The Austerity Prescription

For nearly a year, I've been asking if someone, anyone, can point to any country, anywhere, that has used austerity successfully to end economic distress.  So far no one has been able to answer my question.  Yet today we are facing a very real possibility that we will be see austerity become the   remedy of choice on January 20, 2012, if Mitt Romney becomes the POTUS.  Should that happen, my assumption is that the Republicans will continue to hold the House of Representatives and take the Senate as well.  If that is the case, the policies of the GOP, specifically the Ryan Budget that passed the House of Representatives, will become the law of the land.  What does that mean?

Rather than dwell on their individual proposals, let me place them in context.  These policies are typical of the austerity programs that have been implemented in Europe, except that the Europeans have increased taxes to make sure everyone pays their fair share.  So how has it gone across the pond?  Has austerity worked?

The U.K. turned to the Tories who implemented the austerity régime there.  At the time, the U.K. was growing very slowly, but its debt was manageable.  So how has it been going?  Thanks to austerity, the U.K. announced last week that it has fallen back into the recession from which it had emerged.  The national debt has ballooned.  The unemployment rate has shot up.  That sounds like a good result, don't you think?

Spain was running a budget surplus when it took the austerity route.  Today it is sitting on a significant national debt.  Unemployment has surged, and economic growth has come to a stop.  Another strong positive result for austerity, eh?

Those who oppose President Obama's policies always like to say that we are headed to becoming another Greece.  While there are any number or reasons why the United States is not heading in that direction, like, for instance, that there is a ready market for U.S. debt instruments at record low interests, in the area of 1%, the results of austerity should be instructive.  Not only is Greece's debt increasing, but the unemployment rate is higher and there is massive civil unrest.

Ireland is experiencing the same negative affects as the other poster children for austerity.  In our own history we have seen the same thing.  In the last quarter of the 19th century, austerity measures gave the country its longest period of economic distress bookended by the panic of 1873 and the panic of 1893.  Herbert Hoover's reaction to the crash of 1929 was austerity that gave us Great Depression.

With all this evidence of the effects of austerity, why do the Republicans want to implement it in the United States now?  I have no idea.

Free Trade - Worshipping A False God

For close to three decades we have been told about the coming of the post-industrial age in the U.S. and of the many benefits of moving beyond the age of factories and industrial production to the glorious world of intellectual and creative power that will follow.

Those of us who live in the world of reality have been skeptical, but the policy wonks, talking heads and pundits drank the cool aid in huge gulps and worship at the alter of the false god of "free trade."  Barriers to trade have dropped like flies, unless you want to export, and off shore manufacturers have stuffed our stores with their goods and our manufacturing base has dried up.  How did we let this happen?  Who is responsible for this?  The short answer to the last question is that we are all responsible.  We have stood idly bye lapping up cheap goods made by subsidized factories that pollute on a massive level, use raw materials that endanger their workers, and sometimes users, e.g. melamine in pet food, or lead paint on toys, steal intellectual property as a matter of course and still play the part of innocents when cited for their abuses.  Isn't it ironic that people have shopped at Wal-Mart for years buying exactly the things that will put their own employers out of business and cost them their jobs?

I wonder why other countries strive to increase their manufacturing bases and stress industrial development while the United States has allowed them to do so by transferring our manufacturing base to theirs.  Are we so much smarter?  Do we know something about economic reality that they don't?  Frankly, we are not smarter, nor do we know something they don't.  Our policy makers from the Nixon Administration to the Obama Administration have been cheerfully manipulated by those governments and large corporations who stand to benefit most from the freedom to kill our manufacturing base.  GE is currently running heart-warming ads about creating jobs in the U.S.  That's all good until we look at the context, which is that for every job GE creates in this country, it creates two or more overseas.  GE and its compatriots are not the answer, they are part of the problem.

Ronald Reagan, George H.W. Bush, Bill Clinton, George W. Bush and Barack Obama have repeated the litany that we want free trade as long as we get a level playing field and then they have told us that whatever free trade agreement they were trying to pass through a clueless Congress addresses the issues that tilt the playing field.  Hogwash! China, India, Pakistan and the rest have no interest in a level playing field.  They want and will insist upon keeping the playing field tilted to them.  The only country in the world that actually develops trade policy based upon the naive belief that there will ever be a level playing field is the United States.  At the recent Second Annual Conference on the Renaissance of American Manufacturing, at which I was a panelist (applause here), Dr. Ralph Gomory, a research fellow at NYU, highlighted this issue and explained that our trading competitors, we have no partners, particularly China, are simply pursuing that age old policy of mercantilism.  Their goal is to have raw materials and technology flow to their factories and markets to be open to the manufactured goods those factories make.  They use all manner of economic enticement to lure companies into playing the roles they want them to play, and large companies, having the flexibility and resources to move, do so.

What can we do about it?  First and foremost, we can stop being the only industrialized country without a national manufacturing policy.  For the first time in decades there seems to be a bi-partisan consensus that the country has to do something to spur industrial renewal in this country, so we need to avoid political side shows.  At the conference I mentioned in the last paragraph, I spoke with other small and mid-sized manufacturers in attendance and I asked them two questions: 1) have you ever made a decision about operating your business in which taxes were the key issue.  The unanimous response was "no."  Big companies can move because they have the resources, but small and mid-sized companies can't, so taxes are something that are one factor, but we can't control them, so you just operate in world as it exists.  2) What is the single item of cost and effort you would like to have removed from your business life?  The unanimous response was health insurance.  They, we, want to have our people insured if only because effective health care means lower absenteeism, but we really don't want to pay for it or have to worry about its operation.  The solution unanimously preferred is Medicare for all.  Everyone gets covered, everyone pays in, and businesses can focus on business.  

Those who argue the tax issue are either missing the point or lying.  A couple of weeks ago, Japan dropped its corporate tax rate and the U.S. became the highest taxed country in the world, or did it?  Unlike other countries, we don't have a Value Added Tax (VAT).  If you add Japan's corporate tax to the VAT, their rate is right up there with ours, and some countries are higher.  What difference does it make?  When a company in a VAT country exports, it gets a rebate of its VAT payments for its exports.  So if the VAT is 15%, the price at which a product is sold off shore is immediately decreased by 15% increasing the competitive price of the product in the foreign market.  If both countries are VAT countries, it sort of cancels out.  But the U.S. is not a VAT country, so when our companies export, the full cost of the tax remains attached to the product, and then the receiving country's VAT is added as if it were made there.  The swing could be 30% or more!  Now add to that subsidies and currency manipulation, and you have a condition in which the American exporter cannot compete there and can't compete here either.

Why don't we have a VAT?  There are historical, political and operational reasons.  After World War II, France asked the United States to allow a 2% VAT to help its products compete and foster rebuilding a nation devastated by the war.  The Eisenhower Administration agreed as part of the nation's policy of helping Europe rebuild quickly in the face of Soviet expansionism.  Part of that agreement was a prohibition against the U.S. doing the same thing.  Over the years, the VAT carve out spread with the prohibition attached.  The VAT has frequently been called a national sales tax because it operates as regressively as a sales tax, even though it is not a sales tax.  Generally the U.S. has resisted the concept of regressive taxation.  The theoretical trade off for the VAT is a reduction in income tax rates, such as Japan has just done.  There is justifiable skepticism about whether or not our government would enact a significant income tax reduction.  In our current hyper political atmosphere, even though a VAT is not on the table, exactly how rates should change is a point of contention regarding current tax law, with the Republicans supporting rate cuts at the higher end of the income scale and Democrats supporting increases at the higher end of the income scale.

We must stop nipping around the edges trade policy, accept the reality of our current situation, and refuse to let the playing field tilt toward any country but ours.  Stop whining that it's not fair.  "Fair" doesn't enter into the equation, just ask China.  Our market is still the main target of the mercantilist countries.  We need to press that advantage to rebuild and reinvigorate our manufacturing base.  Thus far, one of the only things about which Democrats and Republicans agree is the export of our manufacturing base.  Progressives or Tea Party members, we must make sure that those who would govern our nation will care more about us than about jobs created in China by U.S. multi-nationals.

Campaigns: My Life on the Trail

In case you haven't noticed, the campaign season is in full swing, from town councils to President of the United States, candidates are either already duking it out, or are about to start duking it out.  As hard as it may be to believe, I have actually campaigned for office.  Based on that experience and my involvement in many other campaigns, I've recognized some realities of the world of political campaigning that I'd like to share with you.

These observations are bi-partisan and non-partisan, and it seemed like a good idea to get them out there before the flying crud gets too deep, and it will.  

I ran for Mayor of a small town of under 6000.  Understand that I didn't intend to run, but somehow I ended up as a candidate.  Having moved from New York, it just seemed logical to me to join my local party political club.  To my surprise, after just a year, I was the president of the club and tasked with the job of finding two council and a mayoral candidate.  The council candidates were fairly easy to find.  One was an incumbent and the other a well known local resident.  No one wanted to run for mayor.  The incumbent, our opponent, was well known and liked and looked like he should be the mayor.  To this day, long after his political career has ended, "Mr. Mayor" is still on his mailbox.  It was sort of like running against everyone's grandpa or cherished uncle.

The party faithful had signed the nominating petition awaiting for the name of the candidate to be written in.  On the last night before the deadline, having called everyone anyone could think of, I had only lived in town two years so I knew no one, the senior member of the nominating committee turned to me and said, "Noblesse oblige, baby, it's you."  Thus was my glorious campaign launched.

Clearly, I was doomed.  I understood that my task was to avoid screwing up and help the two council candidates get elected.  The traditional method of campaigning in my town, as in most small towns, was knocking on doors and going to meet-and-greets hosted by generous party faithful.  It was tough to get real excited about this since I knew victory was not an option.  On most weekend afternoons, I put our two year old son, Dan, in his stroller and we went door to door.  I shouldn't have been surprised that most people were amiable and friendly.  They were happy to talk, particularly those who supported the opposition, who wanted to slow me down so I would reach fewer homes, a fact I was too thick to understand until I spent a nice afternoon chatting with my next door neighbor and returned home to learn that he was my opponent's campaign manager. Was I pissed off? You bet.

In spite of those few disappointments, I fell into the trap of campaigning.  I began to believe that I could actually win.  The more I canvassed, the more convinced I became that victory was not only achievable, but actually within reasonable grasp.  Of course I was wrong.  Victory was never either possible or within reach.  But, and here's the point, a candidate must believe in his/her ability to win in order to carry on.  This is true at every level.  As the election nears, reality may rear its ugly head, as it must have for John McCain and John Kerry, but by then the commitment is so total, that there is no alternative to working hard if only to salvage some of your self respect.

A campaign is a bubble that surrounds the candidate with people who want him/her to win and who stoke him/her with good news that is either true or mere wishful thinking.  At lower levels like town government, there are no polls to inject any sense of reality.  At higher levels information fed to the candidate is sanitized so as to avoid freaking him/her out and maintain morale.

At the Presidential level, there is a difference if you are the incumbent or the challenger.  The incumbent is on the job, not just campaigning, so along with the intense advantages of incumbency and the bully pulpit of the Presidency, you are "in the world" all the time.  The challenger is always in the position of having been campaigning for a long time, much longer these days than in election cycles past.  You have fought and survived an amazingly grueling round of primaries.  Everything that could have been hurled at you has been hurled at you, whether true or fiction.  Now, here you are, ready to go head to head with an incumbent whose presence has been almost illusory during the miserable process you have weathered.  You are pretty well convinced that having taken all you have taken already, you are ready to meet the challenge ahead, whether you are or aren't, and win, whether you have a real shot or don't.

In my case, I walked into the school to vote feeling pretty confident that I had done well enough to upset the incumbent Mayor.  Everyone involved with the campaign assured me they had heard good things.  Of course I lost by a two-to-one margin.  My running mates lost too, although less convincingly.  

As we move along toward election day, I hope you will use my experience as a cautionary tale that helps you empathize with both candidates you support and those you oppose.  Running for office is a difficult thing.  You are just out there.  No one cares about your advisers, it's your name and ego on the line.  By the way, even though I got hammered, I'm glad I ran.  I learned lots and gained a deep regard for the electoral process, no matter how screwed up it seems currently.  I cannot encourage you enough to take the step.  Speak out for what you believe and have the courage of your convictions.  Run for office, it will be among the most frustrating, annoying, wonderful and exhilarating things you have ever done, just keep your eyes wide open and don't talk only to those who support you.  Good luck to those who are making the run in 2012, except for those that I don't support, of course.

Who Needs All That High Fallutin' Book Learnin'?

Have you noticed that there seems to be a developing sub-text of questioning the value of post high school education in American society.  This line of thought has been slithering about our culture for many years.  It poked it's head up above the general din of the national conversation when Rick Santorum accused President Obama of elitism for pressing to broaden opportunities for post secondary education.  But that was just a public exposure of this particular philosophy, not a causal event.  I'm not interested in the political side of this issue today, so the Santorum-Obama dust up will have to wait, or may now be irrelevant since Santorum's fifteen minutes seems to be over.  I am interested in talking about the underlying discussion.

Essentially, the question is, "Is a college degree worth the cost of tuition?"  After all, in the current economic environment, unemployment is hovering over 8%, and college grads who are already unemployed face similar challenges to those faced by everyone else who is currently unemployed.  Why pay anywhere from $20,000 to $50,000 a year to be unemployed?  If we look inside those statistics we can get a more nuanced picture.  Unemployment among recent college graduates is 4.1%.  Among high school graduates the rate is 8.7%.  Even college dropouts are doing better than high school graduates. Their unemployment rate is 7.7%.  As for high school dropouts, the rate is 13.8%.  Job prospects are significantly better for college grads.

The corollary question attached to the value of a degree is how does having or not having a degree impact pay levels?  The average high school graduate is making $30,400 a year.  The average college graduate is making $52,200 a year.  Advanced degrees make a difference too.  Masters degree holders are earning an average of $62,300 a year.  Over a lifetime of work the effect is dramatic.  High school grads will earn an average of $1.2 million.  College grads will earn an average of $2.1 million.  Acknowledging that these are all averages, and that there are enormous variations that comprise them, it seems clear to me that the question of the value of a college degree is incontestable.

But even that is not my point today.  There are reasons why education is so prized that are not tangible.  My belief is that education provides benefits that are valuable beyond their cost.  Primary among these is that the process permits our culture to endure through generations.  Education is not only about what we learn, but about how to learn.  In elementary school we learn information of a basic nature.  We are introduced to mathematics, which provides a context for analysis of what we see and we learn the concepts of mathematical manipulation that allow us to evaluate the quantitative nature of our world.  The study of our language and, if we are fortunate, other languages provides means of communication with others.  Languages have been shown to be important in understanding mathematical concepts and advanced mathematical concepts like music.  Reading allows us to be exposed to the vast diversity of our existence.  Science is the very essence of everything, and the introductory concepts to which we are exposed opens a door to an astounding array of explanations of what things are, how things happen and why things happen.  History explains how we got here and reveals the patterns of behavior that have made societies what they are and helps us understand why they do what they do.  Art hones analytical skills.  It trains us to see how colors, textures, space and perspective inter react.  Art is math, history and science all rolled into a single area of study that then invites us to "play" with those concepts.  Above all, school teaches us to be social beings.  One of my big complaints about home schooling is that there is little or no social component, and the occasional play date doesn't overcome that shortcoming.  In sum, elementary education gives us information and teaches us to use that information as a problem solving tool.

Secondary education expands our knowledge base and refines our problem solving skills.  We are trained to draw upon all our fields of study to find solutions to questions that arise in life, academic and non-academic.

Higher education is less about acquiring information for its own sake and more about applying it to address increasingly complex issues.  This is where we are our most innovative.  A lifetime of learning to study, learn, evaluate and predict lead to developing truly new approaches that enhance experiencing the world for everyone.

As education becomes reduced purely to test statistics, we lose the thing that has made the United States great: thinking outside the box.  Sorry about the cliché.  During the time when the test scores of Japanese students were cited as examples of the inferiority of the American education system, a Japanese customer told me that the reason the U.S. is so advanced is that we encourage students to question, while other nations reward rote learning.  The higher the level of educational training, the more diverse the problem solving skill set becomes.

This is what I find disturbing.  Exactly how do we expect to remain the driver of innovation and creativity, from the sciences to the arts, when we are doing everything we can to direct education toward being no more than vocational training?  Vocational training is an important component of the overall spectrum of educational opportunity, but it cannot become its central tenet.  As a nation we must stress the value of learning for its own sake so that the United States doesn't become a society of well trained drones.  That, I fear, is what we face today.