Diatribes of Jay

This is a blog of essays on public policy. It shuns ideology and applies facts, logic and math to economic, social and political problems. It has a subject-matter index, a list of recent posts, and permalinks at the ends of posts. Comments are moderated and may take time to appear. Note: Profile updated 4/7/12

31 March 2009

Rick Wagoner and Our Culture of Incompetence


Michigan Governor Jennifer Granholm has called fired GM CEO Rick Wagoner a “sacrificial lamb.” The wonder is how many think she’s right.

Read the posted comments to any news story about Wagoner’s firing, and you’ll find more than a smattering of two views. One sees the firing—in exchange for decagigabucks of government money—as a harbinger of Stalin and the Bolshevik hordes. Lock and load your rifle and prepare to repel the hammer and sickle! The other apparently comes from workers in the auto industry. Somehow, they believe that dismissing Wagoner is dissing their industry and their work.

But sometimes it helps to have a few facts before rendering opinions. Here, in tabular form, is what happened to GM under Wagoner’s “leadership:”

The Decline of GM under Rick Wagoner
BenchmarkBefore WagonerAfter Wagoner (today)
U.S. Market Share33.2% (1994)18.8%
Stock Price$70 (2000)$2 (3/31/09)
Cumulative lossNone (profit
for 1993-2005)
$ 182 billion

Here, reproduced from an earlier post, is a table comparing the percentage of tested GM cars recommended by Consumer Reports with similar percentages for Chrysler and leading Japanese brands.

Consumer Reports’ Share of Tested Vehicles Recommended
SubaruHondaToyotaGMChrysler
100%95% 89%17%
  0%

If you ran a business, would you hire or fire someone with this record? How bad does it have to get before you let a “leader” go?

When I was young, “The Age of Aquarius” was a popular song. Its message was that we were entering an era where everyone would get along. No one would shout or declaim, or, apparently, strive or fire losers. We arrived at that destination long ago. Today most of us live in Lake Woebegone, Garrison Keillor’s fictional town where “all the children are above average.”

Keillor’s mantra makes us laugh because we recognize its underlying truth. We routinely tolerate subpar performance and stupidity because we want to get along. We value self-esteem and personal harmony more than brains, competence and achievement. We have adopted a culture of mediocrity for the sake of feeling good. How else can you explain the public response to such a loser’s firing? How else can you explain the consistently poor quality of GM’s cars?

There’s also another lesson in Wagoner’s story. He spent most of his career at GM, but is he really a car guy?

To answer that question, read his biography. No doubt he’s a smart guy. But he has an undergraduate degree in economics and an MBA. He started his working life as a financial analyst. He proved good with numbers, so he rose to the top. As far as you can tell from his biography, he knows as much about engineering as does Carly Fiorina, who majored in medieval history and philosophy and, before she was fired, nearly did for HP what Wagoner did for GM.

If you think these are isolated instances, think again. Who ruined our economy? Financial gurus and their promoters. Then read Kevin Phillips’ brilliant book about the financialization of our economy. When you put financiers and marketers in charge of designing and building machines, you get cars like GM’s.

Some years ago, I met an up-and-coming young Chinese at an international conference. He was tall, smart and handsome, spoke good English, and stood ramrod straight. Obviously he had had military training. He was in charge of an important industrial office in government and on the rise.

In our country, an equivalent bureaucrat would almost certainly have been a lawyer. So I got curious and asked him his background. He trained as an engineer and had spent over a decade managing a big steel plant. Now he heads a national commission in charge of transitioning big state enterprises to private ownership and global competition.

In China, it seems, engineers run heavy industry. In our country, it’s lawyers, financiers and marketers. If you want to know why we’re losing the battle to keep our heavy industry competitive and on shore, you need look no further than that.

A guy like Wagoner will never know when his company is producing Rube Goldberg machines. He doesn’t have the background or the training. He probably doesn’t even know what he’s looking at when he pops open the hood.

How, pray tell, can such a man run a car company? His record is a testament to our financialized culture of incompetence. His retention, despite his long and sorry record of failure, reflects our Age of Aquarius.

Maybe our new President—our first post-Boomer commander in chief—can break the Aquarian spell. It doesn’t matter whether a politician or business leader breaks it, as long as someone does. If that spell stays in effect, our industrial and economic leadership will be history in about a decade.

P.S. (Update 4/2/09) If you want to see what happens in a country where engineers run the auto industry, not lawyers, financiers or marketers, read this.


Footnote 1: Wagoner took charge of GM’s North American operations in 1994, became COO in 1998 and CEO in 2000.

Footnote 2: Published at the height of the religious right’s power, American Theocracy has a misleading title. As the book’s much longer subtitle reveals, two-thirds of it focus on oil and political power and the transformation from a manufacturing economy to one based on pushing paper. In the last third, Phillips convincingly compares the declines of past empires to our own decline as we undergo that transformation. Whether we can arrest it remains to be seen.


permalink



Site Meter

29 March 2009

Rube Goldberg Machines on Our Streets


Rube Goldberg was a brilliant cartoonist who satirized Americans’ preoccupation with technology. He was (and still is) famous for drawing outlandish machines that work through complex and humorous chains of causation. His name came to stand for any absurdly complex device.

Today’s auto-industry executives wonder why sales of cars are off 50%. One reason may be what they make and sell.

The internal combustion engine (ICE) that powers cars today is a Rube Goldberg machine come to life. Nearly all of its complexity and expense are devoted to eliminating unintended consequences of its motive force: sequentially exploding fuel.

The ICE derives its power from a series of separately timed explosions of fuel and air. To capture their force, ICEs use reciprocating pistons. These devices must be finely machined and surrounded by special piston rings, so the hot explosive gases won’t escape around them. Because pistons only move up and down, ICEs use crankshafts to transform their reciprocating motion into rotary motion to power the wheels.

Now crankshafts are ridiculous-looking devices, with offset journals to which the piston rods connect and counterweights to keep the thing from vibrating. The forces they handle are considerable, so they must be made of specially hardened alloys and machined to exacting precision. Their bearings are so critical that they require continuous lubrication with circulating oil, which in turn requires a large oil reservoir and a separate oil pump.

And that’s just the beginning. Getting fuel and air into the cylinder and exhaust gases out requires hardened metal valves with precisely controlled motion. Controlling them is the job of another asymmetrical shaft with offset pieces, known as a camshaft, which pushes the metal valves inward against stiff springs. Its rotation relies on special gears and an adjustable timing chain for precision. Timing the actual explosions requires another whole system: spark plugs that make sparks to trigger the explosions and a “distributor” of electrical energy, geared to the main shaft’s rotation, to time the sparks precisely.

Now ignition sparks don’t come for free. They need electricity, a battery to store it, and an electric generator to charge the battery as the car runs and depletes it. In addition, ICEs require external power to “turn” them for starting, so they have special electric starter motors, solenoids that provide massive jolts of electricity for cold starts, and keys and ignition systems to switch on the solenoids and starters.

With all this complexity, the ICE is terribly inefficient. It converts less than 34% of the energy in fuel into motion; the rest it wastes as heat. To keep the wasted heat from destroying the engine, oil and coolant circulate through the cylinder block, moved by special pumps, to draw excess heat away. A water-based coolant, augmented by specially formulated “anti-freeze” compounds in cold climates, flows through a radiator, which vents heat into the atmosphere, where it is wasted and contributes minutely to global warming. The radiator requires a moving fan to boost air flow, which in modern cars has a solid-state-controlled motor and temperature gauge.

But that’s still not all. Even when working perfectly, the ICE is a recalcitrant beast. Its torque (rotary power) depends strongly on how fast the crankshaft is turning. So designers have to add a transmission, with a gearshift and some sort of clutch (manual or automatic), to change gears as the engine “revs up.”

Furthermore, when the car turns, each of two opposing wheels turn at a different speed. So the car needs a “differential” transmission on each axle to allow its wheels to turn at different rates without stressing the axle, wheels and tires. Since the rate at which the engine turns also determines the best fuel-air mixture, the engine needs a fuel injector or (in the old days) a carburetor to change the mixture as the engine “revs up.”

Finally, an ICE requires exhaust manifolds to take the burning exhaust gases out of the cylinders. The manifold leads the exhaust to a single pipe, which has a muffler to keep the still-explosive exhaust from hurting our ears. And if we want to get rid of the worst pollutants before they enter air we breathe, the muffler also must have a catalytic converter, which uses one of the most expensive materials known: platinum.

To sum up, a car’s ICE requires at least a baker’s dozen complete systems to ignite, control and time its sequential explosions, convert their power into rotary motion, and deal with all the undesirable side effects of excess heat and exhaust. Those systems are: (1) distributor, spark plugs and wires, (2) battery and generator, (3) pistons and rings, (4) valves, camshaft, timing gear and chain, (5) piston rods and crankshaft, (6) oil reservoir and oil pump, (7) coolant, coolant pump and radiator, (8) transmission and shifter, (9) differential transmissions for axles, (10) exhaust manifold and pipe, (11) muffler, (12) catalytic converter, and (13) starter motor, solenoid and ignition system to start the whole thing off.

With all these Rube Goldberg systems, it’s a wonder current cars work at all, let alone reliably.

In contrast, an electric car has two systems: (1) a battery and its solid-state controller, (2) one or more electric motors. The same motor(s) that power the car generate electricity as the car slows down and brakes, and a well-designed solid-state controller can put that power right back into the battery. Toyota’s Prius already does all this.

But unlike the Prius, which has a complicated variable transmission, fully electric cars have no need for any transmission at all. The reason: electric motors have a “flat” torque curve. They produce about the same torque throughout their total range of “revs.” That range is far larger than ICEs’ range because electric motors have nothing so asymmetrical and prone to vibration as pistons, connecting rods, a crankshaft or a camshaft. Since heavy-duty commercial electric motors achieve 80% to 90% efficiency, they have no need for coolants or radiators. And since electric motors are small and relatively cheap, designers can put one on each wheel, eliminating axles and axle differentials entirely while providing fully independent four-wheel drive.

Now imagine that you like simplicity and reliability. Which kind of engine would you prefer? Which do you think would be easier to operate and maintain? Which would be less likely to break down and cheaper to repair if it did?

Then imagine that, for most of the last century, designers had to use batteries based on lead—the heaviest non-radioactive, widely available metal—because they had no other technology. Imagine further that they had discovered how to make batteries with lithium, the third lightest chemical element. [Lithium (symbol Li, atomic number 3, atomic weight 7) is about fifteen times lighter per unit of power than lead (symbol Pb, atomic number 82, atomic weight 207).] Imagine that commercial production of electric cars with lithium batteries was imminent. Wouldn’t you want to buy one?

Now imagine that the world’s once-largest car maker (now number two) had promised to make an electric car and sell it in about eighteen months, and that most of the rest of the car industry—although a bit behind—had followed suit. Imagine that the price of fuel for ICEs had yo-yoed between less than $ 1 and $ 4 a gallon in the last four years alone.

Then imagine that you could buy a car that would run on electricity, one that wouldn’t produce any loud noise, smells, stains, carbon monoxide or noxious odors. Imagine that you could do your part to make us energy independent and to reduce global warming by buying one. Imagine further that you could “fill it up” in your garage, without ever going to a gas station. Imagine that [see chart at end] it could reach highway speeds as quickly as another small car and would take you where you need to go for work and routine chores. Wouldn’t you wait for one?

Of course the economy matters. Many people aren’t buying cars because the economy is collapsing all around them and they don’t know whether they’ll have a job or a home next month.

But maybe they’re also tired of spending huge amounts for their second biggest purchases (after their homes) on Rube Goldberg machines. Maybe they’re tired of being jerked around by gas prices that change every week, while the price of electric power stays constant or varies only slowly. Maybe they want to do their parts to curb climate change. Maybe they see the near future and are willing to wait for it.

If so, good luck to all the sellers of Rube Goldberg machines out there. Like sellers of horse-drawn buggies at the turn of the last century, they’ll need it.

P.S. Superfluous Rube Goldberg Machines

While the Obama Administration is considering how much bailout money to give GM and Chrysler, it might read the latest Consumer Reports. In a two-page article [subscription required] entitled “Who Makes the Best Cars?”, CR gives the world’s leading manufacturers report cards. It bases its grades on the average test score of each manufacturer’s tested cars, its extensive customer surveys of reliability, and the percentage of each maker’s tested vehicles that CR recommends.

Out of fifteen manufacturers listed, GM and Chrysler came in dead last, in that order. The percentage of tested vehicles that CR recommends was even more revealing, as shown in the following table:

Consumer Reports’ Percent of Tested Vehicles Recommended
SubaruHondaToyotaGMChrysler
100%95% 89%17%
  0%

The overall scores were similiar, with the leading Japanese makers in the mid-to-high seventies and GM and Chrysler weighing in at 57 and 48, respectively. (Ford came in fourth from last, with only motorcycle-maker Suzuki, which started making cars as a sideline, intervening.)

In an auto industry about to be creatively destroyed by new electric technology and environmental necessity, how much sense does it make to invest taxpayer money in cars that are not only Rube Goldberg machines, but the worst Rube Goldberg machines in the field? Electric cars will still need parts like tail lights, bumpers, mirrors and frames, so maybe the bailout effort should focus on parts makers, rather than makers of the very worst cars.

permalink



Site Meter

24 March 2009

Creative Destruction


[For a brief comment on the future of securitization, click here.]

It pays to listen carefully to really smart people.

Our huge, diverse land has many of them. For the last eight years they’ve kept their heads down, as hurricanes of mindless bombast roared by. Now that we have a really smart president, they seem to be popping up all over.

One of them is Eric Schmidt, Google’s CEO and an early Obama supporter. He strutted his stuff on Charlie Rose recently. He uses simple language—rarely a polysyllabic word. Yet his thoughts are uncannily precise and insightful. He speaks the way the best of us write after four or five drafts.

You could tell right away something special was going on. Uncharacteristically, Rose interviewed Schmidt before an audience of educated professionals, who reacted appreciatively. If you missed the show, you can watch it on line.

Toward the end of the interview, Schmidt said something simple but profound. If you have to survive a depression like the one now beginning, you’d rather be in America than anywhere else. Why? Because it’ll be “more painful, [but] you’ll get out faster.”

I didn’t fully appreciate Schmid’s sagacity until the next day, when I read a New York Times article headlined: “Job Losses Hint at Vast Remaking of Economy.”

Industrial economist Joseph Schumpeter was another really smart man. He described capitalist innovation as “a perennial gale of creative destruction[.]”

Many people have quoted that marvelous phrase, but few understand it fully. It means there are two sides to the coin: creation and destruction. You can’t have one without the other. Old industries and ways of life must die so that new ones can be born and thrive. Destruction and dying are painful but necessary companions to creation. They are the pain to which Schmidt referred.

Schmidt’s optimistic prediction—that the pain will be severe but brief—depends on us heeding Schumpeter’s warning. Unfortunately, we Americans have become soft: we wince at pain. As a result, vital sectors of our economy have put their creative destruction off far too long. So now they need a much bigger dose of it, and the result will be more painful.

Although we invented nuclear power, over half our electricity still comes from burning coal—a nineteenth-century technology that is destroying our biosphere. For transportation we depend almost totally on oil, an early twentieth-century fuel that (in economic terms) is rapidly becoming scarce. For health care, we rely on outmoded and failing private markets that all our trading partners have abandoned.

Not only that. Our private markets in health care leave 47 million “customers” unserved. Aren’t shortages and rationing supposed to be consequences of socialism and central command, not capitalism and free markets? We’ve turned capitalist economic theory on its head, and no one even noticed.

Our auto industry is another example, if one were needed. While the Japanese introduced the Wankel engine and hybrid technology, our car industry has introduced no basic advance in propulsion technology in over fifty years. Now we wonder why it’s going under.

Why have we let these failing industries linger so long? The reason has nothing to do with capitalism. They’ve entrenched themselves far beyond their technological or market merit by subverting government to their own ends.

For most of a century these three basic industries (fossil fuels, autos, and health care) have enjoyed massive direct and indirect governmental subsidies. Not only have they been mostly free from reasonable regulation; their rivals have often been more heavily regulated. What was the taxpayer-built Interstate Highway System but a massive subsidy to the automobile and fossil-fuel industries? As for regulation, these industries paid few, if any, of the costs they impose on society through pollution, climate change, economic waste and (in the case of health care) lack of prevention, belated treatment, needless suffering and death. They all have been favored children of government, maintaining their predominance not through free markets, but though lobbying, political contributions and other forms of special influence.

Since government has always been part of the problem, it has to be part of the solution. For decades it has favored these industries in ways big and small. It has postponed their inevitable destruction without regard to Schumpeter’s capitalist credo. It’s past time for them to exchange the government-rocked cradle for the coffin.

Our banking meltdown and collapsing general economy leave no alternative. Government must help jump-start creative new industries to replace the ones we’re losing because, in an imploding economy, no one else can. Only government can help young industries give us electric cars, rapid transit and the windmills, solar energy and safe nuclear energy to run them, as well as smaller, denser planned communities (with well-staffed local health clinics) that use them more efficiently, so as to preserve our clean air and our biosphere.

One of my favorite stories of resistance to change comes from the steam-engine era. After watching a steam locomotive reach the unheard-of speed of twelve miles an hour, a newspaperman was inconsolable. Such vicious velocity, he wailed, would destroy our way of life by frightening the horses.

Some people resist inevitable change; others embrace it. In the final analysis, that may be the most salient difference between Republicans and Democrats. A few weeks ago one Daniel Henninger of the Wall Street Journal huffed:
“There isn’t much in [the President’s] plan to stir the national soul. It’s about ‘sacrifice’ now so that we can live for a future of small electric cars and windmills.”
If saving our biosphere, achieving energy independence, and exchanging stinky, cantankerous cars for smoke-free ones that run more cheaply and more reliably, and that you can “fill up” from a plug in your garage, doesn’t stir the soul, I don’t know what will. As I read Henninger’s words, I mentally added “and give up our horses.”

Henninger also failed to note a few minor relevancies. First, the world is running out of the oil on which we depend utterly for transportation, so sacrifice is inevitable. Second, the economic laws of demand and supply inelasticity, which Wall Street Journal pundits ought to know, decree ever-increasing prices for oil, as soon as the global economy starts to recover. Third, he failed to mention that it takes millions of years for Nature to make oil, and we humans need all we’ve got as feedstock for chemicals, fertilizers and plastics. Finally, he failed to note that profligate burning of fossil fuels is changing our climate and destroying our way of life far more dramatically than the disappearance of horses or the decreasing popularity of SUVs and muscle cars.

As always, our youth will save us from ourselves. Is there any wonder that they favor the President and his visionary program by substantial margins? Youth understand the power of creative destruction because applying that power and achieving both destruction and renewal are their eternal role.

Resurrecting Securitization

Today’s Paul Krugman column raises a vital question: will the resurrected system of loan securitization that Tim Geithner plans look more like Christ risen or a vampire emerging from a coffin?

As you may recall, securitization is the process of “bundling” loans and selling the bundles to get the loans off the lending institution’s books. It also has another purpose: slicing and dicing the bundles allow financial firms remote from the lender to separate various levels of risk and, by placing bets on those levels, presumably to control risk better.

You may also recall that this theory didn’t work. Instead of helping Wall Street to manage risk better, it encouraged extreme leverage and rampant gambling, which ultimately crashed the entire financial system.

Krugman is unequivocal about his conclusions. “I don’t think the Obama administration can bring securitization back to life,” he writes, “and I don’t believe it should try.”

Oddly enough, Warren Buffet said much the same thing (albeit in different words) about derivatives just a few weeks ago. In his much-awaited annual letter as CEO of Berkshire Hathway, he wrote:
“Improved ‘transparency’—a favorite remedy of politicians, commentators and financial regulators for averting future train wrecks—won’t cure the problems that derivatives pose. I know of no reporting mechanism that would come close to describing and measuring the risks in a huge and complex portfolio of derivatives. Auditors can’t audit these contracts, and regulators can’t regulate them.”
Until I read Krugman’s column today, I was deeply skeptical of securitization but still agnostic. It does leverage funds available to lend, thereby potentially loosening credit, which is tight right now. But clear and strong opposition from a Nobel Prize winning academic economist and the world’s smartest investor caused me to rethink.

To me, the crux of the matter is moral hazard. A wise lender knows her borrower. If a bad decision stands to lose her money, she will be careful. But securitization whisks the risk away from the lender to some remote office on Wall Street. Not only that: by bundling hundreds or thousands of loans together, it makes the risk of each seem negligible, even though the whole is nothing more than the sum of the parts.

Maybe this wouldn’t matter if people were dispassionate, rational computers. Then Wall Street could accurately assess the risks of each loan in a bundle and add them up.

But people are not computers, and that’s not what actually happened. Instead, people at every level—lenders, securitizers, sellers of securities, and insurers through credit-default swaps and other sophisticated instruments—had incentives to increase throughput and underestimate risks. The final link in the chain, the rating agencies, had incentives to rate high (to increase their fees) and disincentives to accuracy (because no one had ever devised a good mathematical model for a bubble popping). The results we see in shambles all around us.

Unlike computers, people need to feel a sense of personal responsibility to do the right thing. Securitization ignores that very human element. It is the financial equivalent of saying to troops in Afghanistan, “If you lose courage or screw up, your buddy next to you won’t be hurt, but some guy you once knew in high school might.” No one would run an army that way, and no one should run a financial system that way, either.

To do its work, moral hazard has to be felt and tasted. Securitization prevents that from happening. It takes the consequences of lending decisions to some remote office far away. To make that sort of system work well, you’d have to change not just regulation, but human nature.

So I add my small voice to Krugman’s and Buffet’s megaphones. Let’s make banking stodgy and boring but reliable again. Then let’s get back to the serious business of reforming our basic industries. If we put all those misdirected financial brains back to work doing something productive, who knows what we might achieve?



permalink



Site Meter

23 March 2009

TITLE AND SUBJECT INDEX TO POSTS (CURRENT AS OF 1/23/17)


NOTE: For technical reasons, the date of this index (above) is wrong. I try to keep it current, usually within two months. For more recent posts, click here.

HOW TO USE THIS INDEX:
    IF YOU KNOW THE POST’S TITLE, search for the title (or its key words) using your browser’s “Find” feature (usually Ctrl-F or Cmnd-F) IF NOT, review the Subject Index below and find the post under the appropriate heading, in alphabetical order. (Many posts are classified under multiple headings, so be patient: there are over 900 essays, with most classified several times.) You can also use Google’s search engine, on the extreme top of any page, to search for key words outside post titles, but it will only find the most recent post with those words.
[NOTE TO READERS: This index previously appeared on the blog’s home page, along with the most current post. But it got too long and unwieldy for Google’s template page and so was moved here.]

SUBJECT INDEX
[New Category—Morality—added 4/28/13]
American Culture (See also Gender and Sexism, Race and Racism, Texas)
The Auto Industry
Barack and Michelle Obama [For topical matters relating to the campaign, see Politics.]
The Computer Industry
The Constitution
Donald J. Trump [Added 1/23/17]
The Economy
Energy Policy [see also, Global Warming]Faith and Public Policy
Foreign Affairs
      International Trade
      Other General Topics
      Afghanistan and Pakistan
      Arabian/Islamic Liberation (See also Libya)
      Bush Administration
      China
      Diplomacy
      The European Union
      Iran
      Iraq
      Islamic State [new 10/5/14]
      Israel
      Libya
      North Korea
      Al Qaeda
      Russia
      Saudi Arabia
      Syria
      Turkey
      Ukraine
Gender and Sexism Globalization Global Warming Health Care The Media and Their Performance The Military and Intelligence Politics
Race and Racism Texas permalink