Tina K. Russell

November 21, 2008

Market failures

Filed under: Uncategorized — Tags: , , , , , , , , — Tina Russell @ 12:32 pm

UPDATE: The letter-writer responds in a comment below! How cool. Just so you know, people who are addressed, directly or indirectly, in my posts should totally leave a comment, because those comments are awesome.

Letters – Rescuing Detroit – The Great Debate – NYTimes.com
To the Editor:

I agree that letting the Big Three domestic automakers collapse would result in a catastrophic loss of jobs, but find the terms of your proposed bailout counterproductive (editorial, Nov. 15).

Companies as large and complex as automakers simply cannot afford to replace top management in the middle of a crisis. Doing so would also be pointless when the industry’s troubles stem primarily from the temporary spike in oil prices and the continuing financial crisis, not poor management.

After all, the Big Three did not specialize in trucks out of shortsightedness or social irresponsibility, but because that is what the market demanded.

Pah! I found that statement amazing. The trouble isn’t that they were following the market’s demands; the trouble is that they thought, arrogantly, that those demands would last forever. And, when the market stopped demanding SUVs and trucks the size of small moons, the automakers didn’t notice. Now they’re on the brink of collapse, and they want us to bail them out.

Forcing automakers that accept a bailout to produce only micro cars that get 50 miles per gallon would deprive Americans of the larger, sportier vehicles they prefer, while placing the rescued automakers at a competitive disadvantage when gas is cheap.

Oh, my Lord! Has this person seen an SUV dealership, lately? There’s one near my apartment, and its signs now shout loudly, “Fuel-efficient cars here!” (or somesuch) and hope the message is loud enough that you don’t notice row after row of gas-guzzling tanks. The SUV market is a disaster; nobody wants to buy a heavy car in this market. I give that SUV dealership six months, tops.

This brings me to the really depressing part of the bailout, and the whole act of legislating more fuel-efficient cars: it’s a failure of the market. No, not us; we want more fuel-efficient cars, we buy more fuel-efficient cars, and it just so happens that they’re made by foreign automakers (which, by the way, often have factories in the US). In a just world, in a world where the CEOs of the Big Three car companies had more than half a brain, we wouldn’t need fuel-efficiency standards; companies would simply compete on fuel efficiency until America produced cars that ran on little or—get this—no gasoline at all. It’s in vogue; everyone would want to buy a Chevrolet or a GM hybrid. It just so happens that they missed the boat; well, more accurately, they missed the boat, denied there was a boat, and are lobbying the government for their right to continue failing.

That’s the depressing part: we have to legislate that these companies make cars that people will buy. We have to demand that Detroit’s car magnates make money. Why are they so arrogant? Why not jump on the fuel-efficiency bandwagon when there’s so much money in it? I can only imagine it’s sheer obstinance, and if the jobs provided by these car companies are important enough for the government to step in and help the company out, they’re important enough for the government to step in, change the rules, and fire the management.

The federal government must help the Big Three weather the current financial crisis; they are truly too big to fail. But such assistance should not be used as an excuse to dictate the types of cars that Americans can drive.

Karl von Schriltz

Washington, Nov. 15, 2008

Ha! More like we have to force the automakers to make the cars Americans want.

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October 24, 2008

Economics is applied common sense

Letters – Twists and Turns, Finish Line in Sight – NYTimes.com
Re “The Real Plumbers of Ohio,” by Paul Krugman (column, Oct. 20):

I know a real Joe the Plumber, and yes, his name is Joe. He’s married to my cousin and lives in Massachusetts. He even has a real plumbing license.

A few years ago, he was doing well, but with this growing recession, people have stopped calling him. The thing is, when people don’t have money, calling the plumber drops way down on their list of priorities.

Joe has four kids, and his second child is entering a local college. He thought he could afford her tuition, but with these bad times he’s not so sure anymore. Since his business has shrunk, he needs to cut back, too.

So my question to people who still feel that giving tax breaks to the wealthy will ultimately benefit the economy is this: I get the trickle-down effect, I get what you say by giving corporations power and freedom to really do business. But if we give the middle class a little bit more money, too — not the lines of credit and risky mortgages that have been handed out like Halloween candy and that have made us feel rich even though we’re not, but real money in the form of tax cuts and pay raises — doesn’t that allow us to hire people like my cousin Joe and keep his business going?

Doesn’t the trickle-down effect also have to trickle back up for capitalism to really work?

Susan Porretta
Westport, Conn., Oct. 20, 2008

The poor, the humble, the workers of modest means are what you might call a “growth industry.” In them is the biggest disparity between potential and actual output, which is the disparity that causes and maintains recessions. (Economic downturns are natural, but recessions are when they overstay their welcome, and depressions are when they’ve laid down roots.)

Money, like any commodity, has a diminishing marginal value. That is, the more money you give to someone, the less each dollar is worth. It’s obvious that $20 in the hands of a humble plumber means more than $20 in the hands of a CEO. Nevertheless, there’s a constant drumbeat that more money to the rich will help improve the living conditions of the poor. (I’ve always found that funny; if you’re admitting that money to the poor is the goal, why not bypass the middleman? I’m glad, of course, that Americans have recognized the folly of “trickle-down,” and its true meaning: diverting wealth to the rich will turn a torrent of hard-earned revenue into a trickle.)

Rich people, bless their hearts, hoard their money. They buy yachts and mansions. They invest in start-ups with catchy names and no business plan. That may benefit the manufacturers of yachts and mansions, and you never know, maybe the recently-graduated engineering student who helped design the yacht, or the construction worker who helped build the mansion, might make a little bit of solid cash. Poor people, however, spend that cash right quick. They pay rent on their house or apartment, helping the landowners, janitors, construction workers, material suppliers, and everyone else involved. They buy food, helping farmers, grocers, truckers, everyone.

Instead of buying one big mansion, giving good work to people who need it, they buy lots of more modest housing, giving the same work to far more people at a lower price. (Price of labor is price of labor; you don’t get paid more for working on a more expensive house, unless for some reason the construction company needs more specialized workers. Anything above that, management will pocket.) They’ll buy tons of food at the local farmers market rather than a serving of caviar from a far-off land for the same price. I don’t blame rich people for what they do with their money—if I had lots of money, I’d get started on my dream house right away—but it goes without saying that a little money means more to you if you’re poor. It also means more for the economy.

(There are some idealistic rich people—Bill Gates, George Soros, Mark Shuttleworth—who spend their personal fortunes making the world a better place. They’re wonderful, but we cannot become dependent on them, or expect every rich person to be like them. They’re only human.)

Money spent on the poor, of course, is even better when it’s a tax credit to supplement earned income, a (good, fair, transparent) loan to build their business, or help with going to school to learn new skills. These are investments that not only encourage good behavior, but come back many times over in the form of tax revenue that can then be spent on helping even more people. It’s true to a large extent what conservatives say about the numbing effect of welfare; it encourages dependency and lessens the incentive to work. That isn’t to say people on welfare are happy that way, though; it’s to say we need solutions that help poor people be able to do what they want most and do it better: to work, to take care of their families, and to achieve their dreams.

The central pillar of Bush’s “compassionate conservatism” in 2000 was that people who are already trying hard should get help from the government so that they may achieve their goals. It’s a sentiment I strongly believe in, and it’s a shame Bush abandoned it the very second he was appointed President. Barack Obama, meanwhile, is the quintessential compassionate pragmatist, willing to do whatever it takes, whether the idea comes from the left or the right, to help those who are struggling and those of modest means and big ambitions. After all, these are all conservative as well as liberal values: you work hard, you serve the country, and you don’t let hardship get you down. Investing in the poor is something everyone can get behind, and not just in election season.

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