Did you hear the news on broadcast television what Al Gore said about Ethanol? Neither did I. You have to dig a little further to find news that goes against the progressive grain.
Alternative propulsion
A recent article in the New York Times, “Once Stigmatized, Food Stamps Find Acceptance,” talks about how Food Stamps are now, thankfully, accepted and people can get the help they deserve.
I remember the first time I encountered food stamps. I was in line at the grocery store behind a woman with a cart piled high and among its contents were soda, potato chips, and other tasty luxuries. When the bill was tallied, she took out her book of food stamps and handed them to the cashier. I related this story to a friend who told me that you can’t use food stamps on junk food so it must have been applied against the other items in the cart. Even so, I thought back to when I grew up. We weren’t poor but we were no where near rich. Things like soda and potato chips were a rarity reserved only for those times when relatives were coming from a distance for a visit. Otherwise it was home brewed ice tea and supermarket generic cookies. But even those treats weren’t purchased through a subsidy of our food staples.
New York is now actively recruiting new food stamp recipients in all languages imaginable. It seems that it is not enough to provide the service but you have to make sure that everyone who can get food stamps is taking advantage of them. Let’s see, government employees paid by taxpayers going all out to make sure that a taxpayer funded program is using as much taxpayer money as possible including a program on Rikers Island (the city jail) to enroll inmates as they leave. The article describes one woman who was actively recruited to join the program:
A big woman with a broad smile, Ms. Bostick-Thomas swept into the group’s office a few days later, talking up her daughters’ college degrees and bemoaning the cost of oxtail meat.
“I’m not saying I go hungry,” Ms. Bostick-Thomas said. “But I can’t always eat what I want.”
Okay, I’m going to go out on a limb here. By a “big woman” can we take that observation to mean she is not lacking in caloric intake? She says she doesn’t go hungry. She talks about her daughter’s college degrees. So why are taxpayers tasked with helping her eat what she wants? And what is that anyway? Steak? Lobster? Twinkies? Ice cream? Why aren’t the daughters with their college degrees helping their mother? Maybe they could invite her over once a week and feed her the foods she favors? And if they are not local, why not ship her a box of Omaha Steaks? Why does some other taxpayer have to pick up the tab for her after they worked hard to feed their own family?
The Other Side of the Coin
On the other side of the coin, from the budget of the same Department of Agriculture, we pay farmers not to grow food in the form of farm subsidies. Why? Well, if we didn’t, the prices of farm products, aka food, would become too cheap for the farmers to make a decent living. In my simple economic model of supply and demand that would seem to indicate that maybe we have more farmers than we need. But you see farming is a way of life as much as it is an occupation, and taxpayers must be sensitive to preserving that way of life whether or not it is economically justified. I am sure there are several million unemployed people in this country who would like to have their jobs subsidized. Unemployment compensation is when the government gives you a check (actually its funded by your employer) when you lose your job. Farm subsidies are when the government (no employer funding here) pays farmers to keep working at their job.
Add to that another government program to pay farmers to produce corn to make ethanol, another uneconomic subsidy. Ethanol is pitched as a substitute for gasoline, but it takes a lot of energy to make it, it cannot be transported via pipeline like petroleum products, and when the corn is diverted to produce ethanol, the cost of almost all food goes up. Corn is used for feed for cattle, as seed to produce corn, for corn syrup as a sweeter. So on top of regular farm subsidies, we have ethanol subsidies to further drive up food prices. In the case of corn syrup, sugar could be a substitute, but our government places a very high tariff on imported sugar, to protect our domestic sugar producers.
Coming Full Circle
So, on the one hand we have several government programs, funded by taxpayers, that drive up the price of food. Then we have another program, taxpayer funded, to help people buy food because food is too expensive. And then we have government workers and programs, taxpayer funded, that are actively marketing the food stamp program to overweight people, who never go hungry, have college educated children who could help them but don’t seem to, so that the recipient can eat the things she wants to. But if you see a problem with this, don’t worry. Michele Obama is about to use more taxpayer dollars to launch a program to fight childhood obesity. Can we get off this Merry-Go-Round?
How about we shut down the Department of Agriculture? It’s function is not in the Constitution and so it should not exist at the federal level. End farm subsidies. If that means we have a few less farmers, so be it. The American people do not owe anyone other than themselves a way of life. To the farmer who can make it, you have my complete admiration. End ethanol subsidies. If ethanol is a viable fuel, it should be able succeed on its own, not because Archer Daniels Midland spends millions on agricultural lobbyists. Negotiate free trade agreements so that our successful farmers, instead of being paid not to produce, produce and sell their goods around the world. Likewise end high tariffs that protect our farm products. These steps should lower the cost of food.
With lower food costs we shouldn’t need a food stamp program. End it at the federal level along with the Department of Agriculture. If there continues to be a need it will probably be a much smaller one and let each state decide if it wants to start its own program. Also, with everyone saving on food there is a greater likelihood for people to contribute to food banks to help the truly needy. But to have one government program create a problem and another government program to try to solve it is lunacy.
With our economy hurtling toward a cliff with out of control spending, we don’t need to be on both sides of a problem.
I was having lunch with a colleague the other day and the conversation turned to the economy. He spoke of some recent analysis of the number of jobs that would be lost if the Big Three failed. He recounted not just the employees of the auto companies themselves, but the employees of their suppliers, advertising firms that produce car ads, and on and on. His final tally was well over 1 million jobs lost. He concluded by saying it would make the current financial crisis a walk in the park.
Getting enough exercise?
Does that mean that we are all going to start walking? Not that that would be a bad idea, we could all stand to lose some pounds, but for someone who has a 23 mile one-way commute with no option for mass transit, it’s just not going to happen. So what do we do? Well, one of several scenarios is going to happen.
Scenario 1: The Big Three Close Their Doors
If this scenario came about, what would we do? We would go buy Toyotas, Nissans, Hondas, Volkswagens, etc. Those companies would have to scale up to fill the void caused by the Big Three closing their doors. That demand would need people. So a significant number, but by no means all, of the laid off workers from Detroit would move to North Carolina, Alabama, and other points south, and join these auto companies at their U.S. plants.
Likewise the suppliers would form new alliances to supply these car companies, as would all the other ancillary companies that currently support Detroit. Would jobs be lost? Yes. Would it be anywhere near the number of jobs my friend projected? No.
Scenario 2: The Big Three Reinvent Themselves
The liberty of the car companies to reinvent themselves is constrained by government regulations. Surprise! If the Big Three have any hope of reinventing themselves, they have to have the freedom to do so. Start by eliminating the CAFE standards. CAFE, which stands for Corporate Average Fuel Economy, is the mileage standards dictated by the government that the auto companies must comply with or face heavy fines, draining more money from the Big Three’s coffers. So for every car that the Big Three build that may get 20 mpg, they may have to build and sell perhaps 3 that get 30 mpg, in order to meet the standard. But what if they can make money on the 20 mpg car, but they lose money on every 30 mpg model? What if the reason they can’t make money is because of their labor costs per vehicle, their pension costs per vehicle, their health care costs per vehicle, when added up are too high compared to their foreign competitors. They are basically forced by the government to make an unprofitable product.
Why not abandon the CAFE standards? Let Detroit build the cars and trucks that they can make at a profit. Let the foreign manufactures make cars that they can make at a profit, including high mileage cars. Let the American people have the freedom to choose which they want. As the price of gasoline climbs as it did, and will again, people will want to buy high mileage cars, hybrids, electric cars, but they will also want to buy SUVs, luxury cars and light trucks. Why does a particular manufacturer have to produce all kinds? When has government ever made the right call on what products to produce? (Hint: think of all the five-year plans and Great Leap Forwards from the Communist world).
Scenario 3: The Government Bails Out the Big Three
The government prints up a bundle of cash, $25 billion or more, gives it to the auto companies and hands the IOU to you and me. The new Democratic Congress and Administration will toe the line for their backers in the environmental movement and demand higher CAFE standards for the auto companies in the interest of addressing: our dependence on foreign oil; green house gases; and helping consumers. This will put increased pressure on the Big Three to make more unprofitable products and we will find ourselves back in the same place a few years hence. More liberties will be vaporized as the government appoints a czar to oversee the auto companies to be sure they are building the right products, that management is not getting paid too much money, and well let’s face it, they would basically be nationalizing the auto companies. Management talent would dry up, and socialism would make greater inroads into the U.S. economy.
The Best Scenario
The Big Three file for bankruptcy, if that is what they need to do. The stockholders would probably be wiped out, the management team would be replaced, and this will let them re-negotiate their labor agreements. Congress and the new Administration realize that people will want to purchase cars with higher mileage as the price of gas climbs regardless of any government requirement. There is no justifiable reason that any particular auto company has to build a particular car because the government says so. Achieving this state of enlightenment, Congress repeals the CAFE standards. With the liberty to manage the company to make a profit rather than meet the constraints of a bevy of interest groups, a more energized management team takes the reins, and returns the Big Three to competitiveness.
Drawing a line in the Sand
If we don’t take a stand here and now, every company that wants a cash cushion will be working the halls of Congress to get their hands on your money. There is not enough to go around. In addition, many of the problems we are facing were created by government initiatives. The mortgage mess was not the result of not enough regulation but by government programs that compelled lenders to give loans to people who could not afford them. Detroit’s problems are a result of CAFE standards and onerous union contracts. Since government created many of these problems why do we think that government knows how to fix them? What we need to do is tell them to back off and let the free market work.
The conga line for companies with their hands out forms on the left. The next ones bellying up to the slop trough are GM and Chrysler. They need $25 billion to help them through a tough patch or they may go out of business. It is a loan? Is it buying a stake in the company? Is it that thing of which we dare not speak– socialism?
What’s Next?
The question is are we, by the continued intervention of the government, managing our way out of a recession and into a full blown depression? For all the warm memories of FDR, the depresion lasted more than twelve years thanks to, “We’re from the government and we’re here to help.” Perhaps it’s time to take our medicine, pull the covers up under our chin, sweat it out, and get back on our feet.
Business, like many things, runs in cycles. There are up cycles and there are down cycles. We can’t eliminate them, they are a necessary part of the process. But just as there is no cure for the common cold, sometimes it is best to let it take its course as soon as possible and be done.
Was Government Intervention Wrong?
I don’t believe so. It was unfortunately necessary to end the panic. When lenders have no confidence that if they lend they will be paid back, and if they have non-performing assets and they can’t sell them because they don’t know how to price them, the whole system locks up. The system needs a lender of last resort and the only one big enough to step into that role is the government. However, that should be for the least amount of time possible.
The Problem with the Auto Industry
The auto industry has had 35 years to figure this out. With the Arab Oil Embargo of 1973, Japanese auto companies made major inroads into the automobile markets. Imagine buying a car that got 20 miles per gallon, rather than 8, was better built, and cost less. Well, that’s what the Japanese companies were offering, but what did Detroit learn? Union contracts too expensive, let’s invest in robots and get rid of the expensive people! GM bought boatloads of robots and later ended up scrapping them. Why? Because the workers weren’t the problem.
Who transformed the Japanese auto industry? An American by the name of W. Edwards Deming. After World War II, Japan’s industry was in shambles. Deming went to help them get their industry back on its feet and taught them about statistics and quality control. They learned their lessons well. They focus on incremental changes every day. If someone sees a problem on the assembly line and takes action to stop the line, he doesn’t get chewed out, he gets applauded.
The Big 3 have had all this time to figure out what they were doing wrong and fix it, but what did they do? During the good times, they just rolled along. If signing a big labor contract kept the peace and kept the factories running, they would buy off the unions. But when the trouble starts, there’s no room to maneuver.
Leading the Way to the Future
The Japanese saw the need to cut back further on fuel consumption, but they knew there was a limit as far as how much mileage you could squeeze out of a gasoline engine, so they came out with hybrids. Initially they were a novelty, but when gas was headed for $4 per gallon, they we economical. Where was Detroit on this? Lagging behind, of course. Don’t develop a hybrid car until your customers demand it, but by the time they do, they would rather buy the tried and true hybrids being built by Toyota and Honda. Ford promised to produce 250,000 hybrid cars but rescinded that pledge nine months later. Why?
“According to a Ford spokesperson, an internal panel of experts analyzed customer interest in hybrid cars and did not feel that there was enough demand to warrant the expense of building 250,000 hybrids.”
What was the price of a gallon of gas when they made that decision? $2.20, the lowest it had been in ten months. The other half of that article quoted above said, “Toyota remains top hybrid producer.” GM is now placing a very big bet on the Chevy Volt, which will be an electric car scheduled to launch in 2010. Although there is little fanfare, Toyota, Nissan and Mitsubishi are all planning electric cars in the next two years.
To Bail or Not to Bail?
So why should the taxpayer be on the hook for the mistakes of the Big 3 auto maker’s management for these past 35 years? Perhaps they should just go into Chapter 11, reorganize and come out as more competitive companies. Why prop them up so that they can stumble along for another 5-10 years until the next downturn and come back to the trough? The stockholders have been electing the boards of directors for these companies for 35 years and buying their stock. The boards have been hiring the management team and providing them with their compensation. The management team has made the product decisions, negotiated the labor agreements, and all the other missteps. Why should American taxpayers have to step up to the plate and bail them out. They got themselves into this mess, let them get themselves out.
But that’s just my opinion.
