Friday, November 5, 2010

The American People Have Spoken--November 5, 2010

It’s Nov 5 and the American people have spoken. What did they say? Seems like everyone agrees with three messages they sent: Cut spending, cut taxes and create jobs! That’s what the American people want, according to almost everyone, especially from the Republicans and the Tea Party. And, surely many Democrats feel the same way.

But, where are the specifics? Republicans and Tea Party candidates rode in to a majority in the House, based on criticism of the Obama administration as it relates to these three things. Purposefully, few offered any specifics whatsoever about how to cut spending or to create jobs. When asked by newscasters to be specific, they offered only examples which intelligent Americans should have seen to be inconsequential in terms of real meaningful impact—none representing even 1% toward closing any of the gaps. And no one—that’s for sure—no one—has offered a comprehensive solution to the problems.

Why is that? On the surface, it would seem to be a great opportunity for those opposed to the current administration and its policies. And, it would seem that the American people would demand this of anyone new who promised solutions—before electing them. But, we didn't.

Could it be that most of these hundreds/thousands of vocal critics in leadership who provided us the passionate interpretation of what the people want—cut spending, reduce taxes, create jobs—could it be that they don’t really understand the problem with all of this? Surely a few of them do not--they seem so ignorant in their remarks, that one would think most of this mass they call the homogenous “American People” would also see their lack of understanding. OK, I will name one name—Donald Trump, who trumpeted in a business channel interview since the election that we should solve the problem by charging a 25% tax on everything coming from China!

No, that’s not the real answer. Most of the critics are intelligent enough to understand the problem with all of this (below). Most of the critics probably understand the problem is so difficult and complex that the American public will not sit still for the long explanations of trade-offs and dependencies. And, those who do understand this perhaps fall into one of three categories: (a) those who know the problem cannot be solved and yet they want to gain personally and for their constituency by occupying a place of power—e.g., a Congressman is surely able to general millions of dollars of pork for his or her District, and thisis not too bad for his own ego and future wealth predictor either—these types don’t really expect to effect any significant change when they get to Washington; (b) those who understand the difficulty of the problem, want to try to fix it when they get there—somehow--but have no idea how to do it, yet; and (c) maybe there area few—very few—who have plans and don’t reveal them yet because the specifics are so egregious that they would never have been elected if they had revealed them to the American people during the campaign—so, stay vague, get elected, and then do your best! See The Candidate, Robert Redford, 1972.

What’s the problem? It’s really quite simple. Our budgets (city, state, and federal) have evolved to a state where so much is committed relatively irrevocably, leaving what can be considered truly “discretionary” as a very small percentage of the total—something like 16% of the total, only. So, we can, with great difficulty, cut 10% of discretionary, but that’s less than 2% of the total. For cutting spending, the hard work and the meaningful gains are in reducing the non-discretionary items, such as military spending, social security, and medicare. However, to the candidates, it doesn’t seem likely that’s what the American people had in mind.

Then, as to cutting taxes, the key is that when taxes are cut, government revenue disappears, revenue that will no longer be available to help with the budget deficit. The theory of tax cutting is that lower taxing motivates business folks to start or grow their businesses, and when that happens, eventually tax revenue goes up because eventually sales and profits go up, and there’s also increased employment along the way. However, there is debate as to how well this theory works. If your taxes were cut, would you go out and spend it, or would you save it or use it to pay down your debts, considering the times we are in? There is also a delay of a year or two—or longer. Can we afford this at this time of huge deficits and crisis?

Jobs—that’s the biggest problem. Donald Trump does not have the solution. He fails to recognize that we have a minimum wage of $7.75 per hour and that’s more than most Chinese blue collar workers make in a day, so it is very simply far more efficient for many things to be made there—we benefit because we pay far less for clothing, furniture, and even the Bay Bridge expansion, all of which was built in China and shipped here. And, if we shut out China, what about India, Bangladesh, Mexico and most of Africa? Can we shut out the rest of the world?

We still have millions of skilled factory workers in a country less and less able to compete globally in the factory arena, with few exceptions that will sustain. Our workers need new skills in areas like technology, marketing, research in areas like medicine and health, financial services, media, and many others. My father’s skills running a machine in a textile mill would be worth nothing in today’s American marketplace. The factory in which he worked in High Point, NC, has long since been shuttered.

It is useless and dangerous for us to try to turn the clock back to a kind of isolationism, when we have so much to gain from globalization. It’s also useless for us to occupy ourselves with blaming politicians for problems we don’t want to face. It is useless to elect candidates who do not offer solutions, however harsh and painful they may be. We need to face the challenges, and forge ahead .We have a strong position in the evolving world, if we don't try to turn back. We need to move forward, to rise to our potential. The fixing of jobs for the American people will take years—and there is no wise critic who can find a solution within the next two years—so many of us need to go back to school and re-engineer ourselves.

So, we have a new power group in Washington and Sacramento, and the rhetoric is flying, around budget cuts, tax reductions, and jobs creation. That’s what the American people said they want—and right away! They might as well have said they want what they had 30 years ago, when we had the world all to ourselves. Progress will be difficult and slow, because the solutions are complex and require sacrifice and change, and because our political landscape is polarized. It’s quite likely the American people will end up throwing this new group of leaders out in 2 years. That seems to be the limit of our patience these days.

I’d like to offer a more optimistic outlook, but it’s not valuable or relevant at this time. For the next few years, we face the challenge of telling and persuading “the American people” of the painful truth our rhetoric has hidden. We have been implicitly promised vague approaches to solutions to major problems which we must soon face and address.

And, by the way, we’re not a homogenous American people who all said the same things in the election. We are now the most ethnically diverse and heterogenous nation in the world and this is indeed not just one of our problems, but also one of our greatest assets—to be developed.

Sunday, October 17, 2010

Growth Miracle Coming to an End? October 17, 2010

October 17, 2010

There’s been a lot written about the future of China. Some argue that the small group of leaders of the CPC (Communist Party of China) has managed a 32-year trade-off of economic growth and increasing prosperity in exchange for the people of China continuing to surrender their democratic freedoms. These include no rights to vote for their leaders in a free political system where the people can propose candidates. Also included (or rather excluded) is some of the freedom of speech and press found in modern democracies. This also means that if the leaders feel they need to delay investment in the environment to favor economic growth, there is little that can be done to change that. It means that if your shabby housing project is needed to enable a new high rise, there is nothing you can do to prevent it. You get a nice new home, but you don't get to prevent the move. It means your intellectual property rights (for foreigners) are not going to be protected when you do business in China—not until China has enough intellectual property of its own to protect.

Some say this era of growth under such controls is nearing an inevitable end. Soon there will be enough economic prosperity and the citizens of China will want what’s next: freedom to choose leaders and to speak freely, write freely, to criticize, even change their government in the areas that trouble them. It is true that there are many protests in China, seemingly a growing number as time passes. The government quickly quells most and little is heard of them. Whether these have any connection to the economic growth and prosperity (essentially freeing people to rise to the next level of Maslow’s hierarchy), or whether perhaps due to the growing access to the Internet and news from the rest of the world, is the subject of speculation only. These are legitimate concerns expressed by insiders and outsiders to China. There are problems.

However, while much has been written about all this by Western press, little credit has been given by the critics to what has been accomplished under the Chinese manner of rule, which has overseen the 30-year miracle of China becoming a world superpower and one of the greatest capitalisms of all time:
o 30 years of peace between China and all its neighbor in Asia, and the world
o 30 years of peace inside China—that is, no civil wars
o Continuously improving living conditions for the majority of Chinese
o Economic opportunity, better jobs, entrepreneurship
o Unlimited access to news, entertainment (outside the one realm of being denied criticism of the CPC)

All of this coming from an incredibly poor economy and standard of living prior to 1978 and with the largest population in the world, now 1.3 billion people.
It is also interesting to consider where the unrest, the quickly quelled riots, is coming from. Is it from the new ultra rich? Doesn’t seem likely. Is it from the middle class, which has been enjoying a better home, a car, computers, HDTV’s, and soon an iPhone? Not so likely, either. It may be coming primarily from the still large majority of Chinese who have not yet participated significantly in the fruits of the economic revolution. While there is undoubtedly great intelligence among these people, there is less education in subjects like economics. We imagine many of the protestors have not seriously considered the enormous tradeoffs that CPC leadership has been navigating, rather successfully, for an amazing period of time.

We dare say there is not a government leader in the world who would not envy the 32-year history of success that the small group of leaders of the CPC has engineered. The critics of the west to all of this give far too little credit. One can certainly rightly challenge with any single instance of denial of rights we enjoy in the west, or maybe even with justification challenge the lack of attention to a single issue or industry—like the danger of coal mines in China, to the workers and the environment. However, few economists would question the real tradeoff Chinese leadership made in choosing growth. Had they not chosen growth, there might be up to 30 million new work force entrants denied jobs annually. It would only take a few years of growth at half what they have enjoyed to result in economic unrest which would threaten the stability of China. Clearly, they knew they needed 10% annual growth, and this would be hard to come by—it would mean some hard tradeoffs against “nice to haves” for a number of years. Had China stumbled and not been here to support the world economy in 2008, where would we all be now?

Now, are we at a point where all of this must change? Are we at a point where democracy as we know it is inevitable for China—with all the fairness and openness, accompanied by all the extreme points of view and all the burdensome bureaucracy, which often seems to accompany democracy in the West now? It’s not going to change anytime soon, because the vast majority of Chinese still completely support their system and their leaders, whose polls are far higher than those of any of our Western leaders.Furthermore, if it does start to change, let’s not be too quick with our hurrahs. Managing for economic growth, jobs, opportunity will have to be diluted to meet the many other objectives we try to address in nations of much smaller size and much more mature economies and governments. The risks to the country, the region, and the world during such change will be significant. And, it would help our relations with this great country if we would continue to acknowledge the amazing miracle of what they tried to do and did, with great intelligence and with their own form of government.