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.

No comments: