#347 GM EV1 (Electric Vehicle): Story Behind the Story (Part 2)

[Readers: this blog is set in the future (sometime after the year 2020). Each entry assumes there has been a 5th revolution in the US — the Revenge Revolution. More about the Revenge Revolution, a list of earlier revolutions and the author, Entry #1.

Periodically I write a “sense check” to assess whether in the next few years, a revolution in the US is still possible or whether the entire exercise is based on a statistical aberration — i.e., a roughly 50-year cycle between major upheavals in the US.  Most recent sense check, Entry #332.]  

The past few entries have been a break from the craziness in Washington.  In Entries #343-#345 I included some observations about my time working with Lee Iacocca, who died July 2.  Entry #346 started discussing another project that continues to generate considerable interest — the GM EV1, the first modern electric vehicle, which was introduced more than 25 years ago.

There are two sides to the EV1 story — product and non-product.  The product side is reasonably well documented.  The non-product side story is far from complete, and what’s been told so far I think is misleading.  The next few entries — I actually do not know how many — will attempt to provide addition insight.  Stick around.  The series will be a good diversion from DC madness and offer a good lesson or two, I hope.

(If you have not read Entry #346, suggest you do so before reading this entry.)  On top of the array of his decisions to divert cash from developing and marketing new products, Roger Smith (GM CEO) hired McKinsey & Company (consulting company) to study and determine if GM should be reorganized, allegedly to streamline operations.

As someone trained in finance, I agree that some improvements in operations likely were needed.  At the same time, those improvements could have been accomplished without a reorganization. Just for some perspective on relative size of GM at the time, Buick Motor Division generated more revenue than the worldwide operations of the entire Goodyear Tire & Rubber Co. Chevrolet Division was more than two times the size of Buick. In addition, under the then current organization structure, GM had been extremely profitable for decades. So why would anyone want to reorganize?

When I was interviewed by McKinsey for the study, it was clear from the questions that Smith had already decided to reorganize the corporation. The study was a sham and used as a front to justify the decision. The reorganization, or so we were told, would streamline product development and eliminate redundant cost.

Not part of the study was the value of “organizational loyalty.” Smith never spent time on the revenue side with a US operating division — Chevrolet, Cadillac, etc. If he had spent time, he might have understood how most employees felt about “their” division. Many people at Buick, for example, whether in field sales or on the assembly line, considered themselves part of the “Buick family.”   At the time of the “study” Buick had been operating in Flint, MI for more than 75 years. Many workers were 3rd, even 4th generation. Same type of history existed with many hourly and salaried employees at Chevrolet, Pontiac, Oldsmobile, Cadillac and GMC Truck.

For many of the same workers, even though their respective operating division was part of General Motors, the other GM divisions often were viewed as competitors.  Oldsmobile was considered a competitor by many people at Buick and vice versa.   While this might seem a bit unusual to many outside GM, I personally believe the sense of loyalty to a particular operating division was one of GM’s strengths.

The reorganization ignored the “emotional bond to the division” of the various employees. The reorganization created two major operating groups – CPC, which consisted of Chevrolet, Pontiac and GM of Canada – and BOC, which consisted of Buick, Oldsmobile and Cadillac. In addition to now being grouped with a former competitor – Buick and Oldsmobile, e.g. — the name of the group, “BOC” changed the alignment of the position in the marketplace of two divisions.

Since the 1920’s, Buick had been positioned higher than Oldsmobile in the GM hierarchy and higher in the car-market pecking order. Yet, the BOC name implied Buick as being lower on the pecking order than Oldsmobile.

Another example of the people driving the reorganization being incredibly tone-deaf was the names initially assigned to the “manufacturing-related” groups within BOC.  Names for these groups were apparently chosen by people who never worked in communications or marketing. Or, if they had worked in these areas, the names assigned were to thumb their nose at those responsible for the reorganization.

The initial names for the groups were etched on large metal signs and installed at the HQ buildings. The morning after the installation I saw the sign driving into Buick’s office.  The sign noted the Flint Automotive Group would be co-located in the Buick HQ building. At Oldsmobile, I assume there was a sign indicating the Lansing Automotive Group would be co-located at Oldsmobile’s HQ.

After a quick chuckle and a head shake, I asked someone in the Flint Automotive Group if anyone had considered the initials of the group — “FAG”.  The Lansing Automotive Group initials were “LAG”. Apparently no one had considered the initials.

After the inquiry, the names were quickly changed but another example of someone making decisions but not paying attention to anything other than what was considered a possible cost savings. The inept “non-financial”-related decisions — group alignment, group names, sub-group names, etc. – never set well with most employees and the ill-will towards Smith continued at least into the 1990’s, past the announcement of the EV1.

As if it were not bad enough that Smith diverted huge amounts of cash to non-core projects that diminished GM’s competitive position and earnings power, Smith was a control freak. Smith seemed to have to make all key decisions, even if he knew little or nothing about the topic. An example was when Buick sought approval for the introductory MSRP of the Reatta, a 2-passenger near-luxury car.

Buick had completed extensive research about consumer expectations for the MSRP. Two different research methodologies were used and results of each method suggested a price of less than $20,000 ($1985). Research also indicated a price above $20,000 was a psychological barrier and would reduce sales potential significantly.

Buick presented the research findings and the ~$19,950 MSRP to the Price Review Group, whose members consisted of various GM executives. While we were making the presentation and discussing the findings of the research, Smith interrupted the presentation and stated, “The MSRP is going to be $25,000. Next item on the agenda.”

So the Reatta was introduced with about a $25,000 MSRP. What happened? The Reatta had great visual appeal and consumer interest, but sales never achieved potential. Why? Rather than argue about the correct MSRP, a better indicator of value is to look at what happened in the used-car market.

The used-car market sets prices on what customers will pay, not what a manufacturer claims the price should be. A year or so after introduction, if one applied the traditional depreciation schedule to the Reatta, the introductory MSRP should have been about $20,000 (just what the research indicated and what Buick proposed), and not Smith’s demand of $25,000. The result? Smith’s arbitrary “seat-of-the-pants” 25% premium on the Reatta basically killed the program…and with it GM lost another opportunity to build market share and make money.

Buick was not alone in being subjected to Smith’s arbitrary decisions. All divisions suffered. I’m just not as familiar with some of the details since I was focused on activities at Buick.

With no love lost for Smith among a wide swath of GM executives, along comes the GM electric vehicle, the EV1. To add a little salt to wounds inflicted by Smith, how did the EV1 concept car get developed? Through GM Design Staff? Developed in conjunction with an operating division? No, the EV1 was developed in secret by a company located in southern California, called AeroVironment.

How are GM executive introduced to the EV1 concept car? Showings at the GM Tech Center? An in-house video?  No. The executives found out when the EV1 (called the Impact at the time) was introduced at the 1990 Los Angeles Auto Show. The introduction in Los Angeles also included Smith’s surprise proclamation that GM would put the EV1 in production.

Just think about what’s happened the decade preceding the surprise introduction of the EV1. Smith’s decisions included diverting cash to: (i) buy Hughes Electronics; (ii) buy Electronic Data Systems (EDS); (iii) buy back all the stock owned by Ross Perot as part of the EDS purchase, (iv) start yet another GM division, Saturn, which then never made money; (v) reorganize a company that had essentially printed money since the early 1920’s; (vi) arbitrarily price vehicles (I’ve spared you other stories about how Smith put the kibosh on breakthrough advertising and marketing ideas at Buick); (vii) focus on profit per car rather than market share.

The effect of these decisions was hugely negative. During Smith’s reign in the 1980’s, GM lost of 10 points of market share – equal to five (5) assembly plants.  Plus, GM laid off tens of thousands of employees.  Some of the supposed cost savings from these plant closings were never realized as many hourly employees continued to receive full pay even though not working.  The net result of Smith’s actions was a loss of tens of billions of dollars profit and a drain of cash for future product development and marketing. And now Smith develops an electric car in secret and the first time most executives became aware of the EV1 and the commitment to produce was the media coverage of the LA Auto Show.

So if anyone wonders what attitude executives in the operating divisions had toward the EV1, now you know why there was little, if any support at the beginning of the program. The lack of support eroded as the program continued and GM continued to lose share and cash.

The next entry will begin to discuss conflicts that emerged inside GM after the program started and Smith retired. For example, one GM executive told me over lunch, “Dabels, you’re my worst enemy.” Stay tuned.

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#346 GM Electric Vehicle (EV1) — the Story behind the Story (Part 1)

[Readers: this blog is set in the future (sometime after the year 2020). Each entry assumes there has been a 5th revolution in the US — the Revenge Revolution. More about the Revenge Revolution, a list of earlier revolutions and the author, Entry #1.

Periodically I write a “sense check” to assess whether in the next few years, a revolution in the US is still possible or whether the entire exercise is based on a statistical aberration — i.e., a roughly 50-year cycle between major upheavals in the US.  Most recent sense check, Entry #332.]  

The previous three (3) entries were about my personal experiences with Lee Iacocca, who many consider one of the most effective corporate executives of the 20th Century. I decided to continue the break from the craziness in Washington and discuss another part of my life that continues to generate considerable interest — The GM EV1, the first modern electric vehicle.

There are two sides to the story — product and non-product.  The product side is reasonably well documented.  The non-product side story is far from complete, and what’s been told so far I think is misleading.  The next x number of entries — I actually do not know how many — will be an attempt to provide addition insight.  Stick around.  The series will be a good diversion and offer a good lesson, I hope.

More than 25 years ago, GM presented to the public the first modern electric car. The car generated widespread interest worldwide and helped boost GM’s image. Despite the positives associated with the car, GM management never seemed to endorse the program. After very limited production by auto company standards, GM pulled the plug. People frequently ask me, “Why was the program stopped?” “What could have been done differently so GM management would have kept the program?” “Did GM killing the EV1 set back development of electric vehicles for a decade or more?”

The questions and discussions about electric vehicles range from informal over drinks and dinner to Q&A following classroom lectures to interviews as part of formal research for a book or academic paper. For example, recently I was contacted by a professor doing research on electric vehicles. He’s been researching EV’s for a number of years and contacted me for more possible insight into the late GM EV1 program.

After two lengthy Skype calls, and roughly a day I spent filling in holes in such public information as Wikipedia, his comment was, “I’ve never heard anyone talk about what you said.” Just to calm the EV1 crowd, no confidential information was provided or discussed.

The focus on the “untold story” was the dynamic inside GM that I considered the primary reason GM management never fully supported the EV1. As will be described in this series of entries, my belief – the underlying reason for stopping the program had little to do with GM’s public claim of lack of demand and excessive cost. True that GM had limited cash but, as will be described herein, much of the cash shortage was self-induced.

As a bit more background, most companies struggle with introducing new technology. Such struggles are well-documented. Two books address the phenomenon of the internal struggles. If you’re interested in learning more, start with Jim Utterback’s, “Mastering the Dynamics of Innovation.” You’ll be shocked at how many companies tried to introduce a threatening disruptive technology but were unable to do so. To help understand more about why the difficulty, read Clay Christensen’s, “The Innovator’s Dilemma.” The books have been around a while but I think still relevant and certainly will help build an understanding of the difficulties of transitioning a company from an existing to a new, disruptive technology that without adoption could put the existing company out of business.

Before getting into the internal dynamics at GM, let’s clear up one gigantic misconception about why the GM EV1, and other electric vehicle models were not pursued. Despite implications in the movie “Who Killed the Electric Car?” from all that I know and experienced – and that was a lot – there was no conspiracy! There was no sinister backroom plot to kill EV’s. Yes, auto companies were frustrated with CARB’s (California Air Resources Board) zero-emission vehicle mandate.

And, yes, oil companies have repeatedly tried to thwart any regulation or legislation that reduces access to drilling, no matter what the cost to society or the environment. But neither of those killed the electric car.

What did kill the EV1 was dynamics inside GM. The dynamics are rarely, if ever, discussed. To understand how the dynamics evolved we need to review actions inside GM during the decade leading up to the introduction of the EV1 concept car. For many inside GM, those 10 years could have been titled “The Decade of Sour Grapes.”

I apologize for the length of this explanation. I still don’t know how many entries might be required to explain properly what occurred inside General Motors and why there was such resistance among so many executives to the EV1 program. Whatever the number of entries, I hope you find these entries enlightening and hope the decision to kill the EV1 becomes more understandable. You might not like the decision, and I certainly did not, but I think it will be more understandable following this series.

In 1980, the position of GM chairman transferred from Thomas A. Murphy to Roger B Smith. Murphy and Smith were polar opposites. Tom Murphy might as well have been the quintessential CEO from central casting. He was well spoken, self-confident, witty, kind and considerate. Smith, his successor, was short, insecure and had a ruddy complexion, squeaky voice and a tyrannical personality.

After Murphy retired I often thought if you could sit down with him, ask him what decision he considered his biggest mistake as chairman, after a couple of drinks he might say appointing Roger Smith as CEO/chairman. After a few years into Smith’s reign, I decided Murphy wouldn’t need a couple of drinks to admit the mistake. A cup of coffee would do.

One of the keys to success for OEM’s in the auto industry — GM, Honda, Daimler, Ford, etc. — is keeping products up-to-date, including significant styling updates. Keeping products fresh requires enormous amounts of cash. Without product updates, sales decline and the amount of cash available usually declines even faster. Further the effect of the decline can take years, if not a decade or two to turn around.

As obvious as the sales to cash generation relationship might seem, Smith took a different view. He believed sales and market share were less important than profit per car. Profit per car is important but without sales, all the fixed cost inherent in the auto industry gets spread over fewer units and the additional cost per unit starts to eat away at even the most profitable car lines. As the sale decline continues the company can be overwhelmed with red ink.

Inside GM the car divisions were profit drivers. Virtually all cash generated within GM was associated with sales of cars and trucks. While some individual product lines were marginally profitable, those product lines helped spread the enormous overhead cost.

Forcing each carline to be profitable also limited the car division’s opportunity to offer competitive products to counter the ever increasing number of imports, particularly from Asia.  The goal of the imports was to gain market share and many modals very attractively priced.  The Asian companies took a much longer view and were willing to subsidize certain models sold in the US with profits from carlines sold elsewhere.

Smith’s time horizon was much shorter and the emphasis on profit per car/truck, rather than overall profit, had a devastating effect. For reference, think about a grocery store. In order to attract people to shop, the store has “loss leaders.” If the store stops offering such loss leaders, what happens? Profit margins might increase but overall profit will likely decrease as people begin to shop elsewhere. And this is what happened to General Motors in the 1980’s under Smith’s strategy of emphasis on profit-per-car/truck rather than sales. People stopped coming in GM dealerships and started shopping elsewhere.

How bad was the strategy? Over the decade of the 1980’s GM market share of all cars/light-trucks sold in the US declined from roughly 45% to 35% — a relative decline of about 25%. What did that mean in terms of unit sales? During the 1980’s, the US averaged about 13-15 million cars and light-duty trucks per year. The 10 points lost by GM (45% to 35%) equated to sales of 1.3-1.5 million cars and trucks per year.

What did that mean for employment? 1.3-1.5 million cars and trucks per year equates to roughly five (5) assembly plants. Thus, Smith’s strategy resulted in unemployment for everyone who worked at those five assembly plants and unemployment for thousands more at GM suppliers. In addition GM made huge cuts in white-collar staff. (Yes, I understand there is another discussion that needs to take place about which auto companies gained share that GM lost. However, that conversation is not relevant to the dynamics inside GM that affected the EV1 program.)

Did GM profit improve under Smith’s strategy? In terms of earnings, if each car averaged say $2,000 variable profit (a reasonable estimate), then GM lost market share during the 1980’s reduced potential GM earnings over the 10-year period by at least $15-$20 billion. (Roughly $30-$40 billion in $2019.) In addition, GM profit margin declined as did overall profits. If you were the teacher grading Smith’s performance, a grade of “D-“would be extremely generous.

In addition to a strategy that generated lower profits and less cash, Smith directed GM to purchase Hughes Electronics, to purchase Electronic Data Systems (EDS) and to start the Saturn division. Where did the cash come from for these ventures? Funds from an ever smaller piggy bank that should have been allocated to help car and truck divisions maintain competitiveness were instead diverted to Smith’s various projects. As such, the divisions — Chevrolet, Buick and others — had even less money to update new products and less money for marketing. Of the GM car and truck divisions, only Buick managed to maintain market share during Smith’s reign.

The purchase of EDS created another problem. With the purchase of EDS, Ross Perot became GM’s largest single shareholder. Perot asked many thorny questions during the GM board meetings which irritated Smith. Perot irritated Smith so much he ordered GM to buy back all of Perot’s stock — for $750,000,000. (About $1.5 billion $2019.)

Where did the $750 million cash come from to repurchase Perot’s stock? Again, funds diverted from the car divisions that should have been used for product development and marketing.

Another major diversion of cash went to the creation of Saturn division. Smith created Saturn because he believed the existing car divisions were incapable of attracting younger buyers. Smith’s attitude angered many senior executives at the car divisions.

To make a bad situation worse, Smith insisted Saturn should be set up as a completely separate car company, even to the point where Saturn had a separate foundry to cast engine blocks. Such vertical integration was ridiculous. No one, and I mean no one, cares which supplier casts a particular engine block as long as it meets quality standards.

In addition to diverting funds to set up Saturn as an operating unit, Saturn never made money. The longer Saturn stayed in business the more the other car/truck divisions suffered as funds were diverted from product development and marketing programs to prop up Saturn. (Although not a topic of this set of entries, Smith’s negative impact on GM did not stop when he left office. The decline in GM share became almost impossible to stop because the product competitiveness of the divisions had fallen so far behind. In my view, GM’s eventual bankruptcy should be attributed directly to Smith.)

Hope you’re beginning to get an understanding of frustration among executives at the car and truck divisions. Hard to believe, I know, but there’s more background we need to cover. You mean like why Smith cast aside the organizational structure that had made GM hugely profitable for decades? Yes. And when the reorganization happened Alfred P. Sloan likely rolled over in his grave…and rightfully so. Time to pause for now.

 

#345 Personal Observations. Iacocca’s Genius. Leveraging What’s at Hand. (Part 3 of 3)

[Readers: this blog is set in the future (sometime after the year 2020). Each entry assumes there has been a 5th revolution in the US — the Revenge Revolution. More about the Revenge Revolution, a list of earlier revolutions and the author, Entry #1.

Periodically I write a “sense check” to assess whether in the next few years, a revolution in the US is still possible or whether the entire exercise is based on a statistical aberration — i.e., a roughly 50-year cycle between major upheavals in the US.  Most recent sense check, Entry #332.]  

As noted in last week’s entry, I thought it might be interesting to present information about Lee Iacocca that has been overlooked or generally not discussed in the media. None of the stories are too personal, embarrassing or disclose confidential information. However, these stories are what I remember most about Lee Iacocca. I hope you find them interesting. [If you missed entry #343, which includes how I met Lee and our working relationship, you might want to read before proceeding. #344 in Part 2. ]

When writing the personal observations about Iacocca, I asked myself, what was his genius? Why was Iacocca so good at certain things?

As noted earlier, his lifestyle did not rival Mother Teresa’s. He also was not an intellectual giant. So what was his genius?

I think he excelled at taking whatever was at hand, making something useful, then finding a way to convince people to buy it. That seems odd for someone trained as an engineer. But, think about his success in the automobile business. The Mustang was developed in response to the Chevrolet Corvair Monza Spyder, for which Ford had no corresponding entry. Iacocca filled that hole by putting new sheet metal on a Ford Falcon chassis. The Mustang was wildly successful even though initial models were underpowered and built on a so-so chassis.

When he became CEO at Chrysler, what did he have to work with? A company with no cash, a product line essentially built on one chassis — the “K” platform — huge unsold inventory (some cars had been stored for so long at the Michigan Fairgrounds in Detroit) that weeds had grown higher than the bumpers) and, as I understand, an automatic transmission that nearly always failed.

Having any one of those problems might be enough to make a normal executive cry. But not Iacocca. Within a few years, Chrysler got back on its feet, started generating cash, paid back early the government-guaranteed loan and introduced a vehicle concept that revolutionized the industry the minivan. Pretty successful lemonade out of all those lemons.

And here’s a story you probably haven’t heard before. When he relocated to California after Chrysler, he bought a house in Bel Air. The house was vacant and had been caught up in the Savings and Loan quagmire of the early 1990’s. Yet, he converted the empty house into a beautiful, very comfortable home with exquisite landscaping. Another example of taking what’s available and making it much better.

Back to Chrysler. Situation #1 — Chrysler had no cash. The piggy bank was empty. The choice he faced was either secure a loan or declare bankruptcy. Moreover, the bankruptcy probably would not have been a reorganization of Chrysler but very likely a liquidation of the company – the end of Chrysler.

No bank would lend Chrysler the money without some guarantee of repayment. So Chrysler took a highly unusual step and asked the Federal government to guarantee the loan. In order to secure the loan guarantee, Chrysler had to reduce costs, including labor costs, both salaried and hourly. Yet, as late as the night before Iacocca was to fly to Washington and try to secure the loan guarantee, the UAW had not agreed to take a cut in wage rates.

I’m not sure of the exact location of the meeting, but apparently Lee asked Doug Fraser, president of the UAW at the time, to go for a walk. Iacocca offered Fraser a choice. Agree to lower wage rates and gain rights to buy 1,000,000 shares of Chrysler stock at a very attractive price, or Chrysler files for bankruptcy and 30,000 UAW members are out of a job. Fraser agreed to the wage cuts and supported the loan guarantee. The next day Iacocca went to Washington and secured the government guarantee.

Situation #2 — the “K-car.” For those old enough to remember, virtually every Chrysler model in the early 1980’s was built on a “K” platform. (In internal communiques, auto companies often use letters to designate different chassis since a number of models may be built using the same chassis.) K-car variants included coupes, sedans, a convertible and even a goofy looking stretch limousine.

The quality of the K-cars was marginal at best. To address the quality problems and build customer confidence, Iacocca began a series of TV commercials where he boasted, “If you can find a better car, buy it!” The commercials were audacious to say the least since finding a better car was easy. Yet, sales at Chrysler increased as people responded to Lee’s challenge.

Whether Lee or anyone at Chrysler knew about the following, I don’t know, but they certainly benefitted from it. A seemingly unexplainable phenomenon with building customer satisfaction — people are often more loyal and supportive of the company after a product they own has failed, as long as the failure was handled properly.

For owners of K-cars, Chrysler had such an opportunity since virtually every automatic transmission was destined to fail. Chrysler’s response to the failure was to provide the customer a rental car at no charge and deliver that rental car to the customer’s home or office. With that effort, Chrysler began to build positive word of mouth. The combination of Chrysler owners telling friends about their ownership experience and Iacocca on TV challenging people to buy a better car if you can find it, helped begin building a positive reputation for Chrysler.

Situation #3 –the Minivan. How did that happen? The minivan concept was a “hand-me-down.” The concept was developed originally while Iacocca was at Ford. For some reason, Henry Ford II did not support the concept. When Iacocca was fired from Ford, he asked for the design and HFII agreed. Iacocca joined Chrysler and then hired Hal Sperlich from Ford to implement the design at Chrysler.

The minivan was introduced as a 1984 model. However, given the lead times for development, certain key decisions needed to be made in 1982, if not earlier. I don’t know for sure but my guess is for the minivan, because Chrysler was still so short of cash in 1982, they were forced to upgrade the K-car chassis as marginal as it was. To minimize any negative publicity from the automotive press, Chrysler probably assigned a new letter designation to the chassis, with a letter far away from “K.”

Another early decision was whether the instrument panel should be offered in two versions, one with an airbag, and one without. At the time auto companies were offering airbags as an option since it was not clear the public would accept airbags.

Chrysler, again because of the cash shortage, could only afford to tool one instrument panel. In a huge leap of faith, Chrysler chose all airbags. Doing so was contrary to Iacocca’s previous position that argued against airbags. In classic Iacocca style, Lee cut another TV commercial promoting airbags as being standard on the minivan and implying that Chrysler was taking the lead in auto industry in trying to increase safety for the driver and the passenger.

What can we learn from these stories? The main theme seems to be take what you’ve been given and make the most of it.

In many ways Iacocca’s story is that of many Americans. The son of immigrant parents growing up in an area where there are few others like him — an Italian in Pennsylvania Dutch Country. Yet he survives and graduates from Lehigh University, then goes to Ford engineering. When he sees a long path to success in engineering at Ford, he switches to the sales department. Despite wild success and becoming head of Ford Division, then president of Ford, he gets fired. Then he moves to Chrysler, which is out of cash, teetering on bankruptcy and where product is abysmal.

But what does he do at Chrysler? He takes what little is on the table, leverages it and initiates an incredibly remarkable turnaround. Was that turnaround based on some wild innovation, some technological breakthrough? No. All the success came from looking at what was in front of him and making something out of it, and then rather audaciously promoting it with the public.

Originally I thought Iacocca’s lesson might be the oft-cited lesson of making lemonade out of lemons. But in retrospect, I think his genius and the lesson is much broader and deeper. The financial turnaround at Chrysler was impressive. But even more impressive was the incredible loyalty and support he built with people inside and outside Chrysler.

One incident in particular sticks in my mind. We were in Newport Beach (CA) having breakfast at a hotel prior to attending some meeting or conference. I should say we were trying to have breakfast since we were interrupted constantly by an array of people who came to meet Lee. They stopped at the table not for an autograph or to take a picture. They stopped to thank him sincerely for what he had done to help save Chrysler and to help restore the Statue of Liberty and Ellis Island. While I remember that day in particular, such interaction with everyday people was not unusual.

This entry is the end of the series of my personal thoughts and perspectives about Lee Iacocca. I’m grateful for the opportunity to have worked closely with Lee and thankful for the opportunity to share the experiences and lessons learned.  He was quite a guy.

 

#344 Lee Iacocca: a Personal Perspective (Part 2)

[Readers: this blog is set in the future (sometime after the year 2020). Each entry assumes there has been a 5th revolution in the US — the Revenge Revolution. More about the Revenge Revolution, a list of earlier revolutions and the author, Entry #1.

Periodically I write a “sense check” to assess whether in the next few years, a revolution in the US is still possible or whether the entire exercise is based on a statistical aberration — i.e., a roughly 50-year cycle between major upheavals in the US.  Most recent sense check, Entry #332.]  

As noted in last week’s entry, I thought it might be interesting to present information about Lee Iacocca that has been overlooked or generally not discussed in the media. None of the stories will be too personal, embarrassing or disclose confidential information. However, these stories are what I remember most about Lee Iacocca. I hope you find them interesting. [If you missed entry #343, which includes how I met Lee and our working relationship, you might want to read before proceeding.]

One characteristic rarely mentioned was Lee’s voice. You know how some people have voices that are just naturally loud? He fell into that category, big time.

Following are a few examples that come to mind. #1 — Was that an ass chewing?  The office location for EV Global Motors (electric bike company post Chrysler), as you might expect, was in a fairly high-end building in Los Angeles — corner of Wilshire and Westwood. A few of the individual offices had tall, heavy, solid wood doors.

When Lee and I had conversations about personnel, legal or financial matters, the door would be closed. I always thought the wood doors were pretty soundproof. That idea was shattered after one meeting when the staff asked me, “Did you just get your ass chewed?” My befuddled response was “No, why do you ask?” Staff responded, “Because his voice was so loud we heard it out here.”

As a sidebar, the only time I saw him really get mad was discussing legal bills. I remember one invoice in particular that was on the high side. He was furious at the amount and my assignment, which he described in very explicit terms, was to renegotiate the amount with the lawyer.

The subject set of legal bills was associated with what I would characterize as a frivolous lawsuit. An executive of the company had been offered what most would consider a very generous buyout. After presenting the offer, I suggested he review with counsel. Rather than taking the offer, which included a guaranteed payment even if he had another job in hand, which he had, the executive hired a well-known litigator in LA who took the case on contingency — I think only because of Lee’s association with company.

The case ultimately was dismissed and the employee and the hired gun got zero. However, the company spent a considerable amount of time and money on the case before it was dismissed.

Conversations with Lee about the case were unpleasant and because of his frustration, often loud. The conversations with counsel trying to renegotiate the invoice were equally unpleasant and often loud. On a positive note, I maintained a close friendship with counsel until his death a few years ago.

Voice Incident #2 was actually funny, even at the time. Lee and I were to visit a company near Palm Springs that made upscale golf carts. The purpose of the visit was to determine if the company was qualified to make neighborhood electric vehicles (NEV) for EV Global Motors. NEV’s were part of the long-term strategy to expand the product line beyond electric bicycles.

I was to meet Lee at his house in Palm Springs. Murphy’s Law took over that day and I was late. As I stopped at the guard house at the entrance to the development, I heard a voice that sounded as if the person were standing next to me shouting in my ear. But instead of next to me, there was Lee, probably 50-75′ away leaning out of the driver’s side of a minivan yelling, “Dabels, where have you been? Follow me!”

Voice Incident #3 I still find humorous as well. It occurred during one of our regular Sunday evening calls to discuss pending business issues. Over the previous few weeks, the company had experienced a problem with a key component of the electric bicycle. The president of the firm suppling the part was also to call me Sunday night and provide an update on fixing the problem.

Although Taiwanese-based, the supplier had an office in LA and with the same area code as Lee’s home. When the phone rang, I saw the area code 203. Before I could say “hello” there was a “hello” on the other end, to which I responded “Percy?” (name of supplier contact). My question led to a response in a rather loud voice, “Do I sound like Percy? Dabels, (expletive) do I sound like Percy?”

After a quick apology from me, the conversation turned to business at hand. However, whenever I hear the name Percy, my mind flips back to the phone call and the question, “Do I sound like Percy?”

#4, The Buzzer. Iacocca’s office in LA included the desk and the phone from his office at Chrysler. The phone was typical style for that era — touch dial pad and buttons at the bottom for incoming phone lines. On the far right at the bottom was a buzzer, which when pressed while Lee was at Chrysler, would alert the administrative assistant in the outer office.

One day over coffee, he asked me, “See that buzzer? After I nodded, he continued, “When I was a Chrysler, I could press that buzzer and in 15 minutes someone would be in here telling me about the economy in Kazakhstan or some other country. “You know what happens now when I press that buzzer?” I shook my head. “I’ll tell you what happens. Absolutely nothing.”

#5, The Tone of Voice. The final voice observation in this entry is how the tone of his voice changed when talking about family, especially the topic of growing up as maybe the only Italian in Pennsylvania Dutch country. Although he never said it directly, at least to me anyway, the tone of voice conveyed a certain loneliness about not being accepted. Like most of us, our childhood experiences have a profound impact on our behavior as adults.

For Lee, the childhood experiences were a great motivator to become successful, which he clearly accomplished. But even with all that success and glory, what never left him, as probably never leave any of us, were the childhood experiences and that little voice that kept asking to be accepted.

All for now. More next week.

#343 Lee Iacocca: a Personal Perspective (Part 1)

[Readers: this blog is set in the future (sometime after the year 2020). Each entry assumes there has been a 5th revolution in the US — the Revenge Revolution. More about the Revenge Revolution, a list of earlier revolutions and the author, Entry #1.

Periodically I write a “sense check” to assess whether in the next few years, a revolution in the US is still possible or whether the entire exercise is based on a statistical aberration — i.e., a roughly 50-year cycle between major upheavals in the US.  Most recent sense check, Entry #332.]  

Thought I would take a break for the second week in a row and write about something not linked to the Revenge Revolution. The topic for this entry, and likely a couple more, was prompted by the death of Lee Iacocca on July 2nd.

Without question, Iacocca was one of the greatest business people of the 20th century. When people talk about Iacocca’s accomplishments, two are usually mentioned: (i) being the father of the Mustang; (ii) leading the turnaround of Chrysler Corporation in the 1980’s. While each is a great accomplishment, there’s more to the story.

From my perspective, two often overlooked major accomplishments are: (i) leading the funding campaign for the restoration of the Statue of Liberty and Ellis Island. Restoring the Statue of Liberty/Ellis Island was of great personal interest to him. Iacocca’s parents passed through Ellis Island as immigrants from Italy; (ii) accelerating the implementation of airbags in cars/vans. Most comments about Iacocca and airbags center on his initial efforts to thwart the use of airbags. But he later switched and promoted the use of airbags.

Before going too far with the Iacocca story, I need to explain my relationship with him. We met in his post Chrysler days. He had moved from Michigan to Los Angeles and purchased the rights to an electric bicycle company. Longer term he wanted to expand the bicycle product line to include smallish electric neighborhood vehicles.

The electric bicycle needed a new brand name. He wanted to use “ebike.” The “ebike” name, however, was owned by a company that made electric motorcycles. I happened to be on the board of that company and an investor.

The president of the company, Scott Cronk, and I met to negotiate the rights. After the negotiations, Lee asked if I had a resume. Surprisingly I did, having just left the company that resulted in the move to Charlotte. When reviewing the resume, he ignored my career at GM, or at least never probed about it. What he did comment on was: (i) graduating from MIT, noting that “At least I know you can think,” and (ii) having been an adjunct professor at University of Michigan with the comment, “I like people who teach.”

Then he asked if I would spend two weeks at the company (EV Global Motors), analyze operations and give him an assessment. I thought it might be a fun gig, and if nothing else, great cocktail conversation.

Two weeks later we met in his office. My assessment started with a series of questions, “Why does the company do this? Why does a company own that?” At the end of the third or fourth question, I don’t remember which…and none of which he answered…he asked, “Want to be my CFO?” I said “Yes” and thus started my relationship with a truly interesting man.

There’s no question that Lee’s reputation in the business world for being hard-charging, demanding and disciplined is well-known and well-deserved. But underneath all that bluster and boisterousness — and yes the voice was very loud at times, even in casual conversation — there was the son of immigrant parents who had a rough childhood. Think about growing up as son of Italian immigrant parents in Pennsylvania Dutch country.

Just to be clear, let’s not go overboard and start thinking his personal life was like Mother Teresa’s. But we are talking about is an American hero, who like the rest of us, had a real desire for friends and loving relationships.

Fortunately for me, I was working with Lee at an early-stage company. EV Global Motors was not Ford and not Chrysler with large support staffs. As a result, I spent many hours in his office discussing and trying to solve a range of problems. Some of those discussions continued at the house over dinner, wine and, of course, a cigar.

If you want to get an idea what those conversations were like, pick up one of his books. Lee dictated most of the material for the books, which was then edited. My compliments to the editors, who did an excellent job of capturing the tone and rhythm of his comments, although a few likely expletives never made it to print.

At some point in our relationship, I asked Lee why did he think he was so successful. He became head of Ford Division at about age 35, which is a remarkable achievement in the auto industry. His answer was simple, “I made a plan for the week, the month and the calendar quarter. And then I stuck to the plan. Most guys didn’t have a plan and those who did have a plan didn’t necessarily stick with it.”

We used that approach for operating the company. Every Sunday evening we’d chat for maybe 15 minutes and outline issues for the coming week. On Mondays, after I formalized the “assignments” list, we’d have coffee and go over the plan in detail. We also had a rule. If the plan included an assignment that I or someone on the staff was supposed to complete the prior week but hadn’t, then Lee could question me. If he had an assignment that was not completed, then I could question him.

The discussions always included why the assignment hadn’t been completed and what was required to complete it successfully. A task on the list for 3 weeks with no meaningful progress toward completion was likely to be considered irrelevant and scrubbed. This method was simple but highly effective in keeping both of us and the staff on task.

A more interesting story is why Iacocca switched from engineering to the sales department. In the auto industry, that type transfer was unusual at the time, and probably still is. I also made an unusual transfer, moving from corporate finance staff in New York to marketing director at Buick HQ, Flint, MI.

The seminal “career moment” for Iacocca apparently occurred at a drafting table, probably at the River Rouge plant but I’m not certain. Imagine a very large area with a sea of drafting tables. At the very back of this sea of tables is a young Lee Iacocca. Behind his table is a walkway. If you’ve ever been in a Kahn-designed auto plant — vast open areas with large concrete support pillars — you’ll get the picture.

In the walkway behind Lee two men approached and then stopped at his table. One was Henry Ford I and the other was Harvey Firestone. Yes that Ford and that Firestone. After they left, apparently Lee looked at the number of draftsmen ahead of him and who he would have to pass to get promoted. That sea of people convinced him there was a better way to the top of Ford Motor Company. And that better way was joining the field sales staff.

So the Lehigh/Princeton-trained engineer heads off to the sales department and, voila, turns into one of the best automotive sales and marketing guys ever…and head of Ford Division at about age 35. In the next entry or two, I’ll write more about some untold or under-publicized stories. For example, stories about: (i) how Chrysler obtained the base design for the minivan; (ii) how Chrysler had so many unsold K-Cars for so long that in one major storage lot weeds had grown taller than the bumpers; (iii) the red phone on his desk; and the voice. And, oh, that voice. Could it ever carry.

#342 Big Bang Theory but Not the TV Show

Readers: this blog is set in the future (sometime after the year 2020). Each entry assumes there has been a 5th revolution in the US — the Revenge Revolution. More about the Revenge Revolution, a list of earlier revolutions and the author, Entry #1.

Periodically I write a “sense check” to assess whether in the next few years, a revolution in the US is still possible or whether the entire exercise is based on a statistical aberration — i.e., a roughly 50-year cycle between major upheavals in the US.  Most recent sense check, Entry #332.  

This entry has absolutely nothing to do with the potential for a Revenge Revolution in the US sometime after the year 2020. I thought a diversion would be welcome after Trump’s 4th of July “me, me, me” celebration and his claim the Continental Army guarded the airports. Is anyone really that stupid?

The thoughts in this entry started kicking around in my head many moons ago. Actually, it started the summer between my sophomore and junior years in college.

My job during summers in undergrad was working at a Pepsi bottling plant. The job combined moderate manual labor, some fun — especially when I was “promoted” to lift truck operator — and a chance to work with and learn from a crew of people with whom I had very little in common.

During one evening work session — a bottling plant works lots of overtime in the summer — I was assigned to make sure the bottles coming out of the washer — yes, soda was in glass bottles in those days — were the correct size and had the correct label for what was being bottled — Pepsi, Orange Crush, root beer, etc.

Watching bottles is not the most exciting job in the world so the mind has a tendency to wander. Sometime during the overtime shift, and who knows why, I started to think about events supporting the Big Bang and creation of the universe. Obviously, I’m not the first person to have thought about the Big Bang and I’m certainly no astrophysicist…but it is an interesting topic.

I could buy into the idea of a Big Bang and all the material then shooting off in various directions. All the stuff in the solar system had to get there somehow, right? But as I continued to try and reconstruct what happened, two parts stumped me that night watching bottles come out of the washer — and continue to stump me all these years later.

  1. Where did the material for the Big Bang come from? Religious beliefs aside, how did the ball of stuff that went boom get put together, let alone then go bang?
  2. How do we earthlings know the universe is not part of another object — like a chair? Or maybe part of an experiment?

Granted the universe is so large as to be unfathomable. But size is all relative. To humans, a molecule or atom is microscopic. Yet, in the human body there are millions, if not billions of molecules and atoms and other little creatures running around. Size and space are relative so for atoms, molecules and other creatures, our body might look like the universe does to us.

What about time? Let’s pretend we are a gnat. A gnat lives an average of 6-7 days. A human living until age 90, has a lifespan more than 5,000 times longer than a gnat. From a gnat’s perspective, if 6-7 days were the equivalent of 90 years, then a lifespan for humans would be nearly 5,000,000 years. Still very short by the age of the universe but an example of how time is relative.

Could life on Earth be part of an experiment? Could the Big Bang have been part of a science project in some college class with really large people? Could part of the experiment be to determine which objects after the Big Bang grow things, and what conditions are required for things to grow? Before you discount completely the idea of the universe being part of some gigantic petri dish, think again about how many cells are in your body, millions and millions if not billions.

Even though I’ve thought about these ideas over the years, I’ve still not come up with any logical conclusion. Further, I have yet to hear any reasonable non-religious explanation for where the matter for the Big Bang came from or how it went boom.

And even if one buys into a religious explanation, where did G_d get the stuff to start with? If he or she created it, how many more universes are there?

With each Hubbell-like telescope, we learn more about the universe and its components. During early 2019, we saw “pictures” of a black hole. According to a description in MIT Tech Review, the black hole is located…”inside Messier 87 (M87), a galaxy located more than 53 million light-years from Earth. It has a mass 6.5 billion times that of the sun.” Comprehend the relative size and distance of the black hole? You know, think about time in relation to a very long, multi-generation flight between JFK and LAX and size as a big beach ball compared to a grain of sand.

What does all this mean and where do we go from here? I have no idea. As far as progress in trying to understand the Big Bang and the universe, I might as well be back at the Pepsi bottling plant watching bottles come out of the washer. In fact, I might have regressed in some understanding since the more we learn about the universe, the more incomprehensible it becomes – at least to me.

What I do know for certain, there were no airports during the Revolutionary War and the words to the Star Spangled Banner were not written until the War of 1812. Seem to recall learning that in grammar school. Did Fred Trump buy Donald’s way out of grammar school, too? And it’s that kind of stupidity, demonstrated by the president and his hard-core supporters that will lead the US to a Revenge Revolution.

If you have any serious thoughts about the Big Bang, please forward. Thanks for your time.

#341 SCOTUS Puts another Arrow in Revenge Revolution’s Quiver

Readers: this blog is set in the future (sometime after the year 2020). Each entry assumes there has been a 5th revolution in the US — the Revenge Revolution. More about the Revenge Revolution, a list of earlier revolutions and the author, Entry #1.

Periodically I write a “sense check” to assess whether in the next few years, a revolution in the US is still possible or whether the entire exercise is based on a statistical aberration — i.e., a roughly 50-year cycle between major upheavals in the US.  Most recent sense check, Entry #332.  

The original entry for this week was a diversion from politics, culture and the potential for a Revenge Revolution sometime after 2020. The topic was ideas about the Big Bang Theory and the formation of the universe. (I’ll publish the Big Bang entry sometime in the next few weeks.)

Maybe discussing the idea of the Big Bang was fortuitous. A big bang seemed to be the thinking of the Supreme Court this past week. The decision regarding legality of extremely partisan gerrymandering — Rucho vs. Common Cause — may go down as one of the most illogical SCOTUS decisions of the last 100-150 years. Use Plessy vs Ferguson as a reference point for being illogical.

The majority opinion, led by Chief Justice John Roberts, claimed SCOTUS was not entitled to second-guess state legislatures’ decisions re gerrymandering, even if the result was extreme disproportionate representation. Really? The majority of SCOTUS’ justices claimed the Constitution did not provide authority for the Supreme Court to address such state issues as gerrymandering, and besides, the framers envisioned that politics would influence the drawing of legislative districts.

Duh, Roberts, put aside the legal mumbo-jumbo and try to figure out what’s right and wrong for the country. The case, which involved extreme gerrymandering in North Carolina, demonstrated clearly that Republican legislators intended to discriminate against certain voters, i.e., Democrats, the Party which happens to include most black and Hispanic voters.

The consultant, hired by the Republican-controlled NC legislature, publicly stated disappointment that he could ensure Republicans only 10, not 11, of 13 the seats in the US Hose of Representative despite the percentage of voters in North Carolina being split about evenly between Democrats and Republicans, and slightly favoring Democrats.

Gee, Roberts, using your logic, it’s OK if Democratic votes in North Carolina count less than 1/2 of what Republicans votes count. (Of the 13 districts, based on the number of Republicans and Democrats, at least six (6) should be represented by Democrats. With the gerrymandered districts, Democrats hold only three (3), or less than 50%.) If the SCOTUS justices keep referencing the Constitution as the basis for the gerrymandering decision, at least have Democratic votes count 3/5 of a Republican vote, which is what the Constitution noted that slaves counted.

When citing laws and legal precedent, ever think about considering the 14th Amendment? What about considering the Voting Rights Act? What about Brown vs. Board of Education? Okay, I understand your logic. None of these decisions had been made when the Constitution was written and, therefore, should not be considered.

But wait. What about the Citizen’s United case?  In Citizens United the majority, of which you were a member, claimed that when it came to campaign financing a corporation was really a person and should be treated as such. I’ve looked at my copy of the Constitution and I can’t find where corporations are mentioned, let alone being considered “people.” Your logic must be to reference the Constitution when convenient but to disregard the Constitution when you want a different outcome.

A second Supreme Court ruling this past week was well-publicized, but frankly a bunch of meaningless noise. The second decision prohibited the Bureau of Census from including a question about citizenship during the 2020 census. Roberts, in an apparent Fox-News attempt to be “fair and balanced,” sided with the Democrats on prohibiting the citizenship question.

But Roberts’s position is a ruse. The SCOTUS decision does not prevent future census from including a citizenship question. Moreover, with all the publicity around the case, Roberts and Republicans already have convinced many immigrants, even legals, not to respond to the census. And who can blame them? As long as Trump is in office, immigrants will be targets for deportation, regardless of status, and the Trump administration has demonstrated repeatedly a willingness to ignore restrictions on misusing and/or sharing confidential information.

How should the Supreme Court decisions be interpreted? In the months and years ahead, the US will experience more partisanship, and as hard as it might be to believe, even more extreme positions by politicians. With the gerrymandering decision in place, politicians must now consider all members of the other party as the enemy if a politician is to survive in the primaries in the gerrymandered districts. Compromise and civility will be surefire paths to losing a primary, which has become the defacto general election.

The gerrymandering decision piled on top of the Citizens United case, should be viewed as the Supreme Court putting another arrow in the Revenge Revolution’s quiver. Given the stupid-is-as-stupid does approach of the Supreme Court combined with the abdication by the McConnell-led Senate Republicans to thwart any illicit and illegal actions by Trump, the only solution to steer this country back to the middle where a government can work for all people seems to be a revolution.

Comments, welcome, as always.  Any, yes, have a happy 4th of July.  Wasn’t there a revolution sometime around then?

#340 Abbott Awards Costello the Presidential Medal of Freedom

Readers: this blog is set in the future (sometime after the year 2020). Each entry assumes there has been a 5th revolution in the US — the Revenge Revolution. More about the Revenge Revolution, a list of earlier revolutions and the author, Entry #1.

Periodically I write a “sense check” to assess whether in the next few years, a revolution in the US is still possible or whether the entire exercise is based on a statistical aberration — i.e., a roughly 50-year cycle between major upheavals in the US.  Most recent sense check, Entry #332.  

Begin Entry #340.  Somewhat buried in this past week’s news was that Bud Abbott awarded Lou Costello the Presidential Medal of Freedom. Well, okay, it wasn’t really Abbott and Costello, but it might as well have been.

The actual players were Donald Trump and Arthur Laffer. If you don’t follow the players in the field of economics, you might not recognize the name Laffer. In the mid-1970s, Arthur Laffer, then working in the Nixon/Ford Administration, but previously a member of the faculty at University of Chicago, outlined for Messrs. Rumsfeld and Cheney (the same two as in the Bush 43 administration) a curve to illustrate the theory that government revenues could be maximized at certain marginal tax rates.

According to Laffer, too high a marginal income tax rate would be a disincentive for people to work and/or invest and tax revenues would fall. If the margin tax rate were too high, then lowering the tax rate would result in the economy expanding with overall tax revenues increasing despite the lower maximum rate.

The Laffer Theory, commonly referenced as the Laffer Curve, was cited as justification for large cuts in tax rates under Presidents Reagan, Bush 43, and Trump. In fairness to Laffer, his theory, which had been discussed earlier by other economists, could be true where a country had exceptionally high tax rates – although too high a tax rate has never been defined – and there was no compelling societal need justifying the higher rates.

Laffer’s Theory should also be considered the foundation for what is known as “trickle-down economics.” However logical Laffer’s theory and “trickle-down economics” might seem, to my knowledge there is no empirical evidence demonstrating the theory is correct.

In the 1950s, for example, maximum marginal income tax rates in the US were 70%. Yet during the 1950’s the labor-force participation rate was very high and the economy was strong. One might argue – and I think fairly – that the very high marginal tax rates were justified by a societal need. The US needed to pay down some of the enormous debt the US incurred during WWII.

More recent tests of Laffer’s theory include the Reagan, Bush 43 and Trump Administrations. What happened to government revenues when the Laffer Curve was used to justify lowering income tax rates in each of those administrations? The economy grew some but income taxes remitted to the Federal government never increased enough to offset the rate cuts. The result was a sharp increase in the Federal debt, both nominally and as a percent of GDP.

The Laffer Theory has been tried in other venues. In 2012 the Republican governor of the State of Kansas, to whom Laffer was an advisor, convinced the legislators to reduce maximum marginal tax rates. The project result, according to Governor Brownback, would be a rapidly growing economy and enough additional revenue to the state to offset the reduced tax rates.

What happened was just the opposite. Like the experience of the Federal government, tax revenues in Kansas plunged. The difference between the State of Kansas and the Federal government is a critical one. Unlike Washington, the State of Kansas is constitutionally required to balance its budget and does not have a Treasury Department that can print money. The only alternative for Kansas was to raise taxes and substantially cut expenditures in such critical areas as education and infrastructure.

Bush 41 called “trickle-down economics” that emanated from the Laffer Curve, “voodoo economics.” The voodoo economics label seems to be widely shared among most well-respected economists, with more than 95% of professional economists rejecting the Laffer Theory.

So why did Laffer receive the Presidential Medal of Freedom? The president has wide discretion in awarding the medal. A recent recipient, for example, was the golfer Tiger Woods.

What struck me as comical was the Administration’s justification for selecting Laffer. The White House press release indicated Arthur Laffer was “…one of the most influential economists in American history.” (Maybe true but “influential” does not equate necessarily to being correct.) Adding to the comedy of the press release were remarks by Trump, who claimed to have studied Arthur Laffer’s theory for many years.

Seriously? Studied for many years? Trump is anything but a student. He’s repeatedly demonstrated an appalling lack of understanding of basics taught in economics 101. While the examples are numerous, a couple of recent economic headscratchers include his claim that tariffs are paid by the country of origin – i.e., tariffs on goods shipped from China are paid by the Chinese. No, Donald, the tariffs are paid by the residents of the receiving country. The receiving country is called the United States and the tariffs are effectively a tax on consumers.

Another head-scratching idea is that world trade must be a zero-sum game; therefore, the US should work toward having a trade surplus with most all, if not all, countries. If that were true, then nearly every country worldwide would make and consume its own products. If I’m not mistaken, Trump’s theory went out millennia ago.   Maybe Trump should study more about such people as say, Marco Polo. Somehow I think Marco Polo was in the international trading business.

What about Trump’s approach to increase US GDP over the long term? Roughly 2/3 of US GDP is driven by consumer consumption. If you don’t increase the number of consumers and/or increase consumption per capita, then GDP is not going to grow and it will gradually decline. As the population ages, consumption per capita decreases and the economy can stall or start to slide — just look at what happened to the Japanese economy beginning in the 1990’s. In the US, the declining birthrate among native-born citizens will result in lower potential GDP growth unless some fundamental changes are made.

One change to help ensure sustained economic growth could be to increase the pool of younger consumers. How does the US expand the pool? The government can’t force families to have more babies. So what about more Immigrants? Wouldn’t more immigrants help offset the declining birth rate?

According to the Trump Administration, the US should not allow more immigrants, especially those entering without visas. Moreover, according to Trump, even the number of legal immigrants should be reduced sharply.

Mmm, this economics game is not so simple. Maybe Trump should have attended economics class more often. Economics seems something like a teeter-totter. Somehow the two sides need to be balanced for the system to work.

What’s the takeaway from this blog entry? Most everyone, well most everyone except Trump’s hardcore supporters, acknowledges Trump is uneducated about many subjects and his decisions are often arbitrary and conflicting.

Maybe the purpose of this entry is allowing me – and I hope some of you – to vent frustration and anger at Trump with his gang of incompetents and enablers. For many years, I’ve studied economics and had jobs where applying economic theory was a key part of a critical decision. In many of those decisions, the financial well-being of numerous families was affected. In my view, and one seemingly shared by many others, Trump’s decisions about lowering income tax rates mostly for the wealthy, efforts to influence the Federal Reserve, restructuring immigration policy could harm significantly the potential for sustained economic growth in the US.

Now, I hope I’ve made the case for why I cringed when Trump awarded the Presidential Medal of Freedom to someone like Arthur Laffer. I cringed not because of Laffer. He had no hand in this decision. I cringed at the thought of what’s going to be the next incredibly stupid decision made by Trump that will have lasting negative consequences for US citizens.

We should all be concerned, regardless of political party. As for Abbott and Costello, my apologies to them for being drawn into the discussion. Unlike the Trump Administration, even Abbott and Costello figured out who was on first.

Post Entry Update: In the week following publishing Entry #340, Eli Broad (rhymes with road), a multi-billionaire, published an Op-Ed piece in the NYT outlining why taxes on the very wealthy should be raised.  Unlike Trump, Broad views a higher-tax rate for the wealthy as necessary to help begin eliminating the growing economic inequities in the US.  Link to comments, 19 06 26 NYT Eli Broad OpEd re Asking to Raise His Taxes.

Comments welcome, as always. Thanks for your time.

 

 

 

#339 Still Supporting Trump? Quit Claiming to be a Republican.

Readers: this blog is set in the future (sometime after the year 2020). Each entry assumes there has been a 5th revolution in the US — the Revenge Revolution. More about the Revenge Revolution, a list of earlier revolutions and the author, Entry #1.

Periodically I write a “sense check” to assess whether in the next few years, a revolution in the US is still possible or whether the entire exercise is based on a statistical aberration — i.e., a roughly 50-year cycle between major upheavals in the US.  Most recent sense check, Entry #332.  

Current entry — the reason I skipped the blog entry last week was to take time and try to make some kind of sense of actions by Trump and actions, or lack thereof, by Republicans in Congress and elsewhere. By any measure, Trump’s behavior is illogical, inconsistent and illegal.

In fairness to Trump, he’s exhibited this same behavior for many years. While being president has inflated his ego and allowed him to exhibit behavior dangerous to the country, his approach to decision-making and working with others – now as head of government rather than just head of a real estate company – has remained the same as it was in New York. Noting that Trump has not changed his behavior as president does not condone his behavior. Trump continues as he has been for decades – a scumbag crook.

What has changed is the behavior of all but a few Republicans. Proposals and/or actions undertaken during the Obama and Clinton Administrations that Republicans labeled as illegal or even treasonous, are now considered by Republicans as perfectly acceptable under the Trump Administration.

Recall when Trump wanted to lock up Hillary Clinton for a having a personal email server, even though no evidence was found that classified information was compromised? Now the same Republicans who chanted “Lock her up!” think it’s okay when Trump indicates publicly he’d take information on a candidate provided by a foreign entity, even if an enemy of the US. If offered such information, he would not call the FBI. Just in case you’re wondering such behavior is illegal and possibly treasonous. And no, his insincere recant of his statement doesn’t count.

While the list of egregious behavior by Trump, his family and/or members of the Trump Administration is almost endless, what has me the most confused – baffled might be a better term – is why so-called Republicans have been so quick to join Trump and discard long-held positions on free trade, fiscal responsibility, and individual rights. What happened to the Republicans who supported those long-held beliefs?

As noted periodically in this blog, I think many so-called Republicans have been brainwashed by watching too much Fox News and/or listening frequently to Rush Limbaugh. However, if 75% of the former Republicans have been brainwashed, that still leaves 25% who should be able to think. So where is this 25% group that’s not been brainwashed? Who knows because other than a handful, no high-profile Republican seems to be speaking out against Trump.

The malleability of Republicans is dangerous. Putting Trump aside, the US needs two viable political parties to function correctly. Right now we have one party that’s functioning as a party – the Democrats. Then we have a bunch of people supporting a wannabe autocrat, but not functioning as a political party – so-called Republicans.

Let’s consider this comparison. You say, “Look at all of what Trump has done. It’s been great. So don’t get so hung up on his behavior.” If that’s your logic, then ask yourself, “If I were in Germany in the 1930s, would I support Hitler? After all, Hitler helped improve the economy. Forget that he got rid of a few million of those pesky ‘undesirables.’ Overall, things were better for Germany and we should support Hitler.” The question might be a bit of a stretch but many Republicans appear to be as malleable and spineless as many Germans in the 1930s.

Here’s a more straightforward question for people who support Trump and claim to be Republican. Are you a person who believes in long-term Republican values — free trade, fiscal responsibility, individual rights, etc.? Are you willing to discard those core values and support someone who has no ethics, shows no loyalty to others and even shows no loyalty to the United States? If you decide to continue to support Trump, obviously it’s your choice. But if you continue, please stop claiming to be a Republican.

One more item to consider. Please take time to read and think about the meaning of the oath taken by the president of the United States. “I do solemnly swear (or affirm) that I will faithfully execute the office of President of the United States, and will to the best of my ability, preserve, protect, and defend the Constitution of the United States.” Now, go look in the mirror and ask yourself, “Has Trump made every effort to preserve, protect and defend the Constitution of the United States?”

 

#338 The Human Toll of the Coming Technology Tsunami – Example, Lordstown, OH Plant

Readers: this blog is set in the future (sometime after the year 2020). Each entry assumes there has been a 5th revolution in the US — the Revenge Revolution. More about the Revenge Revolution, a list of earlier revolutions and the author, Entry #1.

Periodically I write a “sense check” to assess whether in the next few years, a revolution in the US is still possible or whether the entire exercise is based on a statistical aberration — i.e., a roughly 50-year cycle between major upheavals in the US.  With all that’s happened lately in Washington, I wrote a special sense check, Entry #332.  

One of the contributing factors to the Revenge Revolution will be a technology tsunami, which I believe is rapidly headed toward US shores.  Fifteen recent entries addressed various aspects how the tech tsunami might: (i) affect the US economy and family incomes; (ii) be mitigated by taking certain actions.  The series of entries is available as an eBook. This entry is an supplement to the booklet and now included with the booklet.  (Download: 19 06 01 Tech Tsunami Booklet with Supplement)

The impact of the technology tsunami can easily be viewed as an abstract concept, especially if one is not affected directly. For example, you read an article about technology replacing someone’s job. Then the person replaced finds another job, which is fairly easy in today’s labor market. Reader thinks, “What’s the net effect on the person whose original job was replaced by technology? Zero. What’s the net effect on the unemployment rate? Zero. Time to move on to the next article.”

But, hold on, there’s more to this story. What prompted this blog entry was an article in the New York Times about a family whose members had worked at the GM Lordstown, OH plant almost from the opening day of the facility.

The Lordstown plant was built in the mid-1960s, but over the years GM continued to invest and upgrade the facility. What resulted from investments in Lordstown and other plants throughout North America was increased potential capacity with lower labor content per car/truck produced. Thus, more output with fewer employees. (As I wrote in late 2018, although I had no first-hand information, based on my experience inside GM, closing Lordstown, and other plants in North America, seemed justified.)

What happens to workers when a GM plant closes? Depending upon an individual’s seniority and the number of jobs available at other facilities, some laid-off employees might be eligible to transfer to another GM plant. Some laid-off workers at Lordstown met the criteria and have transferred.

What about workers who aren’t eligible to transfer or who don’t want to transfer, which often involves relocation? Some training is available for other types of jobs, which are usually non-automotive and often at lower pay. In addition, some laid-off workers, again depending upon seniority, receive from GM supplemental unemployment benefits for a limited period.

Back to the family featured in the NYT article. If you haven’t read the article, it’s worth a read. (19 05 28 NYT Lordstown Shutdown Employee Impact Examples ) The short version is the father gets out of the military, goes to work at the Lordstown plant soon after it opens. Over time the father becomes a representative of the union. The son, born after the father starts at Lordstown, doesn’t study much in school but is confident he will get a job at the plant, primarily because of his father‘s position with the union.

After completing high school, the son is hired and one of his jobs is prepping cars before final painting. Painting is an areas where the auto industry has installed as much technology as possible over the years to improve the quality and consistency of the finish. The implementation of technology in the paint shop has dramatically reduced employment. At Lordstown plant the number of employees declined from 38 to 4, a decrease of almost 90%. While the decrease in employment in the paint shop is at the high-end, substantial declines in employment from technology have affected body welding, engine machining and other high-precision areas with high labor content.

At the time of closing, the son had worked at Lordstown for 25 years. While no specific age was cited in the article, the son is probably in his mid to late 40s. With his years of service, he’ll be eligible for a modest pension from GM. However, he has at least 20-25 years left before being eligible for Social Security and Medicare.

Where does the son find another middle-class paying job given his limited education and skill level? Another job in the auto industry unless he relocates to another GM plant. Even if he finds an auto job, he runs a high risk of losing it given the continuous implementation of labor-saving technology by the auto companies and suppliers.

The extent of how many jobs in the auto industries (and other industries) are being eliminated by technology goes far beyond the assembly plant, which most people think of. In an earlier blog entry I mentioned an auto supplier in Fort Wayne, IN that bends tubing to make exhaust systems for cars and trucks for many auto OEM’s. If you don’t think there are lots of twists and turns in your vehicle’s exhaust system, next time you see a car or truck up on a service rack, go take a look underneath.

The process of bending tubing might seem straightforward (no pun intended) until one thinks about what happens when a tube is bent. The metal on the “outside” of the bend becomes thinner and the metal on the “inside” of the bend wants to “crinkle.” Bending tubing can be much more complicated than it first appears.

The company that bends the tubes is a perfect example of the impact on employment of the coming technology tsunami. The company incorporates an extraordinary amount of high technology, with a plethora of very sophisticated machines…and very few people staffing those machines. The parking lot of the company is the tell-tale sign of the technology tsunami. The company operates 24×7 with significant daily output, yet has a small parking lot that even during the day when office staff is working, has plenty of empty parking spaces for visitors.

Is this just a story about how one family was affected by a GM plant closing or are there broader implications? If the attitude of the now unemployed son is at all representative, then US society has a growing problem. While the son apparently has not yet come to grips with the long-term implications of the layoff, he is searching for answers to “Why is this happening to me?” “Why, after 25 years of working at this facility, am I getting screwed?”

He’s very frustrated and believes that people in Washington “just don’t get it.” The frustration includes Trump, whom he voted for in 2016, and members of both parties. He’s also frustrated with large corporations, which he thinks suffer no penalty for shuttering plants and relocating operations to say Mexico.

The frustration and anger of the son is understandable. While from a business perspective I think GM is more than justified in closing the Lordstown plant, especially given some of labor problems over the years, the business justification does not eliminate the economic and social issues facing the laid-off workers.

We, as I keep suggesting is the proverbial societal we, need to help this family transition from pissed-off members of society to being productive workers in an ever-increasing technology-laden workplace. As it stands now, even with a small pension and some additional benefits, the son is the kind of guy who is ripe to be part of a Revenge Revolution. For those not familiar with northern Ohio, almost guaranteed he’s got a deer rifle or two and a bunch of ammo. Now, he’s out of a job, has shrinking income, thinks politicians don’t understand the problem, and thinks large corporations are exploiting people and communities. Not a good combination.  (The son is much like the character “Sandy” who appears periodically in the blog entries.)

Without some serious societal effort, the ranks of this group are going to grow. Making America great again does not involve trying to reintroduce high-labor content products or industries from decades past. The implementation of technology to replace humans is going to continue. All types of jobs and skill levels will be affected, from manufacturing to legal to medical. Without a national plan to begin lifetime education for people of all ages, from 6 to 66 (and older), the US is going to face a growing segment of the population which is extremely angry and poses a growing threat to a stable democracy.

Reminder: For more about how the technology tsunami might affect the US economy and culture, and ideas to help mitigate the effects, there’s a free ebook waiting for your download. The book is a compilation of this entry and 15 earlier blog entries about the technology tsunami. Comments welcome. (Download, 19 06 01 Tech Tsunami Booklet with Supplement)