May 20, 2009

Driving the Country into the Ground

Justin Katz

Well isn't this just dandy (emphasis added):

Some soccer moms will have to give up hulking SUVs. Carpenters will still haul materials around in pickup trucks, but they will cost more. Nearly everybody else will drive smaller cars, and more of them will run on electricity. The higher mileage and emissions standards set by the Obama administration on Tuesday, which begin to take effect in 2012 and are to be achieved by 2016, will transform the American car and truck fleet.

Agree or disagree with the concept of higher mileage and emissions standards, just about everybody acknowledges that there's an economic cost, and this one will hit Americans as (at best) the country's taking shaky legged steps out of a severe recession. The President has hopped into the driver's seat of the U.S.A. — which already needed repairs — and opened her up. "Let's see what this baby can do!"

Even David Brooks — who once fawned over a certain literary academic politician — is beginning to realize that indications of Barack Obama's intentions weren't mere rhetorical flourishes:

What these traits do add up to is a certain ideal personality type. The C.E.O.'s that are most likely to succeed are humble, diffident, relentless and a bit unidimensional. They are often not the most exciting people to be around.

For this reason, people in the literary, academic and media worlds rarely understand business. It is nearly impossible to think of a novel that accurately portrays business success. That’s because the virtues that writers tend to admire — those involving self-expression and self-exploration — are not the ones that lead to corporate excellence.

For the same reason, business and politics do not blend well. Business leaders tend to perform poorly in Washington, while political leaders possess precisely those talents — charisma, charm, personal skills — that are of such limited value when it comes to corporate execution.

Fortunately, America is a big place. Literary culture has thrived in Boston, New York and on campuses. Political culture has thrived in Washington. Until recently, corporate culture has been free to thrive in such unlikely places as Bentonville, Omaha and Redmond.

Of course, that's changing. We now have an administration freely interposing itself in the management culture of industry after industry. It won't be the regulations that will be costly, but the revolution in values. When Washington is a profit center, C.E.O.'s are forced to adopt the traits of politicians. That is the insidious way that other nations have lost their competitive edge.

And the children sing:

We're gonna spread happiness
We're gonna spread freedom
Obama's gonna change it
Obama's gonna lead 'em
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Last Fall when Jack Welch was on ABC's "This WeeK" reiterating for the world the dysfunctional economics of Rhode Island (in response to a comment or question regarding the New York Times article that same day on the same RI subject), he also made a comment along the lines of "if you want to see [how bad] the rest of the country eventually look like under an Obama administration, just look at Rhode Island."

Poor quality but expensive public education system (soon to be extended to health care, if Obama has his single-payer way with us); collapsing infrastructure; increasing population of unskilled and non-upwardly mobile aspired people, living wholly or partly on the dole; withering private sector economy as productive people and investment capital move and/or avoid this place.

Such is the future of the USA under Obama - productive people and investment capital will move overseas to more welcoming environments, and the USA will continue to decline. Ironically, this works in the Democrats favor, for they benefit from poor conditions and promising to make it better (though they never do) and a growing government dependent class.

For a real world preview, look at the slow decline of Great Britain that began after WWI as it socialized its economy (e.g., government taking control of their auto and steel industries when they could no longer compete on their own due to unionization and taxes). The 1959 Peter Sellers movie "I'm Alright Jack" gives a humorous sample.

Posted by: Tom W at May 20, 2009 8:37 AM

My understanding is the cost of hardware for fuel efficiency is about $1300 per unit. If gas prices reach $3.50, there is an operating savings of about $2,800 over a four year period. In addition, by reducing demand there is downward pressure on gas prices.

So, while the cost of NEW carpenter trucks may go up, the operating cost is reduced. And, I don't think there is any indication that we will need to retrofit old carpenter trucks with hybrid hardware.

On top of reducing foreign oil dependence and air pollution it will hopefully reduce our dependence on American lives to fight in oil fields to keep the cost lower.

Ironically, the short-term benefit promulgated in this argument to maintain the financial status quo is also criticized as a fatal flaw of local and state government.

Posted by: Robert Balliot at May 20, 2009 7:24 PM

Let's start out by noting that your numbers are all hypothetical. The auto industry is still working on the technology, so we don't know how much more it will cost. I'd note this, too, from the first article linked in the post:

Eric Fedewa, vice president of global powertrain forecasting for the auto consulting firm CSM Worldwide in Northville, Mich., said the changes will make pickup trucks so much more expensive that they will be used almost exclusively for work.

Wherever you got your average from, it doesn't appear to be evenly distributed across vehicles.

As for the effects of shrinking demand, I'd suggest that you think about it: Does that make sense in a practical economy? Demand won't be going down because companies are chasing fewer customers (which would lead them to compete); it will be going down because the same number of customers need less of the product. And yet everybody along the fuel supply chain will still have costs to cover.

Let's say the average vehicle needs 40% less fuel. Are gasoline suppliers going to take 40% losses? They may, but many will go out of business. The rest will have to spread the increase in per-transaction costs across less per-transaction volume of salable product. It seems to me very likely that, in addition to the natural increase in costs, as well as whatever increase derives from OPEC and other unpredictables, the change in demand structure will lead to another increase.

If your predicted $3.5 goes up even to $4, the break-even point for the new technology (again, the average, vehicle, weighted heavily in favor of small cars) goes from roughly two years of gas purchases to roughly three.

But the bigger point, is that the government is forcing this large mass of gambles on the economy during a period of uncertainty.

Posted by: Justin Katz at May 20, 2009 7:47 PM

Sorry Justin - this is a completely incorrect assessment - "Demand won't be going down because companies are chasing fewer customers (which would lead them to compete); it will be going down because the same number of customers need less of the product. And yet everybody along the fuel supply chain will still have costs to cover."

Demand will be going up globally - China, India and everywhere else. Their consumer demand is growing and they are building small inexpensive cars to fill that demand. Yet, if we are able to reduce consumption and still accomplish the same activites, we remain competitive as a country. My friends that work for Exxon have had their 'costs' covered quite well. They have done a great job convincing you to fear change.

Posted by: Robert Balliot at May 20, 2009 10:16 PM

Ah. So at 7:24, "by reducing demand there is downward pressure on gas prices." But at 10:16, "Demand will be going up globally."

'Spect I'll be moving on now, except to note that I don't fear change so much as arbitrary dictation of change.

Posted by: Justin Katz at May 21, 2009 5:27 AM

I know this will be an unpopular opinion here, but if the feds are insistant on moving toward more fuel efficient vehicles, then they should devise a progressive fuel tax plan over the next decade and allow the market to produce more fuel efficient vehicles in response to inevitable consumer demand. That is certainly more preferable than the government continuing their socialist power grab in American industry.

Of course that will never happen because they'd no longer be able to redirect the blame.

Posted by: JP at May 21, 2009 10:45 AM
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