Americanly Yours

Im sure that everyone has heard about the “Cash for Clunkers” program.  This is another one of those government programs that sounds like a good idea until you really think it through.

In an effort to both stimulate the economy and aid the environment, Congress and the Obama Administration enacted a $1,000,000,000 [$1 billion] which allowed people to trade in old cars with low gas mileage and receive a discount of up to $4,500 on new cars with high gas mileage.

Because protecting the environment was one of the goals of this program (and to protect against fraud), dealers were required to pour a solution into the engine of the car that was traded in which permanently disables the car.  The car is permanently taken off the road and is recycled.

Sounds good, right?  Not quite.

Who buys new cars?  People with money, of course.  The rest of the driving population buys their cars used from people who feel the need to buy a new car every few years.  By disabling used cars, the government is permanently removing their supply from the market.  Doing so prevents lower and middle class Americans from buying that vehicle, and has the net effect of raising the prices for used cars.

Someone who is still driving the 1995 Cadillac DeVille that they bought from their neighbor 7 years ago probably isnt very likely to go out and buy a 2010 Honda Accord, even under this program.  But, they would be much more likely to purchase the 2003 model DeVille that their neighbor bought after selling the 1995 DeVille 7 years ago.

But, rather than allowing the market to work in this fashion, the “Cash for Clunkers” program removes the 2003 DeVille–a perfectly good car–from the market and makes it tougher for the person still driving the 1995 DeVille to find a used car that fits his budget.

My personal opinion was that one of the reasons that this bill was passed was to protect the United States’ “investments” in [read:  theft of] General Motors and Chrysler.  It is clear to all that Congress and the Administration intended for this program to stimulate the economy and help the environment.  But I also believe that the government wanted to use this program to inflate the revenues at GM and Chrysler to make the American people less uneasy about the bailouts of those firms.  Think about it.  If you had just made a hugely unpopular move like taking over two iconic American automakers, you would do anything possible to convince the public that it was a good decision.  This includes funneling money to those companies to make their revenues look good.

My guess is that this program will actually hurt GM and Chrysler as compared to their competitors, namely Ford.  Why?  Well for one, a new Rasmussen poll found that 66% of Americans have at least “a somewhat favorable opinion of Ford.”  The same poll found that “General Motors is viewed favorably by 38%… and unfavorably by 56%”  It also found that 34% have at least somewhat favorable opinion of Chrysler “while 55% see the company unfavorably.”  The American people are angry at the other two companies for taking taxpayer funds, and Ford is now perceived as the only American automaker that isnt owned by the government.

They also make much better cars now than they used to.  I love my 2007 Ford Fusion.

In another poll that was published on the same day, Rasmussen also found that 46%of Americans are more likely to buy a Ford because they did not take a government bailout (13% said they were less likely and 37% said it didnt make a difference).  41% OF Americans also believe that quality of GM’s cars will get worse now that the government owns the company, while only 19% think it will get better.

[Investors like me know this.  For the sake of disclosure now that the FTC has announced that it is going after bloggers, I am a proud stockholder of Ford Motor Company and have seen the stock rise by about 18% in the last week.  Still, I am 100% opposed to this program.]

Additionally, the government’s intention was to get people to purchase cars with much better fuel efficiency and the new Ford Fusion Hybrid gets 41 MPG and was rated higher than the Toyota Camry Hybrid, making it an attractive choice for anyone who decides to trade in their clunker.

If the intention was to increase the revenues at GM and Chrysler, this program will backfire, as do most government programs.  My prediction is that the market shares of Ford, Toyota, Honda, Hyundai, and Kia will rise at the expense of GM and Chrysler.

This program also raises further questions about the competency of the government.  Love or hate this program, it was administered poorly.  No, this doesnt “prove that government cant run our health care system.”  It should, however raise at least some concern about the capability of government to administer programs.  It should also serve as a warning that when the government offers people a massive discount to use a service, people will take advantage of it (people respond to incentives).  The government and taxpayers should at least use the example of this program to think about what the effects of what will be perceived by many to be free health care will have on an already strained system.

This program should remind us to be weary of government estimates.  The $1,000,000,000 [$1 billion] allotted for this program was expected to last at least until the program’s anticipated end date of November 1st.  Instead of lasting for 4 months as estimated, it lasted less than one month before it exhausted its funding.  If the government was this wrong–way wrong–on estimates for its costs of giving out coupons for discounts on cars, can you imagine how far off could its estimates of the costs of administering a $1,000,000,000,000 [$1 trillion] “free” health care program be?

Its worth thinking about.

Americanly Yours,

Phred Barnet

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General Motors declared bankruptcy yesterday morning. This move had been much anticipated and probably didnt surprise anyone.

Presidents Bush and Obama gave General Motors billions of dollars to help it avoid bankruptcy, yet the inevitable still happened. No matter what your stance on bailouts and government interventions are, you probably agree that this money was wasted.  If you support bailouts and nationalizations, then you would probably argue that the money was wasted because the government could have and should have) bailed out and taken over GM six months ago.  If you are opposed to bailouts and nationalizations, then you would be opposed to any and all government assistance for GM.  More money will be wasted on GM in the future.

According to the Washington Post:  “During the GM bankruptcy, the United States aims to raise its investment in the company to $50 billion, take a majority stake in it and name most of its directors, giving the government unprecedented control over one of the nation’s largest manufacturers.”

I dont think that you can seriously deny that the United States is no longer a Capitalist Nation.  We have now officially morphed into a socialist country.  Yesterday was another sad day for Capitalists who again were forced to watch while the government continued to destroy this once great Nation.

President Obama and other supporters of these interventions have promised that they will be temporary.  I dont believe this and neither should you.  Thomas Sowell says that “nothing is so permanent as a temporary government program.”  Historically this has proven again and again to be true.  There are still programs in effect from the Great Depression which were said to be temporary at the time.  A 3% excise tax on phone use was enacted as a temporary measure in 1898 to help pay for the Spanish-American War.  This “temporary” tax lasted 108 years until it was finally ended in 2006.

Government programs, actions, and interventions tend not to end.  It is important to oppose them as they happen, while these actions are still fresh in the minds of the public.  If the government does not sell its stake in General Motors within the next few years the vast majority of people will cease to care, opposition will subside, and the government will continue to control General Motors forever (or at least for quite a long time).

Even if our government sells its stake in General Motors within the next few years, there will still be a tendency for future administrations to use Presidents Bush and Obama’s actions as precedents for future interventions and nationalizations.

President Obama told NBC’s Brian Williams that the government would be taking a controlling stake in General Motors. He also said that he essentially had no choice but to do so.

But, President Obama did have a choice.  A liquidation bankruptcy of GM might have caused temporary stress for the economy, but this stress would have been temporary and would have smoothed out in the long run.  Under a liquidation bankruptcy, General Motors would have been broken into pieces and sold off piece by piece to the highest bidder.  Every brand name, factory, patent, and all real estate owned by GM would have been sold off.  The money recovered from these sales would have gone to pay as much of the money owed to GM bondholders–who  to the company in good faith–as possible.

The brand names would have been sold–probably to existing car companies, although they possibly would have been sold to venture capitalists who were looking to start a new car company.  The factories would have been sold to new owners (or the same venture capitalists) who would either continue to make cars in them or would refit them for some other kind of production.  GM’s patents would have fetched lucrative amounts of money at auction.  Purchasing these patents at a discounted auction price could have helped move other automakers years forward in their research and development, saving them billions of dollars.  For example, GM was years ahead of the competition in developing fuel cell cars.

The auction process might have been stressful while it was being sorted out, but it would have been an efficient way to deal with General Motors.  Instead, our government has pledged to loan GM an additional $50,000,000,000 [$50 billion].  However, GM owes creditors $172,800,000,000 [$172.8 billion], meaning that the government’s invenstment will be unlikely to stop at $50,000,000,000 [$50 billion], just as AIG’s initial $85,000,000,000 [$85 billion] bailout ended up doubling.

You can argue that government control of General Motors will save American jobs, although this argument is tenuous at best. General Motors is losing money for several reasons including: their cars are not up to par with those of Honda, Toyota, Nissan, and Ford, their union contracts force them to pay their current and former workers much more money than similar workers at Honda, Toyota, and Nissan, and they have been slower to innovate than have their Asian rivals.

Toyota, Honda, and Nissan have been continually building more and more of their cars in America, while General Motors, Chrysler, and Ford have been building less. Last November, I wrote an article detailing my opposition to all bailouts, but said that if the government had to bailout auto companies, I would rather it bailout the successful ones (ie Toyota and Honda).  At least this way money would be flowing to innovative companies who have a chance of paying back the loans, rather than to sluggish companies who refuse to adapt and will be unlikely to repay any loans.

The United States government now has a controlling stake in General Motors and a very large stake in Chrysler.  General Motors, the world’s second largest automaker, is now owned by the United States government (with a minority stake being held by the UAW).  Chrysler is now owned by the UAW (with a sizable minority stake being held by the US government).  Additionally, a significant percentage of Nissan is owned by the French government (the French government owns 15.7% of Renault which owns 44.4% of Nissan).  This is not fair to Ford, Honda, and Toyota. These three companies have to compete with three large automakers who are owned by large and powerful governments who have made it a matter of public policy to ensure that the automakers they own do not disappear.  As a Ford stockholder, I’m pretty mad that a company that I have invested in (because I believe in its products and its management) now has to compete with a powerful government which can print money to pump into Ford’s competitors as it sees fit.  Additionally, the US government also had the right to increase regulations on the auto industry which can hurt Ford and benefit its government owned competitors.

As unfair as this is to Ford’s shareholders, this is extremely unfair to the taxpayers who will have to foot the bill for these bailouts.  The tens of billions of dollars in additional funding for GM are not the whole picture.  American consumers will have to pay thousands more for their cars in the future due to the inefficiencies being created by the government bailiuts.  The United States government is keeping car companies in business which have no business being in business.  It is also mandating that certain GM models now be produced in America, rather than in foreign countries.  While this may sound like a good thing in an economy that is hemorrhaging jobs, it is not.  GM has chosen to produce cars overseas becaue it is cheaper to do so.  Simply put, forcing GM to produce cars here will raise the cost of those cars and will make American consumers poorer.

Americanly Yours,

Phred Barnet

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Check out this chart from Coyote Blog before reading on:

http://www.coyoteblog.com/coyote_blog/2009/02/voting-with-their-feet.html

I find this to be very interesting.  With the exception of Louisiana, every one of the States listed in the bottom 10 is a State that is heavily unionized, has more social programs, and higher corporate taxes (and even Louisiana has high corporate tax rates).

The States with the highest positive net migration, however, are all “business friendly” states.  In these States, unionization is minimal, corporate taxes are generally low, and social programs are not as abundant.

You might think that people would want to live in places where corporations are taxes at a higher rate (so that they pay their “fair share).  You might think that people want to live in a place where there are more social programs to help those who are less fortunate.

The numbers, however, tell a different story.  While sticking a faceless corporation with a higher tax bill sounds great, higher taxes mean more expensive goods and either fewer jobs, or jobs that pay less (or give fewer benefits).  Social programs might help people temporarily, but they are no substitute for jobs.  The States above that taxed their corporations at higher rates and spent more of their budgets on social programs saw people leave.  Those people came to States like Georgia, Texas, and Tennessee.  States with low (or no) corporate income taxes and little if any union control over jobs.

While automakers in Detroit are moving out and leaving the country, foreign automakers from Toyota, to Kia, to Honda have built plants in the South where labor unions do not have an iron grip and corporations are not taxed for the “social good.”

There was an interesting article in the Wall Street Journal back in September comparing the economic policies of Michigan with those of then-Senator Obama.  Here is an interesting excerpt from that article:  “While the population of the three highest-performing states grew twice as fast as the national average, per-capita real income still grew by $6,563 or 21.4% in Texas, Florida and Arizona. That’s a $26,252 increase for a typical family of four.”

Policies of higher corporate taxation, heavy union control, and costly government programs impede economic growth. Would you rather have a government run safety net, or an extra $6,563 for each person in your family each year?

And more importantly, will people begin to leave this country if we pursue these policies on a national level?  They just might.  I just might too…

Americanly Yours,

Phred Barnet

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Today was an interesting day for automaker news.

First, President Obama took an unprecedented step of basically firing a private sector CEO, by requesting that GM CEO Rick Wagoner step down:  “On Friday I was in Washington for a meeting with administration officials.  In the course of that meeting, they requested that I ‘step aside’ as CEO of GM, and so I have.”

GM’s shareholders should have probably fired Wagoner at least 5 years ago.  They didnt.  Who ran the company should have been of no importance to the government.  However, rather than allow GM to go bankrupt, the US government (in its infinite wisdom) gave GM and Chrysler $17,400,000,000 [$17.4 billion] in loans and took an ownership stake in the two companies, effectively nationalizing 2 of the 3 American automakers.

My “favorite” part of this was that the government gave GM their $13,400,000,000 [$13.4 billion] knowing that GM planned on cutting 47,000 American jobs.  That means that we paid GM $285,000 for each job that they cut.  Just wonderful.

But, back to the issue at hand.  My opinion is that President Obama took a dangerous and shameful step by demanding the resignation of a private sector CEO.  One of my main problems with the bailouts besides the economic aspect is that they are impossible to handle objectively.  For example, Bank of America has received $45,000,000,000 [$45 billion] from the government–over 3 times the amount received by GM, yet Bank of America’s CEO Ken Lewis has kept his job.  The same is true at Citigroup and many other government owned banks including JPMorgan Chase and Wells Fargo.

And of course there is Chrysler.  Chrysler was bailed out the same day as GM, and yet their CEO, Bob Nardelli has retained his job and has not been “asked to resign” by President Obama.

The law and our government needs to be objective and treat everyone the same way.  If the government feels that it is necessary to bailout and take over the operations of private companies, then it needs to treat all companies which receive government aid in the same manner.  It is the only fair way.

But the news doesnt end there.  President Obama also made some interesting statements today.  While he did grant Chrysler an additional month’s worth of aid and gave GM an additional two months worth of aid (by the way another example of the government active subjectively, rather than objectively), he signaled that the two companies might be forced to file for bankruptcy.  A government review board went over the restructuring plans submitted by the two companies and decided that they were not viable plans, thus allowing President Obama to take a much needed hard line on the companies.

I tenatively applaud this step.  We just have to see how this works out.

I hope that President Obama is serious when he says that GM and Chrysler will be allowed to fail if they do not take the necessary steps.  Those steps include negotiating further concessions from the labor unions and bondholders.  My guess is that the companies will be able to gain the necessary concessions and then will receive more aid from the government, allowing President Obama to gain credit for taking the hardline approach, but clearing the way for the government to send more taxpayer [or freshly printed] money to these companies.

Americanly Yours,

Phred Barnet

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This past weekend, President Obama announced that he wanted to cut the deficit in half by the end of his first term in 2013.  You would think that this would make a deficit hawk like me happy.  It would–if it werent so misleading.

President Obama says that he wants to cut the $1,300,000,000,000 [$1.3 trillion] deficit that he inherited from President Bush down to a deficit of $533,000,000,000 [$533 billion] by 2013.  While this seems like a tough goal that will cut spending, this will actually result in increased spending.  The reason for this is simple:  the present massive deficit is an aberration from the normal, including hundreds of billions of dollars in spending that was supposed to be one time spending.  For example, included in the $1,300,000,000,000 [$1.3 trillion] deficit is the $700,000,000,000 [$700 billion] spent on the bank bailout, the additional billions spent on the bailouts of Bear Stearns and AIG, and last years stimulus plan that sent most Americans a $600 check.

In fact 2008’s deficit was $438,000,000,000 [$438 billion] a massive number, but a number that is dwarfed by the $1,300,000,000,000 [$1.3 trillion] deficit that is to be expected in 2009.  The vast majority of this money was supposed to be for one time things.  In fact, without adding the increased spending from the “one time items,” the deficit for 2009 looks a lot like the deficit for 2008.

President Obama’s 2013 budget deficit figure still represents an increase of over 21% from 2008’s number.  This “cut” looks more like an increase to me.

And Mr. Obama’s own numbers still admit that he will have a deficit of over $1,000,000,000,000 [$1 trillion in both 2010 and 2011].  No numbers were given by his office for 2012’s predictions, but lets give him the benefit of the doubt and assume that 2012’s deficit equals 2013’s deficit of $533,000,000,000 [$533 billion].  This means an increase in the national debt of at least $3,000,000,000,000 [$3 trillion]–equal to $10,000 per American.  I think the numbers will be much higher.

More on that later.

Americanly Yours,

Phred Barnet

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