Sunday, September 30, 2007

How American is the Mustang Car Revisited?

Now that GM and the UAW have reached an agreement that will be copied by both Ford and Chrysler which relieved the US manufacturers from the burden of uncertainty in delivering health care you would expect the US car manufacturing to recapture market share wouldn't you? Not so fast.
Back in 1987 the proportion of cars sold in the US that were not manufactured in North America surpassed 27%. But as Honda, Toyota, Nissan and others flocked into the US that proportion dropped to almost 10% by the late 1990's. That is no longer the case. Last year 23 % of automobiles sold in the US were manufactured outside the US, Mexico and Canada. I am afraid that the trend will continue . What that means is that at best the new UAW deal might reduce the rate of increase in the hemorhaging experienced by the big three but that it will not reverse the trend. If anything I would expect GM, Ford and Chrysler to import more cars to the US. Is car manufacturing the next textile industry? Is the US destined to become a services economy and is that something to worry about?

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, September 22, 2007

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. GM and the UAW have been trying to hammer out a new agreement for the last three weeks of constant negotiations. A deal might be announced in the next 24-48 hours but if I am to speculate I would say that the UAW is not in a position of strength. It will probably be asked to give back and give back some more. That should not be surprising when you learn that the UAW currently represents 180,000 auto workers when only seven years ago they represented more than twice as much.

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, September 20, 2007

Is a recession on the way?

What if Allan Greenspan is right and housing prices in the US tumble by around 15%? One possible scenario of such an eventuality has been sketched out by the Centre for Economic Policy and Research.

The main points of the study may be summed up as follows:

* The 15% drop in the price of the housing stock in the US would total $4 trillion in real terms
over 3 years. ($4,000,000,000,000.00) Yes that is a four followed by 12 zeros!!!!

* The above loss would translate into a decrease in wealth to the tune of $50,000.00 for each
homeowner. The above calculation assumes that we have 80,000,000 homeowners.

* Some parts of the country will face a 30% drop in prices while some others might not drop at

* Prices will not recover for a very long time, that is why it is called a bubble. The pre bubble
prices will not be retested for at least a decade and then only in nominal dollars.

* Job losses in the construction industry and related sectors could amount to over 1 million

* Financial crisis could deepen and spread.

* The negative "wealth effect" is estimated to bearound 5 percent of the change in the value of
the housing stock. The resulting contraction of $200 billion in aggregate consumer spending
combined with the associated job losses would result in setting the stage for a deep

Is it fair to excoriate Mr. Greenspan for the above mentioned failure? You bet that it is. If he had expected the above dire scenario then why didn't he take any measures to stop it or is this potential outcome composed only to attract attention and sell books? Would the real Greenspan step forward please? Don't hold your breath.

Thursday, September 13, 2007

Money Illusion

City light, and sounds, act like powerful magnets. Many of the youth want to move to NYC as soon as they graduate from college and find a job. And why not? The city is dynamic, full of life, never sleeps and yet offers better wages. It is because everything is so much more expensive in the city, thats why not.

Housing costs in the city and its environs are much more likely to take a much bigger bite of ones income as to make the differential in pay favouring the city disappear. The following shows the actual latest census data on this subject.

Proportion of Renters spending at least half their
income on rent, by County.

Bronx 32.9%

Kings County 30.0

Queens 28.0

Suffolk 33.9

Westchester 23.5

Once you are ready to make your move don't forget that spending 50-60% of your income on rent does not leave you with much for anything else. But hey, we all have different priorities.


"There Ain't No Such Thing As A Free Lunch" is one of the most fundamental and most enduring ideas in Economics. Interestingly enough the above expression expresses the same principle that ecologists consider to be paramount; everything is connected to everything else.

When would the "shallow" environmentalist, the world over, start applying the lessons of their discipline ?Don't we have the right to expect a policy designed to be environmentally friendly to live up to its billings or have we gotten soused to sloppy thinking that we have become enamored of faddish behaviour, superficial thinking and yes, even the willingness to deceive.

To understand that ethanol is not a solution to the energy crisis and that it should not be encouraged is a no-brainer. Studies have demonstrated clearly that the production of ethanol from corn in the US uses more energy than the energy that is produced as an output in the process. Add to that the evidence that a strong mixture of ethanol in the fuel appears to be corrosive and the obvious fact that there is no infrastructure to transport ethanol and distribute it across the land and it becomes rather clear that this so called solution is actually one way to aggravate the problem. But if we are to gloss over all of the above glaring shortcomings of ethanol production there is no excuse for not having seen that the rush to grow more subsidized corn by the farmers can only create a shortage of other crops whose production is replaced by corn. And sadly this is exactly what has happened. The projected wheat crop in the US is going to be smaller than expected and that, combined with an Australian draught , has resulted in a major increase in the price of wheat. The future contract hit today an all time high of over $9 per bushel. The price has more than doubled since April.
Ironically the poor nations will suffer the most as a result of our misguided "environmental" policies. The poor will have to deal with a greater incidence of malnutrition, we will have higher food prices, rich ethanol producers , corroded internal combustion engines and no relief from the energy shortage. Oh what tangled webs we weave when first we practice to deceive.