Serious Implications

Simplified Stagflation Index for 2008

The November and December Simplified Stagflation Index (SFI) jumped due to negative inflation and wage increases. Given all the bad news about unemployment, cuts in factory orders, foreclosures, and bank insolvency, this was some good news for those of us who hung onto our jobs. The positive SFI numbers mean that workers are rebuilding some economic strength to buy, save, and invest after several years of losing it. That sunny thought, however, and hope for economic recovery, requires we continue to keep our jobs and create a lot of new ones.

The December data from the Bureau of Labor Statistics indicates that wages rose faster than inflation for non-managerial workers in the private sector, who make up about 80% of the American workforce. The key data:

Consumer Price Index (CPI) -0.7%
Average Hourly Earnings (AHE) +$0.05 or +0.27%
Average Hourly Wage $18.36/hour

Calculating the December percent increase in wages adjusted for inflation:
AHE – CPI = 0.27 -(-0.7) = 0.97
December Simplified Stagflation Index = 0.97 X 100 = 97.

The 12-Month Cumulative SFI = 317, with big increases coming since August and lower fuel prices. Real estate prices, in general, are also down over that period.

When the experts boil down all the details about the economic crisis, they will likely find three main culprits: (1) rising fuel costs (gas prices over $4 per gallon); (2) banking deregulation leading to the securitization of bad debt; and (3) the Commodities Futures Modernization Act of 2000. The problems we face as a result were preventable.

We could have avoided this mess by getting serious about energy efficiency, redesigning cars to meet higher CAFE standards, and developing renewable energy. We could have avoided the current bank bailout fiasco by keeping intact the banking regulations that separated commercial banks from investment banks. We could have kept commodities prices, including oil, from skyrocketing by requiring sane margin requirements for speculators.

For a fascinating discussion on the banking and commodities deregultion, listen to Michael Greenberger on NPR’s Fresh Air with Terry Gross

I want to support Michigan businesses and industry, including the domestic automakers. My wife and kids drive a domestic van with sliding side doors. It seems a good, sturdy vehicle for them. They do everything in that van.

I’d like to drive a domestic car to work, but I don’t. I drive a Honda with a 1.6-L engine, mostly on the highway where it gets about 38 MPG. It has 258,000 miles. I bought it at 182,000 miles for under $2,000. If I could find a domestic car that was comparable in terms of price, fuel efficiency, and reliability, I’d buy it. But so far, I don’t see any.

I heard recently that, in its last two model years, the Ford Escort was quite reliable – they finally worked out the bugs. So what did Ford do? They discontinued the model. If somebody knows of a domestic car comparable to my 1991 Honda Civic, I’d like to hear about it. Otherwise, I’ll buy another Honda.

Recently (and historically), Michigan Senator Carl Levin (D) and suburban Detroit Congressman John Dingle (D) have opposed more ambitious Corporate Average Fuel Efficiency (CAFE) standards for vehicles built in the United States. Nancy Scola describes how close Congressman Dingle is to the auto industry in this article at MyDD.

As bad as business has been for GM and Ford, I’m mystified why anyone would think higher fuel efficiency standards would hurt Detroit. Consider the following exerpt from a report on Ford’s latest earnings at theautochannel.com. Not only did they lose $12.7 billion (remember, all those UAW “legacy costs), they sold fewer vehicles.

“DEARBORN, Mich., Jan. 25 — Ford Motor Company [NYSE: F] today reported a 2006 full-year net loss of $12.7 billion, or $6.79 per share. In 2005, the company reported net income of $1.4 billion, or 77 cents per share….

Worldwide Automotive revenue for 2006 was $143.3 billion, compared to $153.5 billion a year ago. Total fourth-quarter Automotive revenue was $36 billion, a decrease from $40.7 billion a year ago…

Total company vehicle wholesales in 2006 were 6,597,000, a decrease from 6,767,000 in 2005. Fourth-quarter vehicle wholesales totaled 1,568,000, compared to 1,737,000 units a year ago.

So what is Ford’s plan to get back on its feet and how does it relate to fuel economy?

“We began aggressive actions in 2006 to restructure our automotive business so we can operate profitably at lower volumes and with a product mix that better reflects consumer demand for smaller, more fuel efficient vehicles,” said Alan Mulally, Ford’s president and chief executive officer. “We fully recognize our business reality and are dealing with it. We have a plan and we are on track to deliver.”

If the President and CEO of Ford recognizes that their cars need to meet the demand for “smaller, more fuel efficient vehicles,” then what’s the problem with higher CAFE standards?

In contrast to Ford’s troubles, here’s what’s been going on at Honda:

“TOKYO, Japan (Reuters) — Honda Motor Co. posted a smaller-than-expected rise in quarterly profit, helped by brisk sales in Europe and a weak yen that offset a dip in U.S. sales — where Honda could not keep up with demand — and nudged its full-year forecast higher.

Honda, which overtook Nissan Motor Co. as Japan’s No. 2 automaker last year, increased its full-year net profit forecast to 560 billion yen ($4.61 billion) from a previous 555 billion yen. Market forecasts are for 567 billion yen, according to Reuters Estimates.”

On his website, Senator Levin makes his case:

“When considering fuel economy, Senator Levin believes we should invest in “leap ahead” technologies like hybrid and hydrogen vehicles rather than spending our resources on incremental increases by ratcheting up CAFE standards. However, if CAFE is going to continue to be the instrument used, the discriminatory impact of CAFE that currently favors imported vehicles that are no more efficient than domestically produced ones should be ended.”

Wouldn’t ambitious CAFE standards incentivise “leap ahead” technologies? Furthermore, let’s look at how Ford and Honda compare with respect to fuel efficiency:

From a report by the US Department of Transportation:

2005 Model Year Fuel Efficiency (MPG)
Ford Domestic Passenger Vehicles 28.2
Ford Light Trucks 21.5
Honda Domestic Passenger Vehicles 36.7
Honda Light Trucks 24.8

Looking at the data, and listening to Ford’s own President and CEO, fuel efficiency is a winner. So why do two of Michigan’s most powerful men in Congress oppose higher fuel economy standards?

The United States currently imports about 22% of its oil from the Middle East. About half of this, 10 percent, goes to fuel U.S. cars and trucks. The other ninety percent of the fuel for cars and trucks comes from domestic or other foreign sources such as Canada, Mexico, and Venezuela. The United States could save nearly three times as much vehicle fuel as it imports from the Middle East if the nation as a whole could drive like the good people of Vermont. See additional information at Fuel Efficiency by State.

Vermont’s average vehicle fuel efficiency based on 2001 data was 23.54 mpg while the national median was 16.44. Driving vehicles similar to what they drive in Vermont would cut vehicle fuel consumption by about 30 percent.

So what do they drive in Vermont? What do we drive in the other states? For the educators in the audience, this might be a good research topic.