It’s Not the Debt, It’s the Spending

Politicians hold the truth dear. So dear, in fact, that they believe that the truth should be used in only the rarest and most extreme circumstances; and then to the minimum extent possible. To a politician, language is a finely nuanced tool that is to be manipulated so that the public may, in turn, be manipulated.

Over the years I have watched politicians twist the English language in ways that only the makers of Silly Putty would envy. But, I have never seen more lies, half-truths, and distortions than during the current debate over raising the debt ceiling,

The biggest lie of all is the statement from the Obama administration that the government will default on its obligations if the debt limit is not increased by Aug. 2^nd. An increase in the ceiling of at least $2.4 trillion would be needed to push this issue past next year’s presidential election and that, of course, is what the White House is demanding.

Default is a very specific financial term. It occurs when a borrower fails to make a scheduled payment (of principal or interest) on a debt obligation.

If the U.S. were to fail to make interest payments on its outstanding debt, borrowers would immediately demand much higher interest rates to compensate them for the untrustworthiness of the federal government. In that case, the interest payments on the $14.3 trillion in national debt could increase overnight from about $250 billion a year to more than $1 trillion (roughly half of all tax revenue would be needed just for interest).

The increased interest rates would flow through the economy affecting mortgages, car loans, consumer credit, and the costs of capital investment. What many people feel is the never-ending recession would become the never-ending depression.

The threat is scary. No sane nation would ever allow this to happen if there were any way to avoid it. The consequences are devastating. That is why it is so tempting to use this threat as a negotiating tool. But, it is a very dangerous negotiating tactic that rests upon misleading the American public.

Each month, the federal government receives about $175 billion in tax revenue and spends about $300 billion. (The difference is made up with borrowed money.) Interest on the debt is a bit more than $20 billion each month. The Secretary of the Treasury, as directed by the President, has complete flexibility in deciding which obligations will be met from the tax revenue on hand, and which must be paid from increased borrowing.

There is language in the 14^th Amendment to the Constitution (Section 4) and supporting Supreme Court decisions that many legal scholars believe require the government to pay its debt obligations before any other. But, even if that were not the case, there are adequate funds available for the government to meet its debt payments and avoid a default even if the debt ceiling is never raised.

Three simple words from the President to the Secretary of the Treasury would reassure financial markets and guarantee that the United States would never default on its debt obligations. Those words are: “Pay interest first.”

But, saying those words would take away negotiating leverage for the real issue at stake: continuing to spend money that the government doesn’t have.

If the American public understood that default was not going to happen, and the only issue was the government spending less, much of the urgency to raise the debt ceiling would be lessened.

If the government were not allowed to borrow new funds, it would have to cut back on planned spending by about 40 percent, starting in August. Spending would have to be cut back by $125 billion for August alone. Spending in September, October, and coming months would also be reduced by a like amount.

With only enough revenue to pay 60 percent of the bills, choosing which bills would be paid and which would not be paid would be difficult, controversial, and highly revealing of the government’s priorities; situations politicians dread.

Slamming on the spending brakes while the train is going full speed would cause many issues and problems. But, none of them would be related to financial default.

The politicians want to link the two issues. They want us to believe that financial catastrophe is imminent unless we raise the debt ceiling so that we can keep spending money. And they want the limit raised sufficiently so that they can continue to borrow beyond next year’s elections. But, in reality, the issues are not linked.

Is this leadership? Or, is it mis-leadership?

Evil Oil

I just filled up my car’s gas tank. Like everyone else, I cringed when I saw the final price. It hurt.

Really, it did. Economic theory discusses a concept called the “pain of paying”. In perfect theory, the reluctance to spend a dollar should be the same for every dollar spent. In practice, some dollars are much harder to spend than others.

When it is obvious that we are giving up something, such as paying in cash, an MRI of the brain at that moment will show that the brain’s pain centers are being activated. (These tests have actually been done.) When the payment is less obvious, such as a credit card, the brain’s reaction is less intense. We know that it is costing us intellectually, but it doesn’t feel like spending, so we don’t care as much.

The government understands this principle thoroughly. That is why the vast majority of all taxes we pay are hidden in something else. Read your phone bill or the small print on your pay stub sometime.

But, back to gas. Gasoline is the only thing we buy that has its price posted in large numbers on almost every street corner. As we pump it into the car, we watch the price race up with each brightly lit penny being added to all the pennies before.

It’s not the swipe of a credit card, or even the rustle of a bill, it is a flashing number that screams: you are paying for this! It becomes the symbol for the unease we feel about our country’s future.

So, it really hurts, and people are reacting to the pain. With no shortage of oil in the world, it seems as if these price increases are coming from out of the blue. People understandably want to know why.

The politicians are quick to answer. It’s all the fault of greedy oil companies and even greedier speculators. If we just find some way to tax and regulate them more, we will all be happy for the rest of our lives. Of course, the politicians won’t bother explaining how raising the cost of producing gasoline will lower its price.

If you pin them down, they will point their fingers toward you. For the iron law of politicians, embedded deep in the DNA of everyone who has ever hogged a microphone is the credo that has been borrowed by the CIA: “Admit Nothing. Deny Everything. Make Counter-Accusations!" Nothing is as important as finding an excuse to raise taxes and increase government power.

What’s really happening? Gasoline prices are the product of a very complex interaction of many different factors, many different types of oil, and constantly shifting demand.

Before looking at those factors, the first, most important, concept is that the price you pay today represents an estimate of what the price will be in the future—not the costs of the past. The refiners, who are the ones who convert oil into gasoline, must replace the oil they use with new oil so that they may continue to make gasoline. They must price the gas at a level that will allow them to buy a volume of oil that will replenish their supply; regardless of what they paid in the past. This is not speculation. It is a requirement to stay in business.

The second important concept to understand is that, after the cost of oil, taxes represent the next largest component of gasoline prices. At current prices, greedy, selfish oil companies make about 8 cents profit per gallon, and the loving, friendly government about 60 cents; 750% more. And, since taxes are based upon a percentage of the price, the government’s take will increase as the price increases.

But, setting taxes aside (I wish I could.). What are some of the more important strategic considerations that drive up the expected price of oil?

The first is that oil is priced in U.S. Dollars, wherever in the world it is bought. In the last three years, the value of the dollar has fallen by about 15 percent. As a result, the dollar has fallen from the second strongest currency in the world, after the British Pound, to the sixth. It is now worth less than the Euro, the Swiss Franc, the Canadian Dollar, and the Australian Dollar. Even if nothing else affected the price of oil, it now takes more dollars to buy a barrel than it did just a few years ago.

Indeed, the outlook for the U.S. economy and currency is so doubtful, that a number of the leading nations are actively considering no long using the dollar as the world’s reserve currency. If and when that happens, prices of every import—including oil—will skyrocket.

Another major consideration is the domestic supply of oil. Now that the technology for extracting shale oil is becoming economically feasible, many estimate that the U.S. has at least a 200 year supply of oil reserves. Natural gas also offers huge, long lasting supplies of energy for the country. But, Washington has steadfastly refused to allow increased domestic production of oil and gas. Because there is a significant lead time for developing these resources, even if the politicians reversed course, it would be years before the increased supply had a significant impact on domestic prices.

That means that the U.S. will continue to be dependent upon energy supplies from politically unstable parts of the world. The Middle East is currently more volatile, and its future is more uncertain, that at any time in living memory. It is far too soon to know if the so-called Arab Spring will sprout beautiful tulips or thorn bushes of hatred and violence. There are certainly many forces in that area that embrace the latter world view.

Neither Washington nor Europe has shown any signs of understanding what is going on in that part of the world, or how to influence it. Leading from behind does not give one confidence that a secure path will be followed.

Imagine if you had to set the price of gasoline at a level that would ensure sufficient supply in future. The currency you use is getting weaker and every indicator is that it will weaken further. There is no realistic increase in domestic production in the future. The oil that is available comes from an area that is unstable and insecure and becoming more so. You have no control over these factors and the politicians who do are ignoring them. What would you do?

That’s right. You’d blame evil oil companies and then go off looking for another good deed to do.

Great Bumper Sticker

Just saw this bumper sticker:

"When everything is free, will I still have to work?"

The World Turned Upside Down

The World Turned Upside Down was a popular Revolutionary War song. Reportedly, it was played as General Cornwallis surrendered some of the finest troops in the world to a rag-tag army of colonials at Yorktown, Virginia, in 1781.

A ghostly whisper of that song could be heard in the background of last week’s minuet over minor reductions in current year federal spending.

The nature of American politics has changed dramatically, and the politicians are the last to see it.

Until WWI, service in the federal government was part time. It was routine for members of Congress and the senior officials of the Executive Branch (to include the President) to take at least six months of vacation each year. Shortly after that, during the Great Depression, politicians learned that they could win popularity by spending other people’s money. For some reason, the electorate never made the connection that the goodies they were receiving from the government were being paid for by money the government had taken away from them.

No political sacrifice is too great to win popularity and stay in office, so the full time Congress was born. After all, if a little bit of spending is good, a lot of spending must be better.

In the decades since, the politicians have made popularity from the spending machine even more productive. They discovered borrowing. Previously, Washington had approached debt as you and I do; a way of meeting a pressing need and something to be repaid. Indeed, the historical view of debt was expressed most clearly by President Thomas Jefferson, when he said:

“I ... place economy among the first and most important of republican virtues and public debt as the greatest of dangers to be feared... And to preserve independence, we must not let our rulers load us with perpetual debt. We must make our election between economy and liberty, or profusion and servitude.”

How old fashioned. Spending more each year than the government receives in revenue allows the politicians to maximize their popularity and let others in the future worry about paying for it. As President Herbert Hoover said, only partially tongue-in-cheek, “Blessed are the young, for they will inherit the national debt.”

The other tactic to hide the cost of government largess from the voters was the semantically brilliant concept of progressive taxation. Just as the Paris mob would shout “death to the aristos” during The Terror, their modern counterparts shout “tax the rich”. And, just as the doomed aristocrats dared not protest for fear of further political prosecution, today’s successful people are equally cowed into silence.

As a result, 40 percent of all federal income taxes are now paid by those in the top one percent of income. Some 98 percent of income taxes are paid by the top 50 percent of wage earners. Half of all Americans pay no income tax at all. Indeed, many receive “rebates” on taxes they never paid. They have no idea of how much government costs and do not participate in paying for it. To them, it is just a huge cookie jar full of never ending free goodies. But, they vote. And, that is just the way the politicians want it.

Unfortunately, that well has run dry. Taking 100 percent of wealthy people’s income won’t make a dent in the financial problems we face. But, expect to hear cries to “tax the rich”. Bad habits are the last to die.

For decades, a style of politics has emerged which is based upon unlimited spending to buy popularity. That spending has created interest groups whose existence depends upon federal spending. Alliances between the politicians and the interest groups have generated campaign contributions that help the politicians stay in office, so they can keep the spending coming. A closed loop of mutual reinforcement has been created that continually pushes spending upward.

This has become so pervasive that politicians of both parties have had to play the game, and build a “bridge to nowhere”, or be defeated.

The cost of spending now and paying later has finally caught up to our nation. In 2006, when Senator Barak Obama declared that raising the debt ceiling was a failure of presidential leadership, and voted against it, the total national debt was $3.5 trillion. Today, with President Obama, the debt is $14.2 trillion, growing at almost $5 billion per day, and scheduled—under President Obama’s budget—to grow to more than $22 billion in less than ten years.

With only a slight increase in interest rates, the interest on that debt could very well crowd out virtually all government spending in the future. We will all pay taxes, but all of it will go to pay the debts that have been incurred to buy votes in the past. The cookie jar will be broken.

Some of the new Republicans understand this. The only way to save the country is to end deficit spending; now, not tomorrow, and begin to pay off the debt while we still can. The rest of the Republicans, and virtually all the Democrats, see no need to change the basis of politics that has worked so well for the last six decades. Spend today and ignore the future has always worked, why won’t it work forever?

Government does not create wealth. The teenage girl who babysits, the boy who mows a lawn, and every other facet of the private sector create wealth. Government consumes what they create.

Members of corporate boards of directors have a legal an ethical standard to exercise their power wisely in the use of their company’s assets. Failure to do so could land them in jail. Members of Congress have no such legal or ethical standard requiring them to be wise stewards of our national resources. They have used their power to further their own careers, not protect the nation.

The debt crisis has turned their world upside down. From now on, the successful politician will be one who is seen as a wise steward not a spendthrift; one who places the needs of his constituents before his own need for power. I doubt that many now in office will be able to make that transition. And, if we lose those who can’t, the nation will be better for it.

Let’s Open Our Eyes

Patrick Henry, who most famously cried, “Give me Liberty or give me death!”, also said: “It is natural for man to indulge in the illusions of hope. We are apt to shut our eyes against a painful truth, and listen to the song of that siren till she transforms us into beasts.”

Illusions are so comforting. As long as we can cling to them, we don’t have to face the unpleasant world—or ourselves. Have you, like me, ever told yourself that a snack is OK because you can cut back on calories later? For some reason, later never seems to arrive and the waist keeps getting bigger.

The more successful you have been, and the more power you have, the easier it is to fall into the trap of doing the easy thing now because you can always fix it in the future. The fly diving for the sweet nectar of the Venus Fly Trap hasn’t the slightest doubt that he will be able to fly away after the feast. Yet, the outcome is always the same.

Politicians are the Grand Masters of living a life of illusion. Regardless of political party, they are men and women who have devoted their lives to creating an illusion about themselves in order to win elections. And, since the payoff in politics is always short term, the most compelling thing for them to do is ignore the future. Grab the instant prize; someone else will fix it down the line.

For many decades, some of the most intelligent and articulate people in the country have promoted the concept that the government is a huge candy bowl. Washington is the source of never-ending free goodies that don’t have to be paid for. And, the country has bought into it.

There is only one problem with this. The United States is bankrupt. The government cannot afford to keep the promises it has made to the American people. This is beyond dispute among those who have taken a serious look at our country’s financial situation. Yet, our elected leaders continue to shut their eyes to this painful truth.

Before Libya pushed financial news off the front pages, much was being made about the dramatic showdowns between the Republicans and Democrats in Congress. The former wanted to cut $61 billion from this year’s budget. This amount represents 1.6% of the total spending projected for the year, and only 3.7% of the projected budget deficit. The median (half above and half below) household income in the U.S. is $46, 326. A spending cut of this magnitude would be about $740 for the year for a family. Most of us have done more than that, but the mere prospect makes swooning politicians reach for the smelling salts.

The Democrats are using every weapon in their formidable arsenal to resist those cuts by portraying them as extreme and irresponsible.

Neither side is serious. The debt is rising by about $5 billion a day, or about $3.5 million a minute. In that context, the $61 billion that the Republicans have set as a goal represents only about 12 days of borrowing. If the Republicans succeed, the national debt by the end of September will approach $16 trillion. If the Democrats succeed in avoiding any further cuts, the national debt by the end of September will approach $16 trillion. The difference in their positions, in relation to the total debt, is about 3/10,000,000.

Today, the U.S. has some $14.2 trillion in public debt. (This does not include the more than $100 trillion in future year financial obligations it has assumed.) President Obama’s proposed budget projected that the public debt will rise to some $19 trillion by 2021. Just a month after making that projection, the independent Government Accountability Office estimated that the debt would be $2.7 trillion greater than forecast by President Obama; or, almost $22 trillion. (Historically, every single five and ten year forecast of the growing debt has been low. The Congress always spends more money than expected. I believe that, if we continue on our current path, the debt will be much more than $22 trillion.)

But, let’s assume that the forecast is right this time and the debt will be only $22 trillion in ten years. The interest payment, at the current weighted average rate, would be about $420 billion in 2021. This would be only slightly less than the amount projected to be spent on all non-defense discretionary spending.

Rates are almost certain to rise from today’s historic lows. The average interest rate on public debt over the past 30 years has been almost four times greater than it is today. If rates rose to that 30 year average, we would pay almost $1.6 trillion just for interest on the debt in 2021. That is equal to the total amount projected to be spent on all discretionary spending in 2021, to include defense and security.

In short, over the next ten years, we could shut down every single cabinet agency (including defense), close every single government program except entitlements, fire more than 4 million civilian and military personnel, and still save only enough to pay interest on the debt.

But, interest rates are likely to be much higher than in the past. Inflation is beginning to come back. Oil and food prices are rising dramatically, and like Ole Man River, the Fed just keeps rolling (printing money) along. If inflation drives interest rates to the levels seen in the late 1970’s, then the amount needed to service the public debt will approach the total projected tax receipts.

Under this plausible scenario, we could eliminate all government activities across the board, including entitlements, and still collect only enough taxes to pay interest on the debt.

The answer isn’t to raise taxes. We can’t raise them enough without destroying the country. We can’t print more money without igniting hyperinflation. The only answer that works is to cut spending. We must stop increasing the debt. That means no more budget deficits. Starting now. Not sometime in the future.

I don’t know what the future will bring. But, I do know that our country cannot survive with the federal debt burden that we already have. Continuing to increase it merely drives more nails into the national coffin.

The Obama Administration ignores this and projects deficits and increasing debt as far as the eye can see. The Democrats cling to their illusions. The Republicans, on the other hand, talk about responsible change but, so far, have not done anything serious about it.

This is not unique to America. Throughout history, whenever a country has faced an overwhelming debt burden, the politicians have acted as if they are somehow exempt from the consequences of their actions. They continued to tax, borrow, and spend their way into a financial collapse of their country.

There is an old story about the sinking of the Titanic. When the ship hit the iceberg some chunks of ice fell onto the ship’s deck. Some of the wealthy party goers, confident that no harm could ever come to them, reportedly broke off bits of the ice and used it in their drinks. They partied while the ship sank. I don’t know if that is a true story. But, if it is, the tuxedoed gentlemen and their ladies must have been politicians.

It may be good political theater to appear to be fighting. And, the tinkle of a bit of iceberg in one’s whiskey might be charming, but the ship is sinking and those we elect to represent us don’t act as if it is a real problem.

Unless You Know Where You Are Going, You Can’t Get There.

In 1992, Vice Admiral James Stockdale was Ross Perot’s running mate for President. In the Vice-Presidential debate he began his comments by saying: “Who am I? Why am I here?” He was greeted with laughter and near universal scorn in the media. They opined that anyone so naïve as to ask these questions clearly wasn’t qualified to be Vice President. A professional politician would never expose himself to such a question.

As usual, it was the media that was clueless. Stockdale was not a politician. He was one of the most highly decorated naval officers in history. As the senior POW in the infamous Hanoi Hilton, he survived seven years of torture and near starvation. In the process, he set an example of character, integrity, and leadership that gave hundreds of other POW’s the strength to survive. He was awarded the Medal of Honor for his courage in captivity.

Even more important than a medal, however, was the impact he had on those who followed his example in prison. They took those lessons home with them and, as changed men, had an impact on others. No one will ever know how many thousands of people today are stronger because of the character of one man whose body was broken, but whose spirit was untouched.

Stockdale was able to do this because he had asked himself the questions: “Who am I? Why am I here?”

Many of us are as clueless as the media’s understanding of Stockdale.  Business text books say we should have a mission statement. Most organizations ignore the need for it. Many executives dismiss it as a meaningless bureaucratic exercise. As El Bandito said in the “Treasure of Sierra Madre” when he claimed to be a policeman, “We don’t need no stinking badges!”

Other organizations go through the motions and produce a mission statement that is so general that it doesn’t say anything and that everyone ignores. They merely prove that the cynics are right. They waste the organization’s time and delude themselves.

No one would think of getting into a car and start driving without knowing where they are or where they are going. Yet, that is the way they run their organizations.

Leadership is not possible unless you can bring people together to work for a common purpose. An effective mission statement that is actually used within the organization is one of the single most important tools on building an understanding of who are we and why are we here. It builds a common sense of purpose. It establishes a common standard of behavior that allows the organization to evaluate its effectiveness.

Without a common sense of purpose, an organization can never excel. Without it, an executive becomes a herder of cats and not a leader of a team.

Below is the mission statement I use for my own organization (a consulting firm). Like everything, it could be improved, and we are always seeking to do so. It has become an important communications and team building tool. I urge you to look at what you are doing in your own organization. If you haven’t invested the effort to answer Stockdale’s questions, how can you ever reach your full potential?

Here’s my mission statement:

The Austin Group exists to support its clients. Our mission is to take a genuine interest in our clients, understand their objectives, and meet or exceed their expectations. We dedicate ourselves to these values: 

• For our clients, we will work hard, provide superior services on a timely, effective, and efficient basis, and maintain the highest standards of professional integrity.
•  For our office, we will foster an enjoyable working environment, based on open
  communication and mutual respect, and will encourage initiative, innovation, teamwork, and loyalty.

Only in Washington

Politicians speak English. Sort of. They use the same words we do, but give different meanings to them. For example, increasing spending by less than the amount forecast is called a budget cut. You and I, seeing that the amount of spending has increased, would call it a spending increase. How silly of us not to recognize that the increase is really a decrease and a bold act of political leadership.


In the 2012 budget released this week, President Obama proposes to freeze federal non-defense discretionary spending for five years. He claims that this will “save” $400 billion in spending. But, remember, this is Washington Politico-Speak. Actual spending will not be reduced in spite of the claims. It will remain at unprecedented levels. This category of the budget has increased by almost 50 percent in the two years the Obama Administration has been in power.

This is like a man who begins to eat two desserts after every meal. His doctor tells him that the weight gain is unhealthy and that drastic action is needed to avoid catastrophic problems. The man then announces that he will freeze his eating habits at two desserts per meal and not increase to three deserts. He then calls this a bold diet and claims that the extra weight that the third dessert would have caused is really a weight loss.

Only in Washington . . .

The media is now consumed with the looming fights over entitlement spending. Bringing entitlements under control is essential to long term financial health for our country. The debates on how to do this will take time as a national consensus emerges. But, significant actions to reduce the deficit and resulting debt can be taken in the meantime.

Almost all of the record deficits of the last two years has come from the huge increase in discretionary spending, not entitlements. For more than two centuries we grew and prospered without our government eating two desserts after every meal. The current level of spending is an aberration, not the norm.

Huge savings, simply by returning to the levels of discretionary spending that existed just two years ago, are available if we use American English to address the problem, and not Washington English.

Chrysler Bailout *

Automaker Chrysler is facing bankruptcy. Its executives come to Washington to ask for a government bailout. The United States economy is in recession. Sound familiar?

But the year was 1979. Lee Iaccoca was Chrysler’s CEO. And the amount granted in the form of guaranteed loans was a mere $1.5 billion. “They spend that much on paperclips for bailouts nowadays,” quipped Michael A. Driggs, who was involved in the first Chrysler bailout. He spoke at a Legal Affairs Committee luncheon on April 22.

Mr. Driggs, an examiner at the Office of Management and Budget at the time, was tapped to head the Chrysler bailout. As executive director of the Chrysler Corporation Loan Guarantee Board at the Department of the Treasury, he reported to three superiors: the Treasury secretary, the Federal Reserve chairman, and the comptroller general. There was no task force, as is the case today.

Chrysler, he said, asked for government loans. But the board agreed only to guarantee company bonds. The bonds were redeemed by Chrysler in 1982. Moreover, the government made a return of $350 million from the sale of warrants it received in return for the guarantees.

Unlike today, when the chairman of troubled General Motors was compelled to resign, the government did not fire Chrysler’s officers or impose its view on what products the company should make. Again, in contrast to today, the government did not show favoritism toward any of the stakeholders in Chrysler. Instead it forced the corporation to come up with its own plans for survival. “Chrysler would come in with a plan. And we’d say, ‘Not conservative enough. Try again.’” Once, he disclosed, they even threatened to force the company into bankruptcy if Iaccoca did not agree to a more realistic plan.

Chrysler continued to be troubled. In 1998 it merged with Daimler, a stormy relationship that ended a decade later. Today it is faced with a merger with Fiat.

Mr. Driggs lamented the fact that the government has apparently not learned from the first Chrysler bailout. The Carter administration and the Democratic-controlled Congress had already had experience bailing out companies like Penn Central and Lockheed. “They knew the seductive addiction of federal subsidies without conditions – or linked to political considerations rather than economic realities. This pool of experience has been lost to our government, perhaps because as a country we do not remember our history well.”

But the speaker speculated that today the government has invested so much money in Chrysler ($4 billion in government loans granted last December and $6 billion more requested) that it can’t readily pull out and follow the formula he and his board established 30 years ago.

*The above is an article that appears in the monthly newsletter of The Cosmos Club, Washington, DC, describing a speech I gave at the club. (Michael Driggs)

Act 1: Bush Sets the Stage for Obama

On December 19, President Bush offered GM and Chrysler $17.4 billion in loans, $8 billion of which could be issued as early as December 29. It won’t be enough. These companies must not only weather the downturn in the auto market, they must significantly restructure in order to be competitive in the U.S.

Time is the variable. No one can predict with certainly just how long it will take the auto market to recover. Until the market returns, all auto manufacturers, dealers, and suppliers—not just the Detroit 3—will struggle. It will also take time to restructure. Time to negotiate new arrangements with lenders, suppliers, and labor. Time to change the product mix. Time to streamline the manufacturing process. And, time to for all these changes to take effect.

For 30 years, the U.S. manufacturers have been on a steady downward spiral in the U.S. market. Since the oil shock of 1979, they have been losing market share and per unit profit margin to foreign car makers. They have tried to adjust. To cite just one example, their workforce has declined from 1.1 million employees in 1979 to about 250,000 today. But, they have been chasing a moving target. Every improvement in quality, product offering, and manufacturing efficiency has been matched, or exceeded, by the foreign manufacturers (even in their U.S. operations).

They had plans to continue to adjust slowly over the next several years to ease the transition impacts on the companies. These were the basis of the proposals they made to Congress a few weeks ago. Although it was not clear that what they had planned to do over many years would have been enough to close the gap with their competitors, the changes they contemplated would have been smoothly implemented.

The combined fuel and finance shocks this year, however, created the need for the auto companies to implement these plans—and more—in months rather than years. And that is the heart of the question facing the U.S. government. Will we use our fiscal power to accelerate change which must occur? Or, will we use it to cushion private companies from rapid change?

President Bush has come down on the side of the former; use federal loans to accelerate needed change. He has created a structure, however, that forces President Obama to address the same set of questions just weeks after he takes office.

The Detroit 3 can make money overseas and in the sale of large cars and trucks in the U.S. They cannot make money on the sale of small cars in the U.S.; precisely the portion of the market that many see as the future of the industry.

Buying a small car represents trading off the comfort, convenience, and safety of a large car with the fuel economy of a small car. When gas prices rise, demand shifts toward smaller vehicles, only to shift back when prices fall again. Given historic fuel prices, the American consumer is not willing to pay a premium for fuel efficiency. They will do so in Europe. There, gas prices have not been below $4/gallon since 1996. (They rose as high as $10/gallon this past summer.)

Yet, the Detroit manufacturers must compete in the market in which they live, not the market they would prefer. To be competitive with those who successfully meet the demands of the U.S. market they must take several steps. Their product offerings must be streamlined to match consumer demand, with redundant and costly fringe products eliminated. The products must offer features and amenities, and be of a quality, that is fully competitive with other available vehicles. And, just as importantly, they must be built at a cost that allows them to be sold at a profit.

Detroit must accelerate the changes that it has begun to achieve a complete makeover of the way it does business in the U.S.

The President’s loan proposal is the first step in doing this. It uses the financial crisis, and the power of federal financing, to require GM and Chrysler to produce a plan by February 17th that shows how they will achieve economic viability by achieving a product mix and cost structure that is competitive in the U.S. while, at the same time, complying with all federal fuel economy standards. It outlines specific and dramatic concessions from lenders, management, and employees that must be made as a condition to the loans.

The offer, however, only gives the two companies half of what they have said they need to survive through the first quarter of next year. (They had asked for $34 billion.) And, it is silent on what will happen after March 31st when the Executive Branch will report to Congress on the status of the restructuring effort. It is also silent on the implications for Ford. Ford has not asked for assistance, and would not be required to comply with the dramatic changes being asked of GM and Chrysler. But, if those two make significant improvements in their cost structure, Ford will become less competitive if it does not match them.

By next March, we will have a new President. We will also know more about the economic state of the country and how sincere the auto companies and their stakeholders have been in making the changes they need in order to survive. Even if they have moved in good faith to expeditiously change the way in which they do business, it is almost certain that they will need substantially more financial assistance from the federal government.

The question facing President Obama will be: is the additional aid to promote increased change in the auto industry, or is it to avoid change and preserve the status quo? What will Act II reveal?

“Freedom’s Just Another Word”

The above is lifted out of context from an old Janis Joplin song. But it does reflect, I think, the view of all too many among us. For them, freedom is just something that exists. It has always been, and always will be, ours by right. There is no need to fight for it and it is certainly not important enough to justify any sacrifice on our part to extend its benefits to others.

This is not new view. Our country has always had many who can justify endangering future security for peace and comfort today. Although they would never use these words, their actions proclaim: Yes, our children may suffer, but that is a problem for the future to deal with. Why should we make any sacrifice now? Or, as long as we can enjoy the benefits of freedom, why should we bear any burden to share this blessing with others?

Two centuries ago this view had its advocates who felt just as strongly then as their counterparts do today. On the surface, they had reason to despair. George Washington had been driven from New York and, as 1777 drew to a close, the British army was threatening Philadelphia. The American cause had achieved only a string of mistakes and defeats for all of its efforts.

That is when Thomas Paine began a series of pamphlets that later came to be called “The Crisis”. The first was published on December 23, 1777. George Washington was so impressed by Paine’s analysis of the fight for freedom, that he had the entire article read to inspire his troops just before they boarded boats to cross the icy Delaware River. The Christmas Eve attack on the Hessian soldiers in Trenton was Washington’s boldest move during the war, and raised hope throughout the nation that the cause of freedom was not lost.

Below, I quote excerpts from The Crisis. You will find some of the phrases familiar. I think that much would be gained if our country read and thought upon these words today. They are as meaningful now as they were 229 years ago.

Please see “The Crisis” for the full text.

“THESE are the times that try men's souls. The summer soldier and the sunshine patriot will, in this crisis, shrink from the service of their country; but he that stands by it now, deserves the love and thanks of man and woman. Tyranny, like hell, is not easily conquered; yet we have this consolation with us, that the harder the conflict, the more glorious the triumph. What we obtain too cheap, we esteem too lightly: it is dearness only that gives every thing its value. Heaven knows how to put a proper price upon its goods; and it would be strange indeed if so celestial an article as FREEDOM should not be highly rated. . .

“. . . a noted one [Tory], who kept a tavern at Amboy, was standing at his door, with as pretty a child in his hand, about eight or nine years old, as I ever saw, and after speaking his mind as freely as he thought was prudent, finished with this unfatherly expression, "Well! give me peace in my day." Not a man lives on the continent but fully believes that a separation must some time or other finally take place, and a generous parent should have said, "If there must be trouble, let it be in my day, that my child may have peace;" and this single reflection, well applied, is sufficient to awaken every man to duty. . .”