US Controversies and Big Ideas 2008 and Beyond

Health Care Reform and Medical Innovation

Medical innovation was barely mentioned in a year of discussion on health care reform. This is like discussing food without mentioning nutrition. Much of the value of medicine stems from medical innovation. Basic care can provide protection against everyday infections, injuries and procedures like delivering babies. The significant gains in life expectation today require more specialized care like heart or cancer treatment or cures for genetic illnesses. Will socialized medicine maintain America’s leading role in medical innovation?

Killing the Golden Goose

In a recent study released by the Cato Institute in November 2009, “Bending the Productivity Curve: Why America Leads the World in Medical Innovation,” the authors, Glen Whitman and Raymond Raad, crunch the numbers on medical innovation in America and find that it accounts for most of achievements in medical innovation.

The U.S.A’s preeminence in research is indicated by its lead in the funding of medical research and the Nobel Prizes earned. The National Institutes of Health alone spend $30 billion in annual research compared to $4 billion in all of Europe. The detractors will very likely respond by saying that NIH is a government institution. The reality is much of the basic research is done in Universities, often large private Universities like Stanford, Harvard and Northwestern, and the commercialization is completed in private companies. The NIH only funds the research.

According to the CATO study, of the 95 recipients of Nobel Prices in the past 40 years, 57 (60 percent) were from the United States, while 40 (42 percent) were from the European Union countries, Switzerland, Canada, Japan, or Australia—countries whose combined population is more than double that of the United States.

Comparing the Quality of Innovation

Innovation may not necessarily make a great deal of difference to the quality of life of patients. The authors have, therefore, singled out the innovations that have had a lasting influence on the quality of medical care. This was done based on feedback from 225 leading primary physicians.

Of the 27 innovations in therapeutics and diagnostics and for which a country could be identified, work performed in the United States significantly contributed to the invention or advancement of 20, including nine of the top 10. As for drugs, sixteen of the twenty nine representative drug classes were developed in the United States, while 15 were developed in the EU or Switzerland. The lower rate of innovation in Europe has a lot to do with the monopsony buying power of government buyers. The compensation for prescription drugs, for example, is 35 to 55 percent lower in Europe compared to the USA.

In the USA, lower compensation of innovative therapies by Medicare has discouraged the adoption of implantable defibrillators. This is a clear case of penny wise and pound foolish policy. The loss of health benefits from new innovation is far more than the dollar value of lower compensation.

Costs can be lowered in more creative ways, such as by using medical devices, to substitute for more expensive specialized care. Ultra-sound equipment can be used by primary physicians to detect heart disease. This will hardly be possible if compensation for primary physicians is lowered.

The American biotechnology industry is poised to churn out a great deal more innovative drugs that will, for example, cure genetic disorders which can disable humans for life. An entirely new generation of personalized medicine is possible with medical informatics which enable therapies suitable for the specific genetic composition of individuals.

Superficial comparisons

Much has been said of higher rates of infant mortality in the USA compared to Europe. This is another example of facetious analysis which leads to completely misleading conclusions. According to Gregory Dattilo, co-author of “Your Health Matters”, the reality is that the USA has used technology to reduce the mortality of pre-maturely born babies. By contrast, European countries has allowed them to be aborted because it does not consider the cost of saving them worthwhile. If mortality of pre-maturely babies is taken into account, Europe will in all probability end up with higher rate of infant mortality.

AMERICAN PEOPLE'S ONLINE HEALTH SUMMIT

To create an integrated health care system across the domains of discovery, development and delivery so that there is constant innovation and rapid availability of integrated solutions that will eradicate disease and preserve health. The last half of the 20th century has witnessed astounding progress in science and technology that is elucidating the genetic and molecular mechanisms responsible for disease. These discoveries are transforming medicine, enabling the development of rational interventions that can be tailored to the needs of each individual patient and will predictably achieve the desired outcome of restoring and preserving health.

via cht.typepad.com

The pipeline of the biopharmaceutical industry in the USA is rich in new innovations which will dramatically improve the quality of life and increase life expectation. In addition, the innovations are potentially the drivers of a new era of higher growth and prosperity for Americans. Obamacare will put this opportunity in jeopardy.

Obamanomics: The double dip and two economists

Arthur Laffer and Robert B Reich are poles apart. The former personifies the sublime and the latter the supercilious. I can read Arthur Laffer and learn something new from every one of his articles. He writes infrequently but every single article is timed to address a major issue. This time he has discussed the prospect of an economic train-wreck of 2011---a catastrophic double dip recession likely to be precipitated by Obamanomics. Robert Reich, on the other hand, publishes often in a variety of journals and most of it is old ideological fluff rewritten as a new article. In the current mood in the country, he sticks his neck out to defend the indefensible—the tax and spend policies of the Obama administration.

Robert Reich’s latest article, “The Necessity of Obamanomics” published in Wall Street Journal regurgitates tired old Keynesian nostrums. The hubris is palpable from the very first sentence, “Alright class, here’s your assignment….”. This is quickly followed by a cliché, “as long as the private sector is deleveraging the public sector has to borrow and spend in order to keep the economy moving forward”.  Really. Japan has been stimulating its economy for the last twenty years with nothing to show except stagnation and now near bankruptcy. Over a dozen rounds of stimulus have yielded insanities like their own “bridge to nowhere” which one Japanese joked is used for “bungee jumping”. He dismisses concerns of rising debt and considers it manageable as long as government entitlements costs are controlled.  The fiscal concerns of “mad-as-hell” tea partiers get a short shrift.

In the very same issue of the Wall Street Journal, another article on electronics retailer, hhgregg, describes its rapid expansion, despite the recession, constrained only by the supply of appliances. It is taking advantage of inexpensive retail real estate to expand and grab the space left empty by the now defunct Circuit City. hhgregg is already expanding to absorb the job losses suffered due to Circuit City’s bankruptcy without any help from the stimulus. 

The recovery this time has been less than vigorous with growth rates close to half of what they generally are at this stage of the cycle. Given the spectacular growth in productivity over the last two years, the recovery in profits could have been faster than normal and would have propelled higher levels of investment. The thorn is the package of anti-business policies of this administration.

Art Laffer singles out the key issue as the uncertainty in the business environment. The numerous tax concessions and tax increases, the fiddling with major sectors of the economy create uncertainty whether these measures are eventually enacted or not. Capital is shy like a cat and will not commit till the macroeconomic environment is more predictable. The growth rate in 2010, according to Laffer, will be decent and the rate of unemployment will decline modestly. Many businesses will pre-pone capital expenditures to take advantage of the tax benefits that will expire in 2011. The lop-sided growth with faster expansion in manufacturing and much slower in services industries is a clear indicator that growth is being driven by the need to stock up inventories.

All hell will break lose in 2011 when profits are squeezed by higher taxes. Business is also going to be hit with health costs maintaining their rising trajectory. The double dip recession is a near certainty as the economically illiterate loons in Washington run amuck. Unless the much maligned tea partiers intervene to remove these irresponsible creeps.

A Retired California Official tells the inside story of Public Unions in the State

A retired correctional officer, Rod Ferroggiaro,  reacted to my post on California State's Bankruptcy and he had interesting remarks on how the public unions in California have evolved into a special interest group ripping off the public. His comments are an eye-opener.

 I spent most of my career at San Quentin but also worked in Tracy (D.V.I) and Ione (Mule Creek State Prison) California. As a member of The California Correctional Peace Officer Association (CCPOA), I speak from experience when I relate how this union, along with the other government employee unions are leading our state down the path of destruction. It seems not that long ago that working in California’s prisons was a job although always dangerous was a workplace where you felt proud, a workplace filled with a can do attitude not unlike elite military units, officers and management worked as a team we led the nation in professalism and education. During the mid 1980s, our state prison population exploded. Prisons were built all over our state thousands of new officers were hired and the prison unions coffers overflowed, CCPOA became a force to be reckoned with in our states politics , anyone who stood up against them was crushed , state officials soon learned to fear them if they wanted to stay in office. Moral in our prisons soon took a turn for the worst no longer was management (Sergeants-Lieutenants) a position strived for by officers. Large numbers of top paying high echelon positions have been created that were never needed. Discipline has become almost nonexistent, Sick abuse is now the norm and since its all on the taxpayer’s dime, no one wants to stand up against this powerful union. An example of sick use abuse would be when the Oakland Raiders play at home San Quentin cannot man enough positions to run the prison in a normal way they have had to modify their programs. Now that our state has reached the breaking point we should pull our heads out of the sand, we badly need to expose these unions for what they are political powerhouses who employ a fleet of lawyers who have plenty of money to spend on misleading television advertisements, these people are not used to opposition most Wardens hide under their desks at the first sign of conflict. Lawmakers have no stomach to tackle the union thugs our only hope is the people of California wakening up and demanding a stop of this fraud, Waste and abuse.

Individual Mandate for healthcare: the flawed comparison with auto-insurance

In the make-belief world of the current administration, supercilious comparisons are made to justify its proposed programs which have no basis whatsoever in reality. Fallacies abound and seem logical to the unsuspecting. One clear example is the justification for an individual mandate for health care. “Just like compulsory auto-insurance is mandatory, so also for health care”. Yeah, that seems like a straightforward and reasonable justification.

It goes a step further. An auto accident could cause damage to another person who probably does not bear any responsibility for it. Such a person needs compensation for the harm caused to him. The person who caused the accident will be able to pay only if he or she has an insurance plan. Similarly, the administration argues, everyone needs to have a health insurance plan to pay for their care rather than end up in an emergency room where they cannot be denied care. That society would otherwise pay for their care.

First, the individual mandate for auto-insurance does not require drivers to pay for comprehensive insurance. They only need to pay for the minimum level of liability coverage. The individual mandate for health insurance, proposed in the conceptual plans, are required to meet the standards of coverage that the Government requires each person to have which would now include pre-existing conditions. The comparable auto-insurance would include not only comprehensive coverage but also costs of repair and maintenance including oil change!

Just like a person whose auto-liability insurance includes only the minimum coverage will have to pay out-of-pocket for any amount in excess of it, the individual mandate can at the most require a minimum level of health coverage.

A more efficient alternative to individual mandate is   health savings plans. For those with very low incomes, the government could provide vouchers to fund the accounts. This would be akin to earned income credits. For emergency care, the expense could be paid over an extended period of time to cover the deductibles. The rest would be covered from the insurance plan.  

The Sophistry on Medicare: The case against Government takeover

What the Democrats lack in governance, they make up in sophistry. The issue of Medicare and Government takeover is just one example. They sneer at the apparent hypocrisy of Republicans who have taken on the role of opposing cuts in Medicare. “If you are against Government takeover, why are you supporting a government program like Medicare or even Medicaid? Similarly, the Democrats chide the elderly for opposing government takeover while insisting on retaining their own government health program.

Given an option, the Republicans are inclined to offer choice and private services to the elderly. The Medicare Advantage program was launched for precisely that reason. And the Democrats are viscerally opposed to Medicare Advantage. Better still, the Republicans would be inclined to simply offer vouchers to low income or retired folks which they can use to pay for privately delivered services.

The Medicare program has already been paid for by the elderly—it is now their turn to benefit from the investments they have already committed. That the Democrats are now considering the reallocation of funds from Medicare to their universal care experiments is only confirmation that the government cannot be trusted to comply with social contracts. When public finances are mismanaged, governments will be inclined to raid cash hordes.

The rationale for Medicare and Medicaid or for children’s programs for healthcare was not that Government provision of health is generally better than private delivery. Instead, the premise was that private markets fail to function when the elderly, the low income folks and children don’t have the purchasing power to buy health care.

With advances in knowledge about the health care business, its time to look at alternatives. The elderly can take care of their health needs if they are able to save money in their health care accounts over their working life. The poor and children of low-income households can pay for their health care with vouchers.

The Democrats are looking to make cuts somewhere to pay for universal access because they refuse to institute incentives which will help to cut costs. Resources are scarce and increasing demand for health care can only be fulfilled by supply side reforms including competition in the health care industry. The Democratic program cannot possibly increase access so they will only redistribute resources from one group to another without improving the overall system.   

 

Trade Credit: The low hanging fruit for restoring economic growth

An incipient economic recovery, colorfully described as green shoots, is said to be a precursor  of better times for the US and the World Economy. This notion has been countered by an equally colorful skeptical riposte “yellow weeds”. In an environment of risk aversion, skyrocketing fiscal deficits, stalled negotiations over the Doha Round, the imminent prospect of increasing tax rates, massive unfunded liabilities of health care and retirement acting as a drag on the economy aggravated by a log jam over the future policy for health and social security, the chances of growth recovering to its trend rate of 3% in the USA are near zero. The more likely prospect is that of of a double-digit recession. A temporary boost from Government spending will be followed by another recession as the economy is weighed down by higher debt service payments.

The one reason for optimism is the recovery in emerging markets. Till September 2008, the recession in the USA was relatively mild. A devalued dollar helped to drive exports overseas especially to emerging markets. The torrid growth in exports was brought to an abrupt halt following the collapse of Lehman Brothers. While the banks were saved from a domino effect, the financial crisis spiraled out of control as trade credit to emerging markets shrank. Concurrently, capital overseas sought refuge in the USA which raised the value of the dollar and rendered exports non-competitive.   

As credit markets stabilize, the cost of credit is steadily falling from its astronomical levels and its availability is increasing. Concurrently, overseas investors are increasingly skeptical of USA as a safe haven and want to diversify their currency portfolio. As growth prospects in emerging markets improve, capital is beginning to flow out of the USA. The dollar’s value is steadily falling.

A survey by the International Chamber of Commerce in March 2009 revealed the extent of the damage to the trade credit market. 47% of the 122 banks in 59 countries surveyed by ICC reported lower volume of letters of trade credit and 43% in the value of the letter of credit transactions in the last quarter of 2008. Over 40% of the respondents reported higher fees they have to pay for Commercial Letters of Credit, Standbys and Guarantees. At the same time, the cost of trade credit increased dramatically. According to a survey by the IMF, the cost of export credit insurance was 19 basis points more than cost in the last quarter of 2008 compared to 8 basis points increase over the year ending October 2008. Similarly, the cost of stand-by Letter of Credit increased by 25 to 300 basis points over LIBOR and in some cases 600 basis points. The higher costs of credit squeeze the tiny margins that Asian exporters earn on the goods they supply in developed markets.

A correction in the abnormal situation in credit markets could well restore export activity from Asian countries to levels correlated with the current levels of economic activity even if it has been lowered by the recession. While economic activity in the USA declined by about 5% in the first quarter of 2009, the corresponding reduction in export growth was 22%. In emerging countries like India, the growth was a positive 6% while exports declined by 24%. The World Bank estimated that 85% of the decline in trade was due to fall in international demand and the rest due to shortage of credit of the order of $300 billion. In the case of USA, there is an additional impact of an almost 40% increase in the value of the dollar as overseas investors sought a safe haven.

The trade credit market is showing some early signs of recovery. Central Banks in India, Russia, Brazil and China have stepped in to improve supply as have multilateral institutions like the IFC and Asian Development Bank. The cost of trade credit is still high with a 400 basis points spread over LIBOR. However, the LIBOR spread itself is down 400 basis points from its peak. Concurrently, the value of the dollar has declined 10% against the Euro, 23% against the Australian dollar and 20% against the Brazilian real.

US economic recovery will be driven by growth in the rest of the world till structural problems in the domestic economy are resolved. Lower costs of trade credit and devaluation of the dollar will arrest the dramatic decline in growth but the US economy will continue to sputter at around zero growth.

 

California State's Bankruptcy and its Economic Future: A report from a conference

Liberty on the Mind (an offshoot of Liberty on the Rocks for conferences) organized a conference on the subject of the fiscal crisis of the state of California at Santa Clara University on 27th April 2009. As a grassroots organization, LOTR attracts members who are capable of animated public policy discussions in bars, the background noise notwithstanding. They agitate for a freer and more prosperous world and they like to be well-informed citizens rather than partisans.

The topic of the conference generated some controversy. A member of one of the think-tanks, close to the state’s establishment, felt that bankruptcy does not accurately describe the current state of finances in the state. According to him, the current crisis is an administrative issue created by the two-thirds majority rule for passing a budget which an unnecessarily high bar.  He added that there has never been a bankruptcy in any of the Union’s states anytime in history. We checked with an economic historian and confirmed that some states did experience bankruptcy in the early nineteenth century. A deficit of $40 billion clearly reflects a deep-rooted economic malaise especially when consider the fact that the credit rating of California is the lowest of any state, the tax rates are the highest and cost of doing business in the state is 20% higher than the average cost of doing business in USA. Also, there has been an out-migration of 1.2 million from California over the last four years. We concluded that his comments about the two-thirds majority rule are a not-well-disguised rationale for an unhindered spending binge.

We, therefore, sought speakers who had done research on the state’s expenditure policies as well as the business environment for growth. Seven speakers from think tanks and universities around California agreed to come and speak. Michael Shires of Pepperdine Public Policy Institute was eventually called for jury duty and could not make it.

Professor Fred Foldvary, Director of Civic Society Institute, displayed data on persistent deficits in the state which are accounted largely by soaring expenditures on education, health and prisons. One striking slide showed that expenditures on prisons are rising at the same rate as education. Liberalization of drug sales and their regulated use is one way of relieving the pressure on prisons and for increasing the revenue base for the state.

Expenditures keep rising despite the constitutional provisions for citizens to vote against them on the ballot.  A wide variety of checks and balances exist in the state, such as the use of two-thirds majority rule for raising taxes, Proposition 13 which caps property taxes, provisions for recalls of elected representatives, term limits on legislators and voter approvals for major initiatives, to guard against political intransigence. The voices of ordinary citizens, nevertheless, are overwhelmed by sophisticated advertising campaigns by organized groups such as teachers unions, firefighters and law enforcement officers unions. Vallejo had to recently go into bankruptcy because it was unable to honor its pension liabilities to 17 of its firefighters. Professor Foldvary recommends a cellular democracy, widely discussed by public economics expert and Noble Prize winner James M. Buchanan, where politicians are elected at the micro-local level. At this level, the actions of politicians to be visible to each citizen and they can be easily recalled when voters don’t approve of them. A constitutional convention will clear the way for a new set of rules to govern the state.

Lisa Snell, an expert in school reform at the Reason Foundation, pointed out that nearly 20% of expenditures on education are incurred on retirement and health liabilities of teachers. Teacher layoffs are usually a chimera. Typically, teacher layoffs are widely reported in the press. However, the reversals of layoff decisions are ignored by the press. Altogether, only 31 teachers have been laid-off mostly for cause.  Other egregious wasteful use of resources is the $20 billion bonds on new schools building while enrollment in older schools drops.

Innovative school education methods account for only about one-percent of the students but they have been able to provide better quality education at lower costs. Charter schools are initiated at the local level and are spared a backlash from teachers’ unions.  The state has refused to call even a meeting to consider school vouchers but a small program, sponsored by private foundations, has been successful. She was particularly enthusiastic about virtual academies similar to the free learning materials provided by MIT. These are internet based learning options that aggregate teaching materials from a wide range of sources.

Health spending accounts is the next highest budget item. John R Graham, Director of Health Care Studies at the Pacific Research Institute spoke on the built-in incentives to increase health expenditures regardless of the outcomes.  Between 1997-1998 and 2006-2007, Medi-Cal (the state version of Medicaid) spending nearly doubled. The 2009-10 budgets of $135 billion for the California state allocates $38 billion of state funds for health & human services. In addition, the U.S. government throws in $40 billion for Medicaid & SCHIP: almost three quarters of the total budget. At the end of the day, physicians have to be prepared to serve patients if any of this spending is to help at all. One survey, quoted by Dr. Graham, found that there are only 46 primary care physicians per 100,000 Medi-Cal beneficiaries, versus 75 per 100,000 for users of other health insurance plans in California. This is not hard to explain given that Medi-Cal pays less; in 2003, Medi-Cal paid physicians only 59 percent of what Medicare paid. According to a study by Professor Daniel Kessler, the premiums paid by private individuals would fall by 11 percentage points if Medicare and Medi-Cal were to pay the full costs of their patients’ hospital care. Next time anyone buys insurance, remember you are subsidizing someone else.

Health Savings Accounts (HSA) have already proved to be a means to lower costs. In 2007, CIGNA HealthCare conducted a two-year study to compare cost management by consumer-directed and more traditional HMO/PPO plans among its membership of 430,000. It found that the costs of subscribers of consumer plans were lower by 12% even though they spent more on preventive care and maintenance medications. Despite the proven benefits of HSAs, the California Government chooses not to provide tax benefits for money invested in these funds. Consequently, only 4% of Californians have invested in HSAs compared to 8% nationwide.

David Zetland, a Wantrup Fellow at UC@Berkeley spoke on the mismanagement of natural resources, especially water, in California.  The state still treats water as a free good and farmers don’t have to pay for it. The state’s investments in water infrastructure are hard to recoup. Farmers resist paying prices by drawing on underground water. The effects are especially devastating in times of drought when crops are left to wither.

Dr. Robert W Fairlie, Professor of Economics at the University of California, Santa Cruz, spoke about trends in entrepreneurship and its effects on California’s economy. New businesses rely a great deal on their personal savings, such as second mortgages on their homes, financial investments and savings, to bootstrap their businesses before financiers are willing to risk their money. The decline in personal wealth, as a result of fall in home and stock prices, has affected financing of new businesses. Immigrants, especially Asian entrepreneurs, are important sources of human and start-up capital. They are able to raise capital from additional sources such as their ethnic networks.  A slowdown in immigration will have an affect on growth.

Jim Atkins from the law offices of James E. Atkins P.C. is a specialist in bankruptcy law and provided a window into the experience of businesses in recent months. While business cycles are a common experience and most owners learn to rough it out till growth starts again, this time the mood is less optimistic and entrepreneurs dread a worse turn of events.

The Logjam on Immigration: False assumptions and lost opportunities

American immigration seems immune to reform. False assumptions have been deeply ingrained over many decades and blithely parroted by the large majority of citizens. Employers protest before Congress but have not invested in research and communication with the purpose of presenting the facts which would help to verify the assumptions. Their strategy for dealing with immigration is just so inept. This despite the fact that the urban legends about immigration are just plain silly.

The refrain is that H1 employees displace locals. This is a half-truth. More often than not, H1 employees do technical work that Americans prefer not to do and choose management and marketing jobs. I have heard terms like programming monkey widely used to belittle such functions.

The other story is that as immigrants H1 employees are more likely to turn into entrepreneurs. Their chances of upward mobility are lower in the American corporate world due to cultural barriers. As entrepreneurs, they create jobs for Americans.

The current legal system in the USA is horribly dysfunctional. If companies need technical talent and don't get in the USA, they have the option of setting up an office in Vancouver where immigrants are easily available. The Canadian system is a transparent system which lowers the uncertainty and the costs of hiring foreign labor both for the employer and the employee. I made an application for the Canadian permanent card and had to do nothing after the initial application was filed. Also, the attorney was expected to return my fee if my application was not accepted. By contrast, the American application cost a huge amount, I had to make two attempts and all the time there was no way of knowing whether I would be accepted. The Canadian system takes an economic approach and matches the country's needs for workers with supply by using a point system. The system clearly works as indicated by the fact that you don't have intense controversies as in the USA.

I have worked previously on an H1 visa and always found that employers took this option as a last resort. Employers don't like the hassle of the legal process involved in H1 or the harassment of explaining to immigration officials why they chose a foreigner over a local American. Also, foreigners take a more than a while to adapt to the culture and the processes which is an added cost. The only time H1 candidates are employed are when the economy is in a midst of a boom and immigration is more relaxed.

I have heard a lot of people say that foreign labor is hired because it is cheap. Never have seen a single piece of evidence cited to support the assertion. The only thing that stops H1 visa holders from rising is the lack of mobility that comes with the byzantine immigration processes. Really, Americans with conscience will not support this banana Republic variety capricious legislation.

I might add and ask why the detractors don't ever mention the jobs that are created when foreigners turn into entrepreneurs or facilitate the global expansion of American multinationals. The tax rules for Americans overseas are just not attractive for them to go work abroad. American companies have to rely on local workers and American trained employees help in bridging the cultural gap.

BAILOUT OF THE AUTOMOTIVE COMPANIES: THE ALTERNATIVE MARKET BASED AMERICAN SOLUTION

While our loony politicians are hell-bent on bailing-out Detroit’s automotive dinosaurs, entrepreneurship is alive and kicking in the specialized automotive aftermarket. The industry for customized automotive accessories notched sales of $38 billion in 2007. The revenue earned from accessories has grown at an average rate of 7.4% over the last decade compared to an anemic 1.07% for new car sales. While the sales of accessories have slowed down to 4% in 2008, they are still out-performing many other industries.

Consumers are bored with the drab cars churned out by large automotive companies. The recession was really the last nail on their coffin. Cheap credit had for years propped up the Big 3 and the house of cards crumbled as the credit crisis hit.

Younger customers crave for fun vehicles personalized for them. They like cars like Scion, Cooper and Mustang. Market research by Deloitte indicates that two-thirds of Gen Y customers see vehicles as a reflection of their tastes and status and they consider these factors in their purchase decision. As many as 67% of them consider how well a vehicle reflects their personality.

Dealers, with a focus on customization, are reporting strong performance despite the recession. Galpin Auto Sports, with seven dealerships in Los Angeles area, earns $500,000 a month in revenue from innovative customization. Half of Ciener-Woods Ford in Kernersville, N.C customers are loading up their Mustangs, Fusions and F-150 pickups with as much as $20,000 worth of accessories. MWW Automotive, a global automotive design company, which supplies customized accessories to the Big 3, reported 11.4% rise in sales and 7.4% rise in gross profits at the end of the third quarter of 2008. The company attributed improved profitability to higher sales of spoilers--customized and popular accessories which provide a sporty look.  
 
Skilled mechanics in the automotive after-market have been driving the growth of the accessories markets while the Original Equipment manufacturers have been much slower in adapting to this trend. While vendors in the after-market are responsive to consumer need for personalization, factory made accessories tend to be more reliable and OEM warranties trustworthy. An expanded market for personalized vehicles will develop with the growth of the role of OEMs in this segment of the industry.

Large automotive companies are hobbled by state franchise laws which protect their dealers. Manufacturing companies incur enormous costs when they want to change their products and brands. General Motors was mired in 19 lawsuits in 17 states when it decided to discontinue its Oldsmobile car in the early 2000s. For this reason, OEMS prefer to payoff dealers when they want to end their relationship. Customization can hardly be successful if OEMs cannot change their products without losing money on the way out.

State franchise laws vary between states and provide different levels of protection. The most problematic aspect of it is the inability of manufacturers to communicate directly with consumers which is critical for product differentiation and direct marketing to the most desired consumer segment.  They prohibit internet sales which have been instrumental in personalization in other industries. When consumers search web sites for car information, the manufacturers are not allowed to direct the leads to dealers best able to fulfill the demand.  Digital signage increasingly provides opportunities for engaging customers with motion video. Automotive manufacturers are unable to take advantage of this medium.
 
In addition, state franchise laws inflict costs that would be saved in a more competitive environment. Inventory and distribution costs, financing and insurance costs and excess margins add about $1,500 dollars to the cost of a vehicle according to studies conducted by the Consumer Federation of America.
 
The American genius for innovation and customer service is the best bet to save the domestic automobile industry. No other country has a comparable vibrant class of entrepreneurs reinventing the automotive industry focused on providing personalized vehicles. By abandoning the archaic franchise laws, the American government will pave the way for a new phase of growth in the industry.