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Posts Tagged ‘Economics’

Auto Worker Compensation

December 15th, 2008 No comments

I came across this New York Times article, shedding some more light on the highly controversial $70+/hour ($150,000+ per year) that auto workers allegedly make.

The essence of the article is that the $70+/hour figure that has been the focus of much attention is not entirely correct – it’s actually lower than that. However, it’s still much higher than Japanese auto makers like Honda, Toyota, and Nissan. The average hourly cost of a Big Three unionized worker is $73. The chart below breaks it down for Ford (whose cost is $71/hour).

Auto Worker Compensation Break Down

Auto Worker Compensation Break Down

 The cash paid to a worker (i.e. the salary your paycheck reflects) is about $40/hour, and benefits (health insurance and pensions) add another $15/hour, bringing this component of compensation to $55/hour. This is about twice what the average American makes, which should serve as a key counter-point to Mr. Stein’s comments:

They are our brothers and sisters. They fight our wars. They maintain our middle class lives. Maybe they get paid a lot, but they have been giving back for years. When will it ever be enough?

The NYT article notes that the salary plus benefits cost at Japanese auto makers is about $45/hour, with the $10/hour difference coming mostly from the benefits, not the cash compensation.

The remaining $15/hour of the about $70/hour for Big Three employees comes from benefits for retirees. These are costs that must be paid since they were promised, and are independent of the number of cars sold. So, in economic times like these, the revenue from car sales falls sharply, but the costs don’t since they’re fixed – now you see one dimension of the auto industry’s issues. The article goes on to say that this cost is a function of both the generours benefits and the number of retirees – suggesting that as Honda and Toyota mature to where the Big Three are on the American manufacturing scene, they too will have many retirees and similar costs. Of course, there are a few key differences – the benefits at the Japanese makers aren’t as high, and I doubt they’ve hired as many people due to improvements in automation as well as leaner product lines (they’re not making as many varietys as GM, thus likely employing fewer people). Yes, retiree costs at Japanese costs will go up in the future, but I’d be surprised if it was anything like what we’re seeing at the Big Three today.

The NYT article makes a very important point: Even if we took away the $10 of the $15 for retiree benefits and trimmed down the cash compensation to $45, to match the Japanese auto manufacturers, we’d save the Big Three $800/vehicle. The article also mentions that the Big Three typically sell their cars for about $2,500 less than the equivalent cars from Japanese manufacturers, suggesting that the cost saving won’t fix the problem. The issue – that Americans just don’t want to buy American cars.

Quality and efficiency problems have plagued American cars for years. The Big Three claim they have learned their lesson, yet their sales numbers beg to differ. For the 25 years or so that Japanese cars have been selling here, they continue to gain market share.

There is no doubt that improving the cost structure for the auto makers will help - in a situation like this, every penny helps. But it alone will not be sufficient to solve Detroit’s problems. The Big Three have to completely reorganize their operations. And it seems to me that the best way to do that is some kind of organized bankruptcy (where they re-emerge as much smaller, more efficient operations), or some kind of organized sale to the Japanese brands (with obvious conditions around keeping American jobs and manufacturing).

Categories: Economics Tags: ,

Mr. Stein on the Auto Bailout

December 15th, 2008 No comments

I recently read a piece from Ben Stein titled “Bail Out Detroit – Now“. I’m not a regular follower of Mr. Stein, nor do I have an opinion on his writing – I just happened to see this on the Internet. However, I must say, this was utter garbage! I haven’t seen total crap like this in a while. Below are Mr. Stein’s comments, along with my thoughts:

First, we are on thin ice economically. To allow our largest heavy industrial component to fail at this delicate moment is suicidal. To put a couple of million more Americans into unemployment is just not sensible. Mr. Barack Obama is talking about public works projects to employ hundreds of thousands of Americans -bridge building, school building, airport building. These projects take time to start, disrupt local community life, and are famously wasteful.

Why not be smart about it and NOT LET AMERICANS GET UNEMPLOYED IN THE FIRST PLACE? (Please pardon the shouting.) There are millions of Americans already hard at work making great American made cars and trucks. Why not keep them on the job? Wouldn’t that be smarter than allowing the whole upper Midwest to fall into oblivion and then rescue it over a fifty year period?

Yes, I agree that these are trying economics times, and, in an ideal world, we would only have issues like the auto industry failing when everything else is hunky-dory (heck, in an ideal world, we wouldn’t have issues at all, but you get my point). However, we don’t live in an ideal world, we live in reality, where more than one problem can, and most certainly will, arise at a single point in time. These problems have to be dealt with – it is not acceptable to simply say “we have other problems right now, so let’s just throw money at this problem to make it go away for now”. Furthermore, I don’t see anything wrong with Mr. Obama’s plan to put Americans to work in public works projects. To be clear, I believe Mr. Obama is suggesting this plan to combat the rising unemployment in the U.S. (independent of the auto industry issues) and to create domestic economic growth (though the sustainability of this growth is another question altogether), not as an answer to what several thousand auto workers will do if the industry goes under. Thus, I think Mr. Stein’s assertion about not letting Americans get unemployed in the first place is unfounded. Finally, I disagree that millions of Americans are already hard at work making great cars. If these cars were so great, more Americans would be buying them and we wouldn’t be in this predicament. The problem is that these cars aren’t so great and haven’t kept up with the quality and efficiency improvements in the industry – thus leading to the companies current problems. I see no value in burning tax payer money so we can keep building these sub-par vehicles.

Somehow, we can give bailouts to investment banks where the top dogs make hundreds of millions a year for running the company into the ditch and wrecking the whole credit picture in America. Somehow we can have bailouts for Fannie Mae and Freddie Mac, whose bosses were trading on the credit of the taxpayers to make themselves rich while pumping up a serious housing bubble.

Amazingly, we can have whole fleets of C-130′s fly to remote areas of Iraq and Afghanistan with pallets of hundred dollar bills piled from floor to ceiling. Then we can pass them out to warlords who make tea for our soldiers one hour and blow their guts out the next. We can send CIA operatives into Somalia and give millions, maybe hundreds of millions, to warlords to fight other killers.

But we cannot find it in our hearts to save our fellow Americans in Ohio and Michigan and Indiana who make the cars and trucks that about half of us buy?

Okay, this is just plain old silly. I would hope that someone writing on economics would understand the difference between the bailout of the auto industry and the bailout of the financial services industry, and the underlying reasons behind each. The crisis in the financial services industry and the need for a bailout there is to address short-term liquidity issues. Yes, the real estate bubble burst and that created problems. But most of the carnage we’re seeing now is not directly caused by the actual decrease in real estate asset values, it’s caused by good old fear – the rising of the hairs on the back of your neck as you think about your portfolio value and risk exposure. Investors are scared, much like my toddler daughter when confronted by a new insect – she’s never seen it before, doesn’t understand it, and just wants to hide in a corner of safety until it goes away. The corner of safety for investors is cash, and they’re staying in it until there are clear signs that the insect known as the current crisis goes away. Until then, there’s no liquidity in the market, things don’t trade, and so asset prices fall. After this short-term fear has passed, investors will come out of the cash corner to play again, and we’ll see much more liquidity and an improvement in prices. So, in the meantime, the Fed is providing liquidity (think of it as your mom trying to catch the insect and throw it outside). When things return to normal and asset prices come back to a rational level, the Fed will get its money back.

The auto bailout is quite different. Here we have companies that have been run poorly with very bad cost structures. The impact of foreign cars on the industry has been known for about 25 years now, yet American auto manufacturers have failed to respond. Their labor costs are too high, innovation and sales too low, and understanding of the consumer virtually missing. Throwing money at them will not result in them having an epiphany and completely changing their operations overnight. Given that a bailout would reduce the risk (and thus pressure on mangment) of an imminent failure, the companies are very likely to continue operating as normal – meaning they’ll burn through the bailout money and likely face bankruptcy in the near future. The difference between the two bailouts is that one is akin to an investment, and the other is plain old foolishness.

By the way, I do completely agree with Mr. Stein’s thoughts on the billions we’re spending in Iraq while neglecting our country. But that’s a different topic…

And please don’t tell me how GM and Ford and Chrysler have made bad cars that people don’t want. I drive only American cars, only GM cars actually, and they are the best, coolest cars I have ever driven: my 1962 Red Corvette, my mighty Cadillacs whose potent engines and super brakes have saved my life many times on the freeway.

Sorry Mr. Stein – too late. Please see a few paragraphs above. By the way, I wish most Americans felt the same way about American cars, but they clearly don’t – hence the problem.

Why are we so angry at the unions? They negotiated their deals in good faith. It’s not their fault that roller coaster gasoline prices messed up their world.

Wait, let me get this straight – you’re saying that it’s not fair that an increase in fuel prices shed light on this inefficiently run industry and absurd compensation practices, and ultimately may cause unions to lose the ridiculously sweet deals they negotiated with poor management who should’ve known better? Wow.

Yes, they did negotiate a deal with management. That deal is between them and management. If management can turn these companies around and deliver on the deal, good for both parties. However, they did not negotiate a deal with the taxpayers, so why should the taxpayers get involved to deliver on the unfairly sweet deal?! What about the other hard-working Americans in this country? They don’t have nice fat pension plans and benefit plans – is it fair to them that tax revenue benefits the auto workers?

The bottom line is that these business were run inefficiently – the cost structure was too expensive, the products weren’t what consumers were looking for, and management was too slow to adapt to a changing industry. Just like any other company, its employees, and any deals these employees may have had with the company – the firm has to turn itself around, or become extinct.

I’d love to hear what other people think about this (Mr. Stein’s piece specifically, or the auto bailout in general). I’ll also be posting other things I’m reading and thoughts I have on the subject…

Categories: Economics Tags: ,

What should you do when you’re down? … Shop!

December 3rd, 2008 No comments

It’s a joke in our house now – “We have to shop to move the economy forward”. I’ve been saying it for weeks, maybe months, now. Since we moved back to the Chicago area earlier this year and bought a house, there have been a few large purchases. Every time my family asks why I’m blowing so much cash, I respond with the same “we have to move the economy forward”. Heck, even my folks say it when they buy a bunch of stuff on sale with prices so good they can’t say no (imagine this – $20 for a cart full of new clothes – as much as you can stuff in it).

Anyway, Dave Kansas (president of FiLife.com, a personal-finance Web site owned by Dow Jones & Co. and IAC Corp, and a columnist for The Wall Street Journal) agreed with me in his column in the online edition of the WSJ. I’ve pasted the text below.

As with everything, common sense should always be applied:

  1. The idea here is to splurge a little – not to go blow the next two months mortgage payment on a new flat screen TV and home theater system. Though we all should collectively breath life into the economy, our intent is not to mutilate our financial pictures. Taking on excessive debt to shop well beyond our means will only add to our misery and hurt the economy going forward.
  2. Related to the point above, this philosophy will not apply to everyone. Some will be in a position to shop, and some quite frankly won’t. If you’re just making ends meet and are concerned about a job loss, you should put away as much money as possible for the likely rainy day. But, if you have the fortune of having some money saved away, not being up to your eyeballs in debt, and have some disposable income, then you certainly should not put away your wallet in fear. Take advantage of your good fortune, buy yourself and your family members something nice to relax them in these gloomy times, and contribue to our country’s growth. Hoarding cash in fear won’t help us out of this hole.
  3. I don’t entirely agree with everything Dave says in his article – I think his idea of pretending gas is still $4/gallon and spending the difference is silly. When gas was $4/gallon people were much more stressed out about their financial situations than they are now, and cut back spending drastically. So, to pretend that gas is at a level where you curb your spending, just so you can beef up your spending account is counter-productive. I understand what he’s trying to say, I just think this is a poor example. It seems much easier to me to simply create a good budget. Since energy costs have dropped so much, that should create an extra  cash position in your budget – save part of this, and add the rest to your shopping fund – simple!

Dave’s elaboration on the fear that drives our current situation is spot on in my opinion. No doubt these are hard times and the country (heck, most of the world) is in a recession, but the gloom and fear that people and investors feel is probably exaggerated. I think stocks are likely over sold, and a lot of wealth has been destroyed for no good reason. This then becomes a self-fulfilling prophecy.

So, if you’re feeling down, rather than reaching for the ice-cream, go shopping!

The Christmas shopping season is fast approaching, and most of us face a stark dilemma: The economy needs us to spend, but we feel a need to save.

While it is crucial for individuals to have their houses in financial order — reducing debt and building savings — it is also crucial to not lose faith that things will eventually get better. This is a Christmas season where some small splurging could have an outsized impact on the economy by altering some of the gloomier thoughts dominating the national conversation.

Ultimately, there’s a crisis of confidence in the economy. Banks aren’t confident enough to lend money. Consumers aren’t confident enough in the future to spend money. Everyone is, to some degree, paralyzed by terrible headlines and uncertainty about the future.

Consumer fear is especially powerful, because consumer spending makes up about two-thirds of economic activity. That means a lack of confidence among consumers translates to less spending and weaker economic growth, as we’re seeing now. The retreat into recession is under way, largely because consumers aren’t spending.

World-wide Slowdown

And it’s not just our own economy that relies on U.S. consumers. Other economies, notably exporters like China and Japan, depend heavily on our open wallets. Because of the slowdown in the U.S., factories overseas are closing and tens of thousands of people in those countries are being thrown out of work.

It’s obviously true that consumers face tough head winds and have real reasons to cut back on their spending. High debt, reduced portfolios and concerns about job security are thorny issues facing many people. Prudence and thrift are rapidly becoming cultural watchwords.

A Small Surge

But this race back to thrift can get overdone. There’s a real risk that people will start thinking about going to the mattresses. Fear can reach a level where people store cash at home, cut back on all but the most necessary purchases and act as though the economy will never recover. This can become a self-fulfilling prophecy. Indeed, this level of fear curtailed economic activity during the Great Depression, making a recovery elusive. That’s just one more argument why a small splurge makes sense this season.

One reason that fear is racing ahead is the manifold comparisons to the Great Depression. While this makes for good headline copy, it overstates the reality of the situation. Fact is, unemployment, currently at 6.5%, may tick toward 8%. Some outliers predict an unemployment rate of 10%. During the 1930s, unemployment rates topped 25%.

Most people are safe in their homes, whereas in the ’30s huge numbers lost their homes. Some banks will fail, but not on the scale of failures seen back then.

There’s more fear in the air than the facts on the ground warrant. Much of the fear may flow from the recently ended election campaign. Politicians, especially nonincumbents, like to stoke the fear of economic Armageddon while positioning themselves as saviors.

A good deal of fear also comes from falling stock prices. Stock prices aren’t likely to rebound, however, until signs of confidence return to the economy.

Fight Fear

One way to reduce the fear suppressing the economy would be a stronger-than-expected holiday shopping season. This would send a signal that consumers have some confidence in the future and that not all is terribly bleak. Rather than bury money in the backyard, people are instead giving gifts to family and friends.

Since expectations for consumer spending over Christmas are vastly diminished, it wouldn’t take much to shop toward a positive surprise. So, what are some strategies for surprising the doomsayers while remaining prudent about your own financial situation?

First, take advantage of plunging gasoline prices. Gasoline prices, and energy prices overall, have plummeted since July. Already gas at the pump is below $2 a gallon in several states.

Pretend that gas remains at more than $4 a gallon and stash away the balance in your holiday shopping fund. This will give you a kicker of funds on top of what you’ve already budgeted for gifts. After the holiday season, you can begin diverting more of these savings to paying down debts or addressing other financial needs.

Shop Strategically

Second, stretch your dollars by hunting for discounts and cheap financing. Retailers have already started discounting aggressively, and they are likely to do so more in the coming weeks. Search strategically for sales; they’ll be plentiful.

Try to avoid financing purchases with high interest-rate credit cards. Now is not the time to add to that burden. Instead, pay with your gasoline slush fund or look for zero-percent financing options on big-ticket items.

Third, embrace utilitarian gift giving. By purchasing presents that help people with things that they need — food, kitchenware, a sweater — you can have a little splurge while remaining prudent and thrifty. This is not a time for frivolous gifts.

Another reason for stretching on your gift giving this year: It will lift spirits during a difficult time. The economic and financial markets have served up nothing but grim tidings during the past few months. You have a chance to reverse that trend, just a little. You’ll make someone smile and, who knows, you might help start the economy back down the right track.

Categories: Economics Tags: