China’s rapid growth and climb in economic power is old news and should not be a surprise to anybody. Something to keep in mind, however, is that the development of China’s infrastructure is still ages behind the United States. This should come as good news to the average American citizen who is concerned with China establishing itself as an economic powerhouse, but for those of us who are above average, we should see this an opportunity.
In order for a country like China to build its infrastructure, it needs many basic resources, such as concrete, iron, steel, food products, etc. So, where do you think China is obtaining these resources? Well, I’ll tell where they are not obtaining these resources, the United States. China is quickly becoming (or has already become) the world’s top super power, and although the United States has this infrastructural advantage over the Chinese, we do not appear to be exploiting it to try and regain a competitive advantage. Put simply, we are in the race for our lives, and we are tying our own shoes together.
While China continues to grow and expand, the United States has become too concerned with its internal reforms to take a step back and look at the big picture. We are missing out on Asian growth and may eventually be unable to compete with those other countries that are providing China (and many other Asian countries that are expanding as well) with the resources it needs to build this desirable infrastructure. In 2009, China superseded the United States as the top customer for commodity imports from Brazil. This is not a surprise because, given the circumstances that the United States’ infrastructure is so much more advanced than China’s, the United States has significantly less room for growth than China.
Because the United States has so many groups protecting blue collar workers, such as unions, and activist groups making it difficult for many companies trying to obtain natural resources, it would be impossible for the United States to provide such commodities to China at prices that are competitive with Brazil’s. As a result of this, such developing countries providing China with the resources it needs to grow have become the Home Depot for all of the expansion in Asia and the Middle East. These direct beneficiaries of Asian growth (those countries providing China with the resources it needs to expand) that are trying to develop are gaining wealth, giving those countries the opportunity to purchase more consumer goods. Basically, China is purchasing raw materials to build its infrastructure, and countries like Brazil that are accumulating wealth from selling those raw materials will eventually be purchasing goods back from China. The major problem with this picture is that the United States is completely out of it. The United States continues to pass legislation that increase taxes on the American consumer, so the American consumer will have less spending money to purchase those consumer goods. This is also a double-edged sword because China owns a large portion of the United States’ debt, so if American consumers are not buying consumer goods, the ability for the United States to get out of debt decreases therefore giving China even more power. In essence, China will not only be in control of the United States because of the mass amount of debt they own, but will also have power over those countries that are dependent on buying its products, such as those developing countries providing China with resources.
It would be wrong to say that Brazil should not be able to gain wealth by selling less expensive commodities to China because every human being should be given the opportunity to achieve a higher standard of living. However, the United States needs to figure out how to use our infrastructural advantage over China to get back into “competition shape.”
Monday, April 19, 2010
Saturday, April 3, 2010
Wishful Thinking By The Obama Administration
In an article in The Wall Street Journal entitled "Factories Revive Economy", it was reported that the “U.S. manufacturing index in March registered its best reading since 2004…” and goes on to claim that production is increasing around the world, which is a good sign that the United States won’t “double-dip” back into a recession. One would have to be very naïve to believe that this production increase indicates a solid turnaround in business growth in the United States because although there’s been an increase in production in the private sector of the US, permanent employment numbers have not changed significantly. When a recession occurs, businesses have two means of surviving: cutting expenditures or increasing productivity at a lower a cost of producing goods.
In the recently released uptick in employment numbers, when temporarily subsidized stimulus related employment, along with temporary additional census workers are removed, the permanent private sector job increase has been at a minimum, despite the increase in production. Production has been, for the most part, increased in companies that have demonstrated the ability to show productivity and efficiency increases without labor cost increases. In other words, it has been a jobless recovery in the private sector.
Politically, it has been very important for the current administration to be able to speak about employment increases to help improve the American public’s confidence in our economy, but as stated before, these employment increases have been somewhat illusionary. Private sector companies will increase their costs, such as labor, only when absolutely required to maintain productivity growth. That is why the government has made such a push for stimulating employment through every means at its disposal with subsidies in the areas of energy efficiency, as well as federal and state work projects that could be advanced through the use of stimulus money.
The fact of the matter is the United States economy will not truly begin to turnaround until the private sector begins providing more jobs because the key to success is to give the American consumer increased purchasing power as a result of truly improved employment conditions and increased confidence in the security of the future of the American economy. One of the reasons that the economy is depressed is the people that continue to have jobs are being conservative in their own spending because nobody has confidence in their job security. Since so many American workers fear reduced hours, pay, or being laid off, they do not want to spend their money. All of these temporary fixes make the Obama administrations statistics look better, but they are not providing for long-term sustainability of our economy. You can only buy so much with stimulus money because at some point, the economy needs to be able to stand on its own and compete with the rest of the world’s economies.
If you read this Wall Street Journal article more closely, the details begin to unravel as it is revealed that the main contributor of the sudden increase in factory production is China (and other Asian countries as well). As a matter of fact, the United States production levels are only a smidgeon higher than they have been since the recession hit. That’s not to say that the United States isn’t doing better, but production has correlated with the increase in purchases made by these other countries and consumption in the United States has really been minimal. The inflated employment numbers, coupled with the positive statistics in factory production have only been effective in tricking the American consumer to have more confidence in the economy. This will hopefully help in encouraging people to spend more money, but this is not the panacea that the current administration would like you to believe that it is.
In the recently released uptick in employment numbers, when temporarily subsidized stimulus related employment, along with temporary additional census workers are removed, the permanent private sector job increase has been at a minimum, despite the increase in production. Production has been, for the most part, increased in companies that have demonstrated the ability to show productivity and efficiency increases without labor cost increases. In other words, it has been a jobless recovery in the private sector.
Politically, it has been very important for the current administration to be able to speak about employment increases to help improve the American public’s confidence in our economy, but as stated before, these employment increases have been somewhat illusionary. Private sector companies will increase their costs, such as labor, only when absolutely required to maintain productivity growth. That is why the government has made such a push for stimulating employment through every means at its disposal with subsidies in the areas of energy efficiency, as well as federal and state work projects that could be advanced through the use of stimulus money.
The fact of the matter is the United States economy will not truly begin to turnaround until the private sector begins providing more jobs because the key to success is to give the American consumer increased purchasing power as a result of truly improved employment conditions and increased confidence in the security of the future of the American economy. One of the reasons that the economy is depressed is the people that continue to have jobs are being conservative in their own spending because nobody has confidence in their job security. Since so many American workers fear reduced hours, pay, or being laid off, they do not want to spend their money. All of these temporary fixes make the Obama administrations statistics look better, but they are not providing for long-term sustainability of our economy. You can only buy so much with stimulus money because at some point, the economy needs to be able to stand on its own and compete with the rest of the world’s economies.
If you read this Wall Street Journal article more closely, the details begin to unravel as it is revealed that the main contributor of the sudden increase in factory production is China (and other Asian countries as well). As a matter of fact, the United States production levels are only a smidgeon higher than they have been since the recession hit. That’s not to say that the United States isn’t doing better, but production has correlated with the increase in purchases made by these other countries and consumption in the United States has really been minimal. The inflated employment numbers, coupled with the positive statistics in factory production have only been effective in tricking the American consumer to have more confidence in the economy. This will hopefully help in encouraging people to spend more money, but this is not the panacea that the current administration would like you to believe that it is.
Sunday, March 28, 2010
United States Trails in Clean Energy Market
With the United States economy already suffering greatly, the last thing that the economically-concerned public needs to hear is that we are not leading the charge in Clean Energy investments. In an article on CNNMoney.com, Steve Hargreaves notes that China destroyed the US in eco-friendly energy investing by $16 billion in 2009, while in the previous year, the United States led China by $8.9 billion.
Many will argue that clean energy should be one of the United States’ top priorities, such as the director of the Pew Environment Group’s Global Warming Campaign, Phyllis Cuttino, “‘The United States' competitive position is at risk in the emerging clean energy economy.’” I will not argue with this point for several reasons. First, the need for clean energy increases daily as we take every step closer to depleting our current sources of energy (natural gas, fossil fuels, etc). Secondly, new markets create new jobs. The move towards clean energy investments created over 700,000 jobs in 1998, and because such a market is a technologically driven one, it can continue to grow as long as there is a need for energy.
I would never disagree with any of the points stated above, but I am realistic. The concept that so many people fail to understand is the fact that a lack of investment in this field is an undesirable, but highly unavoidable, byproduct of the US economy’s downturn, and I’m not referring solely to the clean energy market. There just is not enough wealth available for companies to continue dumping gratuitous amounts of money in Research & Development because there is no direct line-of-sight between investing money in R&D and returns on profits. Put simply, a company could invest heavily in a new and promising method to refine oil in a way that makes it twice as potent as before (which would technically double the Earth’s remaining supply of oil), but if some calculations were wrong and the new method does not work as planned, all the time and money spent in that investment was more-or-less wasted (not entirely wasted because such developments can be used in other projects).
One of the major worries here is that many people will lose their jobs. While this is probably true, the fact that so many of these companies are cutting back on investments shows that they are working to keep people on board because when they can’t continue to afford both a large workforce and heavy investing, they are cutting the investing first.
What worries me even more is the fact that we are losing to China. With companies like Google and GoDaddy.com cutting many of their operations in China, tensions are beginning to rise. China is one of our largest competitors in many markets, and is also our primary financier of debt. The last thing the United States needs on its plate right now is to allow China to overtake the US in such a lucrative market because when it comes down to it, the country with the cheapest and largest amounts of energy have the ability to work at some of the least costly rates. This is definitely a “bargaining” chip because lowering the cost of production in a country also lowers the cost of the products it sells in foreign markets, allowing that country to undercut everyone else.
The United States’ trailing in the clean energy market to China is discouraging in many aspects, but until the US can stabilize its debt, investing in clean energy is not a solution to the United States’ economic recession (I use this term loosely).
Many will argue that clean energy should be one of the United States’ top priorities, such as the director of the Pew Environment Group’s Global Warming Campaign, Phyllis Cuttino, “‘The United States' competitive position is at risk in the emerging clean energy economy.’” I will not argue with this point for several reasons. First, the need for clean energy increases daily as we take every step closer to depleting our current sources of energy (natural gas, fossil fuels, etc). Secondly, new markets create new jobs. The move towards clean energy investments created over 700,000 jobs in 1998, and because such a market is a technologically driven one, it can continue to grow as long as there is a need for energy.
I would never disagree with any of the points stated above, but I am realistic. The concept that so many people fail to understand is the fact that a lack of investment in this field is an undesirable, but highly unavoidable, byproduct of the US economy’s downturn, and I’m not referring solely to the clean energy market. There just is not enough wealth available for companies to continue dumping gratuitous amounts of money in Research & Development because there is no direct line-of-sight between investing money in R&D and returns on profits. Put simply, a company could invest heavily in a new and promising method to refine oil in a way that makes it twice as potent as before (which would technically double the Earth’s remaining supply of oil), but if some calculations were wrong and the new method does not work as planned, all the time and money spent in that investment was more-or-less wasted (not entirely wasted because such developments can be used in other projects).
One of the major worries here is that many people will lose their jobs. While this is probably true, the fact that so many of these companies are cutting back on investments shows that they are working to keep people on board because when they can’t continue to afford both a large workforce and heavy investing, they are cutting the investing first.
What worries me even more is the fact that we are losing to China. With companies like Google and GoDaddy.com cutting many of their operations in China, tensions are beginning to rise. China is one of our largest competitors in many markets, and is also our primary financier of debt. The last thing the United States needs on its plate right now is to allow China to overtake the US in such a lucrative market because when it comes down to it, the country with the cheapest and largest amounts of energy have the ability to work at some of the least costly rates. This is definitely a “bargaining” chip because lowering the cost of production in a country also lowers the cost of the products it sells in foreign markets, allowing that country to undercut everyone else.
The United States’ trailing in the clean energy market to China is discouraging in many aspects, but until the US can stabilize its debt, investing in clean energy is not a solution to the United States’ economic recession (I use this term loosely).
Thursday, March 18, 2010
No More Gasoline for you, Iran!
It was reported on CNNMoney.com that the Royal Dutch Shell company ceased selling gasoline to the country of Iran sometime in late 2009. The reasons for the halt on sales is unknown, but we can speculate that it has something to do with the possibility of US sanctions on gasoline imports to Iran.
The US senate recently passed a bill allowing Obama to increase sanctions on Iran in response to the country’s developing nuclear program. Iran claims that the reason for its nuclear program is purely for energy, but the threat of Iran developing nuclear weapons is in the back of all our minds for several reasons.
First, the rather undeveloped country of Iran is sitting on one of the largest oil reserves in the world. You can’t honestly tell me that a country that severely limits the amount of technology available to its citizens and has more oil than it can use has a need for nuclear power to survive.
Second, the “elected” president, Mahmoud Ahmadinejad, has repeatedly stated that he wants to blow Israel off of the face of the map. As if that weren’t enough, Iran has purchased technology from North Korea that gives them the ability to accurately hit targets in Europe with missiles, including nuclear missiles if they obtain them. This alone is enough to prove that the first thing Iran will do if/when it obtains nuclear power is to develop nuclear warheads to attack countries it sees as enemies. Although the country of Iran is a republic with an elected president, there is not a lot of confidence in the election because elections are usually landslide victories upwards of 100%, and the votes are counted at unusually (almost impossibly) high speeds. It is more likely than not that the presidential elections are extremely rigged, so the person who wins is simply a puppet president controlled by the Ayatollahs (who truly run the country). It is commonly believed that Iran is one of the largest supporters of terrorism in the world because the country is actually run by extremists with destructive political agendas. Also, the fact that the other powerful party in Iran is the Islamic Revolutionary Guard Corps, the group believed to be responsible for the development and supplying of Iraq with IEDs (Improvised Explosive Device) to fight against the American military, doesn’t exactly give Iran credibility in developing nuclear power for non-lethal purposes.
Lastly, Iran is actually comprised of Shiite Muslims (Persians) who speak Farsi, not Arabic. Historically, there was a large division of power in the Muslim world between the Shiite and Sunni Muslims, and a large power struggle resulted. The Shiites believed that they should be the preeminent power in the Muslim world, and many of those sentiments exist today.
All signs point to danger for the entire world if Iran is able to obtain nuclear technologies. I believe that Shell is making the right decision to stop supplying Iran with gasoline, and the rest of the world should follow suit.
The US senate recently passed a bill allowing Obama to increase sanctions on Iran in response to the country’s developing nuclear program. Iran claims that the reason for its nuclear program is purely for energy, but the threat of Iran developing nuclear weapons is in the back of all our minds for several reasons.
First, the rather undeveloped country of Iran is sitting on one of the largest oil reserves in the world. You can’t honestly tell me that a country that severely limits the amount of technology available to its citizens and has more oil than it can use has a need for nuclear power to survive.
Second, the “elected” president, Mahmoud Ahmadinejad, has repeatedly stated that he wants to blow Israel off of the face of the map. As if that weren’t enough, Iran has purchased technology from North Korea that gives them the ability to accurately hit targets in Europe with missiles, including nuclear missiles if they obtain them. This alone is enough to prove that the first thing Iran will do if/when it obtains nuclear power is to develop nuclear warheads to attack countries it sees as enemies. Although the country of Iran is a republic with an elected president, there is not a lot of confidence in the election because elections are usually landslide victories upwards of 100%, and the votes are counted at unusually (almost impossibly) high speeds. It is more likely than not that the presidential elections are extremely rigged, so the person who wins is simply a puppet president controlled by the Ayatollahs (who truly run the country). It is commonly believed that Iran is one of the largest supporters of terrorism in the world because the country is actually run by extremists with destructive political agendas. Also, the fact that the other powerful party in Iran is the Islamic Revolutionary Guard Corps, the group believed to be responsible for the development and supplying of Iraq with IEDs (Improvised Explosive Device) to fight against the American military, doesn’t exactly give Iran credibility in developing nuclear power for non-lethal purposes.
Lastly, Iran is actually comprised of Shiite Muslims (Persians) who speak Farsi, not Arabic. Historically, there was a large division of power in the Muslim world between the Shiite and Sunni Muslims, and a large power struggle resulted. The Shiites believed that they should be the preeminent power in the Muslim world, and many of those sentiments exist today.
All signs point to danger for the entire world if Iran is able to obtain nuclear technologies. I believe that Shell is making the right decision to stop supplying Iran with gasoline, and the rest of the world should follow suit.
Saturday, March 13, 2010
Unsustainable
The United States government has been presiding over an ever-growing debt since the Bush administration took office and began spending large amounts of money to fund new and expensive entitlement programs, such as "Medicare Modernization Act," "No Child Left Behind," “The President’s Emergency Plan for AIDS Relief” (PEPFAR), and many pet "pork" projects that were slipped into bills passed by many senators and congressional leaders. Also, let’s not forget about the tremendous cost of funding Bush’s “War on Terror” as a result of 9/11. As a result, President Obama began his term during the worst financial crisis that the United States had faced since the Great Depression. To make matters worse, as the Obama administration takes steps to move the United States out of its $11,875,851,000,000 debt at the beginning of 2009 (United States Office of Management and Budget, table 7.1, 2009), it is also attempting an expansion of government obligations via increased involvement in private enterprises, healthcare, etc. As the United States government grows in relation to GDP, the cost of government expenditures forces changes in the lives of the taxpaying citizens because of the government’s need to fund its increasing debt via the collection of taxes.
It goes without saying that all of the programs that the Bush administration enacted listed above are good and meritorious by nature.
For example, the purpose of the No Child Left Behind Act was to improve standardized test scores in an attempt to give more students the opportunity to go to college through a series of changes, including greater teacher accountability, improved quality of education for all students, and heightened awareness and attention to minority populations. The only problem with the NCLB act was its enormous cost to the taxpayers, about $42.2 billion by 2006 (U.S. Department of Education, 2006). Also, the Medicare Modernization Act was supposed to help those less fortunate seniors pay for their prescriptions, and the purpose of PEPFAR was to combat AIDS in Africa and the Caribbean, but these two projects were projected to cost $549.2 billion over five years (Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, 2009) and $48 billion over five years (Dunham, 2008) respectively. Unfortunately, funding too many projects of this magnitude can be counterintuitive when it causes the American taxpayer to have to pay even more money out-of-pocket to fund them because it forces many Americans to sacrifice their own standard of living.
Consider the lifestyle of the taxpaying citizens living in a country whose government has already enacted the same programs that the United States is attempting to initiate. In 2006, the average size of a home in the United Kingdom was 914.9 square feet. In the United States, it was about 2,200 square feet (Hennigan, 2006). There are several reasons as to why there is such a large difference in the average size of a home between the two countries. One of the major contributors is the cost of energy due to taxes. The price of a gallon of gasoline in the United Kingdom is more than two times the cost of a gallon in the United States, and over 60% of the UK’s cost is tax paid to its government states (Energy Information Administration, 2010). This high inflation in the cost gasoline and all forms of energy has a massive impact on the citizens of Britain. This significantly determines who can afford a car and how much it costs to drive one. Basically, if you are not in a government provided vehicle, and are not very wealthy, chances are you use public transportation for the majority of your traveling needs, and out of the significantly smaller proportion of people in the UK who actually own cars (as compared to the United States), most of them have tiny vehicles that get relatively good mileage. The other immediate impact is on the cost to heat and power a home, because when it can cost up to three times the amount to run the air conditioning or heater in a UK home as compared to the United States, a much smaller percentage of people in the UK can actually afford to live in those comparable homes. The point here is that, because everything is taxed at such high rates in the UK, a large percentage of people must take public transportation because they cannot afford to own and operate their own vehicles, nor can they afford to own similar sized homes in the United States because the cost of energy to heat and cool their homes, as well as the significantly higher property tax rates, force most of the citizens to live in much smaller homes and apartments.
Why is all of this relevant? The tremendous growth rate of government expenditures and accumulation of debt will force the United States government into a tax structure like that which our European cousins are currently enduring. This year, there has already been talk in Washington of considering the institution of a federal “Value Added Tax” or “VAT” tax as it is known in the United Kingdom (Montgomery, 2009). The need to generate revenue for an expanding government debt will impact the lifestyles for citizens in the United States unless our government can manipulate the economy in such a way that it can grow at a rate that keeps pace with the increasing debt and government spending using our current tax structure. As a government expands its entitlement programs and becomes increasingly more involved in the everyday life of its citizens, the citizens come to expect more and more from the government. As a result, these entitlements develop their own synergy. Once this happens, there is a natural progression for that government to continue growing, which eventually leads to its increased consumption, and therefore increased expenditures. If the government begins paying for entitlement programs, such as nationalized health care, there will be increased taxes to cover those costs. Those increased taxes almost always have a negative impact on business growth and GDP. Also, if a government begins down that path, it can be a slippery slope until it hits a tipping point. When a government’s expenditures exceed the government’s actual income for a long enough period of time, the country finds itself in a financial crisis similar to Greece’s current economic situation. This should sound all-too-familiar because I am describing what has already happened in the United Kingdom (and the EU as a whole), and is exactly what is currently happening in the United States.
In my previous blog post, “The Cost of Doing Business,” I explain how, although it is difficult for people to accurately calculate the value of any currency in the midst of so much economic chaos, the one commodity that every person needs to survive, energy, can be used as a reference. One must understand this point conceptually in order to begin brainstorming ways on how to begin working to get the United States out of its large debt. One method the United States has used to remedy past similar (but not nearly as severe) debt situations is to simply print more money. This may have been successful in the past to help alleviate debt crises, but that is the last thing the US government should do today. If the government devalues the dollar, the taxpayers are punished because the cost of energy increases and inflation is created. It does not matter if a taxpayer is making more money than before if the buying power of the dollar has decreased proportionately.
Economic Nobel prize winner, Paul Krugman, believes that we should not be so concerned with paying off the debt as soon as possible, but rather to focus on stabilizing debt altogether.
His reasoning is that if a country is in debt, but that country’s economy is growing and the debt is stable, then the debt to GDP ratio decreases and the country’s economy will stabilize. In Krugman’s New York Times blog post, The Burden of Debt, he discusses how the United States used this tactic in 1950 when debt was 80% of the country’s GDP and reduced the ratio to 46% by 1960, despite the threat of the Cold War with Russia. I agree with Krugman that such tactics are probably the United States’ best option, however it is very difficult for the economy to grow when the government is working to increase entitlement programs.
Although outrageously high taxes are the reason for such different standards of living in the United Kingdom versus living in the United States, discussing the actual percentages themselves is a waste of time. Instead, we should focus on the reasons for those high taxes. As mentioned before, the United States’ ineffective stimulus expenditures are not exactly helping the issue, but there are more problems underneath the surface that are keeping the United States from effectively getting itself out of debt.
One of the government’s largest expenditures is the payment of salaries to all of its federal employees. Consider this: according to an article in USA Today, within the first 18 months of the recession, “Federal employees making salaries of $100,000 or more jumped from 14% to 19% of civil servants…and that's before overtime pay and bonuses are counted” (Cauchon, 2010). I could continue listing other statistics, such as how the number of Transportation Department employees making at least $170,000 a year increased by 1,688 within those 18 months, or the number of Department of Defense Employees making at least $150,00 a year increasing by over 8,000 from December, 2007 to January, 2009, but I think I have made my point.
While the private sector is hurting financially, the public sector is giving its employees raises and hiring more people than ever before. Many of the same people who advocate Obama’s stimulus package, nationalized healthcare, and the hiring and increase of salaries of government employees are the same people who are pointing the finger of shame at corporate CEOs making salaries, bonuses, and stock options equal to several million dollars. There’s only one major difference here – unlike many government departments who are distributing pay raises and hiring more employees while the US government is spending more than it is taking in, many CEOs who are experiencing increased salaries and benefits also have companies that are actually turning a profit. Current McDonald’s CEO, Jim Skinner, received $13.6 million in 2008, an increase of 70% in his compensation from the previous year (Shepherd, 2008). McDonald’s, however, experienced a net profit increase of 80% from $2.3 billion in 2007 to $4.3 billion in 2008 (AFP, 2008). What a novel idea! Give the guy who runs a company more compensation when he helps a company to succeed, rather than increasing his salary when the company is in the red.
The United States is structurally on a path to keep increasing the cost of government and entitlement programs, which, by design, survive by drawing wealth off of the private sector in the form of taxes or by nationalizing industries (similar to what Venezuela has done with their petroleum industry). So, what happens when it is more profitable to work in the public sector, than in the private sector? When this is the norm, the majority of people will begin shifting away from the private sector in an effort to enjoy the guaranteed benefits of being unionized employees working in the public sector. This will result in more people living off collected taxes than those actually paying them.
There is one word that comes to mind when I consider the situation where someone is spending more than they are earning: unsustainable.
It goes without saying that all of the programs that the Bush administration enacted listed above are good and meritorious by nature.
For example, the purpose of the No Child Left Behind Act was to improve standardized test scores in an attempt to give more students the opportunity to go to college through a series of changes, including greater teacher accountability, improved quality of education for all students, and heightened awareness and attention to minority populations. The only problem with the NCLB act was its enormous cost to the taxpayers, about $42.2 billion by 2006 (U.S. Department of Education, 2006). Also, the Medicare Modernization Act was supposed to help those less fortunate seniors pay for their prescriptions, and the purpose of PEPFAR was to combat AIDS in Africa and the Caribbean, but these two projects were projected to cost $549.2 billion over five years (Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, 2009) and $48 billion over five years (Dunham, 2008) respectively. Unfortunately, funding too many projects of this magnitude can be counterintuitive when it causes the American taxpayer to have to pay even more money out-of-pocket to fund them because it forces many Americans to sacrifice their own standard of living. Consider the lifestyle of the taxpaying citizens living in a country whose government has already enacted the same programs that the United States is attempting to initiate. In 2006, the average size of a home in the United Kingdom was 914.9 square feet. In the United States, it was about 2,200 square feet (Hennigan, 2006). There are several reasons as to why there is such a large difference in the average size of a home between the two countries. One of the major contributors is the cost of energy due to taxes. The price of a gallon of gasoline in the United Kingdom is more than two times the cost of a gallon in the United States, and over 60% of the UK’s cost is tax paid to its government states (Energy Information Administration, 2010). This high inflation in the cost gasoline and all forms of energy has a massive impact on the citizens of Britain. This significantly determines who can afford a car and how much it costs to drive one. Basically, if you are not in a government provided vehicle, and are not very wealthy, chances are you use public transportation for the majority of your traveling needs, and out of the significantly smaller proportion of people in the UK who actually own cars (as compared to the United States), most of them have tiny vehicles that get relatively good mileage. The other immediate impact is on the cost to heat and power a home, because when it can cost up to three times the amount to run the air conditioning or heater in a UK home as compared to the United States, a much smaller percentage of people in the UK can actually afford to live in those comparable homes. The point here is that, because everything is taxed at such high rates in the UK, a large percentage of people must take public transportation because they cannot afford to own and operate their own vehicles, nor can they afford to own similar sized homes in the United States because the cost of energy to heat and cool their homes, as well as the significantly higher property tax rates, force most of the citizens to live in much smaller homes and apartments.
Why is all of this relevant? The tremendous growth rate of government expenditures and accumulation of debt will force the United States government into a tax structure like that which our European cousins are currently enduring. This year, there has already been talk in Washington of considering the institution of a federal “Value Added Tax” or “VAT” tax as it is known in the United Kingdom (Montgomery, 2009). The need to generate revenue for an expanding government debt will impact the lifestyles for citizens in the United States unless our government can manipulate the economy in such a way that it can grow at a rate that keeps pace with the increasing debt and government spending using our current tax structure. As a government expands its entitlement programs and becomes increasingly more involved in the everyday life of its citizens, the citizens come to expect more and more from the government. As a result, these entitlements develop their own synergy. Once this happens, there is a natural progression for that government to continue growing, which eventually leads to its increased consumption, and therefore increased expenditures. If the government begins paying for entitlement programs, such as nationalized health care, there will be increased taxes to cover those costs. Those increased taxes almost always have a negative impact on business growth and GDP. Also, if a government begins down that path, it can be a slippery slope until it hits a tipping point. When a government’s expenditures exceed the government’s actual income for a long enough period of time, the country finds itself in a financial crisis similar to Greece’s current economic situation. This should sound all-too-familiar because I am describing what has already happened in the United Kingdom (and the EU as a whole), and is exactly what is currently happening in the United States.
In my previous blog post, “The Cost of Doing Business,” I explain how, although it is difficult for people to accurately calculate the value of any currency in the midst of so much economic chaos, the one commodity that every person needs to survive, energy, can be used as a reference. One must understand this point conceptually in order to begin brainstorming ways on how to begin working to get the United States out of its large debt. One method the United States has used to remedy past similar (but not nearly as severe) debt situations is to simply print more money. This may have been successful in the past to help alleviate debt crises, but that is the last thing the US government should do today. If the government devalues the dollar, the taxpayers are punished because the cost of energy increases and inflation is created. It does not matter if a taxpayer is making more money than before if the buying power of the dollar has decreased proportionately.
Economic Nobel prize winner, Paul Krugman, believes that we should not be so concerned with paying off the debt as soon as possible, but rather to focus on stabilizing debt altogether.
His reasoning is that if a country is in debt, but that country’s economy is growing and the debt is stable, then the debt to GDP ratio decreases and the country’s economy will stabilize. In Krugman’s New York Times blog post, The Burden of Debt, he discusses how the United States used this tactic in 1950 when debt was 80% of the country’s GDP and reduced the ratio to 46% by 1960, despite the threat of the Cold War with Russia. I agree with Krugman that such tactics are probably the United States’ best option, however it is very difficult for the economy to grow when the government is working to increase entitlement programs. Although outrageously high taxes are the reason for such different standards of living in the United Kingdom versus living in the United States, discussing the actual percentages themselves is a waste of time. Instead, we should focus on the reasons for those high taxes. As mentioned before, the United States’ ineffective stimulus expenditures are not exactly helping the issue, but there are more problems underneath the surface that are keeping the United States from effectively getting itself out of debt.
One of the government’s largest expenditures is the payment of salaries to all of its federal employees. Consider this: according to an article in USA Today, within the first 18 months of the recession, “Federal employees making salaries of $100,000 or more jumped from 14% to 19% of civil servants…and that's before overtime pay and bonuses are counted” (Cauchon, 2010). I could continue listing other statistics, such as how the number of Transportation Department employees making at least $170,000 a year increased by 1,688 within those 18 months, or the number of Department of Defense Employees making at least $150,00 a year increasing by over 8,000 from December, 2007 to January, 2009, but I think I have made my point.
While the private sector is hurting financially, the public sector is giving its employees raises and hiring more people than ever before. Many of the same people who advocate Obama’s stimulus package, nationalized healthcare, and the hiring and increase of salaries of government employees are the same people who are pointing the finger of shame at corporate CEOs making salaries, bonuses, and stock options equal to several million dollars. There’s only one major difference here – unlike many government departments who are distributing pay raises and hiring more employees while the US government is spending more than it is taking in, many CEOs who are experiencing increased salaries and benefits also have companies that are actually turning a profit. Current McDonald’s CEO, Jim Skinner, received $13.6 million in 2008, an increase of 70% in his compensation from the previous year (Shepherd, 2008). McDonald’s, however, experienced a net profit increase of 80% from $2.3 billion in 2007 to $4.3 billion in 2008 (AFP, 2008). What a novel idea! Give the guy who runs a company more compensation when he helps a company to succeed, rather than increasing his salary when the company is in the red. The United States is structurally on a path to keep increasing the cost of government and entitlement programs, which, by design, survive by drawing wealth off of the private sector in the form of taxes or by nationalizing industries (similar to what Venezuela has done with their petroleum industry). So, what happens when it is more profitable to work in the public sector, than in the private sector? When this is the norm, the majority of people will begin shifting away from the private sector in an effort to enjoy the guaranteed benefits of being unionized employees working in the public sector. This will result in more people living off collected taxes than those actually paying them.
There is one word that comes to mind when I consider the situation where someone is spending more than they are earning: unsustainable.
Monday, March 8, 2010
The Cost Of Doing Business
With all of the economic turmoil that’s been happening world-wide, one of the most difficult things for anybody to wrap their heads around is the value of currency and exchange rates. One day, the euro drops drastically and stock prices plummet, then the next day, Greece and the EU publicize their plan for how to fix the problem and the economy temporarily stabilizes. It is obvious that we are in a period of many unknowns, so the market is extremely volatile and is therefore sensitive to any new developments in the economy.
No matter what state the economy is in, there is one commodity that will always represent a universal currency: energy. Although there is fluctuation in the price of oil, it is only due to fluctuation in the value of the dollar. Because oil is not an unlimited resource and the economy is not doing so well, many oil-producing countries are looking to get more money from international companies, such as Exxon Mobile, to do business in their countries. For example, Brazil just discovered a large amount of natural gas (estimated at 50 billion barrels) off one of its coasts. Because of this, Brazil is looking to increase the cost of allowing Exxon to obtain that gas from 50% of Exxon’s total profits (considered to be on the lower end of the spectrum) to about 80%.
Exxon’s profits haven’t been very high lately for several reasons. First, the cost of producing gasoline is extremely expensive. When you factor in the costs of transporting the oil from international soil to the United States (Exxon has to pay to burn fuel too), refining, and distributing the oil, the profit margin on selling oil is already severely limited. Also, because the economy isn’t doing well, the economy is unable to support high priced gasoline. If Exxon started charging $5/gallon of gasoline, it would not equate to higher profits. Instead, it would result in a decrease of gasoline purchases because of the high rate of unemployment.
So, what does all of this mean? When the economy is strong, companies can take measures to increase their profits margins. When the economy is down, however, companies must take opposite measures to give people the opportunity to purchase their products or services. For example, many McDonald’s owner/operators are not thrilled about the new breakfast dollar menu. McDonald’s breakfast is the single-most profitable meal of the day for many franchises, and offering some of those menu items for a dollar (several of which are actually at cost) decreases the profit margins. McDonald’s chose to introduce this dollar menu when sales were being hurt by the economy to give people more of an incentive to eat their food in hopes that they will purchase more than one item (preferably off the dollar menu). In the same way that McDonald’s offers special deals on its food items when the economy is down, Exxon can’t afford to increase the cost of gasoline to the American public, even if the countries from where Exxon obtains the oil increase the cost of doing business.
No matter what state the economy is in, there is one commodity that will always represent a universal currency: energy. Although there is fluctuation in the price of oil, it is only due to fluctuation in the value of the dollar. Because oil is not an unlimited resource and the economy is not doing so well, many oil-producing countries are looking to get more money from international companies, such as Exxon Mobile, to do business in their countries. For example, Brazil just discovered a large amount of natural gas (estimated at 50 billion barrels) off one of its coasts. Because of this, Brazil is looking to increase the cost of allowing Exxon to obtain that gas from 50% of Exxon’s total profits (considered to be on the lower end of the spectrum) to about 80%.
Exxon’s profits haven’t been very high lately for several reasons. First, the cost of producing gasoline is extremely expensive. When you factor in the costs of transporting the oil from international soil to the United States (Exxon has to pay to burn fuel too), refining, and distributing the oil, the profit margin on selling oil is already severely limited. Also, because the economy isn’t doing well, the economy is unable to support high priced gasoline. If Exxon started charging $5/gallon of gasoline, it would not equate to higher profits. Instead, it would result in a decrease of gasoline purchases because of the high rate of unemployment.So, what does all of this mean? When the economy is strong, companies can take measures to increase their profits margins. When the economy is down, however, companies must take opposite measures to give people the opportunity to purchase their products or services. For example, many McDonald’s owner/operators are not thrilled about the new breakfast dollar menu. McDonald’s breakfast is the single-most profitable meal of the day for many franchises, and offering some of those menu items for a dollar (several of which are actually at cost) decreases the profit margins. McDonald’s chose to introduce this dollar menu when sales were being hurt by the economy to give people more of an incentive to eat their food in hopes that they will purchase more than one item (preferably off the dollar menu). In the same way that McDonald’s offers special deals on its food items when the economy is down, Exxon can’t afford to increase the cost of gasoline to the American public, even if the countries from where Exxon obtains the oil increase the cost of doing business.
Wednesday, February 24, 2010
Toyota's Epic Fail
Toyota, the world’s largest automaker in sales, was forced to begin a recall that would affect 8.5 million Toyota vehicles around the world. The recall involves an issue with floor mats and gas pedals sticking. Many Toyota customers had been complaining that their Toyota vehicles had been accelerating unexpectedly, an issue that has already proved to be extremely dangerous. On August 28, 2009, four members of the Saylor family were driving a loaner Lexus ES350 while Mr. Saylor’s car was being serviced at the dealership. The loaner vehicle’s acceleration pedal became stuck, which caused the Lexus to speed up to about 100mph when it slammed into the back of another vehicle, causing the Lexus to go out of control off of the highway, went airborne, and rolled several times before catching on fire, killing all four family members inside the vehicle.
After consistently avoiding the press, President of Toyota, Akio Toyoda, finally agreed to do a press conference on Capitol Hill. Mr. Toyoda was questioned as to why it took so long for Toyota to begin recalling all vehicles affected by this malfunction. In essence, Mr. Toyoda stated that the vehicular malfunctions can be attributed to structural issues and “misuse” of the vehicles (not defects in the electronic throttle system), admitted failure on the company’s part to respond quickly, and promised that Toyota is now setting up a “global commission to address complaints more quickly and efforts to increase transparency on safety issues” (CNNmoney.com).
Even after avoiding the press for so long, many people in the general public, including myself, are dissatisfied with Mr. Toyoda’s response to this situation. I drive a Toyota vehicle, and knowing that the company’s President avoided the press for such a long time, only to NOT be able to provide any reasonable answers about the company’s recent shortcomings makes me extremely nervous and skeptical about the company I invested in.
Also, Toyota’s executives were scrutinized for a company memo in 2009 which clearly stated that the company was saving $100 million in limiting their recalls. That couldn’t have come out at a better time. Customer safety comes first, huh? Thanks Toyota!
At the press conference, Mr. Toyoda expressed his condolences for the Saylor family again. However, when asked if Toyota will take financial responsibility for anybody injured as a result of the recall, the president of Toyota's North America division, Yoshimi Inaba, hesitated in responding that such decisions will be left to Toyota’s legal teams. Are you kidding me? These guys knew they were walking into the lion’s den when they agreed to do this press conference in the first place, so they should have expected that question. They could have at least agreed to “try their best” in accommodating for any future issues that may arise as a result of the recall. I understand that such decisions will be made on a case-by-case basis because of the need for research to have evidence that the crash was a result of the malfunction being recalled, but give me a break! The point of a press conference is to give the organization being represented positive press, and it seems as though these guys were simply counting money the entire plane ride over to the U.S., rather than practicing how they were going to respond in the conference.
Potential danger to Toyota customers aside, what effects will this have on Toyota’s auto making competitors? Could this give the struggling American car companies, such as Ford and GM, the edge they need in order to gain some market share? I may be hypocritical when I say this, but I sure hope so. I want American car companies to succeed because, although some of them do outsource certain parts of their vehicles to other countries, the United States could use a boost in American car sales to help propel our country out of the economic rut. I bought into Toyota a long time ago because of its reputation for having high quality vehicles that you could basically drive into the ground for 100,000 miles without ever needing an oil change (this is an exaggeration, but you get the idea). Now, however, I may need to rethink what car I choose to drive next when my car does eventually die. What do you think?
One last thing – If you drive a vehicle and your gas pedal sticks, so you are unable to stop the acceleration, you can do one of two things to increase your chances of survival. One (and this is my recommendation, especially if you have a vehicle with a start button instead of a key), turn your car off! You will lose power steering and breaks, but your vehicle will stop feeding gas to the engine completely and you will be able to turn your emergency lights on and hopefully steer your car to safety. Two, put your car in neutral. This has the same basic effects as option one, but your car will still rev the heck out of the engine because it is still on, which can freak the people out around you by making your car sound extremely loud and possibly do more damage.
After consistently avoiding the press, President of Toyota, Akio Toyoda, finally agreed to do a press conference on Capitol Hill. Mr. Toyoda was questioned as to why it took so long for Toyota to begin recalling all vehicles affected by this malfunction. In essence, Mr. Toyoda stated that the vehicular malfunctions can be attributed to structural issues and “misuse” of the vehicles (not defects in the electronic throttle system), admitted failure on the company’s part to respond quickly, and promised that Toyota is now setting up a “global commission to address complaints more quickly and efforts to increase transparency on safety issues” (CNNmoney.com).
Even after avoiding the press for so long, many people in the general public, including myself, are dissatisfied with Mr. Toyoda’s response to this situation. I drive a Toyota vehicle, and knowing that the company’s President avoided the press for such a long time, only to NOT be able to provide any reasonable answers about the company’s recent shortcomings makes me extremely nervous and skeptical about the company I invested in.
Also, Toyota’s executives were scrutinized for a company memo in 2009 which clearly stated that the company was saving $100 million in limiting their recalls. That couldn’t have come out at a better time. Customer safety comes first, huh? Thanks Toyota!
At the press conference, Mr. Toyoda expressed his condolences for the Saylor family again. However, when asked if Toyota will take financial responsibility for anybody injured as a result of the recall, the president of Toyota's North America division, Yoshimi Inaba, hesitated in responding that such decisions will be left to Toyota’s legal teams. Are you kidding me? These guys knew they were walking into the lion’s den when they agreed to do this press conference in the first place, so they should have expected that question. They could have at least agreed to “try their best” in accommodating for any future issues that may arise as a result of the recall. I understand that such decisions will be made on a case-by-case basis because of the need for research to have evidence that the crash was a result of the malfunction being recalled, but give me a break! The point of a press conference is to give the organization being represented positive press, and it seems as though these guys were simply counting money the entire plane ride over to the U.S., rather than practicing how they were going to respond in the conference.
Potential danger to Toyota customers aside, what effects will this have on Toyota’s auto making competitors? Could this give the struggling American car companies, such as Ford and GM, the edge they need in order to gain some market share? I may be hypocritical when I say this, but I sure hope so. I want American car companies to succeed because, although some of them do outsource certain parts of their vehicles to other countries, the United States could use a boost in American car sales to help propel our country out of the economic rut. I bought into Toyota a long time ago because of its reputation for having high quality vehicles that you could basically drive into the ground for 100,000 miles without ever needing an oil change (this is an exaggeration, but you get the idea). Now, however, I may need to rethink what car I choose to drive next when my car does eventually die. What do you think?
One last thing – If you drive a vehicle and your gas pedal sticks, so you are unable to stop the acceleration, you can do one of two things to increase your chances of survival. One (and this is my recommendation, especially if you have a vehicle with a start button instead of a key), turn your car off! You will lose power steering and breaks, but your vehicle will stop feeding gas to the engine completely and you will be able to turn your emergency lights on and hopefully steer your car to safety. Two, put your car in neutral. This has the same basic effects as option one, but your car will still rev the heck out of the engine because it is still on, which can freak the people out around you by making your car sound extremely loud and possibly do more damage.
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