Credit Crisis Solution

To predict the future, it’s important to understand the past. The evolution of industry in China and other developing nations highlights a short period of massive investment and adoption. China will be lagging technologically in manufacturing to established nations for a long period, but to put it into perspective, their typical electronic production 10 years ago was a bug zapper or parts to larger electronic items, now they fabricate entire computers and motor vehicles. They continue to accumulate assets and technologies used in manufacturing, educate their society, and receive foreign contracts.

In the US and other developed nations, we have our domestic industries, primarily: trades that require on site skilled labor, extract our domestic natural resources, or services which require specific skill sets or are difficult to outsource. It’s important that create new industry or further innovate existing ones to stay ahead of the curve, especially those that pay homage to our domestic resources, and can be exported globally. Two of these industries that are continually promoted, but their importance isn’t reflected in the investment are Biotech and Clean Technology. These two industries have globally recognized value and need, and the US arguably has the best foundation to lead the way.  The intrinsic nature of these industries would also provide a bump in skilled labor and production while offering global selling opportunities.

This concept does not endorse protectionism, but rather much needed innovation as we continue to lose manufacturing and service industries by improved communication technologies.

The stimulus package of the great depression was arguably the best use of monetary resources in the last century. The concept is being used today with several rounds of stimulus, the first of which was the tax credit enacted by Bush, the second was the Financial System bail out, and the most recent is the multi-stage efforts to reduce unemployment.

It’s important to note the fundament differences in the context of labor and industry between then and now.  The technology of a century ago required limited imported resources, and we lead the world in innovation and production, affording us the ability to make the investments. Today, these core competencies have been either damaged or destroyed, yet we are still following the aged protocol.

Our ignorant perception is that it’s beneficial, but the inherent nature of corruption and waste, and weak fundamentals make it unwise. A prime example of a program that is said successful and in theory could be good, as it promotes both consumerism and environmental respect is the “Cash for Clunkers” program. A program allowing owners to trade in old inefficient automobiles for newer more efficient ones.

Disregarding the pricey tag, and Edmund’s estimates that it costs the government $20,000-$45,000 each car, it remains fundamentally flawed for the following reasons:

Criticism: $4,500 is an enticing offer for a car on its last leg, but the contingency of buying a new car ostracizes the target demographic. Many of the people driving the “clunkers” drive them as a result of limited income and inability to afford upgrades. Accordingly, many of the “clunkers” received were actually mechanically sound automobiles traded in by drivers who saw a great selling opportunity.

Improvement: Allow drivers to purchase used cars as well at a reduced value. Even at half the incentive, many eligible buyers would be able to retain a price greater than market value, promoting the environmental cause, serving the target demographic, and continuing to help the auto industry..

Criticism: The top 10 traded in cars were Ford Explorer, Jeep Cherokee, Ford Windstar, and Dodge Caravan. These SUV’s and vans are rendered un-drivable and scrapped.

Improvement: The scrapping implies the cars were useless, where as many of them were mechanically sound. Many organizations could have used the automobiles including: schools, churches, and farms. These auto’s would be used by organizations in need and for just causes.

Criticism: Most new car purchases are done through debt financing, a primary cause of the financial crisis. We are setting ourselves up again for greater future financial burden.

Improvement: None.

The notion that “Cash for Clunker” was a great use of resources is wrong. It’s important to note that this was considered one of the better programs in the stimulus package, if one extrapolates the concept throughout the package as a whole, one can better understand the scope of government waste.