Archive for October 2011
What Will the Next Economic Drivers Be?
From 1982 to 2007 the U.S. economy had an unprecedented expansion. The twenty five year period was driven by innovation, economic global expansion, favorable economic policy, increase in population and expansion of debt. During this period most of the current professional started their careers. The resulting concern is the current professionals are not trained to offer advice in anything other than a near perfect economic environment.
Briefly, let’s review the 5 aforementioned economic drivers from 1982 to 2007 Dr. Albert Niemi, Jr. Dean of the Edwin L Cox School of Business at the Southern Methodist University. The first driver was innovation. The invention of the microprocessor and innovation of technology contributed to a new level of productivity and life style. Currently, Dr. Niemi does not see a new invention or technology to fuel growth. Also he does believe bio-tech discoveries may fulfill a pipeline in 15 – 25 years.
Second, free market economics has opened up the economies around the world. During the past 25 years former closed communist economies from Easter Europe, the former Soviet Union countries and some countries in Africa have join a free market system. The conversion of communist based economies to free market based economies has helped fuel global economic expansion. Dr. Niemi does not believe there are many more countries that can be added to the global economy which can have a material effect.
Third, economic policy has been favorable during this 25 year period. The economic policies included a reduction in tax rates, a decrease in inflation and policies which allowed for free trade between countries. Dr. Niemi believes taxes will increase (in the US) due to demographic of our aging population and government deficits (which have accumulated over the past 25 years).
Fourth, the population continued to expand during the past 25 years. The generation of the “baby boomers” was the beginning, driving force and continued to create a population explosion. Currently, Dr. Niemi believes there is a current trend for younger generations to reduce the amount of offspring and the younger generations are waiting longer to have offspring. Additionally, the policies towards immigration have become less favorable. The result is a lower population growth rate.
Fifth, changes in the financial system influence individuals to save less and increase debt amounts. The savings rate before 1970 was 7% and in 2007 it was 0%. During the same time period the percentage of debt to household income rose from 25% in 1970 to (more than double) 60% in 1982 to (more than double) 130% in 2002. The decrease in savings and increase in debt allowed for individuals to consume more (thus expanding the economy). Dr. Niemi believes individuals are more prone to saving and financial institutions will not lend as generously in the future.
So what may drive the economy in the future? Can we no longer depend on these drivers? What can we do about it? I do agree with Dr. Niemi on several conclusion including technology has not offered the new “wow” invention (i.e. the microchip), the global economy has expanded to most relative economic areas, economic policy will not be as favorable, the population growth is slowing and expansion of savings and a reduction is being forced by financial institutions. However, the economic drivers of the past may not be the same economic drivers of the future.
A new driver to our economy could be productivity. Technology may not currently have a new invention to build an economy around, but technology allows us to increase our productivity (i.e. we can do more with less). Additionally, to keep our economy the same size (or to growth it) with less people each employed person will have to due more.
A second driver could be in the investment sector. Savings rates reached 0% in 2007 and have begun to increase since. Our current economy is signaling individuals and businesses need more liquidity and to reduce debts. The new round of savings may fuel a new round of capital which can be placed and managed around the world.
Why is this knowledge important? Business owners and advisors have grown up in environment of economic roses. The economy only suffered 16 months of recession between 1982 to 2007. According to Dr. Niemi the 100 year period before 1982 had about 40 years of recessions and about 60 years of growth. Dr. Niemi believe we are heading toward more challenging economy times were the economic balance might be 40% recessions and 60% growth. Advisors and business owners must understand the difference in business tactics and business positioning during more challenging and volatile economic periods.
Business tactics may need to be long-term focused instead of the short-term mind set we have grown accustom to over the past 25 years. Business positioning my require more liquidity, less debt, more equity and better margins which would replace two decades of minimal liquidity, increase debt, minimal equity and a focus on revenue growth instead of margins.
Other challenges we might need to overcome are social attitudes. We will need to work harder and work smarter. We need to increase our competitive mindset (people who finish last do not deserve a trophy). We need to understand that life is challenging and may not always “be fair.” These challenges do not have to stand in the way of progress. Businesses can be prepared by creating a business plan. After the plan is written the businesses can form a board of directors (or an advisory board) to meet regularly to keep a business on course. Finally, in good economic times businesses should strengthen their financial position (and owners should do the same). Have discipline to use your profits wisely to prepare for the future instead of increasing your life style.
Liberal Economic Policy – Democratic Socialism Won’t Work
For years, many Americans have been worried about creeping socialism here in America as our government has started more and more federally controlled programs, and instituted more and more regulations in our lives. However, since Obama’s election, the trend toward socialism has become a growing rush of “Lemmings to the Sea” with proposed Government control over most areas of our lives. Many Americans on both sides of the aisle have become more and more alarmed at this trend, making it not just a Conservative Issues Problem, but an American Problem.
Apparently, some “smart” fellow(s) decided to try and make socialism more palatable to millions of Americans by calling it “Democratic Socialism”. There now, doesn’t that sound better than just plain old Socialism?
So let us examine just what Democratic Socialism is. “Democratic Socialists believe that both the economy and society should be run democratically to meet the needs of the Whole Community, not to make profits for a few. If adopted in America, many structures of our economy must be radically transformed…so that ordinary Americans can participate in many decisions affecting our lives…Democratic Socialists do not want to create a big government bureaucracy.”* Now let us stop and consider. Does anyone reading this see anywhere in Obama’s Socialist programs where the average John and Jane has any say in running the proposed programs? I don’t; ergo he is not proposing Democratic Socialism, but rather Autocratic** Socialism. Sure, we can vote him out of office in four years. We can call our Senators and Representatives and protest, BUT WE HAVE NO SAY IN RUNNING OR FINANCING PROGRAMS PROPOSED BY OBAMA.
Going further, “social ownership can take many forms: worker-owned cooperatives or state-owned enterprises managed by workers and consumer representatives. Democrat Socialists favor as much decentralization (of federal government) as possible…worker ownership of large corporations is another possibility…the tasks would be spread among as many people as possible and redistribution of wealth (taxing the rich more and giving it to the poor)…the vast wealth of this nation must be distributed more equally…simply put, we must tax the rich.”*
Socialism has not and cannot work. To expect people to divide their wealth with the poor who cannot or will not work goes against human nature and democratic ideals. Going further in the same article, “…NO COUNTRY HAS FULLY INSTITUTED DEMOCRATIC SOCIALISM.” There are reasons why; DEMOCRATIC SOCIALISM DOESN’T WORK.
Fellow Americans, do not let the name, Democratic Socialism, fool you into thinking this is a better or more perfect form of Socialism and therefore ideal for America’s future. A wolf in sheep’s clothing is still a wolf. Beware of Socialism in any form and fight to preserve America’s values and heritage of capitalism, personal responsibility, and fairness. Nobody who played by the rules, paid their mortgages, and worked hard wants to help pay the mortgages of folks who didn’t. LET US WORK AT KEEPING AMERICA THE LAND OF OPPORTUNITY.
*”What is Democratic Socialism,” www.ydsusa.org/whatisds.html
**Autocratic = Absolute
Free Market Capitalism is the Worst Economic System
…Except For Every Other System Ever Tried
Sir Winston Churchill famously quipped: “It has been said that democracy is the worst form of government except all the others that have been tried.” With apologies to Mr. Churchill, I would suggest a modernization of that quote based on today’s political/economic environment in the United States. You hear a lot about the “failure of capitalism,” and how bad it is compared with the socialist Utopia long sought by progressives; but in reality, free-market capitalism far outpaces any other economic system.
For proof, look no further than the only nation in history which has actually employed free-market capitalism for many decades, and his created more wealth than any other. In America, the lot of the poorest people would be the envy of many in other nations, where the poorest do not own things like microwave ovens and multiple televisions.
Today’s left-leaning leaders have convinced many of us (though no longer a majority) that government can and should do more for us by keeping taxes high and spending billions on social programs. They are taking us toward the sort of “social democracy” they have in, say, Europe. Never mind that Europe has been trying to catch up with us since days after the end of World War II… for some reason we have elected a crew that envies Europe and its socialist systems.
Here are three big problems with that:
Investment Seeks A Free Market.
When a government jerks up taxes, investors take their capital somewhere else where they have a better chance of making it grow. Ireland proved this, leading the way in Europe by lowering taxes and reducing regulations, and they’ve benefited by a large influx of investment (which always brings jobs). Spain, on the other hand, invested billions in creating “green jobs,” essentially constraining the sort of investment they would allow in their country, and now their economy totters on the brink of disaster in the wake of revelations that for every “green job” they created, they destroyed more than two other jobs. (By the way, the President announced today a similar program of “investments” coming soon to an economy near you – if you’re in the United States.) Donald Trump echoed this in a television interview today, predicting that if the government follows through with its promise to end the “Bush tax cuts” from 2001 and 2003, a great out-flow from America – of investors, capital, businesses, and jobs – would be inevitable. On the other hand, experts have suggested that if all taxes in the U.S. were slashed to a flat rate of something around 12 per cent, there would be a flood of money into the U.S. and the economy would soar… and, instead of a drain on the federal treasury, all that business would create a commensurate flood of tax revenue that would be the best hope of avoiding the economic disaster invited by the current tax-and-spend, impossible-deficit policy. Even within the U.S., businesses are fleeing high-tax states like California and New York and flooding into low- (or no-) tax states like Texas and Florida.
You Will Not Get What You Pay For With Socialism.
In country after country, when they go to government-run health care, the cost of care goes up and the quality of care goes down. Governments simply cannot force health care to be good… but the free market can entice it to be great. That’s only one example; of course, progressives would like the government to control virtually everything (in the name of “fairness”). All that spending, though, has created an entirely unsustainable debt and deficit that we will never be able to pay off unless we quickly change course. Luckily, in America, we can do that… but to change course, we’ll have to change governments.
Say Goodbye To Inspiration… And Greatness.
The profit motive made America the most prosperous nation in the history of the world. The possibility of getting rich is a beautiful thing: it creates the next Big Idea, it makes wonderful technologies available and affordable, it gives everyone a reason to do business better, smarter and faster than a competitor. Socialism, though, seeks to remove the profit motive in the interest of trying to make everyone end up with the same outcome. When it becomes obvious that you’ll never enjoy more wealth than your less-inspired neighbor (that wouldn’t be “fair,” after all), you may think your altruism will kick in and make you create the next great enterprise… but I wouldn’t bet on it. To be at their best, entrepreneurs need to be inspired by competition they can beat, money they can make, good they can do, and customers they can delight.
Henry David Thoreau said “That government is best which governs least, because its people discipline themselves.” This is a philosophy directly opposed to that espoused by today’s U.S.government; they govern as if their basic principle is “Some people cannot discipline themselves, so we have to do it for them, and govern everyone’s lives in every respect.” How uninspiring. What’s more, it just doesn’t work – it’s been tried in state after failed state. For all its greed, inequity, and other flaws, the free market is still the best hope of everyone, from rich to poor. And if we lose it here in America, where will the rest of the world go when they need a break from the sad fairness of socialism?