Econ Rap

Check it out: KEYNES v. HAYEK.

Economics for Polymers

It looks like I have a typo on the syllabus. Here is the link to Economics for Polymers.

Swine Flu Makes Cancun Struggle

A recent phone call from a good friend of mine – an owner of a night club in Cancun, Mexico - made me aware of the following situation and post this blog:

The announcement of the swine flu in Mexico has brought panic and uncertainty to several countries. The disease has greatly affected Mexico City and generated a huge uncertainty about this country and the disease itself. Furthermore, Mexico's main airport is located here and many flights to Mexican cities have layovers in Mexico City.

Therefore, Cancun - a city based on tourism – has experienced a great loss of its customer base. As soon as the swine flu had been announced, the tourists have cancelled their vacations, the streets have become empty and the city has resembled a ghost town.

The fear of an infection has decreased the demand in tourism dramatically and the prices have declined. The supply has also changed as a response to the decrease in demand and the night clubs and some hotels have closed for a certain period. Lacking the critical amount of customers, they have been forced to this decision, since the production costs such as personnel expenses cannot be offset. (The decrease in supply prevents the prices from falling to zero, so there is still at least little supply and demand for hotel rooms).

Even though the swine flu is not as dangerous as predicted and there have not been any cases in Cancun yet, tourists would rather choose different locations for their vacation. The downturn of the tourism still goes on making Cancun struggle by the fear of the swine flu.

Agency Problems for Firms and Banks

On April 2nd, 2009, the leaders of the G20 group of developed and emerging economies gathered in London to combat the economic crisis.

Their goal was to “rewrite the rules of global finance and reshape the world’s financial institutions” because since their last meeting last November, “the global economy has fallen off a cliff. Consumers have cut back their spending. Companies have slashed production, postponed investment and laid off workers in their millions. The financial system remains dysfunctional. Trade flows are shrinking at the fastest rates since the second world war.”

(Retrieved from the article “Be Bold”, April 2nd, 2009, from The Economist Website: http://www.economist.com/opinion/displaystory.cfm?story_id=13405306)

Representing member states from 5 different continents, the G20 faces challenges from the start to create a common solution for the economic crises. The most difficult to combine, were the soltuions of USA/Great Britain and France/Germany.

The US/UK solution includes the call for more stimulus spending. According to the Washington Post, U.S. President Obama statet in his international debut that the "voracious" U.S. economy can no longer be the sole engine of global growth. Major European powers are firmly resisting calls to further open their coffers and cut taxes to spur the global economy. Obama and Brown suggest a higher government spending for each of the member countries to boost the sales and therefore the economy. Higher spendings result in higher investments and reflect a growth potential for both, consumer and financial markets.

On the other hand, Europe and Asia do not agree with the US/UK stimulus package. France and Germany consider it a big mistake for the governments to spend more on the economy without stabilizing the financial system.
”German and French leaders have shunted aside the president's call for increased government spending to stimulate their economies. The Czech Republic's prime minister even characterized the U.S. proposal as charting "the road to hell.” Instead of more stimulus spending, European and Asian leaders want more government regulation of the financial system. And they have been openly skeptical of Treasury Secretary Timothy F. Geithner's regulatory plans, suggesting they don't go far enough.”

(Retrieved from the article “Obama at G20 Summit”, March 30th, 2009, from The LA Times Website: http://www.latimes.com/news/nationworld/world/la-fg-g20-obama302009mar30,0,

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“President Nicolas Sarkozy and Chancellor Angela Merkel said Europe had done a lot already to provide economic stimulus. What was needed was far tougher regulation, whose targets would include banking transparency, hedge funds, traders’ pay, rating agencies and tax havens. Another problem for firms and banks arises out of the interactions between the owners and managers.”

(Retrieved from the article “Be Bold”, April 2nd, 2009, from The Economist Website: http://www.economist.com/opinion/displaystory.cfm?story_id=13405306)

Since all of the other arguments basically involve macroeconomic analysis, I would like to describe the last one within a microeconomic context. According to the principal-agent-theory, there is a conflict of interest between the owners and managers. In economics, the principal-agent problem treats the difficulties that arise under conditions of incomplete and asymmetric information when a principal hires an agent. The theory is concerned with resolving two problems that can occur in agency relationships.

The first is the agency problem that arises when (a) the desires or goals of the principal and agent conflict and (b) it is difficult or expensive for the principle to verify what the agent is actually doing. The problem here is that the principal cannot verify that the agent has behaved appropriately. Therefore it is likely that the manager tries to achieve short-term profits to maximize his outcome while the company’s interest focuses on long-term success and survival.
The second is the problem of risk sharing that arises when the principal and agent have different attitudes towards risk. The problem here is that the principle and the agent may prefer different actions because of the different risk preferences. Because managers benefit from the firm’s short term profits by a premium and still receive their full salary even with bad decisions, they are less risk-averse than the owners.

These problems can lead firms into a crisis and contribute to the current economic downturn.Therefore I think it is important, that this argument was mentioned and that firms generate solutions for this problem. Various mechanisms may be used to try to align the interests of the agent with those of the principal, such as incentives like piece rates/commissions, profit sharing, efficiency wages, the agent posting a bond, or fear of firing. In my opinion, these do not prevent the short-term orientation of managers. I would rather suggest the concept of a bonus bank. An instrument that pays managers only a certain percentage of their incentives, leaving the remain in their bonus bank account and distributing it over the next few periods. However, if the target achievement of the managers in the following year is lower or even negative, a negative credit can offset their credit account in the bonus bank. This way the interests can be aligned and the managers have incentives for long-term orientation. It would help the company’s efficiency and long-term success which could stabilize the economy.

This was an analysis of only one out of few arguments mentioned, to solve the global economic crisis with the hopes that the G20 group can compromise and develop a common and successful stimulus package.

offshore tax havens

President Obama presented proposals in order to crack down on overseas tax havens. Obama claims that these oversea tax havens are costing tax payers “tens of billions of dollars a year." One of the key changes would restrict companies from deferring the payment of taxes on profits earned overseas. Administration officials stated, “The plan also would keep firms from taking deductions against their taxes by inflating the amount of foreign taxes they paid.” Obama also claims he is aiming to take away the competitive advantage for companies that invest and create jobs overseas, working to replace their tax advantages with incentives to produce jobs in the U.S. He plans to rise of 200 billion dollars in 10 years.

Double taxation to US global business is only going to benefit our foreign competitors. If Obama continues on with this he could put many American corporations at a strong disadvantage. American corporations use global strategies (offshore tax havens) in order to remain competitive in the industry. Tax foreign profits of our corporations and you just cut our ability to compete. By changing these rules, Obama will again be putting US companies at a greater competitive disadvantage.

Powers struggle

According to this local paper, our fair town of Colorado Springs, USA, is divided into two main parts, as far as restaurants go: the downtown area and the Powers Boulevard area. In the downtown area, franchises really struggle whereas on Powers, local restaurants are losing lots of money. Now the franchises might have to just take the fact that they cannot compete, but I think that the locals have opportunities that they might not be taking advantage of.
According to the article, “One of the biggest threats to independent restaurateurs is food costs” (Schniper, Matthew. “Powers struggle.” independent April 30-May6, 2009: 22). These threats can be separated further into four categories: 1. Wage wars from “bulk-buying chains” 2. An explosion of competitors 3. A dramatic increase in rent 4. A strong susceptibility to troughs in the business cycle.
Notice anything in common about these categories? If you realized that they all reflect greater costs for smaller restaurants, give yourself a cookie. In economics, this is referred to as positive economies of scale, and means that much greater profits can be had by growing larger. How much larger? The company should ideally try to produce the quantity that will result in the lowest average cost. In a perfectly competitive market (which should provide a good approximation in this case), this will also be the point in which marginal revenue equals marginal costs of the industry; the profit maximizing point.
One might conclude that this implies that the large companies are guaranteed to corner the market around Powers, but this is not so. According to Mr. Link, an owner of Eastside Grill and ex-owner of a Ruby Tuesday franchise, the flexibility of his new restaurant menu went a long way toward covering the gap because now he can react to what his customers are asking for, which buys him consumer loyalty and is more in tune with customer preferences. In fact, many of the restaurant owners that were interviewed in the article felt that two companies would definitely flourish, simply because their offerings were unique and authentic to their ethnic heritage.
To me, the obvious solution is that this dilemma is to consolidate. Cartels may be illegal, but two shops might find that they can peacefully share a larger building in order to cut down on costs and to cause some advertising due to the novelty. After all, several larger restaurants have done so successfully (such as the Pizza Hut/ Taco Bell that lies down the street from me). If lots of restaurants started “buddying up,” they could reduce the competition; share the cost of rent; and support each other through the lean times. If they share ingredients, they may even be able to cut down on their food costs by buying in bulk and cutting back on spoilage and waste.

Gas Tax

This article suggest imposing a higher tax on gasoline due to the fact the prices have dropped from the $4.00 per gallon to $2.30 and Americans are using this price fall to consume more. As Americans consume more gas it drives the demand up resulting in higher gasoline prices. This article also introduces the idea that if the government raised the gas tax it would reduce consumption and prices would likely fall also with greenhouse gasses.

In the economic times of today this gas tax would pose many negative threats. First off this tax would attack the poor more than the rich and as unemployment raises this tax would place a burden on the many families affected by this economic downturn. Also with Chrysler and GM failing this tax would aid in destroying these companies as they are known for their trucks and SUVs. With this raise in gas prices GM and Chrysler would see a drop in demand for their vehicles.

There are many other solutions to reduce the use of gasoline. Auto makers continues to invest in making care more fuel efficient also with focusing more on alternative fuels such as natural gas, bio fuels and electricity. If more Americans have access to alternative fuel vehicles the gasoline consumption is reduced more than if a high tax is imposed.

"It'll be the domino effect."

This article suggests that with the declared bankruptcy, and subsequent closing, of Chrysler, other auto manufacturers might have to face shutting down as well. This is because the plants in charge of supplying Chrysler with parts will suddenly be losing a lot of money, possibly closing down, leading to a shortage in parts in the auto industry.

Looking at the situation as if the car manufacturers are in monopolistic competition, it can easily be seen that one firm leaving the industry could allow other firms to increase production, possibly even bringing them out on top of this economic recession. However, the article is right to look at the parts manufacturers.

Parts manufacturers, with the exit of Chrysler, suddenly find themselves with a decreased demand for their product. Again using the monopolistic competition model, this would result in a sharp decrease in quantity produced, with an increase in price. This demand shift occurs due to two reasons: first, the firms that produced Chrysler-specific parts no longer have any sellers; second, the firms had already been giving the auto manufacturers as many parts as they needed.

With the price increase on one of their inputs, auto manufacturers may find it difficult to continue production at current levels, at least as far as the short run. Lowering production means lowering already low profits, which could force auto manufacturers to close plants or even declare bankruptcy themselves.

It is possible that the closing of Chrysler would increase demand for other types of vehicles, because people who would have bought a Chrysler would eventually no longer be able to do so. But Chryslers aren't going to simply disappear overnight, and a manufacturer declaring bankruptcy could shake consumer confidence in all auto manufacturers, decreasing demand even further. It's difficult to say which shift will be observed until it actually occurs.

Can Toys "R" Us Sell Toilet Paper?

In today’s market, many businesses are struggling to stay afloat and many have been forced to close because consumers do not have the money to spend. What do you do when people cannot afford to spend money on luxuries and your business specializes in such things as electronics or children’s toys? Toys “R” Us seems to think they have the solution to that problem. They have announced that they are going to open a new convenience section, called the “R” Market, where they plan on carrying items like toilet paper, paper towels, laundry detergent, food and baby supplies. Sounds like a good idea to me. If you cannot stay afloat in your own market then move to one that is not doing so poorly. That is the way a market works. You stick with it as long as you are making an economic profit. However, Toys “R” Us is no exactly changing markets. They are just branching out in efforts to recover. I don’t see this working. They may get the occasional last minute shopper that forgot to buy toothpaste while they were at Wal-Mart, but that will probably be it. Parents that cannot afford luxuries are not going to take their children to the toy store just to but toothpaste. That is a tantrum waiting to happen. You take your kid to the toy store to buy toys not essentials. This is what Toys “R” Us is overlooking, peoples preferences. People prefer convenience, but not at the expense of there pocket book. They are still going to have to buy that toy they cannot afford. The demand for luxuries is low and simply offering something else of higher demand is not going to raise the demand for the luxury. Essentials and luxuries are two different markets and offering essentials in a market for luxuries does not affect the demand for luxuries.

Life's Certainties: Death and Taxes

Ben Franklin’s adage finds relevance in an April 22nd WSJ article bringing up Obama’s proposal to increase corporate taxes on overseas profits. Written by Jesse Drucker, the article stresses the administrations proposal to generate a “potential 20 billion dollar tax revenue” to combat the fiscal recklessness seen by critics in its first 100 days. Drucker states that currently, “U.S. companies can defer taxes indefinitely on the profits they say they have earned overseas until they repatriate that money back to the U.S.” Corporations that will most likely be hurt include, global corporations like Phizer, Hewlett Packard, and Coca Cola. But these companies have benefited immensely as well, for example Phizer due to the current law, cut its effective tax rate by 20.2 percent. While the complete repeal of the law that allows for such benefits is unlikely a restructuring is a valid proposition. In defense of corporations, America’s corporate tax is amongst the highest in the world--around 35%, on the other hand critics point out the number of loop holes in the tax code and the fact that a lot of these larger corporation hold profits in shell offshore companies to stem off taxes. Accordingly, the administration “is committed to reforming deferral to improve the overall efficiency and equity of the tax code by reducing incentives to divert investment from the U.S. in order to avoid taxation.”

While the argument possesses a populist sentiment, it undermines several economic ideas. First, the idea of diverting investment from the US, suggests that the idea of trade being a zero sum game, contradicting classic economic thought. Acquiring comparative advantage through trade and competition, progresses all participants. While the spokesperson for the administration might equate money as investment, and thus divestment, wouldn’t it make more sense that a lower corporate tax to begin with would attract more foreign investment into the US? Higher corporate taxes hinders US companies to compete and taxing profits hinders them substantially, in a global economy it is essential that we are able to grow our corporations to benefit not only ourselves but the world. How are US companies able to compete overseas where domestic companies are being taxed at a considerably lower rate and have an advanatge in their business model. By removing incentives like these laws, it only inhibits competition globally. As the article states these “titans” of industry aren’t going down without a fight, with significant lobbying power, Round 1 of this fight will be bloody.

Kenya: Price Controls are in!

Zeddy Sambu, a business journalist in Kenya reports on their government's efforts to save consumers from starvation in the face of a draught. According to her, their Catholic Church leader, and many different leaders in the agricultural branches of Kenyan government are outraged over failure of tarrifs on foreign wheat to protect starving consumers from high prices. Zeddy reports that they are eager to staunchly domestic wheat production and save the country from starvation. Instead of simply stating the facts as Zeddy did, to tell readers about the government's plans, her article would've benefited enormously from economic models of monopoly and perfect competition. She may have been able to highlight that aside from the Kenyan Government's proposed solutions to high prices, insight from microeconomics would provide them with a whole range healthier and quote possibly more effective solutions.

Zeddy reports that a draught in Kenya recently has made it more difficult for wheat growers to produce and sell their product to local millers. The draught has prompted them to raise their prices, as an economist's model of a firm in perfect competition would certainly tell us. She takes quotes from the leaders of their argricultural sectors to verify this. In turn, her article says that millers, facing this price, have resorted to buying wheat for flour through imports at much lower prices than local growers in draught season charge. Economically, not alot is missing from this report. It says that because import prices for wheat were much much lower than local wheat, millers resorted to the lower cost capital input. What her report does miss is that the millers must have a certain degree of monopoly power (can hold price well above it's cost of production) to be able to purchase wheat at a lower price yet still charge a dangerously high price for flour. These high prices, according to the report were the reason for government action in the first place. With this monopoly power, the millers can take adavantage of starving consumers who want to make bread to feed their famalies. There is the real reason for the people to complain.

To solve this, according to Zeddy, the Kenyan government has tried a number of things. The first attempt to regulate the milling industry was a 35% tarrif on imported wheat. Their hopes were to discourage millers from buying at a low price and selling and high and buy more domestically-produced wheat. To further propogate the effort, the government required all wheat growers to bring their harvest to market to be sold to the millers in government stores. It wouldn't be surprising to an economist that these measures did more harm than help.

Had Zeddy asked an economist what he thought of the Kenyan government's decisions, she may have been able to provide the article with a description of their problem's solution. The first place they went wrong was to impose an import tarrif on wheat. Removing it would have the effect they desire. If there tarrif did not exist, this would mean very large economic profits for those firms importing to Kenya, because of the large demand for bread and wheat. If these firms were encouraged to import, or even move to produce domestically, as models would tell us, the market for wheat would become more competitive and help keep the prices consumers want. Furthermore, if a more competitive wheat market caused prices to drop, it may encourage more milling firms to enter the industry (domestically or in imports) and drive down the price for flour. The government's movement to make millers buy domestically, also, would simply, as a quote in the article indicates, force millers to charge even higher prices for flour. Removing the tarrif, or even imposing a price ceiling on the millers where price equals the amount millers would be sell a given output and consumers would be willing to buy it.

Such analysis of perfect competition and monopoly would've provided Zeddy with a proper economic solution to Kenya's price problems.

Economic Challenges of Electrical Cars

This article addresses the difficulties associated with bearing the economic burden of an electrical car for a supplier.

The costs of developing and producing an electrical car combined with the cost of electrical power and battery maintenance, electrical cars are much more expensive than the current class of internal combustion engines, and the hybrids available.

While electrical power is cheaper than gas power, it is largely because electrical power comes from a combination of gas power along with many others, if primarily coal. On top of that, the cost associated with replacing a large-power battery like those required for electrical cars can be thousands of dollars that the consumer must absorb.

Another problem with to building a large market for gasoline-effecient vehicles, is that the reduced demand in gasoline drives its price down and makes gasoline-based vehicles more attractive as electrical-based cars get nearer to it in cost.

When all is said and done, the fixes available are: government subsidization to drastically reduce electric-car cost bourne by consumers, or else artificially high oil taxation, or a dramatic increase in the technologies available for producing/maintaining/running electrical cars, relative to gasoline cars.

Caution: Minimum wage regulations may have serious side effects

Minimum wage regulations are usually put into effect to ensure the working poor do not fall victim to greedy corporations and unbearable debt. Politicians often boost their success in passing such laws and credit themselves as the rescuer of the average Joe. What may not appear to them is the significant relationship between minimum wage rates and unemployment. Such a relationship has been a part of economic theory for quite some time now, yet most political figures brush it under the table. CNN is often there to ensure they can get away with such nonsense.
In an article published this week titled “Unemployment: 109 cities at 10% or higher” news reporter Julianne Pepitone gives a prime example at how little the media knows about what is going on in today’s economic world. This article looks at cities with unemployment rates over 10 percent. Pepitone does not bother giving much of a reason as to why unemployment is sky rocketing in these cities, which she probably would just blame it on Mexico or President Bush anyway. Instead she rambles on about how horrible the economy is compared to a year ago and repeats the same things every other news reported so brilliantly has already said. I think the real story in this article has yet to be discovered.
Nine out of ten of the highest unemployment rates listen in the article are in cities that also have the highest minimum wage regulations in the country (California and Oregon). Doing more research, it became apparent that Michigan, Rode Island, and California have the highest overall unemployment and all three have minimum wage rates over the federal rates. Wyoming, North Dakota, and South Dakota hold the lowest unemployment rates in the country (all below 3.5 percent) and all have minimum wage rates lower or the same as the federal standard. Of course, many factors could be hidden behind these statistics such as, population and industry, but it does appear that a connection does exist.
When it becomes too expensive to keep hired help, firms lay them off. If firms could instead offer a lower salary people could keep their jobs. And in times like these, less money is better than no money. The government has tampered long enough with concepts they know little about. Passing minimum wage rates could to be to blame for the increasingly high unemployment rates in these cities. While other states keep unemployment at bay, high paying states are reaching rates that were last seen in the great depression (25%). Perhaps government should stop trying to save the day with their ridiculous bail out plans and instead just abolish the laws that are holding back capitalism from correcting itself.

Houston We Have A Problem: They Do Not Want Our Help!

In the article " Feeling More Secure, Some Banks Want to Be Left Alone", Banks are addressing concerns with government intervention because the growth of the government in the banking industry and how that plays a part in additional banking restrictions. Banks like Bank of America and Citigroup are being disruptive to the process because agencies swooping in are acting like authorities. These authorities which I could not find in the NY Times article, have already existed before this banking situation.

Anyone can access their bank information depending on the level of depth that you want to research and pay for. Not sure, however, if the one company I am aware of, Bankrate.com is a private enterprise (even though they may be a monopoly) or not. But this company's objective has been a auditor of banks before these government authorities came in establishing stress tests that examine strength and longevity because of the supposed irresponsibility of the execs.Are there more companies that showcase knowledge of these banks assets and ratios publicly?
Not really sure, I just know of the one company that is internet based. But wouldn't it be better to let banks publicize information on their own?- What causes information to be limited for consumers?- The zoning of banks? Wasn't there a standard about how close banks or credit unions can be in approximation of each other? Tax breaks for some institutions (non profit)?
( Sounds like restrictions to me) These restrictions seem to be separating markets further than just geographic boundaries.

So, why is there protection in knowing that experts outside of the field especially in banking is a safe bet? What did we just go through with banks? Playing good cop- bad cop takes time, effort and for some reason more cost to those banks that are surviving. By interfering you are punishing many rather than separating those who took on more risk than what they could handle.
Strangely the government still wants to give funds to those banks that have had many losses with credit cards, commercial loaning, and mortgages. Why?

Banks that want to be secure on their own grounds:

"Many banks are reluctant to sell their nonperforming loans because they could suffer big losses, forcing them to raise more capital. Others want to avoid the stigma of latching on to another federal program."

“Never mind the price,” James E. Rohr, PNC’s chief, said in a recent interview. “I would’t want to be the first person and be perceived as a weak bank.”

D. Bryan Jordan, the chief executive of First Horizon, a big lender based in Tennessee, said the likelihood that his bank would participate was somewhat low. “We think we can get a lot more value out of them by working them out ourselves,” he said earlier this month in a conference call about first-quarter results.

There are still banks accepting the idea of government funding..
Funding comes with a price tag- whether the cost comes from an attorney checking out the package and not missing details that creates more risk to the firm; the future restraints that government can place on the industry b/c of its share in the market;time to make changes independently; and the reduction of economic growth.

The crystal ball tells me your future holds...

It is interesting to me that Chrysler would turn over so much of their company to the Union.  It has kind of a mixed feel to it.  On the one hand, as we have learned, when unions get more and more power they tend to advocate for more money, more benefits, etc.  So in that context, them giving the union more power, is going to cost them money.  However this is a very unique situation.  If the workers don’t take pay cuts, and less specialized jobs, and the lower benefits, it is likely they won’t have a job. 

                As I see it, for now giving the union that power and allowing the people to control somewhat what happens with their jobs may be beneficial.  Since it is their job on the line they should be much more understanding, take the pay cuts, and just be thankful that they have jobs.  So this could potentially work.  So long as the labor union isn’t dumb about it.

                However, once Chrysler starts getting back up on its feet (assuming it ever does), they may be in quite a bit of trouble.  The government is going to own part of their company, and set lots of controls on them, and then the union is going to own another part, and be trying to fight the government regulations. Granted, that won’t happen for quite some time, but they’re not looking ahead at the trouble this will cause.  They’re going to get out of this recession, start becoming strong, and then it’s going to hit them like a brick wall.  However, that mostly depends on how understanding both the government regulations, and the labor union is.  

Revenue in a Recession

http://www.nytimes.com/2009/04/13/business/media/13circ.html?_r=2&ref=business

Under the condition of a recession, it’s not surprising that magazine firms are seeing a decrease in revenue. Money in the magazine business comes almost exclusively from advertising, and businesses that typically advertise in magazines have less money to do so as a result of their own recession-related financial problems. So, magazine firms are looking for new ways to increase revenue to maximize profits. This is the topic of the article I chose.

The question is, if magazines increase subscription prices, will subscribers continue reading and allow firms to bring in more revenue? The writer leads readers to make the assumption, consistent with economic analysis, that firms are profit maximizers and consumers are utility maximizers. The article doesn’t offer a solution explicitly, but rather bats back and forth the idea of raising subscription prices.

If subscription prices were raised, readers could react by not renewing their subscriptions or they could ignore the increase and fork over the few extra dollars. It seems that a magazine firm would fall under the category of monopolistic competition—readers have some loyalty to the magazines they read, thus firms have some price searching power. Realistically, the added cost would be negligible to consumers and most would continue their loyalty. The result would be an extra lump of cash for the firm.

spend money to make money

Going green is also getting green, not only helping the environment but the economy as well. This form of tax credit gives the average homeowner/ consumer incentive to spend money on environmentally friendly products and get a hefty tax credit in return, some are 30% of the original purchase price. An underling hope, I see, is that this tax credit will stimulate the economy a little on its own.
Since in a recession/ depression consumers normally put off buying durable goods, goods that last more then 3-5 years, these tax credits offer more incentive to not delay with that new purchase. Besides the federal government, the local utility companies also offer a cash rebate for similar energy efficient purchases. In fact Colorado Springs Utilities offers an entire list of cash rebates for Eco friendly home upgrades. http://www.csu.org/residential/rebates/index.html
The rebate money and the tax refund money back in the pockets of consumers may also aid in stimulating more consumer spending, helping the economy eventually turn around. Every little bit helps whether the subject is the economy or the environment or both.

Do Or Die For Chrysler

Chrysler has filed a survival plan, as they face a life-threatening time in their life-cycle.
Yesterday, on March 30th 2009, the plan was rejected, being considered as insufficient by President Obama.
The White House has imposed an April 30th 2009 deadline on Chrysler, to come up with a working business plan. Chrysler announced it had the framework of an alliance with Italy’s Fiat SpA. President Obama is convinced that the company can no longer stand on its own and requires that Chrysler engages in an alliance with a partner, in order to receive another multibillion-dollar loan from the government to escape from bankruptcy.

Requirements:

• Chrysler must restructure its balance sheet so that it has a sustainable debt burden in the next 30 days.
• Chrysler, Fiat and the UAW need to reach an agreement that entails greater concessions than those outlined in the existing loan agreements.
• Chrysler and Fiat need to detail an operating plan that is viable, that can generate cash flow and demonstrate taxpayer loans will be repaid on a timely basis.
• A final plan agreed to by Chrysler, Fiat and their stakeholders must not require more than $6 billion in loans from the U.S. Treasury.
• Chrysler must have an adequately capitalized mechanism to finance the purchase of Chrysler cars by its dealers and customers. (Source: The White House)

The basic idea behind the alliance is for Chrysler to take existing small cars, car platforms, and engines from Fiat to produce Chrysler vehicles and for Fiat to utilize Chrysler’s excess manufacturing capacity and dealer network to sell Fiats and Alpha Romeos.

There are several arguments to support the alliance.

Looking at Volkswagen and Toyota sharing platforms or the Audi TT and the VW Golf coming from the same Volkswagen A-platform, a few alliances have been successful in the past.
Eventually Fiat and Chrysler will build both companies’ models together on assembly lines in the United States and Europe, allowing economies of scale.

A piece-by-piece sale of Chrysler after they file for bankruptcy would also represent high opportunity costs, including all future profits of the no longer existing company. Economically, this reflects a decreased supply, taking a producer out of the market.

According to Fiat’s chief executive Marchionne, taking the risk of an alliance with this critical partner, Fiat would help Chrysler come back to life, strengthen its financial position, and be more competitive in the American small car market against Japanese producers. It would also help preserve American jobs and accelerate Chrysler’s efforts to produce fuel efficient cars.

It could also be helpful that President Obama is working on a new program with the Congress to provide consumers with incentives to trade in old and fuel-inefficient cars with newer and environmentally “cleaner vehicles”. Regardless if it is ethically correct or not, Germany has already proved, that a scrap premium can work, increasing its car sales by 21%. For Chrysler, this policy could also mean an increase in car sales, especially when the company can manage to produce more fuel-efficient cars with the help of Fiat.

By strengthening Chrysler and expanding in the American market, Fiat could itself generate value to its stakeholders.

While Fiat would receive access to the American market, Chrysler would gain a distribution network outside of North America.

Theoretically, it might be a good idea for both companies to engage in this alliance. In reality however, the partnership between Chrysler and Fiat faces many problems that might threaten the alliance's success.

First of all, a deadline of one month is only little time to fulfill the requirements and to come up with a new detailed business plan with the partner firm. It is important for both firms to carefully work out a common concept for their future business. Finding a proper solution in 30 days could be a difficult task for Chrysler.

It is also questionable, that a company like Fiat, in bad shape itself four years ago, would be able to save a big company like Chrysler. With a rating of only BB+, Fiat has only limited access to capital and therefore limited financial latitude.
Sharing platforms cannot be realized right away and it would take an estimated two years before Fiat cars could be remade into Chrysler models. Before that, a deal has to be struck.

One cannot forget that Chrysler’s last alliance with the German car manufacturer Mercedes-Benz failed, too. The merger between the two companies in 1998 was made “to set new standards in earning power, profitable growth and social responsibility.” But as the U.S. partner turned out to be critically ill, 30,000 jobs had to be slashed and six plants closed or sold off. Today, consultants use DaimlerChrysler as a model case study to illustrate everything that can go wrong when two companies from different continents and corporate cultures merge.

Even though Daimler CEO Schrempp proclaimed that Chrysler and Mercedes-Benz would mesh perfectly because their strengths lied in different vehicle classes, the two fundamentally different companies were hardly able to do much for each other.
Chrysler had little use for Mercedes- Benz' expensive technology because U.S. customers were not willing to pay for it. Conversely, Mercedes-Benz could not use Chrysler's cheap plastic parts; its clientele was more demanding.

As the DaimlerChrysler example shows, alliances face more or less unpredictable problems in reality. Even though the quality of the parts is more comparable between Chrysler and Fiat as it was between Chrysler and Mercedes-Benz, it will still be a crucial aspect for both companies to work out, integrate, and implement a consistent business plan despite great differences.

The English mentality differs completely from the Italian. Since the corporate cultures, visions, and the companies’ policies derive from the domestic mentality, the alliance could face even more difficulties.

Other contrary arguments of experts are that Chrysler could lose even more potential sales because consumers are worried about warranty cost coverage, whether dealers would be around to repair the cars, and if their car might be of less worth if the brand or model is discontinued. For example, the sales of Saturns, Saabs and Hummers are decreasing already.

Critics also state that small-car profits are difficult to achieve in the U.S. because labor costs are the same as they are on larger vehicles even though the prices are lower.

Another option for Chrysler would be to file for bankruptcy in order to split into “good” and “bad” segments.
As president Obama explained, Chapter 11 bankruptcy does not necessarily mean a company has to close their doors; rather it provides them with the option of cost cuts and restructuring of debt with help from the federal court.
The other side of the coin is that consumers could be afraid to purchase cars from a critically ill company.
Chrysler could also be sold piece-by-piece.

In my opinion, since they are under high pressure at the moment, Chrysler will engage in the alliance with Fiat, because it sees no other way out. Hasty decisions and business plans, and the companies merging from two different continents with completely different car classes and corporate cultures, might lead to another failure in the next few years.

As far as Fiat goes, it is highly important to analyze their potential partner, which is critically ill, their risks, and their potential opportunities. Daimler’s experiences with Chrysler, for example, illustrate that size is no guarantee for corporate survival.
As Porsche CEO Wendelin Wiedeking has persistently mocked: “If volume were everything, dinosaurs would still be roaming the earth today.”

China Seeks More Involvement--And More Clout

Last month, I insinuated that China may be considering expanding its global influence more aggressively, in preparation for its baby-boomer generation to retire and leave the workforce. It seems that I may be right in thinking that: Today, the Wall Street Journal reported that the International Monetary Fund has been begging China for additional funds, on the order of around $50 billion (the actual amount was not stated in the article, but IMF's goal is a $250 billion dollar increase and has recieved $100 billion from Japan and $100 billion from the European Union). China is now under negotiations to grant the additional money in exchange for more votes in the IMF, which, though it comes at the expense of already-overrepresented smaller European countries, also aims to wrest policy control out of the hands of the US. This is a clear reversal of the traditional roles between the IMF and China because China has normally kept a low profile and has had a "sometimes rocky relationship" with the IMF. This change is possibly because the IMF itself has been adapting: the IMF has often been considered a last-resort option for developing countries. In light of current economic trends, however, the IMF has been changing alot of policies, such as loosening the conditions it places on the country in order to recieve the loan. The IMF has gone so far as to consider changing its name, or at least not using its name on its loans. In basic economic terms, there is a large demand for loans at the moment but--despite a sufficiently large supply--not for an IMF loan. Voila! The perfect opportunity for a large economic profit in an almost monopolistic market, if only the Chinese can convince the begging countries that the IMF is different now. And with China a key player, it almost undoubtably will be different.

Lions and Tigers and... Public Health Insurance?

President Obama believes that “healthcare is a right, not a privilege.” So, as promised, he is currently working on a plan to make healthcare affordable for everyone. President Obama wants to create a government-run health insurance plan that would operate beside the private sector of health insurance already in place. The details have yet to be nailed down, but both support and opposition have already raised their voices.

The issue of a public health insurance plan deals with the basic economic concept of competition, and the not-so-basic concept of profit maximization. The article’s author, Reed Abelson, offers almost none of his own explanation or conclusions, but rather offers input from both sides.

Support for a public health insurance plan argues that such a plan would not only make health insurance available for at least most of the 50 million Americans who cannot afford it, but it would also bring more competition into the market. They contend that more competition would result in more fair prices for health insurance, and healthcare effectively.

Those opposed to the plan argue that the government is an “unfair competitor.” Their contention is that the government would have lower costs than private insurance companies.
“It would have a much lower overhead than private plans, with no need to make a profit or spend money on marketing or brokers’ commissions.”

Both sides agree that if the government went through with the plan, the price of private health insurance would have to fall to compete with the government plan. The opposition continues by saying that prices would fall so much that the private sector would be driven out of business altogether. Even if a private firm offered insurance plans at the point where marginal cost was equal to marginal revenue, the generally recognized point of profit maximization, the market price would eventually fall so low that shutting down altogether would be the least costly choice.

Neither side is totally wrong. Economists generally do not regard competition as a bad thing. But the opposition’s analysis is not out of tune with economic analysis—this particular style of competition could potentially cause serious harm to the health insurance industry. The fact is, not enough details are set for anyone to make a complete analysis. Only time will tell.