Wednesday, December 3, 2008

Economics 3.141592…..Whose to blame for the Big Three Failure?

If you are wondering, the number is a reference to the illusive solution to mathematical Pi. Because our lives and times and thought streams are not infinite, we eventually have to stop. However the “butterfly effect” of any economic policy change does not stop just because we do. Ever heard two people in an economic debate who have two completely different beliefs but you find they are both making agreeable valid points? First, you need new friends and a better life if you are listening to an economic debate. Secondly the reason is that they might both be right depending on where along the chain of events you would like to stop the reasoning.

Let us look at a few examples. Many Americans from both sides of the isle hold disdain for welfare recipients. What if the government just ended it. Money is no longer flowing into the hands of people who patronize small liquor stores to Wal-Marts around the country. Farmers and textile producers will no longer be receiving the revenue generated by these consumers. That will force these producers and distributors to cut staff. That means even more people who will no longer be able to buy goods. I mean, welfare is gone. Many of these newly unemployed actually made enough to buy cars, houses, and an occasional lap dance. Now you are starting to take a bite out of the consumer base of “hard working middle class Americans.” And the collapse will continue.

Now let us apply this ripple effect to how the Detroit Big Three ended up before congress begging for money. There are a few forces at work here and enough responsibility to go around. Overall, the encompassing problem is that American business decision makers and our legislators have made policy changes to the delicate economic system as if the effects were contained in a vacuum.

I remember in the 70’s and 80’s that Japanese auto reigned king in quality. Toyota, a company that introduced its first product into the world’s strongest economy in 1957. The fact that they were allowed to offer a fuel efficient, low priced auto into the system caused ripples. Until that point the big 3 had not competition. The winner of that local competition just hired more Americans and the accounting remained balanced. Their wage structure and benefit plans were based around wholly built American products. Even if the US had wanted to build the exact same car, it would have cost them at least 15 to 20% more. Some would argue if you look at the full impact of costs and lost opportunities it is closer to 50% more. The US allowing this product, not regulated by the same costs, into the market was irresponsible. Like letting an invasive species into to lake system.

Let us look at the pickle the big three were in at that time. If they manage to muscle the very powerful UAW into accepting a huge cut in wages and benefits in order to lower the cost of their current product and/ or retool to meet the new demand for Japanese type products, they are taking money way from the consumers who buy their product. The loss of capital of course being felt throughout the system as described in the welfare example. Not a problem for the Japanese manufactures to deal with. Wage cuts seemingly a bad idea for the Big Three, the other option is to cut quality. Spend less time on R&D and revamp the marketing strategy instead. "Buy American cause it is good for America." The problem was that many of the design flaws were not caught until after they reached the market. This developed a product image problem. The other option was to employ people outside the economy to lower costs and build new products. This was ultimately the medium that they settled on. There was no winning option for Ford, GM, and Chrysler.

Also in the 60’s instead of sending our crop of bright but maybe not financially endowed young men to college, the government was sending to die in the rice patties of Vietnam. Economically, this lead post high school entities with a smaller consumer pool. That required them to charge more to cover the expenses. High educational cost are certainly contribute to the high cost of health care today. And the ripple effect continues on infinitely and in all directions. I mean we haven’t even considered the global ramifications.

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