Efficiency and Unemployment

Around 35 years ago I attended a seminar presented by Deming, the father of statistical quality control and a major contributor to Japans technological resurgence in the middle of last century. He commented on automation saying that the only times automation is justified is when there is a shortage of labor or where the mechanical motions create a superior product. His argument was that if there is no shortage of labor then automation puts workers into the unemployment lines and they have to be paid anyway.

Last week we elected a conservative House and moved the Senate more to the right. They made promises of austerity and fiscal responsibility promising to cut non-defense discretionary spending by 22%. The Democrats, not to be outdone, will most likely focus on cutting the defense budget. I believe that during a severe and potentially protracted recession, both are dangerous.

Whenever there is an economic slowdown enterprises take the opportunity to streamline their operations, thus improving efficiency. This is natural. Companies with shrinking demands, have the need to lower costs and more time available to focus on improving operations along with a workforce more willing to work harder which in better times it might not. So what happens is that, with excess labor already in the market because of the slowdown, this improvement puts more people into the pool of unemployed. To further aggravate the situation, the politicians react to voters concern about the cost of government and promise to cut costs by cutting programs, eliminating waste and improving efficiency. All these, if successful, further increase unemployment whether directly by cutting staff or indirectly by reducing consumption of material which still boils down to cutting labor somewhere.

We have gotten out of previous economic downturns by waiting things out until demand picks up and the pool of unemployed starts shrinking. We also have been blessed with a slow and somewhat ineffective Congress. So by the time they get around to really cutting costs and reducing waste (improving efficiency) as promised, the recession is over and things are back to normal. The potential risk I see is that this downturn is more severe and different than previous ones and with both parties starting to campaign for the 2012 elections and the electorate drifting to the right, they will have the vigor and the time to start fulfilling their promises before we are out of the hole and extend the period before recovery or even worsen the situation driving us into a depression.

If the number of unemployed rises dramatically for whatever reason, we will be faced with a few choices. Ignore them and face the threat of civil unrest and possibility of either an extreme left of right wing tyrannical dictatorship or we can help them by raising taxes on those not struggling as much or borrowing and printing money. Another option, if the demand for private sector goods and services does not improve quickly, create demand for labor through government intervention and though it sounds counterintuitive, allow the waste and inefficiency to continue until there is strong evidence of an impending recovery. Someone working at 50% efficiency will still be contributing more than they will on the unemployment or bread line. The private sector, driven by self-interest cannot ignore waste but a government working for the common good can.

Something that is even a harder sell relates to the defense budget. The above arguments also hold true for defense. If there was a sudden peace and all troops came home and were demobilized and we stopped producing armaments, not only the troops, but the workers in the defense industries would enter the already surplus labor pool, greatly expanding the ranks of the unemployed. Though we want to reduce and eliminate the casualties of war as soon as practical, during a downturn, reducing military activities will add to and prolong the economic downturn. Maybe we can reduce the fighting but not military activity until we are back on our feet.

“Big Republican gains presage a nasty period of gridlock for Obama” says the November 6th issue of The Economist. In the final analysis, the electorate, unwittingly may have done the right thing by seating a congress that will ensure a complete grid lock, making it impossible to do anything of any consequence when it comes to eliminating waste and cutting costs and maybe only work together on less contentious and more important issues that address the structural readjustment necessary like education, energy, macroeconomics and our relationship with and economic pressure from the rest of the world.

Globalization, Free Markets and the Plight of the US Middle Class

Over the last three decade, though the average earning of the US population has been going up the middle class has at best stayed stagnant. There have been more trinkets to buy, more pressure to buy them and less money to buy them with. I don’t know to what extent the growth in credit is attributable to this but I can’t help think that at least to some extent it has. The promise of a better future for the middle class has been shattered. This stagnation has been aggravated by the fact that, the already wealthy have been getting wealthier and since material well-being is relative, the middle class in that sense has been moving backward. In the 50s, at the height of prosperity for the middle class in America, a family with the man of the house working in a “blue collar” job could live comfortably, send their kids to college and, if really frugal, have a small cottage on a lake. To do the same today it takes both the man and woman working and to get the cottage on a lake, it takes two professional incomes. Though politicians have been assigning the blame to each other and reciting talking points, I believe the real cause is a structural and natural consequence of the Free Market at work.

The size of the middle class in the industrialized west, if not shrinking has at best stagnated. Worldwide, however, there has been a significant growth of the middle class along with its buying power. So on a global scale the Free Market has been working for the benefit of society. To reiterate the basic concept behind Free Market Capitalism, the quest for self-interest on the part of individuals, collectively leads to benefit for society. In this case that is what is happening on a global scale. In their quest for maximum gains, businesses have been drawn to regions of lowest cost labor. Support services are moving to India and manufacturing to China. We also see this in this Country. New automobile plants, to avoid wages and benefits derived through union activities in the North, are appearing in the South where, though wages are lower than in the North, they are still better than other wages in the South. The South gains the North looses. When the Free Market works uninterrupted, as discussed in a previous posting, it knows no borders, communities, religions, ethnicities, religions or races. With the exception of the near total meltdown of the financial system, the free market is working well from a global perspective, the middle class is growing, commodity prices are going down and global buying power up and the corporations and their owners in the West as well as the East are growing in size and wealth.

The problem, however, is that from a local, regional and national perspective of the West’s middle class, things are getting worse and the question comes down to whether, how and when do we get back to growing it. Now that the financial system’s bleeding has stopped, the Liaises-fair Free Marketers are content to let the markets sort things out. Riches derived from the East are of no less than value than riches derived from the West. So as long as there are riches there is no need to change. The Market will sort things out. The question is how long will it take, what will be the local effect and the resulting collateral damage.

Is globalization a zero-sum game? For someone to win will someone else have to lose? In other words, will the market increase the wealth of the poor nations at the expense of the rich? Believing prosperity to be a zero-sum game, governments historically have interfered with the market forces through tariffs or other trade restrictions trying to force the use of local resources at either the cost of higher prices to the consumers or profits to the enterprises or both and thus starting trade wars often leading to shooting wars.

Free marketers claim that this migration of jobs is a natural consequence of a free economy and it does not have to be a zero-sum game. I believe the current administration agrees. We have gone through such cycles in the past. An industry starts, faces growing demand and creates opportunities for others to enter. Competition increases, prices drop and there begins a drive to lower costs. The textile industry started in England then moved to New England, then the South and now to all parts of Asia. When computers were invented in Silicon Valley and expanded to the East Coast, some of the old textile mills having stood empty for decades began housing the likes of Digital and Wang and now stand empty again as the manufacturing has moved to Asia.

The world is changing rapidly. Technologies advance faster every year. Financial centers move. Balance of power shifts, all this at an accelerating pace. During these dynamic times it is increasingly important that the markets, guided toward the benefit of our society as a whole, remain free. We need better government that understands the global issues and ensures that the paths to our success as a country and in particular our middle class thrives. In the meantime our electorate is becoming increasingly conservative, wanting to protect what it has if not go back to a time when it felt it had more. The danger is that politicians, in their quest for reelection will succumb to the parochial populist movements and steer a course for “instant gratification” and negate the possibility for maintaining our leadership in the world.

The cycle of innovation starting in the West and in particular in the US, maturity and then migration has worked but can it continue? Will the markets alone support this cycle or is there a role for government to play and if so what is this role. The conservative on the extreme right, represent the “small business” and are working to get legislation to advantage small business while the liberal left pushes for legislation supporting labor. The innovation unfortunately does not come from the small business represented by the Chamber of Commerce; the restaurant owner, beautician shop the plumbing contractor, insurance and real estate broker or the family farmer, nor does it come from the labor unions, banker or broker on Wall Street. It comes from an area that is not represented by either party; the universities and research laboratories in large corporations.

The conservative right is suspicious of the “elite”, the intelligent, the educated the newly rich and particularly the government while the left is leery of the wealthy. But, like it or not, our ability to get our middle class growing again and restoring the American dream depends on these. Government has a very important role to play. There is a difference between the Free Market on aggregate and the individual participants in the market. They are at odds. Whereas the market is pushing to lower profits, the participants look to maximize profits and in so doing try to get around the market wherever possible. An important role of government is to block their paths around the markets thus keeping markets indeed free. The markets by their very nature are global and another key role of the government is to make sure that in all the moving and shaking created by the markets, their constituencies are not disadvantaged. This applies to the national, regional as well as local governments.

Our federal government has contributed greatly to the aforementioned cycle. It has supported research at both the universities and in industry through various programs. It has provided for the education of our young. Much of the innovation, such as the semiconductor and the Internet, has come from development funded for defense. When I was running our Company, in applying for federal funds for development projects supporting defense or space, a key question asked was potential commercialization and without a strong argument for commercialization the probability of funding was greatly diminished. (Recent advances in diapers have come from the NASA space program where much engineering went into developing better urine disposal systems for female astronauts.) Its immigration policies have encouraged migration to the United States from all over the world. The father of our space program was a German Scientist. The government has passed antitrust legislation to prevent the formation of monopolies, which would eliminate competition that drives the need for innovation. It has intervened on behalf of local industries when other governments have tried to circumvent the Free Market through currency manipulation or tariffs. As the world, along with all its technologies, changes so does the role of government, its size and cost. The job of government and its associated cost is minimal in a primitive society. The larger and more advanced a society, the greater the complexity of interactions and thus the greater the benefit from and cost of government.

I hear a lot of rhetoric about “too much government” but none about the proper role of government. I believe that the Free Market does indeed work and coincidently does benefit society as a whole but it does so given that the forces that keep the various self interests from circumventing the market are kept in check. I heard someone say the other day that the Republicans are on the side of business and the Democrats on the side of government. I don’t believe that’s a valid categorization. A cynical way to look at this may be that the Republicans want a government that helps business avoid a Free Market while the Democrats want a government that facilitates labor’s quest to find a way around it. Our society, however, needs a government that keeps the markets free and puts roadblocks in the way of everyone who wants to circumvent them. Whoever promises to “keep jobs from going overseas” essentially is offering some path around a free market. My fear is that an irrational quest to minimize the size of the government without understanding its proper role, will diminish, if not destroy our participation in free markets. We will have stronger paths created for business around the markets during the Republican reigns and greater paths around the market for labor during the Democrats reign. These paths will continue to grow. I also fear that during the diminution of the government’s role funding of development through the military, industry and academia will be reduced. There is talk on the far right of eliminating the Department of Education and either privatizing or turning education over to regional politicians. There is a real danger that we will wind up with not only over 50% of the population in one state not realizing that Hawaii is a State and the President a citizen but 50% of the country. Not only will we not have the manpower to support the required technologies with the ability to innovate but one that will be open to misinformation and manipulation through the mass media by whoever is vying for power.

The hallmark of a third world country is the relative small size of the middle class and the very large gap between the small number of very rich and the large number of very poor. Can we stem the tide pushing us in this direction and what are the obstacles we must overcome? “Patriots” shouting about America’s exceptionallism overlook an area where we have been truly outstanding, our ability to attract and integrate foreigners and their cultures into our society. If innovation is one of the keys to our continued success, and I believe that it is, then we need to continue, if not accelerate, this integration. Frans Johansson in his book the Medici Effect points out that creativity leading to innovation comes when a situation is viewed from different perspectives, disciplines and experiences. Innovation often comes from either an individual schooled in a variety of discipline, exposed to different cultures and having worked in different fields or from teams of individuals with the same variety of experiences. The continuous influx of new points of views has contributed to our innovation and our success. The danger we now face is that, with the xenophobia on the extreme right manifest in the Islamophobia and all the anti immigrant rhetoric, we will strongly discourage if not prevent emigration. We will become a homogeneous society likes of India and China and lose our only long-term advantage, our ability to differentiate through innovation.

Another danger, though I believe or at least hope it is a remote one, is that as the wealth of an ever-shrinking group of individuals grows disproportionately, so does their power and their ability to influence policies that then allow them to gain even more power and wealth. If this is allowed to happen we will slip from a true democracy into an oligarchic regime and become a nation not to dissimilar to many South American Countries where a handful of families essentially rule the nation. Part of the government’s responsibility is keeping markets free and in doing this it had to prevent the situation where a small minority has all the wealth and power and uses this to control the government. The way it has achieved this is by imposing taxes on the transfer of wealth from generation to generation and thus hopefully weakening what would otherwise become powerful dynasties. The threat to the reestablishment of the middle class comes from the right’s assertion that the wealthy are the “job creators” and builders of the nation and heavy tax burdens on them will endanger us all. (If I were a descendent of the Chinese and Irish who died building our railroads or Mohawks building our skyscrapers or slaves working the plantations and all others who not only have toiled but died in the process of building this great nation, not to mention lost their lives defending it, I would not so readily concede the credit for our success to the providers of capitol, though I might be persuaded to share it.) The current mood in the country is fiscal conservatism, which I believe translates into less spending on the needy and lower taxes for the wealthy. The theory is that as the rich get richer everyone benefits because there are jobs created in the process. This has not been born out in the decade sine the last tax cut. The poor got poorer, the rich richer and the middle class still stagnated. I believe if the Right’s goal is uncompromisingly realized, it will accelerate the widening of the gap between the very poor and very wealthy, stifle free markets and accelerate our slide into oligarchy.

Globalization does not have to be a zero-sum game but it needs intervention from a strong, well functioning government driven, not by ideology nor populism, but by the recognition that our country’s true success depends on the state of our middle class and drives to restore it.

Fear

Last night I watched the “Rally to Restore Sanity and/or Fear” on CSPAN. This was essentially a comedy show at the National Plaza attended by about 200,000 and hosted by John Stewart with heavy involvement from Steven Colbert. The central theme was a spoof contest between fear and sanity, and it made me think about something I either heard or read from an ancient Hindu writing about the role of a leader. It basically said that the role of leadership is to make the polity fearless. With so much fear mongering going on today particularly on the right, wouldn’t it be nice if in the next presidential election someone come forward on a platform of eliminating fear.

Many fears are real. In some neighborhoods people are afraid to walk the streets at night while in others kids have to be escorted or take long, roundabout routes to get to school and then be afraid of either being beaten up or shot even there. Fear of being mugged, your home invaded, your identity stolen. There is fear of becoming sick and loosing ones home and having to declare bankruptcy. Fear among all who work for a wage, however large or small, that they will lose their job and, not only the income but also the respect of their family and friends. People running a business are afraid of loosing customers and not being able to pay the bills and the wealthy fear the markets collapsing and loosing their fortunes while the homeless fear not having a place to bed down for the night and an empty stomach. There is fear of racial, gender, ethnic and religious discrimination.

We are afraid of being attacked by terrorists from outside or political extremists from the inside. There is the fear that the thousands of nuclear warheads that were once pointed at us by the Soviet Union will once again return to the same direction and the growing power, both economical and military of China with its billion plus population. Many are afraid of getting embroiled in another war started by North Korea, Iran or Israel. The world will run out of fossil fuel. The climate is changing and the seas will rise and the growing zone will shrink bringing on hunger, war and many other calamities. And there is the fear (or maybe joy) among some Christian fundamentalist that we are in the era of Armageddon.

Then there are more socio-political fears. There is the fear that at some point in time, the majority of the population in the US will no longer be white, that we may lose the right to bear arms, be able to go to the church of our choice and there is the fear of becoming a fundamentalist Christian theocracy, be overrun by Muslims or become a nation of atheists. There is fear that our judiciary will fall under Sharia law and that, Jews will take over the economy and poor African Americans will invade their white neighbors. Many fear too much regulation while others fear liaises-fair Capitalism. Some people are afraid that we are heading toward Socialism or even Communism while others are convinced we are on a dangerous path to becoming a Hitler like fascist state. There are fears that we are too soft in our foreign policy while others fear that Neocon imperialism will strangle us. The middle class fears not being able to providing a better life for children and the homeless not having a place to bed down for the night. Many fear that we are drifting away from the “real” America and others that we are not changing fast enough to keep up with the technological, political and economic changes in the world.

Though I have listed many fears, I could go on for several more pages and still only scratch the surface. Among the fears are well though out and also the totally irrational ones. There are fears that have a high probability of coming to fruition while others, though maybe real and theoretically possible, don’t stand a “snowball’s chance in hell” of being realized. The fears originate from both ends of the political spectrum and many transcend politics, with the underlying causes often understood and sometimes even the solutions. The challenge is to find a leader who can alleviate these fears by promoting policies in the case where the fears are real and of consequence to our society, communicate their absurdity in the case where they are only imagined and putting them in the proper perspective in terms of probability in the case where they are real but insignificant.

Unfortunately fear has become an effective political weapon. The “fear mitigating” leader cannot be an ideolog. Solutions to different problems will most likely be based on different ideological principles. Solutions to how to make the streets safer will be different from how to make us more competitive in the Global Marketplace. Answers to improving the life, realizing dreams and protecting property probably require a touch of Libertarianism, Socialism and bits from everything in between. The “sacred cows” should be the elimination of the fear, the constitution and not the ideology behind the method. If such a leader can rise (I doubt they can by the 2012 election if ever given the complexity of our society and our current political system) not only the country but the world, given our leadership position in it, would be a better place for everyone to live.

Businessmen as Politicians

Getting close to the midterm elections, with all the political adds on TV in recent weeks, I’ve noticed that many aspirants cite their experience as operators of small businesses as a qualification for politics. Even Barney Franks in one of his adds mentions that his family owned a small business which he took charge of for a short while after his father died. I started to wonder if indeed the experience gained as a businessman (I use man in this case to include woman) truly is relevant to public service and have concluded that not only is it not relevant, it may in fact be detrimental to a position representing a population.

As I pointed out in a previous posting on Free Market Capitalism, the system works (and I do believe it does) because in the quest for self interest, coincidentally the society as a whole benefits. The success of a business is measured by the degree self interest is maximized not by how well society is served. In the stock markets, the price of a companies stock increases whenever there is an announcement of impending labor cuts because lower labor means lower costs and lower costs mean greater profits. So when an aspiring politician claims that they were successful businessmen, they in essence are saying they figured out how to bring greatest benefit to themselves. (Though I consider non-owner operators of businesses as administrators, in the common parlance businessmen is also applied to them so in this discussion that’s fine and we can think of their goal as bringing the greatest value to the owners.)

At the ground level the businessman, if successful, has figured out how to get the most for the least out of all of their associations. The highest price from their customers, the lowest price from their suppliers, the lowest rent, the cheapest labor. There is nothing wrong with this because that is how the system works. The output of the endeavor is singular, very focused and clear. It is profit, and there is only one beneficiary to be concerned with, either themselves or their employer in the case of outside owners. In public office, on the other hand there is the need to balance and maximize the benefits to a very diverse constituency with varied interests. A thing we often forget is that the role of a politician is to represent the entire population within their realm of responsibility, those who voted for them and agree with their ideology and those who didn’t. They should to be sensitive to the needs of business to maintain profits, of labor to have jobs and make a reasonable living, of the disenfranchised, the old and the sick, the needs to educate the young, protect lives and property and do this all within the guidelines set by the Constitution and prevailing local laws.

The businessman, on the one hand, has a singular goal and needs to understand the exterior forces in play as they move toward one goal while the politician needs to not only understand the exterior forces but also all the nuanced need of their diverse constituencies. Whereas there is only the need to balance the application of resources for businessman, there is the additional need to balance the benefits to the entire community. Unfortunately most politicians don’t do this well, if at all. They take the easy route and focus on one constituency, be it business, a minority, labor, women, the downtrodden, etc. The job of balancing all the varied needs is difficult and requires a great amount of skill and I feel the business experience with its singular focus is antithetical to the balance required at the output end. Having only focused on profit with no need to ever balance the output they have no experience and there is no indication that success with one is indicative of a skill set required in the other. In fact I believe the skills may in fact be totally different.

House of Worship

Last week I was a guest at a wedding in RI. The ceremony took place at a Catholic church, St. Mary’s in Bristol, and I was struck by its beauty. I had a chance to visit a number of cathedrals and churches in Italy, France and Germany and found this church to be on the par with the best and more beautiful then most.

While there I started thinking about criticism I’ve heard over the years about gilded houses of worship in impoverished neighborhoods, particularly in the third world. (I must admit I was a mild critic myself.) However, sitting in this splendid place I started to change my position. I imagined a person struggling all day coming home to an earthen floored, one room home with the only ornaments being pictures cut out of a magazine and maybe a religious symbol or shrine. And I thought about what a pleasure it must be on that one day a week when they are able to sit and relax in the splendor of such a place. I want to think that there is a sense of not only belonging to a community but ownership. This is their place. This is an extension of their home. It is the formal living room where they gather with their friends and the more humble the home the greater the significance of this great house.

Another though rattling around in my brain while admiring the architecture, color and stained glass was that this building must have given a great amount of joy to the designers, artisans and builders of this a magnificent structure. I imagine that the official justification for such opulence, particularly in the face of poverty, is that it represents respect for and a desire to properly worship ones God. I suspect God isn’t impressed easily and tolerates this because it enriches what would otherwise be drab and gray lives of the parishioners as well as the builders.

Optimism for America’s Future

I was watching a month old video of CNN’s Global Public Square hosted by Fareed Zakaria. (it’s the Sept 12 program which can be downloaded for free) He convened a panel consisting of Kathleen Parker, a nationally syndicated columnist and co-host of a CNN talk show, Bernard Henri Levi, a French philosopher, Dan Senor of the Council on Foreign Affairs and Christia Freeland, a Global Editor at Large for Roiters. They were discussing the news of the week and got into a debate on the Tea Party. I believe the consensus was that the lower middle class feels threatened and the Tea Party is the response to their fears. These threats range from the irrational that a Muslim population of less than 1% will somehow impose Sheria Law on all the population of the US to real discomfort with the fact that at some future date the majority of the population of the United States will no longer be white and that the middle class, not only in the US but also in Europe, is now having to compete with a billion people from the emerging economies. I believe this last fear is very rational. Whereas globalization has improved the condition of the educated and wealthy and has had minimal impact on the lesser paid workers in service jobs that cannot be outsourced, many of the higher paid, less value added jobs have gone overseas and may not return.

The world has changed dramatically and we need to recalibrate and figure out how we will continue to succeed in this new setting. Bernard Henri Levi pointed out that the United States has faced great challenges in the past citing the 1930s and 60s as examples and has found its way and he, a Frenchman, was confident that it will again. He said (and I paraphrase) that what is going on in our country is a National brainstorming session where ideas are presented, discussed and a path forward determined and that in any good brainstorming session you must have on the table a full gamete of ideas ranging from the ridiculous to the sublime. He was very confident that as we have done in the past, we will find the right path again.

I tend to agree with him and feel confident that the rhetoric about “second amendment (the right to bear arms) remedies” and against Muslims is just at one extreme end of ideas in this National brainstorming session. In fact, if I allow myself to get really optimistic, I think that the fact that we can have such a debate, in the long run may strengthen our democracy as we will have considered all alternatives, including the ridiculous and have chosen the path that will not only lead to continued success, but is consistent with the fundamental principles that have made ours a great nation.

Islamophobia Continued

Tonight I watched a debate on Bloomberg Television. The two sides argued whether Islam is a religion of peace. The side arguing that it is not won. My disappointment came not from the outcome but from the debate. I wonder if there could have been a debate on whether, Catholicism is a religion of pedophilia, Judaism a religion of greed, Hinduism is a religion of socio-economic discrimination or whether atheists are immoral or African Americans lazy. Certainly within all group there are sexually depraved, greedy, bigoted, immoral and lazy people as there are extremely violent ones. In today’s environment it is OK to have “frank” discussions about Islam in a national forum but I doubt whether the same could be had about any other group.