Monday, October 25, 2010

An honest discussion about our future

Okay, so the election is about a week away and we've still not heard a substantive commentary from any candidate on their vision for the future. It's all

"I'll create jobs (but I don't have a plan, just a catch phrase)"
"I'll save jobs (even though, those jobs were state jobs that will probably be cut next year)"
"I'll cut your taxes (not really, but it sounds good)"
"He gets his hair cut in the same town that NANCY PELOSI once visited on vacation (anything to get Nancy Pelosi in the ad)", etc..

Here's the real deal.

1) We have to raise some taxes on some people. Income taxes need to go up for the wealthiest 300,000 people in the US. The other 306,700,000 of us should have our income taxes held flat. That's the long and the short of it. Are you for or against higher taxes on the richest 300,000 people? The other 307 million of us will not be impacted.

2) We'll need some more consumption taxes (namely on fuel). Add an extra dollar to every gallon and that funds investment in batteries or other technologies.

3) Spending. Yes, it's out of control. No, it's not all President Obama's fault. Here's the analogy that I like to use: The US economy was a heavy social drinker in the late 90's. Post 9/11 we became a paranoid drunk that had to down a case of Natty Lights every day just to "maintain". After the financial crisis we switched to downing a bottle of Jack every day. Now, we've suddenly realized that we have a little "spending" problem. Do you want to quit cold turkey (which may be violent and painful) or ease off the sauce (which may or may not work)? While it would have been easier to cut spending 10 years ago, that's water under the bridge, we have to deal with the situation at hand. I think a goal of reducing the Federal Budget by 10% in 2011 would be a great start but it would be very, very painful. Many people would lose their jobs and many are never going to be employable again (last night's 60 minutes episode made that very clear). This is the sad, painful truth.

4) We need to figure out a way to make our citizens valuable. Tom Friedman made the point over the weekend that we need to figure out a way to make 1 US employee more valuable than the 10 or 20 Chinese or Indian workers that you can employ for the same cost. This is very challenging because many companies only see the bottom line and lose sight of the quality of the product produced. This is probably one of our top 5 greatest challenges over the next 20 years.

5) No amount of stimulus can change the fact that businesses will only expand when they see an opportunity to gain additional customers. There isn't sufficient demand to expand at this point. Until demand returns we are likely to continue on our current path.

Okay, I'll offer up one freebie to the politicians running for office. Do you want a cheap and easy way to stimulate activity in corporate America? Repatriation.

Allow me to explain. Let's imagine a large US based multinational named MBI. They earn billions of dollars around the world but the profits earned overseas aren't taxed by the US as long as the money stays overseas. So MBI builds another data center in Bangalore or Shanghai instead of expanding in NYS. It has been estimated that there is nearly $1 TRILLION of US profits located overseas. Again, we're never going to get to tax this money because it was earned overseas and it will stay there as long as there is a prospect of taxing that money.

However, if we offered a 1 year, tax free repatriation of profits, companies like MBI could bring that money back to the US without fear of the taxman. This is a way to stimulate the economy without spending a dime. Yes, it would be derided as siding with big business, but if MBI builds a new research location in NYS and hires 200 new engineers I think we'd all be happy we sided with big business.




Anonymous said...

I can't go into why I know this except to say that I deal with this every day, but let it suffice to say that the situation could be totaly resolved by depegging China's currency. Once complete, and with the anticipated 30% immediate rise, many US factories (low tech) would become competitive with China's US landed costs for products. Once that happens, US companies would need to purchase new equipment to actually produce said products, as they have previously allowed their equipment to become obsolete, or sold it. This would then spur addiditonal jobs building higher tech production equipment. Once the new mfg equip is in place, US companies would have a "leg up" because even at a slightly higher labor cost (vs post float China Rinimbi, plus freight, etc..) the US goods would be produced on the most labor saving equipment. US products would then not only be competitively priced for the US market, but also for export. Meanwhile China, India, would begin to consume more of their own products, and become net users , vs net exporter, as they develop their standard of living to be closer to the West.
Any pretense that the US is going to "cut their way" or "print their way" out of this mess is absurd. We never got over Kent State or Watts. Imagine 5,000,000 unemployed unionized rioters in the streets.
We need to work our way out of this, and the only way to do that is to demand that currencies are fairly traded.

The Artful Blogger said...

It's an interesting thought, but I think our ability to dictate terms to China is a ship that has already sailed. In fact, there seems to be a little backlash against our own moves as of late (see the German comments that the US is depressing the value of the $).

The Treasury was set to label China a currency manipulator about 1 week ago when Washington apparently got a call from someone who said we might want to rethink that idea. 15 minutes before the report was to be released we decided to "postpone" it's release for 6 weeks so we could re-evaluate.

My greater fear is for our service industries that are now migrating entry level jobs overseas. Auditors, tax professionals, law firms, etc, can hire 10-15 entry level staff in India for the cost of 1 person in the US. Clearly, the quality of the work is inferior, but when it comes to bill rates no one knows if the person doing their work earned $32/hour in Mass. or $1.15 in India, thus the profitability of overseas service work can be enormous.

No easy issues, but hard topics that should be discussed. I haven't heard any candidates voice an opinion on any of these issues.

Anonymous said...

No doubt we will lose a significant amount of white collar service jobs. Not only because of the labor savings, but perhaps even more so, due to the lack of quality education, and parenting, on top of the horrible work ethic of the "new generation" of Americans. Compound that with forced unionization of service providers, and everything that can move, will move. However transportation and logistics costs make the production of low tech US consumer goods a viable soultion should the Rinimbi, Viet-Dong, etc.. climb.
As for why the US pulled the plug on the report about the manipulation, it's merely because they know that the immediate effect on consumers will be inflation, and because they have already shot the load of lowered interest rates, they will have no ammunition to fight it. But it will start right after the elections regardless. Get ready to go long UUP.