Are Business Grads Hirable?

            First, a bit of background material:  Here in Iowa, as in most of the United States, public employees and public services are under attack by organized business interests and by their lackeys in government.  The scope of this attack is so broad as to include all forms of public services--even police and fire fighters.  But nowhere is this antisocial wrath focused more strongly than on public education. For the forces of “organized money,” the teachers’ union and the tenured professor are now the poster children for all that they see wrong with the world.

              Their enmity toward public education has many roots, not all of which are economic, and their desire to pay lower taxes may be but one part of a complex mosaic of motivational factors.  Educators, if they perform their function well, have a responsibility to disseminate the truth, including all those inconvenient truths which established interests would prefer to ignore or perhaps deliberately conceal.  And of course, there are cultural wars which can entrap educators no matter how strongly they attempt distance themselves from this kind of controversy.  Explaining to students how the photo decay of uranium inside a cubic zirconium crystal can tell us that the earth is about four and a half billion years old would not, to most of us,  seems like a very controversial thing to do. But to the sanctimonious lunatics who teach their children that God created the world in seven days, any teacher who would dare to say such things is clearly a servant of Satan. Yet it is the actual tax expenditure for education where these smoldering hostilities to the tellers of truth boil over into the political sphere and begin to have real world consequences.

             Education has always been expensive. But a generation ago, if anyone seriously suggested that it would be possible to maintain a modern, industrial state without continuing to make these expenditures, he would have been laughed out of any political party in the U.S. or any other Western country.  And till the end of the cold war, the most influential conservatives would still advocate increased educational expenditures--because education was one area where the Soviets were leaving us behind. But that was then, and this is now.

            The University of Northern Iowa has just suffered radical funding cuts, imposed by the GOP controlled state legislature.  About a third of all major programs have been discontinued, and the Malcolm Price Lab School, (at one time the premier pedagogical research facility in the country) will be closed. The faculty has returned to the administration a vote of no confidence, and the local debate is bitter and spirited.   As part of this ongoing debate, Jim Offner, the business columnist for the Waterloo Courier, wrote a March 25 column which said, basically, that while the goals of a well rounded education were valid goals, the employers’ demand for highly specialized workers makes the liberal arts degree impractical in today’s business environment. On April 1, a guest article, Liberal Arts Majors Are Very Hirable,  by Professor Martha Reineke of the UNI religion department and Professor Margaret Holland of the philosophy dept, appeared in the same paper in reply to Mr. Offner’s remarks. They offer evidence that if you look at mid-career salaries, liberal arts grads actually do much better in the job market than business grads.   They cite data from Pay Scale’s annual survey of salaries, which lists salaries of graduates according to major. This survey shows that at mid-career, philosophy majors have higher salaries than business management majors.  Reineke & Holland also show that liberal arts majors do better on all tests required for admission to advanced graduate programs, including law, management, and medicine. They wrote:

            “*Philosophy majors are No 1 on the LSAT; business majors are No 24.

            *Philosophy majors outperform business majors by a margin of 15% on the GMAT.

            *Philosophy majors, on average, do better than all other majors on the GRE, LSAT,             GMAT, and MCAT.”

Also, they quote the president of Babson College, (a business school) who claims that, due to the pace of change, business skills acquired in the classroom expire in about five years.  By contrast, he claims that skills learned in liberal arts disciplines such as history and philosophy are long lasting—and indispensable to business.  And they also quote Marissa Mayer, a Google vice president who studied philosophy and psychology at Stanford.  Mayer says that of the 6,000 people Google hires every year, 4,500 are liberal arts or humanities majors.

            (By the way, if you imagine that philosophy majors are students who spend most of their college years studying the writings of philosophers, or that they expect to be hired upon graduation to perform philosophy, let me correct your misimpression. The beauty of a philosophy major is that it is the one major which allows you to study almost any subject and still apply it towards your major.  Why?  Because almost any field of study can be considered a branch of philosophy.  Those who declare a philosophy major are simply those students who wish to acquire the broadest possible range of knowledge. )

            While Reineke and Holland did their homework well, and made a very convincing case for the continued value of the liberal arts, this is precisely what I would expect them to do, because their own department is one of those under assault. What did surprise me is that a few days later, I saw an article in the April 5 issue of the Wall Street Journal , Wealth or Waste?  Rethinking The Value of a Business Major, which said exactly the same thing. In fact, The WSJ piece makes the point even more strongly than Reineke & Holland do.  The article begins by saying:  “Undergraduate business majors are a dime a dozen on many college campuses.  But according to some, they may be worth even less.”            They say that more than 20% of U.S. undergraduates are business majors.  But faculty, school administrators, and corporate recruiters are beginning to question the value of a business degree at the undergraduate level.  The biggest complaint is that business majors focus too much on the nuts and bolts of finance and accounting and fail to develop the critical thinking and problem solving skills that are the hallmark of liberal arts courses.

            Top business schools are taking the hint.  The business schools at George Washington University, Georgetown University, and several others are now tweaking their undergraduate business curricula to integrate history, ethics, and writing--into courses about finance and marketing. At George Washington U., they are planning to use the expertise of their philosophy and psychology depts to teach business ethics.  And they plan to use the engineering dept to help teach sustainability. So, just as pro-business lackeys within the state legislature are trying to reduce or eliminate the liberal arts in favor of the study of business, (believing that this will be doing a favor to business interests) the top business schools and corporate recruiters are beginning to embrace the liberal arts as the only cure for what’s wrong with American business. Ahh, the irony of it all!  I will provide a link to both the Courier article and the WSJ piece, but you may hit a pay wall on WSJ.

             

Jobs Picture Better Than it Looks.

    In the Monday, April 2, 2012 issue of The Wall Street Journal, there was an article by Justin Lahart entitled U.S. Jobs Rebound Still Leaves Work for Ben Bernanke.  (I'd provide a link, but you'd just hit a pay wall.) In the U.S.,  recently published statistics on total jobs have showed significant improvement over the last year.  The Labor Department payroll survey says that  the U.S. has added an average of 245,000 jobs in each of the last three months.  That same survey says that we have added 2,000,000 jobs, over the last year.  The payroll survey is a survey of 6% of U.S. employers.   But this survey only questions those employers who are well established--it overlooks start-ups that are often an important part of any recovery.  A lesser known, but probably more accurate survey is the Household Survey.   In this poll, they simply ask a small number (60,000) of householders to tell them who in that house is working.   According to the household survey, there have been not 2 million, but 3.2 million jobs added in the last year.   And in any previous recovery, the Household Survey has turned out to be closer to the real picture. So while the official job picture is finally starting to look good, the real picture is probably even better.   And remember, we have 4 years of pent up demand.

Japan's First Trade Deficit Since 1980

            This post is a response to three separate articles which have appeared recently in the Wall Street Journal:  End of Era for Japan’s Exports, (Jan 24, 2012)  The factory Floor Has a Ceiling on Job Creation, (Jan 12, 2012) and Building a Case for Producers’ Relevance, (Jan 18, 1012).  Mostly, this post is about jobs—and about the relationship between jobs, trade deficits, and currency exchange rates.   But before beginning, I should perhaps explain why, as a liberal with no particular love for Wall Street, I should wish to quote WSJ or even bother to read anything which might be printed in its pages.

             When I was in college in the late 50s, the word about WSJ was that its opinion pages were filled with outrageous nonsense, but that its news pages contained accurate and reliable information, often including in-depth coverage of economic events across the globe that no one else was covering at all.   I think it still fits that template, except that since Mr. Murdoch purchased the paper, there seems to be a lot more opinion and a lot less of the in-depth coverage which made WSJ the useful research tool that it once was.  But it still contains information on global markets and commodities that you rarely find in other mainstream journals. I subscribe to over a dozen periodicals—mostly liberal journals like American Prospect, Nation, and In These Times.            But I still read WSJ, and I’ll explain why:  Last night, there was an account in my local paper from AP which stated that Japan had its first trade deficit since 1980.   This piece was one paragraph long.  WSJ gave the story a whole page.

            This WSJ article begins by explaining that some of the causes of Japan’s trade deficit are immediate, short term problems:   the tsunami, the loss of its nuclear power, etc.   These events have shut down a lot of Japanese production, and you cannot export that which you cannot produce.  And Japanese exports are also hurt by weak demand in the U.S. and Europe. But within a few years, Japan would have been entering an era of long term trade deficits anyway, due to other causes:   the graying of its population, the appreciation of the Yen, the increasing cost of imported oil and other commodities, and the recent rise of a number of third world industrial powers.

            The Japanese trade juggernaut began about 1950, with a government policy of export- led growth based on an artificially undervalued Yen and cheap credit for Japanese manufacturers.  This policy was so successful that it was called “The Japanese Miracle.”  For decades, Japanese manufacturers were able to promise their workers total job security, through good times and bad, because by running a large trade surplus, Japan was able to export its unemployment to the rest of the world--mostly to us.

             I’m going to digress here to explain something that the article does not go into. Japanese products were able to penetrate markets all over the world because they were able to sell higher quality cars and electronic goods at lower prices than their domestic competition. They claimed that this had something to do with “Japanese efficiency.”   But efficiency had nothing to do with it.  Originally, the Japanese price advantage was cheap labor.  Japanese workers, right after the war, were willing to work for much lower wages than workers in any other developed country. But even after Japanese wages reached parity with the U.S. and Europe, their manufacturers still were able to sell higher quality products at lower prices.  This was partly because Japanese manufacturers had much lower capital costs, since their government insured that loans were available to Japanese employers at much lower interest rates than the world average.  But most of the Japanese manufacturing advantage was due to a radically undervalued Yen.  In the 1960s, when $2,000 Japanese cars were being sold here, they were probably being built at a cost equivalent of over $4,000, but the phony exchange rate covered this loss and even made a fat profit.   If a dollar paid by a customer in the U.S. converts to the equivalent buying power of $3 in Japan, then it becomes pretty easy for a manufacturer to hire enough skilled labor to build whatever quality level he wants and still underprice our market.     And of course, in the 50s and 60s, Germany did the same thing.   I bought a new VW bug in 1967, and I sincerely believed that I did not buy a foreign car just because I was too cheap to pay for an American made car—I merely wanted a higher quality.  I paid $1,850, and there was at least one model of American car I could have bought for $1,800.  I just felt that the VW was a better car.  Well, I now suspect that if this exact car had been built by VW in the U.S. at that time and at that level of quality, it would have cost over $3,800 to produce, which was nearly the price of the cheapest Cadillac.  Of course the VW was a high quality car—why wouldn’t it be?   Price and quality are merely opposite sides of the same coin, but few people understood that. Like the Yen, the German Mark was deliberately undervalued.  We tolerated these trade games because of the cold war.  Our government wanted to build up Japan and Germany as a strong bulwark against the USSR and China, and we were willing to trash the jobs of millions of American workers to do this.

            But in the 1980s, the U.S. patience with Japan began to wear thin.  First, the U.S. demanded that Japan voluntarily limit the number of cars sold in the U.S.   And then the U.S. accused Japan of selling goods overseas at lower prices than they were charging at home.  This is called “dumping,” and it is generally considered an unfair trade practice.  In 1985, the U.S. and Europe’s leading economies pressured Japan into signing the “Plaza Accord,” an accord in which Japan agreed to stop intervening to keep its currency value artificially low.  The Yen rose from 239 Yen to the dollar in 1985 to 128 in 1988.

            According to WSJ, Japanese authorities tried to mitigate the effect of this change by flooding the economy with cheap money.  But this produced an asset bubble, which eventually crashed.  And the crash caused two decades of economic stagnation in Japan. One of the reasons that China is so reluctant to let the Yuan appreciate is that they remember what happened to Japan after the Plaza Accord.  (Of course, one could argue that the Japan disaster resulted not so much from the revaluation of the Yen but from the decision of the Japanese government to flood the country with cheap money—or perhaps even from the decision of the Japanese consumers to spend this easy money by just bidding up the price of real estate rather than buying more Japanese goods.)

            When the Japanese trade juggernaut first started, Japan had the cheapest labor costs of any country that had the industrial know-how to manufacture anything.  But Japan was soon joined by South Korea and Taiwan, and must now compete with new industrial tigers like China and Brazil, as well as new sources of cheap industrial labor such as Thailand, Indonesia, and Latin America.  Japanese manufacturers are responding by “off shoring”  some of their production—sometimes moving the entire operation overseas, sometimes just moving the low skill, labor intensive jobs, hoping to preserve at least some jobs in Japan by doing so. This is, of course, exactly what American manufacturers were forced to do when threatened with the Japanese trade advantage a generation ago.  Today, some  Japanese jobs are being off-shored to the U.S.   Mori Seiki is planning to build a machine tool plant in Davis, California.  But most jobs are being off-shored to countries that have one thing in common—an undervalued currency.

            The second article, The Factory Floor Has a Ceiling on Job Creation, by David Wessel, examines whether improvements in the manufacturing sector will solve our unemployment problem.  The short answer: No.    Wessel provides a graph showing factory employment as a percentage of total employment in the U.S. since 1950.   In the early 50s, factory jobs accounted to over 30% of all employment.  (And since these jobs usually paid better than service jobs or retail employment, they probably provided much more than 30% of the country’s spendable income.)  Then we started outsourcing jobs to low wage countries, and today, only 9% of U.S. employment is in factories.  So, if we could bring back all the jobs outsourced since 1950, would that bring back a nation with factory jobs for 30% of its people?  No—not even close, because another trend since 1950 has been automation.  Although we employ only 11.8 million people in manufacturing, total output since 1950 has increased 500%.  Productivity has also increased 500%, and real factory wages, on average, have more than doubled since 1950.

            So even if we could bring back all the lost production, it would not bring back all the lost jobs.  And even if we could, the modern factory job requires more skill and training than a generation ago.  In 1950, a factory job was a ticket to a middle class life for a person with no education beyond high school.  But today, an applicant without prior experience will usually need about 2 years of tech school to get an entry level factory job.

            Yet factories are important because they are a primary driver of growth.  As Obama’s “Manufacturing Czar,” Ron Bloom says, “If you get an auto assembly plant, a 

Wal-Mart follows.  If you get a Wal-Mart, an auto assembly plant doesn’t follow.”

            The third article, Building a case for Producers’ Relevance, by Justin Lahart, claims that the 330,000 new factory jobs added in the last two years, while not equal to the 2.3 million jobs lost in the two years before that, are still an important part of the recovery.  In fact, he says that’s mainly what’s driving the recovery.  In the third quarter, goods production accounted for 28% of GDP.   That’s far less than the 43% in 1960, but it’s still 28%. 

            I think we are approaching an era where we could bring back all the production that we ever out-sourced.  In my view, this would add at least 3.5 million jobs.  This would not completely solve our unemployment problem, but it would nearly cut it in half. Of the 13+ million officially unemployed, at least 5 million would be unemployed in a normal economy, due to routine job changing, bankruptcies, seasonal lay-offs, etc. That really only leaves a deficiency of 8 million jobs.   And since manufacturing jobs act as a primary driver for other jobs, each one these new jobs might eventually create one additional job. If that happened, we’d have nearly full employment.  

            If we had a government policy deliberately aimed at bringing back these off-shored jobs, we could easily do this. In his State of the Union Address, President Obama indicated that he would be pushing for precisely such a plan.   But don’t expect any help from the Republicans in Congress.  Most congressional Republicans depend heavily on Wall Street elites for campaign funding. This is a problem for both parties, but Democrats can access other sources of money--labor PACS, green PACs, trial lawyers, etc.  There are Republican voters who hate Wall Street, and they have pretty loud voices--but not very deep pockets.  So the GOP must give Wall Street what it wants. Right now, full employment is not what it wants. Wall Street loves a slack labor market. It allows them to bust unions and hire people for pennies.  Since they now have this advantage, I’m sure they have no desire to give it up.

Does Skyscraper Boom Predict Recession?

     According to an AP article in Jan 11, 2012 Waterloo Courier,  Barclays Capital has issued a report claiming that it has uncovered an "unhealthy correlation" between skyscraper construction and recession, that goes back 140 years. Building booms are a sign of excess credit, and skyscraper construction coincides  with easy credit, rising land prices, and excessive optimism.  But these are the same factors which produce speculative bubbles which result in a crash.  So by the time the skyscraper is finished, the economy has slipped into recession.  Right now China and India are having a skyscraper boom, which could mean their economies are heading for a crash.

Are Small Businesses Better?

            My latest Northern Sun Catalogue offers a bumper sticker which reads, “Break the Chains—Shop at independent Stores.”  I assume that the author believes that if only we could rid ourselves of the shackles of the Walmarts, Best Buys, and Targets, and all the other big box chain stores, we could return to some halcyon age of kinder and gentler commerce.   Well, let me first say that those who believe this are probably among the kindest and most well intentioned people around—but I don’t think they have any idea what they are asking for.  There is an old Irish proverb:  “Be careful what you pray for—you might get it.”

            We live in an age now where everyone seems to accept without any evidence that smaller is automatically better; that smaller stores would somehow treat their workers better, or perhaps treat their customers, their communities, and their local environments in a more responsible manner. They accept the “sacred cow” belief that the small yeoman businessman is the salt of the earth.  And apparently, they believe that greed moves men to commit theft and chicanery only when enterprises are so large that the individual perpetrators  have no noticeable  stake in the outcome; that it never occurs to small entrepreneurs to steal for their personal enrichment, but that corporate minions will eagerly risk going to jail to enrich a million anonymous stockholders whom they have never met.

            Of course, neither the small business model nor the large corporation model applies to the financial sector.  Major investment banks are in a category all their own.  The high stakes traders act with considerable autonomy and behave as if they were individual entrepreneurs or outside contractors, and that’s how they’re paid, even though they bet the company’s money.   Yet the thousands of accountants, statisticians, and actuaries etc are simply part of the general corporate culture. The high stakes traders are driven by an individualistic risk taking mentality, whereas, in a typical day, the biggest risk an accountant might take would be deciding what color tie to wear.  But crime is risky, so when it occurs, it is usually in the part of the operation where individuals operate as if they were running their own small businesses.

            I suspect that those who entertain illusions about the purity of small business are mainly those who have never actually worked for a small business.  I entered the work force in the late 1950s, and by the time I retired I had worked for at least 75 employers, including some of the largest corporations on the planet.  But most of my employers were small, family owned operations.  With just a few exceptions, all my employers were scum bags.   Some were intelligent enough to maintain a warm and cheerful surface veneer, and some were too stupid to bother. Some would screw their workers and customers only whenever they could make a fat profit by doing so—and some would do it just for practice.  But they were all scum bags.  And by far, the worst were the smallest, and this was true across a variety of industries.   I did have the opportunity of working for one small family outfit where I was treated like a member of the family.  And I worked for four other outfits, two large and two small, where I was treated fairly and never lied to or cheated.  That’s five out of 75.  Let me give you some examples:

            Back in the 50s, there were no large retail chain stores in our area except Sears, Penny’s, and Ward’s.  People who actually wanted to spend their lives in retail sales stood in line for jobs at these places because the chain stores paid better.  All entry level retail sales jobs paid lousy wages, but at Sears at that time, if you could really sell and if you stayed several years, you could actually work your way up to making a living wage.    A friend of mine who was an electrician had a wife who worked for Sears till she retired, and she ended up with a better pension than his electrician’s pension.  Back then a typical family retail operation would employ half a dozen non-family members. The family might or might not derive a good living wage from the business, but the hired help almost never did.  During high school, I was hired as non-family help for several of these companies. I worked for a paint store when I was 15.  My job involved taking palates of paint cans on a horrible old freight elevator up to a second floor warehouse. The elevator was completely open with no guards or railings of any kind, and was propelled by huge old wooden pulleys driven by flat belts. There was no safety stop, so if a belt ever broke, I assume the thing would plunge clear to the basement.  Looking back, I suspect that I was hired so that if an accident did occur, it was me that would die instead of a family member.

              I was also hired to cut glass there.  The boss said that I was to take a new glass cutter off the retail display, take it out of the box, make one cut and then put it back in the box and back on the shelf—but never use the same one again. He explained, “These cheap cutters are really only good for one perfect cut, so always use a new one.”  This respected local businessman and prominent church member knowingly sold his customers cutters that were already used and worthless when he sold them.  Tip:  Don’t ever buy a glass cutter from a store that also cuts glass, unless it comes sealed in plastic. 

            Another job I had at 15 was a summer job loading hides from the hide cellar of a local rendering works.  These would be hides of animals which had died of disease.  The stench was unbelievable. Of course, this was industrial work, and could only legally be done by workers over 18. (And considering the nature of the carcasses involved, I suspect there would be a legal requirement that all workers touching them be properly vaccinated.)  But they just hired 15 year olds off the street. It was a small, family business.  I also worked at a bakery when I was 15.  Both of these jobs were clear violations of child labor laws, but small businesses can “fly under the radar.”  They’re too small to be noticed.

              After I was 18 and out of school, I worked for the largest company in town:  John Deere tractor works.  I was on a piecework job on a machine that had formerly been run by a giant of a man who could run the operation quite fast by doing things in a way that were not part of the procedure, and that no one except a gorilla could do. Every time he ran over 140% of the basic quota, they re-timed the job, till eventually even he could not make any money at it.  He used his seniority to bid on a different job, and I was hired to replace him.  At 18, I was a powerfully built young man, and I think that was why they thought I could probably do the job the way the previous guy had. They were wrong—I couldn’t even make the base rate quota.  Although I was doing my best, they kept threatening to fire me if I couldn’t do the job faster.  I finally told them to take the job and shove it.   I don’t believe that they ever did find anyone who could run that job at the speed for which it was timed, and they eventually split it into two jobs.   But if I had been assigned to any other job in the department, I would have stayed for life, and probably made more money and fringe benefits than any job I’ve ever done.  As a skilled electrician working on big overtime jobs, I’ve often had a short surge of cash, sometimes grossing a couple thousand in a week.  But for year in, year out wages, I’ve never done anything that could beat a union job in a big factory.  Mind you, working piecework for a large factory is not usually pleasant—but it’s often well paid, or at least it used to be.   After leaving Deere’s, I spent a couple years in college as a physics major, and then I went to California. In the next phase of my life, I performed work that was pleasant, high tech, and low wage.  I wore clean clothes, worked in a clean, air conditioned environment on state of the art technology, had lunch with the engineers and venders, and was paid slightly over the minimum wage.  Many of these high tech companies are small, family businesses. And except for a handful of weasels at the top, no one makes any money.

            One of the ploys which these small outfits use to lure well trained people into working for crummy wages is to promise a grand future.  They explain that some new operation is just starting out and there is no money in it yet, but if someone can get it going it will soon be an operation requiring several workers-- and there will be a really good supervisory position for the guy running it. So you take the job and bust your guts building it into what they wanted it to be, and lo, there really is good supervisory job at the top—but not for you.  They bring in a family member.  On some Monday morning, your boss walks up and says, “This is Bob, my brother-in–law.   He’ll be your new boss.  Oh, and could you show him the ropes?  He’s never done this stuff before.”   (This happened to me twice in a row.)   This kind of trick could happen anywhere, but it happens universally in any small family business.  The reason is that any family business has some family members stuck in lousy jobs.  They resent this, but they put up with it as long as there are no outsiders placed in jobs that are any better.  So the rule of thumb is:  On the rare occasions that a good job is part of the picture, you give it to your brother-in-law and screw the outsiders. (But first you have to sucker some outsider who understands the technology into working out all the problems to the point that your idiot brother-in–law can handle it.)

            I then spent three years in the Army as a communications specialist in the Signal Corp, and when I got out I eventually became an IBEW electrician, but not before I spent a few years working for a small, family owned, non-union company.  This company installed cable TV, sound systems, intercoms, etc in large buildings. I was the cable guy.   Eventually I became foreman, and one day my boss told me to fire a guy.  There was no doubt that this man had to go; he was utterly incompetent. As my boss walked out the door, he reminded me that our company had a one week paid vacation for any worker who had been there for one year, and the worker involved was just one week short of having one year.  I thought, “What an unexpected show of compassion.  He wants me to wait one more week, so that the poor guy isn’t cheated out of his vacation.”  No--he wanted me to fire him just before he would qualify for that vacation.  At that point I decided that I was working for a no good son-of-a-bitch, and should start looking for a new job.  Shortly after that, I was introduced to one of my boss’ old cronies who was to be my new boss, and I was asked to please help him learn his new job. 

            Have you ever noticed that small businessmen always belong to various organizations where they attend testimonial dinners where they all get up and expound on what a warm, wonderful human being Old Joe is? Why do they need to do this? They need this approval from each other because there damn little chance they’ll ever get it from anyone else—at least, not from anyone who knows them very well.  And notice, at none of these testimonials is there time allowed for dissenting opinions.  Nor do they invite the guy’s ex-wife, his ex-business partner, and certainly not the ex-worker who spent 30 years there, but who was fired after his back was worn out and he could no longer do the heavy lifting.  

            After leaving the cable installing company, I became an IBEW Journeyman inside wireman, and spent nearly 40 years working for nearly 50 different contractors, ranging from Bechtel, the largest in the country, to small family owned outfits.  So who would I prefer to work for—Bechtel or Billy Bob’s Electric?  I’ve found, over the years, that the bigger the better.  A very friendly, intelligently run, small shop can be delightful if you can find one.  But the overwhelming odds are that any small business will be run by either an ass or a moron. And a small shop run by some horrible beast can be a living hell. But if you work for a very large concern, you don’t have to worry about it, especially if it’s a union shop.  When you work under a union contract for a large company, you have no way of knowing whether you are working for saints or for beasts, nor will it make much difference.  It’s more like being in the Navy.  If you were a Navy Electrician’s Mate 1^st Class, and you read that the Secretary of the Navy had died and would be replaced, would you really care?  Would it make the slightest difference in your daily work?  You would certainly care who your immediate supervisor was; that would make a difference.  And a different Executive Officer in your unit might make a difference if you ever got into trouble.  But the two things that would determine your daily existence would be your immediate supervisor, and Navy regulations.  The Navy runs by rules. And on a big construction job, there are also rules:  OSHA rules, the customer’s own safety rules, National Electrical Code rules, Federal wage and hour rules, and the union contract’s rules.  You have to abide by these rules, yet so does the contractor.  But a small outfit will often completely ignore the rules and dare you to do anything about it.  And they usually get away with it because they are too small for anyone to bother with. But if you are the poor worker who is being asked to do something patently unsafe, then you are the one who has to choose between being fired or risk being injured or killed.  On a big job, you don’t usually have that problem.  It isn’t that the owners of large companies are always nice people.  But they are usually smart enough to understand that with 5,000 pairs of eyes watching them, there is not much they can get away with.  Even on a non-union job, there would always be a whistle blower.

            So far I’ve examined only whether small operations are better for workers.  I spent about 50 years discovering that they are not.  Some small employers are pleasant and some are unpleasant.  But they almost all pay lousy wages and no benefits, and most of them are non-union. And even in industries where small business are often union, such as the skilled trades, big jobs with big companies are usually preferable to small jobs and small companies, even with the wages and benefits equal. But let’s look at this from the consumer’s standpoint.   

            When I was growing up in the years just after the war, food was sold at little neighborhood grocery stores. Safeway and other supermarket chains had not yet come to our area.  There were five stores within three blocks of our home.  These tiny markets had only two or three choices of meat on any given day, and if some of the meat the grocer bought went unsold, it spoiled and was thrown away.  What you did buy from this meager selection was often nearly spoiled by the time you got it, and was extremely expensive because the sale price of the meat which was sold had to pay for other meat which had spoiled, and also pay for the cost of having meat trucks deliver a paltry amount of fresh meat every day to every tiny store in town. The fresh vegetable selection was just as bare, often wilted, and always expensive. 

            But they built a Piggly Wiggly store, and soon there were several other chain supermarkets.  And this opened a whole new world for us.  Every day, we were offered every cut of pork, beef, lamb, and poultry, all perfectly fresh and priced at half what the tiny markets had charged.  And produce was also cheaper, fresher, and more diverse than anything we had ever known.   Cans of processed food of every kind and description were stacked for half a block, at prices starting at a dime a can.  Understand that this was a working class neighborhood, populated mostly by packing house workers. The advent of the supermarket, in and of itself, had nearly doubled our standard of living. And as other big box stores began to replace the family owned hardware, clothing, and appliance stores, this too radically increased our standard of living. Did these new stores replace hundreds of small businesses? Yes, they did.  And were these new stores all non-union, low wage employers?  Yes, they were.  But what were the small stores they replaced?  Were they not also low wage, non-union jobs?  Occasionally, one of these small outfits made a decent living for the owner’s own family—but never for the half dozen he had employed.  If one of these former independent businessmen ended up stocking shelves for Walmart for slightly above the minimum wage, what is his real complaint?  That he now has to work for the same wage he paid others?  I think there’s some irony here.

            One last question:  Some of you are probably repulsed by the political views of the owners of some of these big box chains.  Guess what?  So am I!  And I actually know a handful of small businessmen who have decent, compassionate values.  That’s a half dozen out of 500. There are at least 500 small businesses in my county and over the years I’ve dealt with most of them.   Let me tell you about their political instincts.   If you’ve noticed the crowd of deranged candidates cueing up for the Republican Caucuses in Iowa, you might wonder what kind of right wing degenerate morons could support such nonsense. It's not mainstream Republicans. The Tea Party crazies are fun to watch, but they are totally wrecking the Republican Party, and most mainstream Republicans are intelligent enough to understand this--and they are not amused.  In Iowa, the Republican Party is a minority, and only a minority of that minority participates in the caucus. The few Republicans I know don’t particularly like any of the announced candidates.  (They would probably prefer someone like Bob Dole.)  So who are the raving right wing sociopaths who attend rallies for these loonies?  It’s the small business community.  And if you ever give these people any of your business, whatever profit they get from you could end up in the campaign coffers of the most extreme right wing political elements in the country.   In most parts of Iowa, the Tea Party is the small business sector.

            As far as workers’ rights, women’s rights, or minority rights of any kind are concerned, for all of my life the most strident and regressive voice in Iowa politics has been from the small business sector.  Right now they’re upset about federal child labor laws.

            The main problem for workers in the retail sector is that it’s all non-union.  Walmart, Target, and Best Buy are non-union, but so were the small companies they replaced. The large chains are still non-union because we have labor laws slanted against organizing.  Canada does not.  And workers in Canada succeeded in organizing a Walmart store.  But even if we had the same laws as Canada, there is no way anyone could ever have organized a significant percentage of the kind of small stores which these chains replaced.   Any basic history of economics text will tell you that in the Nineteenth Century, the reason that union organization took hold is that industrialization brought large numbers of workers together within the same company--and that makes them easier to organize.  As industrialization gave us the motive to organize, it also gave us the means and the opportunity. 

            Having said all of this, let me also say, just for the record, that I do not shop at Walmart, though I often shop at big box stores.  My reason is not that they are non-union, but that they have made it such a grand and expensive project to stay that way.  As a union member, I find that insulting.  But if they ever start signing union contracts, I would find it not only permissible to shop there but would feel a moral obligation to do so.   And that’s a promise.

            I have painted with broad strokes, and there are certainly exceptions.   In a liberal college town like Iowa City, you can find scores of local businessmen who are decent, intelligent and civic minded leaders of their community.  But they are the way they are, not because they are in business—but because they are in Iowa City.  The same situation obtains for many other liberal college towns, such as Madison WI, Ithaca NY, etc.  And I suspect that whoever wrote the slogan about breaking the chains probably lives in such a place.   A word of advice:  If you ever leave that liberal academic enclave, be ready for some surprises. 

So How Bad is This Recession?

I just read something that you might find interesting.  Let me quote a few brief fragments, and  you see if you can guess who said it.  (In some cases I will be quoting just parts of sentences, because including the whole sentence would tell you who the speaker is.)

         “. . . those who are now twenty-five years of age, and who in spite of earnest search have been unable to find a job . . .”

         “. . . one of the most significant facts of this age is the continuous unemployment of millions of good people.”

         “. . . Yale graduates are actually working at jobs which pay [some very low figure] per week.”

         “[someone] recently advertised for a housemaid;  she received thirty applications for the job, and twenty-five of these were girls who had graduated from college.  . ”

         “Our young people may wait until we are ready for them to begin, or they may not; but they will not wait forever.  During the past four jobless years, they have become terribly disillusioned.”

         “. . . a rich land racked and mismanaged, with huge accumulations of goods and wealth, yet with millions of our people deprived and helpless.”

         “We have millions of people with good bodies and minds who can’t get jobs.”

                “. . . move increasingly to an enforced realization that unrestrained selfishness is ruinous to everyone.”         

         So who said all this, and when?   I’m reading from New Frontiers, written in Nineteen Thirty- Four by Henry A. Wallace, who was then Secretary of Agriculture, under Roosevelt. 

            Much has been written about whether the current recession is comparable to the Great Depression of the thirties.  There are differences.  In 1933 the official unemployment rate was 25%; today it’s less than 10%.  But the fact that the same rhetoric written in 1934 fits perfectly to describe the situation today should be a wakeup call  for anyone who doesn’t think we need a radical job creation program.  The only reason we have 10% instead of 25 % is because of Obama’s 700 billion dollar stimulus program.  Everyone knew at the time that to actually get the country out of recession would require about twice that much.  But conservatives in Congress would not even consider spending such an amount, so Obama didn’t even propose it.

             In a way, we are much better off now than in the thirties.  But in a way-- we are much worse off.  The stock market crash of ’29 occurred very early in the Hoover presidency, and Hoover had almost 4 years to fix it by the election of 1932.  But he did almost nothing; so when the election of ’32 approached, unemployment was at 25% and rising.  The public was so disgusted with Republican incompetence that they not only elected a Democratic president—they elected a huge, lop-sided Democratic majority in both houses of Congress.   So Roosevelt had a “rubber stamp” Congress to quickly pass the many radical programs needed to deal with the disaster which he had inherited.  The few Republicans left in Congress were mostly noisy, ignorant obstructionists, just as Republicans in Congress are today.    But they had too few votes to do much obstructing. 

            The Bush market bubble, and the crash which followed it, were caused by the same kind of Republican miss regulation which cause the last depression.  But this time, it was our extreme misfortune that this crash occurred near the end of the second Bush administration, not near the beginning. The election of 2008 occurred well before the real depth of the disaster which Wall Street had caused had become obvious to most voters.   And the inevitable unemployment surge, caused by damage which had already in occurred by the fall of 2008, would still not peak for nearly a year and a half.   

            Even so, the public was disgusted enough with Republican mismanagement to vote into office a Democratic president and a Democratic majority in both houses of Congress.  But that majority was a slim majority.  At no point in Obama’s presidency has he been able to count on having the 60 Senate votes needed to stop a Republican filibuster.   So he and his party have been handcuffed—limited to passing only those things which the Republican leadership will allow them to pass.  And the Republican leadership has made it clear that they desire all of his initiatives to fail. They have been willing to totally sabotage the administration’s efforts to save the country just so that Obama is not re-elected.  They’ve admitted that they are willing to trash their own country for whatever short term political advantage they can gain by doing this.

            Why isn’t sabotaging the country’s interest considered treason?  It would certainly be considered treason in time of war.  Oh, wait a minute—we are at war.  The Republican leadership is betting that they can deliberately screw up the country for four years, and then blame Obama for it in 2012.  And they assume they will get away with it, because their rich friends own and control most major media outlets, and because the Supreme Court has ruled that corporate dollars have an unlimited right of free speech. Will the American people be stupid enough to fall for this farce?  I hope not.  But I’m 72 years old and if the American electorate has any capacity for intelligence, I have not yet had the opportunity to catch them at it.

            

Do Family Businesses Make a Profit?

              I am reading Anthropology, Economics, and Choice, by Michael Chibnik, a professor of anthropology at the University of Iowa.   For forty years, Mr. Chibnik has conducted anthropological studies, in both the U.S. and third world societies, trying to analyze economic choices by viewing them from both economic and non-economic perspectives.  He studied how Iowa corn growers in Van Buren County chose whether or not to try no-till farming methods.  And he’s studied how subsistence corn growers in the Peruvian Amazon decide whether or not to participate in the government agricultural loan program.  In both of these studies and many others, he found that most real world decisions generally involve some important element that is beyond simple economic gain or loss.  For example, [my example, not his] if your employer offered you a promotion to a position in another state at a higher wage, you might easily refuse this job for any number of reasons.  There might be economic reasons; such as, you would have to sell your house at a huge loss in today’s market. There might be social reasons; such as, someone has to look after your aging parents, or perhaps you have a special needs child who might not adapt well to a new school situation.  There could be cultural reasons; such as, you come from a family of scientists, but the school system you would be moving into teaches “Creationism.” Could your family really adapt to living in such a culture, and would you even want them to try?  And of course, your reasons for refusing the job could be psychological and personal.  This would be a risk, and perhaps you are uncomfortable with risks. 

            Mr. Chibnik gives the example of how corn farmers in Van Buren County decided whether to try no-till farming.  They considered the variability of yields, the impact of droughts and floods, the change in fuel consumption, and the increased cost of additional herbicide and pesticide use.  But they also worried about the possibility that the increased chemicals used would eventually get into the well water, possibly exposing their families to increased risk for cancer and other diseases. So how would you put a price on that?  Yet they also worried that continued conventional tillage would cause so much topsoil loss that within a generation, there might be no topsoil at all.   Could you put a price on that either? And worst of all, these possible disasters are not risks—they’re uncertainties.  According to Chibnik, a “risk” has a probability that is knowable and calculable.  An “uncertainty” does not.

            Mr. Chibnik explains that economists using “rational expectations” theory actually try to assign a price to such things.   They assign prices to such imponderables because if they did not, it would be impossible to complete their equations. They simply define such choices as “preferences”, i.e. we would “prefer” to have live children—as opposed to having dead ones. We would “prefer” to have farmland that can still feed us—as opposed to having mass starvation.   And how do they assign numerical values to these preferences?  They make a guess.   The main thesis of Mr. Chibnik’s book is that any numerical analysis which includes even one element which is merely an arbitrary guess will produce a final answer that is no more reliable than that guess, which explains why such analyses have not, historically, had much predictive power in real world situations.  He feels that while a careful study of the immediate economic inputs and rewards is still worthwhile, only a careful ethnographic study of the culture and history of the people involved allow us to draw any conclusions about how their decisions are being made.

            He gives us this quote from Duesenberry (1960): “The difference between economics and sociology is very simple.  Economics is all about how people make choices. Sociology is about how they don’t have any choices…”      

            I must warn you; this is the kind of book where you sort through four or five pages of often impenetrable jargon—and then find one paragraph which gives you a wonderful insight.  One of his best insights is his analysis of the choice between running a family business, or working for wages.  Interestingly, the same elements of choice apply for the Peruvian farmer choosing between being a subsistence farmer or wage worker on a plantation, and the Silicon Valley engineer agonizing over whether or not to quit his job and open some high tech family business. 

            In his second chapter, “Choices between Paid and Unpaid Work,” Chibnik quotes Russian scientist A.V. Chayanov whose studies showed the difficulties in using classical economic models to analyze peasant farm situations where money is not used. But even in societies which use money, comparing the paid labor of commercial farm operations to the unpaid labor of family subsistence farms may not always be reasonable.  Chayanov says that on commercial farms where all work is paid for, any increase in labor inputs without a matching increase in income would be disastrous, because profit equals gross income minus material cost and labor cost.  So every new worker has to produce as much as he costs. Family subsistence farms are not tied to such a standard.  Since the labor is unpaid, a decrease in income without a decrease in the number of workers does not result in bankruptcy.  So subsistence farming is more resilient, and less fragile than commercial operations. For this reason, a family operation which is technically unprofitable if the value of labor inputs and production outputs are compared, might still feed a family for generations.

              But assessing the market value of unpaid labor on a family farm, or any family business, is no straightforward matter. On a commercial farm, any worker who cannot yield a standard day’s work is fired—because he has to be fired. But you don’t fire your family.  Chayanov says that many family operations regarded as operating at a loss might actually be considered profitable if the non-standard quality of labor is considered.  And Chibnik points out that the value of the produce grown on subsistence farms should not be reckoned at the wholesale market price derived if these crops were sold, but rather at the retail price of the food which would have to be purchased if these things were not grown.  But even so, it’s likely that most family operations would be considered unprofitable by any classical economic analysis. Of course, the usual method of valuing family labor, the “opportunity cost,” meaning the cost of forgoing the opportunity to sell one’s labor by working “off-farm” for others, may not apply when no such opportunity for off-farm employment is available.  Many a family business, in both the third world and here, has been started simply to provide jobs for family members at a time when they would have otherwise been unemployed and unemployable. But are family businesses really profitable? The acid test of whether a business is profitable, I suspect, would be whether an investor can be found who will pay anything for it. 

            A few years ago, just before the crash, I had a talk with one of my cousins; we’ll call him Pete.   Pete is an engineer who was down-sized from a large corporation during the farm crisis of the 80s.  Not wishing to re-locate to obtain work, he started a small business, producing small, custom items of industrial electrical hardware. He had a number of corporate clients, probably including his former employer.  This production required a lot of work and a variety of skills. But like all members of that branch of the family, he was hard working, competent, and multi-talented.  And like some members of that branch of the family, he liked people and could relate to them effectively.  So he could personally handle the sales, as well as the engineering, drafting, and all aspects of production. His wife, an intelligent and competent woman, managed the office, and the teenage kids delivered the products.

            For many years, his operation produced a middle class income stream that allowed him to pay off a nice house, put the kids through college, and generally continue living in the manner to which he had become accustomed. He did not, during those years, accumulate much in the way of retirement savings. He assumed that as his business grew, this business would in itself be an asset of sufficient size and fungibility to guarantee a secure retirement.

            As he approached his mid-sixties, it occurred to him that it might be time to sell out.  He would not need a lump sum in cash.  If he could find a reliable person with the proper skills, he could accept a reasonable down payment and carry the contract himself.  The income stream from the principal and interest payments would support him for life.   And then a funny thing happened.  There were no buyers—not at any price.  Several people looked at his operation. But when they saw how many hours of labor were needed to produce the income he was getting, they had little interest.  He could easily have sold the physical assets—the building, assuming he actually owned it, the vehicles, and miscellaneous shop equipment—for about what they would bring at an auction. But this trivial sum could not support his retirement.

            His explanation for the lack of buyers was that people are all lazy nowadays. No one wants to work.  I said, “Pete, let’s take a look at this.  If you are trying to sell this operation to an investor, then you have to look at it as an investor would see it.”  I told him that in a recent article by financial columnist Malcolm Berko, Mr. Berko was asked by a reader why he was having so much trouble selling his small, family business. Mr. Berko replied that most family businesses actually operate at a loss, but stay in business because they are subsidized by unpaid or underpaid family labor. And this includes the hours of underpaid labor contributed by the entrepreneur himself.  He said that any potential buyer should consider all labor inputs at market value, that is, the probable labor cost if strangers were hired to perform all tasks.   Even if the buyer plans to supply only his own labor, he should still price that labor at what it’s worth—the market value.  Having done this, the buyer should then subtract this labor figure, along with all other operating costs, from the gross revenue.  What’s left, if anything, is the net profit.  Typically, small businesses sell for about three times the annual net profit.

            “So tell me, Pete,” I asked,  “if an entrepreneur were to hire a part time salesman, who was as effective at selling as you are, and a part time engineer and draftsman, whose engineering and drafting skills were equal to yours, and a fabricator with shop skills comparable to yours, employing him full time and probably many hours of overtime, and also employ a full time office manager as competent as your wife, about what would this cost?” 

            I haven’t seen Pete since then, so I have no idea whether he managed to sell his operation.  Frankly, I doubt it.  I assume he’s still working, and he’s nearly 70. I was disappointed by this outcome. I have always liked Pete, and I think it’s unfair that anyone who worked so long and so competently should have so little security in his old age.  But this is something to consider when becoming self employed. There are many occupations that can support a man well during his working years and still leave him with nothing.  Arthur Miller’s play Death of a Salesman awakened a whole generation to the way Western society uses salesmen and then discards them.  But this same fate awaits most of the self employed. Unfortunately, the Willy Lomans and the Petes of the world aggressively consent to their own entrapment.

More Job Openings--But Not More Jobs.

   The Associated Press just ran an article which says that Americans employers are now posting more job openings than at anytime in the last three years.  But the article goes on to point out that more "job openings" do not necessarily mean more jobs.  And they cite specific industries where jobs have declined while posted job openings have increased.  How could there be more job postings and fewer jobs?   There was an article in Wall Street Journal last year which explains what is happening.   Many employers continue to run "help wanted" ads when they have no immediate plans to hire anyone.   They do this mainly because they know that someday the economy will switch from being a slack job market to a tight job market---to a market where they will need to add new workers quickly but will have trouble finding them.  And this change could happen overnight.  So they collect a huge file of resumes and continually update it.  Also, having a "help wanted" sign on the front door helps convey the illusion that the firm is healthy and expanding rapidly, when it may actually be on the verge of bankruptcy.
    But doesn't interviewing all those job seekers consume the time of their present employees?   Well, they don't actually interview them.  They just sit them down at a computer terminal and have them enter massive amounts of personal information into the company's proprietary data base. This costs them nothing.  Yet millions of desperate unemployed people spend their last few dollars jumping through hoops to apply for non-existent jobs.
  And what happens to these massive data bases which now contain personal data on thousands of people?   No one has mentioned this yet, but it occurs to me that some of these companies are probably selling this information.

Quote of the Day, Nov 11, 2011

   The difference between economics and sociology is very simple.   Economic is all about how people make choices.  Sociology is why they don't have any choices to make.
               Duesenberry  1960: 233

Would Keynes Like the Trade Deficit?

            There were a couple of interesting articles in the media last week that call attention to our disastrous trade deficit.   One was a piece by Thomas Geohegan in the Oct 17 issue of The Nation Magazine entitled “What Would Keynes Do?”   It makes the point that Keynes’ ideas went far beyond “pump priming,” that is, deliberate deficit spending as an economic stimulus. If he were alive today, he might or might not be concerned about our budget deficit.   But he would be utterly appalled by the size of our trade deficit—and alarmed that few people in government, in the business community, or even in the economics profession seem to care.  Keynes felt that no country should ever run a large trade deficit or surplus except during a war or other temporary emergency.

            The global trading system we now have started in 1944 with the famous Bretton Woods Conference, and Keynes was one of the chief negotiators of that agreement.   He is often referred to as the architect of that agreement.  But what the world got out of Bretton Woods is far short of what Keynes had strongly advocated.   Keynes wanted a trading system where the currency moved between countries to settle balance of payments accounts would be a special international currency (he called it the Bancor) which could be used for no other purpose. And according to Keynes’ original proposal, if any country ran a large trade surplus in any year, they would be required to run a deficit the next year or pay massive punitive damages.  Private overseas investment by corporations would be prohibited.  Countries in need of capital could borrow from the World Bank only. But what Keynes wanted is not what we got.  We got a trading system where the U.S. Dollar became the main currency for international settlement. And the main source of capital for most countries is the private financial sector of some other country. 

            Keynes opposed trade deficits and sovereign borrowing from private banks for the same reason:  no society that owes money to foreigners is free—and he believed in freedom.  When any country runs a trade deficit, then someone in that country must incur debt to settle that deficit.  It works like this:   If we run a 400 billion dollar merchandise deficit with China, and China uses the money to buy 400 billion worth of U.S. Treasury bonds, then the balance of payments issue cancels out.  We bought something from them--and they bought something from us of equal value.  But someday those Treasury bonds will be cashed.  We owe that money.  But what if the Chinese purchased private sector corporate bonds instead?  Then our private sector would owe them the money.  Whether foreigners end up owning our government or our industry, either way we become further indebted as a society, eventually becoming a country of debt slaves.  Keynes understood this.

            Geohegan points out that another reason Keynes opposed trade deficits is that they undermine “pump priming” efforts,   because the Keynesian pump ends up leaking.   When the administration spent 700+ billion dollars on a stimulus, this probably helped.  The official unemployment rate is still 10%, but without the stimulus it could have gone much higher.  In the Hoover Administration, the gov’t took no action at all and the unemployment rate reached 25%.   And yet, if all that 700 billion had been spent on things made in the U.S., it surely would have been a much more effective stimulus. Our deficit spending still puts people to work, but not always in this country.  We have been running large merchandise trade deficits now for many years, and the resultant decline in American economic strength is nothing short of a disaster.

             Another article last week which touches on the trade deficit was a guest editorial in the Oct 16 Waterloo Courier by Coleen Rowley, the ex-FBI agent who wrote a “whistleblower” memo in 2002 and testified before the Senate Judiciary Committee concerning the FBI’s pre-9/11 failure to protect us.   Most of her article is taken up with statistics showing that our two wars have not made us any safer, but precipitously less safe.   But toward the end of the article she quotes Professor Robert Pape, the world’s foremost expert on suicide terrorism. Pape says, among other things, that our decline in safety is partly related to “America’s massive decline in power” since 9/11.

            Pape says, “A nation’s relative power is based on its economic wealth compared to the rest of the world.  In 2000, the U.S. controlled 31% of the world economy; in 2008, that figure had fallen to 23 percent and, according to the International Monetary Fund, the projection for 2013 is 21%.  In the past eight years, the United States has lost one-third of its economic wealth or, put another way, since 2000, the U.S. has lost nearly a third of its relative power in international politics while China’s has doubled and Russia’s has tripled. This decline represents the largest drop in the history books.”

            Our two foreign wars and the fact that we are financing these wars by foreign borrowing rather than taxing ourselves is only one cause of this decline.   The other is our massive trade deficit.  But the two are inextricably related.  The hundreds of billions of excess American dollars which the Chinese invest in our government debt is what makes the budget deficit possible. Without this annual infusion of money, the U.S. could never borrow that much, and taxes would have to be raised to cover our war spending, our stimulus, our interest payments, and all other spending.  But all of the increase in taxation would have to fall on the top 1%, because those earning under $150,000 a year are already overtaxed, if payroll taxes, state income taxes, property taxes, sales taxes, and miscellaneous other taxes are considered. The only under-taxed wealth left in the country is held by the top 1%, and they know it. That’s why they don’t want to end the trade deficit.  Yet every time we move another million jobs to China, they become more of an 800 pound gorilla and we become more of an insignificant, comic opera state, trembling at the mercy of its foreign creditors.

             When Warren Buffett says, “The trouble with this country is that rich people like me don’t pay enough taxes,” he’s absolutely right.  At the end of the Eisenhower administration, the top marginal tax rate was 92.5%.  Today it’s 35%, which is the same marginal rate paid by most working people.  And of course, the billionaires don't even pay the 35%--they arrange their affairs so that all income is a capital gain, taxed at 15%. Granted, only a handful of billionaires paid at the 92.5% rate, and they often avoided this tax by giving most of their earnings to charity.  But most working people back then paid less than 10%.  In 1959, I had a good union factory job and my gross wage was exactly $100.00 per week.  One hundred dollars was a lot of money then. You could buy a new six-cylinder Ford pickup truck for $1,800.00.   But my take home pay, after federal income tax, state income tax, FICA tax, and union dues was still $89.00.  As a percentage of GDP, the government took in more tax then—but not from working people.  The failure of economic elites to pay serious tax is now the cause of most of our problems.  Our failure to invest in infrastructure, in education, and in advanced research is the most visible outcome.  But our trade deficit and general industrial decline is another.

            The economic elites (the people which Justice Wm. O. Douglas once called “organized money,”) have been accumulating wealth since the Reagan administration.  What, besides hoarding it have they done with it?  They have invested it very wisely.  Besides buying factories in low wage countries, they now own all major media outlets and most of the United States Congress.   (A wise investment indeed!)  More campaign money flows from Wall Street to both parties in Congress now than from all other sources combined.  This being the case, it is axiomatic that no serious action will be taken to end the trade deficit anytime soon.  But if, by some political miracle, the American people were to regain control of their country, would there be any action that could be taken to end the trade deficit?

            One thing that Keynes was very clear about:  tariffs  don’t work.  If two countries each start raising tariffs on arbitrarily chosen targets of their competitor’s goods, as each responds, tit for tat with additional trade restrictions,  the result is a trade war that hurts both workers and consumers on both sides. Keynes also did not approve of currency devaluation as a solution, because eventually every country in the world would respond by cutting their own currency value, till all currency everywhere is worth nothing.  It’s a race to the bottom.

            Keynes demanded a trading system where no country could run a surplus, but he ruled out tariffs and currency manipulation as tools to achieve this end.  Instead, he envisioned a world order in which trade surpluses were simply outlawed by a commonly agreed upon trade treaty.  Having failed to implement such a treaty, is there anything which we could do unilaterally at this point?  I believe there is.

            On Nov 10, 2003, Fortune Magazine published an article by Warren Buffett about the trade deficit.  He briefly outlined the damage now being done by our current trade policy, and the disastrous consequences which will result if we try to pursue this policy much longer.  Then he explained what our alternatives are. His suggestion is that we enact an “Import Certificate” plan.   In this plan, at some point in time, we would begin issuing to American exporters, certificates for every trade transaction in which American goods is sold to a foreign buyer. The certificates would be issued in proportion to the size of the sale.  Sell a thousand dollars worth and you get a one thousand dollar import certificate.  Then, a few months later, all goods entering the U.S. would have to be accompanied, dollar for dollar, by such certificates, to be surrendered to the U.S. customs service.  All other trade restrictions would be phased out.

            He then went on to explain that such a plan would have many advantages.   First, it recognizes the fact that trade is a multi-lateral exchange—not bi-lateral.   A country might run a large deficit with one country, but run a surplus with several others.  As long as the overall picture is in balance, there is no problem.  The import certificates would be negotiable, and could be traded on commodity markets like wheat or pork bellies.   Exporters could sell the certificates which they would accumulate to whoever wanted them, using the proceeds to lower the price of products offered to foreign buyers, thereby making American exports more competitive.  Another advantage is that such a plan would not subsidize or penalize any one particular industry or country.  What to buy and what to sell would still remain a market based decision.  But America as a whole would be exporting exactly as much as we would be importing. 

            One of the obvious flaws of tariff based strategies is that they are imposed piecemeal, and the tariffs which Congress is most likely to enact are those intended to protect the most vulnerable industry, usually an industry that might be in bad shape even without the unfair foreign competition.  And if our trading partner responds by a counter tariff on some American product, what will they target?  Probably the product that has penetrated their market most deeply, ergo, the product of our most efficient industry.   So we would end up punishing our most efficient industry to prop up one that will likely fail any way.              

            But the Import Certificate Plan would not do this—it would do the opposite.  If the demand for import certificates induces foreign companies buy goods from America, what will they choose to buy?  They would buy whatever is the best deal for the money, ergo, the product of our most efficient industry. And if a foreign competitor had to buy import certificates and add that cost to the price of his product, that fact alone would make American products more competitive at home, and allow some American manufacturers to stay in business who might otherwise fail. But if some American product were truly inferior or overpriced, it could still fail.  So an import certificate plan would boost our best industries, discipline our worst ones, and do so without having a trade war.

            Buffett concedes that such a plan might not be perfect, but our present deficit cannot continue forever.  When I first became aware of the Fortune article, I was quite surprised. A friend called me and said I would find it very interesting. That friend and I had been part of a grass roots effort twenty years earlier to prod Congress into doing something about the trade deficit—and we had proposed an initiative very similar to Buffett’s idea.  We sent copies of the plan to about fifty congressmen and a dozen senators.  Most of the replies were pro-forma responses, but a few were thoughtful replies that indicated that someone had actually read it and taken it seriously.  A few even suggested that if we ever get serious about solving the problem, this might be what we should try.

Why Supply Side Economics Doesn't Work

            On Friday, Aug 5, The Wall Street Journal had an interesting piece entitled, Small Firms Hunger for Sales, Not Credit.  (Click on link at end of this post.)  The collapse of credit at the very beginning of the recession was, no doubt, a major factor in the downsizing or bankruptcy of many small businesses. Today, lending to small firms still has still not returned to pre-recession levels, but perhaps not because credit-worthy firms are being denied loans.  In fact, they simply are not applying for loans.   According to the article, “In many cases, small businesses don’t want loans. Their sales are so weak they just can’t justify taking on debt to expand operations.”

            This should not surprise us.  John Kenneth Galbraith said in one of his books (I can’t recall which one)  that though credit collapsed at the beginning of the Great Depression,  credit to credit worthy business customers was restored as soon as Roosevelt took over, and remained available throughout the 30s.   Yet there was very little business borrowing or spending. Why? If a manufacturer had half of his factories shut down and his warehouse was stacked to the ceiling with unsold goods, what sense would it make take on more debt to build another factory?  And why would a dept store chain build more stores if they have insufficient customers for the stores the already have. 

            Severely tightening credit will stop the economy, but loosening credit won’t necessarily re-start it.  That is the great limitation of monetary policy.  You can’t push a string. And if you are trying to control an aggressive Great Dane by using a choke leash, if you jerk the leash so hard that it chokes him into unconsciousness and he dies, just loosening the leash is not likely to make him magically spring back to life.

            And this is why “supply side” economics doesn’t work.   The whole rationale of supply side is that giving money to corporations and very wealthy individuals grows the economy by growing private capital, which then becomes available for loans to business. And when business borrows and invests this money, this investment will create jobs.  There’s just one problem. At any time when the economy is so sluggish that we really need jobs, no businessman in his right mind will take on more debt to make additional investments.  So supply side only works when you don’t need it.  It’s like a life boat that works except when you put it in the water. 

            So, would supply side policies work when the economy is in the opposite state--when we have full employment, high inflation, and a shortage of all manufactured goods?  We were in this situation for part of the 1970s, and that is when supply side ideas first became respectable.  But if you actually employ this tactic at such a time, and manufacturers actually do borrow money and invest it, the immediate effect is to fan the flames of inflation even more by creating more demand for steel, copper, Portland cement, plywood, and skilled construction labor—the very things already in short supply.

            If monetary policy doesn’t really work, then what does?   What works is fiscal policy.  Spend more and tax less to expand the economy; tax more and spend less to shrink it.   Since our main problem, at least in the short run, is unemployment, (which is probably over 17% if all those out of work are counted) then the last thing we should be trying to do is balance the budget. It should not be a question of whether we balance the budget by raising taxes or by cutting gov’t payrolls.  We shouldn’t be doing it at all.   Ironically, if most of the unemployed were back to work, the increased taxes collected from them, along with the reduced layout for unemployment benefits, Medicaid, and other welfare expenses would, in itself, balance the budget. As I have mentioned in an earlier blog post, when Roosevelt took over in 1933, he inherited a 25% unemployment rate.  By using deficit spending to expand the economy, by late 1936 the rate had been reduced to 10%.  Then conservatives in Congress convinced him to quit worrying about unemployment and balance the budget. It was a disastrous decision.  By late 1937, the rate was back up to 25%, and were it not for WWII, the depression might never have ended.  We are now making precisely the same mistake.

            If we are to create jobs by taxing less, then what kind of tax relief works?  What we are now doing, just giving more tax breaks to billionaires, is supply side economics, and as we have seen, this doesn’t work.  If you really prefer to use tax relief to create jobs—fine--but don’t just hand sacks of money to billionaires.  Use “demand side” economics, like employment tax credits.  Just extend tax credits to all employers who agree to a net increase in the number of permanent employees.  If any of the new jobs turn out not to be permanent, that is, not last a certain specified number of months, the money is clawed back.

            If you want to use increased public spending create jobs, fine!  Hire someone!  That creates a job. Or you can spend public funds to purchase goods and services that will cause people to be hired. There is no shortage of things needing to be done. The infra-structure effort to convert our country to a post-petroleum economy alone would keep us all working for half a century.

            The general approach I have described is called Keynesianism, and we did it for over half a century, and it worked.  I believe that, if properly done, it could still work.  For an analysis of the limits of this policy,  see:  Does Keynesian Policy Still Work?  in the archives of this blog.  http://online.wsj.com/article/SB10001424053111903885604576488054002109720.html