Twirling the flag

In the mid-70s, I went to a high school game between the school where I was teaching and a very rural high school in a very poor and rural county.

We were playing on their field. Many of our players were the sons or grandsons of Marines, who had come out to see their boys play.

At the beginning of the game, the home team's band came out on the field to play the National Anthem. They had a flag team, with 2 girls carrying the national and state flag, and two others with wooden rifles as an honor guard. We all stood up and removed our hats, the band played, and the flag and honor guard marched off.

At halftime, the band came back on the field to perform its program, and the flag team came out with it. Most of the girls had banners with the school colors, but two of them still carried the US and NC flags. The music started, the girls on the flag team began their routine, waving and twirling with the flags--including the national and state flag.

I thought the Marines in our stands were going to have collective heart failure!

When the young lady threw up and caught the US flag along with the others, you could hear a collective gasp.

Several of them wanted to go in a body to the band leader and tell him off Marine style. But a retired colonel and the civilians among us (including their wives) finally convinced everyone that a confrontation there, on their field, at their school, and in their county, might not be a strategically good idea.

What they finally decided to do was to get a copy of the USMC flag manual and send it to the school with a letter advising them that they needed to handle the flag more respectfully.

This was done. The next time I happened to see that school's band perform, the flag was not twirled.

The poverty effect

During the housing boom (or, as we now know, the housing bubble), many people felt richer than their incomes might have indicated because their house had increased so much in estimated value. They took out home equity loans and other loans to buy things they would not otherwise have considered buying. They felt that, if necessary, they could sell their house at such a profit as to be able to clear their debts and still leave enough to buy another house. Some people even made this a practice, buying a run-down house and refurbishing it and "flipping" it with a profitable resale.

Economic reporters called this feeling that a house was a storehouse of value that you could tap to improve your lifestyle, the wealth effect. It led people to buy more, spend more, and rack up more debts.

Now that we are in a recession, many of those people who enjoyed the wealth effect are suffering from the poverty effect. Some of them are really much poorer than they were, having lost their jobs, their health insurance, and their house to foreclosure.

The poverty effect, however, is spreading beyond this group. Many young people with good and stable jobs have looked at the falling values of their 401k's and gone into panic mode. The fear of losing your job is real; it is wise and reasonable to take precautions. It is wise to revisit your 401k and put whatever is left into more conservative investments for the time being. It is wise to increase savings and decrease waste in your daily expenses. It may be wise to postpone getting that new car or replacing your living room furniture until you are sure of your job situation.

But the poverty effect can lead to irrational behavior as much as the wealth effect. If you are in your 50's and your 401k had sunk like a rock, you are facing serious problems. But if you are in your 30's, you still have thirty more years of work and investment to repair that damage. You may never get back to where you appeared to be at the top of the boom, but you can reach a level of safety. And, in fact, you never really were as well off as you thought at the top of the boom: like the invisible assets of so many toxic bonds, you had imaginary wealth, like the imaginary food in old tales that seemed real, but evaporated when you swallowed it.

It is wise to postpone replacement of a good, reliable car. It is unwise to skimp on its maintenance to save money, or to hold on to it when it has become unsafe.

It is wise to try to take care of minor problems yourself. It is unwise to try to take care of things that are beyond your skill because plumbers or electricians are expensive. The fifty or one hundred dollars you might have saved is nothing to the result of a flooded house or one burned down by an electrical fire.

It is wise to cut back on luxuries, but homeowners and liability insurance is not a luxury. Yes, you've had your house for ten years and never needed it. But that is no guarantee; during Hurricane Floyd, part of North Carolina flooded that had not flooded since before the Civil War. You may be able to save on premiums by raising your deductible, but if you raise it to a point where you don't have the cash to cover it readily available, you are actually worse off than before.

Above all, we all need to remember that this is not going to last forever. We have gone through these situations before. The Great Depression was long and difficult, but it ended. The panics before it ended. The recessions since the Depression ended. And this will end.

I am not being Pollyanna. I know we are in trouble, and that closing our eyes and whistling "Happy Days Are Here Again" is not going to solve the problems we face.

But neither is panic and irrationalism.

Unemployment for part-time workers

As I understand it, several governors are asking their legislatures to refuse that part of the stimulus money that extends benefits for part-time workers who lose their jobs. The governors of South Carolina, Louisiana, and Mississippi are among them.

These governors feel that such an addition to the unemployment insurance program, if begun, would be politically difficult to end. Once the stimulus money is gone, the state would then have to increase unemployment insurance premiums on businesses in the state, adding to their expenses.

All of that is true.

What they are not saying is that it has become a common practice for many businesses to hire many part-time workers instead of a smaller number of full-time workers deliberately, just so they will not have to pay benefits to those workers. Wal-Mart is not the only major chain that practices this.

One result of this practice has been to exacerbate the health care crisis by adding to the number of workers without health care.

Another has been to increase the number of working poor: people who have a job, but don't earn enough to sustain an adequate standard of living. These people further strain social service benefits, such as food stamps, housing assistance, etc.

In other words, to keep the cost of their business down, some businesses are deliberately acting to force the local and state governments to accept greater expenses. The taxpayer is being forced to assume the costs these businesses are refusing to pay. They are doing this very rationally; a good businessman acts to increase profits and/or decrease expenses. They do it because it is legal. It is an unintended consequence of the original decision to exclude part-time workers from unemployment insurance when that program was set up.

We need to decide if we are going to become a full-time or part-time labor economy. If we are going to make it economically advantageous for businesses to hire part-time workers instead of full-time ones, we need to structure our system so that the national, state, and local governments are prepared to take on the social costs of that decision.

In the long run, I think such a decision would be wrong economically, socially, and ethically. I believe it would increase the percentage of working poor at the expense of the middle class. I think it would greatly increase the tax burden on every level of government.

Recession and the motorcycle industry

I wonder how this recession will affect the motorcycle manufacturing industry? I think we may end up very glad that MG is affiliated with Piaggio, which seems to be one of the manufacturers that is set to weather the storm. Piaggio's strong presence in the scooter market gives it an income stream that is likely to resist the downturn. In fact, as people look for cheaper vehicles, they may prosper. And while they do, our marque will last, if only because the Italian government insists that it last.

Honda and the other Japanese manufacturers are part of very large industrial concerns that are likely to weather the storm.

Royal Enfield is part of a large Indian transportation group, Eicher Group.

BMW is also part of a larger manufacturing concern.

Harley has enormous reserves. If the recession lasts too long, however, they may also find it hard to adjust their product mix. Piaggio sells Guzzis as well as scooters. Harley sells Harleys, and their past offerings of cheaper bikes have not gone over well. For one thing, can they retool to produce much smaller motors?

Victory, which is part of Polaris, may have a good chance.

It is the smaller marques that may suffer the most. Ducati and Triumph may have a harder time. Mergers with stronger firms may hold the best outlook for them.

I think that in 5 years we may have a much smaller range of marques.

What I would do about the current economic crisis

I would do what Henry Paulson said he was going to do and did not do, and what still has not been done.

I would create a program to buy the unsalable toxic assets of the banks--mostly collateralized mortgage packages that contain an unknown amount of sub-prime mortgages that cannot be valued. I would buy them at an amount greater midway between their salvage value (8-10 cents on the dollar) and their face value--around 60 cents on the dollar.

I would place them in a fund where, as those mortgages that were sound were paid off, the money could accumulate to repay the government for their initial investment. In the long run (10-15 yrs.), I think the entire cost could be amortized, so that the program would cost the government nothing.

Many banks are resisting the sale of these assets. Some still hope this crisis will be short (4-5 yrs) and they can recoup their investment. More are unwilling, by revealing how much of these assets they have, to reveal how stupidly they behaved during the real estate bubble. I would use the regulatory authority of the government to compel a sale.

From the beginning, the current problems have been caused by the toxic assets that are weighing down the banks and destroying their ability or willingness to lend. Everyone has said this, yet no one seems willing to do anything about it. They remain there, month after month, the recession drags on month after month. We create programs to deal with the consequences of their effects, but we do nothing to deal with the cause.

GM kills Saturn, Hummer, and Pontiac

As part of their reorganization plan being presented to Congress, GM will shut down or spin off Saturn, Hummer, and Saab. GM will also end Pontiac as a separate division, retaining a few models that will be sold at GMC dealers. It's about time.

In the Roger Smith era, GM reduced the individuality of its brands. In essence, when you saw a car coming down the road, you knew it was a GM product, but until it got close enough to see the badge, you often didn't know which GM marque it was. This was a disaster. The distinctions and marketing differentials the various divisions worked for years to build up were wiped away. Every attempt to re-establish those differences has failed except for Cadillac, which has managed to regain its reputation in the luxury car market, just as Lincoln has been losing theirs.

GM needs two divisions with separate dealer networks: Chevrolet and Cadillac. The Chevy division should have Corvette as a draw, and the Caddy division should sell the Crossfire as its rival. Chevy could sell Chevy trucks, and Cadillac could sell GMAC trucks.

Very few people will miss Buick. Saturn will be a lost opportunity. I hope someone will buy Saab, preferably to return it to Sweden, where it got its original reputation as a superb but quirky car.

Ford has already gone this way: There are Ford dealers and Lincoln-Mercury dealers, with Mercury being only a few models to attract younger buyers. But unless Ford begins to pay real attention to Lincoln, it will lose this brand as well. While Cadillac has finally managed to build some fast, sporty upscale models, Lincolns continue to be huge, clumsy Interstate cruisers. Sorry, but if I had the money for a Lincoln, I would not get one. And I am at the age where comfortable cars are a real draw, belonging to the War Baby generation, before the Baby Boom. If I had the money, I would buy a Jaguar. Why can't Ford build cars that handle like Jags in its Lincoln plants? They once owned Jaguar, so they should know the technology.

Chrysler tried to merge with Mercedes, and is now trying an "alliance" with Fiat. It isn't going to work unless Fiat is able to cut off the entire top leadership of Chrysler and start over. The current Chrysler management still has a "Big 3" mentality, thinking of Chrysler as an equal or superior partner in any merger. They aren't. But that arrogant attitude will ruin the culture in any merged company, as it ruined the merger with Mercedes.

Finally, Americans need to learn how to build luxury cars. I'm sorry, but no matter how realistic the interior plastic looks when it's new, it's still plastic, not wood, and you can tell. And vinyl is not and never will be leather.

The stimulus package and its opponents

This is why bipartisanship did not work on the stimulus package, in my opinion.

The Democrats and the Republicans have two entirely different theories about how the economy works. These theories, strongly held on both sides, determine what each party believes is the best way to deal with the current economic downturn.

The Republicans believe that market conditions are self-correcting--this theory is sometimes known as the "invisible hand of the market." If the market goes down, demand will shrink until prices begin to fall. When prices fall sufficiently, demand will rise again, and the downturn will become an upturn. In their opinion, the best thing the government can do in a downturn is to get out of the way and let the market work smoothly, doing only whatever is necessary to prevent absolute want. Part of that getting out of the way is reducing taxes, to put more money in the hands of businesses and individuals. The great economic theorists that support these beliefs are Adam Smith and Joseph Schumpeter.

Most Democrats believe that all of the above is true
most of the time. But, in exceptional circumstances, they believe that the market may lose the power to self-correct. In other words, the normal cycles of ups and downs predicted by Smith and Schumpeter may, under certain circumstances, run out of control. One of the things that might cause this is a structural flaw in the market system. In such a case, the government can't just get out of the way of the market, because the market will spiral down to catastrophe, as it did in Germany prior to the rise of the Nazis. When such a "death spiral" begins, they think the only force that can prevent it is for the government to create and pump stimulus in the form of deficit spending (to be repaid when the crisis is over). The gurus of this view are John Maynard Keynes, Paul Krugman, and Joseph Stiglitz.

The Republicans believe that most of the predictions that we are entering a "death spiral" at the present time are overblown and alarmist. Yes, things are bad, but in their view, not so bad as to require huge deficit spending. Indeed they fear such spending will create huge inflationary pressure once this downturn comes to its natural end, as they think it will. They believe that the markets will indeed self-correct.

The Democrats believe the subprime mortgage crisis and the resulting blow to bank liquidity have created the kind of structural flaw that will prevent the markets from self-correcting. They point flaws in the banking system in 1929 caused by a lack of a system for guaranteeing bank deposits. These flaws meant that when the banks wished to inject capital in the markets, they could not, and that the same conditions exist today. Therefore, they believe that only quick, massive, and decisive action by the government can prevent the "death spiral" which they fear we have begun to enter.

Notice that these viewpoints make it very hard to compromise. If you believe we are not yet in an out-of-control situation, as most Republicans believe, then you think all this huge stimulus will do is create a huge wave of inflation in a few years. High inflation is a very cruel thing, especially for the poor.

On the other hand, if you believe we are in a systemic crisis, as most of the Democrats believe, you think that if we fail to act strongly now, we will create a situation that may be uncorrectable for many years--years of joblessness and misery.

Please note that there are degrees of agreement with both theories in the academic community and in the political community as well. Some Democrats (who voted against the stimulus in the House) are not convinced the situation is out of control. Some Republicans (the 3 who voted for the stimulus bill in the Senate) believe we may indeed be getting to a crisis point.

Both sides are sincere, I think. They sincerely hold views that lead them to opposite conclusions as to the best way to act. They are not traitors or buffoons, but principled people who disagree.

For the record: I have attempted to put the views of both sides as neutrally as I could. I personally think the banking crisis points to a serious structural flaw in the market system and that the danger of an out-of-control economic fall is real; in other words, I agree with the Democrats. Indeed, I believe that the current stimulus bill is, if anything, much too small. Nevertheless, I respect the positions of those who agree with the Republicans, and deplore the nasty tone and vicious attacks that BOTH sides have engaged in.