By Staff
On Thursday, House Democrats unveiled the details of an $825 billion "economic stimulus" package in the hopes of turning our current economic slump around.
It's a feel-good measure with billions of dollars in new spending for energy, education and health care, as well as $275 billion in tax relief.
To me, though, it brings up an important question: Can government fix a problem that was largely of its own doing?
No, federal government policies did not in and of themselves cause our current economic meltdown. But there is no denying that, coupled with bad business practices and a touch of bad luck, the government played a huge role.
Think of what general causes we look at as the impetus of the recession: the subprime mortgage crisis, the burst of the housing bubble and the auto industry's cash crunch.
Those aren't the only causes, but those three things played a key role (along with high gas prices, overstimulation of the cash supply by the Federal Reserve and a broader, global economic crisis) in our current situation, and all three were caused or exacerbated by government policies.
Whether it was caused in part or in total by government policies in the 1990s, home loans did indeed become easier to secure by the end of the last century.
Some blame the strengthening of the Community Reinvest Act in the 1990s for encouraging loans to homeowners who wouldn't have otherwise qualified.
Some blame has to be given to the practice of predatory lending, wherein some lenders actively sought out people who truly couldn't afford the homes they wanted to buy, but by and large, the constant government push for homeownership for all is to blame.
The simple truth is this: Some people simply cannot afford to own a home. It's sad, but true.
The myriad costs associated with outright homeownership – mortgage payments, property taxes, utility costs, repairs and maintenance – add up quickly, and if a household's income isn't high enough to support those costs, they are restricted to renting.
Lenders used to require a large down payment in cash on a loan, a practice that worked fine for generations in the free market.
When the federal government got involved and not only pushed for the "right" of homeownership, but allowed lenders to take on risky loans, disaster was almost a guaranteed outcome.
The practice carried into the new millennium, and lending practices became even more risky. According to the Federal Reserve, the "subprime markup," the difference between subprime and prime mortgage loans, declined from 280 basis points to 130 basis points between 2001 and 2007 – in other words, the lowest criteria for issuing a loan dropped even lower during that time.
Throw in adjustable-rate mortgages with interest-only payments and some in the mortgage industry were almost giving home loans away.
And it can all be traced back to the push by the federal government for increased homeownership.
Politicians from both major parties love to talk about rising homeownership during their tenure in office, but there will always be a segment of the American population that simply can't afford to own a home.
Be skeptical of rising homeownership rates, because often those additional numbers are coming from that segment.
The rise in bad mortgages can also be blamed for the burst of the housing bubble.
Banks were naturally forced to tighten their lending practices, and at the same time, the market of homes for sale was saturated with recently foreclosed properties and homes that needed to be sold quickly to avoid foreclosure.
When supply exceeded demand, home prices naturally began to drop.
So how is the government to blame for the auto industry's cash crunch?
Well, it's not entirely to blame. There are countless reasons to blame American automakers. But without government mandates, would American automakers be building little cars that denigrate their profit margin?
CAFE (Corporate Average Fuel Economy) standards require that fleets by automakers have an average fuel economy better than a certain number.
Pretend for a minute that there are only two car companies in the world, AmCar and Japan Auto, and each makes only two vehicles.
AmCar makes an SUV with a large market share (the 2009 AmCar Guzzler) and, due to CAFE standards, also makes a small car that gets great gas mileage (the 2009 AmCar Sipper), but that no one wants to buy because for about the same amount, they can buy a 2009 Japan Auto Shrimp, which gets better gas mileage and has better brand reputation.
Japan Auto's other vehicle is an even smaller car with a hybrid engine called the 2009 Japan Auto Nanospeck.
Now pretend that you own AmCar. You have 2,000 employees who make $30 an hour, which is comparable to the workers at Japan Auto.
Most of your employees, 1,500, work on the line of the AmCar Guzzler, and the other 500 build the Sipper.
Due to economy of scale and because your domination of the SUV market allows you to charge more for a new Guzzler than a Sipper, your profit margin on a Guzzler is higher.
You make $9,000 for every $20,000 Guzzler your dealers sell, but you only make $5,000 for every $14,000 Sipper.
You had $125 million in labor costs last year and sold 100,000 Guzzlers and 15,000 Sippers.
Because you've been building the Guzzler essentially the same way for 10 years, much of the line is automated, but the Sipper has smaller parts and must change every few years to keep up with its Japan Auto competition.
With 500 people on the Sipper line, you have to sell 6,240 Sippers just to cover the labor cost of producing it, or a sustained sales volume of 41 percent.
With 1,500 people on the Guzzler line, you need to sell 10,400 vehicles to cover the labor cost of producing it, or a sustained sales volume of only 10.4 percent.
This means that Japan Auto can take 89.6 percent of your SUV market (or 89,600 vehicles) share before the model is no longer profitable, but only needs 59 percent of your small-car market share (which is only 8,850 vehicles).
You could put AmCar in a stronger position by diverting resources to better production, quality and marketing of the Guzzler, but due to the CAFE standards, you can never get rid of that margin-denigrating hassle known as the AmCar Sipper.
So if market share of your Guzzler is reduced due to higher gas prices, you don't have the option of dumping the Sipper altogether.
Like I said before, CAFE standards aren't the sole cause of American automakers' woes, but it's just another small nail tapped in by federal policies to our current economic coffin.
E-mail him at bryan.clapper@leaderpub.com.