Why Do We Owe $10 Trillion?
Part 2: The Trade Deficit
In the last installment of this series I discussed how our trade deficit with China puts us $250-$300 billion deeper in the hole per year. In this issue I will discuss why the auto industry contributes another $100 billion to the trade deficit.
The first part of the answer is that since the late 1990's the Big Three (GM, Ford and Chrysler) bet on the light truck and SUV craze and lost. They shifted much of their manufacturing and human resources away from the compact and mid-sized cars to light trucks and SUV's because they were more profitable. Profit margins, ranging between 15-20% for an SUV versus 3% for a car, are certainly tempting. The problem is that as we entered a new century, we decided we ought to be more knowledgeable about how things like carbohydrates affect our bodies and we decided to start paying more attention to how certain chemicals like carbon emissions affect our environment. A concern about carbon emissions leads to related concerns like fuel consumption and that meant big trouble. Why? Because Japan already requires autos to achieve 45 miles per US gallon of gasoline. China requires 35 mpg-US. The European Union requires 52 mpg-US by 2012. U.S. autos are required to achieve only 25 mpg-US and it took the $25 billion handout last September just to get the Big Three to agree to achieve 35 mpg by 2020! Regardless of what happens to gas prices the growing social stigma associated with driving a gas guzzler will continue to cost market share.
The second part of the answer is labor costs. Most people equate labor costs to a salary or an hourly wage but it is much more. Labor costs properly viewed is the total cost of an additional employee to the company including pension benefits, health care, deferred compensation plans or any other benefit that might induce a prospective employee to sign on. Many of the employees at the Big Three are members of the The International Union, United Automobile, Aerospace and Agricultural Implement Workers of America, better known as the United Auto Workers (UAW). Founded in 1935 this labor union has become deeply entrenched in the auto industry and as a result of their bargaining power, the average auto worker at the Big Three is paid in total compensation between $70-$75 per hour, which is approximately twice what the average American worker makes, benefits included. When compared to the average Chinese worker who makes $14 per day the severity of the problem begins to emerge. But the problem cuts deeper because even when compared to American workers at Japanese auto companies who have factories in the United States, the UAW negotiated compensation is high. It is anywhere from $10 to $20 per hour higher than the Japanese worker largely because of the difference in fringe benefits. An extreme example of a fringe benefit is the now much maligned Job Bank program that required the Big Three to pay more than 12,000 employees their full salary in 2005 even though they had been "idled" due to technological improvements. This is another way of saying they were being paid $70 per hour to be idle.
No amount of bailout money will enable a company with such a severe fixed cost disadvantage to survive in the long term. Any money poured into this economic structure will simply delay the inevitable at the expense of the taxpayers. It is for this reason that recent bailout discussions have centered on a feasible long term restructuring plan that ensures the viability of these companies. Many experts are concerned that the recent compromises are still not enough to solve the problem.
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LOL - Laughs OnLine
"This is nothing compared to the bath my stocks have taken!"
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What's The Big Idea? 
A Sweet Tooth
There is a sweet tooth and then there is whatever I have, which is something in excess of a sweet tooth. I came to this realization one day making coffee. In the interest of efficiency, I poured the Coffee Mate creamer into the cup and added the sugar while I was waiting for the coffee to brew. Now, some would contend that this is already a problem because you shouldn't need sugar with Coffee Mate creamers because they already contain a ton of sugar. But it gets worse. As I was waiting for the coffee, I kept staring at the now ridiculously sweet creamer thinking "Don't do it Kwame, don't do it!" But having lost control of my motor functions, I plunged my finger into the cup and then into my mouth. The appeal of cookie dough or cake batter to a five-year old is cute. A grown man with his finger in a cup of creamer and sugar is just embarrassing. For those of you who read about my Super Bowl meal, you can now imagine the complete sense of indignation I felt when I was told that dessert was to be bran muffins from Trader Joe's.
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Share If You Care
Our goal with this newsletter is simple: Cover every important topic that might help homeowners and investors make more informed decisions concerning real estate. You can help in two ways:
1) Send us any articles or information you come across that might be of interest to other readers
2) Forward this newsletter to anyone and everyone you know that owns or plans to own real estate!
Sincerely,
Kwame J. Granderson
Equinaire
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Special Series
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You won't want to miss next week's newsletter when our main article will be the first in a series talking about the Obama housing rescue program and how it will impact you as a homeowner and investor.
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1. Getting your best deal: 5 things banks won't tell you
2. Understanding your options
3. Direct to bank vs. Legal Representation
4. How to qualify: homeowner vs. investor
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Time: 7PM - 8 PM
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Be on the lookout for upcoming webinars on the following subjects:
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Did You Know
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Did you Know? Dueling is legal in Paraguay as long as both parties are registered blood donors.
Did you also know that when your loan is sold to another servicing lender, it is your responsibility to ensure that proof of insurance is conveyed to the new lender?
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