stay off the buses.  Stay off the trains.  And drive their cars.  Alone.  And it has nothing to do with saving the planet.  They just want to drive in the HOV lanes and save a couple of hours driving each day.  And they’re willing pay more to be able to do that.  For time is money.  And life.  Time lost sitting in traffic and waiting for a bus or a train is time that we can never get back.

California has the strictest environmental laws in the country.  But when it comes to living with the consequences of these laws the people will look to cheat.  As they are with the Chevy Volt.  Which will reverse all the progress the environmentalists have made in restricting people’s freedoms in California.  By placing such a high opportunity cost on driving a car alone.  Painfully long commutes.  But thanks to the Chevy Volt Californians can do what they’re always wanted to do.  Drive their gasoline-powered cars.  In the fast lane.  Hell, they may never plug in their hybrids.  And pretend they’re driving real cars in the fast lane.  Just to relish the knowledge that they’re putting one over on the environmentalists.

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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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Cars are Better for the Environment and more Convenient than Trains in L.A.

Posted by PITHOCRATES - December 10th, 2011

Week in Review

California is going broke.  Out of control public sector pension and health care costs.  The high cost of regulation hindering the economy.  And spending money on light rail that the people don’t want.  And makes it take more time to get from point A to point B (see 17 Miles in Just 78 Minutes! Light Rail vs. Reality in LA by Reason TV posted 12/9/2011 on YouTube).

They spent billions of dollars for these trains.  They’re slower than the buses.  They run emptier than the buses.  They subsidize them almost 10 times as much as the buses.  And the average light rail trip uses more energy than a car per passenger mile.  About twice as much.  Which means they contribute more to global warming than cars do.  In other words, this is why California is in the financial mess they’re in.  Bad government policy.

It took 78 minutes to travel 17 miles.  If you do the math that’s about 13 miles per hour.  If you drove in a car on a road with a 35 mph speed limit you would have made it in about 30 minutes.  For a round trip that’s an hour of drive time compared to about 2 .6 hours of train time.  Well, train and bus time.  Because there are a few transfers.

Cars are cheaper and use less energy than trains in L.A.  And they are so much more convenient.  So why are they replacing cars with trains?  More union jobs to build these lines.  And more public sector jobs to run these lines.  That and I guess for the global warming.

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Major Automakers Feeling the Pressure to try and Sell Electric Cars

Posted by PITHOCRATES - November 28th, 2010

Electric Trains Don’t Use Batteries

Electric trains are powerful.  Provide fast acceleration.  And are very efficient in converting electrical power into forward motion.  And yet the majority of trains are diesel electric.  Why?

Cost.  Diesel electric trains use a diesel engine to power an electric generator that drives electric traction motors.  And a diesel electric train can carry its own diesel fuel to produce its own electrical power.  So when you build track infrastructure for diesel electric trains, that’s all you have to build.  Track.

Electric trains, on the other hand, require a whole lot more infrastructure.  For every mile of track there has to be a mile of electrical power distribution.  In subways this is usually an electrified third rail.  In above ground trains, this is usually overhead wires.  And this electrical power infrastructure is costly.  So costly that few trains are electrified.

(For more information on electric trains, see Electric locomotive on Wikipedia).

And Cars Shouldn’t Use Batteries Either

Now, do you know why they build this very costly electrical power distribution infrastructure for these electric trains?  Because they can’t run on batteries.  Battery-power would not let these trains travel the distances they need to travel.  And so it is with cars (see Major automakers zipping electric cars into showrooms soon by Jerry Hirsch and Tiffany Hsu posted 11/27/2010 on The Washington Post).

Because it relies solely on battery power, the [Nissan] Leaf has a range limited to about 100 miles – maybe more if driven conservatively in cool weather and definitely less if the engine is revved up with the air conditioning running on a hot day.

The [Chevy] Volt can go a lot farther, primarily because it is technically a hybrid rather than a pure electric vehicle. It goes about 40 miles on a single charge. When the juice runs out, a four-cylinder gas engine kicks in as a generator and powers the electric drive train, extending the car’s range by about 300 miles.

I don’t know about you, but the commute on my last job was about 50 miles – one way.  And I drove a lot of that in the dark.  In cold weather.  You ever leave your headlights on accidentally? 

When I was in college, my car’s headlight control was a little loose.  When I slammed the car door it turned my dome light on.  Some 6 hours later, I found that my dome light had drained my battery.  And that was just the dome light.  Imagine if it was the headlights.  Or an electric heater plugged into the cigarette lighter.

You can go Further on a Full Tank of Gas than on a Fully Charged Battery.  And that’s while Using the Headlights and the Heater.

Those rosy mileage estimates are all well and good as long as you are driving in the daytime, during warm weather and going downhill both to and from work. 

You have a digital camera?  If so, tell me how much longer your battery lasts when you don’t use the flash?  You see, that’s the dirty little secret about these electric cars.  Unless you put a nuclear reactor under your hood, you’re not going to have the range to go anywhere but to the corner grocery store.

And speaking of digital cameras, how long does it take to recharge your battery?  I mean, can you put it in the charger and then take it right out and start using it?  Is it like going to a gas station?  Where you stop to fill up your gasoline tank and then drive away minutes later?  Or do you carry around extra batteries because it takes too long to recharge a discharged battery?

Pay More and Get Less when Choosing Electric over Gasoline

People know these electric cars will only provide a fraction of the range, reliability, comfort and safety of a gasoline powered car.  And to add insult to injury, you have to pay more to get less.  People aren’t stupid.  So to get people to pay more for less, the government has to subsidize these lemons.  I mean, cars.

The Volt will start at $41,000. The similar-size Chevrolet Cruze LTZ sedan with an automatic transmission, navigation and other bells and whistles is about $26,000.

Nissan’s Leaf hatchback starts at $32,780. A similarly equipped conventional gasoline Versa hatchback from Nissan starts at less than $17,000.

A $7,500 federal tax credit designed to accelerate entry of electric vehicles into the marketplace will reduce the cost of both vehicles.

These cars are almost twice the cost of their gasoline cousins.  And they can only go a fraction of the same distance on a charge.  The ‘backup’ gasoline power plant on the Volt has 650% more range than the battery.  And you know what?  If you run low on gasoline you can top off you tank and go another 300 miles.  With a dead battery.

Bribing People to Risk their Lives in Battery Deathtraps

Unless you’re taking stupid pills, I can’t see why anyone would pay more for less.  I mean, there’s a reason why the majority of trains are diesel electric even when electric trains are more efficient.  Because they can’t run on batteries.  And electrical power distribution systems are just too costly.

If batteries were viable the government wouldn’t have to bribe people to risk their lives.  And they are.  Risking their lives when they drive these cars.  To get what little range they can out of these, they’re going to be tiny little cars.  And light.  To get as much out of that battery as possible. 

But, to save the environment, we have to sacrifice people.  It’s either us or it.  Think about this when your daughter drives off to college or her job. And what she’s going to do if her charge runs out in a bad part of town.

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FUNDAMENTAL TRUTH #20: “It is never a consumer that complains about ‘predatory’ pricing.” -Old Pithy

Posted by PITHOCRATES - June 29th, 2010

LOW PRICES.  GOD help me, I do hate them so.  I hate them with every fiber of my body.

Who says this?  Do you?  I don’t.  Of all the times I’ve spent shopping, I have never heard anyone bitch about low prices.  I’ve heard people bitch about high prices.  But never about low prices.  When gas approached $3/gallon, people bitched about that being too high and drove 10 miles to find ‘cheap’ gas to save a few pennies per gallon.  Let it approach $4/gallon and they’ll want Congress to take action.  To attack Big Oil.  To seize their oil and their profits and give us cheap gasoline in return.  But when gas was cheap, no one ever bitched about it being ‘too’ cheap.  It just doesn’t happen that way.  People bitch about high prices.  Not low prices.

So who bitches about low prices?  Competitors.  There’s a saying that competition makes everything better.  And it does.  It lowers prices.  And raises quality.  And who is looking for lower prices and higher quality?  Consumers.  Who isn’t?  Competitors.  Especially competitors with political connections.

WHEN THE BIG 3 were putting out crap in the 1970s, they did so because they could.  I mean, who else were you going to buy a car from?  So what if your car breaks down and the fenders and quarter panels rust away?  That just means you gotta buy another car sooner rather than later.  A pretty sweet deal.  Especially when there are only three places to go to buy a car.  And each of the Big 3 is selling the same crap.

Then the Japanese had to go and ruin a good thing.  They started selling cars in America.  These cars were smaller than your typical American car.  But there were other differences.  They didn’t rust like the American cars.  They didn’t break down as much.  And the imports were cheaper than the American cars.  Lower price and higher quality.  More bang for the buck.  Exactly what consumers were demanding.

So what was the response of the Big 3?  Did they rise to the level of their new competitors and deliver what the consumer wanted?  No.  They ran to government for help.  For protection.  And they got it.  Voluntary Export Restraints (VER).  The government negotiated with the Japanese to ‘voluntarily’ limit the number of cars they exported to the United States.  Or else.  So they did.  To avoid worse protectionist policies.  Problem solved.  Competition was limited.  And the Big 3 were very profitable in the short run.  Everyone lived happily ever after.  Until the Japanese refused to play nice.

The problem was what the Big 3 did with those profits.  Or, rather, what they didn’t do with them.  They didn’t reinvest them to raise themselves up to the level of the Japanese.  Protected, they saw no incentive to change.  Not when you have Big Government on your side.  And how did that work for them?  Not good. 

So look, the Japanese said, the Americans like our cars.  If the American manufacturers won’t give them what they want, we will.  While honoring the VER.  We won’t export more cars.  We’ll just build bigger and better cars to export.  And they did.  The Big 3 were no longer up against inexpensive, higher quality subcompacts on the fringe of their market share.  Now their mid-size and large-size cars had competition.  And this wasn’t on the fringe of their market share.  This was their bread and butter.  What to do?  Build better cars and give Americans more bang for their buck?  Or run to government again?  What do you think?

The Big 3 assaulted the Japanese under the guise of ‘fair trade’.  The cry went out that unless the Japanese opened up their markets to American imports (in particular auto parts), we should restrict Japanese imports.  To protect American jobs.  To protect the American worker.  To protect the children.  This was code for please make the Japanese cars more unattractive to purchasers so they will settle for the more costly and lower quality cars we’re making.  (Let’s not forget the reason Americans were buying the Japanese cars in the first place).

The Japanese response?  They took it up a notch.  They entered the luxury markets.  They launched Acura, Lexus and Infiniti.  They competed against Cadillac and Lincoln.  And well.  The quality was so good they even affected the European luxury imports.  More attacks followed.  Americans were losing their jobs.  Soon there would be no more American manufacturing left in the country.  So the Japanese built plants in America.  And Americans were now building the Japanese cars.  The Japanese actually created American jobs.

SON OF A BITCH!  So much for the loss of American jobs.  The Japanese threw a wrench in that argument.  So now the argument became about the loss of ‘high paying’ American jobs.  For the Japanese plants were non-union.  Didn’t matter that their workers were making better pay and benefits than many in their region.  No.  What mattered was that they were building a better product.  And they didn’t want THESE jobs in America.  But if they couldn’t get rid of these new workers, they should at least unionize them so their cars cost more.  To make them a little less appealing to the American consumer.  So far they have been unsuccessful in this endeavor.  The workers are happy as they are.

Well, these cars just weren’t going away.  So the Americans surrendered car manufacturing to the Japanese.  They couldn’t beat them.  (Of course, it’s hard to do that when you don’t even try).  They, instead, focused on the higher profit truck and SUV markets.  Then the Japanese entered those markets.  And at every level they competed with the Americans, the Japanese gave more bang for the buck.  And the consumers responded.  With their hard-earned wages.  It just wasn’t fair.  The Japanese kept giving the American consumer a better product.  No matter what political action the Big 3 took or demanded.

And there’s the problem.  They sought their answers from government.  Instead of making a better car.  They wanted to stop the Japanese from giving the American consumer what they wanted so they could force Americans to pay more for less.  All the while the economy was forcing the majority of consumers to get by on less (the majority of consumers do not have the wage and benefit package the ‘select’ few had in the Big 3). 

Fast forward to 2008 and we see the ultimate consequence of their actions.  Bankruptcy.  GM and Chrysler had to grovel for a federal bailout and in the process become Washington’s bitch.  Ford survived on her own.  As did the Japanese.  You can bitch all you want about costs, but if you have the revenue you can pay your costs.  And the Americans just couldn’t sell enough cars to maintain the revenue they needed for their cost structure.  By refusing to address the core problem (they weren’t making cars Americans wanted to buy), they only made their competition stronger and more entrenched in the U.S. market.

IT’S ALL POLITICS.  Political cronyism.  And crony capitalism.  It all comes down to political spoils and patronage.  That’s what happens when politics enter capitalism.  Big Business partners with Big Government and they enter into relationships.  You scratch my back and I’ll scratch your back.  But when government protects a business for political expediency, the industry suffers in the long run.  As the U.S. automobile industry has.  Ditto for the U.S. textile industry.  And the U.S. steel industry.

So what goes wrong?  When you protect an industry you insulate it from market forces.  You can build crap.  The problem is, consumers don’t buy crap.  So, for awhile, politics intervene and makes the crap more favorable.  Whether it’s predatory pricing, monopolistic pricing or collusion, business can’t win.  Big Government is there.  If your prices are too low, government will intervene.  If prices are too high, government will intervene.  If prices are too similar, government will intervene.  To make things ‘fair’.  And by fair they mean to reward those who play the game and to punish those who don’t.  And the spoils go to those large voting blocs they need.  And in return for their votes, they can count on patronage.  Government jobs.  Political positions.  Favorable legislation and regulation.  If you got the vote out, you were rewarded quite nicely. 

And consumers be damned. .

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