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Gush Up vs. Trickle Down

We shouldn't try a trickle-down approach to "saving" the auto industry and especially the auto finance companies; instead, if aid is needed at all, it should be shoveled in at the bottom of the economy from which it is sure to gush up (see a sample plan below).

The New York Times has done a great job of revealing that banks are using their bailout funds not to make more loans but to buy out their competitors. Now Cerberus, the private "capital management" company which owns most of Chrysler and a majority interest in GMAC is seeking federal aid for a plan to bail out its badly timed investments in the auto industry. Cerberus and GM have been fairly frank that the aid is needed to finance massive layoffs so that combination of Chrysler and General Motors can save cash. The question is why would we want to use taxpayer money to do that?

There is no promise that more money will mean more loans to car buyers. There is no promise that a taxpayer bailout will result in cars Americans want to buy even if they can get loans. There is also no recognition that "foreign" car makers are building cars in America with American labor that Americans want to buy. Do we really want to endanger the American jobs at Toyota in order to finance layoffs at GM and Chrysler?

Trickle-down aid to an economy doesn't work because 1) a trickle is too slow to aid an economy which has seized up; 2) the money tends to stay at the top – eg. be used for buyouts and/or executive salaries rather than flowing out into the broad economy where it's needed.

A Gush Up Proposal

Suppose that, instead of bailing out Cerberus and GM, we use our bailout funds to buy any and all cars and light trucks over ten years old BY THE POUND. Prices should be set so they are higher than the small amounts these cars fetch on the resale market today. All such purchased cars will be scrapped and recycled; in fact the program should be run through the junk dealers – they have much less overhead than banks. To avoid buying already scrapped vehicles, only those cars and trucks which have been registered for the last twelve months should be eligible.

The nice thing about putting money into the bottom of the economy is that it's sure to gush up. The owners of ten year old cars aren't going to stuff the money in their mattresses or finance neighborhood buyouts.

A few will be able to get by with one less car and switch to mass transit and use the money for other necessities. That's all goodness. Most will buy another not-quite-so-used car; there's a very good chance the newer car will use less fuel than the old one, especially since that's what people know they want and because cars get inefficient as they get older; also we're paying more for heavier cars so we're getting them off the road. That's a bonus.

The people who sell the not-so-used-cars to the people who scrapped their junkers will now have more money to spend on a new car. This is true whether the used cars pass through dealer lots or not. The dealers, who are in bad shape, will benefit from a firming of used car prices. Also, the more you get for a tradin, the less financing you need for your next purchase.

Money put in at the top tends to stay at the top; money put in at the bottom flows through the whole economy. The gush-up proposal will put money into the hands of the consumers most likely to spend it instead of the bankers most likely to hoard it. Gush up will also reduce the average size and age of vehicles in the American fleet and further reduce our gas consumption. Let's do something like that if we need more bailouts.

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Comments

Susan

I recently came across your blog and have been reading along. I thought I would leave my first comment. I don't know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.


Susan

http://www.car-insurance-choices.com


Josh Young

I don't think it's quite correct that "Prices should be set so they are higher than the small amounts these cars fetch on the resale market today."

The market-clearing prices should be set so that the people who give up their junkers (and need new ones) can replace them.

So we've would have to pay that premium, which seems simple till we consider that the "resale market today" isn't the relevant resale market. We should actually focus on the resale market tomorrow, when supply has been dramatically reformed.

The price of those newer ones will be higher--potentially much higher--in the context of the new, smaller supply of cars. The entire supply will decrease, sure, but that's not the heart of the matter, because the resultant demand will still be concentrated at the bottom of the stack. (You don't trade in your Yugo, even at 150% of its blue book value, and then scoop up a BMW.)

Getting rid of the bottom rank of cars would tend to make all remaining cars more expensive in the short term and might well make the new lowest rank of cars considerably more expensive.

Jorge Ortiz

Tom:

Under NAFTA agreements Mexico has allowed imports of 10 to 15 year old cars into Mexico.

So you would have a harder time finding card older that 10 years in the US.

Tom Evslin

Matt:

I'm glad you're already thinking through the practical aspects of the proposal. I hope the new President will make you part of the implementation team:-}

Thanks for commenting.

Tom Evslin

Doc:

Thanks for the thoughtful comment. Couldn't agree with you more that cutting the regressive corporate income tax would be great economic policy. Would be wonderful if populists understood economics! Hopefully you'll help educate them (him) as you suggest.

Of course McCain would get Fred Smith's advice dirctly from the horse's mouth:-}

Matt Lewis

Great proposal. Actually this sounds like it would benefit everyone in huge part and I like that thinking. Only consequence I could see involved with crushing older vehicles is the work hours required in finding each and every mercury switch inside of them. We can not simply remove these vehicles by crushing them, but would be required to filter out these switches. Car companies do not report on the mercury switches they had to use in older vehicles because they do not want to appear like they are harming the environment with each vehicle produced. Instead we have relied on salvage yards and companies like Car-Part.com to find and document where they have found these switches. If these switches are crushed, the land will be contaminated... so you would need many helping hands in removing these before further stripping of the vehicles can be done.

Doc Searls

Well put.

Some additional thoughts.

First, "trickle" is not the only metaphor we should be using. Nor are "top" and "bottom." Both suggest contained zero-sum settings.

Second, we need to think past "saving" lame and doomed companies and industries, and toward encouraging the best and the brightest to grow the economy. Lame companies like GM and the Wall Street wrecks make bad examples of What Needs To Be Done to get the economy moving again.

The economy ultimately depends on the healthy functioning of smart and well-behaved companies of all sizes. These are the companies that give us growth, employ people, invent and innovate, and both support and spin off other successes.

One such company is Fedex. If you can get past the @#$%& pay/registration wall, check out "Fred Smith Goes to Washington," in the Wall Street Journal. Here's the link: http://online.wsj.com/article/SB122488966230768509.html . It's from 25 October.

Forget that Smith prefers McCain, and that the Journal is a Murdoch instrument with a political ax to grind. Just remember that Smith created and runs one of the most innovative and transformative companies in human history. A few paragraphs from the piece:

"'The United States has a completely uncompetitive tax structure in general and it has a particularly onerous tax structure for firms that are asset-intensive. If you run an industrial company like FedEx, which employs 290,000 folks, most of whom are blue-collar people, the way we have to run this business is to equip those workers with billions of dollars of assets that allow them to pick up and deliver millions of things around the world.'

"His theory is that the tax bias against capital explains why so much top U.S. talent got whisked off to become investment bankers. "Not too many young people coming out of school are studying to be production managers at General Motors." He says that most of FedEx's first line managers come not from the top flight universities, but out of community colleges and the military. 'The top talent has wanted to go to Wall Street.'

"He has come to hold the get-rich-quick Wall Street financiers in more than a little disdain. He views the heroes of the U.S. economy as the companies that actually produce real goods and services. He sees the Wall Street collapse as an inevitable byproduct of investment bankers building multitrillion dollar debt pyramid structures.

"So how do we fix this problem and retool our industrial sector in a pro-competitive fashion? "We've got to reduce the taxes on equity. Let companies expense their capital purchases.'

"He uses an example from FedEx. 'Look, our capital budget as we went into this year was about $3 billion. We went out to Boeing in July for our board meeting to see the new triple seven, [the Boeing 777] which we have bought. If we had a lower corporate tax rate with the ability to expense capital expenditures, guess what? We'd buy more triple sevens. We absolutely have to cut the corporate tax. Our current tax rate is about 38%. Even Germany has a 25% rate.'"

If Barack Obama wants to be truly bi-partisan, and to re-regulate to shape an economy that works for everybody, he can't just leverage old-time Democratic religion, which is all about wealth "distribution." He needs to sit down with guys like Smith, who know how to make business succeed, and not just for himself.

And he needs to come up with some new ways to frame economic challenges. I also think it's our job to help him.

Cheers,

Doc

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