United States

Now that Presidential campaigning is on at least temporary hold until after the Christmas holidays, we have a new reality show to follow. It’s a good thing, too; the entertainment value of the Republican traveling circus had been in steady decline as the more flamboyantly interesting pretenders fell away one by one. Michelle Bachmann, the diminutive spitfire with a demonic gleam in her eye. Herman Cain, the pizza mogul with a catchy fiscal formula and a flood of sexual harassment charges. Newt Gingrich, the onetime history professor who lectured TV reporters on their intellectual shortcomings and blamed the abandonment of his cancer-stricken wife for another woman on the stresses of “trying to save the country.” Sex-obsessed Rick Santorum in his sweater-vests.

It will take some time to fully parse the complex relationships, sexual and otherwise, involving Generals Petraeus and Allen, buff military reservist and biographer Paula Broadwell, and socialite Jill Kelley, who narrowly avoided foreclosure on her imposing Tampa home having spent the mortgage money on entertainment for the McDill Air Force Base officer corps. It’s hard to imagine this not becoming a made for TV movie or even an ongoing reality show, a combination of “Real Housewives,” “Keeping Up with the Kardashians,” and “Reflections in a Golden Eye,” the steamy Carson McCullers novel set in a southern military base, made into an even steamier movie with Marlon Brando and Elizabeth Taylor.

The idiocy of destroying one, and possibly two, distinguished careers over an extramarital affair (possibly two), involving no improper relationships with subordinates or sexual harassment, and unlikely to have entailed any breach of national security, seems wasteful in the extreme. David Petraeus may not have merited the near-universal adulation he received, but he is unquestionably a talented and dedicated man whose service to his country should not have been cut short by the kind of peccadillo to which powerful and famous men are especially vulnerable.

A couple of remarkable bits of information have leaped out of the voluminous media coverage of this set of interconnected events. The first, and most troubling, is the revelation of the ease with which law enforcement agencies can read our e-mails pretty much at will. The government needs no search warrant, only a court authorization or subpoena, to access e-mails stored for more than 180 days, and it can do real-time intercepts of social network traffic. The difference is that a search warrant requires probable cause, while a request for a court order need only state that the information is relevant to an ongoing investigation. This is more than a semantic distinction, and something that goes to the heart of the deliberate erosion of our civil liberties, often without our knowledge,  in the wake of the 9/11 attacks.

But the thing that most impressed me is the report of the 20,000 to 30,000 pages of “inappropriate” e-mail exchanges between General John Allen and Ms. Kelley from 2010 to 2012.  According to Slate magazine 20,000 pages, if printed on 8-1/2- by 11-inch paper, would form a stack 6 feet four inches high. We don’t yet know anything about the content of these e-mails, but their quantity is staggering. By way of comparison, the Penguin edition of Samuel Richardson’s 1747-48 epistolary novel Clarissa, one of the longest novels ever written, counts a mere 1,534 pages. Most of the English translations of War and Peace, possibly the greatest novel ever written and also one of the longest, run to about 1,400 pages. By the time the Duke University Press publishes the 46th and final volume of the collected letters of the Scottish Victorian historian Thomas Carlyle and his wife Jane Walsh Carlyle, which include 70 years of correspondence with such luminaries as Charles Dickens, Ralph Waldo Emerson, John Stuart Mill, and Ivan Turgenev, as well as with each other, the series will amount to some 20,000 pages. I don’t mean to suggest that whatever General Allen and Ms. Kelley had to say to each other was of any less enduring interest than Thomas Carlyle’s exchange of ideas with Johann Wolfgang von Goethe, but it does raise a question similar to the one on everyone’s mind when Wilt Chamberlain in his 1991 autobiography claimed to have had sex with 20,000 women: how in the world did they find the time? For now, neither Gen. Allen nor Ms. Kelley is saying. Let’s hope the People magazine exclusive or the TV movie will enlighten us. And we can wait for Duke University of someone else to publish the correspondence to find out what they were talking about.

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Marco Rubio, the Tea Party-leaning freshman Senator from Florida, recently said something remarkably intelligent, if self-evident, which appears to elude most Washington policy makers. “We don’t need more taxes,” he said, “We need more taxpayers.”

This is axiomatic for anyone trying to reform tax systems and increase government revenue, which I have done in a number of countries in Africa and Asia. In most of these countries, as well as in places like Greece and Italy, most people (and companies) do not pay taxes, at least not officially. Tax administrations are both inefficient and corrupt; if you’re lucky you will never attract the attention of the taxman, and if you’re not, a bribe – possibly significant, but almost certainly less than your true tax liability – will do the trick. And when garbage piles up in the streets and public money vanishes into the pockets of corrupt politicians and bureaucrats, it is natural for citizens to decide government is not worth whatever taxes they are supposed to pay.  In most of these countries, it is foreign individuals and corporations, who lack the proper connections, who are not steeped in the arcane rules of the game, and who try to obey the law, who shoulder much of the tax burden. The cell phone company, the brewery, and the oil and mining companies – and their foreign employees – are easy and highly visible targets, and governments never tire of trying to change the rules, imposing new taxes or demanding a share of the company.

The United States, of course, is not Nigeria or Greece. As hard as it may be to follow the letter of the law when the tax code runs to 10,000 pages, most people and companies try their best, exploiting whatever advantages they and their accountants can find, but rarely committing any deliberate infractions, cash payments to the guys who help carry your furniture up to the second floor apartment notwithstanding. The IRS is too effective, and the penalties too great, for most of us to chance it. And, at least until now, most Americans have thought that paying taxes is one’s duty as a citizen. [click to continue…]

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Not long ago I would have said that Sarah Palin has no chance whatsoever of becoming President, but now I am not so sure. People talked about how Howard Dean and then Barack Obama used the Internet and new media to raise money and energize a base of voters, but they are both rank amateurs compared to Palin, who has proven herself amazingly adept at using the mainstream media, which she derides for their liberal bias, to promote herself. She has become the first Reality TV and Twitter candidate, and although she may be stupid about matters of policy and governance (and geography) she is a genius at understanding and using a combination of new and traditional media to make her a ubiquitous and dominant presence. [click to continue…]

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In the Financial Times, possibly the best newspaper in the world and full of intelligent reporting and comment, John Kay stands out for his incisive take and economy of expression. One of his most recent articles, “Why you can have an economy of people who don’t sweat,” takes to task the “manufacturing fetishists” who believe that any economic activity apart from manufacturing, agriculture, or mining is of minimal real value. We are all prey to this attitude to some degree, especially in the wake of the financial crisis, in which economies that rely heavily on a somehow “unreal” financial sector fared worse than those economies more focused on production of things you can drop on your toe.

I have long been troubled by this attitude. Somehow, a banker inventing and flogging new forms of derivatives or trading algorithms seems morally and economically less worthy than someone who makes pig iron or beer for a living, and this view may be justified. But on close examination, many other jobs, which involve more brains than brawn, generate far more real value, however you care to measure it, than tightening bolts or stitching sleeves on an assembly line.

Kay mentions Apple’s iPod  as a product in which the value added from manufacturing the device itself, including the extraction and processing of the metals and plastics it contains, amounts to three or four dollars of the two or three hundred dollars the finished product sells for. Product and production design, marketing and promotion, and logistics and distribution are where the real value is created. This is increasingly true of almost any physical product we buy. When you pay several dollars a tablet for your heart medicine or Viagra, the value resides not in the cost of producing the pill itself, which in most cases amounts to fractions of a cent, but in the billions of dollars spent on research and development and testing: the intellectual value. Even if pharmaceutical companies are often guilty of inventing cures for conditions no one knew existed until they saw the TV commercials, the intrinsic value of much of what they produce is incalculable, and has little to do with the hourly wages of workers on the assembly line. Kay also cites the example of book publishing, in which “the books that Britain exports have, for as long as I can remember, been made from trees grown abroad; but then globalization meant the paper was also made abroad, and increasingly the printing took place overseas. Soon shipments will be entirely electronic; selling a book will involve no physical objects.”

Lately I have been working on development of industrial parks in Haiti, in which international garment manufacturers, attracted by cheap labor, special trade preferences, and proximity to the U.S. market, will set up factories.

This is unpopular in many quarters. Anti-globalists point to the exploitation of poor Haitians. A Haitian garment worker can expect to make less than six percent of the earnings of an American on minimum wage. Working and living conditions will be poor, and a worker might spend a quarter of his daily earnings for transport to and from work. Though the factories for the most part are clean and well-lighted and ventilated, it is not an easy life. Many also decry the shipment of American jobs overseas, as if employing Americans as minimum-wage sewing machine operators were vital to our national interest.

Most of the garment manufacturers likely to invest in Haiti’s industrial parks are Korean companies. Once Korea itself was a huge manufacturer and exporter of clothing, but as Korea grew richer it could no longer compete with lower-wage countries. But the Korean companies that had formerly made garments in Korean factories using Korean workers did not quit the business. Instead, they began setting up factories in places like Vietnam and Cambodia and Honduras and Nicaragua, which, with Korean experience and know-how, became some of the most efficient manufacturing operations in the world. The Korean companies integrated these factories into their global supply chains, becoming suppliers of choice to U.S. clothing companies and retailers like Levi Strauss, Wal-Mart, Nike, and Gap.

When you buy a pair of Levi’s made in Haiti, what is the source of value in the product? Is it the product design, distribution, quality control, and marketing provided by Levi Strauss? Is it the factory design and construction, production engineering and management, fabric sourcing, and logistics provided by the Korean manufacturer? Or is it the Haitian sewing machine operator? Obviously, all participants in this complex supply chain play an essential role, but you’d have to be a devout Marxist to argue that the product’s value resides exclusively or mainly in the direct manufacturing labor. That may have been the case in the 19th century, but certainly is not in the 21st. What differentiates one product from another, except perhaps for hand-made watches costing $100,000 and up, is not the skill and hard work of the laborer but the design, engineering, production management, logistics, distribution, and marketing that transform an idea into a tangible item.

It goes even further. The end product needn’t even be tangible, as John Kay points out in his example of book publishing. To put it another way, why do most of us instinctively feel that manufacturing a TV set is somehow a more worthy activity than producing a TV show?

Our entire way of looking at the economy is conditioned by this bias. We talk about our balance of trade, but although statisticians and econometricians do their best to quantify trade in services, such data are much harder to capture than information on trade in physical goods. When a software package is exported or an engineering firm designs and manages construction of a new road in another country, those transactions show up in the balance of trade of both the exporting and the importing country. But it gets far more complex when we consider all the trade in non-tangible items and services that take place within a single company or supply chain. When Gap sends its new T-shirt design to a manufacturer in Haiti it is effectively exporting its intellectual property to the manufacturer. When an engineer flies from Korea to Haiti to oversee the retooling of the manufacturing line for the new product, his employer in Korea is exporting his know-how. But it’s unlikely that either of these transactions shows up in official trade statistics. So, to complement our manufacturing bias, we have a system of recording data that fails to capture much of the value of non-physical trade and thus devalues that trade in the estimation of both the public and the policy markers who rely on those data.

It gets worse. Engineering is still considered a noble endeavor, but mainly because it remains directly linked to the production of something physical, be it a toaster, a bridge, or a pair of pantyhose. But a designer? Someone who slaps his initials on a T-shirt so as to sell it for ten times the price of the equivalent generic product. Where’s the value in that? And what about the marketers, the shippers, the wholesalers, the retailers, and the advertisers, not to mention the customer support staff? Useless parasites all of them, in the popular view, selling us stuff we don’t need and adding layer upon layer of profit to make everything more expensive than it should be. A moment’s reflection should dispel that belief, but it doesn’t. So Wal-Mart, which has outsourced much of its manufacturing to China, is considered a villain for shipping American jobs overseas, even though it has devised one of the most sophisticated systems of distribution, logistics and inventory management on the planet, which employs 2.1 million people worldwide, 1.4 million of them in the U.S.

The garment industry is an especially pertinent example, because it employs so many people and, in many poor countries, is the first step on the path to industrialization and greater prosperity. It is also one of the first industries to leave a place when the cost of production rises, usually as a function of rising wages. It happened in the U.S. right after WWII, when New England textile mills moved to the Carolinas, attracted by lower wages, less powerful unions, and cheaper electricity. It has happened again as textile and garment companies moved their factories to Mexico and El Salvador and Lesotho and China, and now Vietnam, Cambodia, and Haiti. Each time this happens there are recriminations and self-criticism. We are losing the manufacturing base that makes us strong. Our leaders should have done more to keep the jobs here. Those underhanded foreigners are grabbing “our” jobs.

If this were actually true, and if the migration of low-skill, low-paid jobs to poorer countries were such a threat, unemployment in the U.S. would be much higher than it is, whereas, until the current recession hit, we had one of the lowest unemployment rates of any advanced country. Some proportion of the U.S. labor force does work slinging burgers, greeting shoppers at Wal-Mart, and calling you at dinnertime to sell you a new cable TV service, but that’s only a fraction of the total. In Massachusetts, where I live, many of the textile jobs that went south and then overseas were replaced by higher-skilled and better-paid jobs in information technology, telecommunications, biotechnology, and finance. If our government had tried to resist the economic tide and preserve those textile jobs, these new industries might never have emerged. We should rejoice at these trends instead of seeing them as emblematic of the failure of our system of economic governance.

In John Kay’s words, “The productivity of modern economies is based on the division of labor. If everyone grows their own food, and gathers their own fuel, it takes them most of the day. There is little time or energy left for conversation, entertainment, trading derivatives or inventing new goods… specialization of tasks gave opportunities to achieve economies of scale and to focus on tasks at which individuals or companies were, or became, particularly skilled. Less time had to be devoted to toolmaking, hunting and foraging, and more was available for chatting, playing music, hairdressing, insurance broking and discovering how the world worked. Some new activities required rarer skills and were consequently well rewarded…the division of labor becomes ever finer and generally increases the wealth of all involved in the production process. Perhaps it is time for manufacturing fetishists to move beyond categories set by Stone Age man’s requirements for food and shelter.”

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The media have been full in recent weeks of articles and commentary about Barack Obama’s view of business. Is the President pro- or anti-business? Have his actions improved or worsened conditions for American businesses? The Economist 10 days ago ran a cover story on the topic – “No love lost: Corporate America’s complaints about the president keep getting louder” – and also just concluded one of its online debates on the motion “This house believes that the Obama administration has been good for business.” The pro side won, 59% to 41%. [click to continue…]

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