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Global Warming, Part One

26 Apr

From www.mcgeepost.com .Copyright © 2013 Michael H. McGee. All rights reserved. Please feel free to share or re-post all or part non-commercially, hopefully with attribution.

At this time in history we live on a “New Earth,” a planet which has conditions which have never before existed in human history. Current environmental problems come from many natural changes in the earth’s environment. One very significant natural change is population. The current population of the earth plays a major part in the explanation of the presence of all our environmental excesses and disturbances, including the rise of mega-corporations and huge polluting factories, water shortages, the extinction of species, deforestation, and the huge islands of plastic bags floating in the North Pacific.

This is an explanation which per se does not allow any solutions of any kind which do not include the bare fact that five billion more people have been added to the population since 1927. Reducing the population by five billion is not even remotely within the realm of possibility. Current initiatives in “population control” are like using a wine cork to stop Mauna Loa. Even if the rigorous efforts at population control now used in China were extended world-wide, there would be no decrease in population, only a slowing of the increase.

I feel that many of the post-apocalyptic, alien invasion type movies and novels are metaphors for that which we cannot ever say: at some level we wish we had five billion fewer people on the planet. Even the current fear of earth being hit by a meteor could be a form of unspeakable wish-fulfillment. It’s not every day you can actively imagine billions of people being destroyed by a faux-scientific means you can’t do anything about.

The purpose of this essay is to show that all our efforts to stop global warming and pollution with our present technology are doomed to failure. All the talk and all the effort is no more than dust in the wind. Further, the only way to move forward is to admit that we cannot really control the natural changes brought on by massive population growth, and to find ways to live with the changes in our planet. These changes have been a natural phenomenon brought about by the burgeoning numbers of humans using the same amount of space and resources as were formerly used by a great deal fewer persons.

I choose to look at the situation not with gloom, but with hope. The hope is that our efforts at managing the changes in the atmosphere and temperature and pollution of the earth will take into account the incredibly massive increases in population as a given fact. As long as we ignore this simple fact, we will not be able to learn to live with and master the new atmosphere and temperature and pollution of the earth. If we accept this truth as a bottom line, we will find better ways to move forward and live with the “New Earth” and its changing environment. The sudden increase in population is a phenomenon never before seen on our planet. We can’t look at history; there are no precedents. Yet what is happening is natural and is real.

Let’s look at the numbers and do some simple math. According to Time magazine the population of the world as recently as 1927 was only two billion people. The few environmental advocates at that time were mostly concerned with stopping the dumping of poisons and caustics which were the by-products of manufacturing. There were no global warming activists, and frankly, there was no need for them.

Here’s one chart which shows the absolutely stupendous and phenomenal growth of human population. The black dot showing the passing of two billion is right close to the year 1927. Before that time there had never been even as many as two billion people on the planet. The black dot showing the passing of seven billion is right close to the year 2011.

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As of the end of 2011 the population of the world was seven billion people. This works out to an increase of five billion people in only 84 years’ time. Of course the environment is going through major changes; and of course people are screaming that we need to stop these changes in our planet. Unfortunately we cannot stop these naturally occurring changes unless we are willing to exterminate five billion people, which of course we cannot and will not do. We can, however, discover ways to live with the changes which now exist on the “New Earth.”

To begin this analysis, let’s forget about the industrial and sewage and plastic bag and CO2 pollution. Let’s start by looking at the people themselves, the inhabitants of the planet as human bodies only, without reference to what they do. Further, let’s concentrate only on the five billion people who’ve been added in the last 84 years.

Each human being maintains a body temperature of 98.6 degrees F, making each human body a little furnace of its own. A resting person puts out about 100 watts of energy at any given single moment of time, dispersed around the whole of the body. If you want a clear picture of what this amount of energy feels like, put your hand close to a 100 watt light bulb, where the same amount of energy is concentrated in a very small globe. Thus our five billion new inhabitants produce heat at the same rate as if there were five billion 100 watt light bulbs burning all at the same time, all the time.

Boron & Boulpaep’s Medical Physiology says that the body’s rate of heat production can vary from approximately 80 calories per hour at rest to 600 calories per hour during jogging. So let’s conclude conservatively, including children, that the average heat production of each human body is about 90 calories per hour, or 2160 calories per day, released into the atmosphere.

Since the calorie is not the standard measure of heat, we have to convert the calorie into heat energy, as measured in scientific standard “joules.” We start with the statement: The calorie approximates the energy needed to increase the temperature of 1 kg of water by 1 °C. This is about 4,184 joules of heat.

Therefore with a bodily heat production of 2160 calories per day, multiplied by 4,184 joules, we come to the individual human body giving off about 9,037,440 joules of heat a day. Thus the five billion people added to the planet since 1927, as human bodies and nothing more, are giving off or radiating 45,187,200,000,000,000 joules of heat a day. That’s 45 quadrillion joules a day.

According to www.rapidtables.com, the power P in watts (W) is equal to the energy E in joules (J), divided by the time period t in seconds (s): P(W) = E(J) / t(s). There are 1,440 minutes in a day, and 1 joule of heat per minute equals about 1.6 watts of energy per minute, or 2,304 watts of energy per day.

So multiply 45 quadrillion joules by 2,304 and divide by 100. The five billion new people on earth since 1927 thus naturally radiate from their bodies every single day the heat equivalent of 1,036,800,000,000,000,000 hundred-watt light bulbs. That’s the heat energy from a little more than one quintillion light bulbs a day.

Multiply that number by the 365 days of the year, and you have a natural human body radiation of the equivalent of 378,432,000,000,000,000,000 hundred-watt light bulbs of heat a year into the atmosphere of the Earth. That’s 378 quintillion hundred-watt bulbs a year of heat generated by the five billion extra human bodies added to the planet since 1927.

Now you have the tip of the iceberg (a bad metaphor, I know) of global warming. This heat radiation is a totally natural phenomenon which is not subject to change by legislation or good intentions.

Next, let’s look at the external heat generated outside the natural heat of their own bodies by the activity of each of these five billion human beings added to the earth since 1927. Assume only the minimum: each of these persons has a cooking fire and a single electrical light fixture, and each person in temperate or cold climates has a single heating stove. I won’t bore you by computing the additional amount of heat generated by these natural activities outside each human body. Multiply five billion by whatever number seems appropriate to you.

Now you have the second element of global warming. This normal use of heat by humans is also a totally natural phenomenon which is not subject to change by legislation or good intentions.

Moving on, it is a commonly held scientific assumption that one of the drivers of global warming is the increase in levels of greenhouse gases including carbon, CO2, in the atmosphere. These greenhouse gases trap heat inside the atmosphere and prevent it from radiating back into space as it has done throughout human history.

I have here a chart which was created by another blogger, Dave Munger of Davidson, NC. The graph tracks government scientific surveys regarding the rise of carbon levels in the atmosphere over time. Overlaying this graph is a standard data graph plotting the rise in population over time. The two graphs follow an almost identical trajectory:

Pop&CarbonSame

Make up your own mind after studying this graph. In my humble opinion it speaks for itself. There is no doubt that there are many other factors affecting global warming, yet deliberately ignoring the increase in population as a major factor is working with blinders on. And we must assume that the population will never decrease. The most we can expect is that at some point population will begin to increase at a slower rate.

The “New Earth” will always from this point on remain a very populous earth. Thus population must be taken as a given, an unchangeable natural factor with which we have to deal in discovering better ways to live on our “New Earth.” There’s no going back, and no pretending that we don’t have all these heat and carbon emitting souls on our planet.

Simply changing our ways by herculean efforts to reduce carbon emissions and stop industry from polluting is not going to make even a small difference in global warming. “Changing our ways” to save the environment is a little like trying to empty Lake Champlain by dipping it out with a teaspoon. We must instead focus on ways to live with the new environment which has developed around us, and new technologies which will enable us to prosper as a species in light of the non-reversible changes which have overtaken us.

According to James Famiglietti (UC-Irvine) et al. (2012), one of the other factors scientifically demonstrated to contribute to the rise in sea levels related to global warming is groundwater depletion. Fresh water, up until recently locked in the land, is being pumped out all over the world to irrigate crops and mitigate droughts. That extracted groundwater runs off into rivers and is ultimately added to the oceans, increasing the sea level by meaningful amounts. Groundwater depletion is without question entirely a product of the vast increase in population on the planet.

The same goes for carbon emissions from giant electrical utilities, factories and internal combustion engines. The greater the population, the greater is the need for larger and more electrical production utilities, larger and more factories to produce goods, and more and more vehicles with internal combustion engines.

In China and most third world countries, greater populations mean more carbon-rich wood-burning fires for cooking and heating. On any given day at least two billion wood-burning fires are started world-wide in hearths where these fires are the only means of cooking and staying warm. It would be very difficult to make a case for these people to stop making the fires which are necessary for their daily survival.

This is part one of a four-part series.

Dash Cams and Black Boxes

15 Mar

From www.mcgeepost.com .Copyright © 2013 Michael H. McGee. All rights reserved. Please feel free to share or re-post all or part non-commercially, hopefully with attribution.

The comet which landed in Russia recently may have brought us some outer-space or at least space-age technology which has not really been considered up to now. The comet’s explosion revealed the hitherto unnoticed phenomenon of the wide-scale use of dashboard cameras in small-town northern Russia, one of the more remote places on earth.

Dash Cams are small video cameras that are placed on the dashboards or windshields of cars or trucks to record video on an endless loop, with or without sound. Dash cams can be powered either from the car’s cigarette lighter or from a built-in battery.

A trip to the web site http://www.nextag.com/dashboard-camera/products-html shows 202 varieties of dashboard cameras currently available for purchase in the US, or for that matter anywhere in the world. So far I’ve never seen a car with a dash cam, though. It’s time we got on board the Soviet dash-cam craze, and get each car equipped with its own dash cam. This new tech will be a boon for the electronics industry and for the auto insurance industry; and a burden for personal injury lawyers, who thrive on lengthy, expensive and uncertain examinations of who was at fault in an accident. (As a retired lawyer, I know how we work.)

According to http://www.zetronix.com/, which sells higher end dash cams, “when an auto accident occurs, in most of the cases it’s not clear which of the parties are at fault unless there is specific physical evidence of negligence, which is very rare. In a typical case the only way to really find out what happened is when one of the parties involved in the collision has a dash cam. A dash cam will take any ambiguity from any accident. Every car, truck and SUV on the road should have a dash cam. They are inexpensive and can save you thousands if not tens of thousands of dollars if there is ever an accident.”

Additionally, when a driver has a dash cam, it’s more likely the person will pay closer attention to what they are doing while driving, knowing their movements are being recorded, even if voluntarily. It’s important that the dash cam does not have a viewing screen visible to the driver (except when backing up) or this will become one more distraction like texting.

Ultimately we’ll move this discussion to talk about mandatory automobile “black boxes,” which will be an even greater motivator for drivers to take care of safety while driving. Voluntary measures are good, yet are not enough to motivate anyone other than geeks and safety freaks.

We need to treat each automobile accident that involves personal injury or death as seriously as an airplane accident. We need to have first responders who have their own cameras, which are capable of quickly making an evidentiary quality video of the details of each serious crash scene before the vehicles are moved. The involved vehicles and their dash cams need to be impounded into a secure warehouse for meticulous examination and cataloging by an “Auto Safety Board.” The dash cams of any vehicles which may have recorded any part of the accident should be taken into temporary custody, for downloading and return to the owner.

It is much less safe to ride in a car than on an airplane. According to the National Highway Traffic Safety Administration, in 2011 in the US alone there were 32,367 deaths by auto accident, an average of 89 per day. More than two million persons were injured in auto accidents during the same year. We tend as a nation to totally ignore the deaths and mangling caused by motor vehicle accidents, and the implementation of new safety measures is a very low priority. Compared to the airways, though, the highways are a slaughterhouse. We ignore the slaughter and the maiming because we need automobiles so badly that we can’t even think about the possibility of death or maiming while driving.

According to the National Transportation Safety Board, in 2011, for the second year in a row, there were no fatal accidents involving scheduled air carriers or scheduled commuter operations. Each of the grand total of 485 US air fatalities in 2011 was in general aviation, including private light craft, charter, air taxi, air tour, and air medical operations. Yet how many people have a “fear of flying?”

Where are our priorities? Here in the twenty-first century we have the technological means to monitor automobile travel more closely, yet we don’t have the will to do so. When will we ever learn?

Maybe today is not the day we’ll learn. It’s not as easy to get people to buy and use dash cams as it is for me to say it’s a good idea. As I was writing this someone said to me, “So does this mean you’re going to get a dash cam for your car?” I actually froze, clamped up, at this question. Desperate, futile thoughts flew through my mind.

I’m a safe driver, I thought. If I get a dash cam, does this mean I’m preparing to be involved in an accident? It’s kind of grisly, came my unbidden thoughts, for me to gird myself for an accident I never expect to have. And I’ll be the only one out there who has one, which will make me look weird and even more like a nerd than I already am.

It was only later that I came out of my acutely self-centered panic thoughts. Then I realized that having a dash cam might help create an evidentiary record if any driver around me was involved in an accident which was within the view of my dash cam. I really don’t mind the idea of being called as a witness if I see or record the details of a serious auto accident. Civic duty, and all that.

In addition, I realized that there are a lot of crimes committed in and around cars, including car-jacking. If a potential attacker saw that there was a video camera in the car he might be a little less eager to approach the car for purposes of violence. And if he failed to notice the camera, there might be a very good face-shot of the perpetrator recorded on video.

Great Britain has courageously taken the lead in installing Closed Circuit TV (CCTV) cameras on street corners and around public parks and other areas. These cameras are typically up high and have wide angle lenses. They have had a dramatic effect in reducing street crime and in helping to track the movements of fleeing criminals. New York and other US cities are beginning to get on the CCTV bandwagon, though in the US we are trailing far behind our neighbors across the pond. Dash cams are simply a smaller version of a CCTV camera.

One problem with endless-loop dash cams is that even with a wide-angle lens the current crop of cameras can only see maybe a field of 120 degrees around the front of a car. So they won’t help much if the accident involves the side or rear of the car. A way of improving the field of vision would be to hard-mount the camera near the center of the car, about where the dome light is.

Even better would be to have two cameras, one pointed forward and one to the rear. The rear camera could be also connected to a screen visible to the driver, so the driver can get a better view of what’s going on behind the car; like a kid in the road or a tight parking situation. Some upscale cars already have a rear-view camera, but it’s mounted too low to pick up all the area around the rear of the car.

In addition to providing evidence, dash cams might easily record some really peculiar behavior on the road, or some catastrophically stupid street activities, which might go viral on You Tube. Get your fifteen minutes of fame, folks!

Even with the utterly minuscule chance of death in an airplane accident in the US, all aircraft are required to have sealed black boxes on board, which can be retrieved and read by investigators after an air crash. It’s likely that the data which has been retrieved by these black boxes from crash sites over a period of many years has substantially contributed to the now nearly perfect safety record of aircraft.

Up until the twenty-first century we really didn’t have the technology available to even consider putting a black box in each automobile. Building black boxes was too expensive, the component parts were too big, and they required too much power to operate. Back in the 1990’s proposed boxes would loop for only twenty seconds; twenty minutes is a feasible loop time with current technology. Now we have very small electronic parts which are inexpensive and use little power. It’s time to put our most advanced micro-electronics to work on the vast problem of highway safety. Mass production will dramatically reduce the cost per unit.

There’s been a lot of discussion of the use of “black boxes” on cars, similar to their present use on aircraft. Some people were against using these black boxes because they could end up as evidence in a car crash lawsuit, and also could violate privacy. These types of concerns seem unwarranted, since the state has always had the power to impose conditions on the drivers of motor vehicles in the interest of public safety.

The black boxes on aircraft are multipurpose devices. They record among other things technical data and pilot conversations for a looped period of twenty minutes just prior to a crash. A conversational monitor in a private vehicle would definitely violate privacy, but airline pilots surrender their privacy when on the job.

Automobile black boxes could include a locational monitor such as a transponder which would send out a position and emergency signal in the event of a crash. They could include a speed and steering movement indicator which would show spatial details in last five or ten minutes before a crash, and some way of indicating if a vehicle system failure was involved in the crash. A record of longer-term movements would be helpful in alcohol related crashes, or when people are asleep at the wheel or joyriding. Short last second movement tracking would be helpful in seeing who swerved and who applied brakes, etc., just before the accident.

In addition, drivers will definitely be more careful while driving when they know their poor driving or carelessness will be on record if they are in an accident or stopped for a traffic violation.

Today auto makers currently have the technology to make auto black boxes, and they do in fact install them on some vehicles without the knowledge of the owner.

Since at least 1998 the National Highway Traffic Safety Administration has been in possession of technology which amounts to black boxes. They call these devices EDRs (Event Data Recorders). In 1998 and 1999, the agency denied petitions from its staff for rulemaking asking to require installation of EDRs in all new motor vehicles. The petitions were denied “because the motor vehicle industry was already voluntarily moving in the direction recommended by the petitioners”, and because the agency believed “this area presents some issues that are, at least for the present time, best addressed in a non-regulatory context.”

Didn’t anyone learn from the struggle over seat belts? In the 1960’s visionaries like Lee Iacocca started offering seat belts to new car customers on a voluntary basis. Almost nobody volunteered to pay the small extra price, even though evidence showed that seat belts were effective in reducing death and injury in auto accidents. Seat belts didn’t really start being used until after the first seat belt law was passed, a federal statute which took effect on January 1, 1968. Now we really couldn’t live without seat belts.

The lesson is that no one, I mean no one, is going to buy a black box and have it installed on their car voluntarily, in a “non-regulatory context.” Either black boxes are required by law, or they really won’t exist at all.

When the National Highway Traffic Safety Administration uses the term EDR (Event Data Recorder), they are referring to a device installed in a motor vehicle to record technical vehicle information for a brief period of time before, during and after a crash. The NHTSA describes their EDR devices very specifically. For instance, EDRs may record (1) pre-crash vehicle dynamics and system status, (2) driver inputs, (3) vehicle crash signature, (4) restraint usage/deployment status, and (5) post-crash data such as the activation of an automatic collision notification (ACN) system. NHTSA EDRs do not include any type of device that either makes an audio or video record, or logs data such as hours of service for truck operators. EDRs are devices which record information related to an “event.” In the context of this site the event is defined as a highway vehicle crash.

We must use all the technology that is available, at the cutting edge, to improve the safety of highway travel. An endless loop black box will freeze-frame when the car is stopped. It will stop also when a car is hit and decelerates, flies through the air and crashes, and when it rolls or turns over. The police could even have devices to remotely read the black boxes during a traffic stop.

Inside the black box will be an attitude recorder, showing the pitch and roll of the vehicle for the last twenty minutes. There will also be inside, a recorder showing all steering wheel movements and speed changes for the last twenty minutes.

The black box must be sealed so that it cannot be tampered with by the driver. The data must be retrievable and viewable by the police when a traffic stop is made or at an accident site. A law must be passed making a black box speed display admissible in court as evidence of speeding.

The courts could require a person convicted of Driving Under the Influence or reckless driving to waive his right of privacy as a condition of receiving any sort of driving privileges during the term of his or her probation. Then a dash cam or black box which records the face and the speech of the driver could be hard installed in the car. The person could be hauled in on visual or oral evidence of drunkenness, even without waiting for a collision to occur.

Also, why should police be the ones to investigate auto accidents? They should be involved only at the outset to determine if criminal activity such as speeding or DUI is suspected. A rapid-response auto accident investigation team of civilian specialists should then be called to the scene. These civilians, like CSI techs, should be highly trained in accident reconstruction and the evidentiary handling of black boxes, and should have all of the latest equipment. This would free up the police from a lot of activity which has very little to do with law enforcement.

Housing Prices and the Consumer Price Index

4 Jan

From www.mcgeepost.com .Copyright © 2013 Michael H. McGee. All rights reserved. Please feel free to share or re-post all or part non-commercially, hopefully with attribution.

The annual rate of inflation in the United States and in most other countries is measured by the Consumer Price Index (CPI). The CPI shows that the United States has had a very low and manageable rate of inflation, with prices increasing an average of less than three per cent a year since the 1980s. It’s all good. People can still buy what they need at a reasonable price. The dollar is still sound in the marketplace.

So why are we weeping? Why has the owner-occupied residential housing market crashed? I offer here one suggestion which may have had more impact on the recent recession than most people have realized.

The Consumer Price Index is used almost exclusively as the measure of inflation in the United States. It is based entirely on a “basket of goods and services” most commonly purchased by retail buyers for personal use. Eight major groups of consumer products are measured. The US Bureau of Labor Statistics, within the Department of Labor, has compiled the CPI since 1913.

The CPI is compiled by looking at price changes in eight major categories of consumer spending. One of these major categories is defined as follows: “HOUSING (rent of primary residence, owners’ equivalent rent, fuel oil, bedroom furniture)” [emphasis supplied]

Changes in the costs of items on this list have over time actually done a reasonably good job of measuring the rate of inflation in our economy as a whole. The only problem is that the contents of this list have not remained the same over time, and therein lies the problem.

You will note in the items included in the CPI under HOUSING: “owners’ equivalent rent.” In this seemingly innocuous phrase lies what may be one the root causes of the housing bubble and the lending crisis which hit the US in 2007 and following years.

In footnotes to the list of items included in the CPI, the Bureau of Labor Statistics makes a full disclosure that, and I quote: “The CPI does not include investment items, such as stocks, bonds, real estate, and life insurance. (These items relate to savings and not to day-to-day consumption expenses.)”

From 1913 to 1982 the actual increase in the value of owner-occupied housing had been included in the Consumer Price Index. This was the “asset-price approach,” which treated the purchase of a home as a consumer good.

In 1983, however, the increase in value of owner-occupied housing was removed from the CPI, and replaced by the term “owners’ equivalent rent.” The new measure relates to a statistical estimate of how much a homeowner would have to pay to rent a home.

The statistical estimate is not a “real” number, but a mathematically derived construct based on certain theoretical assumptions. The use of these assumptions since 1983 means that in practice the “owners’ equivalent rent” tends to artificially track the “rent of primary residence” function, and bears little relation to what consumers actually have to pay to live in a home they have purchased.

The rationale for the 1983 change was that (1) it was too difficult to measure the increases in the prices of owner-occupied homes, and (2) the increase in the value of a home was an “investment item” and therefore did not belong in the Consumer Price Index. The details and timing of the change are given in “Changing the Treatment of Homeownership in the CPI,” by R. Gillingham and W. Lane, http://www.bls.gov/opub/mlr/1982/06/contents.htm .

According to the chart below, house prices remained in line with the “owners’ equivalent rent” element of the CPI until 1999. The purple line on the chart, labeled “Owner’s Equivalent Rent,” is taken directly from Consumer Price Index figures, and therefore accurately states how the CPI measured the increase in prices of owner-occupied housing after 1983.

The dark line on the chart, labeled “House Price Index,” is not an accurate statement of the rise in value over time of owner-occupied housing. The numbers are taken from the S&P/Case-Shiller Index, and probably significantly understate the rise in value of owner-occupied housing.

The S&P/Case Shiller index measures all existing single-family housing stock. Rental units occupied by tenants are included. New construction, condominiums, co-ops, and multi-family dwellings are excluded. You cannot have a clear measure for the CPI unless all types of owner-occupied dwellings are included, and rental properties are excluded. I borrowed this chart only to illustrate the trend, not as an exact statement of fact.

Chart One

At least from 1999, and possibly earlier, the price of housing went up like a moon rocket, while the measure of “owners’ equivalent rent” used in the CPI increased at only a rate of less than four per cent a year. This meant that the CPI rate of inflation stayed within limits tolerable to the Federal Reserve Board, while at the same time owner-occupied home prices rose spectacularly.

The removal of the value of owner-occupied housing from the Consumer Price Index in 1983 in fact created a squeeze on homeowners and homebuyers after 1999. Wages, benefits and the amounts earned by entrepreneurs tended to rise slowly, based roughly on the increases in the Consumer Price Index. At the same time the cost of purchasing owner-occupied homes went up through the roof, as it were, without being in any way tethered to the cost of living or to the rate of inflation.

So when it came time for a consumer to buy a house, the cost of the house far outstripped the income available to pay the mortgage. Lenders had to come up with all kinds of special types of loans to enable consumers to buy homes on incomes which were largely tied to the CPI. Even starter homes began to cost more per month than the average person could pay.

Lenders were forced to abandon the “non-speculative ten per cent down thirty year fixed rate mortgage with a total monthly payment, including taxes and insurance, of no more than a fourth of their income.” At the same time huge amounts of new money became available to lenders, along with instructions to lend it whatever the circumstances.

The natural result was that lenders gave easier terms to for the most part good people, and created new types of loans. Worried by their own efforts to help their customers, they passed on their “hot potato” risk by selling their more conforming loans to Fannie Mae and Freddie Mac; and by selling tranches of their riskier loans to investors as mortgage-backed securities. The collapse was inevitable. The only question was when. Now we know.

Now I suspect that if you asked most consumers, they would say that owning a house was more about giving them a place to live, and any increase in value during the time they owned it was gravy. Most owners who bought or already owned homes during the period after 1999 took the gravy. They treated their homes as additional sources of income, through refinancing and second mortgages or equity lines of credit. Most of those who sold their homes during the same period used the profits as a down payment on a more expensive home.

During all the time both before and after the 1983 change in the CPI standard regarding home ownership, purchasing and owning a home has always been a part of what each family spends on normal expenses. Since at least 1970 more than sixty per cent of consumers have owned the homes they lived in (See the chart below). These homeowners are also consumers, and one of the things they consume on a daily basis is housing. Owner-occupant homeowners are for the most part purchasing as retail buyers for personal use.

Chart Two

The purchase price of owner-occupied homes should never have been removed from the Consumer Price Index. I say this with twenty-twenty hindsight. It was probably a good idea when it was done in 1983. This change, however, created a ticking time bomb starting no later than 1999 when conditions in the lending market changed.

There’s a fair consensus that the collapse of the owner-occupied housing bubble, along with the associated collapse of mortgage-backed securities and other housing debt, is what caused the recent recession. It doesn’t get much simpler than that. Could the housing bubble from 1999 to 2007 have been averted? Not with the information the Fed had at the time. Was their information faulty? As I have just explained, yes, their information was faulty.

The toxic and nearly fatal recession which began in late 2007 had its genesis in a bureaucratic policy decision made in 1983, as we have seen. The decision was benign when it was made, and remained benign until 1999 (or earlier), when conditions in the home lending market changed. From that point it was only eight years until the biggest financial downturn since the Great Depression. No one saw it coming until it was too late. The collapse of the housing bubble beginning in 2007 is what caused the recession.

The Federal Reserve Board (Fed) largely relies on the Consumer Price Index (CPI) in setting its Federal Funds Rate, which is its primary tool for fighting inflation. Since the increase in the purchase price and value of owner-occupied homes was not a part of the CPI in 1999, the Fed did not see it as a problem when the prices of owner-occupied homes began to skyrocket, even during the recession of 2001-2002.

In fact, Fed Chairman Alan Greenspan, who I assume was speaking for the whole Board, seemed blissfully unaware of any problems in the owner-occupied housing segment. In testimony before the Congressional Joint Economic Committee on November 13, 2002, he graciously took a bow when congratulated for keeping inflation at under three per cent for the last few years, and under four per cent for his whole tenure. He noted that the Fed was reducing the Federal Funds Rate even further, thereby making mortgages more readily available to consumers.

I’m not saying Mr. Greenspan did anything wrong or made any error in this analysis! It’s too easy to blame others using twenty-twenty hindsight. He was working within the established definitions of the Consumer Price Index. So was everyone else. The increase in the “investment value” of owner-occupied homes was at the time seen as a great benefit for the average person, adding to the net worth of individuals as well as giving them greater purchasing power through such vehicles as home equity loans.

As an “investment vehicle,” the owner-occupied home became more and more speculative and untethered to economic reality. And since the owner-occupied home was not a part of the CPI, no one was minding the store when home prices took flight. Consumers have paid a high price for the 1983 “theoretical” change in the CPI. And the crisis in mortgage loans took down the rest of the economy as well.

The solution, of course, is to restore the cost of owner-occupied housing to the Consumer Price Index. Right now the prices of owner-occupied homes have declined to a point where a switch at this time would not cause too much of a change in the CPI rate of inflation.

The real stumbling block to change in the CPI is that the Federal Reserve Board has no authority whatsoever over how the CPI is compiled. Thus a turf battle could slow down the ability to make such changes as may be necessary. The Consumer Price Index has been compiled by the Bureau of Labor Statistics, within the Department of Labor, for the last hundred years.

According to Janet Norwood, former Commissioner of the BLS, the CPI was “originally developed for wage adjustment,” which was well within the purview of the Department of Labor. As we have seen, over time its use has expanded to where it is used as the primary measure of monetary decisions affecting the whole economy.

Yet the Consumer Price Index still sits in the Department of Labor, and we see the effects of the unintended consequences of a seemingly benign 1983 decision. It’s likely that institutionally the Fed has never even questioned the elements used in compiling the Consumer Price Index.

It would make better sense at the present time in history for the Consumer Price Index to be compiled by the Treasury Department in coordination with the Federal Reserve Board. Until such a change is made, though, the Fed should immediately go to the Bureau of Labor Statistics and request the necessary changes needed to compile an inflation rate which more accurately reflects the experience of consumers in all areas of the economy, including owner occupied housing.

According to the Gillingham and Lane study cited above, the major problem the Bureau of Labor Statistics had before 1983 in calculating the House Price Index was that it was difficult to establish realistic price changes in owner-occupied housing over time. They did all their computations in-house and there were too many variables, they said.

The problem of difficulty in establishing realistic price changes in owner-occupied housing resulted from trying to take into account too many irrelevant factors, which necessitated dozens of surveys of various elements of housing cost, including mortgage interest rates. If we focused solely on the increase in median owner-occupied home prices from year to year, the statistical difficulties would evaporate.

It is highly probable that we could come up with a composite index of increases in value of owner-occupied housing over time, using the current level of computer sophistication which was not available in 1983. For example, I expect that the national Board of Realtors could generate a computer-generated report of the actual median sales prices for most owner-occupied housing in the country.

Making the recommended changes will have a huge long-term impact on homeowners. Their homes will no longer rise in value like a moon rocket. It’s likely that homeowners are feeling so battered right now that the change will be palatable. If we let the prices of owner-occupied housing rise again, without these price increases triggering anti-inflation measures such as raising the federal funds rate, we’ll be setting ourselves up for another economic crisis.

Dangers of Our Import Economy, Part Three

14 Dec

From www.mcgeepost.com .Copyright © 2012 Michael H. McGee. All rights reserved. Please feel free to share or re-post all or part non-commercially, hopefully with attribution.

In our efforts to reduce the impact of imports on our economy, we need to do two things at the same time. First, we need to make imported goods more expensive to buy in the United States. Second, we need to provide realistic policies and incentives for employers to build and operate new facilities, or re-open shuttered facilities, inside the United States. Both these efforts must be accomplished with great care and with the intention to create excellent outcomes.

At the same time we must consider realistic options for our former trading partners, which will make it less likely that they will have to close down their own facilities which were built to manufacture exports to the United States.

Any efforts made must be perceived to be permanent or at least long-term in duration. American employers will build, reopen and hire only if they can see a stable event horizon of ten years or more. Temporary resolutions and half-hearted solutions will not produce one single new American job. Our own companies will react chaotically if imports are reduced in one year and then increased again the next year.

Not to mention the confusion that will be caused in such places as China if we ask them to close their factories, then open them again, then close them again. China has done a lot to benefit us economically. They don’t deserve to be jerked around by inconsistent or wishy-washy American policies.

Having said all this, I feel more than a little intimidated by the task of offering solutions. Well, I’ve never let that stop me before. I’m sure many others will come up with better ideas. Right now, though, most people aren’t really coming to terms with the long-term impact on the United States of our continued reliance on cheap imported goods. They will, though. I hope it won’t be too late when they do.

Raising tariff rates on imported goods is the time-honored means of reducing imports. We’d have to break a lot of treaties and trade agreements to take this action, and we’d undoubtedly stir up a lot of retaliatory trade wars. So how do we do it without raising tariffs?

I’ve discussed this in an earlier entry, so I’ll not again go into detail. Phase in a value-added tax on imported goods after they are in the country, and/or a federal sales tax on imported goods at the retail cash register. These taxes would have to be significant, and phased in over no more than two or three years in order to make a difference. People will complain about higher prices on both foreign and domestic goods and services, and economists will wail about inflation.

Companies producing goods and services inside the United States will likely have to raise wages in order to compensate for the higher prices their employees will have to pay for goods and services. Most people have tolerated stagnant wages only because they can get along by buying cheap imported goods from Wal-Mart. Once again, economists will wail about inflation.

It is beyond dispute, though, that over the last twenty years the rise of cheap imports has kept the Consumer Price Index (CPI), which is the government’s measure of inflation, artificially low. We will have to tolerate some inflation if we are to bring products and services back to the United States and break our dangerous dependence on cheap imports. As long as the rise in US wages and prices is tied firmly to a policy of encouraging the domestic provision of goods and services, the inflation will not be destructive. I will be writing more about inflation in later blogs.

The other thing we must do is to further reduce the number of federal, state and local regulations governing labor and employment, and roll back some of the more crackpot schemes to save the environment, such as carbon credits. Stop creating new labor and employment regulations and let the Environmental Protection Agency deal only with frankly toxic materials. Politicians have been trying to reduce the regulatory burden on industry and commerce for years, with very mixed results. Now we need to take seriously the task of streamlining laws and regulations, treating it as a basic economic issue and not as an ideological football.

We also need to open new land and water in our country, including Alaska, for the extraction of oil, gas, coal and other energy resources, and to cooperate with Canada to get their resources flowing into our country. It’s not healthy for us to be more concerned with Caribou than we are with the billions of dollars daily flowing out of the US to OPEC.

We have been much too hard on BP, which employs 23,000 U.S. residents and indirectly supports nearly 250,000 US jobs, when they had their Gulf oil spill. Energy extraction is messy. Mistakes will happen. The huge penalties for the oil spill are more related to environmental ideology than to business necessity. We need to be pumping out every available drop of offshore oil as fast as we can!

All the statistics show that there are a LOT of people in the United States who have not reaped, or are not currently reaping, much benefit from formal education, perhaps even with the best efforts of their teachers. These people need jobs just as much as the rest of us do. I suspect that they can do repetitive tasks and small assembly work just as well as any person from a developing country. As long as we’re shipping their jobs overseas, there will be no work available for those who don’t excel at book-learnin’.

There may need to be other incentive programs directed at companies which want to build or open facilities in the United States, to replace foreign plants and equipment, or to repatriate money held outside the US.

For example, right now Cisco has billions of dollars earned outside the United States, which they would have to pay taxes on if they bring the money inside the country. I’m sure other companies have the same problem. Let them bring the money in tax-free if they agree to use a certain portion of the money to build or expand facilities inside the US, thus moving chunks of their foreign production and service operations back home.

Give many more US work visas to people from other countries based on education and expertise, rather than on job category, and reduce visas based on other reasons. Microsoft is currently complaining they can’t get visas for foreign geniuses to come to work at their facilities in the US, and no one is available here in the country who’s as fully competent as they need. Here’s a company that keeps a lot of their work inside the US, and our very own government is giving them problems they don’t need.

What can we do to ameliorate the impact of our changes in policy towards imports on our most honorable trading partners such as China, Indonesia and Mexico? Very little. Their problems are their own and we are not the world’s social safety net. We need to make sure first that we are strong and that our economy is healthy. We will of course do what we can for the rest of the world, both for humanitarian reasons and to preserve our global sphere of influence.

Let the developing world’s manufacturing facilities be used to make products to sell internally or to other developing countries. Encourage employers throughout the developing world to use Henry Ford’s example: raise wages and benefits so their own citizens will be able to buy the products they are manufacturing.

China is for the most part a state-run enterprise. This state-run enterprise is engaging in its own version of the Swedish Disease (See my blog entries of October 8 and October 18, 2012.) They have parked well over a trillion dollars of enterprise funds in low-yield yet safe US treasury bonds and other securities, thus slowing down overall economic activity and opening themselves to the diversion of some of these assets into the pockets of their fund managers.

If they would use some of their new-found wealth to pay higher wages to their own countrymen, then they could sell more of their manufactured products to their own people. It would not be a bad thing for the average Chinese worker to have a new stove and refrigerator, better clothing, and even better food, all purchased internally. These items are not materialistic in nature, they simply make life better. I expect Mao would approve as long as the better wages are spread to the masses and not limited to a few elites.

Dangers of Our Import Economy, Part Two

12 Dec

From www.mcgeepost.com .Copyright © 2012 Michael H. McGee. All rights reserved. Please feel free to share or re-post all or part non-commercially, hopefully with attribution.

Part One of this series was published on my blog on October 18, 2012.

In one capacity or another I have practiced Labor and Employment Law for thirty years. Therefore I feel more than competent to state with a high degree of certainty what I am about to say. Every citizen of the United States should pay close attention to what I am describing.

From the beginning, the primary motivation for companies in the United States to move their manufacturing and customer service facilities outside the country into the developing world has been the genuine and accomplished desire to avoid the expenses of having to comply with our country’s labor and employment laws.

The flight from our country’s salutary yet excessive employment laws and regulations is the primary source of the reduction in the standard of living for the American middle class. These laws and regulations were for the most part designed by Congress to prevent the exploitation of American employees, and to hold all employers to the same standards when dealing with our working people. Now these same laws and regulations are actively putting our people out of work.

There is also a genuine and accomplished desire to avoid having to deal with labor unions, which are a peculiarly Western institution; and with the federal agencies which attempt to standardize the relationships between labor unions and management. This is a really big deal. I have always represented management in labor disputes and negotiations, so I am certainly no union agitator.

I understand, though, that in situations where management is bad, labor unions are necessary. Labor unions are a huge source of irritation and expense for management. Moving facilities out of the country eliminates this irritation and expense instantly and permanently. Every remaining labor union becomes more conciliatory when the very real threat of leaving the country is held over their heads. Labor unions which are artificially weakened in this manner are not in the best interests of our country.

There are dozens, maybe hundreds of federal and state laws that employers have to comply with when they have employees inside the United States. There are at least 60,000 pages of detailed rules and regulations concerning employment in the Federal Register. Each state has its own administrative rules and regulations which must be followed. Each one of these laws and rules and regulations adds expenses to the cost of having employees inside the United States.

Companies pay millions, even hundreds of millions, to attorneys and consultants and human resources departments to interpret and apply these laws, rules and regulations. In addition, employers must pay payroll taxes such as their share of Social Security, and such things as unemployment insurance and health insurance and worker’s compensation and matching retirement benefits.

It’s easy to make a case that the government has put far too much of a financial burden on employers, and that all this burden must be passed along to consumers by way of higher prices for goods and services made in America. Yet this is what we have, and until Congress and state legislatures wake up and reduce this burden, we must deal with what we have.

Now here’s the crux of the matter. When an American employer ships jobs overseas, or buys goods from a developing country, all the legal and regulatory burdens, and all the payroll expenses, associated with production, are immediately and permanently stripped away. All of them. Forever. Employers in developing countries cannot be touched by US employment laws and regulations. These US companies find a freedom they could only have dreamed of in the present “land of the free and the home of the brave.

All they have to do is step lightly over the US border and most of their labor and employment problems disappear forever. They can ignore our child labor laws, our minimum wage and overtime laws, our equal employment laws, our Lilly Ledbetter law, our labor union laws, our worker’s compensation laws, our social security laws, our unemployment laws, and so on. They don’t have to worry about retirement plans or employee health insurance. They don’t have to comply with OSHA workplace safety laws and rules.

To add even more freedom of action, these US employers manufacturing goods in developing countries no longer have to worry about our environmental laws and emissions requirements. Their factories can intentionally discharge toxic wastes, and don’t have to answer for accidental spills. When byproducts of production seep into the ground they don’t have to worry about massive remediation costs. If employees become ill from exposure to contaminants, they can safely terminate them with no payment or only a token amount.

Each year environmental standards in the US are being tightened. Melinda Wenner Moyer, in the December, 2012 issue of Scientific American, says: “Traces of some of the nearly 80,000 chemical substances used by U.S. industry end up in the air, in consumer products and in drinking water. Yet the U.S. Environmental Protection Agency has only evaluated the safety of a few hundred of them.”

Oh, gee whiz…. Wait until the Environmental Protection Agency gets around to issuing regulations governing the use of all 80,000 of these chemical substances.  At the usual government rate of maybe ten pages per regulation, we’ll end up with 800,000 pages of new regulations which all companies with facilities in the US will be forced to comply with.

Never in the history of mankind have we been in a position to remove all dangers from our environment. Neither will we do so now, even if as idealists we would like to see it done. Were we to remove all the dangers of industry, we would see almost all American industry shutting down. Then we would be confronted with a whole new set of dangers from a vast population where each person was seeking to ensure individual survival. We would further become totally dependent on other nations where industry was permitted to flourish even though their industry was not perfect.

China and all the other developing countries will likely never have Environmental Protection Agencies to add costs to their production processes. These countries will react only when American consumers are being poisoned by one specific product or another.

In the developing countries US manufacturers can continue to take advantage of almost feudal conditions and peonage – as most of life was in the Middle Ages. They can go back to the way things were before our country attempted to right every wrong and correct every error.

The few “fair-trade” sellers and the pledges by major producers to monitor overseas employment practices have about as much impact as throwing a pebble into Lake Superior.

Companies in the United States have everything to gain and almost nothing to lose by shipping jobs out of the US and doing their manufacturing in developing countries. Retailers and other merchants have no choice but to buy the cheaper imported products for resale, or get plowed under by the competition selling at lower prices.

Some retailers got on the imported goods bandwagon very early and have been able to grow by blowing away their slower-to-adapt competition. As an example, for many years now, almost everything sold at super-low prices by Wal-Mart has been made outside the country, entirely without regard to US labor and employment laws and environmental laws. They’ve also been first-adopters of technology, and have probably the most efficient supply line of any company in the world. The heart of their system, though, is the selling of imported goods at really low prices. Before they could get ahead of the competition they needed to have totally unimpeded and consistent access to all these imported goods.

According to Wikipedia, the 1990s saw an era of furious growth by Wal-Mart, on a scale never before seen. In 1990, US sales were $32 billion annually. By 2000, US sales were $156 billion annually. This period of growth roughly coincides with the time from 1992 to 2000 when Bill Clinton was president.

Wal-Mart started in Arkansas and still maintains its headquarters in that state. Bill Clinton was governor of Arkansas from 1978 to 1992 except for one two-year period. His wife Hilary was a partner at The Rose Law Firm in Little Rock. Starting in the 1970s the firm’s clients included Wal-Mart, again according to Wikipedia.

Throughout his presidency Bill Clinton was a big advocate of free trade and lowering barriers for the entry of imported goods. I have no evidence to suggest that Bill Clinton took any actions as president which may have been favorable to Wal-Mart. I certainly have no reason to do other than praise Wal-Mart.

In the next part of this series we will look at what we can do to ameliorate the dangers of our import economy.

Warren Buffett: I Used To Pay A 91 Percent Tax Rate

2 Dec

From www.mcgeepost.com .Copyright © 2012 Michael H. McGee. All rights reserved. Please feel free to share or re-post all or part non-commercially, hopefully with attribution.

The other night Warren Buffet appeared on Comedy Central’s The Daily Show and talked with Jon Stewart. He was in great good humor and ready to be skewered like every other guest. I’ve just got to say, it’s impossible not to love Warren Buffett. If we could all be as sweet and happy as he is, and one-hundredth as productive, the world would be a better place.

Warren and author Carol Loomis were making the rounds promoting their book, “Tap Dancing to Work.” Buy this book. Now. Learn to tap dance.

These two were a billionaire and a millionaire, telling other billionaires and millionaires to stop acting as if they are losers. A reasonable tax hike for the one percent, or even the top ten percent, is not going to hurt those poor children, they said. Buffet said that using only methods which are approved under the tax code, he paid a little over fifteen percent tax on his earnings last year.

He repeated what he’s said before. Many of his employees, who make only normal wages, paid up to 38 per cent on their income last year. This shows that the tax code is unfair and needs to be revised.

But there was a hitch in Warren when Jon Stewart repeated back to the audience that many employees were paying 38 per cent in taxes. Warren interrupted him each time and said, 38 per cent, counting payroll deductions. He was rigorous in his language, and there’s a deep lesson to be learned from Buffett’s rigor.

The lesson is that people earning under $110,000 a year pay much more than their federal income taxes out of each paycheck. They pay a percentage of salary to Social Security, a percentage of salary to Medicare. Retirement, health insurance, Health Savings Accounts and state taxes are also deducted. A few states, including Alaska, Pennsylvania and New Jersey require employers to deduct part of the unemployment taxes from employee paychecks,

In addition, independent contractors and the self-employed have to pay both federal and state unemployment taxes out of their own income, and more than double the amount of Social Security and Medicare taxes deducted from a wage-earner. This excess burden seems calculated to discourage small business owners, but that’s another story.

With all these amounts deducted, wage-earners are left to live off about 38 percent less than their stated incomes. Independent contractors and the self-employed have to pay out even more of their taxable incomes.

Now let me make it clear that I’m not advocating the elimination of these payroll deductions. They are a necessary part of the social contract and few would quibble with them. You can argue how much they should be, but not that they should be.

The bottom line is that for people making more than a million dollars a year, most of these deductions and expenses are limited and capped, and amount only to a fly buzzing around their heads. For a wage earner or for a self-employed person making $110,000 or less, these deductions have a major impact on their lifestyle and ability to save and plan for the future.

This is the deep meaning of Warren Buffett’s persistent correction of Jon Stewart’s language.

There was another thing Warren Buffett said that sent me scrambling to do some research. He said that he even made money when he was paying an income tax rate of 91 percent. What? Has that kind of confiscatory tax rate ever existed in the United States? I found it hard to believe, until I found this chart:

Historical_Mariginal_Tax_Rates

It was true! From 1944 until about 1965 the top marginal tax rate for high earners was about 91 percent. I assume this was to help pay off the WWII national debt. From 1965 until about 1982 the top marginal tax rate was 70 percent. This tax rate likely helped pay for the war in Vietnam.

Even so, I cannot understand why the wealthiest people weren’t screaming to high heaven about having to pay such a confiscatory tax rate. Maybe they were more patriotic than we thought. Nevertheless, when Ronald Reagan promised to reduce taxes, what he was really doing was agreeing to stop the federal government from confiscating wealth from the rich. There should never ever have been be a 70 percent tax rate in the United States, or a 91 percent rate, and there never should be one in the future.

The problem is, most of the wealthy undoubtedly remember or were taught about these 91 percent and 70 percent tax rates, which were actually in effect in our country for about 28 years. When politicians talk about raising taxes on the wealthy, most citizens, wealthy or not, are seeing visions of tax rates like those in the past. They see a vast calamity occurring “when” tax rates are raised back to 91 percent, or even 70 percent. If this type of tax rate ever occurred again, there would be a calamity of epic proportions, and everyone in the country would be hurt.

This is why it’s important for the politicians to stay away from the vague term “raise taxes on the wealthy.” This term is much too open to interpretation, and most people will visualize the worst case scenario when given an opportunity to do so.

A top marginal tax rate of 38 percent is as high as taxes should ever go, or will ever go; along with eliminating the capital gains rate for long term gains of over a million dollars a year. Politicians need to make their percentages definite when talking about taxes on the wealthy. General statements on tax increases are crazy-making.

Until seeing this interview with Warren Buffett, I had always wondered why ordinary citizens would be violently opposed to raising taxes on the wealthy. Now I know the answer. No loyal American wants to see taxes rise to confiscatory rates, as the government has done in the past. I’m definitely a middle-class person, yet I know that those with wealth are a necessary part of our economy, and I personally find many of them to be quite productive, creative and likeable. Including Warren Buffett.

Dangers of Our Import Economy, Part One

18 Oct

From www.mcgeepost.com .Copyright © 2012 Michael H. McGee. All rights reserved. Please feel free to share or re-post all or part non-commercially, hopefully with attribution.

What are some of the things government can do to assist in shaking loose the dormant and inactive corporate spirit of America? The loss of vigor has been demonstrated in one facet by describing “The Swedish Disease,” the phenomenon where once-active and competitive companies are parking a combined nearly $2 trillion on the sidelines in safe yet unproductive funds. (See blog entries of October 8 and October 18, 2012.)

First, if corporations and other investors ever attain a renewed vitality and begin to withdraw parts of the staggering sums they have parked in safe US government securities, then the government is going to have to take major steps to cut the deficit. Otherwise, the government won’t be in a position to pay all the demands for redemption of bonds which will be made against the treasury. In addition, if Chinese goods are not as easily imported into the United States, the Chinese government may also need to redeem some of its US government securities in order to make a greater investment in its own economy.

The US government needs to take immediate steps to reduce the importation of goods and services from countries with low pay scales. This needs to be done even if it means that other countries will retaliate by reducing imports of American-made goods. The bald fact is that American-made goods cost more in developing countries than most of those in the population can afford to pay. And the prosperous and influential in those same countries will really not want to give up their American-made luxuries, so they may be less inclined to retaliate than is imagined. In any event, exports from the US will be more than counterbalanced by the increased demand for the same goods inside the US when the manufacturing and construction industries are revitalized and more people are hired and higher wages are paid to American consumers.

There are also many foreign companies which operate productive enterprises inside the US. Still, these companies often use executives from their home country, and also import many of the components of their products and only assemble them inside the US. These companies should be given some credits for the number of US citizens employed in their in-country facilities, and be treated the same as any other importer with regard to their home country executives and the portion of their product which is brought in from outside the US.

Just as an example, BMW has an assembly plant in South Carolina. About forty BMW suppliers are now located in South Carolina within a few hours’ drive of the Spartanburg County plant, creating more than 10,000 jobs and dramatically multiplying the economic impact of the plant to the region. This local supply network should be given great credit when considering what portion of the total value of each BMW is imported and what portion is not.

I examined the back of one of my Dell laptops. It says simply “Made in Malaysia.” I’m sure many of the parts were made in other low-wage countries. But quite simply, this Dell laptop is an imported product, which does not have much effect on the US economy except for its sale markup and corporate profit.

Rather than using tariffs or import quotas, which are more likely to engender retaliation, the federal government could impose a tax inside the country at the wholesale level in order to make the foreign-made goods more expensive. A ten or fifteen per cent across the board federal tax on all imported goods as they are delivered to wholesalers would be good for the country. This tax should also be placed on foreign oil yet not on domestic oil, and on foreign automobiles, trucks and equipment yet not on domestic automobiles, trucks and equipment.

Many other countries already use this entry tax on foreign goods as a means of protecting domestic enterprise. For example, the Philippines imposes an across the board ten per cent Value Added Tax on goods before the goods can be released from import warehouses. They also impose an ad valorem tax of up to fifty per cent on selected items. See for confirmation the description at http://www.aseansec.org/14298.htm.

Economists typically take the view that tariffs and other taxes on imports tend to benefit domestic producers and the government at the expense of consumers, and that the net effects of such taxes on the importing country are negative. I say that such taxes can become a positive when a rise in domestic production and wages results from the reduction or elimination of the cost difference between domestic and imported goods. This type of result is very much needed right now in the United States, to prevent our domestic economy from being hollowed out by imported goods, and to restore the vigor and vitality of discouraged corporate officials and employees, and the unemployed of our country. Parking half of corporate assets in unproductive funds is surely a sign of loss of faith by corporate leaders in the potential of our country to grow and prosper, and is also a sign of a corporate culture dominated by pessimism and ennui.

Such specialized taxes on foreign-made or produced goods and services would, in the situation as we have it today, act as a revenue-positive stimulus to the United States economy. I say revenue-positive because it would result in the collection of some taxes, yet would not require the expenditure of any tax funds on the part of the government. At the same time, there would be a definite creation of greater internal demand for US made goods and services. This demand  could only be satisfied by increasing production inside the US. The stimulus would affect positively almost all the goods and services made in the US, and would at the same time provide increased opportunities for financial institutions to put together and fund large loan packages which would be backed by much greater stability.

When US lenders make loans in the current economic environment, the ability to repay the loans is subject to considerable instability, at least in part due to the fact that at any time the borrower can be destabilized by the introduction of new imported goods or services. If the loan is made to a foreign company, there is an inherent instability in the international markets which can lead to defaults. Lenders need to be able to make loans which are not subject to the whims of market changes that are beyond the reasonable control of the borrower.

We need to review our international trade agreements and tighten them up where we can. It is highly likely that such pacts as NAFTA have been more beneficial to the other participating countries than to the US. Our government needs to always and ever make sure that all foreign trade is weighed against how it will affect the strength of US companies.

We need to stop stigmatizing the domestic exploration of oil and gas. Oil and gas are messy. Up to now we’ve preferred that the mess be made in the deserts of the Middle East than in our own backyard. We are now becoming extremely economically depleted in part by our desire not to have the mess of resource extraction in our own country. In some ways it can be said that our rampant environmentalism is a type of NIMBY: Not In My Backyard. Keep the mess out of the US. Let some other country pollute their groundwater and deal with oil spills, and pay them great sums to keep on doing so. It’s only our own environment we will worry about. Those foreigners don’t count. When was the last time you saw our militant environmental groups demonstrating against fracking or oil pollution in Iran or Nigeria? Not our problem!

The government needs to review all parts of the tax code to make sure that all tax incentives are aimed at encouraging US companies to produce their goods and services inside the country, and penalizing those who import their goods or parts.

There will still be a need for some parts of goods to be produced in other countries. It will be difficult to find American workers who will be interested in spending all day wiring and soldering tiny parts on assembly lines. Many will actually do so, though, if they are unemployed and want to find ways to support their families. The key is that the pay has to be sufficient to motivate Americans to do fine and tiny work.

The bottom line is that the United States economy has been hollowed out by our reliance on low-priced imports. The low-priced imports are necessary mostly because even our citizens with jobs don’t make enough to pay more for American-made goods.

There will be pain in a lot of low-wage nations if the US withdraws from importing such a large portion of its goods and services. Some of this pain will simply have to be borne by these nations. It’s a question of whether the US should shoulder their pain by having its manufacturing base hollowed out, or whether they should deal with their own pain.

The United States should not have to bear the pain of the world to our own detriment. We cannot remain in our current position as the savior of the world. It’s like on the airplanes: put on your own oxygen mask before you help your child or the weak. We first of all have an obligation to make our own country strong, for the long haul over the next fifty or a hundred years. Our first economic obligation is to our own corporations, entrepreneurs, and employed citizens, and the need to maintain prosperity within our own borders.

Right now we are losing our strength by catering to the low-wage cultures of other nations. We as a nation will grow weaker year by year until we own up to the fact that our own people are discouraged and unmotivated, and lack the will to stand up to the siren song of cheap imports.

Henry Ford’s solution is also the solution for many of these foreign countries. Their own citizens can only afford to buy more of the goods manufactured in their own countries if wages are raised to provide a sufficient domestic market to offset their loss of exports. It’s really up to those countries to look after their own prosperity. We can’t continue to do it for them.

The largest foreign holder of U.S. debt is China, which owns more about $1.2 trillion in bills, notes and bonds, according to the US Treasury. In total, China owns about 8 percent of publicly held U.S. debt. According to the World Bank, the total Gross Domestic Product of China is about $7.2 trillion in normalized US dollars. So it would appear that China is on the edge of doing the same hunkering down that US corporations have been doing: parking their excess cash in safe investments rather than taking the responsibility for using this cash wisely to stimulate their own economy. And no one should ever doubt that the value of China’s $1.2 trillion normalized US dollars has a purchasing power inside China of at least ten times the normalized US dollar amount. And don’t forget that much of China is state-owned, which means that the state itself acts in some ways exactly in the same manner as US corporations act.

If China wants to replace lower exports with higher domestic consumption, they can pull away some of that parked excess cash reserve and use it to pay Chinese workers high enough wages so that these workers can afford to buy the products which are manufactured in China. I’m not willing to let China off the hook by perpetuating the belief that there is no way for China to be able to pay more for labor costs within their own country.

And the same goes for the private businesses and state-owned enterprises in other countries. All these businesses and state enterprises actually have the capacity to pay their workers more, and by doing so sell more of their products in their own countries. It’s not up the United States to subsidize their profits or state returns by enabling them to pay almost starvation wages to the people of their own countries.

The certainty of low wages in other countries is a myth. It’s time the United States stops buying into this myth, and begins to get on with the business of strengthening our own economy before we actually become a mildly impoverished country, sharing the fate of the rest of the world which doesn’t have the will to work for the benefit of its own citizens.

The below quoted words of Thomas Jefferson show that, back in 1816, he understood the necessity for a strong domestic manufacturing base in order for the United States to have “the comforts of life.” If you are a citizen of the United States, please read this quote for the way it applies to what I have written above about pulling our country back from an import economy and returning vitality to domestic manufacturing inside the United States. Domestic manufacturing even today is as necessary to our independence and to our comfort as it was in the time of Thomas Jefferson.

If you are a citizen of another country, please read this quote for the way it applies to the necessity of each nation having its own internal manufacturing base if the nation is ever to have “the comforts of life.” If you live in a developing country, be very aware that in 1816 the United States was a wild and untamed developing country. In 1816 there was no certainty that the United States would ever be more than a backwoods outpost to be exploited by the other more civilized nations of the time.

“We have experienced what we did not then believe, that there exists both profligacy and power enough to exclude us from the field of interchange with other nations: that to be independent for the comforts of life we must fabricate them ourselves. We must now place the manufacturer by the side of the agriculturist…. Shall we make our own comforts, or go without them at the will of a foreign nation? He, therefore, who is now against domestic manufacture must be for reducing us either to dependence on that foreign nation, or to be clothed in skins and to live like wild beasts in dens and caverns. I am not one of these; experience has taught me that that manufactures are now as necessary to our independence as to our comfort.” (Letter to Benjamin Austin, January 9, 1816, ME 14:389)

For part two of this two-part series, click here: https://mcgeepost.com/2012/12/12/dangers-of-our-import-economy-part-two/

US Corporations Hoarding Trillions, Part Two

18 Oct

From www.mcgeepost.com .Copyright © 2012 Michael H. McGee. All rights reserved. Please feel free to share or re-post all or part non-commercially, hopefully with attribution.

In the first part of The Swedish Disease” we looked at the huge drag on the American economy created by the almost two trillion dollars of excess assets hoarded by US corporations. The Swedish Disease is one of the reasons the economy of the United States lacks vitality and is slumbering in a stagnant cesspool of miserably slow growth and stubborn unemployment. Yet there are not many ways for the government to dislodge this stagnation. Corporate Shareholders and Boards of Directors need to provide the stimulus to reverse the stagnation of the corporations for which they have a fiduciary duty. The government can assist with wise tax policies and incentives, yet at the end of the day those with the money have to decide to spend it differently.

What incentives to the owners of American corporations today will be sufficient to convince them to release their excess cash into the rushing river of national productivity and prosperity? Their doing so is of course not the whole cure for our moribund economy, yet it is one major part of the solution.

Let’s begin by looking at the philosophy of one of the greatest entrepreneurs of the twentieth century, Henry Ford. In 1914 Ford began offering a $5 per day wage, which more than doubled the rate of most of his workers. The announcement came in the middle of what was considered to be an industrial depression in the United States. The move proved extremely profitable; instead of the constant turnover of employees which most companies experienced, the best mechanics in Detroit flocked to Ford, bringing their human capital and expertise, raising productivity, and lowering training costs. (Much of the detail here comes from Wikipedia, although the stories about Henry Ford are quite well known.)

During this same period Ford set a new, reduced workweek of six 8-hour days, giving a 48-hour week, later reducing it to five 8-hour days, giving a 40-hour week. So, Henry Ford paid his employees more than the prevailing wage rate for fewer hours of work. Competitors were forced to raise wages or lose their best workers. Ford’s policy was also intended to give his employees enough income so they could afford the cars they were producing.

At the same time Henry Ford made it a part of his company credo to produce his product at the lowest overall cost, mostly by standardizing parts and increasing productivity. Another part of Ford’s philosophy was one of economic independence for the United States. His River Rouge Plant became the world’s largest industrial complex, pursuing vertical integration to such an extent that it could produce its own steel. Ford’s goal was to produce a vehicle from scratch without reliance on foreign trade.

Henry Ford explained his payroll policy as “profit-sharing” rather than wages. And even after raising wages beyond the norm at the time (or as he might say, sharing profits with all his employees) he became one of the wealthiest men in America. Bill Gates did much the same thing during the early years of Microsoft, and to some extent Microsoft continues to do so today. Many people who have been with the company for years are multi-millionaires, and are the best at what they do, and are intensely loyal to the company. And even after many years of paying the highest wages, and distributing the most prolific profit-sharing, and conducting most of his research and manufacturing in the United States, Gates is one of the wealthiest men in the world.

In the present day, most of the American corporations that have built up great troves of excess cash have done so by paying the lowest market wages to their employees, selling their products and services at the highest prices, and importing much of their manufactured inventory and out-sourcing services. Is it any wonder that few US consumers can buy the manufactured products or services of American corporations? These corporations seem to have failed to understand what people such as Ford and Gates have taken for granted: their customers generally are employed persons, and these customers must be well-paid if they are to buy the products and services of corporations.

Further, low-paid employees are generally not very loyal, and not inclined to increase their productivity, are not inclined to be the best that they can be, and are willing to change jobs at the drop of a hat.

Ford and Gates instinctively understood that a corporation is made up entirely of its employees and contractors, and without the best pay and incentives these employees and contractors are not going to raise up the corporation to its highest purpose. These men and women will slog along on the job, getting by from one day to the next. Meanwhile, the corporation slogs along from one day to the next by letting its excess cash money managers move funds around in low-risk securities or blithely drop funds into risky and uncertain ventures, or rob the company by siphoning off small amounts of the excess cash. There is a profound lesson to be learned from the experiences of the great free-market entrepreneurs such as Henry Ford and Bill Gates.

Which is going to be the first American corporation to drop the pretense of holding a valuable treasure trove, and begin to invest their excess cash in productive activity inside the United States? Which corporate leaders are going to have the courage to use some of their hoarded cash to raise the salaries and wages of their employees from top to bottom, whether calling it pay increases or bonuses or profit-sharing? These increases will give the economy a boost and give employees the means to buy the products and services of the corporations.

Which corporate leaders are going to be the first to build new factories and service facilities, and upgrade existing facilities, at a time when it is not certain that the products and services being produced will be purchased? Remember, Henry Ford did all these things starting in 1914, when the nation was in the middle of what was considered to be an industrial depression in the United States. He even continued to act during the Great Depression, and came out a second time at the top of the heap.

When are American corporations going to realize that shifting many of their activities out of the United States to low-wage nations is undermining the US customer base which feeds their profit and growth? People in the US work, or want to work, at jobs, and yet cannot afford to buy the company’s products or services due to their reduced purchasing power. This downward death spiral is combined with the lack of market economic motivations to raise wages, and therefore working people cannot buy what is put on the shelves and in the showrooms for sale.

When I was a young man growing up in the small southern town of Lexington, North Carolina, there were a hundred or more furniture factories within a triangle area of sixty miles around Lexington. I understand that today there is only one factory still in operation. The remaining production of furniture has been moved over time to low-wage nations such as China. The Lexington-High Point-Hickory area is still a national furniture center, though. The area is loaded with distributors and wholesalers who spend their time hawking imported furniture. There is a lot more profit and wealth to be made in the ownership of manufacturing, than in wholesaling and distribution. So therefore the area has become a vast wasting desert of men and women who are breaking their backs to make a decent income selling the products of low-wage countries. Wealth production and decent profits have long departed the area.

Let’s look at Wal-Mart. This giant corporation is sucking into the country billions of dollars a week of products made in low-wage countries. This enables them to continue to offer the lowest prices for everything from soup to nuts. The problem comes when we begin to realize that there are so many customers for Wal-Mart mostly because these customers are either unemployed or working at the low-wage jobs which due to market pressures don’t lend themselves to earning any more money for their efforts.

I’m picking on Wal-Mart because they are the biggest, not because they are the worst. I bought my last television there, assembled in Mexico from parts made in third-world countries. The price was fantastic.

As a matter of fact, with the downward pressures on wages, or perhaps more accurately, the lack of upward pressures, over time the United States is almost guaranteed to creep into a process where our work force begins to resemble the low-wage workforces of other countries. There is in progress in the United States a slow and agonizing transition whereby our country will over time become a “third-world country.” It may take twenty years or it may take fifty years, yet if things continue as they are it will happen, guaranteed.

Since we are a country lovingly dedicated to private enterprise and capitalism, it must be made clear that only our corporations and other private enterprises can make the significant capital infusions to stave off the undermining of the American Dream and its replacement with a dusty world of people living in shacks, struggling with broken down infrastructure, riding on bicycles because they can’t afford cars, tapping away in Internet cafes because they can’t afford computers. I lived in third-world countries for a total of three years, so I know what it’s like on the other side of the economic curtain. The curtain only needs to be torn once for us to join our less fortunate brethren. It doesn’t take much effort to tear the curtain.

When I lived in the third world my income would have been considered modest by the standards of the United States. Yet during all this time I was one of the top one percent in the areas where I lived. Therefore I was able to observe the pits of small despairs without actually participating in the general way of life in these countries.

Anyone who thinks that we in the United States can retain our advanced way of life without the necessity for providing good-paying work for our people is deluded. To paraphrase Nobel Prize winner Gabriel Garcia Marquez, we are already living the dream of a past whose annihilation has not taken place because it is still in a process of annihilation, consuming itself from within, ending at every moment but never ending its ending.

Our people are in the middle stages of becoming servants to inactivity and sloth, of not really caring whether they work or do their best, because there is no decent reward for the work which is available. All around the country people are becoming ever more accustomed to sitting on a porch in a tilted-back chair, dreaming of times of prosperity that used to be and which probably will be no more. They are becoming adjusted to low wages and finding the best ways to get through the day with as little effort as possible and with constant trips to Wal-Mart. The coming annihilation of hope and effort will increase exponentially unless private enterprise once again finds ways to create hope in the American dream and to imbue our people with pride and a desire to be the best they can be.

I focus so hard on the role of private enterprise for the simple reason that we are a capitalist country where the hopes and dreams of our people rest on the shoulders of entrepreneurs as well as on the owners and managers of mature industries. I am a fervent believer in private enterprise and the minimum amount of regulation of enterprises by government.

Is there anyone out there who will have the courage to begin the process of investing in our country before there is any certainty that the investment will pay off? Where are the Henry Fords and the Bill Gates’ of today? Where are the managing boards of mature industries and financial enterprises that are willing to lay their money down, to retain and increase the greatness of America at the same time as they restore their stockholders’ bottom-line profitability?

And make no mistake: if private enterprise isn’t up to the job, our country will loudly and ultimately fail. The notion of the government as a savior is the setting up of a false god. The participation of the government is a necessary, but not a sufficient, element in the restoration of the United States. In the end it’s up to private enterprise to make the decisions which will pull us out of the ennui of which we are in danger of falling.

US Corporations Hoarding Trillions, Part One

8 Oct

From www.mcgeepost.com .Copyright © 2012 Michael H. McGee. All rights reserved. Please feel free to share or re-post all or part non-commercially, hopefully with attribution.

There is significant harm being done to the US economy by corporations who are holding almost two trillion dollars in excess cash assets on their balance sheets. I’m calling the cause of this harm “The Swedish Disease.” This naming of the harm will become clear as you read.

The exemplar company will be Cisco Systems, Inc., which currently holds about $48 billion in excess cash assets on its balance sheet. More than eighty percent of Cisco’s excess cash assets are being held outside the United States. Holding their assets outside the US is a small and rather shabby problem. Holding these assets at all is the big problem.

The value of shares of Cisco stock has remained relatively flat for more than two years after an earlier significant drop, even though the company holds this enormous treasure trove in reserve. The gigantic cash reserve is not enhancing the company’s value, nor is it making any meaningful contribution to their bottom line.

The problem is that Cisco has in effect become two companies. The market cap of the whole enterprise is right at $100 billion. The value of the portion of their company which is held in cash is $48 billion. So, half of the entire enterprise is a low-yield financial management company, run by faceless administrators who just move money around. Only fifty per cent of the company “sticks to the knitting” by creating and manufacturing the fabulous new technological advances the company is known for.

I don’t want to give the impression I’m only picking on Cisco Systems. Ford Motor Company’s 2011 annual report, reading it conservatively, shows a cash reserve of about $18 billion. Their market cap as of today is about $38 billion. Their stock has moved little in the past two years. So, they’re in almost the same situation as Cisco, in transforming half their operation into a passive cash-management company, and contributing to the Swedish Disease.

So the apparent glittering wonder of having so much cash on hand dissolves into a non-core enterprise which produces income at about the T-bill level, which is not really enough income to contribute to the overall profit of the enterprise. Thus the investment administration half of the company is really a serious detriment to the company.

It is much the same with all the other US corporations who make up the list of those holding in aggregate almost two trillion dollars in cash reserves. Cisco’s cash holdings are a detriment to and a drag on the growth and profitability of their company. The aggregate excess cash reserves held by many corporations constitute a detriment to and a drag upon the whole economy of the United States. These reserves are one of several reasons our much-heralded economic recovery has been so slow to appear and grow.

I’m naming this overall almost two trillion dollar macro-economic drag on the economy the “Swedish Disease.” The naming convention in the field of economics comes from the use of the “Dutch Disease” to describe Holland in the 1970′s. This now generic term describes a rise in the exchange rate value of the currency of a country which has one overwhelmingly dominant export. The rise means that any other exports of the country are too expensive, and therefore will not sell on the world market. The only thing the two phenomena have in common, though, is that both are “diseases.”

The phenomenon is fully described in the article “Corporate Control and Value Destruction,” by Lars Scholdstrom and Karl-Johan Wattsgard, Stockholm School of Economics, 2006, published on the site http://www.essays.se/about/separation+of+control+rights+and+cash+flow+rights/ . These two guys did the extremely difficult theoretical work. I’m giving their work a name, and describing the macro application of their thesis to the current situation in the United States.

These most perceptive Swedish economists, Scholdstrom and Wattsgard, describe a situation where the entire economy of Sweden is being dragged down by the widespread disconnection between the ownership rights and the control rights of corporations. Those who have the control rights (usually in Sweden through stock with restricted voting rights) often do not act in the best interests of the common stockholders, who have the majority ownership of the enterprise.

As a result, the commonly traded shares of stock in the corporation remain stagnant in value relative to the book value of the company. Since many different Swedish corporations follow the same practice, the whole economy grows at a much slower rate than the level of economic activity would predict. And according to Scholdstrom and Wattsgard, the situation has persisted in Sweden for many years and will continue to persist into the foreseeable future.

The Swedish economists also demonstrate that the excess of control rights in the hands of a minority of owners leads to the theft of corporate assets. “Depending on institutional framework, the controlling shareholders might be able to extract this value at the expense of the minorities. The value extraction can be performed through a variety of methods such as tunneling to other companies within their control, extensive compensation packages to shareholder directors and management etc., pecuniary private benefits of control, all basically amounting to theft.”

In the case of American corporations with cash reserves greatly in excess of the normal amounts needed for liquidity, the primary problem is that the control of these excess funds is not in the hands of either the shareholders or the board. The control of this excess trillion-plus dollars of funds is in the hands of middle-level investment managers, who work on a completely parallel and unrelated track from the “owners” (the stockholders and the board).

Cisco’s in-house investment managers really have no incentive to maximize the returns on the investment of the billions entrusted to them by the corporations with excess liquidity. Much of the money will be outsourced to managed funds which are entirely beyond the control of the owners, i.e., stockholders and board.

Only the increase or decrease in the total dollar amount of the invested cash tranche will appear on the company’s balance sheet. These days the best-case “profits,” generated by conservative investment managers, will be from cautiously invested and predominately safe government and corporate bonds, and there will still be losses when the funds are spread widely. In any event, the increases are a paltry contribution to Cisco’s overall profitability, and such increases may not be booked at all in a given year if the dividends are paid only at maturity. About half of Cisco’s total market value is tied up in excess assets handled by middle-managers, where the upside potential is probably no greater than 3-4 per cent income maximum.

Thus in order to show a decent profit the operating portion of the company, as opposed to the “dead cash” portion of the company, has to perform at roughly twice the level as one might expect of a well-run corporation. Thus even in the best case the corporate ship is being anchored to the ocean floor by a giant non-core, non-productive, and largely non-performing fifty per cent of the enterprise.

Is it any wonder that the stock of Cisco Systems is muddling along without a prayer for improvement? Is it any wonder that with all those corporations holding almost two trillion dollars in the same manner as Cisco, the United States economy is muddling along without a prayer for immediate improvement?

Now let’s look at the worst-case scenarios of the economic pandemic. Significant harm is being done to the US economy by corporations who are holding almost two trillion dollars in unused assets on their balance sheets.

Tunneling is a European concept, defined as the transfer of assets and profits out of firms for the benefit of their controlling shareholders. One reason this concept is not really present in the United States is that it is very likely that tunneling will be viewed as a violation of the anti-trust laws.

And if we make the probably slim assumption that the trillion dollars in excess cash is being actively managed by the stockholders through their board of directors, then it is likely that these active managers will run into legal problems. For example, one corporation may use its excess cash to tunnel into an interlocking ownership of a competitor, or into a vertically integrated part of the company’s supply or distribution chain. Anti-trust violations are a really big deal.

A look at Cisco Systems’ balance sheet for the end of fiscal year 2011 shows that it’s unlikely this particular company is tunneling. Of the about $48 billion in excess cash, only $1.4 billion is invested in publicly traded securities. The rest is in cash equivalents and in fixed income securities, which means anti-trust manipulations are unlikely. What is almost certain, though, is that Cisco fits the profile of a company with middle-managers passively sitting on billions, without any owner, i.e., stockholder, control, or concern for the profitability of the company as a whole.

To recapitulate in the context of American corporations, the primary Swedish Disease is that the control of these excess funds is not in the hands of either the stockholders or the board. The control of these excess two trillion dollars of funds is in the hands of middle-level investment managers, who work on a completely parallel and unrelated track from the “owners” (i.e., the stockholders and the board), moving around passive (here meaning not used for the production of goods or services) assets.

So what can go wrong? Many passive asset people will find ways to tunnel by investing corporate cash in money-management accounts or companies set up by themselves for their own benefit. The Swedish authors in their study refer to “loss-leading funds.” This is charitable of them. Some mid-level money managers will blatantly invest in their own money-management accounts, and then write off all the assets as a loss. On a $43 billion balance sheet, $10 million, or even $100 million, may pass unnoticed as a rounding error.

This outright theft, a tiny fragment to the company, will be enough to set up the grey faceless middle-manager for life. Remember, the people who manage these excess funds for the company don’t have to be licensed brokers. They are not in any way regulated in their activities beyond the distant oversight of their own boards.

Let me be clear, though. I’m not accusing anyone of theft.

I don’t even want to think about what will happen if any such thefts are taking place at the top level of the company. There’s not much limit to how much the directors and top people could tunnel into their own accounts, using their own authority to cover up the transactions. So I won’t even mention that possibility.

In conclusion, we have in the United States at the present time many corporations similar to Cisco Systems. At least half of Cisco’s market cap is devoted to non-performing assets sitting on the sidelines. The other half of the company has to carry the laboring oar of developing and producing the products and services which make the company what it is.

No jobs are being created, and no new product research and development is being done, by the passive half of the company. Nothing is happening which can increase the value of the stock of the company, or increase the vitality of our economy.

What can Cisco do with their massive stash of cash? First of all, they can repatriate it from overseas and pay to the government the taxes which are due. After all, the assets are probably already invested in US securities, in the form of American corporate and government bonds purchased on the Singapore or Hong Kong exchanges. So the location of the transactions is a distinction without a difference.

Cisco could open more huge new research laboratories and factories in the United States, designed to create and produce the most cutting-edge products for the next generation of digital devices. This will not only create jobs, it will make this “old-line” company more competitive against the new upstarts.

Cisco could increase its dividends to its shareholders substantially. This will move the money into the economy and help support the price of the stock. They could also give each current and retired employee a meaningful annual bonus, again moving the money back into the economy while increasing the loyalty and morale of employees.

They could also do a series of substantial stock buy-backs, which again would help support the price of the stock. I’m sure everyone could come up with other ideas for putting the stash of cash to work.

Most of all, and most to the point, remember that I’m only using Cisco as an example. Each of the other corporations which are retaining funds in excess of normal liquidity requirements makes its own contribution to the Swedish Disease. Only if all or most of these major companies step up to the plate, in this way and others, will there be any significant amelioration of the present sluggish pace of the economy in growing the GDP and decreasing the jobless rate.

To end on a more positive note, the Federal Reserve Board reported that at the end of 2010 the level of cash holdings by corporations, in constant value dollars, is the same now as it was back in 1959. If the corporations find it in their interests to begin to release some of their cash holdings, we may find ourselves in an economic recovery similar to the robust situation in the 1960’s. Sweden has maintained its muted economic growth for many years. Here in the US we need to turn off the Mute button and let the music play!

To reach Part Two of this two-part series, click here: https://mcgeepost.com/2012/10/18/the-swedish-disease-part-two-revised/

Executive Working Hours

18 Aug

From www.mcgeepost.com .Copyright © 2012 Michael H. McGee. All rights reserved. Please feel free to share or re-post all or part non-commercially, hopefully with attribution.

Top executives, as well as high level millionaire/billionaire entrepreneurs, often pride themselves on working very long and harrowing hours, and claim these long hours are necessary to reach their or their organization’s goals. In racking up so many work hours, these very fortunate and usually quite elegant persons tend to minimize the time spent with their families and in pursuing any personal emotional goals.

Bear in mind I’m not criticizing the integrity or accomplishments of anyone. I’m coming at this analysis from the perspective of an economist. A Very Busy Person at the highest levels will feel better inside and be more compassionate to self and others if all the parts of life, work, home and spiritual are expressed. By spiritual I include a bracing tennis game and time spent with family and friends and space for inner peace, not just time in church. Such a person can’t help but be a better leader and analyst.

Wouldn’t it be better if these Very Busy People hired a five or ten member executive team of people as smart or smarter than they are, then delegate as much of their actual work as possible to this scrum. These Very Busy People can then spend fewer hours per week, working only on top-top level work that takes advantage of core competencies. Their executive team can probably perform eighty per cent of the time-consuming physical tasks formerly performed by the top person, and then report their results to the top person for evaluation.

The team will need to be a tight enough unit so that when people talk or correspond with one member of the team, they will be absolutely certain that they’re talking with the executive in charge. Further, those making communications from the team will need to be absolutely certain that the decisions coming out of the team carry the binding weight of a decision reached by the executive in charge.

Such an arrangement will have several very satisfactory results. The primary result will be to free the top executives from their offices and work related tasks. Such an executive can then spend more quality time with spouse and family, engage in mindless sports and targeted exercise, and spend time alone to recharge the batteries.

My daughter Michelle asked me to add that a more balanced worklife may also lead to more women in top executive positions. The “work ’til you drop” corporate culture usually assumes the presence of a “wife” at home, and is thus biased against women in leadership positions.

Another result, if this becomes a general practice, particularly if the practice is cascaded down to the top fifty executives, will be to increase the number of Very Smart employees on the executive payroll. This upward pull within the executive suite will give bright outsiders, as well as rising inside employees, a place to rise further.

Those in these scrum positions will feel more needed and have more job satisfaction, and at the same time be able to learn the meaning of working at the top levels of an enterprise. Very Smart people often have to go through years of being bored with tedious and repetitive tasks before being offered a challenge fully worthy of their abilities.

This practice will also increase the overall employment rate, which translates to reducing the national unemployment rate, when the top fifty executives in each company and in each wealthy entrepreneurial venture establish such teams. Each one of the Very Smart people plucked to join an executive team will leave behind a vacancy in their present jobs.

Their replacements will likely be of two types. The first will be people who are fully competent for the lower-ranking jobs, yet with less stellar resumes and academic credentials. Such people will be less likely to be bored, and might even find the new “lower job” to be a stimulating challenge.

The second type will be younger Very Smart People, or older Very Smart People who’ve been shunted sideways or given up for one reason or another. These folks will have jobs with more responsibility and upon proving how Very Smart they are, will be in line for an executive scrum.

For many years the federal courts have practiced the principle I’ve described. Law clerks have assisted Justices on the Supreme Court of the United States since the first one was hired by Horace Gray in the 1880s. These law clerks are the best and the brightest of new law graduates and most have gone on to establish stellar careers of their own. US Appellate and District Court judges also delegate most of their substantive work to their clerks. In all cases the jurist uses only his or her core competencies, and the excellence of the outcomes over the last hundred years or so is indisputable.

There are some specialized situations where a transitory group of young scholars, replaced every year or so, will accomplish the desired result. The scrum of highly qualified and quickly replaced new graduates who ease the workload of Supreme Court justices is one very credible instance.

Primarily, though, I’m talking about a permanent set of positions to be filled by the best and the brightest from every age group. The incumbents will develop long-lasting relationships with their executives, and will leave only when promoted or recruited away.

Laura Vanderkam, in her new book “168 Hours: You Have More Time Than You Think,” writes very lucidly about the concept of core competencies, as well as about trimming the workweek to its essentials. Most people don’t have the funding or the luxury to establish five to ten person executive teams around them. Simple delegation and a thorough Vanderkam analysis will bring about excellent results for them.

Top executives and high level millionaire/billionaire entrepreneurs do have the full financial ability to fund and operate such teams. Top level employed business executives are typically paid two million and more a year for their services. Adding another million or so to their budget for the additional five positions will not be a hardship for the company.

Maybe the divorce and family estrangement issues many top executives and high level entrepreneurs have could be lessened if they spent less time at the office and more time with those they love or doing leisure or group social activities, or just chilling out. Maybe these men and women will even find they were better able to make the crucial decisions that could take their organizations to the next level of success, or the next level of compassion, if they weren’t being nibbled at the fringes all day every day.

Law firms and accounting firms and medical practices and other professional groups can use a similar approach. The professionals can be organized into tight teams of five or more similarly credentialed professionals, with a designated number of staff at their disposal. The teams will work on the same cases or patients and be familiar with what each other is doing. Each team member will work no more than a forty to fifty hour workweek.

Extra needed time can be parceled out among the team members on a rotating basis, such as when a deadline or the care of a patient requires working around the clock. Since each member and assistant will be familiar with what the others are doing, there will be little loss of efficiency if, say, there is a long legal brief to write on a deadline and three or four of the team members participate in the writing. Travel, trial and engagement responsibilities likewise will be parceled out among team members so no one person is gone from home for too much time.

None of the attorneys, doctors or other professionals will be locked in at the office night and day to the detriment of family life, compassion to self and others, and reviving leisure activities.

I remember talking long ago to a brilliant and well-known solo practice lawyer in Raleigh, North Carolina. He said he’d started out in a large New York law firm after being recruited for his obvious talents. One afternoon he was excited because he had tickets to the opera that evening. Then one of his managers came rushing in and gave him an urgent assignment that would require him to stay in the office most of the night to have the project ready the next day.

He said he sat in his office that afternoon and held the urgent file in one hand and his tickets to the opera in the other hand. After weighing his options, he handed the file back to his manager along with his resignation, and went to the opera. Ever since that time more than twenty years ago, he’d been unwilling to work in a law firm, because he knew they would suck the life out of him. Fortunately he was bright enough to make a sterling reputation even while working alone (with probably an occasional all-nighter).

In conclusion, those who are at the top in business and the professions can make other choices which will preserve and perhaps increase their organizational results. Their choices may reflect more compassionate ways to avoid sucking the life out of themselves and those around them. Or not.