Thursday, August 19, 2010

Banana Split Economics

We may never get out of the woods
To make and export our goods
If amidst all the sobs
We export our jobs
Instead of our handiwork
For that’s where big troubles lurk
The top banana wears a crown
And the rest of us wear a frown
Immersed in our tears and bankrupt
To support the rich and inept

One of the telling differences between the mixed democracies of Mexico and Central America and our own democratic republic has been the relatively high upward mobility of our citizens. Much of the mobility came from education and the public school system of the United States as well as excellent colleges and universities that came within reach of millions of citizens after World War II. Perhaps the single most influential factor was the GI Bill that provided the technical education that propelled the United States through the technology explosion of the 50s and 60s. We invested locally and gained internationally.

The federal government was the underwriter of advanced education and made that education easily affordable and within the reach of nearly everyone socially and even geographically. The technological cauldron was pretty much just that. It was a heated vessel that combined investment, education and labor here in the United States. While other pots were warming, our cauldron boiled over until foreign investment caught up with our market economy. Some of their catching up was through central planning as in China, India and to a lesser extent Japan where social status was subordinated to the needs of each nation to become competitive in a world marketplace. After WW II, the US had a comparative advantage in that we did not suffer major damage or loss of the capital equipment and other resources to compete in the world market. Given extended optimism and insufficient investment, that advantage eventually became a disadvantage as countries that replaced their capital infrastructure did so with more modern and efficient systems and equipment.

The economic disadvantage was made worse by some decisions in the 50s and 60s regarding wages and benefits that sought to give workers medical benefits instead of wage increases. Large corporations discouraged government investment in tax supported medical care. Two decades later, the Reagan Administration changed Medicare policy from payment based on treatment to payment based on diagnosis. Partially due to this, and due to the expansion of diagnostic techniques and equipment, diagnosis became a growth industry within medicine. Myopic labor unions did not fully consider the impact of technology on shrinking job numbers and they did not call for systemic changes in either wages or healthcare. Most developed nations adopted government-controlled healthcare when the US decided (by default) to maintain healthcare provided by corporations, mostly manufacturing. This later became unmanageable when costs skyrocketed and corporations began to cut back on inflationary benefits. The “last straw” for this rickety structure was the massive sea change resulting from labor being competed on a world-wide basis where ever lower level economies provided labor at lower and lower costs. At this point in 2010, not even China can compete in areas such as textiles and has closed hundreds of textile mills. Pakistan, a more recent entry to textiles has already had to close 600 of its 1,000 textile mills. Some of our recently purchased furniture was made in Vietnam. Years ago, it was made in New England. Later, it was made in North Carolina (a right to work state) and then in Europe, but the inexorable beat for lower labor costs accelerated the migration of manufacturing centers to a dizzying pace. Now, unions represent less than 13% of all jobs and far less in manufacturing. We got what we asked for: highly mobile workers and competition for work. Unions are powerless to slow the process. The trend is clear and the only bright spots over these decades has been technology surges when new technology combined with investment capital provided a respite in the outflow of good jobs from the US and the importing of cheap labor from Mexico and Central America. Eventually, Silicon Valley became just another brief stop on the Pony Express to economic oblivion. Executives like Carly Fiorina became famous for exporting high tech jobs (about 32,000 on her watch as CEO of HP). Unfortunately, once the process begins, it cascades and cannot be stopped without both courage and capital. Fiorina was fired and HP stock shot up 7% the following day, but the damage was done and only determined and focused management and investment helped bring HP back to life.

Despite her faulty management of HP, Fiorina was given a golden parachute worth about $20 million. Realistically, if given the opportunity, throngs could have ruined the company for half that severance. All this is describing a situation where our nation is often beatifying CEOs that appear to have only their own interests at heart. It was during the six turbulent years of Fiorina’s leadership that HP circumvented laws preventing the sale of high tech equipment to Iran while simultaneously exporting jobs. Is this in our national interest? These sainted CEOs are highly compensated for failure, perhaps because they have become our new upper class. They have been immunized from their disasters and rewarded for merely being CEOs. They are the lords and ladies of industry. What is more ironic is that now Ms. Fiorina, who seems unable to get another job in private industry, is seeking to become a senator using her name recognition despite the fact that it is negative and that she rarely, if ever, voted as part of the political process.

It is this penultimate social development that brings us back to the banana split. This style of social promotion varies significantly from that practiced in many schools. It is more akin to the social structure of the banana republics where the upper class rules politically as well as economically and that class has no need to take risks. Success becomes an element of birth and not of performance. They invest less in creation of meaningful jobs, but take control of businesses that are essentially monopolies or oligarchies with minimum risk and minimum investment. Carlos Slim is the wealthiest man in Mexico (and the world) with opportunities to assist his own nation to generate meaningful work. He sought and obtained privatization of the telecommunications in Mexico and that acquisition alone raised his net worth by nearly $20 billion. But then he also invested $250 million in the New York Times. While there is nothing wrong legally or even ethically with that purchase, it does nothing for the thousands of Mexicans who seek work here in the US due to lack of opportunity in Mexico. The “final” development is the increasing restriction of “banana republic” economics that effectively throttles the flow of youth into higher education that is needed for social and economic growth by the US. Once that process is nurtured, then relatively few families control the politics and economics of a nation and social striation is solidified. At that end point, the top banana gets economic and political control and takes fewer risks. Education becomes an artifact of the upper class and stagnation of economics is a natural result. The major variable becomes the downward pressure on wages.

The US needs to invest in technology and education and to keep the channels for vertical social movement open for all her citizens. Merit must replace the current system of rewarding birthright in industry. These are economic imperatives more than social engineering. Otherwise the lords and ladies get the ice cream sundae including the banana and the rest get the peel. Watch your step. Vote to support higher education. It may save your job through energy and innovation instead of stagnation and competing your salary.

George Giacoppe
17 August 2010

1 comment:

Roger said...

Ms. Fiorina is a perfect example of how the conservative capitalist ideal has failed. The capitalist theory states that if everyone works in their own self-interest, everyone will benefit in the long run. However, as Ms. Fiorina has been sending jobs overseas as the CEO of HP, the only one benefiting is herself, while the middle class suffers the job loss. She also believes that tax breaks for the rich will somehow trickle down to jobs for the middle class, but history has proven that what actually happens is a rising disparity between the rich and the poor on the backs of the middle class.