Protectionism: How to Bankrupt An Industry

The bankruptcy of Chrysler and especially General Motors (GM) represent a watershed moment in America’s history. These companies and the car industry had such an influence on America’s culture that they became protected by the U.S. government. Unfortunately by protecting its car industry America’s politicians hindered its ability to become efficient and innovative and thus made it vulnerable to nimbler foreign competitors. To be clear the industry’s collapse has nothing to do with the current financial crisis, but started in the 1970s when the car industry rather than compete with incoming Japanese products by making cheaper and better, they hid behind politicians. Rules on fuel economy distorted the market facilitating production of light trucks and SUVs while the government restricted the import of small, efficient Japanese cars. While managers and politicians failed on a grand scale, leveraging their political muscles, the unions contributed quite a bit to this failure fighting against innovation and demanding costly benefits that the industry could not afford. If Detroit had spent less time lobbying for protectionism and more time on improving its products it might have prospered. The great lesson from this failure is that even major industries can become vulnerable when protected from the pressures of competitions and politicians trying to protect them with trade restrictions will do them much more harm than good adding up to a major ripoff for both consumers and taxpayer.

Guide to politics and its miracles

John Stossel unveils on 20/20 a short and interesting politically incorrect guide to politics (source: abc )

Program is available at youtube in six portions on this page with the first attached below.

Bailing Out Irrational America

As Americans debate the cost of bailing out the US financial systems the blame game has begun. The culprit seems to be as usual the Bush administration, lax regulation, and the free market capitalism. Although fashionable it is naive to just blame this crisis on the current president when in fact a major seed of this credit crisis was laid back in 1999, when Fannie Mae, the nation’s biggest underwriter of home mortgages, was pressured by the Clinton administration to get more loans to “borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans.” The Clinton inspired pilot program soon became general policy with money flowing to people who couldn’t afford to pay it back. It is no surprise that while in 1999 there was roughly $5 trillion in total U.S. mortgage debt that number ballooned to $12 trillion by 2007 aided by reckless financial firms (source U.S. Office of Federal Housing Enterprise Oversight). To put things into perspective, the total U.S. GDP is about $11 trillion annually, and U.S. government debt is around $9 trillion so if the housing market really falls apart there is no way the government can cover these losses; No wonder investors are worried. The sad thing is that Americans are now complaining about a financial system that while enriching CEOs also boosted their wealth as homeowners and consumers who delighted in shopping and living beyond their means. This is ridiculous: the blame for this financial mess rests on spendthrift Washington politicians of both parties who use government to promote populist policies, and most importantly on the American electorate who elects politicians with mandates to increase spending while keeping taxes low. Americans should accept the most blame for this mess and start to realize that without curbing reckless social policies, cutting government spending especially on entitlements (social security, medicare, medicaid) and living within their means, America will surely face serious decline in a matter of decades.  Blaming the market system which, although not perfect, is the best system to allocate capital is dangerous but not surprising given that despite the claims of ‘lax regulation’ government now encroaches on large tracts of public life. Bailing out the banking system vital to the economy and allocation of credit is understandable but American intolerance of failure does not bode well for the future. The success of the American economy is built on the ability of the free market system to reward efficiency and innovation while punishing the losers with failure. If the losers in competitive markets are not allowed to fail and the blind American taxpayer does not wake up to its responsibilities and risks of reckless finance, the end of American supremacy will be a self inflicted wound and not one caused by rising Asia.

The Key to Ending Poverty

Despite the hype and celebrity show-offs about the need to increase economic aid to poor countries, the reality is that no amount of charity can truly eliminate the underlying reason for poverty: the lack of economic growth. Economists are not popular souls and targeted charity can deliver benefits but it does not take a PHD to understand that no country can provide its citizens a decent life mainly by relying on the subsidy of others. A recent study on the subject sponsored by the World Bank (“The Growth Report: Strategies for Sustained Growth and Inclusive Development”) looked at 13 countries that since 1950 have grown at an average rate of 7+% a year for 25 years or longer. The report notes that, although the causes of growth varied significantly between countries, they all seem to share 5 characteristics: 1) full exploitation of the world economy (importing bright ideas and technology; producing exports that others want); 2) macroeconomic stability; 3) high rates of saving and investment; 4) letting the market allocate resources; and 5) committed, credible, capable governments. The table above shows a few countries that are growing fast with India and Vietnam on their way close to joining this select group. The bottom line is that good economy policy and especially embracing free markets and free trade can bring millions of people out of poverty more than any amount of feel-good charity.

Spending Lunacy

This week, that popular American president the world loves to hate, unveiled the largest USA Federal Budget ever with proposed spending breaking the $3 TRILLION mark. This should not surprise us at all given the ever expanding nature of the USA federal government. We the people, who inherited and enjoyed a republic with a small federal government for almost 200 years, have relentlessly authorized and often demanded the expansion of government spending over the last 60 years. Politicians of both parties in the presidency and congress are now routinely elected largely on the basis of their plans to spend increasing boatloads of public money to supposedly cure all sorts of social ills while entitlements continue to spiral out of control. Partisan politics demands that the fault always lie with the opposite side but in reality We the people have betrayed the visions of the founding fathers. It is ridiculous to talk about balancing the Federal budget, which the media obsesses about, because $3 trillion in spending would require $3 trillion in tax revenues which amounts to an incredible extraction of private wealth. The truth is that Americans have been living way beyond their means for too long spending other people’s money through lax credit and social redistribution. The future is uncertain but on current path America is unlikely to lead the rest of the world in decades to come.

Watch out for the Storm

After extended losses in global financial markets and with increasing fears of a looming recession, today the Federal Reserved slashed interest rates by 3/4 of a percentage point to 3.5%. The size of the cut and the fact that the decision came at an unscheduled policy meeting provides a hint of the depth of the problems facing the US economy and the expanding loss of confidence. Given the compounding pressures on consumers (higher cost of living, stagnant wages, declining home values, US macro economic problems) it is easy to understand why panic is spreading and why more substantial market losses are ahead. Beyond the financial markets, however, the key message today is that painful times lay ahead for all of us as the economy and job markets continue to worsen. If do not enjoy an executive level golden parachute, be prepared for some stormy conditions.

Goodbye 2007

Another year has come to an end with so much happening in these 12 months. There was certainly a lot to celebrate but also a lot to ponder.

a) The World continues to be in a mess. Forget global warming for now because from Iraq to Iran and beyond the Middle East continues to be in chaos. The whole region which should has been Chaostan remains a potential source of wider global warfare.

b) The Global economy continues to grow with emerging markets, China and India above all, pulling it forward. In the USA however the clouds are gloomier as yet another financial bubble (housing) burst. People are getting squeezed from all sides: cost of living going up (from food to gas) while home foreclosures skyrocket, and the subprime and credit mess spread. And yes let’s not forget the almost worthless US dollar with the Feds spending like there is no tomorrow.

c) The year of 2 key Innovations. With all these excitement around, people were definitively happy to stand in line for hours to get their hands on some exciting toys. This was definitively the year of the Ipod and the Wii which are shacking up the telecom and game industries. And if the economy continues to worsen lots of people will have plenty of time to play those great super Marios games on their phones or in front of their TVs.

Yes it was a year to remember. Goodbye 2007!