Futures and Options

I was reminded again today of H. L. Mencken’s famous quote that, “For every complex problem, there is a solution that is simple, neat, and wrong.”  Today’s trigger is a piece, purportedly from a letter to the editor, but which has been making the rounds on the Internet for at least a month now.  The idea is ambitiously called “Patriotic Retirement” and the “letter” runs as follows:

There’s about 40 million people over 50 years old……. in the work force – pay them $1 million apiece severance with the following stipulations.

1) They leave their jobs. Forty million job openings – UNEMPLOYMENT FIXED

2) They buy NEW American cars. Forty million cars ordered – AUTO INDUSTRY FIXED.

3) They either buy a house or pay off their mortgage – HOUSING CRISIS FIXED.

Let’s take a look at this more critically, shall we?  The US life expectancy is 78 years (on average, for men it’s 75 years, for women, it’s 81 years, but for simplicity, let’s use the average).

If someone is 50 years old and receives the $1,000,000 to retire, that amounts to $35,714.28 per year until that person’s death.  Assuming they die at 78.  If they live longer, it’s less per year.  So they’re probably going to be looking for another job eventually anyway because, unless all of these people live in areas with ridiculously low costs of living, that $35,714.28 per year just doesn’t go very far.  If someone is 60 years old, then it becomes more reasonable at $55,555.55 per year.  Of course, this is all assuming that this is tax-free income.  If it is taxable, lop at least 40% off of those numbers so that Uncle Sugar can have his cut.

Requiring the purchase of a new American car (neglecting the fact that many “Japanese” cars are built in America and many “American” cars are built in Canada or Mexico), would mean that the person would sacrifice about a year’s worth of his or her payout in order to buy the car.  Or they would buy a small car (on which auto makers see very little profit) and promptly sell it, creating a glut of nearly-new used cars that would serve only to depress the automotive market further after the initial, artificial, spike in sales.  More important, however, is that this addresses a symptom and not the disease.

Simply increasing demand through a government mandate will not provide an incentive for increased quality or new ideas, which again serves only to harm automotive companies in the long run.  The situation we currently have exists because US automotive firms have been slower to react to changes in the marketplace than foreign firms have been and simply forcing people to buy the current products will not drive the innovation that US auto makers truly need to see.  In fact, their current state of desperation is, interestingly, the most likely means to ensure that their products will actually improve and become competitive once again.  Look at Ford, for example.  Ford was in a desperate place a few years ago and made the very bold move of ousting William Clay Ford from the position of CEO and bringing in Alan Mulally.  Under Mulally’s leadership, Ford has begun a rather impressive turnaround.  Not only are they the only US auto maker to decline federal bailout money, but they are also producing a hybrid that bests Toyota’s comparable offering (the new Fusion hybrid that offers superior mileage to Toyota’s Camry hybrid, and, I speak from experience with both cars, offers a superior driving experience).  Desperation breeds innovation.

Buying a new house or paying off a mortgage represents the potential sacrifice of 3 or more years worth of the payout in most scenarios and once again ignores the underlying causes.  First of all, people who are 50 or older are unlikely to be upside down in their mortgages.  These are not, by and large, the people who are at risk of losing their homes and they are not, by and large, people whose mortgages represent a high risk to the banks.  Sure, there will be some people here who fit both those categories, but not in significant numbers.  The 50+ and employed demographic is not where most of the risk lies.  Because of this, a stipulation requiring that these people either pay off their mortgage or buy a new house (presumably outright rather than with a loan) would not have any significant affect on the amount of toxic assets carried by banks.  Additionally, many people in this age group already have their homes paid off, so forcing them to buy a new house is also going to force them to sell a house as well (most likely they would buy a house and then sell it again immediately given the hassles involved with moving and also with renting), which means no real progress is made as houses would remain on the market, just now with different owners.

And, lest you think I’m letting something slip, there’s the small problem of the math.  $1 million multiplied by 40 million people is $40,000,000,000,000.  $40 Trillion.  That’s significantly more money than we’re spending on large companies.  More expensive, less effective.  Everyone loses.

At first blush, the proposition seems good.  But upon actual critical analysis it falls apart, fast.  It’s a “feel-good” solution that is actually no solution at all and it represents our collective (and unfortunate) desire for simple “quick-fix” remedies that don’t require us to think about complex issues.  Reality doesn’t work that way.  The problems we are facing today are complex, and the solutions will also be complex.  We’re going to have to actually think to get ourselves out of this one.  I know that’s frightening to many people, but it’s unavoidable.