Government regs, safety, and jobs

SANFORD, FL (jbeech.com) – too many government regulations adversely affect citizens – it’s a given amongst political candidates. Is it true?

While political candidates decry too many government regulations, why are they short on specifics? Any idiot can complain, how about offering up solutions instead. Something concrete.

General aviation

Mention business-use aircraft and a multimillion-dollar Gulfstream typically springs to mind. In point of fact, smaller propeller-driven aircraft make up the vast majority of the fleet. They’re largely very old, and due to government regs can’t be modernized economically.

For example, Genesis Hobby operates a 1954 Bonanza (nicknamed Sweet-E) for transporting display models. This nominally 4-place aircraft is usually flown absent back seats and loaded like an airborne pickup truck. She’s worth about the same as a new pickup too.

Three-years old when a ’57 Chevy was the height of Detroit’s wares, the sleek exterior belies the fact her avionics are antiques too. Moreover, FAA regulations impose such heavy economic costs modernization is unlikely.

The consequences aren’t just high costs but diminished safety and fewer jobs too.

FAA regulations: Certificated vs. non-Certificated

The FAA regulates both commercial and private aircraft. Commercial aircraft are more strictly regulated than private aircraft to better protect the fare-paying public. In broad terms, private aircraft can be segregated into two types, Certificated (made in a factory) and in homage to aviation’s roots, non-Certificated or Experimental.

While often professionally designed, Experimental aircraft are frequently crafted by amateurs, e.g. home-built. In fact, at one time all aircraft were home-built efforts because there were no factories. Successful designs eventually became commercial efforts the likes of Boeing, Cessna, etc.

The FAA’s antecedents, dating back to 1926, were charged with regulating the new industry. Unsurprisingly, they’ve created lots of regulations. However, over the years the FAA’s mission changed and thus, regulations have come to have unintended consequences. Ones, which adversely affect costs and thus, both safety and jobs.

FAA certification: Economic costs

The FAA certification process is complex and thus, costly. So costly the result is a market effectively split in two cost-wise. Parts catalogs often list a non-Certificated price while the Certificated price may be double, or more. Often a lot more. Some products are not available for Certificated aircraft because of regulatory costs.

For example, $1500 buys a single-axis non-Certificated autopilot. Meanwhile, an equivalent Certificated product is approximately $10,000. For a 2-axis autopilot the difference is $4000 vs. $13,000. However, the price delta is staggering for an all-singing, all-dancing model because $8000 vs. $35,000 is more than many aircraft are worth.

Moreover, a non-Certificated autopilot isn’t just less expensive, it’s better because it’s solid-state, operates on reduced current, has better features, and is lightweight. Meanwhile its Certificated counterpart is usually a heavy analog clunker designed in the 1960s. They’re so old they often predate integrated circuits.

Perhaps more tellingly, non-Certificated aircraft aren’t falling out of the skies due to using non-Certificated parts and accessories like autopilots. Far from it.

Surprisingly, once certified these products can’t be modernized. Not without incurring the whole certification process all over again. Consequently, these antiques are still sold – brand new! Unsurprisingly, they sell for inflated prices because the system works to protect these vendors from new competition.

This is akin to government regulations splitting the computer market in two. E.g. where business-users may only buy vintage computers. Meanwhile individuals may opt for the latest Intel screamer with the latest graphical operating system.

Thus, this regulatory cost burden becomes the crux of a problem with respect to modernizing aircraft worth what new pickup trucks cost. To wit, they cannot be modernized – not economically. This effectively prices innovation out of the Certificated aircraft market. An unintended consequence is this adversely affects safety as well.

The human costs of excessive FAA regulations

Like cruise control makes for a less tiring journey, autopilots result in less fatigued pilots. Flying in the clouds is very demanding. Think driving through fog, but worse because pilots may spiral out of control due to how the inner ear works (called a graveyard spiral).

In fact, pilot loss of control is a major component in aircraft accidents-stats each year. What typically happens is a VFR pilot inadvertently strays into clouds, or as happened to John F. Kennedy Jr., flies on a moonless night. Spatially disoriented pilots face tragic consequences.

The real tragedy, however, isn’t how just pushing the autopilot button may have saved their lives but how it isn’t an economic option for many Certificated aircraft because FAA regulations preclude installing anything but a Certificated autopilot. In effect, the overreaching FAA regulations favor the well heeled.

Sadly, this is the hitch in Genesis Hobby using Sweet-E to promote business. Operating her is effectively more risky because she doesn’t have a modern autopilot. Yet investing $13,000 for an autopilot – in an aircraft worth about what a new pickup truck costs – is difficult to justify. The numbers simply don’t work.

In this case, specifically, it means diminished safety for the employees. Yet there’s more because beyond increased operational risks, there’s another cost . . . jobs. American jobs.

The job costs of too many FAA regulations

To recap, FAA regulations dictate Sweet-E may either be equipped with an comparatively expensive Certificated-autopilot, or none at all. While the non-Certificated aircraft aftermarket is a vibrant business scene with many, many manufacturers, the aftermarket for Certificated aircraft is essentially dead.

It’s because year after year a few old-line manufacturers trot out the same old certificated-wares – at protected prices. Meanwhile, FAA bureaucrats handcuff market expansion via onerous regulations. Regulatory roadblocks means proven non-Certificated products can’t be used to improve the safety of the entire fleet.

This is especially tough during difficult economic times because it drives up costs for that part of the market, which is trying to create jobs. As if safer aircraft operation weren’t a high enough price for excessive government regulations, in bifurcating the market for manufacturers, they results in reduced opportunity for sales. No question, this is costing real jobs, right now.

Moreover, beyond the manufacturing jobs, it affects small shops and their mechanics, too. These are the little guys in American business, the ones who install these types of products. Excessive and burdensome regulations are handicapping the American economy at every turn.

Perhaps the owners of Genesis Hobby will ultimately conclude employee safety is important enough to justify spending $13,000 for the autopilot referenced above despite the fact it’s an uneconomic decision based on aircraft value. Maybe not. But there’s an irony is this because it’s a product of a company, which isn’t American.

Imagine you’re crafting the ’57 Chevy of your dreams. However, the US Government prevents you from exercising your property rights via regulations, which say it’s not OK to install a nifty new XM satellite radio. Instead you may either install an old fashioned AM push-button radio . . . or nothing at all.

We’re from the government. We’re here to protect you.

There are regulatory differences between Experimental and Certificated aircraft, which are affecting safety, spending, and jobs. These regulations should be simplified or eliminated. What would I change if I were King?

For private use aircraft it’s simple; at a minimum, once Certificated aircraft become older than the 17 years of manufacturer’s-liability then maintenance and modification should be of nobody’s concern but the owner. Better still, it wouldn’t be any different for Certificated aircraft than it is for other factory-made transportation products like automobiles, boats, motorcycles, or snowmobiles. E.g. take it in for maintenance or modernization to the dealer, your own mechanic, or do the work yourself because it’s your private property.

While I know this last, especially, is heresy for some the facts are we have a fully functioning system of civil redress and tort in America. Thus, if an accident occurs, whether it’s due to the maintenance or modernization, or not, there’s already a mechanism in place expressly designed to deal with it. This simply isn’t the purview of bureaucrats.

Conclusion

Ultimately, if the goal is to simplify regulations and get the government out of our citizen’s lives, we have to begin with the idea it’s not the business of the government to coddle and protect us against ourselves. In the alternative, the nanny state may as well put all citizens in padded rooms and feed us through a tube to keep us safe.

A dog in the hunt

It’s my fat ass usually piloting Sweet-E, so this is rather self serving in some ways because I have a dog in the hunt. While I offer this comment to aid the reader in judging how large a grain of salt to apply to this thesis, it doesn’t change the fact FAA regs impede economical fleet modernization and thus, adversely affect both safety and jobs.

Were the rules changed, Sweet-E would very soon get a good middle-of-the-road autopilot. One costing about $4000. It would improve our chances when flying. It would represent a shot in the arm for the manufacturer. It would give needed work to the mechanics and small shop owners at every airport across America.

Moreover, it wouldn’t stop there either because there are more non-Certificated gadgets available in the aftermarket on which the overwhelmingly old Certificated fleet owners would be able to spend money than you can shake a stick at. These innovative American manufacturers offer a vast cornucopia of amazing new devices, which would help modernize the fleet for safer operations. If only the government would get out of the way.

Some, for example, improve a pilot’s situational awareness – so much so it’s almost like seeing in the dark. These are devices offered for 1/10th the price of Certificated products, but because they can be updated and improved without the FAA’s regulatory burden, their evolution far outpaces the old-line ware manufacturer.How can our government – in good consciense – continue to stand in the way of modernizing the fleet? How can it – in good conscience – impede our American manufacturers? How can FAA bureaucrats – in good conscience – continue to keep consumers from acting in their own best interests?

Do we put a sack of cement on the shoulders of American sprinters when they’re racing at the Olympics? Why are we burdening our nation with so many regulations?

Your author is no genius but this is an easy way of giving America a kick in the economic ass. If I can see this, then anybody who wants to be my President needs to start getting specific about reducing the burden of government because I’ve had it with platitudes and generalities. Don’t take my vote for granted.

Whatever happened to land of the free and pursuit of happiness? 

The economy – how we got here

SANFORD (jbeech) – This isn’t a garden variety business recession so doing what’s worked before, e.g. lowering interest rates, hasn’t worked.

Here’s a primer; as the economy went into recession in 2007, we at Genesis Hobby quickly cut back on non-essential spending. We’ve been at this since 1993 and because it wasn’t our first dance with recession, we knew what to do. E.g. cut expenses because there’s no question someone’s car payment, or groceries, comes waaaay ahead of buying model helicopters from us.

At first, the slow down meant running inventory levels lower than usual (this was 3rd quarter 2007) but before long it also meant reducing R&D because gambling on releasing new products for spring 2008 looked less and less like a good idea. By 1st quarter 2008 there was no question things were bad and heading to worse. Thus, in spring 2008 we began laying off folks and cutting back on advertising.

Laying folks off is bad. But for us, cutting back on advertising means things are really, really bad. In fact, we’d never done this for a recession because this is usually when we cranked up the pressure on our competitors. E.g. advertised more.

Anyway, our advertising commitment changed as we went from 4-color, full page magazine adverts in three monthly magazines (plus banner ads on several websites) to just one full-page 4-color advert in a quarterly magazine, plus 1/3-page 2-color adverts in two magazines. And zero banner adverts. Moreover, our little enterprise went from 5 employees to two . . . just Lynn and I. Basically, we entered full-on hunker-down mode.

Naturally, we cleaned up our personal balance sheet too. Other than our house payment, we cut back on everything we could. This meant selling Lynn’s paid-for Mercedes and putting her into a Mazda 6. It meant paying off credit cads. It even meant eliminating little luxuries like satellite television (and switching to over the air) and converting from AT&T and an iPhone to pre-paid voice-only phones. Yes, we reverted back to the dark ages!

Cutting expenses quickly is our formula for survival. It’s a formula 30+ years of marriage and almost 20 years of being self-employed has taught us works. And if we have to, we dip into savings to meet our obligations. Moreover, this formula works for anybody in America who is reasonably solvent and thus, those who can have largely done the same thing. However, this is bad for America’s GDP, and it’s bad for folks living on the financial edge..

While we’ve cut expenses and hunkered down, the unfortunate folks, e.g. those living on the ragged finacial edge (because they spend everything they make every month) this recession has meant not meeting their obligations when employment issues arrose. By issue I mean things like having their hours cut back, or worse, being laid off. An unfortunate byproduct of recessions are folks living the American Dream – on credit cards – never saved for the proverbial rainy day and pay dearly for their financial foolishnesss when the economy turns down.

These unfortunates soon get to the point they can’t meet their monthly payments. Absent a rainy day fund this is when the repo man shows up. He shows up for their cars, TVs, furniture, and homes. Moreover, while it’s quite sad for them, there’s nothing unusual about it. E.g. so far everything has been normal for a recession . . . except it isn’t. Normal that is.

You see, during normal recessions, a few homes are repossessed and when they are, the banks quickly sell them off (since they’re not in the home owning business). Simply put they don’t want to hold the assets. However, this time around there’s been a problem.

The problem came about because of a recent financial tool called a CDO (Collateralized Debt Obligation). Basically, banks had taken their mortgages, a bunch at a time, and packaged them up for resale. These were sold these to investors. Unfortunately, this also made it harder to figure out who owns which mortgages. Moreover, two other problems surfaced.

First, before you buy an apple, you look it over to ensure it’s not rotten. Similarly, before you buy a CDO you pay someone to look it over for you. Companies like Standard & Poor’s, or ratings agencies, do this. It’s their job, so to speak.

Then the rating agencies assign a rating, e.g. good apples versus so-so apples versus bad apples. Unfortunately, they (the rating agencies) did a crummy job. Thus, some folks paid for good apples but received bad apples – or departing the analogy – bad quality CDOs.

Second, a business called AIG was selling CDS (Credit Default Swaps) on the CDOs. Think of CDSs as insurance policies on the CDOs (in case things go wrong). Naturally, prices are based on ratings just like car insurance is cheaper for people with stellar driving records. So AIG was selling CDS based on the faulty ratings assigned by rating agencies like S&P . . . oops!

However, there was another problem. AIG didn’t have the reserves they should have had to engage in this kind of business. The problem was government regulators dropped the ball, which let them engage in this business without adequate reserves . . . double oops!

I could go on and lay blame on the government for forcing the banks to make poor judgment loans but long story shortened, AIG went broke. Or so close to it as doesn’t matter because too many buyers of the CDSs tried to cash in their insurance policies on their CDOs (e.g. those made up of poorly performing mortgages).

This was a big deal. Moreover, because everything was quickly going to hell in a hand basket, the government stepped in. By the way, the term for this is systemic risk because it could lead to everybody going out of business. Anyway, Uncle Sam stepped in and saved the day – sort of.

We learn about supply and demand in Economics 101. This is basic stuff like too much supply leads to lower prices. Similarly, too little demand also leads to lower prices; remember?

During a recession, fewer people can buy, and thus the lower demand means prices fall. Unsurprisingly, banks selling a lot of houses increased the supply, so prices fell. Unlike mathematics where two negative multiply to make a positive, in this case, these two negatives have made things much worse.

You see, as home prices fall, more and more people find themselves owing more than their homes are worth. Folks making a 20-25% down payment have to see prices fall a lot before they’re so upside down they can economically walk away. However, folks with only a 1 or 2% down payment were upside down almost immediately.

Unsurprisingly, with very little skin in the game, many of the latter folks walked away. Jingle mail entered the lexicon (a reference to the sound of the mail because folks were mailing the house keys to the bank). Naturally, the banks then are putting more and more houses on the market. Way more than usual.

This means prices are falling further, and further. It’s a vicious cycle and is pretty much where we are now. If anything, things are getting worse. We need a fix.

The fix won’t be politically palatable. It doesn’t matter. We need a fix or we’re going to be enduring this recession for the next decade. It’s that bad.

Since any idiot can point out a problem, how about coming up with a fix? This has proven to be harder than I imagined. Smart people have tried. While I’m not one of the smart guys, I do have an idea. Here goes; since the GSE’s backstop +90% of mortgages in the USA already, e.g. we the people are on the hook anyway, why not try changing the dynamic?

First, we’re presently loaning to the banks at 1/4% (to help them repair their balance sheets). The idea behind this is they, in turn, will extend more loans. E.g. to folks needing a refi out of too expensive mortgages (to preclude them defaulting). Unfortunately, the banks are not making many loans. This is because they’ve tightened their lending standards. So why don’t we short circuit the situation? Let’s refi folks directly (cut out the GSEs if they don’t want to play ball). Make the loans to the people with exisiting mortgages at 1/4% . . . instead of continuing to loan to the banks. The banks will howl bloody murder. The GSEs will too because they are private businesses and are making money on the loans despite the rate of forclosures. Since we need to do something about the GSEs anyway, this takes them out of the equation by putting them out of business. Of course, plenty of smart people will explain this won’t work.

However, I figure someone struggling with a $1400 mortgage, but current, isn’t spending anything on toys and stuff, which aren’t absolutely essential because they’re in hunker-down mode. Unfortunately, as long as folks are in hunker down mode they won’t spend.

Mortgages at 1/4% will see house payments drop from $1400 to maybe $700. And once folks catch their economic-breath (form having mortgages drop in half) they’ll start seeing money left over in their pockets after paying their bills. It won’t take long before they’re spending again.

After all, ordinary folks spending makes up 70% of GDP and as things stand, they’re not spending. Let’s just cut to the chase so they can spend again. I know this won’t happen but if it did, I bet we’re out of recession before Christmas.