Not to Use But to Sell

Thirty some-odd years ago I heard a quote that was attributed to Morrie Mages. Morrie Mages was a guy who started out with a pushcart on Maxwell Street and ended up owning and operating a local chain of sporting goods stores. When confronted by an angry customer upset at the low quality of a tennis racket he’d bought from one of Mr. Mages’s stores, the owner replied “These are not sporting goods to use; they are sporting goods to sell.”

I don’t think that either President Obama or Keith Hennessey understands what the Germans and Chinese are doing. In a recent speech the president said that he didn’t want to “cede the wind and solar and advanced battery industries to countries like China and Germany” as part of a justification for the U. S. subsidizing its own wind, solar, and battery industries. Mr. Hennessey retorts:

If the President wants to subsidize wind and solar power because he wants to accelerate the development of carbon-free alternatives to coal and natural gas, he should make that argument. If President Obama is instead going to subsidize industries either because he likes them or because other Nations’ governments are subsidizing them, then we must acknowledge that he is engaged in industrial policy, aka state-managed capitalism, with an open question about whether the managing state is based in DC, Berlin, or Beijing.

There’s a basic difference between what Germany and China are doing and what we would be doing. Germany and China aren’t subsidizing their wind, solar, and battery manufacturing industries to use them. They are subsidizing them to sell windmills, solar cells, and batteries. Does anybody seriously believe that we can undercut the Chinese on price in any of those areas? They’ve obviously got us on labor and all of those technologies which require rare earth elements. China is now the primary (if not exclusive) provider of rare earth elements for manufacturers everywhere, at least in part because refining them is dirty and the U. S. (formerly the primary provider) has made the decision not to do something so toxic on its own soil, polluting its own air, soil, and water. China has put rare earth exports on allotment, giving priority to their own industries. In the near term at least China has us by the short and curlies with respect to rare earth elements. In the longer term we could resume producing rare earth elements here but should we relax our environmental regulations on behalf of economic nationalism?

The Chinese and Germans plan to sell their products here. For the Chinese in particular those products are too expensive to use domestically. They’ll stick to coal and hydro. If we’re going to subsidize our wind, solar, and battery manufacturing for sale here, we’d best restrict our imports while we’re at it. Otherwise we’ll just be pissing the money down the drain.

In case it isn’t clear from this post I think the entire idea is a boondoggle. We should impose Pigouvian taxes on oil, put whatever environmental regulations we think are necessary in place, stop subsidizing ethanol production, end whatever energy subsidies we’ve got in place, and let the market work its wonders.

17 comments… add one
  • China is now the primary (if not exclusive) provider of rare earth elements for manufacturers everywhere, at least in part because refining them is dirty and the U. S. (formerly the primary provider) has made the decision not to do something so toxic on its own soil, polluting its own air, soil, and water.

    What!?!?!?!?!

    No!!!!!

    Kevin Drum told me, and others, this is never the case with environmental policy.

  • In case it isn’t clear from this post I think the entire idea is a boondoggle. We should impose Pigouvian taxes on oil, put whatever environmental regulations we think are necessary in place, stop subsidizing ethanol production, end whatever energy subsidies we’ve got in place, and let the market work its wonders.

    You jerk. It is clear you hate somebody. Not sure who yet, but when I figure it out I’ll be back to make another post!!!!!

    [/sarcasm]

    Sorry Dave can’t resist. That kind of level headed thinking is just…well…wrong these days. You need to spew nationalistic jingoisms (is that a word?) and pay homage to the Gaia while talking about how we can rebuild U.S. manufacturing employment all at the same time. The modern version of fast, better, cheaper.

  • Icepick

    Otherwise we’ll just be pissing the money down the drain.

    No, it will be giving money to favored donors. It’s the new spoils system, only about 1/10 as transparent and several times more corrupt. But we have to do it this way. Otherwise we’ll end up exactly like Chad.

  • Ben Wolf

    The best policy would be something I think Dave has referenced before, retributive measures against countries employing unfair trade practices against us. Whether some will admit it or not, we’ve been in a trade war for decades in which we rarely fight back. There are serious economic repercussions to persistent current account deficits that Washington doesn’t seem to want to deal with head on.

  • Who cares, we have a printing press!!!!

  • Drew

    One of the advantages of what I do is the reach it gives you, certainly on business matters, and often others.

    We were looking at an industrial magnet company about 6-8 months ago. Industrial magnets use a rare earth called neodymium. Yes, mostly controlled by China. (BTW – I first became aware of this rare earth because of my hi fi vice which uses neodymium magnets in high end dynamic speakers.)

    Because these magnets are integral to industrial process control, they have great strategic significance to US manufacturing. Hence, we discovered that a shuttered (driven by the enviros) mine in I believe AZ (where I am now) or perhaps NV or CA (yes, CA) is scheduled for reopening this year.

    At times the greens get trumped. I suspect someone may have said to the President, “Sir, you can go on crappin’ every one with your windmill, solar and electric car fantasies, because there are so many alternatives and the dead weight loss can be hidden, but you will go down in history as a real dope if you dont come to your senses on this.”.

    Read: election realities trump enviro BS

    Just speculating.

    However

  • steve

    Why is it that we cannot manufacture at costs that are competitive with the Chinese, as Dave suggests, but we can mine at a competitive rate?

    OT- ” I first became aware of this rare earth because of my hi fi vice which uses neodymium magnets in high end dynamic speakers.”

    I owned one of the first set of Infinity Betas ever made. Finally sold them to friend two years ago. We downsized to low-mid range stuff, but I still remember the first time we fired them up (Krell front end).

    Steve

  • Drew

    Steve

    Please be careful with the we can’t……

    We can’t compete if you are making toys. But if the labor as a fraction of manufacturing cost ration is low, if you have lots of change orders, if you have ver collaborative design issues, if product shipping is bulky or delivery times precise, or if you need to have local knowledge to understand bidding, or high intellectual content………you can do just fine. We do.

  • Drew

    Steve

    Infinity was an innovative company. I don’t know if you still allocate material time and money to hi fi, but if dynamic speakers still fit your fancy, if I could I’d suggest Sonus Faber (heh, I would, I have the Strats) but also high end Wilson Audio, of course B&W, and less pocket damaging Vandersteens.

    Depending on your tastes, and current electronics, if planers make sense you can get the best value in all of high end audio with Maggie’s, but make sure you have power, power and power, oh, and power…..and a fast amp, and if your tastes have drifted to very quiet passages such as Miles Davis jazz or chamber music, the stat list is short: Quad and Martin Logan. (they are back!).

    BTW – Dave, depending on your rig, opera through s tats is divine, just forget the dynamic flourishes of the orchestra. I could just never do that.

  • Mercer

    I would like to know what Hennessy thinks of a $8 billion loan guarantees for power plants? For example:

    http://economix.blogs.nytimes.com/2012/03/26/the-nurture-of-nuclear-power/

    What form of energy does not get some kind of special treatment from the government? I agree a tax on oil would be better but it is considered blasphemy to ever raise any taxes according to supply side theology.

  • Drew, I think you’d like Ms. Fasanella’s blog, too. She works in the apparel industry — started as a pattern-maker, took a degree in economics from UTexas, and now works as a consultant to the trade, over a 30-some-odd year history.

    She thinks apparel can come back to the states for the every reasons you say manufacturing survives here. Fashion-Incubator.

    She’s a straight-forward woman, too.

  • Ben Wolf

    @Steve Verdon

    “Who cares, we have a printing press!!!!”

    Why would you think this way?

  • Drew

    Janis

    Thanks. I looked at it. It brings up an anecdote. I’ve only been with our firm for 13 years, and we don’t do apparel deals. But about 18 years ago former partners did. They made a fortune on one, but about 4 years after selling the industry moved to Mexico and the company went bankrupt.

    Fast forward. About a year or two ago an apparel deal came along. The pitch was that the fashion content was so high that constantly changing styles and manufacturing techniques, along with precision craftsmanship would prevent the business from going off shore. Many of the things I mentioned. But for me, one of the basic tenets of investing is knowing what you know, and what you don’t. I know widget making. I don’t know apparel. Since we have a one black ball investment committee I killed the deal. I hear it’s done well.

    Can’t win them all.

  • Drew

    I agree a tax on oil would be better but it is considered blasphemy to ever raise any taxes according to supply side theology.

    I think that’s unnecessarily simplistic, mercer. Pigouvian taxes are a perfect example of a tax that, in theory, should be imposed. No one should be able to impose costs on others while pursuing their own economic gain. The problem is correctly assessing them. I think man made global warming is a complete farce. The theory, on it’s best day, should be thought of as contributing about as much to climate change as pissing in the ocean does to affecting the tides.

    And yet others disagree. So how should we assess a tax? The global warming nuts would assess draconian taxes. I’d be thinking $.00001 per gallon. And always fear the politicians. Just look at ethanol subsidies. Look at the current solar debacle. It’s a classic camels nose in the tent situation.

    Even for taxes that make sense in theory, it’s not religion to be circumspect, it’s prudence.

  • Ben Wolf

    “But for me, one of the basic tenets of investing is knowing what you know, and what you don’t.”

    Very well said.

  • @Steve Verdon

    “Who cares, we have a printing press!!!!”

    Why would you think this way?

    Seriously?

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