AskDong

On Friday, Obama enacted a new tariff on Chinese made tires of up to 55%.  Obama had until this week to make a decision, but decided to act early.  This decision was a true test of Obama’s commitment to free trade.   Right now, I feel the same way as Greg Mankiw, disappointed.   I am a strong believer of Free Trade.  Protectionalism serves some people’s interests, but not everybody.

This is not to say there are not real problems with the U.S. economy and especially in the manufacturing sector, but restricting free trade is treating the symptoms rather than the causes.   The U.S. is like an unemployed teenager going crazy buying video games with his birthday money from his grandparents when he should be looking for a summer job.  Restricting free trade might stop him from buying video games, but it doesn’t help him get a job.

The more troubling aspect right now with regards with the tariffs is that China is looking to retaltiate with restrictions on Chicken and Auto Part imports.  If China were to retaliate, we would have few winners and plenty of losers.   A trade war is the last thing we need to see during what are still unertain economic times.

The Cash for Clunkers program has been getting quite a bit of press lately.  Will it be renewed or will it not?   It will.  Not suprisingly there’s been quite some debate about the merits of the program.  Is it an effective program?  If one were to judge by the good news coming out of Detroit, one would have to think that it must be.   However the numbers coming from the automakers are not the only criteria that the program should be judged upon.

Pros

The Cash for Clunkers program serves 2.5 primary purposes:

1. Improve the overall gas efficiency of the US auto fleet
2. Stimulus for the economy
3. Assistance to beleaguered automakers (similar to point 2)

Using those metrics only, it seems the Cash for Clunkers program has been success.  The program has been so successful that it’s run out of funds.  People have turned in cars averaging 15.7 for cars that average 25.4 MPG.   People are driving more effecient cars.

Cons

On the other hand, if you believe that Government has no place in choosing what industries deserve to be helped during an economic downturn, the Cash for Clunkers program is anathema to sound economic policy.   If the government must encourage spending, then a tax cut is surely the best way to do so.  Let people choose what they will spend money on.  In addition, it’s unclear that the Cash for Clunkers is truly benefiting the economy or the environment.

Some believe many of the people trading in clunkers would’ve have brought new cars anyways.  If this is true for the great majority of car buyers then program does nothing to stimulate the economy.  It serves only as subsidy from non car buyers to car buyers, and as a result does little to actually benefit the environment.  Additionally it can be argued that by encouraging people to buy new cars when they were able to make due with an older car has net detrimental effect on the environment because the construction of new car in itself is not good for the environment.   The cars being turned into the program will have their engines disabled, making them only useful for parts.   Ruining a perfectly good engine seems like a waste.  Though not to do so would curtail the effectiveness of making the car fleet more effecient as these cars would then make their way into the market.  As a stimulus program it’s not too much different from the age old example of hiring someone to dig a hole, and hiring someone else to fill it back up.

So is it a good program?

Not surprisingly how people feel about the program has broken down predictable partisan lines.  Equally not surprisingly, I’m a fan of the program.  I supported the original stimulus package because I believe the Economy needed it.   The cash for clunkers program is actually exactly the type of intervention that we need if you believe in Keynesian economic stimulus.  The money was delivered quickly and directly replace spending that was being curtailed (assuming that you believe that it actually encourages people who would otherwise not purchase cars).  Even if people moved up purchases, the program is still effective.   The goal of the stimulus package is not to encourage more consumption, but to encourage more consumption at this moment to prevent a spiral towards a depression like scenario.   While on the surface it might seem a tax cut would serve the same purpose given the prevailing mood, it was more likely a tax cut would’ve gone into savings - good in the long run, but bad in the short run which in turn puts the long run in jeopardy. 

One issue I am worried about is that we have encouraged people who should not be buying new cars into taking on more debt to purcahse new cars.  While such behavior may be good for the here and now, the long run consequences of burdensome consumer debt is not.

If GM files bankruptcy as expected today,  Ford will be the only U.S.  carmaker left standing.  This is not to say Chrysler or GM will cease to exist.  They may both likely survive bankruptcy, or the shotgun marriage (in the case of Chrysler and Fiat), however Ford is the lone US automaker escape the current economic crisis relatively unscathed.

There is continuing debate on how much the Government should’ve been involved if at all with the bailing out the automakers.   Would it have been better that both Chrysler and GM collapsed on their own six months ago?  It’s always impossible to say.  Personally, I prefer an ordered transition to abrupt change as the economic impact is likely more favorable in an ordered transition. 

I’m not, however, particularly estatic at the notion of the Government owning 60% of GM after bankruptcy for any great length of time.   I’ve been supportive of bailouts (bank and auto) because I believe that Government has a role to ensure a smooth economic recovery.  I’m less supportive of the auto bailout both because a single manufacturing industry (even one as large as the Auto industry) has a smaller impact on the econmic system than widespread bank failures.  

The Government has entered a tricky position in having takenownership responsbility of what were private companies.  Only a quick return to private ownership can be ruled a success.  The worst possible outcome would be one such as Amtrak in which the Government effectively nationalized the passenger rail system.  That is not what I or anybody else should want.   I hope for the best and fear for the worst.

The House passed new legislation intended to protect consumer from the big bad credit card companies.    I’m both personally ambivalent, and politically ambivalent about the new regulation.  Personally, I realized that I’m probably going to be hurt by the new legislation.   The new laws are not intended to protect me as I’m the type of credit card user credit card companies don’t really like.  I sign up for lots new credit cards, snapping up all the great offers, and don’t carry a balance or pay my bills late.   They don’t make money off of me because I don’t fall into their traps.  The credit card companies never have a chance to raise the rate on me or stick me with exorbitant late fees, but I still benefit from the teaser offers.   The new legislation is likely to reduce the number of great offers that come my way.

I’m willing to take a personal hit if I think the new legislation will truly help most Americans.   Sadly, I don’t think it will.   The new regulation will help some, but not enough.   The true costs of credit card debt will become more transparent and that is good.  Some of the worst practices such as puting payments towards the lowest interest rate balance should be eliminated.   However, the legislation fails to address the other side of the problem - credit hungry consumers.   Yes, the credit card companies need to be reigned in.   I believe in many of the provisions of the legislation, but we should also be issuing a firm rebuke to credit consumers.   Consumers are in trouble not just because credit card companies have taken advantage of them, they are in trouble because they have shirked tomorrow’s responsibilities for pleasures today.

There’s some hubub regard the rejection on the part of some creditor’s of the Government proposal to Chrysler debt holders to write off a greater portion of the debt.  These “Non-TARP” lenders have appealed to the public that they represent everything that’s right in America.   They have refused to take pennies on the dollar for their nickels on the dollar.

Let’s set aside the issue if the Government should be involved at all.   The Government’s involvement is a big issue, and one that should be debated, but not critical in evaluating how lenders should be behaving.  Assume that role of the Government in this case were instead being played by that of a private investor who already owns a large stake in Chrysler.

Chrysler had hoped to avoid bankruptcy by negotiating with its lenders and union workers.  The investor was willing to put more money into Chrysler if lenders were willing to take a haircut on the money they were owed.   Most lenders and the unions agreed to these concessions.  A few held out.

On the most part, I don’t have a problem with the “Non-TARP” lenders holding out.  That’s perogative, they should decide what’s the best decision financial decision for them.   Maybe they can get more out of the Government by holding out?  Maybe they will get more via a bankruptcy proceeding.  There is one case in which the actions of these lenders may be morally questionable.  If they hold credit default swaps that insures their debt and would actually make them better off if the company were to go bankrupt.  That situation would be akin to me lending a large sum of money to a friend and then taking out a life insurance policy on that friend.   So far so good, but then let’s say that my friend is critically ill and needs a life saving blood transfusion from me.   My friend might get better but if he dies I’m definitely better off financially.

What I object to is the notion that the current actions on the part of the Government in demanding concessions somehow “breaks the rule of law” as some voices of the other end (of the White House) political spectrum have screamed.   Renogitiating when circumstances change is part of a well functioning society, and well within the idea of the “rule of law.” Chrysler is not asking for a renogitation just because it wants to, but because it has to. That’s good business. Those who believe that the “rule of law” is sacrament must believe the only option for dead beat debtors is prison. Even if we still had debtor’s prison, how do you put corporation in prison?