Let me start by saying i do, for the most part, believe in pure capitalism - that is a pure market economy. If i believed that was what we had, i probably wouldn't even be writing this letter. Too much government influence in many areas, too little in others and rampant lobbying are just the big three when it comes to why we're not pure.
Having said that, it's the other big three, that have me thinking this morning. After multiple trips to congress, taking virtually every means of transport known to man short of handsome cab, it seems the automakers have finally made their case for some assistance. (If I were more cynical, I'd say that it was only an effort from this administration to pass the problem along to the next that freed the capital but, hey, it's Christmas, let's keep in the spirit).
The issue here is not how wrong just another bailout is, it's that we need to reexamine how the bailout happens. Let's start with a true market economy. if that's what we had - and you better sit down for this one - business would fail independent of the size of their payroll. If you keep an eye on the companies that get the money, it's much more prevalent for long-standing, big institutions to get the money as opposed to their younger, lighter brethren. Check Citibank's take vs. your local community bank (and yes, please calculate on a percentage basis to level the numbers). How long has this gone on? Check United vs Southwest about 7 years ago - you'll find similar results. I think you get my point.
The reason it's those particular companies that need the influx is something that's endemic of our flavor of capitalism. Escalating executive salaries are easy to blame, but let's not forget inefficiencies that come whenever a company grows as well as all employees anticipation for raises every year. These add up to combined increases in operating costs on annual basis - a situation which begins to lead to difficulty over time. Check out the retail sector - with a few notable exceptions think about the stores that have succumb to similar outcome - Bradlees, Caldor, Woolworth.
OK OK I know, i was talking about the bailout and i know what you're thinking - why should we do anything? Well, since we use so may other things to influence our 'market' economy we need to consider another factor - self preservation. As jobs the world economy levels and jobs continue to shift out offshore we need to take some steps to preserve our place in the world economy. And yes, i do know about the tariffs, trade agreements and price fixing - i guess i meant another step.
The issue at hand is targeted economic stimulus. One which infuses money into the economy, assists a few troubled, but key, corporations and assists the populous as well. The current round of the bailouts, as implemented thus far, seem to only meet one of those 3 goals. The banks that got money are in better shape, but reports of credit freeing up and foreclosures lowering have not come. During that round there was some discussion from both sides of the aisle that the government actually pay mortgages. I'm not sure if the word was aggressive or ill-conceived, but it was a bit off of the mark.
For the auto industry specifically, inventory is a huge problem. It's a variation on the mortgage idea that may do the most good here. Instead of giving the money directly to the companies, the idea would be a government match rebate. Simply stated, at the time of purchase the dealer would produce a receipt of MSRP for the car along with bottom-line price (minus rebates and incentives, not trade-ins, of course). If the manufacturer is an American company and the car is assembled here in America the government would match that break dollar-for dollar, up to 20% of the MSRP. If either the manufacturer is an American company, or the car is assembled here in America it would be a fifty-cent-on-the dollar match, up to 10% of the MSRP. If you base this on the average price of a car at $24,000 this would mean that the same $14B allocated to the car companies would incent almost 3 MILLION car sales.
Why is this - dare i call it 'trickle-up' economics - a better solution? Well because the effects will be felt on the street and trickle up to the top. Embattled car dealers will begin to move inventory. Credit on these assets will be more available since the LTV will go down, so local banks, and yes even manufacturer-based credit companies, will begin to move money again. The money will spread from there.
There are two side notes to this: first I doubt that 1 in every 100 Americans will buy a car. What does that mean? Simply that the proposal will not cost anywhere near $14B. And second: I know what you're thinking this goes against a market economy. Well this is where i beg to differ. Let's go back to the base assumption here, whatever we do will be against a true market economy. By moving in this direction were empowering, now wait for it.....the market to move. People will buy the cars which they believe are the best products and which are the best priced. The fact of the matter is this plan will most likely not save all of the car companies. What it will do is assist with inventory liquidation, infuse capital into local economies and reduce the overall cost to the taxpayers.
We've tried both angles: giving money directly to the big companies and giving it directly to the people - in both cases with no direction. Here we can nudge the direction without making the choice for them and boost the economy.
Sincerely,
Getting 44MPG in his Honda Hybrid.
