Reinventing the American Auto Industry

So today we see that the Obama administration is essentially reading the riot act to GM and Chrysler, forcing out a CEO and imposing tough conditions on any further federal assistance.

If GM and/or Chrysler end up merging, folding, or becoming much smaller versions of their former selves, what opportunities might that present for entrepreneurs here in the U.S. to create an entirely new and vibrant auto industry, centered on new technologies and alternative fuels?

For a century, the auto industry that we know today has been basically riding the coattails of the vision of one entrepreneurial innovator named Henry Ford. Although enhanced by a legion of add-ons like computer-controlled ignition, fuel systems, and transmissions, emission control equipment, better safety features, and other refinements, the autos of today are still, at the core, based on the same old internal-combustion engine technology as the Model T.

Hello? Aren’t we just slightly overdue for something new?

What would an exciting, innovative reincarnation of the American automobile — a Purple Cow Car, to borrow the terminology of Seth Godin, one of my favorite business gurus — look like? Perhaps, with an outfit like Tesla Motors, we are already seeing a hint of what a new auto industry could look like. Meanwhile, here is my own wish list for a Purple Cow car:

--Should run on an inexpensive alternative fuel
--Should sell for a reasonable price — low enough for someone of average income to save enough cash in a reasonable amount of time to purchase outright, or at least to pay off in a short period, two years tops; this, in turn, would create an accessible used market for folks of below-average incomes
--Should require little routine maintenance

I have one additional wish that, since I’m not an engineer, I’m not sure is realistic. But leaving aside the atrocious gas mileage and arguably inferior safety profile, I really miss the cars of the 1960s and 1970s, mostly because it was feasible, and not very expensive, to perform do-it-yourself maintenance and repairs. Maybe with the right technology that could be a moot point, with 10 years and/or 100,000 miles of virtually maintenance free service life being a realistic target today.

I encourage you to comment on this post to add wishes of your own.

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The Private Sector Always Allocates Resources More Efficiently: Myth or Fact?

If you listen to conservative talk radio (and in the market I currently live in there’s not much other choice), you’re likely hearing the likes of Rusty Humphries, Glenn Beck, and Rush Limbaugh continuing to preach against an active role of government in managing the economy, based on the long-held premise that “the private sector always allocates resources more efficiently.”

But I don’t think one needs a PhD in economics to realize that this premise isn’t one that deserves serious credence anymore, if it ever really did. Like governments, businesses are run by people, with the same human failings. And the bigger businesses get, the less they become about money and efficient resource allocation, and the more they become about other things like the egos of their owners and management. If the efficient resource allocation premise were unconditionally true, then every company car would be a small hybrid. No executive would drive a company-owned Mercedes.

Having said that, I also believe that there’s nothing inherently wrong with businesses making decisions on criteria other than efficient resource allocation. Other things being equal, if a business that is legally and fairly making enough of a profit to float something like a $1.2 million office renovation, then so be it. If it’s okay with the ownership, senior managers, or shareholders, and if it’s not done by a company in the process of being rescued by taxpayers, then it’s okay with me. But it’s almost an insult to one’s intelligence to suggest that it’s an efficient allocation of resources.

When I saw former Merrill Lynch chairman John Thain on television trying to explain
away his $1.2 million office renovation, I had, on one level, the same visceral, “how dare he” reaction that most people probably did. When he tried to explain the issue away by saying that the office in its previous form just wouldn’t have been effective for him to use, there did seem to be an element of condescension and entitlement in his tone. It was almost as if he was saying, “You little guys just can’t possibly understand how essential a $1.2 million office is to a high-powered executive like me.” In the current context of economic calamity, rising unemployment, and huge corporate bailouts, Thain’s press appearance was surreal, a bit like a latter-day version of the “let them eat cake” incident.

But at another level, I also couldn’t help but feel a little embarrassed for the guy. There was something almost pathetic about his hopeless effort to explain himself. In a way, it was almost like a scene you could imagine of some poor schleb who’d managed to claw his way into middle management trying to explain to his boss an excessively pricey dinner on an expense report.

The whole incident seemed to confirm the idea that Thain had risen to his position in an environment that encouraged executives to think of such extravagances as perfectly acceptable. As Nick Foulkes wrote in a column in the April 6 issue of Newsweek, “John Thain's $1.2 million office refurbishment spree would probably have been regarded as perfectly unremarkable 18 months ago.” That’s exactly the point. Numerous factors that have nothing to do with efficient allocation of resources can drive private-sector entities to a point where excess is not only tolerated but encouraged.

The executive compensation question is similar. The AIGs of the world have defended lavish bonuses and compensation packages by asserting that they are essential to recruiting and retaining top talent. By extension, this argument follows the efficient allocation of resources line of reasoning – the fat paychecks go to the talented business geniuses who deserve them.

But, again, there’s a strong case for the fallaciousness of this argument. As Seth Godin puts it eloquently in a March 23 blog post on “The Myth of Big Salaries,” “Sometimes markets get stuck because there is a disconnect between what something costs and what you get.” Godin argues that at compensation levels above $1 million per year, the game has become about things other than money. And, by extension, I would argue that it has also become about something other than allocating resources efficiently.

When corporations reach a certain size and level of power, they tend to take on quasi-government attributes and become prone to many of the same pitfalls, such as inefficient, bureaucratic management structures and self-serving motivations of the people that run them. So it’s naïve to believe that the “invisible hand” of resource allocation choices made by businesses as “rational decision making units,” a self-regulating mechanism, is the only regulation that is ever necessary. Like individuals, businesses don’t always act rationally. So checks and balances are as essential to businesses as they are to governments.

Where those checks and balances should come from – shareholders, boards, associations, governments, etc. – is of course a highly fluid and context-dependent question. But let’s get real and stop swallowing the simplistic notion that everything would be fine and dandy if we just stepped out of the way and let the self-regulating mechanisms of the free market run their course. Sphere: Related Content

So Just Who Is This Geithner Dude, Anyway?

Treasury Secretary Tim Geithner seems to be in the unfortunate position of being one of the favorite punching bags of conservative pundits. The criticism as a blunder of his first news conference, in the midst of which the stock market tanked, is probably fair. He wasn’t prepared to present details of a rescue plan for the banking industry, and it’s hard to see much excuse for that.

It’s especially hard to see if you look back a bit further into his background. Among his publishing credits are a 2006 lecture, “Hedge Funds and Derivatives and their Implications for the Financial System,” and a 2004 paper “Changes in the Structure of the US Financial System and Implications for Systemic Risk,” in which Geithner wrote that “… the increased size and scope of these entities necessarily exposes them to a wider array of shocks and risks and means that the failure of one of them could have a broader impact than in the past and be considerably more difficult to resolve. The implications for such a failure would almost certainly fall outside the range of experience captured in conventional markets.”

In this remarkable passage we see that, four years before the fateful events of Fall 2008, the President of the New York Fed already seemed to be aware of the unprecedented vulnerabilities in our banking system. At a time when the U.S. was just entering the upward curve of the Great Housing Bubble, Geithner was apparently well aware that our economy could be dwelling in a house of cards.

If Geithner knew this, so too, no doubt, did the rest of the Fed, which begs the question of why preventive action wasn’t taken sooner. Maybe behind the scenes the keepers of the temple were indeed quietly exploring the issue. Perhaps they were alarmed but didn’t see much that could be done without creating a panic that would bring down an economy that, after the collapse of the tech bubble, was being propped up entirely by the housing bubble. Perhaps the Fed, which of course is almost infamous for its cautious approach to public comment, and understandably sensitive to the impact of its statements on the markets, saw delaying the inevitable as the best among options that were all pretty bad. It also seems quite plausible that political pressure from the George W. Bush administration may have played no small role in the acquiesence.

But now, of course, a different administration is in power. And, in view of Geithner’s above-referenced contributions to the financial literature, we can perhaps take comfort in the idea that the new administration has at least placed someone at the helm of the financial system who has a thorough understanding of the issues behind the crisis.

Much has been made recently in the media of the alleged difficulty the administration has experienced in hiring deputies for Geithner. Given the beating he has taken in the media, maybe a good PR guy is among his staffing needs. In case you’re reading this, Mr. Geithner, I’d certainly be interested in entertaining an offer. Sphere: Related Content

Welcome!

Economics is often called "the dismal science." But our current crisis has taught us that it’s a science we all need to understand better. Over the past thirty years, the leaders we chose here in the U.S. implemented policies that created the conditions that made our current crisis possible.

Even now, it appears that we may not yet have learned our lesson. The public dialogue that frames the current crisis often seems inadequate and based on premises that may by now be very outdated, using the language of such old, simplistic dichotomies as liberalism vs. conservatism, socialism vs. capitalism, etc. Newsweek runs a story with the headline We Are All Socialists Now,” while conservative pundits continue to insist that all the government needs to do to get us out of the hole is cut taxes, cut spending, and get out of the way.

Both sides of this dichotomy are based on ideas that come from a very different world. Isn’t getting government out of the way, through such actions as deregulating financial markets and castrating anti-trust laws, exactly what we did, starting thirty years ago? And don’t those actions have a precise cause-effect relationship to the boom-and-bust cycles we’ve witnessed over three decades and, especially, to the the insane financial practices that gave rise to the current crisis?

But on the flip side, the vocabularies of socialism or New-Deal-style liberal democracy are just as inadequate to helping us comprehend and see our way out of the current predicament. If centralized planning proved ineffective in the 20th-century Soviet Union, just think how much more inadequate it is to the complex, fast-paced, technology-driven world we have today. Centralized planning isn’t what will get us out of this hole. What will get us out are the grass-roots efforts that individuals and organizations, out of sheer self-preservation. are already making to deal with the current situation, responding to such practical, everyday challenges as: How can I make sure that my family continues to have food on the table? How can I make sure my small business will have adequate cashflow to continue to operate? What innovative venture of my own could I launch to replace the income from the job I just lost?

Yet the chatter of the popular media seems to be locked into the framework of old ideas. That doesn’t mean, however, that there aren’t new ideas out there or that there aren’t contemporary thought leaders who, behind the scenes, are quietly influencing those currently vested with decision-making authority. So, the question is: who are the current thought leaders in economics, and what do they have to say? And will the ideas shaping the decisions of those we have placed at the helm help put our society, 30 years from now, in a better place than where we are now, a more stable place where we will be safer from the vagaries of the bubble-and-bust roller coasters of the past three decades?

This blog was conceived as a forum for exploring those very questions. Our current predicament shows that we need a better understanding of what we are assenting to through the authority we vest in our representatives. When our country bought into Ronald Reagan’s evangelism for low taxes, “free” markets, and deregulation, did we understand that the result would be allowing mega-banks to gamble all of our financial futures by placing risky bets on assets leveraged 30 to 1, or that we were creating an illusion of prosperity by building a debt-driven economy? Of course not. We cast our votes and acquiesced to the policies without understanding what we were getting ourselves into.

Let’s avoid making the same mistakes again. Let’s make sure we understand why we believe what we believe. Let’s make sure we truly know our leaders on both the dominant and opposition sides. And, perhaps more importantly, let’s make sure we know the thought leaders who are shaping their opinions, so that, when we exercise our democratic rights through our votes and through the ongoing feedback we provide to our chosen representatives, we are advocating for our own self-interest, from a fully informed context.

I’m not a credentialed expert on economics -- I’m just a reasonably well educated dude with some halfway-decent research skills and, I like to think, a knack for putting together a fairly readable English sentence. So it’s an exploratory undertaking for me, and I invite all interested to join me and, especially, to contribute to the discussion. Sphere: Related Content