Entries for July 2008

This commentary aired recently on the PBS program, Nightly Business Report.

If you haven't heard the news about the American Dream, please sit down while I tell you. Because the American Dream is dead. I keep reading the obituaries.

In the old days, people worked hard to improve their lives. They started small businesses that sometimes became bigger businesses. They bought homes and cars, and when they could afford it, they upgraded to nicer homes and cars. They saved money in case something went wrong.

Welcome to the new age of thrift. Thanks to $4 gas, those big, comfortable rides that were hits back in the olden days (like three years ago) cost too much to fuel. A sagging economy makes big purchases iffy, forcing people to hold on to aging cars longer. And now, with General Motors, Ford, and Chrysler drastically cutting back on leases, getting into a fancy new car every couple of years could end up being prohibitively expensive.

In other words, the party's over. We have to learn to live within our means.

Done crying? Good. Because it's really not that bad. A lot of car buyers end up paying way more than they should for gizmos they don't need. A few constraints on the pocketbook tend to produce much more disciplined shoppers. And automakers these days offer plenty of great cars in every price range, which means you don't need a loaded car to enjoy a luxuriant ride. Here's how to get the best car for the least amount of money:

How much will it cost the beleaguered taxpayer?

That's one of the big unknowns in the housing bill signed by President Bush, which among other things gives the Treasury a blank check for bailing out Fannie Mae and Freddie Mac. The explicit backing of the U.S. government might be enough to help the two mortgage giants sort out their own problems. Or, they might need billions in loans or stock purchases. Whatever the cost, it will ultimately come out of taxpayers' pockets.

But what if there were no bailout? Would taxpayers be off the hook? Not by a long shot.

It's not nearly as fun as the Veepstakes, but let's handicap who should be treasury secretary in the next administration. My nominee: Henry Paulson. He'd fit in fine with either John McCain or Barack Obama as his boss.

Paulson has already been treasury secretary for two years, of course, and as the nation's financier in chief, he's been far from perfect. The former Goldman Sachs CEO arrived in Washington in 2006 with a predictable conservative agenda, hoping to use the waning Bush years to loosen rules on Wall Street and shoo the government out of the moneymakers' way. The timing couldn't have been worse. The return of a Democratic Congress later that year ended Paulson's quest for "reforms." Then, when the air started to leak from the housing bubble in early 2007, Paulson, like most, did more chin-scratching than anything else.

What's eating consumers? The latest numbers show that consumer confidence is close to 40-year lows, suggesting the economy is in worse shape now than in times that seemed far darker, like in the early 1980s, when inflation and unemployment both crept into double digits. Yet inflation—despite record gas prices—remains at a manageable 5 percent. And unemployment is a modest 5.5 percent. So I asked Dan Ariely, a behavioral economist at Duke University and the author of Predictably Irrational, to help explain why a modest economic slowdown has produced such dismal public attitudes. Excerpts:

Why are consumers so gloomy even though the economy, by traditional measures, isn't all that bad? Is it $4 gas? Or falling home values? Or something else altogether?
I think there are three reasons. First, cars are very important to the American psyche. Think about James Dean and his motorcycle, "On the Road Again," and all that. The American psyche has associated freedom with cars, and now it costs a lot more just to use your car and get this feeling of freedom.

Are we there yet? The plaintive plea of the summer car trip can just as well be applied to the weird odyssey the American economy is on. The destination, of course, is the end of the recession—or slowdown, or meltdown, or whatever you want to call it. And if you carefully study the right indicators, it looks like we'll have to buckle in for a good while before the economy stops sputtering.

For all the headlines about undercapitalized banks and unpronounceable securities, most consumers just want to know when the bad news will end, so they can plan their lives. Nobody can say for sure, of course. Yet in real life, people have to make guesses all the time about whether it's a good time to buy a new home or car, make a risky career move, or borrow from their savings. And Americans are clearly spooked about doing much of anything: Consumer confidence numbers are the most dismal in 40 years.

In the old days (like a year or two ago), Americans might have jabbered about gas mileage, but most drivers cared more about horsepower or cup holders. The era of $4 gas has sure changed that. Suddenly everybody's a conservationist, desperate to squeeze a few extra miles out of every tank and cut their gas bill.

Thousand of people who can afford to are trading in big cars for smaller ones. But millions of others own SUVs or other large vehicles that they can't trade in without losing money. Then there are worries about a shaky economy, which makes it a risky time for many to make a big purchase. That leaves plenty of drivers stuck with a car they bought when gas was cheap and fuel economy wasn't an issue. The only solution: finding ways to boost mileage.

American drivers want better mileage—now!—and for the time being, there are only a few ways to accomplish that: smaller cars, smaller engines, and hybrids that use battery power to help improve the efficiency of an ordinary gas engine.

Within a few years, there may be more ways to cut gas bills, including better hybrids, electric cars charged from a household outlet, and ethanol made from cheap, ordinary plant materials. But many experts think the ultimate solution to America's fossil fuel addiction will be hydrogen. It's plentiful, packs three times the energy density of gasoline, and could end up much cheaper than gas. Hydrogen emits virtually no pollutants when burned. And we don't have to deal with dubious monarchies in the Middle East to get it. Gotta love that.

For a while, it was a long, slow decline. Now, the plight of General Motors, Ford, and Chrysler appears to be a rout.

The shift away from trucks and SUVs—and from vehicles built by the Detroit 3 in general—became dramatic earlier this year. And this summer, it's only intensifying. For the first six months of the year, the domestic automakers have seen staggering sales declines of nearly 20 percent, compared with 2007. Their combined share of the U.S. market has fallen below 50 percent for the first time ever. And if gas prices stay near $4 per gallon, it's likely to keep falling. "We see meaningful revenue declines in 2008 and 2009," says Mark Oline of Fitch Ratings. "Market share losses will accelerate through year-end."

The Detroit 3 share many of the same problems, which by now are quite familiar. For years they've been overdependent on big pickup trucks and SUVs, which were highly profitable when gas was $2 per gallon but are unwanted now. The factories of the domestics tend to be older than those of competitors like Honda and Toyota, which makes it harder and much more costly to shift from big vehicles to smaller ones on a given assembly line. A unionized workforce with generous benefits represents another cost disadvantage, compared with the Asians and Europeans.