Posts Tagged ‘ auto bailout ’

An Unlikely Economic Lesson

You have to hand it to Ford.  $5.9 BILLION quarterly loss and they refuse to grovel before Congress for bailout money.  That is not to say they won’t, just that for now, they seem to have more faith in themselves than their two domestic competitors have in themselves.  In my Free Trade essay, How Much free Trade is Free? I wrote about free trade as a whole.  The real point of that essay was that as much as free trade lowers prices, boosts stock portfolios, and lowers the cost of doing business there is a downside.  The negatives include a decrease in available domestic jobs, the destruction of domestic manufacturing, the creation of foreign jobs that pay so little that most qualify as slave-labor, and in the long-run the erosion unskilled labor rates.  The inspiration for that essay was the dire situation of the American Automobile Industry.

There is no competition in wages

Life outside the U.S. is hard for Americans to relate toI contend that free trade created an unfair competitive environment for manufacturing in the United States.  The reason being that wages in the third world and developing nations are not comparable to those for U.S. workers.  I reject the argument that U.S. companies are rendered non-competitive because American workers are greedy.  True, union labor does artificially inflate labor costs and this reduces the competitive advantage U.S. manufacturers might otherwise possess.  My statements seem contradictory, but my point is more fundamental.  If we remove the inflated union wages from the competitive formula, American manufacturers would remain disadvantaged on labor costs.  As I have pointed out before, the American standard of living is far higher than that of developing nations, thus American workers demand a higher wage.  They need the higher wage to pay for all the goods businesses offer them, from housing to transportation, from soap to silverware, from shoes to televisions and computers.  However, a worker in a developing nation such as China, does not need a car, they don’t likely have a TV, let alone a satellite service or Netflix, nor are they likely to have a 3 bedroom/2 bath air-conditioned home.

To make matters worse foreign manufacturers are more than comfortable with the idea of paying workers the absolute minimum wage possible.  In many countries there is no right to belong to a trade union or negotiate for a better wage.  In Mexico it is not uncommon for workers to be paid barely enough to pay for food, (here’s my english language source, I know it’s a Cuban news agency with an agenda, but the stats come from Mexico.)  This story is repeated in other developing nations as well, in China new labor laws are basically ignored.  Workers are beaten for demanding back wages when their bosses simply don’t pay.  This is the “fair trade” playing field.

Would the last person to leave the plant, please turn out the light

I believe greed does play a huge role in our current global economic crisis.  I also believe free trade more than housing, banking, or loose lending has created the mess we are in.  As consumers we covet low priced goods so we can have more of everything.  As entrepreneurs and business people we want to give our customers those low prices and increase our sales volume.  The only way to achieve these goals was to employ those billions of low wage workers so plentiful in the third world and developing nations.  But in 1990 realizing this required convincing the industrialized nations to drop the tariff systems that leveled the economic differences of nations.  When Bill Clinton signed NAFTA a huge hurdle was overcome.  Free Trade agreements became all the rage and we saw a continual stream of them pushed by the WTO.

Since the 1980s there has been a systematic deconstruction of the American manufacturing infrastructure.  However, the real decline has occurred in just the last decade as 3 million manufacturing jobs (nearly 17%) were lost largely to other nations. We are employing cheap labor to support our standard of living without regard to what the consequences might be.

Now that I have painted the picture I want to make a point by comparison, I think the comparison is fair if approached with an open mind.  I stated above, consumers want low prices.  We don’t care how they are achieved we simply want WalMart to continue providing us goods at low prices and we’d appreciate them lower, please.  Business owners and stockholders of corporations want to produce goods with low overhead so they can offer their goods at the lowest possible prices, (payroll is the single biggest expense for most businesses.)  Neither consumers or business owners care how this goal is achieved, they simply want it achieved.

Modern slavery

The workers are also the consumers and they express shock and anger when they are displaced but you will have a hard time finding anyone demanding higher prices in order to save those jobs.  On the contrary, as more people are displaced, demand for lower prices increases.  The fact that people working for wages that barely provide food on their tables and clothes on their backs, is not a concern for either of these groups.  A blind eye is given to these people except when the press exposes a textile factory in Bangladesh, however, the shock is quickly put behind us as we fill our shopping carts at Wal-Mart with cheap T-shirts.  A point Americans ought to be confronted with is that much of the manufacturing growth in third world and developing nations is being done through slave labor. Twelve year old children in China are pressed into labor and abuse is not uncommon.  However, as a nation we not only tolerate such slave labor but we promote it through our economic decisions.  Consumers fain shock at such facts but really we don’t want to know about it.

In the 19th century 16 U.S. states supported their local economies through forced labor, commonly known as slave labor.  The system afforded people in the northern states and Europe very cheap textiles and produce.  Europeans and northerners overwhelmingly turned a blind eye to the injustices and cruelties of slavery.  The fact that slaves worked for a bare subsistence of food, rags for clothing, and substandard housing was largely ignored or conveniently unknown to consumers of the time.  What was important to the average person was being able to purchase cheap food and clothing.  (For the analogy I am leaving out all the other justifications and circumstances of the times.)  In fact, as the Civil War began, the Lincoln administration was fearful that Britain might declare war on the U.S. or otherwise aid the Confederacy to protect their own continued cotton trade, even though the British were overwhelmingly appalled and opposed to slavery, (Goodwin, 2005.)

As I reflected on slavery in the Old South, another parallel came to my mind.  The slave states were not industrialized, they were agrarian societies with high unemployment and poor infrastructure.  The factories were in the North since slave labor required the deprivation of education, they were excluded from factory work.  When war came to the South, southerners found the only arms they had were those obtained from the North.  Cut off from factories, they quickly found they had little means to manufacture their basic needs.  Furthermore, lacking infrastructure to manufacture they experienced a cash drain and were forced to print money at historic rates.  Hyper-inflation was a quick reality as a single Confederate dollar was worth only a few pennies in U.S. currency.

Here’s what I’m suggesting, as we dismantle our ability to manufacture we denegrate our nation and place it in peril.  As I write we have lost the ability to make a television set, let alone make spacecraft capable of landing on and returning from the moon.  What would happen if the United States suddenly had it’s credit frozen by the likes of China and our other creditors?  What if we suddenly found ourselves isolated in a global political crisis?  How would we fare if suddenly we were forced to start making things again?

The magic bucket

I’ll stop the worst case fantasies and come back to reality.  What happens when we find our international creditors beginning to tighten their lending?  If the Obama Administration truly intends to run trillion dollar deficits this will become a reality.  They will finance their drunk spending the same way the Confederacy did, by printing money.  The result?  Hyper-inflation.

I’m all for rebuilding bridges and the like, but we need to address the real infrastructure problem, manufacturing and fair trade policies.  For most of our existence as a nation the federal government was financed from an inflow of money from other nations in the form of import tariffs.  When we made the transition to free trade policies the federal government’s financial base changed to incomes taxes from its citizens. Recently, in college economics class, I heard a professor say there is no turning back the clock on the global economy.  If true the U.S. will see a steady decline in its standard of living.Magic Self-filling Bucket

I see this shift from tariffs to income tax as a very significant event, since previously money came from outside, now it comes from inside the country.  The vision of a bucket being filled from water drawn only from inside the bucket best illustrates my thinking on this.  Meanwhile, a significant amount of consumer money flows outward as well.  As we produce less and less and consume ever more it seems increasingly unlikely the bucket can remain at the same level.

Ironic environment

I had hoped the new administration would have done more to encourage manufacturing and business.  I even hoped Obama would create real change and reverse some of the bad trade deals we’ve seen made in the past 15 years.  Instead he seems to be working against us.  Openly encouraging states to destroy the auto industry through smothering emissions regulations.  Such environmental regulations have already cost the industry billions.

1980 Toyota TercelA point none of the environmental nut jobs seems to be aware of is the self-defeating aspect of emissions controls on cars.  In 1980 I bought my first car.  Gas prices were skyrocketing and being the young hyper-money-aware person I was I bought a Toyota Tercel.  A nerd car for certain, but it got 40 miles per gallon by my own calculations.  Today you would be hard pressed to find a car that could come even close to that kind of mileage.  No, I think you could not do it (even hybrids perform worse when you include any highway useage.)  Well, it is an irony but the more emissions equipment the government places on cars the lower the fuel efficiency.

The question is why?  Obviously emission equipment is not weightless, it has mass, and that mass requires additional energy to move it. Thus with each kilo added to the weight of the car we lose gas mileage.  I want clean air but I also want to be able to afford to live the lifestyle I have become accustomed to.

I thought Obama was going to “preserve or create” jobs.  Instead we see him actively engaged in harming the American auto industry.  An industry I consider critical to American economic strength.  I fear the Obama administration is more concerned about the environment, than any other single concern.  They have bought into the Al Gore lie and it may cost us more than we can currently imagine.

Gettelfinger thinks only an idiot would not want a bailout

Vodpod videos no longer available.

more about “Gettelfinger thinks only an idiot wou…“, posted with vodpod

My good friend, Reedkeys, over on blogspot, posted this video and expressed his outrage that Lansing’s Mayor Bernero seems to imply that capitalism isn’t working for the auto industry.  I didn’t quite get that same message but then again, I’m an idiot.  I think he was saying that free trade isn’t working for the industry.  [Addendum:  OK, I went back and watched this again and I have to admit I tuned this interview out early the first time I watched it.  I see Reed was really responding to the dumbass comment the Mayor made toward the very end.  He then says capitalism doesn’t work and that the rest of the world is NOT capitalist.  OK, I disagree with all of that and think the mayor’s leftism is shining through.] In fact, I would say free trade isn’t working for any U.S. industry.  Unless you want to classify Wal-Mart as an industry.  Wal-Mart is not only thriving but they are a major reason so many jobs are going overseas.

Lansing’s Mayor Bernero tries to say that the American automakers are in a tough bind trying to compete with countries like China that can pay workers far less than we can.  Do we want an America where career choices for the masses are limited to selling a foreign product, service, or menial labor?

I’m not entirely certain I disagree with the mayor. I  blogged about free trade a few weeks ago, my point then was simply that free trade is a wonderful theory but one that only truly works when the playing field is level.  In pure theory, free trade allows the market to determine which industries live and which die, based on pure competitive factors. However, free trade does not introduce fair competition. It allows competitors into our market without adjusting price for VERY different standards of living.

Getting Fat on Free TradeNow if you believe the U.S. standard of living is far far too high and that we here in the U.S. should all be living without cars, TV’s, or computers, and our homes should be made from mud or other low tech materials, then I see where you are coming from. I think Gore may believe this – as long as he is exempt.  Granted unions are demanding wages that exceed their labor output but what is a fair competitive wage in the auto industry?  Would $10/hr be fair?  How about $5.75 that’s roughly the same as your average high school student. (I think they deserve more than $10 but to illustrate my point let’s go as low as we can go.)

Would lowering every single auto worker’s pay to minimum wage solve the problem? No. The average Chinese factory worker makes $2.20 an hour. Furthermore current trade agreements while eliminating tariffs allow the Koreans to continue import taxes on U.S. products through “taxing cars based on “engine displacement”, including the Special Consumption Tax, the Annual Vehicle Tax, and the Subway/Regional Development Bond.”   The Korean only agreed to “overhaul” and “address” trade concerns.  Meanwhile Korean textile imports to the U.S. go tax or nearly tax-free.  But trade agreements do not address the basic standard of living inequities that exist.

It is not capitalism that has failed it is the tariff system that has been changed to benefit third world producers while exterminating American producers. As I mentioned in my essay on this topic, we need to have equalizing tariffs or demand foreign workers make salaries that are roughly equivalent to U.S. workers. This would mean higher prices and thus no one wants this. But should nothing be done to equalize trade, we will slowly spiral into a world where the standard of living reaches a global median. (Oh, I’m certain it wiull never be totally uniform but more so than we see today.)  A world where those who are able to own a business populate the upper-class and what remains of the middle-class while the rest of the world languishes in the realm of the working poor.  This is when you can truly kiss capitalism goodbye.  A poor democracy will vote itself right into a communist dictatorship. Last month we got a taste of just how little people use reason when they are terrified of the future. Naturally, union concessions are necessary but equally so a little strategic use of tariffs to level the field.

Should the auto industry fail, can the U.S. economy absorb up to 3 million displaced workers?  I certainly do not want to give the big 3 money, but I think loans with attached strings is a sound rescue plan.  However, if we do not begin to practice “fair trade” and learn to compete, it will be no different than keeping a brain-dead trauma patient plugged into life-support.  The auto industry and for that matter all U.S. manufacturing will eventually falter.  Allowing industries to fail and continuing to import from nations where labor costs are nearly unmeasurable is economic suicide.  Whether it occurs slowly over decades or overnight I simply cannot accept the notion that such a trade policy is good in the long haul.  I am reminded of something I heard as a child, “the production of finished product from raw materials is the only true way to produce wealth.”  That may not be always be true but applied to nations it makes more sense than where we seem to be headed, “Producing nothing, while consuming all the world can produce is the true way for importers to get rich while a nation goes to hell.”

As a  theory, free trade makes a lot of sense, but sometimes there are good economic reasons to stray from a good theory.

How Much Free Trade is Free?

Getting Fat on Free TradeLet me preface this by explaining, I believe in lowering taxes everywhere we can. It just makes good sense. Without exception when taxes are lowered business increases and government receipts increase. What about import tariffs? Tariffs are taxes and lowering or eliminating them stimulates trade, more economic activity, and thus more taxes through greater income and sales. Prior to the 16th Amendment, legalizing the income tax, the bulk of federal receipts came in the form of tariffs. As the proliferation of free trade agreements has grown revenue from tariffs has been on a decline while income taxes have grown in importance as a source of replacement income for the government.

When we discuss tariffs, it is important to understand who benefits and who does not. Naturally, the federal government benefits as tariffs increase the revenues, domestic producers benefit as they are afforded a degree of protection against cheap foreign competition, and domestic workers benefit by virtue of the protection afforded their companies. The losers in the tariff game are consumers who must pay higher prices for imports and domestic products that are unable to reduce their costs due to the tariffs.

I wish trade policy were only this simple. Unfortunately, as Free Trade proponents will correctly point out, no tariff lives in a vacuum. When the U.S. imposes a tariff on say Japanese automakers to protect U.S. automakers, the Japanese government will in turn impose its own tariff on a U.S. import, like beef. Soon a trade war begins and the world economy is negatively impacted. As this chart from Pitzer College illustrates tariffs artificially increase price and potentially decrease supply (should domestic suppliers not adequately fill the void.)

Earlier I mentioned that domestic businesses were aided by import tariffs but interestingly domestic businesses also benefit by removing import tariffs. When import tariffs are removed, U.S. companies are free to outsource. Businesses can move various parts of their processes to locations abroad that offer the lowest cost. Thus, the overall world economy is made more efficient by the lowering of trade barriers. The economic theory says that each country will produce those products it can produce most efficiently. This is a great benefit for multinational companies that can take advantage of it. In turn, it is a great advantage to consumers, as nearly all studies have concluded import tariffs significantly raise consumer costs through higher prices. A no-brainer, really.

Nevertheless, and yes this is where I get into trouble, is this good for the U.S. consumers in the long-term? I agree that in the shorter term, (meaning 0-15 years), free trade is a “nothing-but-net” slam-dunk win. I have my doubt about its long-term benefits. Liberals argue stockholders and business executives win while workers see their jobs whisked away to far off pockets of impoverished slave labor factories. They will lament the poor living conditions of those workers and point out how Americans are profiting from their misery. They may even complain that U.S. factory workers once making $20 an hour are reduced to working minimum wage jobs or worse standing in unemployment lines. (But you probably won’t find them lining up for a more expensive American made car.)  I decided to research the wage issue and I found that since 1980 there has been very little change in the inflation-adjusted wages of Americans. However, this chart shows an average wage, which includes executives and janitors. So while executives expand their income through higher profit (and I don’t begrudge them earning more), nonfarm, nonsupervisory wages are decreasing. However, we all know we’re in the midst of a global recession.

So far, my argument has been pro-free trade, but I have serious concerns over free trade as a long-term policy. The obvious benefits of adopting a free trade regime is the lower cost of goods and the freeing of resources to produce items in which our country has a comparative advantage. However, my concern is not about the advantage but rather the costs. The one cost nearly everyone recognizes is the loss of American jobs. I would like to add another, the loss of knowledge and innovation.

As we ship technical and manufacturing jobs overseas in search of ever-cheaper labor we are losing the ability not only to manufacture goods efficiently here but we are losing the ability to innovate new product ideas. U.S. companies not only export low-tech factory jobs but also have begun exporting knowledge-based jobs, such as recruiting R&D engineers in Asia. These engineers cost less and have economical access to production plants.

Excessive dependence on too few exports is another risk presented by free trade agreements. If a nation reduces the diversification of its industries to only those in which it has a comparative advantage, there is risk to the economy if global demand should drop for those products. This is closely related to another risk, the risk that an industry might be permitted to die and this could come at a cost to national security; such as losing the ability to produce aircraft, automobiles (thus tanks), or shipbuilding. Yet another risk is losing an historic industry, such as the auto industry. What happens if we find ourselves the victim of an economic embargo? Probably not much today but in 20 years it might be a different story.

Lowering tariffs naturally leads to outsourcing, as we have seen. This results in workforce reductions. Companies are freed to provide lower priced products but the discretionary spending of consumers is lower slightly, (through higher unemployment and lower income), which produces an increased demand for lower prices. This precipitates more outsourcing, automation, and/or other job reductions to facilitate still lower prices. This again lowers aggregate income slightly, thus discretionary spending and so the cycle repeats. Corporations benefit, stockholders benefit, host nations benefit (for a while), but we ultimately pay a long-term economic cost in the form of a reduced standard of living.

It is a very slow turning wheel because people find new sources of employment as technology changes and these new jobs come and go. Simple logic should tell us that you couldn’t put a hole in a bucket and expect the rain to keep it full. Alright, not the best analogy, my point is resources are flowing away from our country faster than they are flowing in. How long can this go on? I would argue until the standard of living is obviously impacted, then the people revolt.

Finally, many trade agreements are lopsided benefiting one partner more than the other. For example, The 2007 KORUS free trade agreement with Korea lowered nearly all restrictions on South Korean imports to the U.S. yet permitted South Korea to maintain nearly all of its barriers against U.S. auto imports. I keep hearing people say, “Let it die” – these people are not strategic thinkers. We need the auto industry, it is the backbone of what makes our nation strong, and it is a historically American product. Granted we need to address problems associated with bad management and poor labor arrangements. Part of the labor problem is the American standard of living. No American factory worker would tolerate living in a small hut and unable to purchase a car him or herself, yet in some countries, this is normal. I say forcing the auto industry to redesign its business model, coupled with a loan, and a modest import tariff on imported automobiles would be a reasonable bailout. Letting it die would be reckless. Do you really want to displace so many additional American workers?  My opinion is that the use of tariffs and subsidies is justified here.  Using tariffs in this sort of bailout makes far more sense than throwing money at the big 3.

We have being giving the house away in free trade agreements that do not benefit the long-term economic or strategic interest of America as a whole. We have getting fat off cheap stuff from China while throwing our own jobs under the container ship without realizing there is a price to pay. What will the American economy look like in 40 years? Can a purely service-oriented economy maintain our current standard of living?

Just because we can does not mean we should. Are protectionist tariffs the answer? Should we use tariffs to protect American industries like the auto industry?  Should we demand workers in other countries make competitive wages? (I made myself chuckle) Do we tax the crap out of business that ship jobs overseas? Do we force American companies to just finish the job and move completely offshore? How far do we go in job creation and what types of jobs do we want?

US flag Made in ChinaI’ll leave you with this interesting thought; I am a history buff and a few years ago, I was reading a book containing a letter from a British soldier stationed in the American colonies just prior to the Revolution. A paraphrase from memory goes something like this, “These colonists would procure their flags from the enemy if they could save a farthing.”* Last year, on the 4th of July, my daughter commented that our Walmart-purchased flags were made in China.  Guess it’s true.

* Farthing: Smallest British Imperial currency measure. 4 farthings made 1 penny.

%d bloggers like this: