Saturday, October 23, 2010

How Did We Get into This Mess?

With the mid-term elections soon to be over and a new set of players involved in setting the direction for our country, it is important that we figure out what the real problems are that must be solved. One of the problems with politics is that both the explanation for problems and the proposed solutions become standardized by political ideology. Thus, the democrats say it's all the fault of greedy corporations and the republicans blame big government liberals. Further, these one-size-fits-all approaches develop around specific issues whether it is the approach to education reform or health care.

Our problems are much too complex to be so simply defined and solved. One of the reasons that none of our approaches to improving education have made much of a difference in test scores and our standing in the world is that we have not understood the cultural forces that have had a greater influence on our children than anything the Department of Education is capable of doing with programs or policies. We have legislated according to political sound bites and then we wonder why our laws have so little effect on the serious long-term problems we face.

I have wanted to write an overview of our present situation from my own, Christian and biblically instructed point of view for some time. This election is about economics so I want to start there.

First of all, our employment and financial problems have not sprung up in the last 10 years as the president and his party have claimed. George W. Bush and the republicans are not the sole source of the massive budget deficit or the shipping of American jobs overseas. We have been Keynesians for a very long time, seeking to drive economic growth by fiscal stimulus and inflation. We forget that cars used to cost $5,000.00 and homes $50,000.00 just 40 years ago. Even though wages and salaries were much lower than today, it was possible, because of a much lower cost of living for nearly every family to have a single bread winner. Inflation has so driven up the cost of living in our society that now both husband and wife must work just to make ends meet.

But inflation is not just the rise in prices and wages (with inflation, people needed raises just to keep up with the cost of living), inflation affects product quality and methods of finance. Electric drills for the home handyman used to be made entirely of metal. Black & Decker revolutionized the field by only using metal where it was needed for wear and durability, everything else they made of plastic. Engineers have been working for decades at taking cost out of products while still maintaining product value. Technology has played a major role in this process both in the development of materials and in using computers and robots in the manufacturing process. But this has resulted in a reduction in the number of people required to make and assemble these products. This is as much of a factor in the loss of jobs as outsourcing. All this was required in order to remain competitive in the marketplace and to keep the price they must charge for their products as low as possible while still making a reasonable profit.

American (and global) industry have a remarkable track record when it comes to innovation. From my background in quality assurance I can tell you that they have developed products that are lighter, stronger, and more reliable than the products sold just 40 years ago. Without these advances in product development and manufacturing our cost of living would be unimaginably higher than it is today. There have been other benefits as well. The fuel efficiency of our cars have improved and the strength, weight, and durability of tools and materials have increased significantly.

But the need to control product costs produced serious problems for society. First, one of the largest expense items in manufacturing is the cost of labor, therefore engineers worked very hard for many years developing machines and methods for eliminating the number of people required to make the products we buy. What this has meant is that machine shops and factories hire far fewer people than they did just a few decades ago. In addition, outsourcing (purchasing parts and materials from overseas) has been going on for decades. Foreign made parts are much less expensive because of lower labor and materials costs. And foreign made parts mean less jobs available for American workers.

Let me try to explain outsourcing from the context of something I know about personally; snommobiles. The first snowmobiles made in the 1960's all had American made engines. As the sport advanced snowmobile manufacturers began looking outside the U.S. for lighter, more powerful engines. They turned to the Japanese motorcycle companies because they had already developed cast aluminum engines with hard plated cylinder walls for durability. No American manufacturers could compete with the price, performance, and durability of these engines, and just about every snowmobile manufacturer in the world bought their engines from Japan.

Like it or not, we live in a global marketplace and companies today are searching the entire world for the best materials and products. In order for us in the United States to see our economy grow, we must work hard to maintain our innovative edge. It's really is all about innovation. Those companies that make the best products for the lowest price where ever they are in the world will have the competitive advantage. This is why Toyota and not GM sells the most cars in the world. This is why Sony, Samsung, and Vizio sell far more television sets than RCA or Zenith (the best sellers when I was a kid).

The same principle applies on the personal level. The main reason the trade union movement has failed in the private sector is that they stifle personal initiative and advancement. The job market today requires people who already possess knowledge and skills necessary for the position. In addition, they must be people who are capable of learning and adapting to the advances that are inevitable today. The most successful will be those who are capable of developing new methods, new approaches, or even new products.

What does this mean going forward? It means we must work to increase our competetiveness in the global economy. We need to lower our corporate tax rate, we must reduce capital gains tax rates to enable investment. We must pass the important trade agreements that await our approval. Finally, we must expand oil exploration and other means of increasing our access to the energy available to us here in America to reduce our energy costs and improve the prospects for the growth of our economy.

The question will be, can our new congress do anything to make any of these changes possible? To be honest, government at whatever level is not the answer. Innovation and the remarkable dynamism of the free market have always been the engine that pulls us out of these economic doldrums. I know it is trite, but the best thing that government can do for business is to get out of the way.

Wednesday, October 13, 2010

"Fixing" our Economy

The crucial question for the next year is how do we achieve economic recovery. The current administration has been telling us for some time that we are already in recovery, and that if we are just patient and willing to re-elect their party, we will see the benefits of their policies. The problem is there are no real signs of recovery, with unemployment still very high and the housing market abysmally low. What concerns me most is that I don't see any "engine" of recovery.

In the past, certain key industries have pulled us out of recessions. Whether it was the auto industry, personal computers and the internet, or the housing market, the recession ended when these products and services became ultra attractive due to pricing, innovation, and low interest rates. All of those drivers are unavailable this time; they are all subject to the same lack of demand that plagues the rest of the economy. So what will pull us out of this mess?

According to the President and his progressive advisors, the drivers of recovery are green jobs and re-building infrastructure. Many to the left of the President, want him to go further and establish a new WPA of government building and employment projects. What they don't realize is that much has changed since the 1930's; the restrictions, work rules, and environmental regulations of today prevent even the government from hiring people off the street to build dams, bridges, and libraries. What used to take a few months to plan and initiate now takes years. The President admitted as much when he declared, "there are no shovel-ready projects." He is right. Even the progressive agenda is subject to the crisis of a bloated government.

So what about green jobs - wind, solar, renewable energy? If we are willing to be honest, we will have to admit that these alternatives to coal and petroleum are not yet viable. The only way that we can go to these options is through subsidies. We have been subsidizing wind generation and solar power since the late 70's with little or nothing to show for it. After decades of government subsidy, we spent six billion dollars to enable American ethanol production and to prevent sugarcane ethanol from being imported from Brazil. In other words, the idea that these "green" industries may be drivers of growth in our economy is not even a pipe dream, it is a complete fantasy.

The central question is how do we promote growth? In my opinion, government is the last group that should be attempting to answer that question. Politicians are under the influence of special interests and incapable of seeing what really needs to be done to bring the economy back to health. I would point to two examples: the cutting off of water for irrigation in California to protect the delta smelt and the takeover of GM and Chrysler. It is a political talking point, but true none-the-less; government needs to get out of the way for business to grow.

Government gets out of the way by reducing the corporate income tax, by approving the various free trade agreements that are held up by the special interests, by reducing (not increasing as planned) the capital gains tax, and adopting any number of other business-friendly policies that would release the engines of investment and entrepreneurship that enable the economy to grow. The next engine of growth is probably out there, but the government will never find it. The free market will take it forward as it did the auto industry, the internet, and the housing boom. The recent success of Apple's I-phone and I-pad show the amazing capacity for innovation in American industry. It is this kind of creative development that gives us a sense of optimism about the prospects for growth.

If we look at the difference between the economic conditions in Texas and California, we see the advantages of conservative policies over progressive policies. Texas is a low tax, business friendly, tort reform state. Over half of all the jobs created in the private sector in the last six months (which the President has alluded to as a sign of the recovery) were created in one state: Texas. While California is losing population as a consequence of its high taxes and restrictive regulations, Texas is the fastest growing state in the union. California has an unemployment rate of 12%, while Texas is at 8.4%.

With the mid-term elections in two weeks, we need to vote for those leaders who will adopt the policies that are working in Texas and reject the policies that had such a disastrous impact on California or Michigan or New York.

Even if the Republicans take control of congress, I do not see a dramatic change in our economy. We face so many difficult challenges and a divided government will make it even more difficult to get legislation written and passed. Nor do I see President Obama making the kind of shift to the center that saved Bill Clinton's presidency in 1994. (Here's irony for you. The democrats brag about the budget surplus and strong economy under Bill Clinton, but it wasn't progressive policies that produced that surplus, it was the conservative policies he adopted after '94.)

It is important that you vote on November 2. Much is at stake in this election.

Let me also say that in these uncertain times we must be Habakkuk Christians. The housing crisis is not going away, and employment will be weak for some time to come. We can expect to be facing a struggling economy for some time. Our hope rests not in our visible means of support, our job or bank account, but in the faithfulness of our God, who gave Himself for us and promised to never leave us or forsake us. Now is the time for us to live by faith and not by sight, and to reveal a hope that cannot be shaken by any of the challenges of our uncertain economy.