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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We all knew it would happen. Chrysler has declared bankruptcy. Big surprise.

The government has announced that Chrysler wont be paying back the $7,200,000,000 [7.2 billion] in aid that it received. $3,200,000,000 [3.2 billion] of that money was given to Chrysler just last week–its hard to believe that the administration was ever planning on getting this money back.

But, in yet another case of the government not learning its lesson, it has actually pledged to “loan” Chrysler another $4,700,000,000 [4.7 billion]!  And on top of this, Chrysler is planning on asking for an additional $1,500,000,000!

What is going on here?

The government has received an 8% in the bankrupt company–which it claims is compensation for the taxpayers for risking taxpayer money.  The whole company isnt worth the amount of money that the government has loaned to Chrysler!  Chrysler is bad news and has been for years.  Did you know that Diamler AG actually paid Cerberus nearly $700,000,000 for Cerberus to take over the company in 2007?

Heres an idea, how about you compensate us by not wasting our money on bailouts!

But it gets worse.  President Obama’s administration has allegedly “strong armed” Chrysler’s investors to force them into agreeing to a deal.

Form Businessinsider.com:

“The sources, who represent creditors to Chrysler, say they were taken aback by the hardball tactics that the Obama administration employed to cajole them into acquiescing to plans to restructure Chrysler. One person described the administration as the most shocking “end justifies the means” group they have ever encountered.  Another characterized Obama was “the most dangerous smooth talker on the planet- and I knew Kissinger.”  Both were voters for Obama in the last election.

One participant in negotiations said that the administration’s tactic was to present what one described as a  “madman theory of the presidency” in which the President is someone to be feared because he was willing to do anything to get his way. The person said this threat was taken very seriously by his firm.”

The Wall-Street Journal reports a similar story–and also reports the lack of media coverage about this.

Basically, many bondholders have agreed (willingly or after being forced) to give  up their claims.  Many of their positions in Chrysler’s debt have been wiped out because of this deal.  These bondholders were individuals, companies, and pension funds who loaned Chrysler money, risking their own wealth to help Chrysler through a bad situation.  If Chrysler’s bankruptcy is accepted by the judge, these lenders will lose the money they loaned Chrysler.   This is nothing more than the government stealing money from one group and handing it to another.

In the future, lenders will think twice about loaning money to aid struggling businesses, especially if there is a chance that the government will cancel their loans.

And that group that got the handout just happens to be the UAW.  Under the administration’s plan, restructuring, the UAW now owns 55% of Chrysler.  The US and Canadian governments also own large stakes in the company.  The UAW endorsed President Obama and actively encouraged its members to vote for him.

But what sunk Chrysler in the first place?  If you guessed the UAW, you guessed correctly.  According to Chrysler’s own numbers from 2007, their average worker cost the company $75.86 per hour.  Around the same time, Toyota’s workers were costing the company about $40 per hour.

President Obama’s administration stole money from bondholders and equity from Chrysler’s investors and gave it to the UAW.  This is thievery and should be condemned as such in the strongest terms possible.

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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There has been lots of talk about an auto industry bailout. Apparently GM and Chrysler are both in imminent danger of collapse, while Ford has enough money to last through 2009, and claims that it will be profitable in 2010. Quite a few members of Congress have been floating several plans to bailout the “Big 3” US automakers, including a plan that would have the government take ownership stakes in the 3 companies (which is interesting because the combined market value of the 3 companies is less than the $25 billion that the government wants to inject into the companies) and appoint a “czar” to run them.

Sure, we could bailout these 3 large, iconic American companies. The rationale behind the bailout is that it could save a lot of American jobs. Yet, with the possible exception of Ford, I see little chance that any of the 3 companies will be able to completely turn around in the future. Instead, I see continued plant closings and lay-offs in the US along with continued losses. I think that bailing out GM, Chrysler, and Ford will just prolong the bleeding. The truth is that even if the bailout is a huge success and the companies survive, the Big 3 automakers will still close down all (or nearly all) of their American plants. The proponents of the bailout argue that the bailout is necessary to save American manufacturing jobs, but in the end, this will still result in the job losses that the proponents of the bailout are seeking to avoid. True, if the bailout works these cuts will come over the next 5-10 years, rather than all at once, but nevertheless they will still come. It seems to me that this type of bailout will end up subsidizing companies for cutting American jobs, rather than creating jobs.

For the record I oppose bailouts, but if there has to be a bailout, I have a better idea. Rather than subsidize 3 large automakers who have done nothing but cut American jobs and hemorrhage money for the past decade, we could subsidize 3 profitable automakers who in the past decade have greatly expanded their employment of American workers while earning large profits. I am talking of course about Toyota, Honda and Nissan.

You can argue that these companies are not “American” companies. This is true, these companies are headquartered in Japan, yet they do employ many American workers. Ford is headquartered in America, but I often wonder if there is anything besides that which makes it an American company. For example, I drive a Ford Fusion (which I love). My car was designed by Japanese engineers and built in Mexico with Chinese parts. I don’t really know what makes it an American car. If you buy a new Toyota Camry you will find that it was built in Kentucky. Japanese automakers also increasingly use American made auto parts in their cars. From 2000 to 2006, Japanese automakers’ purchases of American parts increased 53% to over $48 billion. And while the American Big 3 has been racing to close down its plants and produce its cars outside of the US, 63% of Japanese cars purchased in the United States in 2007 were manufactured in America.

Between 2004 and 2006, Toyota, Honda, and Nissan have created 4,715 jobs, increasing their employment of American workers by over 8% to over 63,000 workers, while Ford, Chrysler, and GM’s American workforce was cut by 23,264 jobs—cutting over 12% of their American workforce. [[Note, these figures were really hard to find, and the American Big 3 cut an additional 30,000 employees in 2007, bringing the total down to just over 129,000, however I could not find any statistics for the Japanese Big 3 for 2007.]] In that same time span, Ford, Chrysler, and GM have lost billions of dollars, while Toyota, Honda, and Nissan have made billions of dollars. Simply put, the Japanese Big 3 has produced much better results. The Big 3 Japanese companies clearly have better business models, and they have created thousands of jobs while Detroit’s Big 3 has cut thousands of jobs. Loaning the bailout money to the Japanese companies rather than to the American Big 3 will create necessary jobs which will most likely be filled by the highly skilled workers who will lose their jobs when the American Big 3 collapses.

Also, which Big 3 do you think ahs a better chance of paying back a $25 billion loan, bloody Detroit, or profitable Japan? And, if the government has to take an ownership stake in 3 automakers, I would rather it take ownership stakes in Toyota, Honda, and Nissan than GM, Ford, and Chrysler.

Besides producing technological innovations, Japan’s Big 3 is also the industry leader in producing environmentally friendly cars. The Toyota Prius and the Honda Civic Hybrid are great examples of popular hybrid vehicles which Detroit just cannot produce.

It is not just American automakers who are in “need” of a bailout. European automakers have asked their governments for a $40 billion Euro ($50 billion) bailout. Even China is now in the process of bailing out their automakers. The Japanese automakers are the only automakers in the world that are not in need of a bailout. Why fight against the inevitable? The whole world knows that Japanese car companies can make cars better and more profitable than any other group of automakers on the planet. Rather than extending the miserable lives of failing car companies, we should euthanize them and embrace the success of the Japanese Big 3. When companies can efficiently produce a great product and sell it at an inexpensive price, we all win, regardless of where the companies are headquartered.

Obviously, these companies are so well run that they don’t need a bailout. The auto industry in America is still strong; it just so happens that the strong producers of cars in America happen to be Japanese. So what? America is a Nation of immigrants. Maybe giving Honda, Toyota, and Nissan low interest loans to expand American factories could convince them to immigrate to America and move their headquarters to Detroit.

We should reward innovation and punish sluggishness. Thanks to Honda’s innovations, a Honda factory in East Liberty, Ohio can switch from manufacturing Honda Civics to making Honda CR-V’s in only 5 minutes. However, a Ford SUV factory in Michigan is switching its production from SUV’s to small cars, but because of a lack of innovation at Ford, the factory is shutting down for 13 months to retool, which is costing the company $75 million.

Bailing out Detroit will subsidize bad behavior, similar to giving a juvenile delinquent child a raise in allowance in the hopes that it will somehow change his behavior (if you think that will work, ask my parents). The government should reward good behavior, not bad behavior. Rather than raising the allowance of the bad kid, why not reward the good child? Wouldn’t this be a valuable lesson, not only to the “children” involved, but also to all the other children out there (airlines). “Bailing out” the Japanese Big 3 will lead to the creation of American jobs, increased research, and increased profits for these companies. Bailing out Detroit will only extend the pain and slow bleeding.

Americanly Yours,

Phred Barnet