A voice of reason...

by: Brandon (re-post from 2008)

Last year I bought a new car. I really needed a SUV because my new beetle wasn't cutting it anymore. I was hauling all sorts of junk in it for my t-shirt business and lumber to work on my house and it just didn't make sense anymore.

While shopping around for a new car I came up with the following list of wants / needs.

Needs:
1. Seat at least 7 people (because I needed to take it on the road for band stuff)
2. Tows a large trailer (for band equipment & my merchandise business).
3. Gets 20+ miles to the gallon.

Wants:
CD Player

I went to all the websites. I did all the research. I asked around for family and friends advice. I finally decided on a v6 Toyota Highlander because it met all of my needs and wants and towed 6000 lbs. I bought it used with 20,000 miles on it for less than $18,000 (The new price being somewhere around 20k to 22k).

A few months later, a family member came over to my house with a beautiful new GM Tahoe. It was the base model of the car but it still had leather heated seats, navigation, DVD, and all the bells and whistles. It seated 7 people and towed 6000 lbs. And it got an amazing 25 miles to the gallon. I have to admit, I was rather envious... that is until she told me how much she paid for it... $40,000!!!

Let's do some math here. Let's say that gas costs $5.00 per gallon from now until I sell this car (probably 5 years or 100,000 miles which ever comes first). Let's say that I put another 80,000 miles on the car. If I get 20 miles to the gallon, I will have used 4000 gallons of fuel and paid $20,000 in gas over 5 years. Now let's look at the Tahoe. If I use the same math I would have consumed 3200 gallons of fuel and spent $16,000. A price difference of $4,000 does not justify spending another $22,000 on a car today, or over the course of 5 years (and that's gas calculated at $5.00 a gallon, the numbers would be signifigantly different if calculated at today's $2.00 prices increasing through 2013 prices).

I guess the point I'm trying to make here is that GM has been building cars that are too expensive and ignoring what most consumers want for too long. They have spent too much time fighting legislature against gas guzzlers and handing out $1.99 gas cards for a year to get people to buy their cars. Overall poor management.

There are 4 costs that pretty much contribute to the price of any good. They are Raw Materials, Setup / Development costs, Labor, and Taxes. Well, taxes are pretty much impossible to control (except by voting responsibly) and they get bigger every year. Setup and development costs are needed to develop any new product and usually fixed, but managed wisely can reduce some costs. Raw materials, just like anything else, get more expensive as the resources required to make them become more sparse. So how do you control costs? Well, labor get's its own paragraph...

Labor is difficult to control, especially in the auto industry. Lets say you need to decrease supply to reach equilibrium because you're making too many cars and not enough people are buying them, and therefore you need to lay off workers that are not needed to produce those goods, how can you do that when you're going to get sued by some labor union or you have to pay them severance pay? This is probably the highest cost of the car... along with the several features that you think are cool but could live without. This is why American industries ship their production out of the country... to control labor cost. They do this because they're tired of labor unions pushing them around and telling them how to run their business. Shipping jobs elsewhere (to areas of inexpensive labor) is not always a bad thing because we as consumers enjoy cheaper products. When we have money and we want to spend it this is good. However, when we don't have money and we need to earn it, this is a bad thing. Any government or union interference with labor wages is a bad thing because it drives wages above the equilibrium price. Period. If an automaker can only afford to spend a fixed amount of money on its labor, and someone is artificially increasing the price of that labor, then they will higher fewer employees to fill that gap.

So how do we get out of this mess? Well first of all, giving them tax payer money won't help anything. Why? Well if you give money to a known crack addict to buy food, what do you think they will do with it? The auto industry is no different. Just let the market work itself out... and it will.

When you start saying "Oh, we have to protect the banking industry because if we don't the world will end", where can you draw the line? The same thing could be said for every industry in the United States whether it be Automakers, Semiconductors, Farming, Fishing, Underwater Basket Weavers or whatever. Well, my business has been pretty slow lately, maybe I'm entitled to a handout too. Perhaps I should charter a private jet to capitol hill? Well, I don't really think that because I think that I'm a responsible individual and if I handle my business and finances poorly I should be allowed to fail.

The fact of the matter is, the government has no business in business. They are there to do one thing... what we the citizens of the United States can't do on our own... and trust me, we know how to innovate and conduct good business. When a company fails, others will buy up their assets cheap and make a killing off of it and they won't repeat the mistakes of their predecessors.

If you want to see protectionism at it's worst, watch the following video. This is what happens when you over protect an industry... and not just the auto industry, but any industry (ie: banking, housing, semiconductors etc...):



I love how the breaks lock up and the car stalls at the end of the video. Priceless.


More good information can be found here:
Commanding Heights
Commanding Heights on Google Video


PS: Try to pay attention to see which political party votes for handing out your tax dollars to the auto industry. Maybe you should vote against them in the next election. Check out www.votesmart.org for voting records.


2009 UPDATE: Guess what, we just threw billions more of taxpayer's money at them and they still went into bankruptcy. Awesome! The democratic party will probably do a much better job of running GM anyway.