Saturday, January 16, 2010

Transportation and Free Enterprise

Shortly after taking office President Obama announced plans for government spending that calls for “billions of dollars to rebuild roads and bridges, modernize public schools, and construct wind farms and other alternative sources of energy.”

He didn’t say much about railroads but it is common to ignore the differences between America’s highways and railroads. With highways everyone has equal access. Anyone can start a trucking company and be ready to haul freight and pay fuel taxes by using Federal highways and the interstate highway system. The trucking companies are private enterprise, but the roads are public enterprise so truck transportation becomes a joint partnership of business and government.

Railroads are private companies that build and maintain their right of way and they own their locomotives and rolling stock. America’s rail routes go back to the 19th century when the Federal government provided land grants to investors who built the lines.

Suppose for the last 50 or 100 years that anyone who invested in a locomotive and freight cars had the right to use the entire rail network as long as they paid fuel taxes just like truckers do for the highways. That way new shippers and new investors could decide trucks or rail without the need to spend billions building and maintaining their own railroads.

Think of a big shipper like United Parcel Service that started way back in 1907. Now they operate their own airplanes and their own trucks, but using the rails means an additional set of transactions with railroads. Shipping rates must cover the cost of fuel, locomotives and freight cars, but also the cost of capital and profit for the railroads.

When it’s time to decide rail or truck, the decision depends on different financial considerations rather than the best way to move freight. Since rail is not available with just the expense of locomotives, freight cars, fuel and fuel tax like it is for trucks, decisions favor trucks.

A whole highway, street and bridge construction industry has grown up from America’s system of interest free and pay as we go fuel tax finance for highways but not railroads. Railroads have to resort to risky private funding and fluctuating interest rates.

We can only speculate how much more rail transportation America would have if the rails and roads had equal access to financing, but even more important, if shippers could use the rails like they use the highways.

During the presidential campaign the Republicans pulled out their favorite bogeyman and called Mr. Obama a Socialist. The terms capitalism and socialism have special definitions in American politics. Socialists are bad guys in political campaigns, but socialist projects like the Interstate Highway System get funded anyway. We can also see that capitalism and socialism are not really the issue; it’s the rules and the finance that make the difference.

Wednesday, January 6, 2010

Retail Costs and Manufacturing

The decline of the American Textile industry is well documented. In 1990 there were 928 thousand working in just the apparel industry; by 2008 it was down to 198 thousand. The decline is more than double the jobs lost in the automobile industry.

Most of us see our clothes marked "Made in China" or some far eastern country. In the debate over free trade economists have offered excuses for the made in China label. They said textiles and the cut and sew clothing industry are labor intensive and American labor is too expensive to compete with the Chinese.

News coverage on the global clothing industry often includes a picture of Asian women lined up in long rows at sewing machines suggesting another excuse: low cost needs large scale.

Large firms are common in manufacturing because manufacturing industries typically starts out with many companies that gradually consolidate into a few large scale producers. The automobile industry started out with hundreds of firms at the beginning of the last century. Gradually they combined into fewer, but bigger producers, until only three American companies survive in a small group of global auto companies.

The cut and sew clothing industry was never like the automobile industry, but large firms produced clothing to be sold and shipped to other firms in the wholesale and retail parts of the marketing chain.

Lately though creative retailers are finding small scale clothing production can be cost competitive when it is combined with their own retail operations. Retailers that produce on site in their own space capture the entire marketing margin; that is the sales price above their manufacturing costs.

Producing on site eliminates the wholesaler and has the potential to cut inventory and transportation costs. Clothing sales have seasonal fluctuations with peak sales in late summer and again in December. Staff doing cut and sew in off peak periods can be moved to retail selling in peak sales periods making more intensive use of staff and raising labor productivity and lowering costs.

Shipping charges from the Far East are eliminated with local production. Freight charges from China to Long Beach are only part of the expense to import clothing. There are Long Beach handling charges, warehouse in and out fees, forklift fees, customs entry fees, and customs duties, but the clothing shipment is still in Long Beach. Add the shipping fee from Long Beach to wherever, and when it is all added up shipping charges are not insignificant in the costs for importing clothing.

It is unusual for an industry to transform itself from a few dominate firms to many small firms in competition. It can happen though. For many years IBM dominated the computer industry. Then the microprocessor chip transformed the industry allowing hundreds of new firms to enter the hardware and software industry. The PC revolution created many jobs with firms only a fraction of IBM.

In the combined textile and apparel industries more than a million jobs are gone, but that should not mean it was inevitable as economist’s like to say. What looks inevitable may not be. America needs jobs and new ideas; maybe a smaller scale, fully integrated clothing industry is one place to look.