Sunday, November 23, 2008

Macro DIscussion Board 4

1. How could the current oil problem be better handled and how has it been (ineptly) handled in last 10 or so years?

The question as to how the current “oil problem” could be better handled implies that the government could, or should, be doing something to “solve” it. Many call for enforcement under the anti-trust provisions of the Sherman or Clayton Acts. But more intervention done by the government is not a solution to any problem, perceived or true. In fact, most of the “oil problem” is the direct result of excessive government intervention into the energy marketplace.

One need look no further than government’s interventions that have restricted exploration in Alaska and off American shores, prevented new refineries from being built, passed environmental restrictions with little or no scientific merit, and taxed the profits of oil companies with a vengeance. These taxes are then passed off to the consumers via higher prices at the pump. This is where the problem lies. Too much government intervention is the problem.

As to the actual oil companies, some say that we need to enforce anti-trust laws currently on the books. Which laws and why? Are anti-trust laws beneficial to the citizen and ultimately the consumer? Are they aimed at hurting the entrepreneur? What does that say to the entrepreneur yet to go into business? Have these laws ever been effective in the first place? When John D. Rockefeller’s Standard Oil was broken up, he then owned and profited from several smaller companies rather than one giant conglomerate. What then was the purpose of breaking up Standard Oil? Was it for the benefit of politicians who were then able to convince their constituents that they were looking out for them, and sticking it to the “robber baron” Rockefeller? Were those same political anti-trust crusaders in the pockets of the Rockefeller apparatus?

It makes no difference that there were 15 oil companies than, and 7 now. They are all primarily owned by the same people. Look at the current cartel. How many of them are made up of former Standard Oil remnants? The answer is just about all of them. Read the 10-Ks of these firms and read who the majority shareholders are. You will see the same names over and over.  Think of the movie Terminator 2: Judgment Day. Recall the T2000, who could morph into any shape. Specifically recall the scene where he is frozen by liquid nitrogen. The current governor of California shoots him and shatters him into a million pieces with his famous “Hasta La Vista, Baby!” What happened next? The broken pieces melted because of heat from a metal furnace, they reconnect gradually, and finally reemerge as T2000. Think of Standard Oil, its “breakup” from government crusaders, and its reemergence as our present oil cartel in the same light.

To better handle this “oil problem” would mean getting the government out of the business of trying to control the energy market. That would be a better course of action than attempting to enforce laws that were never effective in the first place.


7. Explain the meanings of globalization, privatization, deregulation, and commoditization. Further, in terms of restructuring, how has this played out in the U.S. auto industry?  

Globalization is the idea that market and economic interaction are transcending national borders on a worldwide scale, expanding the scope of market participation exponentially. 

Privatization is the idea of individuals owning the means of productions rather than the public, which can own via government and publically traded securities. 

Deregulation is the idea of alleviating the inefficiencies wrought upon firms by intrusive government codes that attempt to regulate markets. 

Commoditization is the idea that a product becomes a commodity because it is indistinguishable from others similar to it such that consumers choose it on its price alone. 

Each of these ideas has had a tremendous effect on the Big Three automakers in the United States. All of these ideas have forced the American auto industry into a competitive arena it did not know previously. In the old days, they had all of the market power, clout, and the right politicians in their pockets. They could enforce their will in the market by making prices, and eliminate any and all competition with considerable ease. Think about this: How many Tuckers, DeSotos, Studebalers, or LaSalles have you seen in traffic in this country? A big reason why is because all of these companies were boxed out and or destroyed by the big three. 

Over time, these four ideas became more and more relevant and visible to consumers. Add to it, the Big Three had been crippled by its excessive protectionism, rampant government intervention, parasitical unions, and a labor force that was no longer competitive. When the four mentioned forces began to take hold in America, the Big Three began to fall on itself, gradually shifting to irrelevance. Firms like Toyota, Honda, Nissan, Hyundai, Volkswagen, etc. were able to adapt and innovate to stay competitive. They could keep prices down and actually turn profits with better and more efficient vehicles. Big Three cars have not been profitable for a long time. American consumers do not feel that it is their duty to pay a premium for an inefficient vehicle so a janitor can make $80.00 per hour. The Big Three will continue to decline, and if they don’t get competitive in labor, design, and efficiency, they will collapse. The coup de grace would be if they are bailed out for so many years of failure. If they are bailed out, they will soon be a memory.


8. How does over-compensation in resource markets (e.g. labor) affect the degree of competition in the product market affect the demand curve facing a firm?

 This is a simple example of supply and demand. When labor is too pricey, the demand for it decreases. When labor’s non-competitiveness is rewarded with wage controls and other protectionist measures, then the demand plummets. Firms begin to look for more competitive alternatives, and usually look overseas.

Here is a quick real world story of my realization of how non-competitive labor in this country has become. When my wife and I were first married, we were visiting her parents who live in the Piedmont region of Virginia. This area, along with North Carolina was famous for furniture of the highest quality. We were on the market to furnish our home, and went to one of the many outlets in the region that historically offered beautiful American made furniture at a great discount, and of unmatched quality.

There was a particularly beautiful dining room set that we liked, and we asked the salesman about it. He mentioned that it was made from wood that was from Pennsylvania. Being from Pittsburgh I liked that idea, and I inquired as to where it was crafted and assembled. He told me that the furniture was crafted and assembled of Pennsylvania wood in China, and he was telling me this in the middle of the Piedmont! Now think about this carefully. Think of the costs associated with harvesting the wood, shipping it cross country on a train to a port, loading it on a ship, offloading it, shipping it to a factory in China where it is crafted and assembled, shipping back to a port, then back across the ocean to the US, then on a train to wind up back in Virginia. All of that is cheaper in the long run than paying non-competitive American labor! This was the day that I realized that non-competitive labor has a profound affect on the demand for its services. 

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