Michigan Population Declines for Third Year in a Row

January 5, 2009

http://www.freep.com/article/20081223/NEWS06/812230354

You may not have seen this story, since it probably didn’t get much press coverage outside of Michigan and Rhode Island.  It’s appropriate that I comment, since the whole basis of my economic theory is that population growth beyond a certain point becomes economically destructive. 

The article reports that Michigan’s population declined for the third year in a row in 2008. 

Michigan is one of only two states that declined in population in 2008, according to annual population estimates released Monday by the U.S. Census Bureau.

The latest estimates mark the third straight year of declining population for Michigan. But even with the loss of 46,368 people — 0.5% of its population — the state has 10,003,422 residents and has not dipped below the 2000 Census count of 9,938,444.

Why is Michigan’s population declining?  It’s clearly the high rate of unemployment. 

Michigan and Rhode Island, which lost residents for the fifth year in a row, had the highest unemployment rates in the nation — 9.6% and 9.3% respectively — in November.

People are leaving to look for work elsewhere.  109,257 people moved away from Michigan, more than offsetting the arrival of over 16,000 immigrants and births that exceeded deaths.  It’s important to keep this in mind because many economists will get it backwards, insisting that it is the decline in population that is behind the region’s economic problems.  Any time an economist is challenged regarding overpopulation, they fall back on pointing to regions such as these, exclaiming “just look at how a declining population ruins the economy.” 

Anyone who lives in Michigan understands that its economic problems can be traced to one issue alone – the demise of the domestic auto industry, thanks to trade policy that gives free access to every import brand that wants it, without getting equivalent export markets in return.  With the possible exception of realtors, no one in Michigan would tell you that we could fix the economy by bringing in more people.  The last thing that our auto workers (including white collar workers in management, engineering, research, sales, marketing and other fields) need is more competition for the jobs that remain. 

With a population density of 178 people per square mile, the state of Michigan is more than twice as densely populated as the United States as a whole.  But the upper peninsula (the region bordered by Lake Michigan, Lake Superior and the Wisconsin border) and the upper half of the southern peninsula is quite sparsely populated.  The view from the Mackinac Bridge, from which you can see both the upper and lower peninsulas as well as Lakes Michigan and Huron, may be one of the most breath-taking vistas in the country.  The upper peninsula is still home to wild populations of moose and wolves, while the upper half of the lower peninsula has the only free-roaming wild elk east of the Mississippi.  It’s only the lower half of the southern peninsula, especially the region of southeastern Michigan where Detroit is situated, that drives the overall population density of Michigan so high. 

So what’s it like to live in a region with a declining population?  Actually, at least out here in the ‘burbs, it isn’t much different than anyplace else.  Our roads are still choked with traffic.  There are still pizza joints, drug stores, bank branches, gas stations, grocery stores, hospitals and shopping malls everwhere you look.  But head down into the city of Detroit and it’s a different story.  There’s vacant buildings and closed businesses and factories everywhere you look.  And plenty of poverty.  At least one third of Detroit’s citizens live below the poverty line.  People need work, plain and simple. 

When we travel to our cabin on the lake in northern Wisconsin, crossing the Mackinac bridge and heading west across the UP (upper peninsula), it’s comforting to see that very little of the natural beauty is being bulldozed for development.  That’s the biggest benefit of a stable or declining population.  The forests, lakes and streams will still be here for my kids and theirs to enjoy.


Is Toyota Guilty of “Dumping?”

December 13, 2008

http://www.reuters.com/article/ousiv/idUSTRE4BC0FS20081213

The linked article reports that Toyota is likely to report a loss in their 2nd half (the October 2008 – March 2009 time frame).  This begs the question:  if Toyota is selling cars at a loss, isn’t it guilty of “dumping,” the practice defined by the World Trade Organization as selling products below cost?  Shouldn’t the U.S. immediately file a complaint with the WTO?  Shouldn’t the WTO immediately either force Toyota to raise their prices or authorize the U.S. to impose tariffs on Toyota vehicles? 

Some may protest that the domestic automakers are also operating at a loss.  True, but that doesn’t violate any international trade agreements.  No other nation can take a case against the Big Three to the WTO because no one imports American-made cars, for all intents and purposes. 

But none of this will happen.  WTO rules are for the U.S. to follow and no one else.  We’ll simply give Japan time to dump yen and buy dollars, manipulating the dollar-yen exchange rate back to where they can easily make a profit.


Boycott Alabama Now!

December 12, 2008

http://www.boycottalabamanow.com/

Readers, here’s a link to a new web site by a retired auto worker.  He put up this site in response to Senator Richard Shelby, senator from Alabama and ranking Republican on the Senate Banking Committee, who with the support of a few other southern senators, killed the assistance plan for the auto industry.  Unless President Bush intervenes by freeing up TARP funds to help the automakers, Senator Shelby may very well have played the role of “Doctor Kevorkian” in assisting the suicide of the American economy. 

Once you get to the site, click on the “take action” tab.  There you will find instructions for contacting Senator Shelby and the Alabama Chamber of Commerce.  I’ve already done so, informing them of my disappointment with Senator Shelby and my support for the boycott. 

It’s time to start exercising our economic clout to punish those who champion the destruction of American jobs and wages.  Please join me in supporting this cause and forward links to your friends and relatives.  Encourage them to support it as well. 

Thanks.


Time to End the War on Wages

December 9, 2008

For the past two decades or so, the federal government and the Federal Reserve have waged a relentless war on wages.  This war was a “shadow” war, a subset of the war on inflation that began with the Reagan administration in response to the soaring inflation of the ’70s.  But never mind that most of that inflation was caused by soaring oil prices.  It was assaulted on all fronts, and that included wages. 

Paul Volcker and the Federal Reserve attacked with interest rates.  But the real weapons of mass destruction were in the hands of the federal government.  The first was trade policy.  We threw open our doors and welcomed any and all foreign competition, regardless of whether or not they reciprocated, and the impact on wages was devastating.  As we were blinded by the flash of low prices, the blast wave leveled factories across the whole country.  Then came the biological weapon – immigration policy.  The labor market was flooded with immigrant workers, legal and illegal, white collar and blue-collar.  The aftermath of this war is that blue-collar wages are now lower than their peak in 1977 and median family income is now lower than it was in 1969.  Family net worth is lower than it was in 1976 and family indebtedness has soared to record levels as Americans have struggled in vain to hold onto their standard of living. 

Sunday, while being interviewed by Tom Brokaw on “Meet the Press,” President-Elect Obama remarked that all sides in the auto industry must come together and make concessions, including further wage and benefit concessions by the UAW.  With wages of $28 per hour, assembly-related workers are already paid below the national mean income and, with wages at $14 per hour, non-assembly-related UAW workers’ pay is already well below the median income.  Is cutting their wages further and cutting tens of thousands of jobs to help the Big Three survive in some form his idea of helping the middle class?  Will he claim moral victory if a few of us manage to hold onto low-paying jobs, saying that at least those jobs weren’t lost too?

High wages aren’t the problem.  Wage inflation that exceeded the overall rate of inflation is what gave Americans the highest standard of living in the world.  Since wages only represent two thirds of the cost of products, rising wages driven by a strong demand for labor actually improve purchasing power.  Cutting wages cuts prices at a slower rate and purchasing power is lost.  Inflation-fighting focus needs to be on the other factors, things like raw material shortages, product shortages, rising taxes and so on.  Want to help the middle class?  Start focusing on driving a demand for labor.  Your stimulus plan will be a nice kick-start, but we need permanent jobs – the ones our misguided trade policy gave away.  We need policies that will increase market share of the domestic automakers, not cut their capacity to match declining market share.  We need policies that will drive the domestic automakers to hire more workers, not cut their jobs and cut their pay. 

Ultimately what we need are immigration policies that stop feeding an over-supply of labor and trade policies that hold foreign nations accountable for upholding their end of the bargain.  They can either buy as much as we buy from them or we can take action to cut imports.  One way or the other, balance must be restored.  It’s their choice, but it’s our responsibility to make sure that one or the other happens.


$350 Billion for Citigroup – Not a Penny for the Auto Industry!

November 24, 2008

http://www.reuters.com/article/ousiv/idUSTRE4AJ45G20081124?sp=true

The double standard and hypocrisy in Washington simply defies belief!  When the domestic auto industry, upon which one out of every ten jobs in America is directly or indirectly dependent, needs a helping hand – a mere $25 billion – to survive the financial crisis, they are forced to appear before Congress for three days of hearings and are berated, belittled, mocked and sent home without a penny – with nothing more than a demand for a “turn-around plan.” 

Then along comes Citigroup.  Without a single congressional hearing or a request for any kind of plan, the government lavishes them with $350 billion!  ($25 billion already given to them, followed by $306 billion to back up their bad debts and another $20 billion injected in the form of capital.)  Not a peep of protest about Citigroup’s corporate jets or excessive executive compensation.  No turn-around plan.  Nothing.  

Add this to the AIG bailout and you have a total of $500 billion for just two companies, twenty times what the entire domestic auto industry has requested.  Yet the government won’t provide a penny to help them.  Obviously, the Big Three would have been much better off going to Citigroup and asking for the money.  Why should Citigroup deny them?  They can pass out money like candy and the government will be there to bail them out, no questions asked! 

The anti-manufacturing bias of the U.S. government is clear.  They force trade policies down our throats designed to destroy our manufacturing base, mock us as “protectionists” when we complain, and subject us to public humiliation when we ask for a little help.  On the other hand, they bow down before the financial industry as though they were gods, regardless of how badly the industry is mismanaged, completely ignoring the fact that they are 100% responsible for the global economic melt-down.

What is the “plan” that Congress wants to see from the auto industry?  The following three-step plan would surely do the trick:

  1. Donate as much money to congressional election campaigns as financial companies have.
  2. Double donations in the following elections.
  3. Double them again.

I’m sure that’d do the trick.


Saving the Domestic Auto Industry: Why and How

November 13, 2008

Why the Domestic Auto Industry Cannot be Allowed to Fail:

The plight of the “Big 3” (GM, Ford and Chrysler) has dominated the news for the last couple of days.  All three are on the verge of bankruptcy.  All three are burning through cash at an incredible rate, the result of sales volume falling far below that necessary to support their infrastructure and legacy costs.  GM stock is now worth less than a 1-1/2 week inventory of the cars it builds. 

There seems to be a consensus that the domestic auto industry cannot be allowed to fail.  Yet, there are those who say “Let them fail.”  “It’s their own fault.  Their labor costs are far too high.  They build gas-guzzling inefficient vehicles.  Who needs them?  The Japanese, Korean and German carmakers can easily meet Americans’ need for vehicles.  Everything else we buy is imported and we get along just fine.  Why should cars be any different?”

Well, first of all, while everything else we buy does seem to be imported, we’re not really getting along fine, are we?  Take a look around.  Check your 401(k) statements.  Read the financial pages.  Our economy is in complete collapse, and the trade deficit is the root cause.  The trade deficit has drained away $9.1 trillion from our economy in the last three decades, and it’s all been financed by selling off American assets, even our homes, through selling mortgage-backed securities to our foreign creditors.  When we ran out of assets to sell them, the whole thing collapsed.

Imagine what would happen if the domestic auto industry collapsed, as it surely would if even one of the Big 3 goes under, taking the supplier base out from under the remaining two.  In a normal year, domestic car sales total about 16 million vehicles.  About half of these (a hair less) is built by the Big 3, about 8 million vehicles.  At an average cost of $25,000 per vehicle, that’s $200 billion per year added to our GDP of about $14 trillion per year.  Take that away, and our GDP falls to $13.8 billion.  Now, import those cars to make up the difference, and our GDP falls to $13.6 billion, because imports are subtracted from GDP.  (Even the government acknowledges that imports are a drag on the economy.)  At the same time, our trade deficit rises to $900 billion per year.  And, of that $200 billion cost of domestic cars, about $140 billion is labor cost.  Eliminate those jobs and, on average, every worker in America will take a pay cut of almost $1,000 per year.  Declining incomes is the real reason that home values are falling.  Take $1,000 per year out of everyone’s incomes and home values will drop another 10% automatically.  Looking for a sure-fire way to finally finish off the American economy?  This is it! 

Regarding the claim that their labor costs are too high, their legacy costs (pensions and health care for their retirees) are extremely high.  But remember, these benefits were promised at a time when domestic auto makers thought they could always count on having the domestic market to themselves, or later thought that free trade would provide them with export markets equivalent to any loss of domestic market.  They were suckered by economists who didn’t understand the real consequences of free trade, which was nothing more than an untested 18th century theory.  But they soon discovered the bind they were in and, since then, they’ve done a great job of working with the unions to slash labor costs and improve productivity. 

And regarding the claim that they only build gas-guzzlers:  they were crowded out of the small car market by imports and forced to specialize on the seqment of the market where they could still make a profit – light trucks and SUVs.  The only reason they build these vehicles is because that’s what Americans wanted.  Every big, gas-guzzling SUV on the road is there because that’s what the owner demanded. 

Now everyone wants fuel efficiency, but the small car market is glutted with overcapacity from all over the world.  The Big 3 simply cannot be cast into that glut and be expected to survive. 

The following article is a good summary of why the domestic auto industry can’t be allowed to fail.

http://www.time.com/time/business/article/0,8599,1858702,00.html?xid=feed-rss-netzero

“If GM were to go into a free-fall bankruptcy and didn’t pay its trade debts, then the entire domestic auto industry shuts down,” says Rodriguez. The system — the domestic auto plants and their interconnected group of suppliers — is far bigger than GM. It includes 54 North American manufacturing plants and at least 4,000 so-called Tier 1 suppliers — firms that feed parts and subassemblies directly to those plants. That includes mom-and-pop outfits but also a dozen or so large companies such as Lear, Johnson Controls and GM’s former captive Delphi. Beyond those are thousands of the suppliers’ suppliers.

Although the Detroit Three directly employed about 240,000 people last year, according to the industry-allied Center for Automotive Research (CAR) in Ann Arbor, Mich., the multiplier effect is large, which is typical in manufacturing. Throw in the partsmakers and other suppliers, and you have an additional 974,000 jobs. Together, says CAR, these 1.2 million workers spend enough to keep 1.7 million more people employed. That gets you to 2.9 million jobs tied to the Detroit Three, and even if you discount the figures because of CAR’s allegiance, it’s a big number. Shut down Detroit, and the national unemployment rate heads toward 10% in a hurry.

Even if just one of the Detroit Three — and GM is the most likely, as Ford is in better shape and Chrysler is much smaller — spiraled into a free-fall bankruptcy, the systemic effects, at least initially, would be huge. The whole industry would not be able to build cars in the U.S., because of the lack of parts. “Unlike the airlines or steel, when you look at the automobile industry and the fact that the whole supplier base is connected — to Ford, Chrysler, Toyota — it will have a ripple effect on the entire industry,” says Nicole Y. Lamb-Hale, a bankruptcy expert at the Detroit office of Foley & Lardner, a law firm that represents some GM suppliers.

And consider this:  the tool and die industry, critical to all of manufacturing, not just the auto industry, is utterly dependent on the auto industry for survival.  If the auto industry vanishes, so too will the tool and die makers.  If they go, the entire manufacturing sector of our economy is toast. 

How to Save the Big 3:

There’s no way that any of the Big 3 can survive even six more months without some kind of federal assistance.  And, just as the government is doing with the banks, it makes no sense to use taxpayer money to bail them out without taking a stake in the company.  So the first step is to provide whatever cash is needed to keep them going and take a 90% ownership stake in each.  It’s not such a crazy idea.  As the following article attests, that’s exactly what’s being considered.

http://www.usatoday.com/money/autos/2008-11-11-pelosi-autos_N.htm

Frank’s legislation would carve out a portion of the $700 billion financial rescue program for the Big Three automakers, letting the government take an equity stake in them in exchange for the loans, said Frank’s spokesman, Steven Adamske.

The Treasury could take warrants to share in a portion of future profits and would have to be paid back before any other shareholder. The car companies would face tougher restrictions on awarding pay packages to executives and dividends to their shareholders than the financial companies that get a piece of the original bailout.

Secondly, as I mentioned above, the Big 3 can’t survive in the glutted small car market.  At best, they would become the “Little 3,” not as bad as failing altogether, but not much better.  So the time has come to carve out a sufficient share of the domestic market to assure their survival.  This means that tariffs should immediately be imposed on every Japanese, Korean, German and Mexican car imported into the U.S.  Any tariff structure would help, but the one I proposed in Five Short Blasts, based on population density, would be ideal.  Such a tariff structure would impose a 5% tariff on cars from Mexico (even if they carry a “Big 3” brand), a 25% tariff on cars from Germany, a 40% tariff on Japanese cars and a 55% tariff on Korean cars.  The same tariffs should be applied to imported parts as well.  The result would be an explosion in demand for domestic cars and, within a few short years, the government could begin selling its stake in these companies at at least a 1,000% profit.  And don’t forget the tariff revenue that could be used to offset income taxes, providing a tax break to consumers. 

It’s time to abandon the blind faith that we’ve put in economic theories that pre-date electricity and steam engines, a time when the world’s population was one seventh of today’s and vast regions of the world remained unexplored.  It’s time to evaluate the results of free trade and globalization and make some adjustments to our theories.  The United States will be of little benefit to the global economy if it’s own domestic economy is in shambles, and there’s no hope of correcting the damage done to our economy without restoring a balance of trade.  Of course tariffs will impose severe hardships on nations dependent on exports to support their bloated labor forces, but how else will they be forced to come to grips with the effects of overpopulation?  Why should the U.S. function as a relief valve for their problems?  We’ve tried and it doesn’t work.  A global economy will work when each nation tends to its own problems first instead of looking for someplace to dump them. 

 


Taxpayer Money Used to Eliminate American Jobs?!?!

October 30, 2008

http://www.time.com/time/business/article/0,8599,1855185,00.html?xid=feed-rss-netzero

It’s being reported today that the details of the GM-Chrysler merger have been settled between GM and Cerberus Capital Management, owner of Chrysler, and that the deal may be done by Tuesday. Just one small detail stands in the way – financing. GM doesn’t have the money to pull it off. That’s where the federal government comes in. The governors of six states have signed a letter to Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke, imploring them to quickly provide federal assistance, without which it is feared that all domestic automakers will go bankrupt, with catastrophic consequences for the entire American economy.

Although GM is selling this merger to the government as the best way to salvage jobs in the domestic auto industry, claiming that both companies will go under without it (which may very well be true if nothing is done), its real interest (beyond mere survival) is in eliminating a competitor while increasing sales and cutting costs.

Projections are that, if this merger takes place, approximately 35,000 Chrysler jobs will be eliminated and that nearly five times that many jobs will be lost in total when parts suppliers and other ancillary companies are included in the impact – a total loss of about 165,000 jobs. Yes, GM will improve its sales volume slightly by the elimination of this competitor, but the vast majority of Chrysler’s sales volume will be lost to foreign competition. What this means is that, if the federal government provides the funding for this merger, billions of American taxpayer dollars will be used to facilitate the elimination and outsourcing of 165,000 American jobs! Then, billions more will be spent on unemployment payments and billions more will be added to the national debt when the income taxes collected from those 165,000 workers falls to zero.  So far, I’ve heard no discussion of this snake-eating-its-tail scenario, where taxpayer money is used to eliminate taxpayers’ jobs.  This should be a pitchforks-in-the-street moment!  Where is the outrage? 

GM is pushing frantically for this deal to be done by Tuesday. Why Tuesday? What’s so magical about that day? The election. If Obama is elected, as appears likely, GM fears that it will then have to deal with an administration that will take a dim view of using taxpayer money to destroy so many American jobs. An Obama administration will still do a deal to salvage the domestic automakers, but will be far less likely to do a deal that eliminates Chrysler as a separate entity. GM would much rather close the deal with the Bush administration, Henry Paulson and Ben Bernanke – people who don’t give a rat’s behind about American jobs.

There are much better ways to save all of the domestic auto industry. Loan GM the money it needs to survive a bit longer and take a stake in Chrysler, perhaps even all of it. Couple that with some new protections of the domestic auto industry, like tariffs on imports, and within a couple of years we’d have an explosion in domestic sales. The government would soon be able to sell Chrysler at a handsome profit for taxpayers. The time is past for timid steps. Without the protection afforded by tariffs, the domestic auto industry will be doomed regardless of what other measures the government or the carmakers may take.