Saturday, August 21, 2010

Introduction, Korea v Korea, Who's #1?, Myth: Two Incomes to Make Ends Meet, Myth: Death of the Middle Class, Outsourcing

Introduction

When it comes to debates on business or the economy, some people can identify the villain before you finish telling them the topic.  It’s the suits, it’s the unions, it’s Wall Street, it’s the Chinese, it’s the Republicans, it’s the Democrats.  For most of us, our favorite political party or movement—Republican/conservative, Democrat/liberal—guides us in fixing the blame for our economic problems (real or imagined).  But from one who’s made the break, I can tell you that it’s very liberating to step away from your party affiliation.  From a more neutral vantage point, you realize that an alarming number of members of both parties are clueless about the economy.  As a former Republican, I found it hard to admit that JFK lowered tax rates and Bill Clinton cut government spending.  As I Republican, I had to support Nixon’s price freezes (he might have been a gifted law scholar, but he clearly didn’t understand economics) or Gerald Ford’s WIN buttons.  WIN for Whip Inflation Now.  Let’s see, we give everyone buttons, and voila’, our inflation problems are solved.  Truly one of the dumber ideas to come out of Washington, and that’s saying something.

‘Observations’ seeks to offer a bias free perspective on those things that have made the US economy the most successful and powerful economic force in the world.  If we can focus on the good stuff, and drop the bad stuff, we can prosper indefinitely.  ‘Observations’ offers a different perspective on a number of widely held misconceptions about our economy and business.  If Observations can do anything, I hope it lets people look at economic and business questions from a new place. 

Real estate and debt has been at the center of the Great Recession of 2008 - 2010, and there’s been a lot of finger pointing to fix blame.  In reality, doesn’t the responsibility lie in lots of different places?  Didn’t the Fed keep interest rates too low for too long fueling too much borrowing and too much speculation?  Didn’t the government put too many policies in place to encourage home ownership for too many people who couldn’t really afford to buy the homes they bought?  Didn’t too many mortgage brokers ‘coach’ too many home buyers through the mortgage application process?  Didn’t too many people buy homes and take on more debt than they really could afford?  Didn’t too many banks carve up all those loans into too many hard to understand and harder to value financial instruments? Didn’t credit rating agencies give too many financial institutions holding all these financial instruments credit ratings that were too high?  Didn’t the government’s regulators whose mission is to help us navigate around these landmines miss the problem?  Bottom line, as much as people want to blame their favorite villain, the blame rests across a wide cross-section from Wall Street to Main Street and most every point in between.

Observations will not break any new ground in the field of economics or develop new models to explain some heretofore mysterious relationship between government farm subsidies in Panama and banana consumption in France.  Observations will never be critically reviewed by the folks over at the Wall Street Journal or the Economist.  Observations was created for two reasons. First, we need to better understand economics and realize the importance of getting it right.  The good news is that America has gotten it right economically more times that we’ve gotten it wrong.  Let’s keep getting it right.  Secondly, business bashing has become fashionable lately.  The bashing is completely understandable given where we’ve recently been economically, but let’s not let a few bad years obscure the very positive long term trend.  For hundreds of years, society has benefited greatly from business.  Do some business people behave badly and cheat, steal, and lie from time to time?  Of course.  But let’s not throw out the baby with the bath water.  While not perfect, our economy and business institutions generally work well and have given us a very high standard of living relative to the rest of the world.  Just look around.  Business have given us lots of cool stuff—iPods, Facebook, the GTO, microwave ovens, mobile phones, 777’s, Red Ryder Carbine Action BB guns, cures for cancer, Halo, seedless grapes, the Polio vaccine, air conditioning, the NFL, eBay, the all you can eat pizza buffet (for under 5 bucks!), and lots more.  Not only has it given us a lot of cool stuff, our business institutions provide employment to the vast majority of people who want jobs.

Economics is a critically important thing for societies to ‘get right’.  As a country, when you get your economic house in order, lots of other issues get squared away.  Countries with strong economies tend to have less crime, nice schools, good roads, nice parks, lower infant mortality rates, higher literacy rates, higher front teeth per capita, etc, etc.   Unfortunately, economics is a subject not widely understood.  Economists are very smart people, but they tend to do a lousy job of explaining their world to the rest of us.

Yes, many of us have been exposed to the subject and have vague memories of some textbook stuff like supply/demand curves, elasticity of demand, and my personal favorite, marginal propensity to consume, but how much do we really understand about the issues of the day like current account deficits and unemployment.  As individuals, do we really understand our connection to topics like job creation and outsourcing?

How Important is it to ‘Get it Right’? 

Look at the difference between countries that get it and those that don’t.  The Korean peninsula is a good test case.  At the end of World War II, what we now call North Korea and South Korea was one country, Korea.  A post war deal between the US and the USSR created an arbitrary partitioning of Korea into two separate countries.  The two countries share a common language, culture, a common plot of land with neither country having significantly more or less in the way of natural resources.  Sadly, at the end of the particularly nasty Korean War in 1953 (well, technically an armistice) both countries shared a common starting point—a bombed out wasteland.

A major difference between the two countries is the approach each has taken to economics since 1953.

South Korea has chosen (for the most part) capitalism and lets the market determine what goods and services to produce, how much to charge for them, and who to sell it to.  As a result, South Korea has become a very vibrant economy supplying the world with ships, cars, mobile phones, TV’s and other assorted consumer electronics.  South Korea does well economically with a total economic output (Gross Domestic Product or ‘GDP’) of $1.356 trillion in 2009, which works out to about $28,000 per person for South Korea’s 48+ million citizens. 

In stark contrast is North Korea.  The North Korean government calls all the shots economically, and decides to throw a large chunk of its resources towards its military.  Thanks to policies originally put in place by North Korea’s ‘Great Leader’ Kim Il Sung and maintained by his dumpy son, sorry, ‘Dear Leader’ Kim Jong Il, the country foolishly prides itself on self-reliance and has very little trade with the outside world.  Its meager exports consist of military hardware and fake US $100 bills.  North Korea’s 2009 total economic output (GDP) of $40 billion works out to about $2000 per person for its population of 20 million.  Not as bad a Zimbabwe, but really bad relative to South Korea.  North Korea also compares very poorly to South Korea in other ‘quality of life’ measures such as life expectancy, infant mortality, etc.  Despite all North Korea’s ‘self-reliance’ rhetoric, the country is far from self-reliant.  The country is, in fact, heavily dependent on others (mostly South Korea, China, Japan and the US) to meet its food and energy needs. The country experienced a very serious famine in the late 90’s that claimed hundreds of thousands of lives.  There are few reliable numbers coming out of North Korea (no surprise) but estimates range anywhere from 500,000 to 3,000,000 deaths due to the famine.  The country’s food problems persist to this day, and estimates suggest that 10 – 20% of the population is chronically malnourished.  I’m told house cats are very rare.  The famine didn’t seem to affect Kim Il Sung in those days as he appeared to be the picture of health in his designer sunglasses and round belly at ribbon cutting ceremonies at the new shoe-lace factory or the new cabbage farm.



The Bright Lights of South Korea Contrasted with the Darkness of North Korea

In poor countries like Sierra Leone or Haiti, we wonder if their economic misfortunes are due to corrupt governments, lack of natural resources, bad luck (hurricanes and earthquakes) or some combination of the above.  The stark contrast between North and South Korea shows us that bad governments and poor economic policies can do severe harm to a society.

NOTE—The economic figures on the Koreas are from the CIA Factbook.  In addition to their very fine spy work, the CIA also has a pretty cool web site with country-by-country facts and figures.  If you ever find yourself in a Trivial Pursuit death match and need to know how many airports are in Equatorial Guinea, just go to http://www.cia.gov/library/publications/the-world-factbook.  By the way, it’s 7.

Are we number 1?

In the US really the world’s leading economic power?

This is a fair question given bank failures, government bailouts, high unemployment, home foreclosures, and many other nasty things that we’ve been dealing with in the Great Recession of 2008-2010.  (Is that what we’re calling this thing?)  And while our economy is stumbling, China, India, and Brazil (among others) are on the rise economically. 

In spite of these issues, we’re definitely number one and there’s plenty of supporting evidence.

Economists look at lots of statistics to measure an economy.  The most common number cited when people talk about a country’s economy is the Gross Domestic Product or ‘GDP’ which is the sum of all goods and services a country produces in a year.  In 2008, the GDP in the US was a little north of $14 trillion with a ‘T’.  The Earth’s GDP was around $60 trillion in 2008, so we’re generating about one quarter of the world’s economic output with about 5% of the world’s population—not too shabby.  In 2nd and 3rd place in 2008 were Japan at around $5T and China with around $4T in GDP.

To adjust for population differences (after all, the US economy should be bigger than France because we’ve got a lot more people) economists look economic output relative to the population, or GDP per capita, to compare countries.  On this measure, the US is not number 1.  Depending on whose data you look at, the US ranks somewhere in the top 20 on the list.  When looking at these rankings, there are a few of important points to consider.  First, this data is for 2008 and the rankings shift from year to year.  If you look at the data over the long haul, the top ranking countries come and go, but the US consistently ranks at or near the top on this measure.  Also, several of the countries ranked ahead of the US have very small populations (Lichtenstein, Luxemborg, Norway, Switzerland) and these countries don’t have near the influx of immigrants that the US has (a large chunk of the people in the lower income groups in the US tend to be new immigrants which tends to lower our GDP per head).  Also, the cost of living in these countries tends to be a lot higher than in the US.  $150,000 will buy you a nice home in Kansas City, and a nice double-wide in Geneva.

Another important measure of an economy’s strength is job creation.  Vibrant economies create lots of jobs and have low unemployment.  According to the U.S. Bureau of Labor Statistics (they have gathered US labor force and employment/unemployment data since 1940) the long term average unemployment rate in the US has been 5.6%.  A 5.6% unemployment rate is pretty low and means that most everybody that wants a job has one.  When you consider that the natural unemployment rate is 4% (economists created something called the ‘natural unemployment rate’ to reflect the fluid nature of employment—people changing jobs, seasonal work, and that sort of thing) 5.6% is pretty low unemployment.  Something that gets missed when focusing too much on the unemployment rate, is the employment rate.  A long-term employment rate of almost 95% is clearly an indicator of a strong and vibrant economy. 

In addition to job creation, our economy has enjoyed low inflation.  Yes, we had inflation problems in the late 70’s and early 80’s, but over the long haul, inflation has been relatively tame in the US.  Our standard of living is and has been high for many years.  The US Dollar is and has been the world’s reserve currency for years.  Just check out what happens when there’s some military flair-up somewhere in the world, the dollar typically shoots up as investors across the globe seek a ‘safe haven’ to park their money.  US companies either lead or are key players in a wide range of important industries from commercial aviation to pharmaceuticals to high tech, and tons of the cool stuff that we rely on everyday—mobile phones, the Internet, vaccines, microprocessors—were either invented and/or greatly improved by US companies.

‘Okay’, you say, ‘I’ll give you the point that the US has been the world’s leading economic power.  But what about China?  They’re growing like crazy right?’  Yes, news flash, China is growing like crazy and they have been for the last 20 years or so.  Prior to that, China was an economic basket case and had been for hundreds of years.  China’s economic performance for the last 20 years is analogous to an upstart company—all they can do is go up.  Go back 20 years (when China wasn’t even on the radar) and all people could talk about then was the Japanese and how they were going to take us down.  Do you hear that stuff anymore?  I don’t.  With over a billion people, China has lots of potential to eclipse the US economically.  The US has a pretty strong economic track record going back 200+ years, in the modern era, China has been a player for 20 years. We’ll see how they do. 

For whatever reason, many people have a strange fascination with bad news.  Flip on the Discovery Channel, the Learning Channel, National Geographic TV or the History Channel, and you’re likely to see a show about a monster tsunami devastating Hawaii or a long dormant volcano coming to life and burying North America under 100 feet of ash or rogue meteorites crashing into earth or all sorts of nasty events predicted by Nostradamus.  The Nostradamus shows first made the rounds on cable TV about 20 years ago, but none of the stuff he predicted on those shows came to pass.  Oh well, fast forward 20 years, and you have a new batch of people needing their fix of gloom and doom.

Likewise, people also seem to latch onto bad economic news.  A few media types have made a career out of telling us how bad things are (Lou Dobbs formerly at CNN comes to mind).  Politicians are all too happy to toss a little gas on the fire to further their political careers.  ‘Look at how bad the economy is.  Elect me and I’ll fix it or at least make sure those idiots from the other party don’t make it worse.’  It’s 2010 and there’s clearly bad news in our economy.  Even before the recent economic troubles, people were convinced that our economy was flawed and had fundamental problems.  Taking a deeper look at some of these widely held beliefs yields a different picture. 

In the good old days, a family could live on one income.  Nowadays, it takes two jobs just to make ends meet. 

Really?  Take a closer look and you’ll see this isn’t true.  We live much better today than we did 50 years ago and we buy a lot more goods and services.  The truth is that a family today can live on one income just as they did back then, but that family would have to be willing to live the way folks did in 1960.  What does this mean? 

Our homes are much bigger now.  But if a family wanted to live on one income, they would need to pack up their belongings and move into a 1200 square foot house that was typical 50 years ago.  That house might have central heat, but may or may not have air conditioning, you’ll probably have to wash your dishes by hand, and you’ll need to work out a shower schedule so that everyone in the family has a chance to clean-up in home’s one bathroom.

Then there’s the family car (and in those days, it was much more likely that a family had one car).  If you want to live on one income, then you’ll need a much more basic car than most folks have today.  In 1960, most cars did not have power steering, electric windows, air conditioning, electric seats, and the other standard stuff typical on today’s cars.  The car of 50 years ago wasn’t nearly as reliable as today’s cars, their gas mileage was poor, and they didn’t last as long.  Those old cars did have a lot more chrome and really cool tail fins. 

These are just a couple of what is a very long list of examples.

The fact is we buy a lot more stuff today that was either considered an extravagant luxury or wasn’t even available 50 years ago.  50 years ago people didn’t have flat screen TV’s, PC’s, subscribe to cable, or have mobile phones.  Not nearly as many people went to college or graduate school as they do today.  If you came down with cancer or some other nasty disease in 1960, your chances of survival weren’t nearly as good as they are today.  Eating out was a lot less common 50 years ago.  Only the very wealthy took vacations by plane to Europe or the Caribbean or some other spot that is crawling with Americans today.  Speaking of vacations, jobs today include a lot more paid time off (vacation days, holidays, personal time, etc.) than the typical job of 50 years ago.

If you want to live on one income, you can—you’ll just need to do without a lot of the stuff that have become standard life ‘necessities’ in the 21st century.

For whatever reason, lots of people assume that things were better and people were happier in the good ol’ days.  If we had time machines and could travel back in time, I think we would be shocked at how hard most people’s lives were a 100 or 150 years ago.  In those days, many people worked 6 days a week and 10—12 hour days were common, they had to carry water to their house from the well or nearby creek, they had to cut down trees and split logs to cook or keep the house warm, and it was common for parents to have to cope with the death of at least one child before the age of 5.  School for the vast majority of children was over by the 8th grade.  And what if a spark from the cook stove caught the house on fire?  There’s no phone to call the fire department, and even if you had a phone, there’s probably no fire department.  Better hope you have a lot of buckets and the creek isn’t too far.

The middle class is under attack (or in decline or in trouble or shrinking…)
 
This one is repeated so much and by some many people—print and electronic media types, politicians, the rental car bus driver at the airport—it’s widely accepted as gospel and few people question it.   I don’t know about the middle class being under attack (and who’s doing the attacking?) but I actually agree that the middle class is shrinking.  The lower income class is shrinking too.  How can that be?  The long term trend in our country shows that on the whole, people are earning more money and the higher income group has grown in size.

First, it’s important to note that there is no official definition or annual income range that specifies ‘middle class’.  Coming up with a definition is difficult as there are many variables to consider.  The cost of living varies widely depending on where you live or the number of people in your household.  Even though there’s no standard income range that defines middle class, I’ve looked at quite a few studies, and there seems to be a fairly consistent earnings range that defines middle class income in the range of from $25,000 to $75,000 per year.  Some definitions widen the middle class income range to cover from $25,000 to $100,000 per year.  Fortunately, I’ve got data to cover both these definitions.

The Housing and Household Economic Statistics Division of the U.S. Census Bureau has assembled a wealth of data on US household income covering many years.  The table and chart below is based on one of these studies (see US Census data at http://www.census.gov/hhes/www/income/histinc/h17.html) and shows the percentage of households falling into low, middle, and high income groups every year from 1967 to 2007.  To account for inflation, income is measured in 2007 dollars.  To accommodate for the ranges of incomes usually cited by economists as ‘middle class’, I’ve created two ranges for middle class income—a narrower middle income group earning from $25,000 to $75,000 per year and a wider middle income group earning from $25,000 to $100,000 per year. 

Regardless of how middle income is defined, the data show a very clear and positive trend.  Incomes have grown and lots of households have moved from the middle income group to the high income group.  Similarly, lots of lower income households have moved to the middle income group, and some of the lower income households have even jumped into the high income group.
source: http://www.census.gov/hhes/www/income/histinc/h17.html

The study above is but one view.  I’ve seen several other studies covering different time periods, and they arrive at a similar conclusion—over time, middle and lower income households are becoming higher income households.

While a fair chunk of families are earning more, about 25% of households in 2007 were in the lower income group.  While this is smaller than the 31% figure in 1967, 25% is still a lot of households.  The US Census data gives us a high level view of household incomes (numbers of households in each income group), but doesn’t tell us anything about how individual households are faring over time.  Are the poor stuck on a treadmill such that the poor people of the past are the poor people of today? 

The University of Michigan has conducted a long term study of individual households since 1968.  The study, called the Panel Survey of Income Dynamics, has tracked income data on a large number of families over many years.  The data suggests that a large majority of the poor families move out of that group over time.  The data suggests that, for the most part, the lower income grouping is a temporary stop on the income ladder for many families.  The lower income group tends to be made up of younger families that earn their way into higher income groups over the years.  For those who suggest that the rich get richer and the poor get poorer, the data only partially agree.  As John Adams famously said, ‘facts are stubborn things’ and the facts show that the rich are getting richer and the poor and middle class are getting richer too.

The US is losing too many jobs

Jobs disappear for a variety of reasons—companies go out of business, the economy goes into recession, productivity improvements allow a company to get by with fewer workers, automation replaces workers with technology, or jobs get outsourced to lower wage countries.  The truth is that our economy has been losing jobs for all of the reasons cited above for years.  Even when the economy is strong, jobs disappear. The good news is that in most years, our economy creates more jobs than are lost.  We don’t have a net job gain every year, but over the very long term, our economy’s net job growth (jobs created minus jobs lost) has been positive and typically keeps 95% of the workforce gainfully employed.  The important thing to keep in mind is that jobs will always be lost, so our collective focus should be on those factors that create real and desirable jobs.  More about that later.    

The dynamics behind permanent job loss can be explained by the concept of Creative Destruction.  The term ‘Creative Destruction’ became popular in economic circles in the early 1940’s based on a book titled Capitalism, Socialism and Democracy written by a brilliant economist by the name of Joseph Schumpeter.  How do I know Schumpeter is brilliant?  His book is 400+ pages of small font and not one picture.  Every time I try to read it, I fall asleep.  Creative Destruction says that a necessary byproduct of a healthy and growing economy is some amount of destruction (loss) to existing industries, companies, and jobs.  Consumers put unrelenting pressure on companies to innovate and provide more and better products or services while charging less for them.  Companies either adapt or are driven out of business.  You can see examples of Creative Destruction today and throughout history. 

150 years ago, most workers in the US were farmers.  Over time, innovations in farming (tractors, combines, fertilizer, irrigation, etc.) made farming much more efficient.  We were able to grow more food with fewer people which meant a smaller and smaller percentage of the workforce was needed in agriculture.  Jobs were lost on farms, but were created in factories that made tractors and fertilizer.  50 years ago, banks employed warehouses full of clerks to manually process checks.  Computers, software, and those numbers at the bottom of your check with the weird looking font automated check processing.  Jobs were lost in banks, but created in companies that developed software for banks.  At roughly the same time automated check clearing made its debut, the shipping industry was being transformed by shipping containers.  Prior to containerized shipping, longshoremen spent days or weeks loading and unloading cargo ships by hand.  Containerized shipping cut this process down to a matter of hours.  Not only was ship loading/unloading more efficient, but all the hand loading and unloading of trucks and rail cars between the factory, the store, and all points in between was eliminated.  Efficiencies from containerized shipping has reduced prices for just about everything consumers buy and has benefited society.  I understand the International Longshoremen's Association and the Teamsters didn’t welcome containerized shipping.

Agriculture, check processing, containerized shipping (to name just three) are examples where menial jobs (in some cases, back breaking jobs) have been lost, but better jobs have been created, and things cost a lot less than they used to.  There are tons of examples where innovation has made some jobs obsolete, created new jobs, and made goods and services cheaper for all of us.  As stuff becomes cheaper, we can buy other goods and services with the money saved which creates more jobs for more people. 

We see examples of Creative Destruction today.  Newspapers are failing or, at best, making much less money than they used to as more and more of us turn to the Internet to get our news or to place our classified ads.  Newspapers are losing jobs, Google is on a hiring binge.  It’s ironic, but when you hear someone complain about job loss, the person doing the complaining is partially responsible for that job disappearing.  As consumers, we tend to buy from those companies that offer us the most bang for the buck.  As investors, we put our money into companies that grow revenues and cut costs (And yes, you’re an investor.  Even if you don’t own individual stocks, most American’s own mutual funds directly or through 401k plans.)  The cumulative result of consumers searching for the best deal and investors searching for the best return is constant pressure on companies to be more efficient.  The pressure drives companies to do all sorts of things to improve their operations—reorganize to increase productivity, invest in technology, and outsource.

Outsourcing jobs to low wage countries is obviously a very controversial topic.  Losing a job for any reason can be very traumatic to the worker and their family.  But the sting of job loss seems to hurt more when that job gets moved to another country.  In those instances, the job didn’t disappear, it’s just being done by someone who’s willing to work for less.

Broadly speaking, outsourcing has taken two forms.  The outsourcing of blue collar manufacturing jobs has been around for awhile.  After World War II, when most of the rest of the industrialized world was in ruins, steel, ships, cars, appliances, clothes and lots of other stuff was manufactured in the US.  The US produced about 50% of the world’s manufactured goods with less than 10% of the world’s population.  In those days, all you needed was a high school diploma and you could get a good job in a factory with a nice paycheck and benefits.  As Europe and Japan rebuilt, they got back into the manufacturing game.  Manufacturing jobs that had fallen into our laps because no one else could do them, migrated back to Europe and Japan as these countries rebuilt their industrial base.  In more recent years, manufacturing jobs continued to be lost as other countries modernized and grew their industries (China and Mexico are good examples).  There are many successful economies where manufacturing is a small percentage of their output with a bigger chunk of the economy devoted to services.  The worry about our future is completely understandable as we’ve witnessed other countries close in on our first place position in manufacturing.  It's important to realize that our manufacturing base is not going away, and there’s good money in services.

 A more recent form of outsourcing has moved beyond blue collar jobs and now includes white collar jobs.  In the last 10 to 15 years, higher wage Information Technology (IT) jobs have been outsourced to places like India.  This development has challenged the traditional argument that said higher paying jobs were safe from outsourcing.  I can speak to this development firsthand as I’ve managed software development teams based in India.  My experience is that outsourcing software development jobs is one of those things that looks a lot better on paper than it is in reality.   The hourly rate of software developers in India is a lot less than US developers.  My experience was that developers in India were a lot less productive than US developers.  I’m not being critical of Indian developers.  On top of cultural differences, anybody writing software for users 12 time zones away will be at a disadvantage.  Writing software for a company is similar to remodeling a house.  Just as the contractor needs to spend a lot of time with the homeowners to get the remodeling job just right, the software team also needs to spend a lot of time with the users of the software to make sure they get the new system just right.  Getting things ‘just right’ is tough to do via a conference call at 9:00pm Bangalore time.  We will lose IT jobs to outsourcing, but I don’t think the losses will be as severe as the doomsayers predict.    

The outsourcing debate reminds me of the uproar associated with WalMart building a new store in town.  We’ve all heard stories about the town’s longstanding family owned store going out of business after WalMart moves to town and opens a new store.   The mom and pop store is boarded up and the townspeople are sad.  Who put the mom and pop store out of business—WalMart or the townspeople who shopped at WalMart because of the wider selection and lower prices?  People sigh with disgust when they read a news story about a company moving 100 call center jobs to India, but think nothing of switching their insurance coverage to the company that sells auto insurance for 20% less than the competition, but also has a call center in Hyderabad.  People grumble about ruthless businessmen who outsource jobs, but praise the wise management team when their stock jumps 10% because of the company’s cost cutting moves.  The truth is that our collective actions as consumers and investors push companies towards outsourcing and other cost cutting measures.

Losing jobs to outsourcing is scary stuff, but it’s important to understand that our economy has lost jobs to outsourcing, in one form or another, for years.  The good news is that, most years, we create more jobs than we lose.  For the most part, the jobs created are higher paying than the jobs we lose.  Our energy has been and should continue to be focused on the emerging businesses and industries (the next thing).  The pattern that our economy has followed for years is one of creating new technologies and new industries and then letting those industries move to other countries after a few years while we turn our attention to the next thing.  At various points in our past, enough people get nervous about jobs leaving our country, and our elected officials come to the ‘rescue’ with new rules to protect industries and jobs.  In the long term, it never works.  We throw good money after bad by pouring tons of cash into businesses that we need to let die.  Our economy has succeeded, in part, because we tend to let sick industries and companies die which makes room for up-and-coming businesses and industries with a future.  I’m reminded of a line from Danny DeVito (Larry the Liquidator) in the movie ‘Other People’s Money’
       
You know, at one time there must've been dozens of companies making buggy whips. And I'll bet the last company around was the one that made the best godd*** buggy whip you ever saw.  Now how would you have liked to have been a stockholder in that company? You invested in a business and this business is dead. Let's have the intelligence, let's have the decency to sign the death certificate, collect the insurance, and invest in something with a future.

Larry was the movie’s villain (although I found him to be a likable villain), but there’s some good stuff in his speech.  The most important part is at the end where he says, ‘invest in something with a future’.  We need to focus our energy on discovering and cultivating the next thing—something with a future.  The government tends to do a lousy job of picking winners (anyone remember Sematech?) so let market forces sort out the good ideas from the bad ones. 

In many instances, job losses in one part of the economy create new jobs in other areas of the economy.  There are lots of examples of our economy losing jobs to other countries, and later, those countries buy stuff from us that they couldn’t afford before.  IT jobs in developing countries create new buyers of US made goods and services.  One of my former consulting clients was a global engineering and construction company.  That company employs tons of engineers, draftsmen, project managers, and other highly paid workers to design and build the airports, roads, bridges, dams and other pricey infrastructure projects these emerging economies are now buying.  Twenty years ago, this company had very few such projects in these countries and a lot fewer employees.

Disappearing jobs is scary stuff especially when you can’t see where the new jobs will come from.  No one has a crystal ball to see the new jobs of the future.  We never know.  If you had a time machine and could go back 50 years, people would have a hard time imagining the jobs we have today.  Take a look at some recent job postings on Monster.com—web site designers, content managers, biomedical engineers, fermentation microbiologists, data architects, wind turbine designers, process re-engineering specialists—these jobs didn’t exist or were in their infancy 50 years ago.  Just as people in 1960 couldn’t envision the new industries, businesses, and jobs we have today, we have a hard time imagining the new industries, businesses, and jobs that are in our future.  Let’s take Larry advice.  Recognize when something is dead, and move on to those things with a future.  What things have a future?  I don’t know. But I trust a venture capitalist in Palo Alto to identify the next winner a lot more than I trust one of our esteemed government officials in Washington.

Future topics
Banks: Bail ‘em out or let ‘em die?
Do the rich get unfair tax breaks?
Executive Pay
Derivatives
Healthcare/Insurance
‘Outrageous’ profits at drug companies
Immigration

2 comments:

  1. Interesting thesis on the virtues of capitalism and a lot of it is factual. However, and I admire you for it is the belief that innovation and operational efficiencies will supercede any hurdles imposed on the US economy by international rivals. This is false thinking as most innovative products are coming from other areas such as Korea and Japan whereas decades ago the US had this playing field largely to itself. The US prospered in an era of cheap oil and homogenous viewpoints a much smaller population and a focus on the country's mission statement. The US is not a homogeneous culture today, overpopulated, and not a leader in innovation(except the military industrial complex), and its by-products and jobs as a result of cheap oil are products that can be easily manufactured almost anywhere else on the globe at a fraction of the costs. The author conveniently fails to mention the role of debt and its impact on GDP as if it is insignificant. An enjoyable read but somewhat flawed in its analysis.

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  2. Dear Anonymous,

    Thanks for checking out the Unrepentant Capitalist.

    The US has been and continues to be a world class innovator in many different industries. The Japanese and South Koreans have been successful taking other's innovations (sometimes ours) and manufacturing and exporting them. A good recent example has been Samsung smart phones. Nice phones based on the Android operating system developed by Google.

    The South Koreans have had some economic success for the last 25 years. I wish them well, but they need a much longer sample space before they're in our league. I certainly wouldn't trade places economically with the Japanese. Their economy has been anemic for 25 years and they have the highest debt to GDP ratio in the industrialized world.

    I think the US has always been a melting pots of cultures and I see that as a strength. The US overpopulated? No. Hong Kong overpopulated? Yes.

    If you've read my blog, you'll know that I've spilled a lot of (virtual) ink on the topic of our country's public debt and on my hopes that our politicians find the courage to implement a long term solution.

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