Friday, December 12, 2008



On August 31, 1981, US air traffic controllers went out on strike. Reagan gave them 48 hours to return to work or they would be fired; they didn't, he did. Air traffic controllers were over paid even more than auto workers are today. In the short run, Reagan's action contributed to one of the worst manufacturing recessions ever. Over the next 19 years, the US enjoyed a tremendous economic boom, punctuated by the real estate recession of 1990-91.

Recessions are manufacturing recessions or real estate recession depending on what drags us into recession. Real estate and industry tend to take turns dragging the economy down. Before a manufacturing recession, excess manufacturing capacity is built to meet great demand for goods. At the peak of capacity utilization, there is high inflation. High inflation leads to high interest rates and a crash in the production of goods. The crash in unemployment ultimately leads to lower demand for real estate. Before a real estate recession there there is great demand for real estate until too much is built. Both industry and real estate are hurt by both types of recessions but both the going-in and the coming-out are different.

The high interest rates that precede a manufacturing recession hold down the excess building of real estate. Real estate construction is slowed by the high interest rates, so the demand to supply ratio stays strong and the price of real estate tends to hold pretty well, only taking a hit near the end of the recession. When the recession is the result of an excess supply of real estate, real estate prices fall early and industry holds up until close to the end of the tough times.

The firing of the air traffic controllers happened early during the recession, but no where even close to the real beginning. In September of 1979, the Carter Administration, enjoying the support of his party in both the house and the senate, gave the auto industry a $1.5 Billion Dollar Band-Aid. The government "fixed" the auto industry by getting it through the recession, without forcing it to make the changes it needed to make. The collapse of the auto industry in 1979 is roughly parallel to the collapse in home construction two years ago. The current collapse of the auto industry is a result of government meddling more so than the result of poor management. The political solution reached years ago was to give the US a semi monopoly on large vehicles. Now that the demand for large vehicles has collapsed, the auto companies were left with high legacy costs that should have been fixed in 1979.


Obama ran a populist campaign. He wants to treat people fairly. It is clearly unfair for some workers to make $100 per hour at the expense of all other citizens. The campaign to be fair makes bailing out union workers that average $74 per hour a difficult pill to swallow. After Obama's inauguration, there will be a Jimmy Carter situation. Has the US learned from it's mistakes?

Starting in 1928, there was a long series of mistakes made by government officials. Tariffs on foreign goods were imposed, the money supply was restricted, taxes were raised and raised and raised so that government could spend more and more and more. A manufacturing recession was inadvertently converted into the Great Depression. FDR was a very popular president but his "infrastructure" programs extended the economic down turn. The Blue Ridge Parkway is a beautiful scenic highway with beautiful massive stone bridges but diverting precious money to the building of massive bridges is not what our country needed to get out of the depression.

During the Lyndon Johnson "new New Deal", many of the FDR mistakes were made but the money supply was not restricted. Poor Jimmy Carter caught the inflation whiplash from the "easy money new, New Deal". Carter followed through with the standard democrat approach by bailing out Chrysler. Carter was president at a secular trough. Reagan was at the right place at the right time. Bush was the president just after a secular peak, he was at the wrong place at the wrong time. Obama is at the right place at the right time. If the government will simply avoid doing great harm, the American economy is going to boom.

The American economy well be well served if a packaged chapter 11 bankruptcy is negotiated for GM. Americans are ready and willing to buy cars made in America, but they will be well served by free markets. Unfortunately, the new CAFE standards were once again designed to make it difficult to import cars to America. Without these rules, consumers would enjoy significantly lower car prices. We do not protect America when we restrict car imports, we only protect the high wages of both executives and workers at car companies. We protect the huge campaign contributions the unions make to our congressmen, senators and presidents. Make the playing field fair and we do not need to limit campaign contributions. The reason that massive amounts of money are donated to campaigns is for the purpose of gaining an unfair advantage on the rest of Americans.

Again, Obama ran as one who seeks fairness. It is not fair for a poor man to pay $73 per hour for the labor to make his car and for the poor man to be forced to make political campaign "contributions" to maintain his oppression.

A packaged bankruptcy will not get rid of the very complicated CAFE standards that have been passed but bankruptcy will reduce the cost of cars and it will reduce the size of union slush funds. There is a turn taking place in housing, foreclosures are down and a massive refinancing at low rates is taking place. The demand for goods is ready to jump. Reagan fired the air traffic controllers about a year before the market took off but that was a manufacturing recession. Economic conditions are now similar to the late fall of 1982; oil prices are down, interest rates are down, housing prices are stable and lagging indicators such as unemployment rates are soaring.

Like they say, "fade the initial reaction". In other words, the markets will probably fall on the "bad auto company news", but the long term health of American industry will be dramatically improved by forcing workers, management and share holders to take the hit. All of us are consumers. We will all benefit from lower prices.