Wednesday, May 03, 2006

How American is the Mustang car ?

If you are in need of a new set of wheels and you happen to believe strongly that it is preferable to spend your hard earned money (cars are the second most expensive purchase that a typical American makes during a life time) on an automobile manufactured by an established US company then most likely you will avoid the Toyota Siena in favour of that traditional American legend the Ford Mustang. That would be a wrong decision.

The most common way to classify automotive vehicles by country of origin is to find out the country with the most value added attributed to it. Once such a simple exercise is performed on the above two vehicles of choice the results will blow you out of the water. They are actually border on being shocking. The Toyota Siena is assembled in the USA and the final value added for this mini van that is attributed to the US is a staggering 95%. The Ford Mustang on the other hand, is also assembled in the USA but the final tally shows that only 65% of the value added is done by US manufacturers.

What is truly paradoxical and difficult to explain is the fact that Toyota appears to be selling vehicles that are totally made in the US at a profit while Ford, Gm and Chrysler are downsizing their US operations, expanding overseas and yet are not even in the same league as Toyota. Global integration, product design and manufacturing philosophies have changed the rules of the game. Toyota manufactures in the US at a profit and gains market share while Ford out sources to less expensive countries, loses market share and operates at a loss. I would still buy the Mustang. It’s sportier:-)

Saturday, April 22, 2006

Tipping Point??

Every rubber band can withstand only so much force before it breaks. What about the social fabric of a society? Does the principle apply or do we have the right to assume that no force can ever break the tevlar like strength of social cohesion?

Let us take a look at the facts and nothing but the facts, and then you decide. Income distribution in the US has continued, over the past quarter of a century, to reward the few at the expense of the many. The chasm that separates the top quintile (20%) of US households from their counterparts at the bottom of the distribution has become a gulf that does not bode well for the future of the class relations. The top 20% of households has increased to an astounding 52.2% of income. This simply means that the top 20% make more than the other 80% of the population put together.

To make things worse, the distribution of income within that top 20% is also very uneven. Actually the figures for 2003 show that the top 1 % of income earners account for over 14% of income. The top 10% account for 37.2% of income. Yet inspite of all this inequality the US government does not see it fit to issue or publicize the Gini coefficient (an accepted measure of inequitable income distribution that could be generated at the push of a button. But then why inform the masses about their standing when you can make the TV rounds and proclaim, as Secretary Snow has just finished explaining last week. He said that we should be proud of the way that our system works because it distributes the spoils according to an “aspirational” compensation system set by the market. Thank you Secretary Snow for explaining to us so cogently why is it that so many Americans choose to live in fear of how to pay for an unforeseen illness, who is to fund their pensions, how to finance their children’s’ schooling and put food on the table.

According to a recent study by the Institute for Policy Studies the average compensation of a CEO was 42 times that of an average worker during 1980. That gap has risen to a multiple of 431 in 2003 which translates to $11.8 million compensation for the CEO versus the $27460.00 for the worker. How much more can the social fabric withstand?

Tuesday, April 04, 2006

Vive La Difference !!!

Is there really anyone who believes that there is no major difference between the United States and France? Just in case that rare specie exists a recent survey done among the French should dispel that illusion. The survey in question found out that three quarters of the young French (yes, three out of four!!!!) would like to become civil service employees. Is this the kind of ambition and creativity that built Silicon Valley or even such prosperous enterprises as Starbucks, Dell Computers and the iPod juggernaut? I am afraid not, the ambition of these young Frenchmen and Frenchwomen is what is needed to create a stagnant economy hampered by bureaucracy and stifled by innovation. And don’t let anyone tell you that statistics show that the French are more productive than the American workers on a per hour basis. The figures are accurate but only because so few of the French people are working!!!

Monday, April 03, 2006

Immigration: Full Amnesty is the Right Way.

The House and the Senate, not for the first time, are working on legislation reform bills that are in sharp disagreement with each other. The House has already passed legislation that would make it a felony to be in the US without proper immigration papers while the Senate is preparing legislation that would offer the estimated 12 million undocumented workers the chance to obtain citizenship. If there ever was an issue that has valid points on both sides of the divide then this is it.

Economists have often admonished us that” there ain’t no such thing as a free lunch; TANSTAAFL. According to this principle no matter which side you take there is a price to pay. So what would the rational economist (Is there any other kind? :-)) do in such a situation? Naturally homoeconomicus will favour the less costly side.

Although there are valid points on both sides of the divide it can be argued very clearly that the concerns of the House side: the right to control borders, downward pressure on the minimum wage in addition to increasing official unemployment rates among teens and low skilled workers are easily trumped by the moral concerns that are guiding the debate in the Senate.

Why am I obligated to help? To me the answer is simple and straight forward. The rights of the poor, the oppressed and the underprivileged rest on two fundamental principles.
(1) The utilitarian idea that if I am in a position to lessen pain, in any form, then I should.
(2) The chasm that separates the poor from the rich has expanded at an alarming rate over the past half a century. Since this increased inequality is the direct outcome of a “world system” and since we are not ready to jettison this unjust system then it must be the moral obligation of those that have profited the most to help those that are most in need.

In the final analysis integrating the 12 million undocumented workers in the US is the right policy but must not be viewed as anything more than a stop gap measure until the next wave of immigrants storm through the borders. That can only be stopped by treating the underlying problem at its roots. Eliminate poverty, improve standards of living and support social justice through fair trade and targeted economic aid.

Sunday, April 02, 2006

Decline in Unionization: Who Is Responsible?

A pivotal institution in the economic, social and political life of the United States is in real danger of extinction. Preventing organized labour from going the way of the do-do bird will not be an easy matter especially when the efforts to weaken labour unions by management and international economic relations are aided by the misguided policies of the labour unions themselves to deliver the proverbial one two punch.

The United States has never welcomed labour unions with open arms. At the height of unionization only 37% of the private sector work force was unionized; but that has dropped to an abysmal 8% of the private sector work force during 2004. Compare that to the current rates of 95% in Sweden , 60 % in Norway and 40% in Germany.

What is even more alarming is that the labour union disappearing act goes on. General Motors has announced the planned layoff of another 30,000 hourly workers in addition to the 20,000 planned layoff by Ford Motor and the potential total shut down of Delphi, the auto parts manufacturer.

It is common to explain the labour woes by references to Ronald Reagan who fired all PATCO employees and sent a strong message to take strong stands against demands by labour unions as it is also customary to blame globalization and the “race to the bottom” that it has engendered. But are the Labour Unions themselves to be viewed as victims and held blameless?

Whose idea was it to raise the effective cost of a typical UAW employee to $74 per hour? Was it company management that suggested setting up job banks in order to pay employees for not working? Who was it that insisted on total implementation of rigid work rules that in effect decreased competitiveness? The sad fact of the matter is that labour has played an active role in its own demise.

Thursday, March 30, 2006

Is a 16th Rate Hike in the Cards?

On Tuesday afternoon the Federal Reserve Open Market Committee announced the fifteenth consecutive interest rate increase , just as expected by practically everyone on wall street. The latest increase of twenty five basis points(0.25%) raises the short term interest rate in the United States to 4.75%, a level not seen during this century. The Federal Reserve is not done yet raising rates. The future markets in Chicago are pricing in an 80% chance of a further rate hike during the next Fed meeting in May. A few economists are even predicting further rate hikes in the summer.

Those who support the current policy initiatives by the Federal Reserve are , as a general rule, worried about inflationary pressures. They tend to point to the low current unemployment rate of 4.8% in addition to the increase in manufacturing capacity utilization of over 81% and conclude that the economy is perilously close to its full employment potential. They argue that unless we start tapping on the brakes in order to slow down the economy then we run the risk of setting in motion a "demand pull inflation".

A small but vocal group of economists dismisses these fears as unfounded. They present the counter argument that such increases in the interest rate are unwarranted since the labour market has at least seven million officially unemployed persons, not to mention the millions of discouraged workers and those that are working involuntarily on a part time basis. Furthermore, this group believes that consistent improvements in productivity will ameliorate any upward pressure on wages.

Who is right and who is wrong? Probably the truth is somewhere in between.The fed should at a minimum stop after the next interest rate increase in May in order to observe and study objectively the new economic data.

Thursday, March 23, 2006

The Conservative Right Strikes Again

We have all seen the dire projections that demonstrate clearly that if we are to proceed with Business as Usual we have nothing to look forward to besides massive amounts of red ink as far as the eye can see. The expected shortfall is not limited to Social Security but the real big problem is the future cost of the Medicare/Medicaid complex. Add on top of that the cost of welfare and then you start to get an idea about the extent of the deficits that our current entitlements will subject us to in the not so distant future.

Charles Murray a resident scholar at the American Enterprise Institute (AEI) and the co author of the very controversial The Bell Curve has done it again. His new book “In Our Hands: A Plan to Replace the Welfare State” argues, obviously from a conservative perspective that we can eliminate poverty and reduce the size of governmental bureaucracy and enhance economic efficiency if we would eliminate all cash program payments at all levels of government; Federal, State and local.

Under this proposal there will no longer be any social security system or mecicare/medicaid or even welfare payments. The plan suggests replacing all of the above in addition to a few other subsidies with a single annual payment of $10,000.00 to each and every US citizen as of the time they turn 21 years old. His projections show that in the early years of this plan the deficit will expand but then will start to shrink and in short order generate a surplus. If this plan sounds too good to be true that is only because it is

Monday, March 20, 2006

Was it Really National Security?

What does buying groceries at Stop and Shop or A&P, filling the car tank at Amoco, going for a jog in Addidas running shoes, turning on your RCA television to watch your favorite soap or quenching your thirst with a 7UP have in common? If you guessed that all of the above mentioned companies are owned by non US firms then you have my admiration. But does that change anything? Of course not. But if so many of the most common corporate names are not American owned then what was all that hullabaloo about when Dubai Port World was to consummate a transaction of becoming the owner of the UK company O&P that is in charge of running six US ports? The short answer is racism, protectionism, partisan politics and short sightedness.

As we have discussed in an earlier post the United States runs on its current account an annual deficit of over $800 billion. This simply means that the US can go on running this deficit as long as we can generate a capital inflow of $2.5-3 billion each and every day. Our most two popular tools to accomplish this recycling of dollars are the sales of our treasury securities that carry a relatively low interest rate and the sale/export of equity in US based corporations. If that capital inflow is interrupted then we have no choice but to curtail our appetite for imported goods or else the excess dollars on the world market could trigger a major financial crisis. There you have it, was the move by the Congress to stop DPW from running six ports in the national interest or was it a move that is best characterized as killing the goose that lays the golden egg? You decide.

Thursday, March 16, 2006

National Debt vs GDP

The US Senate approved this afternoon by a vote of 51-49 a blueprint budget for 2007 that totals $2.8 trillion. This budget was not radically different from the one proposed by the White House last month. The Senators surprised the White House though, by adding a total of $18 billion in expenditures allocated along a number of programs that the administration had intended to either cut or at least freeze at last years level of expenditures.

The budget is predicated on the assumption that the federal deficit will amount to $350 billion in each of the current as well as the coming fiscal years. As a result the national debt ceiling was raised from the current $8.2 trillion to $9 trillion. This debt ceiling has gone up by $# trillion under George W Bush and the ceiling will have to be increased again next year and maybe even the year after. When the current administration was ushered into the White House in January 2001 the federal government was projecting budgetary surpluses as far as the eye can see.

As soon as the House passes its own version of the budget, sometime soon, the real horse trading begins. How many more years before the national debt surpasses the GDP?

Friday, March 10, 2006

Who is Working and Who is Not?

Official unemployment figures for the month of January 2006 reveal that the number of employed in the United States has increased by over 243,000. This figure is substantially larger than the 125,000-150,000 that is required each month to keep the rate of unemployment steady at 4.8% of the civilian labour force.

Those who voiced concern about the strength of the economy and the above expected growth in the labour market are in effect implying that the economy is perilously close to its natural rate of unemployment, NRU. Any growth from this point runs the risk of setting loose the inflationary genie. On the other hand there is a group of economists who believe that this will not happen as long as productivity continues to increase

Even though the total number of the unemployed is 7,700,000 ( 7,300,000 officially counted as unemployed plus 400,000 that are ready to work but have not looked for a job in the last four weeks) only less than half of this number represents a drag on the economy. In a vibrant, dynamic economy up to 3% of its civilian labour force could be classified as in between jobs. Since the civilian labour force in the US is estimated to number 150,000,000 workers then this means that 4,500,000 of our unemployed are voluntarily so. This however leaves over 3,200,000 people that are involuntarily without jobs in addition to those that have been discouraged, those that can be enticed to enter the labour market and those that are currently working part time.

As you can see from the above the argument that we should sacrifice employment for the sake of a lower rate of inflation rests on shaky grounds, at least in the short run.

Thursday, March 09, 2006

Another Month Another Record Deficit

The US trade deficit for the month of January 2006 did not disappoint. It was another record deficit of over $68 billion, that is over $2 billion a day. If this rate is to persist for the rest of the year, and it is expected to, then 2006 will record a trade deficit of around $800 billion. As a result many in the Congress have escalated their attacks on the Bush administration for its liberal trade policies and are threatening to introduce measures that will insulate the American economy. It should be clear that these protectionist measures will not address the major cause for the deficit but will merely politicize the issue without delivering any relief, if relief is needed.

Trade deficit, in a free market economy is not set by the government but is a direct outcome of consumer behaviour. Just under 70 % of the trade deficit for the month of January is accounted for by only two items. Imported oil bill totaled $24.6 billion during the month of January 2006 while the total value of the imported automotive goods added another staggering $22.7 billion. I am sure you will agree that Washington did not actively promote the sales of either Lexus or Honda neither did it encourage the purchases of Mercedes or BMW for that matter. I am equally confident that very few would approve of any efforts by the government to dictate the brand of vehicles that is to be purchased.

The goal of eliminating the trade deficit in the foreseeable future is as unrealistic as the goal of "Energy Independence" and just as misguided. If a country, any country, cannot afford its level of imports then the value of its currency will plummet, foreigners will cease to provide it with credit and its domestic producers will become more competitive. These adjustments will continue until a working balance is restored to the supply and demand of its currency on the foreign exchange market.

So, in light of the above, what does the evidence show? Surprisingly enough, the US dollar has not moved much against the euro one way or the other. When the Euro was launched on January 1, 2002 its exchange rate was $1.17= 1Euro, currently the rate is $1.22=1Euro. The same is practically true of the Japanese Yen which was trading around $=120 Yens in early 2002 and is currently exchanging hands at about $1=118 Yens. So what gives? Most of the excess US dollars supplied on the world markets as a result of the American consumers current fascination with things imported have been recycled back to the US through the equity markets. Foreign investors have shown a voracious appetite for US corporate securities and have thus been more than satisfied to supply us with the variety of wines, cloths,cars and energy in exchange for an equity position in various US corporate enterprises.

In the final analysis international trade is nothing else but a process of exchange. And when that process is not inhibited by governmental rules and regulations then the parties to the exchange will agree to it only if they deem it to be mutually beneficial. In the case at hand, the US pays for its net imports through exporting equity positions to the rest of the world. If we decide that it is not in our interest to sell major US based operations to nonresident enterprises then we must reduce our level of imports from the rest of the world. It is as simple as that.

Saturday, March 04, 2006

Copyrights never die!!!

Copyrighted material has been biven a twenty year extension in a recent bill that memorializes Congressman Sonny Bono of the Sonny ans Cher fame. As a result of the new bill his popular hit "I got you Babe" will be under copyright protection untill the year 2061!!!
I doubt whether such a lengthy period of intellectual property rights is needed to enhance the output of creative people. Mickey Mouse is already more than sixty years old but yet he enjoys world wide protection!!!

Friday, March 03, 2006

The Savings Conundrum

We are all familiar , if not with the figures, at least with the notion that indebtedness forms a major challenge to prosperity in the United States. We are often reminded that the consumers have been using their homes as ATM machines and charging everything in sight. Total consumer indebtedness is estimated to be slightly over $2.2 trillion. That is right $2,200,000,000,000.00!!! This figure pails in comparison to the total Federal debt of an astounding $8.2 trillion and growing at the rate of almost half a trillion every year.

If the above figures are a cause for concern, and they should be, then some of the largest and most trusted names in corporate America should be commended for eschewing the above mentioned trend. Such household names as Microsoft, Intel, Cisco and Genentech do not carry any debt on their balance sheet and when they do the cash hoards that they have amassed is much larger than the miniscule amount of debt . Such corporations have what is known as a negative debt. Many think that since debt is not so good to consumers and government then it should be bad also for corporate America. Not so fast.

Corporate capital structure has two components; (1) equity and (2) debt. Many business executives, financial analysts and economists have spent a good portion of their time researching the optimal corporate capital mix of debt and equity. Recent research on the subject matter has shown that equity is at least fifty percent more expensive than capital. This suggests that the capital structure of some of the largest corporate giants in the US is not competitive when compared to the much more highly leveraged international competitors.

As you can see from the above conventional wisdom is wrong in this case. Corporate America can increase its borrowings and yet improve its profitability. Who says that there ain't no such thing as a free lunch?

Tuesday, February 28, 2006

GDP per capita: Is It A Useful Idea?

Often, the twin concepts of the GDP and GDP per capita are impressed upon us as if they represent accurate and objective measures of well being. One common mistake has us refer to GDP per capita as a meaningful measure of income.Is it? The obvious answer is no, if for no other reason but its utter inability to say anything meaningful about income distribution.A cursory investigation of the data reveals that the average income for the bottom 20% of families in the US is around $10,000.00 while that for the top 20% stands at over $142,000.00 per annum.

Income distribution is a reflectionon of who we are and what we value. We cannot claim to be opposed to it and yet not take any action against it. Acquiesence does not provide an escape mechanism from being held accountable for injustice and unfairness, it is in reality an indictment.

GDP per capita has become a useless measure of income because it allows us to pretend that all is well when in reality distribution of resopurces has become more polarised. It is currently estimated that the top 1% of families in the US own around 45% of the wealth , they own just as much as the bottom 95% of the populace.

(For more on the above please read the Op-Ed by Paul Krugman in the NYT of February 27, 2006.)

Monday, February 27, 2006

Corporate Responsibility?

I have been wondering recently whether the term "Corporate Responsibility" is an oxymoron similar to some other common terms such as "sustainable growth" and "military intelligence".

If we are to judge the car manufacturing giants by their recent advertising campaigns then we must conclude that they have all become converted to the virtues of small cars, efficient engines and alternative fuels. Ford uses the Muppets to show their environmentally sensible offerings, GM touts it 20-30 gas sipping engines, Toyota is very proud of its hybrids and Daimler-Chrysler of its commitment to innovation.

Sadly, though, none of the above manufacturers practices what they preach. The new Ford pick up is almost as large as a bus, GM's Trailblazzer has a vette engine, Chryslers new Grand Cherokee goes from zero to 60 mph in 5.0 seconds and is not meant for the offroad and Toyotas new pick-up trucks are designed to be as large and powerful as their dreaded American counterparts. Maybe it is about time that we teach these corporate giants a lesson. What if they throw a party and no one shows up? Do you think that we have it in us to boycott these products? Fat chance.

Saturday, February 25, 2006

Corporations that Do Good

Corporations vie with each other , just like the Hollywood denizens on Oscar night, to find out how they are judged by their peers on a large number of different issues.
Although we all know that such rankings are purely subjective, yet it is interesting to find out how many of the largest corporate giants rank against each other. Arguably, the most interesting rankings are not the general cumulative ones but the ordering of large corporations according to their "socially responsible" behaviour as good, productive, efficient and yet responsive citizens in their respective communities. The following is the list of the top ten most admired socially reponsible corporations as tabulated by Fortune Magazine:

1 United Parcel Service

2 International Paper

3 Exelon

4 Chevron

5 Publix Super Markets

6 Weyerhaeuser

7 Starbucks

8 Walt Disney

9 Herman Miller

10 Altria Group

Note: Do you find it paradoxical that almost half of these firms are engaged
in activities such as tobacco, paper and non-renewable energy?

Why Is The Income Gap Widening?

Income distribution has been on a downward spiral in the US for quite sometime. The gap between the rich and the poor has progressively widened, the gully has become an abyss!!! Up until the 1960's the top 20% of US households earned ten times as much as the bottom 20% of households. This relatively high ratio has become larger still. The increasingly inequitable distribution of income has produced the current gulf where the top quintile (20%) of US households earn 14 times more than their counterparts at the bottom.

And yet the present administration in the White House is committed to making the tax cuts permanent or at least extending them until 2015. So what is wrong with a tax cut you ask? It is estimated that if the law is extended until 2015 then the average tax payer in the bottom 20% can expect an annual benefit of $23.00, yes that is not a misprint the benefit will amount to 6.3 cents a day for those that belong to the bottom 20% of the income earners. On the otherhand the top one tenth of one percent will each save $196,000.00 each year. A quick back-of -the-envelope calculation shows that the 20 million tax payers will share $460 million while the richest 100,000 tax payers will get a downpour of $19.6 billions. Now that is a trickle down effect in action!

Friday, February 24, 2006

Where is the Beef?

The latest figures released by the Federal Reserve demonstrate again that a major problem facing the US economy center around distributive justice , fairness and equity.

Average family income in the US; $70,700; has declined by 2.3percent between 2001 and 2004. The only solace in this figure is the fact that it is not as bad as what had occured during 1989-1992; a drop of 11.3%. ( For those that are too young to remember that was the era of Bush Sr!!!! Like father like son).

In all fairness though it must be noted that median family income; 43,200 saw a slight increase of 1.6% during the 2001-2004 time period. Interestingly median family networth witnessed also a small increase of 1.5% in the same period ; $93,100.

But what is most important and discouraging is the data about wealth gap. Those who are lucky enough to belong to the top 10% of households saw an increase in their net worth to an average of $3,110,000.00 when the bottom 25% experienced a decline in their networth to the level whereby they are in debt , on the average, to the tune of $1400.00.

"Clearly , the gains in wealth are going to the top end" said David Wise, the chief economist at Standard and Poor's.