Saturday, November 30, 2013

Pension for Disaster

When tough “numbers” blogs enter the fray, some people’s eyes roll over. It’s dry, hard to understand and easily dismissed. That’s exactly what special interests want you to feel and how some of the most horrific practices become unchallenged parts of the body politic. It’s also how we get into the kinds of deficit messes we are in, how we have managed to accrue $2.7 trillion (yup, trillion) in unfunded pension debt within our state and municipal governments. And believe me, if you live in the United States, even where someone actually did take care of business, you will feel this anomaly big time in the not-too-distant-future. The feds often step in to save disasters.
The first element that deserves examination is the difference between how the private sector and the public sector determine and pay pensions. Pensions have been with us since the Revolutionary War, but the most recent mega-shift in pension laws occurred in 1974 with the Employment Retirement Income Security Act (ERISA), which effectively created rules for private sector pension plans and provided a layer of pension insurance on such plans. Pension planning had generally followed two paths: defined benefit plans (your pension paid you a predetermined dollar amount, sometimes with escalators, per pay period… mirroring a salary schedule) and defined contribution plans (fixed sums were deposited into a contribution account, and when you retired, you effective got paid out according to the values that accrued in that account). Individual 401(k)s and IRAs are defined contribution plans, by the way.
Clearly, defined contribution plans did not impose a fixed payment obligation upon retirement, since the account would rise and fall with the market. On the other hand, defined benefit plans placed a hard dollar value that had to be paid no matter how negatively the retirement funds might have been impacted by market conditions. The private sector, governed by ERISA, soon learned that defined benefit plans were just too dicey, too unpredictable and could easily result in under-funding if the deposited sums did not fare well in the investment markets. Most private sector plans moved into the safer world of defined contribution structures.
On the other hand, for state and local governments, since defined contribution plans mandated on-going defined contributions (which could not fall with hard economic times), and since the strongest unions today are in the public sector, the general rule of the day let this public sector avoid having to pay into a fund altogether and garner votes from union workers for generous defined benefit plans. A recipe for a very big disaster. But wait, there’s more. Not only were these plans more generous on retirement than private sector defined contribution plans, but they vested and began paying out after a relatively short period of time (20-30 years, regardless of age), particularly for police and fire employees (so-called “uniformed services”). Folks were retiring with full benefits in their 40s and stepping into another career until they really retired in their 60s or 70s. Unsustainable.
The federal government has the same kinds of pension habits, and believe me this is a huge part of our deficit problem, but they can just “print money” to fund what they have. This is not really a good answer but a big explanation of why our national debt has spiraled so far out of control. State and municipal governments do not have that luxury, so you can look at the various municipal bankruptcies filed in the last few years – places like Detroit, Birmingham and Stockton – and see exactly how much unfunded pension obligations to retirees motivated those filings. These cases are, however, just the tip of the iceberg, and federal law only provides statutory bankruptcy relief for municipalities (non-federal government units that are less than a state) and not states.
One state, Illinois, purportedly has accrued unfunded pension obligations in excess of $100 billion. “For years, even as financial analysts warned that the situation in Illinois had reached crisis levels, lawmakers in this Democrat-controlled state have wrestled with a vexing issue: how to cut pension costs without alienating labor unions, a key bloc for political support, while also staying within the limits of the State Constitution, which bars pension benefits from being ‘diminished or impaired.’ Many states have wrestled with mounting pension liabilities, but experts have pegged Illinois’s troubles as among the worst.
“The issue has proved to be a deeply contentious one in Springfield, the capital, and even among the state’s top Democratic leaders. At one point, the Senate passed a plan. The House passed a different one. And [Democratic Governor Pat] Quinn, for his part, announced that he was stopping paychecks to lawmakers until they agreed on a plan, a move that caused the lawmakers to sue the governor.
“With elections in 2014, the political stakes of repairing the pension system are rising. Mr. Quinn, who has wrestled with low approval ratings and is expected to face a serious Republican challenge in his re-election bid next year, has for several years held out a pension overhaul as an important goal. A year ago, he campaigned publicly for an overhaul with an orange cartoon snake he called Squeezy the Pension Python, though a legislative session at the time came and went with no solution.” New York Times, November 27th. In addition to these massive obligations, Chicago alone has an estimated additional $19.5 billion shortfall in its pension funding.
Well, the Illinois state legislature has proposed a massive restructuring of its pension obligations, one that would conquer the $100+ billion pension deficit and create stability going forward. But given the state constitutional restriction against diluting state pension benefits, you can bet that there is going to be a massive challenge to these new structures by Illinois’ employees and their unions. Change is always threatening.
What are the specifics that will now work their way through the legislative process? “The proposal includes pushing back workers' retirement age on a sliding scale, a funding guarantee, a 401(k)-style option and reducing the employee contribution… [R]etirees would continue to receive the current 3 percent annual compounded cost-of-living increases, but they would only get that rate up to a certain amount of annuity payments, based on years of employment…  [T]he new way of calculating the increases would benefit low-income workers who worked longer…
The funding guarantee allows retirement systems to sue Illinois if lawmakers don't make the full contribution to the fund each year… The plan also would require the state to put 10 percent of the money saved annually through benefit cuts back into the pension funds beginning in 2016. It also will redirect the money the state currently uses for pension bond payments into the retirement funds once those bonds are paid off in 2019.” Further, caps on pension benefits will impact some of the government’s highest paid officials, cost-of-living increases would factor in the total number of years employed, and workers under 45 would have to wait to retire. Huffington Post, November 28th.
War is not pretty, and the state, like so many others, is caught between vested promises made in better times and constitutional restrictions, and the harsh economic reality that the private sector dealt with a long time ago. What happens in Illinois over these issues may well be the canary in the coal mine for pensions in the rest of the country.

I’m Peter Dekom, and there are so many more shoes to drop.

Friday, November 29, 2013

Global Farming

Climate change is bad for some, horrible for others and spectacular for those where frozen tundra and ice-blocked barriers transforming slowly to new farmland and easier access to mineral and petroleum resources, not to mention more efficient shipping lanes. If you live on an island atoll, with rising seas, everything you have will disappear under ocean waters. If you live in Russia or Canada, warming temperatures will open vast tracts of land to agriculture, mining, and oil drilling that was not possible without the change. Riches will explode!
The United States has been a huge agricultural exporting nation. Our Midwest prairies have pumped out massive amounts of grain to feed the world. We have abundance upon abundance, coupled with some of the most modern and efficient farming techniques known to man. As average global temperatures change, however, we have also witness massive flooding in some farm states, fires decimating valuable timberland in the West, and never-ending drought in the heartland, particularly those dependent on the southern reaches of the Ogallala Aquifer (which stretches from the Dakotas to north Texas) and even more particularly West Texas and south Kansas. It seems that the ground water in them thar’ parts has gone bone dry, even as the rains have become increasingly sparse.
The shifting supply of water will redefine the planet. As we lose water in primary agricultural regions, we will lose the export revenues that once went with those productive lands. Other nations will depend on greater imports of foodstuffs and other commodities. Water is life, but as the earth’s population increases, food has to be produced somewhere. To some the current, skyrocketing cost of basics (the price of the humble onion has tripled in India) is just the beginning of a restructuring based on changing supply and demand realities.
Already, the world’s farms take up an area the size of South America. By 2050, a global population of nearly 10 billion people will require roughly 70 percent more food. We have two options: Either we need to get more food out of the land we already farm, or we need to farm more land.” New York Times, November 24th. But until the tundra melts and Canada and Russia pick up the slack, where is the new food-growth-exporting going to come from?
China has been buying and leasing agricultural land in Latin America and across Africa’s Great Rift Valley with precisely that question in mind. But there is this not-so-little pocket of agricultural wealth that is exploding in the eastern part of Brazil. It’s called Mato Grosso (see map above). It’s still not the most accessible region, and better roads and infrastructure are a must for this area to achieve its potential. But Mato Grosso could easily become the next grain belt to a planet with a massively growling stomach.
Brown University Associate Professor (ecology and evolutionary biology), Stephen Porder, traveled the back roads to see for himself exactly what the potential for this rich soil region might be. “After a long flight from Boston, I rode the night bus nearly 500 miles of rutted roads to reach the frontier town of Canarana. Only about 25,000 people live here, but the main street has several stores selling million-dollar tractors. Waiting for my ride to the farm, I met a man from Silicon Valley who commutes every month to sell heavy equipment. He told me, ‘This is where the money is.’
“How can we determine if these farms are sustainable? Admittedly, it’s unnerving to stand in an endless sea of soybeans where there was once rain forest. Exotic animals like tapirs, jaguars and rheas wander through the monocrop desert, and macaws compete for airspace with crop dusters. But sustainability has little to do with appearances. Sustainability depends on whether a farm can continue to produce food over the long term, without irreparably damaging the environment or causing other land to be cleared in the quest for increased food production…
“We focused first on fertilizer. Fertilizer helps grow more food on a given plot of land, but overuse can have serious environmental consequences. Largely, these depend on how efficiently farms use nitrogen and phosphorus. These two elements, which limit how much crops can grow, are the main components of fertilizer. Crops don’t absorb all the fertilizer farmers apply, and what’s left behind often ends up in waterways, where it fuels algae growth. Fifty years of heavy fertilizer use in the breadbaskets of the United States and Europe has left lakes, rivers and coasts with algae-choked ‘dead zones.’
“We expected the story to be similar in Mato Grosso. But to our surprise, we’ve found that streams draining the farms there have no more nitrogen or phosphorus than those in adjacent forests. The deep tropical soils are highly efficient filters, removing nutrients before they reach the water. In the American Midwest, scientists have long been searching for ways to clean up farm runoff. In Mato Grosso, the soils do the work.
“But these same soils present a sustainability concern on a different front. After millions of years of heavy rainfall, Mato Grosso’s soils have lost nearly all their phosphorus. The soils efficiently remove phosphorus before it reaches the streams but also bind phosphorus added as fertilizer, leaving less for the crops. As a result, farms here require twice as much phosphorus fertilizer as their counterparts in more temperate regions, where the soils are younger and more fertile. And phosphate ore, the source of phosphorus fertilizer, is a finite resource…
“The fertilizer story makes it complicated to figure out the sustainability of Mato Grosso’s farms, which send their soy to China, as animal feed, and to Europe. Even more complicated is the question of how these farms will affect the global climate. The link, while not obvious, is important. Global warming results largely from burning fossil fuels. But another important contributor — about 15 percent of our carbon-dioxide emissions — comes from changing land use, primarily the burning of tropical rain forests to make room for food or biofuel crops. If we really want to know the environmental impact of these soy farms, we need to understand their effect on carbon-dioxide emissions.” NY Times.
No matter the complexity, the pressure is on. Mato Grosso is going to be the breadbasket to millions of people, and until they hit a sustainability wall – from that same climate change or the depletion of necessarily minerals from the soil (that cannot be replaced through importing fertilizer) – you can expect this area to become one of the most important agricultural regions on earth.

I’m Peter Dekom, and we are going to witness massive shifts in geopolitical powers based on who has the water, who has the resources and who has the power to guard them against those who will try and steal the values they hold.

Thursday, November 28, 2013


Reading about upticks in pre-Christmas sales, better new car and home sales, small but continuing declines in unemployment numbers here in the United States suggests that there is a recovery afoot. Perhaps, but when you dig into the numbers, what we are seeing may instead be Americans getting used to the “new normal,” a giant downward reset in our hopes and expectations. New home construction, for example, has taken 300 square feet away from the average size of homes from a decade ago ( Home sales for average residences are tied to the tiniest fluctuation in mortgage rates, which in turn suggests that when interest rates settle at their inevitably higher level, we may well see a mini-bubble bursting, taking down home values once again.
I’ve blogged about the kinds of jobs that Americans are, in larger numbers, getting in this new marketplace, and the trends are for work at the bottom of the pay scale, often contract or part-time work. We know about the millions who have given up looking for the kinds of jobs they trained for, were schooled in, and even had for years… some giving up looking altogether. Corporate America has downsized and implemented big cuts to operational costs, sending the stock market soaring. Government cuts, highlighted by the recent sequester, have also placed austerity at the fore.
Looking at the tea leaves again, there is one symbolic segment of our economy, hospitality that caters to conventions and larger gatherings of business or government groups, that provides one of those examples of this reset. Big meetings at hotels have for the most part been replaced with smaller and less frequent gatherings. “‘Meetings that require fewer than 25 rooms per night now account for 70 to 80 percent of conference bookings,’ [said Sherry Romello, senior director of Hilton Meetings and Product Management].” Washington Post, November 24th. They are often last minute affairs, taking away that dependable long-term planning ability, requiring more staff who can act nimbly and quickly. And there is a careful eye on costs.
The overall convention-booking numbers don’t reflect this change, but there has indeed been an overall slow but steady downward trend: “Nationally, group business continues to decline. In September, for example, the group occupancy rate fell to 23.5 percent, down from 23.8 percent last year and 24.4 percent two years ago, according to research firm Smith Travel Research.” The Post. Adding to this mix is a new body of “meeting only” facilities – from banquet halls to shared meeting facilities, even movie theaters with daytime/weekday availability that competes with the local hotel chains. Prices haven’t been this competitive for decades.
The difficulty for economists is to separate nascent signs of recovery, auguring for longer-term prosperity, from evidence of a big reset, one in which Americans will continue to see an erosion in their discretionary income (which has been continuous for well-over a decade). It may be part of a bigger shift in overall growth patterns from the developed Western world to the mega-economies in Asia, Latin America and even Africa.
I think there are very few of us in the West who would argue that our children will live better and more economically advantaged lives than their parents. Even the cost of a good college education, with a parallel available parcel of affordable financial aid, is drifting out of the sightlines of too many families. We keep our cars for more than a decade these days (who remembers a new car every two years?), and the demand for new vehicles may be nothing more than a reflection of necessity rather than conspicuous consumption. Times are hard… and they may just stay that way.
I’m Peter Dekom and getting used to this new normal may be the undercurrent that in significant part powers the severe polarization we see in our political scene.

Wednesday, November 27, 2013

Short Circuit in Washington

An atmosphere of severe distrust, confusion and rampant polarization has deeply infected the body politic in this nation’s capital. While the notion of a filibuster was known even in ancient Roman times (in their senate), the practice in our Senate is and was simply a product of the right of Congress to create their own operational rules. With a simple majority – reflecting the Democrats’ control of that body – and the stroke of a pen, the Senate requirement that required 60 votes to end a filibuster for Presidential appointments simply died. 51 votes will now do the trick.
Some Republicans (e.g., S. Carolina’s Lindsay Graham, a gentleman who actually knows how to compromise) have used the ability to block appointments as a wedge to force the Obama administration to provide information on the Benghazi assassination of U.S. diplomatic personnel. A dead horse issue to most. Others simply do not want to shift judicial and regulatory appointments away from the conservative slant that was established by the Bush administration. Many older incumbent Democrats have been loath to retire for fear of losing the Democratic placeholder for that position.
But the biggest hidden battle seems to be in the second most powerful appellate court in the land (behind, of course, the Supreme Court), the United States Court of Appeals for the District of Columbia. “The real reason Democrats were so eager to confirm Obama's DC Circuit nominees, and Republicans were so desperate to block them, is that the court's current conservative majority has repeatedly blocked the president's agenda. Since most of the federal bureaucracy resides in DC, the DC Circuit is tasked with assessing the constitutionality of federal rules and regulations. Conservatives on the court have neutered much of Dodd-Frank, the post-recession financial reform bill that was meant to keep banks in check. The court alsooverturned Obama's ability to appoint staff while Congress is out of town and struck downstate environmental rules that would have regulated emissions from other states.
“The DC Circuit is also known as a feeder for the Supreme Court. Chief Justice John Roberts once sat on the DC Circuit, as did Justices Atonin Scalia, Clarence Thomas, and Ruth Bader Ginsburg. Bill Clinton nominated future Supreme Court Justice Elena Kagan to the DC court in 1999, but her nomination stalled in committee and she withdrew her name.”, November 22nd.
But they don’t call the end of the 60-vote filibuster rule the nuclear option for nothing. Republicans are seething. While the GOP-dominated House has been the poster boy for gridlock and stupidity, there had been an uneasy truce in the Senate, where more reasonable voices have actually reached consensus on a number of complex issues. “[F]or the foreseeable future, Republicans, wounded and eager to show they have not been stripped of all power, are far more likely to unify against the Democrats who humiliated them in such dramatic fashion.
“‘This is the most important and most dangerous restructuring of Senate rules since Thomas Jefferson wrote them at the beginning of our country,’ declared Senator Lamar Alexander, Republican of Tennessee. ‘It’s another raw exercise of political power to permit the majority to do whatever it wants whenever it wants to do it.’” New York Times, November 21st. And Republican senators are hardly willing to compare this rule change with the strong-arm tactics of conservatives who have pretty much accomplished the same result in the House (which does not have a comparable rule). That is simply not their problem; the operation of the Senate is. The Senate alone is required to approve senior presidential appointments, so this change is particularly significant in this category.
The battles are not over. “‘Doing nothing was no longer an option,’ said Senator Tom Udall of New Mexico, one of a new breed of Democrats who have pressed to reform Senate rules… But the fever is hardly gone. The rule change lowered to a simple 51-vote majority the threshold to clear procedural hurdles on the way to the confirmation of judges and executive nominees. But it did nothing to streamline the gantlet that presidential nominees run. Republicans may not be able to muster the votes to block Democrats on procedure, but they can force every nomination into days of debate between every procedural vote in the Senate book — of which there will be many.
“And [not appointee-related] legislation, at least for now, is still very much subject to the filibuster. On [the] afternoon [of November 21st], as one Republican after another went to the Senate floor to lament the end of one type of filibuster, they voted against cutting off debate on the annual defense policy bill, a measure that has passed with bipartisan support every year for decades.
“‘[The] historic change to Senate rules escalates what is already a hyperpartisan atmosphere in Washington, which is already preventing Congress from addressing our nation’s most significant challenges,’ said former Senator Olympia Snowe, a Republican, and former Representative Dan Glickman, a Democrat, in a joint statement from the Bipartisan Policy Center.” NY Times.
The subtext is that the Democrats seem to be finally giving up trying to find a modus vivendi with their Republican comrades, pretty much rejecting President Obama’s longstanding effort to find compromise positions on key legislation to bridge the unending polarization. “From the moment Mr. Obama took office, the president who proclaimed that there was no red America and blue America, only the United States of America, has strained to maintain some pretense of bipartisanship — through protracted and fruitless efforts to woo Republicans on his economic stimulus plan and health care law, through dinner dates with some handpicked Republican ‘friends,’ through the nomination of Chuck Hagel, a former Republican senator, to lead the Defense Department.” NY Times. The Dems could even expand the nuclear option beyond appointments into legislation in general. War isn’t pretty. Mushrooms anyone?
I’m Peter Dekom, and while I see Republicans and Democrats, where have all the Americans gone?

Tuesday, November 26, 2013

The Hidden Battleground: Infrastructure

The United States is sitting behind an estimated $2 trillion in needed infrastructure repair and expansion to bring our roads, levees, bridges, dams, aqueducts, water storage facilities and power grid into the twenty-first century. That’s before we consider the kinds of infrastructure that we will probably need for climate change projects to deflect storm surges, rising tides, to reinforce concrete and steel against the growing strength of powerful storms, mudslides and raging fires. Think that’s happening in an era of austerity? Yeah, more deferred maintenance sprinkled with a few “infrastructure stimuli” projects that we introduced during the early stages of our recent mega-depression. Expect a continued infrastructure slam on American efficiency and productivity.
Ah, if only we had that Teutonic dedication to state of the art technology, that German drive for engineering perfection. What’s that, you say, they are now the poster-nation for severe austerity, and infrastructure is just one more sacrificial lamb to German politicians? They’re in the same jam we are? “A [German] government-appointed commission recently concluded that it needed to spend 7.2 billion euros a year, or $9.7 billion, for the next 15 years — roughly 70 percent more than it spends now — just to get existing infrastructure back into shape. Others say that even more is needed for schools, for instance, and for extending fiber optic cables to less populated areas.” New York Times, November 20th.
How horrible is it over there? The NY Times provides this rather nasty example: “When inspectors decided a few months ago that the aging bridge over the Kiel Canal in northern Germany was too weak for heavy truck traffic, Holger Dechant, hired to deliver giant wind turbines to the other side, was at a loss… He did eventually come up with an alternative route. But it is telling of the sorry state of some of Germany’s roads and bridges: His company is driving the turbines to a ferry, shipping them north to Denmark and then driving them south again back into Germany.
“‘That’s how bad it is,’ Mr. Dechant said recently, explaining the 186-mile detour in his office here. ‘We just haven’t invested enough. And now there is trouble because there is no easy button to fix it all.’” That’s the story all over the recession-impaired West except, of course, in Australia and Canada.
All this as China typically spends several hundred billion dollars a year building new infrastructure? They are building universities and schools at a record pace as well, reflected in the rise of hard patents in the People’s Republic, just as the number of American hard patents fall. The changes that China has been able to implement have been nothing short of astounding.
Anyone who last visited China 20, 10 or even 5 years ago and returns today will immediately notice the massive boom in infrastructure that has taken place in the country. From practically dawdling coal locomotives to cutting-edge high speed rail in 30 years is some accomplishment. Anyone who has read Paul Theroux’s ‘Riding the Iron Rooster’ will recall his accounts of traveling across China by train in 1988; aptly demonstrating the progress in infrastructure development that China has made over the years. That was just five years before the establishment of [foreign investment consulting firm, heavily involved in the PRC] Dezan Shira & Associates, and Theroux tells of coal-powered steam locomotives running the length and breadth of China. The Iron Rooster being of course, an old fashioned steam loco, which is still used for industrial purposes in some of China’s poorer provinces today. Even today, China hasn’t completely phased their usage out.

“The same is true of roads and airports. [We] recall the main Beijing airport expressway being a two-lane road frequented by donkey and cart (the road still exists to the side of the new eight-lane highway, serving local villages as traffic zooms past along the new road) while China’s airport terminals, once shabby versions of Soviet-built breeze block architecture are now constructed by internationally renowned architects. Just 15 years ago, the main source of refreshment at Beijing Airport was a cup of dried noodles and a massive, steaming hot water samovar used to drown them in. Now there are executive lounges, state-of-the-art facilities, and world-class shopping options with WiFi throughout.”, March 27th.

But wait, there’s more. While the U.S, has most certainly provided generous support, particularly in response to natural disasters, our international face is decidedly reflected by our military aggression. We particularly reflect our presence by waging unwinnable wars in Iraq and Afghanistan and deploying the most technologically advanced military on earth to spy and float killer drones above countries far, far away.
On the other hand, China is creating monuments to itself that will endure over time: providing infrastructure support to developing nations everywhere. “While programs to assist other countries have been in place since the 1950s, the amount of money allocated to Chinese Official Development Assistance (ODA – also called Foreign Aid) has increased rapidly in recent years. Aid nearly tripled in the eight-year period from 1999 to 2007, from RMB4 billion [$650M] to RMB11 billion [$1.79B] – and a large amount of aid has also been given as debt relief, which is not included in these totals. The Chinese government claims RMB25.5 billion [$4.15B] in loans to developing nations had been forgiven by the end of 2009.”
Pictured above: “China has provided over 80 percent of the US$248 million initial development costs for Pakistan’s Gwadar Port on the Indian Ocean, while Chinese [state owned entertprises] have led the port’s construction and are now in charge of its operations.”
And there is the United States. We keep spending on stuff that isn’t needed, on weapon systems designed to fight the Soviet Union but not well-suited to scattered hostile forces not necessarily bound to any particular country. We go where we are not wanted to impose governments and policies that both don’t work and really aren’t appropriate to the local culture. All the while, our deficits are growing and our expenditures on what weneed back home – education, infrastructure and research – are woefully insufficient to support the United States’ continuing status over the long term, our competitors are capitalizing on our failures.

I’m Peter Dekom, and I am very tired of our heartless Congress with little concern for our long-term competitive edge.

Monday, November 25, 2013

Heavier Around the Middle?

Back on June 22, 2011, Forbes explained a bit why our American middle class was contracting: “‘The idea that one can have a single-earner family, get a good job, keep it for life and have a comfortable living is all but gone,’ says Kevin Hallock, professor of labor economics and director of the Institute for Compensation Studies at Cornell University. ‘Long-term job stability is declining, and there aren’t good unionized jobs like there once were.’

“The recession may have just complicated and compounded what was already occurring. Generally, jobs are disappearing where there’s been a technological advance—‘where a human was doing something, now a technology is doing it’–or a change in the way that organizations function, says Hallock. And not only are old-fashioned assembly line jobs on the decline, several white-collar office positions are also in jeopardy.

‘There has been some long-term decline in middle-income jobs,’ says Harry Holzer, Georgetown University economist and co-author of Where Are All The Good Jobs Going. ‘Specifically, it’s good-paying production and clerical jobs that are disappearing.’” To compound these changes, where manufacturing is returning to the United States, it is increasingly reliant on robotics and automation instead of human labor. Thus, the money that was once allocated to union workers “making stuff” is now being transferred to the owners of the automated equipment.

We are also making increasing revenues from financial services based upon market fluctuations versus long-term corporate growth. These factors have moved more income into those at the top of the food chain and contracted opportunities in the middle and at the bottom. Our tax code, which favors capital gains over earned income, has also shifted wealth upwards, resulting in a “banana republic-like” 1% of our country owning 42% of its wealth, a feature that both the World Bank and the IMF tell us is not conducive to long-term general economic growth.

In our chauvinistic perception of Latin America, we tend to look at those economies as the original “banana republics.” Despite vibrant middle classes that are growing in most of those nations below our border, we just refuse to think of them that way. Mexico, perhaps, suffers the most from this gringo view, but they seem to be doing something we are completely failing to accomplish: growing their middle class.

“Education. More sophisticated work. Higher pay. This is the development formula Mexico has been seeking for decades. But after the free-market wave of the 1990s failed to produce much more than low-skilled factory work, Mexico is finally attracting the higher-end industries that experts say could lead to lasting prosperity. Here, in a mostly poor state long known as one of the country’s main sources of illegal immigrants to the United States, a new Mexico has begun to emerge.
“Dozens of foreign companies are investing, filling in new industrial parks along the highways. Middle-class housing is popping up in former watermelon fields, and new universities are waving in classes of students eager to study engineering, aeronautics and biotechnology, signaling a growing confidence in Mexico’s economic future and what many see as the imported meritocracy of international business. In a country where connections and corruption are still common tools of enrichment, many people here are beginning to believe they can get ahead through study and hard work…
“This is a Mexico far different from the popular American conception: it is neither the grinding, low-skilled assembly work at maquiladoras, the multinational factories near the border, nor the ugliness of drug cartels. But the question many experts and officials are asking is whether Mexico as a whole can keep up with the rising demand for educated labor — and overcome concerns about crime and corruption — to propel its 112 million people into the club of developed nations.
“‘We are at something of a turning point,’ said Eric Verhoogen, a professor of economics and international affairs at Columbia University. ‘The maquila strategy has been revealed not to have been successful, so people are looking around for something new.’… The automotive industry has been Mexico’s brightest spot so far. In many ways, central Mexico has already surpassed Detroit. There are now more auto-industry jobs in Mexico than in the entire American Midwest. At least 100,000 jobs have been added in Mexico since 2010, according to a recent Brookings Institution report, and General Motors, Ford, Chrysler, Honda, Mazda, Nissan, Audi and Volkswagen have all announced expansion plans, with nearly $10 billion to be invested over the next several years, mainly in a 400-mile corridor from Puebla to Aguascalientes.” New York Times, November 18th. Like the picture of central Mexico City above? See any bananas? Exactly.

I’m Peter Dekom wondering if someday there might be gringos – “drybacks” – sneaking south of the border for jobs.

Sunday, November 24, 2013

Run or Fun?

When I was in the job market a few decades ago, everyone who couldn’t figure out what to do went to law school. Me too! Still a lawyer! Those who knew became engineers, doctors or scientists. A few years later, as junk bonds dominated the financial world, the new cool job was investment banker on Wall Street. And getting into the mailroom of a mainstream theatrical agency – then International Famous Agency, Creative Management Associates, and the William Morris Agency – was the coolest of the cool…. You could be an agent and someday maybe run a studio or produce mega-successful films.
Aside from the fact that none of those agencies exist today (William Morris at least retained its name in a merger becoming William Morris Endeavor), the big dogs on Wall Street are those who create new instruments and trade them (not the financial structural advisors called investment bankers), law school applications are down 18%, and if you are creatively cool, welcome to the Silicon Valley, not Hollywood’s Silicone Alley! And growth? What’s that? Find short term trading options or companies that can be worth billions in five years or less!
The new mega-cool job description is not really a job; it’s going into business for yourself. You can see it in undergraduate and graduate programs, carrying the word “entrepreneurial” in the degree description. What does that mean? That I can become Mark Zuckerberg, Sergey Brin, Larry Page, Steve Jobs, Bill Gates, Mark Pincus, and the list goes on and on and on. We even make movies about these folks? But what are we creating? Hard patents that push our technology dominance forward or software patents that make life more fun and more connected? What is the impact on American jobs? Are we still leaders outside of military capacity? How are we doing on pharmaceuticals and biotech? How does American innovation stack up against the rest of the world, including the new emerging market powers?
Mirroring my own experience, Bill Keller, writing for the November 17th New York Times: “[T]he main components of America’s success as an incubator of new things: a welcome mat for talented, ambitious immigrants. An education system that (when it is not teaching test-taking) values creativity. The availability of start-up capital. Patent laws that protect intellectual property. An infrastructure that gets things shipped and marketed. And, perhaps most important, a culture that preaches opportunity and celebrates the risk-taker, the pioneer. From the Wright Brothers taking flight, to Bill Bowerman of Nike using a waffle iron to revolutionize running shoes, to Steve Jobs and his beautiful machines..., we worship the inventive spark… The question is, can we keep it up?
“The culture part, at least, seems to be alive and well. ‘Entrepreneur’ is to the academic achiever of today what ‘doctor’ and ‘lawyer’ were to my generation. ‘It’s the cool thing,’ said Bill Aulet, who runs a center for entrepreneurship at the Massachusetts Institute of Technology. ‘I would say nationally we’re looking at 20 or 25 percent of the student population that wants to be entrepreneurs.’
“But for all the pop-culture enthusiasm, there are signs that our innovative dynamism is diminishing. The pace of new business creation, on a per-capita basis, has been in a slow but steady decline since the mid-1980s, according to the Kauffman Foundation, which studies entrepreneurial trends. That suggests that other essentials of a thriving innovative economy have been neglected… Let us count the ways. The decline of our education system is exaggerated but real, especially in the scientific and technical fields. The Internet has made it harder to enforce intellectual property rights, creating havens for pirates and narrowing the advantage of innovator over copycat…
“Start-up capital is still more abundant than anywhere else on earth, but the supply has been depleted by the recession. Dane Stangler, Kauffman’s research director, said most new small businesses are financed not by high-profile venture capital firms, but by family and friends, including home equity loans that went away when the housing bubble burst. Crowdfunding is a new source of capital, but still minuscule.
“And then there is the erosion of our infrastructure — physical and intellectual. James Fallows, who wrote up The Atlantic’s great-inventions list (and who is an astute student of the economic cultures of the U.S. and China) worries about the dwindling of America’s publicly financed research. The budgets of the National Institutes of Health, the National Science Foundation and other sources of investment in the long-term basic science that undergirds practical innovation have been slowly eroding — even before the ham-handed budget sequester and the idiotic government shutdown. ‘This is more maddening than the other most obvious problem, the neglect of physical infrastructure, because it would be so much easier to solve,’ Fallows told me in an email. ‘Rebuilding bridges, ports, etc. takes a long time. Increasing research budgets is an ‘it’s only money’ issue. The sums are small on the national budgetary scale but large in their implications.’
“PROBABLY the most perverse impediment is our immigration law. Currently, Bill Aulet reports, the brightest foreign students come to M.I.T., earn degrees in high-demand disciplines (with a healthy side order of rigorous entrepreneurship training) and then are recruited to work in Canada or Britain because they can’t get an American green card. ‘We should be embracing these people,’ Aulet said, as a source of the heterogeneity and drive that generate new ideas.”
Too many of the folks in Congress who are voting on America’s future don’t seem to care about any of this. They won’t invest in our school system or higher education. They continue to make getting student loans harder and filing bankruptcy when those loans crush lives nearly impossible. They have defunded research (the polite word “sequester” hides the damage they caused) but will vote for military deployment every time at the expense of civilian/medical research or reinforcing and expanding infrastructure. They see immigration as poor people climbing over a wall, even though just about every one of them are descendants of immigrants. The courts continue to support meaningless business method patents at the expense of true invention. Our leaders and our sacred institutions are simply killing our future. Wake up America; we are a great nation filled with great minds and incredible opportunities! It’s time to prioritize our future.
I’m Peter Dekom, and where did our common sense and long-term growth vectors go?