> But maybe this cloud could have a silver lining? I am amazed that I am starting to think there may be a silver lining.
From: [email protected] [mailto:[email protected]] On Behalf Of Centroids Sent: Monday, December 5, 2016 4:15 PM To: Centroids Discussions <[email protected]> Subject: [RC] Could Donald Trump Solve The Real Jobs Problem? Provocative piece. Is it really conceivable we could become like Germany? What would it take? http://www.forbes.com/sites Could Donald Trump Solve The Real Jobs Problem? Dec 5, 2016 @ 04:50 PM <http://specials-images.forbesimg.com/imageserve/624646258/960x0.jpg?fit=scale> President-elect Donald Trump (Photo by Drew Angerer/Getty Images) Scarcely anyone predicted a Donald Trump win. And analysts forecast that if by some miracle he did win, financial markets would tank, given his erratic presidential campaign. On Tuesday evening November 8, as the unthinkable began to happen and a Trump win appeared imminent, the analysts’ forecast started materializing. The Dow Jones index of U.S. stocks crashed by some 800 points, the dollar dropped and money poured into low-risk bonds. But when at 3 a.m. in the morning of Wednesday, November 9, President-elect Trump delivered a moderate acceptance speech focused on pro-growth economic policies, financial markets quickly recovered. Markets have been rallying ever since and now stand at record highs. Stocks have soared and capital has poured into the U.S. as the dollar has gotten steadily stronger. Trump’s early morning speech on November 9 included the very things that business loves to hear—deregulation, corporate-tax reform, tax cuts and infrastructure spending. There was scarcely a hint of the unpredictable campaign-Trump who had talked of risking trade wars, imposing massive tariffs on imports from China and Mexico, dismantling trade agreements, feuding with the Republican leadership and attacking management at the Fed. In the ensuing weeks, business also drew comfort from the emerging Trump cabinet, which was full of familiar figures from the firm that campaign-Trump had fun attacking—Goldman Sachs—along with plentiful denizens from the Washington swamp that campaign-Trump had promised to drain. Instead of pursuing vendettas to lock up the Clintons or punish his campaign adversaries, president-elect Trump was having friendly chats with House Speaker Paul Ryan and holding an elegant candlelit dinner of sautéed frog-legs with Mitt Romney in apparent consideration of his former detractor as Secretary of State. Everything seemed set for business leaders to have a comfortable financial ride. Trump also finds himself in a fortunate position. With a strongly positive response from capital markets, a modestly growing economy, historically low unemployment and majorities in both houses of Congress, the president-elect has the luxury of choosing which issues to focus on. This is a sharp contrast with his predecessor who took office in the midst of the worst global financial crisis in generations. The question is: what will Trump do with this opportunity? Campaign-Trump Is Back Well, guess what? Campaign-Trump is back. During the last week, when he wasn’t snubbing the British prime minister, upsetting China and India by having cordial talks with Taiwan and Pakistan, inviting the despotic president of Philippines to visit DC or threatening to punish flag-burners with unconstitutional sanctions, Trump was promising adverse “consequences” for United Technologies or any other firm shifting jobs to Mexico, and holding a victory rally with his supporters, apparently relishing yet again raucous crowd chants of “lock her up” and “build the wall.” Then beginning at 5:41 a.m. on Sunday morning December 4, Trump launched a new Twitter storm, now threatening “retribution” for firms shifting jobs to other countries. “Any business that leaves our country for another country…. fires its employees, builds a new factory or plant in the other country, and then thinks it will sell its product back into the U.S. ... without retribution or consequence, is WRONG! There will be a tax on our soon to be strong border of 35% for these companies … wanting to sell their product, cars, A.C. units etc., back across the border. This tax will make leaving financially difficult… Please be forewarned prior to making a very expensive mistake!” What exactly did Trump have in mind when he talked about “retribution”? It sounded more like a Mafia shakedown than a presidential declaration. Reporters like Steve Liesman of CNBC who contacted Trump’s staff were unable to get clarification, giving rise to the possibility that Trump himself didn’t know what he had in mind. Was it simply campaign-Trump in his old scatter-brained tweet-storm mode—not to be taken literally or perhaps even seriously, as his <http://www.bbc.com/news/world-us-canada-38188074> former campaign manager has suggested—merely a distraction to feed the “crooked media”? In any event, an across-the-board 35% tariff on finished imports from American firms, even if legal, would face stiff opposition in Congress, as it would put American firms at an immediate disadvantage vis-à-vis their foreign competitors. Why Aren’t Things Made In The U.S. Anymore? Any legislative move to enact Trump’s “retribution” would also raise questions about Trump’s hypocrisy, given that his own companies don’t lead by example by buying goods made in the U.S.A. “I buy thousands and thousands of TVs,” <http://www.nytimes.com/2016/12/01/business/economy/trump-carrier-pence-jobs.html> Trump has replied. “I would like to, but they essentially don’t make them in the U.S.” Quite apart from the fact many things Trump buys and sells are made in the USA, there is the deeper question: why aren’t televisions made in the U.S. anymore? <http://www.forbes.com/sites/stevedenning/2011/08/17/why-amazon-cant-make-a-kindle-in-the-usa/> Why can’t Amazon make a Kindle in the U.S. even if it wanted to, since the technology involved was almost all invented here? Economists often suggest that the loss of jobs in U.S. manufacturing is simply the result of lower-wage labor in other countries and the inexorable impetus of automation as it eliminates employment in manufacturing just as it did a hundred years ago in agriculture. Nothing we can do. It’s just economics. The inconvenient truth here is that not all countries have been equally affected by automation and global wage disparities. Why Did U.S. Lose More Manufacturing Jobs Than Germany? <http://www.innovationfiles.org/how-americas-manufacturing-job-loss-outpaces-other-leading-industrialized-countries/> Studies show that the USA lost proportionately more manufacturing jobs than comparable countries. For instance, between 2000 and 2009, U.S. lost 33% of its manufacturing jobs, while Germany only lost 11%. Why? Like the U.S., Germany has generally played by the rules of the global trade system. But unlike the U.S., many German firms are privately owned. Not surprisingly, they rarely emulated U.S. firms in the pursuit of “maximizing shareholder value as reflected in the current stock price”—an idea that even Jack Welch has called “ <http://www.forbes.com/sites/stevedenning/2011/11/28/maximizing-shareholder-value-the-dumbest-idea-in-the-world/> the dumbest idea in the world.” Private owners of firms can see that a sharp focus on short-term profits hinders the creation of long-term wealth. They have no interest in financial engineering gadgets, like share buybacks, to make the firm’s shares appear to be doing better than they really are. Moreover, Germany <http://www.innovationfiles.org/how-americas-manufacturing-job-loss-outpaces-other-leading-industrialized-countries/> significantly boosted efforts to create a context for innovation throughout the 2000s, steadily bolstering the competitiveness of their manufacturing sector. “Germany set about enacting a range of comprehensive economic reforms to increase the competitiveness of Germany’s economy throughout the 2000s, including making its tax code more competitive, increasing investment in apprenticeship programs, increasing investment in in industrially relevant applied R&D, and during the Great Recession introducing the short-time work program rather than firing workers outright as often happened in the US... And Germany is not alone; many more of America’s competitors—including Japan, Korea, Holland, Taiwan, and even China—worked feverishly throughout the 2000s to bolster their science, technology, and innovation ecosystems that underpin the competitiveness and innovation potential of their private sector enterprises.” How The U.S. Lost Its Competitiveness The picture in the U.S. is very different, as outlined <http://www.forbes.com/sites/stevedenning/2013/03/10/the-surprising-reasons-why-america-lost-its-ability-to-compete/> in Competitiveness at the Crossroads (2012) an alarming report with far-reaching implications, written by three distinguished professors at Harvard Business School—Michael Porter, Jan Rivkin and Rosabeth Moss Kanter. Its conclusion points to something fundamental: America has been losing the ability to compete in the international marketplace. As Professor Porter explains, “The basic narrative begins in the late 1970s and the 1980s. Through globalization, it became possible and attractive for firms to do business in, to, and from far more countries. Changes in corporate governance and compensation caused U.S. managers to adopt an approach to management that focused attention on the stock price and short-term performance." As a result, "firms invested less in shared resources such as pools of skilled labor, supplier networks, an educated populace, and the physical and technical infrastructure on which U.S. competitiveness ultimately depends." These management actions in turn gave rise to "serious social problems (loss of jobs, stagnating income, growing inequality) and eventually a decline of the public sector (an inability to fund health and pensions, or investments in “the commons” such as infrastructure, training, education, and basic research, fields that the private sector had abandoned.)" In effect, while Germany and Asian competitors were strengthening their capacity to compete, U.S. firms were focused on the short-term issue of maximizing the share price, at the expense of long-term competitiveness, and allowing the policy environment supporting the competitiveness of its manufacturing industries to wane. The case of Carrier is instructive. Strictly "A Business Decision" Carrier maintained that its decision to shift jobs to Mexico was “strictly a business decision.” Chief Financial Officer Akhil Johri, Carrier’s parent company, United Technologies, <https://medium.com/the-wtf-economy/this-is-strictly-a-business-decision-4177a09161f1#.uwmsoevpn> explained that “the cuts are painful but are necessary for the long term competitive nature of the business and shareholder value creation” (emphasis added). What did “shareholder value creation” actually mean? “United Technologies faces pressure from investors hungry for earnings growth," writes <http://www.nytimes.com/2016/03/20/business/economy/carrier-workers-see-costs-not-benefits-of-global-trade.html> Nelson Schwartz in the New York Times. "Wall Street is looking for United Technologies to post a 17% increase in earnings per share over the next two years, even though sales are expected to rise only 8%. Bridging that gap means cutting costs wherever savings can be found, as the president of United Technologies’ climate, controls, and security division suggested at the meeting with analysts.” “United Technologies isn’t a company that is on the ropes, a firm that needs to cut costs to remain competitive,” writes <https://medium.com/the-wtf-economy/this-is-strictly-a-business-decision-4177a09161f1#.uwmsoevpn> Tim O’Reilly. “In the end, we are talking about a set of money managers on Wall Street, already members of the .01%, demanding that profits rise in order to pump up the stock, so that their income will increase, and a set of top managers in the company willing to go along, because their compensation is also tied to that rise in stock price. That is, this is a forced wealth reallocation from one set of stakeholders in the company to another.” The workers are disposable components who have no say in the outcome which is presented as “strictly a business decision.” United Technologies doesn’t need to go to financial markets for capital. In fact, the firm has so much capital that <http://www.wsj.com/articles/united-technologies-unveils-12-billion-buyback-1445343580> in December 2015 it committed $12 billion for share buybacks so as to improve the appearance of the firm’s financial performance. The stock buybacks drive up the share price to benefit shareholders and the top management. The money thus spent is not available to compensate workers in the form of higher wages for productivity increases or to society in the form of productive investment in new goods and services. As <http://www.forbes.com/sites/stevedenning/2015/05/27/big-firms-increasingly-resort-to-corporate-cocaine/> The Economist points out, using share buybacks amounts to corporate cocaine: it makes the firm feel good in the short term, but long term, it is lethal. It’s one thing when one firm resorts to corporate cocaine occasionally. It’s another when most firms are doing it all the time. Then you end up with a whole economy in decline, or as Larry Summers calls it: secular economic stagnation. Defenders of Wall Street say, “That’s capitalism. That’s how the system works” The jobs are lost to automation and robots. Nothing to be done. Actually, no. It doesn’t generally happen in Germany and it wouldn’t happen in the USA if corporate management were to focus on the real goal of a commercial firm—to add value to customers. Profits are a result, not the goal of the firm. When profits and the short-term share-price become the goal, then this leads to all the social costs that we see in the U.S. We have to stop accepting the myth that firms are forced by Wall Street to offshore jobs. It’s a management choice as to what’s important. For the U.S., short-term gains flowing from maximizing shareholder value as reflected in the stock price have been viewed as more important to corporate managers than long term growth or a healthy economy. The result is a booming stock market, sky-high executive compensation, but declining ability to compete and secular economic stagnation. What Can Be Done? The dilemma for economists and government policy makers is that the decline in U.S. manufacturing is not primarily the result of government policy. It’s the consequence of the private sector pursuing over several decades “maximizing shareholder value as reflected in the current stock price.” <http://www.forbes.com/sites/stevedenning/2015/02/05/salesforce-ceo-slams-the-worlds-dumbest-idea-maximizing-shareholder-value/> Some CEOs have seen the light, but most haven't. What is to be done? As Upton Sinclair pointed out long ago, it’s hard to get a man not to do something when he is being paid to do it. Managers in public companies are hugely compensated to focus on maximizing shareholder value as reflected in the current share price. Not surprisingly, they see no alternative. "The stock market made us do it." Nor is it obvious that any policy action per se can change management mindsets. When corporate managements are hooked on corporate cocaine, how do you break the addiction? The interesting issue is whether Trump as “the enforcer” might be able to do something useful and threaten corporate leaders with "retribution" if they are not more responsible. As a politician, Trump intuitively senses that offshoring jobs is somehow wrong. By threatening “retribution” for those corporations that do it, could Trump unwittingly stimulate the stunted social conscience of these profit-driven managers that are systematically destroying American competitiveness and the economy? It would be something useful for Trump to do and something he seems to relish doing. And after all, pointing U.S. corporate managers in the right direction poses less of a risk to the planet than playing nuclear poker in Asia. Many looked on the prospect of a Trump presidency without a great deal of hope. But maybe this cloud could have a silver lining? And read also: <http://www.forbes.com/sites/stevedenning/2013/03/10/the-surprising-reasons-why-america-lost-its-ability-to-compete/> Why US Lost Its Competitiveness <http://www.forbes.com/sites/stevedenning/2011/08/17/why-amazon-cant-make-a-kindle-in-the-usa/#2096bd4a5ba2> Why Amazon’s Kindle Can’t Be Made in the US <http://www.forbes.com/sites/stevedenning/2013/03/10/the-surprising-reasons-why-america-lost-its-ability-to-compete/> The Dumbest Idea In the World: Shareholder Value <http://www.forbes.com/sites/stevedenning/2015/11/02/drucker-forum-2015-tackles-the-creative-economy/#7154af8b5fb0> How to Make The Whole Organization Agile‘ Follow Steve Denning on Twitter @stevedenning. 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