The U.S. economy is losing its global competitiveness due to the following policy errors:
1. High Taxes and Labor Unions are making manufacturing uncompetitive in the global market, resulting in a shift of the economy towards more driven by service & consumption. Engineering jobs are now replaced with sales and customer service agents, making science, math, and engineering unattractive subjects in college.
2. Stringent immigration laws are driving science, math, and engineering foreigners trained in U.S. universities (often on a full scholarship) back to where they come from, helping those emerging economies to compete with the U.S. economy.
3. Loose & government rigged monetary policies fuels high profits in the financial industry. Attracting the best minds in the country to the business of money shuffling and casino banking.
4. Expansion of government and government sponsored industries are crowding out talents, credit, and profits for the private sector.
Milton Friedman had pointed out that socialism and dictatorship is the natural tendency of human societies. He had also observed that free market capitalism and the subsequent prosperity is the exception rather than the norm in human history.
In fact, we can generalize the above conclusions to all human organization. And such tendency is what drives big companies to failure. These companies once had all the resources to maintain their market dominance. Unfortunately, sooner or later the succumb to the “law of socialistic tendency” and gradually loses to more efficient competitors.
At the core of the “law of socialistic tendency” is the sense of entitlement based of seniority. People who served the company well ages ago but failed to keep up with technological innovations are kept and often promoted to high posts, crowding out opportunities for smart, motivated, and more efficient new-comers. Therefore gradually the company would be full of inefficient, inflexible, and over-paid employees or bureaucrats, whose skills and knowledge are outdated, while expert in playing politics.
In a slowly changing technological landscape, the company might survive longer as the inefficiency gradually grows in comparison to young competition. However, as technological innovations grow at rapid pace, the company would find its workforce grossly inefficient. Failure to re-structure and fire the dead-weights in the workforce due to the culture of entitlement would result in a slow death for the company and all its stakeholders.
I often wonder, “how can big companies with vast resources and an absolutely advantageous market position slowly let itself overtaken by small competitors?” Today I found the answer from Milton Friedman.
Recently there are a lot of debates between the Keynesian and Austrian economists on the skyrocketing government deficit.
My opinion is this:
In general, government spending is wasteful. To expect governments to efficiently allocate capital is a larger mistake than to believe in Bernie Madoff.
Keynesian policies only makes sense if consistently followed. The true Keynesian policy maker would save money during good times and spend money during bad times. The intention of such policy is to smooth out the business cycles. Unfortunately, our government hasn’t been saving money during good times, therefore to spend now requires the nation to elevate its debt level. And high government debt would easily lead to money printing & hyper-inflation. The solution to too much debt is not be accumulating more debt. If there is no saving, there should be no spending, especially when the spender has a tendency to be very wasteful. In the U.S. case I would side with the Austrians.
The Chinese government, on the other hand, is also spending a lot of money to stimulate the economy. Fortunately for the Chinese, they were saving a lot of money during their economic boom. And now in a global recession, they can snatch up assets and resources for cheap. This investment mentality is what drives the “easy-money” policy in China right now. Therefore, in China’s case I would side with the Keynesians.
The recent stock market rally signals a decoupling between the stock market and the economy. The economy, given its current state, would have a L-shaped recovery at best. As the consumers facing terrible job market, and high debt levels for households and government remains if not worsen, the economy powered by consumption is not likely to have a robust recovery.
On the other hand, aggressive cost cutting has fueled a recovery in corporate profit. However, sales trend still remains weak. With the decline of the dollar, I expect U.S. exports to recover as foreign countries start buying up electronics, IT and capital-goods. Foreign consumption would be the fuel for sales recovery for American companies. Therefore, companies that sells to foreign markets would see a healthy recovery while others would continue to face a tough market. The sales boost from foreign consumption would further increase profitability, and cause positive earning surprises which drives up market.
Another source of divergence between stock market and the real economy is inflation scare. With the government printing so much money, and skyrocketing budget and trade deficit over the years, it is hard to be bullish in the currency. The prospect of currency devaluation is enough to drive a lot of investors out of bonds and cash and into equity markets.
Therefore, while the real economy is struggling, the stock market might perform surprisingly well.
I’ve been following Peter Schiff, Jim Rogers, George Soros, Warren Buffett and Marc Faber lately. I’ve also been watching Obama and Bernanke’s speeches. And here are some thoughts about current state of the economy and where it is going:
The recession is deflationary because the current price levels are the results of the excesses of the consumption and credit bubble. After the bubble busted, there are an over-supply and over-capacity of everything: oil, houses, cars, cloths, over-paid employees. Deflation is market’s way of getting rid of the excesses, punishing the debtors, rewarding the savers, making resources affordable for entrepreneurs who would re-allocate resources more efficiently.
Unfortunately, the government is the biggest debtor of us all. Therefore, deflation would mean the debts the government owe would become more valuable in the future. Considering that a large portion of the debt are owned by foreign countries and investors, it is in the best interest of the U.S. government to engineer inflation rather than deflation into the economy. That’s why Bernanke and Obama keep telling us deflation is evil.
I can understand the government’s rationale that a deflationary spiral would be awful. But if the government acts as the lender of last resort, new entrepreneurs would jump into the scene and snatch up these resources when they are cheap enough to justify a profible business. I think here is where the government got it wrong. Instead of allowing the market to spur new businesses, the government is trying to do it artificially by spending on energy reform, health care reform, education reform, etc, etc. What the government fails to understand is that these investments would not be profitable because:
1. If they would be profitable, the entrepreneurs would see the opportunities way before the government sees them.
2. The government has not run anything efficiently in the history of mankind. It’s not the government’s job to run profitable businesses, and it does not know how to do it. Government spending is more likely to be wasteful at best.
3. The government does not know where to invest and how to invest. Central planning has never worked and never will. Capital allocation are best done at the private sector. One reason for this is that the government employee that makes decisions bears no personal financial risk should the investment go wrong. On the other hand, an
entrepreneur risks financial losses should he makes a bad decision.
It is true that this country needs to produce more scientists and engineers. Under market economy the shortage of scientists and engineers would reflect on their higher salaries, and therefore attract more students into these fields. Obama’s education reform totally ignores this fact. Students do not want to become scientists and engineers because the benefit does not justify the hard work one needs to put in. In the past two decades the brightest minds have gone into the finance industry because that’s where the money is. Since Obama is not letting the banks fail and bankers are still getting crazy salaries and bonuses, more bright students will get into the field and make crazy financial engineering feats that provides no value to society. The whole financial industry is over-bloated and must be allowed to shrink. The re-structure of the economy would depend on bright students going into industries that provide exportable goods and services.
From Obama and Bernanke’s speech it seems that their intention for the bank bail-outs are to prevent a financial meltdown. The financial system is saved at the cost of tax payers absorbing the losses from bank’s bad bets. Eventually these losses would have to materialize. Obama’s only hope is that the economy would turn healthy enough (produce more) to pay off these losses over time. It might work out if his plan actually will do what he promised. But I am skeptical on that because government and bureaucrats are never good at allocating resources efficiently. And Obama’s reforms and stimulus would not turn a profit, and would need subsidies by taxing profitable businesses in the economy, or borrowing more from other countries.
Many people are talking about a currency crisis for the dollar. The dollar has not devalued in the past decades because foreign countries are buying U.S. treasuries. Since the government would not allow deflation and encourages inflation, foreign countries are more worried about the value of these debts and the dollar reserves. That would pressure the dollar to devaluate. As a result, imported goods becomes more expensive and causes more inflation. At this point the Fed would have to raise interest rate to slow down inflation, which will hurt the recovery, and drive the economy into stagflation.
So there are three scenarios:
1. Government allows deflation, which would make our exports more appealing and make our currency stable. But deflation is devastating to all debtors, which includes most U.S. tax payers and the government. So this happening is unlikely as it might result in revolts and social unrest.
2. Government does not allow deflation, hoping foreign countries will keep lending us money. If this happens the economy will start to recover due to the injections of liquidity. But the recovery would be a very slow process as the Fed will pull out money supply at any sign of increasing inflation.
3. Government does not allow deflation, and foreign countries stops lending to us. The government then would have to increase tax, or print more money to fund its projects. At the same time the dollar devalues and consumer prices rise. The government might be force to choose war against other countries, social revolt, or hyper-inflation.
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