Tuesday, December 23, 2008

The Cost of Going Green

Driving around Stanford and the neighboring upscale suburbs brings to mind the 1978 film, “Invasion of the Body Snatchers,” in which alien pods replaced earthlings as they slept. As we sleep, Hybrid Priuses are gradually replacing every other make and model of car, including Volvos, the long, venerated, automotive symbol of socialist Sweden. A Prius, which gets over 45 miles per gallon, is the ultimate green symbol.

What’s the cost of going green?

A comparison between two different Toyota models, the Prius and the non-hybrid but otherwise somewhat comparable Corolla, reveals the cost. The basic 2009 Corolla can be purchased for $16,150 plus sales tax; in California, that brings the price to about $17,525. The stripped-down Prius sells for about $22,000; with tax, $23,870. The difference in the initial purchase price is $6,345.

The web site, automotive.com, presents data on the cost of ownership over a five-year period. For the 2008 models, the estimated costs of ownership, which include depreciation, financing, insurance, repair, state fees, maintenance, and fuel, amount to $23,372 for the Corolla, and $24,083 for the Prius. The comparison presumes mileage of 15,000 per year. Prius does better on fuel: $368 in savings with gasoline at $2 a gallon; $552 at $3/gallon; and $736 at $4/gallon. The savings rise as miles driven and the price of gasoline increases. But the Corolla is less costly for all other elements of ownership.

The data on used car prices fluctuate wildly, depending on mileage and condition. An internet search of 2001 Priuses reveals prices ranging between $8,000-12,000, with comparable Corollas ranging between $6,000-9,000. Using a rough average, Prius owners recover about $2,500 more than Corolla owners in resale value.

All in all, the cost of going green is on the order of $1,000 a year. But these numbers apply during normal times.

In December 2008, with a glut of cars in dealers’ lots, a 2009 Corolla is available for about $14,000, while a similarly discounted Prius, available only for the top-of-the-line model, goes for about $24,500. The puts the annual cost of going green at about $1,200. An extra $100 or so a month is small change to the average affluent resident of the mid-peninsula Bay Area.

Merry Christmas (and/or Happy Chanukah) to all, and if you want to keep your current car, be sure to leave the garage lights on all night!

Thursday, December 18, 2008

Protecting Which Taxpayers?

Members of Congress, the White House, and the Treasury have been repeating the mantra of “protecting taxpayers” in the use of “bailout” funds, the $700 billion TARP (Troubled Assets Relief Program) enacted by Congress. The phrase implies that the government wants this money to be repaid to the Treasury, thereby preventing taxpayers from having to make up any losses.

First things first. Excluding TARP and Obama’s projected fiscal stimulus, the federal government’s budget deficit was estimated in the neighborhood of $500 billion for fiscal year 2009 (October 1, 2008-September 30, 2009). TARP is being financed by federal borrowing, not increased taxes. Obama’s stimulus plan could add another $800 billion or so to federal spending over the next two years, which will also be financed by borrowing.

Assume some or all of the bailout funds are recovered by the Treasury. Any such funds are likely to be appropriated by Congress to spend on government programs rather than redeem the borrowed funds and reduce public debt.

As to “protecting taxpayers,” who is at risk?

If it becomes necessary to raise taxes, Congress could raise income tax rates across-the-board or only on upper-income households. The distribution of income taxes in 2006, the latest year for which data are available, is as follows: the top 1% of households ranked by adjusted gross income paid 40% of total income taxes in fiscal year 2006, the top 5% paid 60%, the top 10% paid 71%, the top 25% paid 86%, and the top 50% paid 97%. Whichever approach is taken, higher-income households will pay the bulk of the increase. But this is the group on which Obama and the Democrat Congress want to increase tax rates. For these households, “protecting taxpayers” is empty rhetoric.

Ironically, the true losers could be lower- and lower-middle income households. The Treasury, the Fed, and Congress are trying to head off the potentially harmful effects of deflation and return the economy to growth. However, the creation and circulation of so much new money could fuel inflation in the next few years, which generally hurts lower-income households more than the wealthy. Should this occur, Obama will have a hard time explaining himself to the electorate in the 2010 Congressional and 2012 general elections.

Tuesday, December 16, 2008

Preventing Another Financial Crisis

Several scholars and journalists have recently criticized the application of mathematical models and high-powered econometrics to the purchase and sale of securities. In an article titled “Wall Street Lays Another Egg” in the December 2008 issue of Vanity Fair, distinguished financial historian Niall Ferguson has written an informative account of the current financial crisis. His central theme is that mathematical models ignore both history and human nature. A particularly poignant phrase, with apologies to Euripides, reads “those whom the gods want to destroy they first teach math.”

Mathematics is extremely useful in many fields of endeavor, but perhaps it has been pushed beyond its applicability in the worlds of academics and finance. To balance the belief that above-average returns require higher risk, for which mathematical models play a crucial role, perhaps all business school students, especially those who specialize in finance, should be required to read and reflect upon Aesop’s fable of the Hare and the Tortoise.

A hare one day ridiculed the short feet and slow pace of the Tortoise, who replied, laughing: "Though you be swift as the wind, I will beat you in a race." The Hare, believing her assertion to be simply impossible, assented to the proposal; and they agreed that the Fox should choose the course and fix the goal. On the day appointed for the race the two started together. The Tortoise never for a moment stopped, but went on with a slow but steady pace straight to the end of the course. The Hare, lying down by the wayside, fell fast asleep. At last waking up, and moving as fast as he could, he saw the Tortoise had reached the goal, and was comfortably dozing after her fatigue.

The Moral: Slow but steady wins the race.

Monday, December 8, 2008

Putting Job Losses in Perspective

The U.S. economy lost 1.9 million jobs in the first 11 months of 2008, with December losses expected to push the total above 2 million. The November loss of 533,000 jobs is the highest number since December 1974. The unemployment rate rose to 6.7% and could pass 8% before the downturn is reversed.

To put these numbers in perspective, consider the case of China. As the country upgrades from low-value added agriculture to higher-value added industrial and service sector output, its economy created more than 80 million jobs between 1994 and 2004. In the four years 1998-2002, the economy successfully absorbed 3 million laid-off workers from money-losing, restructured, state-owned enterprises.

During the more recent period 2003-7, the economy created 51 million new jobs, the equivalent of a new city of 10 million workers every year. During these five years, 24.8 million laid-off workers were re-employed in new enterprises.

In March 2008, well before the financial crisis erupted, China’s goal was to generate 15 million jobs a year by 2020, raising the number of urban and town residents from 280 million to 510 million.

The global slowdown has complicated this goal. Numerous low-margin factories in south China have closed down, with employees returning to their rural homes. Tens of thousands of new graduates from an increasingly educated population will find it harder to secure employment. Indeed, China’s leadership has announced that it will return to 10% growth in 2009 from an estimated 7.5% this year. The difference is millions of jobs.

As the policy-makers in Washington D.C. struggle to reverse the current economic decline, imagine what it must be like in the inner circle of China’s counterparts.

Friday, December 5, 2008

Consolidation is Just a First Step

Some politicians are calling for a consolidation of the Big-3 U.S. auto companies. Perhaps a merger between GM and Chrysler. Maybe later, a merger with Ford, producing one, hopefully viable, competitive, domestically-based automobile company.

Federal support for the financial sector has already resulted in several large mergers. Wells Fargo has taken over Washington Mutual and Bank of America has acquired Wachovia. Down the road, there are likely to be more mergers, shrinking the number of large banks.

Delta has merged with Northwest. United and American airlines are possible candidates for mergers with other domestic or foreign airlines.

National health insurance may be just an Obama administration away.

For good measure throw in federal financing of new homes.

How about more federal control over education?

Each a small step toward a “mixed” public-private partnership” economy; together a giant step toward central planning.

It can’t happen here! Think about it.