Dollars and Sense: Volkswagen woes top economic news
Volkswagen woes. After weeks of covering stock market gyrations and monetary policy related to the Federal Reserve, last week the business news shifted to more corporate issues, beginning with Volkswagen. Chief Executive Officer Martin Winterkorn resigned on Wednesday amid a growing scandal over fake emission controls. Winterkorn said he did nothing wrong personally, but he accepted responsibility for the scandal, saying the company needed a fresh start. Volkswagen is accused of manipulating the emission controls on 11 million VW diesel cars. The vehicles had software that could sense when they were being tested for emissions, turning on the controls. Emission control devices would shut off during everyday driving. That allowed the cars to pass emissions tests while still getting great performance and gas mileage. It wasn’t a mistake but an intentional effort to deceive and circumvent the law.
How big a problem? This is going to be a big problem for Volkswagen. Engineers say they can solve the technical problem with a software fix but it won’t go away once the cars are fixed. VW faces the possibility of huge criminal fines and possibly even jail time for any VW officials involved. Customers who felt deceived by VW might be able to get compensation from the company, which has set aside more than $7 billion to deal with the problem. VW stock is already down dramatically. It lost $20 billion in market value last week alone. This is a defining moment for the company, and potentially a defining moment in the relationship between corporations and their government regulators.
Turing turning tweet. In another example of corporations behaving badly, Turing Pharmaceuticals jacked up the price of a drug it recently acquired, from about $13 a pill to $750 a pill. Then Hillary Clinton tweeted that the price hike was outrageous, and pledged to do something about it if elected president. With that, drug company stocks started falling. The next day Clinton proposed a $250 monthly cap on prescription drugs. That sent drug company stock down further. It didn’t help matters that Turing Pharmaceuticals CEO is a brash, 32-year-old former hedge fund manager who was—at least initially—completely unrepentant. He seemed to confirm every stereotype about rapacious corporate managers. In the end, though, the public outcry was so great he ultimately backed down and lowered the price of the drug.
Economic news. The merger and acquisition market remained active last week. Atmel, a California-based semiconductor company, surged after it accepted an offer worth about $4.6 billion in cash and stock from Britain’s Dialog Semiconductor. Atmel provides electronics products used in the industrial, automotive, consumer, communications, and computing markets. First time claims for unemployment benefits remain low, well under 300,000 last week, signaling job growth. That said, all was not rosy. Durable goods orders for August fell 2 percent, though that was a little better than expectations. U.S. home sales slid in August by 4.8 percent from the previous month, the most since January, according to the National Association of Realtors. Solid job growth and low mortgage rates have boosted sales, but home prices are rising faster than incomes, so the housing market may top out until we see more wage growth. Caterpillar, which is more vulnerable than most companies to global concerns, announced it would lay off 5,000 workers by the end of 2016 and could potentially shed up to 10,000 workers by the end of 2018.
Pope-onomics. Pope Francis discussed economic matters last week, but lots of economists and analysts wished he had read a book by a free-market economist like Ludwig von Mises or Milton Friedman before he spoke. Or perhaps even a book like Henry Hazlett’s Ecomomics in One Lesson, or my new favorite: Jay Richards’ Money Greed and God. I was in Washington last week and saw the Pope drive by in his fuel-efficient Fiat. I heard his speeches. I found his compassion for the poor and the environment laudable, but some of the economic solutions he proposes—which include massive government interventions to deal with climate change and economic inequality—would have devastating consequences for the poor around the world. When it comes to complex economic systems, good intentions are not enough. We should welcome the input from religious leaders into all areas of life, but they have a responsibility to educate themselves about the areas of life on which they are going to comment.
The week ahead. The Caterpillar news is an indication that what happens in China doesn’t stay there. So we’ll have to keep watching China, as we have for many months now. We’ll get lots of economic reports this week, but as September gives way to October, the big news will be Friday’s unemployment report. Currently the rate is 5.1 percent, which is good, but it wasn’t good enough to cause the Fed to raise rates. So, I’ll be watching this month’s report, as will the Fed and the markets.
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