What Really is Sustainable?

Today, the Bush administration announced that it has had talks with GM, Ford, and Chrysler about providing additional taxpayer money to the automakers beyond the $25 billion already announced.

Last week, Consumer Reports announced its annual automobile reliability rankings. The Chrysler Sebring was rated as Consumer Reports’ least reliable car and Chrysler’s offerings clustered at the bottom of Consumer Reports’ rankings. In contrast, Ford had almost caught up to Honda and Toyota in reliability.

Chrysler has made horrible cars for many years and would have failed long ago if the government had not bailed them out in 1979. That they are still in business takes away sales from Ford and GM and helps poison consumers’ views of the quality of American cars. Chrysler’s business model is simply not sustainable, nor is throwing more good money after bad.

The best thing for the American automobile industry would be reduced capacity and higher quality products. A bankruptcy at Chrysler would be a good first step. With GM angling to buy Chrysler and government bailouts on the horizon, of course, the inevitable will be postponed. In the meantime, the taxpayer will be bled some more.

Also today, the Fed announced that it will begin to buy commercial paper. Commercial paper is short-term debt that companies use to help finance their operations. The Fed said it will not cap the total amount it lends out; and at this point, who will be the recipients of more taxpayer handouts is unclear.

To illustrate why this is insanity, let’s take the examples of three retailers: Circuit City, Crutchfield, and Costco. Circuit City is an electronics retailer with a web presence. Crutchfield is a large electronics retailer who sells exclusively online. Costco is an upscale warehouse chain that sells electronics too, among other things. Circuit City will likely go bankrupt while Crutchfield and Costco are likely to survive and even thrive in the coming depression.

In 2007, Circuit City became famous for firing 3400 “overpaid” sales clerks. Now, who did Circuit City consider overpaid? They were sales clerks earning an average of $12-$15 an hour. Of course, Circuit City’s already poor service became even worse. All well and good, as long as consumers were spending their home-equity lines of credit and buying new, big-screen sets. As long as the economy was good, consumers were all too willing to add to their purchase an overpriced, extended warranty and fancy, high-profit connecting cables. Like subprime mortgages, this was an unsustainable business model. Like the subprime industry, Circuit City deserves to go out of business, without the Fed hindering this process.

Contrast Circuit City with Crutchfield. Here is what the CEO of Crutchfield recently had to say:

For many years, I have been concerned about the growing credit bubble. It was obvious to me that it was unsustainable and that an inevitable day of reckoning would come. To protect our customers, our employees, and my family from the disastrous consequences of a financial meltdown, I positioned Crutchfield to withstand the worst. We became very frugal with how we spent money. We did not pay outlandish executive salaries and bonuses. We did not build fancy facilities. We did not expand our retail store operations. And we did not buy other companies. Instead, we worked extremely hard to improve how we serve our customers, while we managed every aspect of our business with excellence. Furthermore, we paid off all of our debt and accumulated cash reserves.

Or, contrast Circuit City with Costco. Here is what the CEO of Costco, Jim Sinegal, recently had to say in response to why Costco pays their workers on average $17 an hour and covers 90% of the health care costs:

You have to recognize — and I don’t mean this in an acrimonious sense — that the people in that business are trying to make money between now and next Thursday. We’re trying to build a company that’s going to be here 50 and 60 years from now. We owe that to the communities where we do business. We owe that to our employees, that they can count on us for security. We have 140,000 employees and their families; that’s a significant number of people who count on us. We owe it to our suppliers. Think about the people who produce products for us — you could probably multiply our family of employees by three or four times. And we owe it to our customers to continue to offer good prices. Our presence in a community makes pricing better throughout that community because when you have a tough competitor in the marketplace, prices come down.

Crutchfield and Costco have sustainable business models—Circuit City does not. Sustainability has become a new, business buzz word. Bailouts hinder—rather than promote—sustainable business models.

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6 Responses to What Really is Sustainable?

  1. Tesh says:

    I’m a mere thirtysomething with a BFA degree, but this sort of thing seems like common sense to me. Build for the long run and don’t let short term burn up long term potential. I’m baffled by the mentality of those around me who have aided and abetted the bizarre consumptive binge that is now sinking our economy. Frugality, thrift, prudence… those aren’t just words. I really cannot understand the mentality that has turned its back on these simple concepts.

  2. Tesh,

    Yes, it is amazing!

    As an economist what is equally amazing are the charlatans calling themselves economists who have no idea what role savings plays in an economy. Savings fuel prosperity and growth!

  3. Lila says:

    Thanks. This is really interesting. Could you add a feature to your site so that I can easily send this as a link to some people?

  4. Tesh says:

    Barry,

    What scares me are the “financial advisers” that I know who suggest that investing is saving. It’s a disease that has permeated the American conscious. The whole business of “making your money work for you” fuels a bizarre sense of entitlement, built on the sense that the economy is always growing, that mutual funds (and/or the stock market) “always go up”, and the insane notion that perpetual exponential growth is possible in a finite system. I’m no economist, but I know math, and that’s simply not possible.

    As I understand it, capital is the key to capitalism. That is, real, honest assets, not promised to anything, and not Orwellian “credit” numbers floating around on a balance sheet somewhere, are necessary to actually fuel production. A service economy is built on selling access to things that are already made, or providing work for money. There’s a market for that, sure, but if an economy is imbalanced to consumption and service rather than production, there is no way to stave off the eventual collapse of the system. (Other than shifting the balance back to production, that is.)

    Is there something I’m missing? I’m just a relatively simple sort of guy, looking at the basic math of the system, and when I see the FIRE sector, services, government and consumption outweighing production, I see an imbalanced equation that leads to dangerous deficits. If I ran my home budget that way, with more liabilities than assets, I’d have problems. I know, the printing presses (or fiat fractional reserve lending) can give the sense of production, but without anything real to back it up, I can’t shake the feeling of a severely broken usurious death spiral in a finite zero sum world.

  5. Tesh,

    Well said! An economy built on fancy financial instruments and speculation is not sustainable.

  6. […] correct buzzword is rooted more in sociology and feel-good PC terminology.  The only truly sustainable business is one that is mathematically stable.  That means no interest.  It means providing a valuable […]

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