Cleaning the Attic

Time to clean out the "To do" link "attic" I keep handy. So, before they vanish into the ether, here are some that may be interesting to others.

Part I: Politics and Economy

Obama, Shaman by Michael Knox Beran:

Obama-mania is bound in the end to disappoint. Not only does it teach us to despise our political system’s wise recognition of human imperfection and the pursuit of private happiness; it encourages us to seek for perfection where we will not find it, in politics, in the hero worship of a charismatic shaman, in the speciousness of a secular millennium.

But Obama is for school choice...and for union "card-checks," as Mickey Kaus mentions in his refutation of the same:

It seems to me that a) a tight 90s-style labor market and b) direct government provision of benefits (e.g. health care, OSHA) accomplishes what we want traditional unions to accomplish, but on a broader basis and without encouraging a sclerotic, adversarial bureaucracy that gets in the way of the productive organization of work.

A Newsweek report on the economic feasibility of oil shale.

Megan McCardle on Sweden, cultural homogeneity and the welfare state.

"A behavioral economist explores the interaction of moral sentiments and self-interest." Surprise! The guy who wrote about the "Invisible Hand" and The Theory of Moral Sentiments was on to something.

Part II: History

A piece on America's "special grace" :

If America has been given a special grace, it is because its founders as well as every generation of its people have taken as the basis of America's legitimacy the Judeo-Christian belief that God loves every individual, and most of all the humblest. Rights under law, from the American vantage point, are sacred, not utilitarian, convenient or consensual. America does not of course honor the sanctity of individual rights at all times and in all circumstances, but the belief that rights are sacred rather than customary or constructed never has been abandoned.

"The Paranoid Style Is American Politics" reminds that conspiracy theories have abounded in American politics since, and including, the American Revolution. Mentions one of my favorites, Bernard Bailyn.

How "luck" is an important, if often overlooked, factor in American History (or any History, for that matter). It's not all about conspiracy or inevitability.

A long and interesting piece on Herodotus and why he wrote his history (from the New Yorker--if you're not banning it or anything...).

Book review of Sean Wilentz's Age of Reagan.

A review of a book about the "Black Death."

Part III: Culture

A "conservative" review of Iron Man (I haven't seen it):

The fantasy wish-fulfillment that makes Iron Man so winning is not being a guy who can fly around and shoot fire from his robot suit. It's being the guy with all the money in the world, the guy who can afford to make that suit.

In "Cleavers to Lohans: The Downhill Slide of the American TV Family", Katherine Berry traces the devolution of "quality family TV" to the reduced importance of parental figures. (Isn't the Lohan show reality tv?).

"Violence and the Video Game Paradox," a fairly recent ProJo op-ed by Dr. Gregory K. Fritz:

...the boom in violent video games correlates with the sharpest decline in youth violence in many decades....The answer to this apparent paradox is that correlation does not prove causation.

But, says Dr. Fritz, parents should still pay attention!

Finally, Where'd Generation X go?

The Coming China Wars

I recently finished reading Peter Navarro's new book, The Coming China Wars: Where They Will be Fought, How The Can Be Won.

The purpose of this book is to warn that unless strong actions are taken now both by China and the rest of the world, The Coming China Wars are destined to be fought over everything from decent jobs, livable wages, and leading-edge technologies to strategic resources such as oil, copper, and steel, and eventually to our most basic of all needs--bread, water, and air.

To achieve his purpose, Navarro explains and examines how various Chinese policies affect its people and government and those of the rest of the world. For example, the book is replete with examples of how China's government has set-up uneven economic playing fields domestically and globally through currency manipulation, protectionism, worker mistreatment, lax regulation--if any at all--and ignoring product piracy within its borders (80% of pirate products seized at U.S. borders come from China). Such practices have fueled China's economic growth at an unsustainable pace, according to Navarro. Throw in a growing appetite for natural resources, both its own and those of other countries, and China is a ravenous beast not easily sated. Its economic needs affect its judgment as the pressure to maintain the rate of economic growth encourages the maintenance of the same unfair and immoral practices.

Given the way China operates within its own borders, it is no surprise to learn that it makes no moral ties to its economic needs abroad; looking the other way when dealing with dictators in Africa or Iran or North Korea for natural resources in exchange for weapons or help with infrastructure, which in turn helps China extract the aforementioned resources. Environmental issues are also not high on their list of priorities. 18 of the 20 smoggiest cities are in China and that so-called "chog" finds its way into the air of its Asian neighbors and the West Coast of North America. Then there is the disastrous treatment of the Chinese waterways: the Yellow River is often also blue, green or red; the three Gorges Damn is proving to be an environmental and health disaster. Recent coverage of the upcoming Beijing Olympics has revealed to the world such things as a particularly large algae bloom and Beijing's poor air quality.

Their willingness to take environmental short-cuts buys them economic growth because such a lax atmosphere proves too tempting to foreign companies. Here, Navarro makes an important historical point:

There is both a danger and a paradox here that should not be lost on any student of Chinese history aware of the "foreign humiliation" that China was subjected to in the nineteenth and twentieth centuries. The danger is that these powerful foreign economic interests are overpowering the political will of the central government, thereby rendering it impossible for China to get a handle on its own pollution problems. The paradox is that as China's Communist Party seeks to mold the country into a superpower, it is quickly losing control of its own destiny to powerful foreign economic interests.

Thus do foreign companies and countries (and their consumers) prop up Chinese economic practices. However, Navarro does suggest that such a climate is causing worker unrest upset over unpaid wages, revoked or reduced pensions and poor health. Then again, the Chinese government has also engaged in repression (Falun Gong, Tibet, Uighur), often with the implicit help of foreign companies (Yahoo! is singled out). This belligerence is also turning outward as China is amidst a dramatic military buildup with the apparent goal of power projection around the world and even into outer space. (An aside: this was the first time I'd heard that the moon may have rich deposits of Helium 3, a rare isotope that scientists believe could help with nuclear fusion.)

So what should we do about all of this? Navarro's concluding chapter offers some suggestions to both governments and to we the people. Focusing on his prescriptions for the individual, Navarro explains that we haven't really, truly been paying attention because of "the narcotic effect that cheap Chinese goods have had on us" or we've been more worried about the Middle East. Or, perhaps most importantly, there "is a general lack of awareness of the far-ranging implications of a world increasingly 'Made in China.'" As to this last, The Coming China Wars is a quick and succinct way to get up to speed. Cheap goods are good for the American consumer, but not if they are produced on playing field tilted as dramatically as portrayed by Navarro.

Note: Original version posted at Spinning Clio.

Progressive Culture Shock

Believe it or not, I'm not a big fan of class warfare. I'm a blue-collar capitalist, after all. I break my back merely to get by, but I'm deeply suspicious of plans to grant the government authority to redistribute income away from those who are more likely to have their backs massaged than strained.

Still, when a behind-the-scenes architect of the progressive Economic Death and Dismemberment Act laments that working stiffs aren't helping to make his commute to work via public transportation more pleasant, it's a bit much to take:

Last week, I was a little startled to get a phone call from my daughter, who is 14. She plays the viola, you see, and is traveling with her high-school orchestra in Europe for ten days this summer, and I'm the kind of 20th-century guy who is surprised by phone calls from Germany.

But it was a happy call, and she reported to me that they were in Berlin, and told me about the Checkpoint Charlie museum (giving me the opportunity to reflect that the Berlin wall, which seemed eternal to me once, came down three years before she was born), and the Fernsehturm, a giant TV tower with a rotating platform from which to view the city. But she also reported that the trains and buses were cool, too. She was thrilled that she and her friends could get wherever they wanted to go -- by themselves. We had a 3-minute call, and probably half of it was about the feeling of independence and how much fun the trains were to use. ...

The problem [in Rhode Island] is that the system is stuck: endlessly starved of resources by a legislature and Governor who don't ever ride the bus themselves and don't see its value. The result: overcrowded and unpleasant riding conditions, schedules so sparse they barely work at all, and unreliable service to boot. The truth is that RIPTA is barely adequate as public transit, and the proof is in the number of cars parked at RIPTA's Elmwood Avenue garage each day -- even the drivers and managers who get a free ride don't take it.

My question for Tom Sgouros: If my wife and I don't have the global mobility that his teenage daughter enjoys, why should we subsidize her vehicular independence back home? If we haven't been able to afford to take a whole week off in two years or to take those sorts of vacations that involve, you know, hotels and stuff for about a decade (since our honeymoon), perhaps it isn't merely the elitism of the governor and the GA that limits the distribution of public finances.

If Mr. Sgouros wishes to transfer more of the state government's current spending toward public transportation and infrastructure, he'll earn my support. But he'll have to explain to his union and other public-dime friends and employers that their largess must be the source of the funds. The rest of us are tapped, and those who need to carry van-loads of tools (rather than laptops and leather briefcases) to work don't derive quite the same cost-benefit analysis.

And if public transportation is such a great deal, by the way, why can't its managers charge enough of a fare to make ends meet without tax dollars? Their doing so might deprive a viola or two of international airfare, but at least Dad wouldn't have to ride to the office on the backs of the proles.

Rhode Island 48th Most Attractive State to Business (Again)

CNBC rated the business climate of the 50 states. Well, at least we didn't get worse....

Interestingly, while RI was pretty static in most categories, there were gains in Workforce and Education (almost into the upper 1/3 in each). Here is CNBC's description of each category, respectively:

Many states point with great pride to the quality and availability of their workers, as well as government-sponsored programs to train them. We rated states based on the education level of their workforce, as well as the numbers of available workers. We also considered union membership. While organized labor contends that a union workforce is a quality workforce, that argument, more often than not, doesn’t resonate with business. We also looked at the relative success of each state’s worker training programs in placing their participants in jobs....

Education and business go hand in hand. Not only do companies want to draw from an educated pool of workers, they want to offer their employees a great place to raise a family. Higher education institutions offer companies a source to recruit new talent, as well as a partner in research and development. We looked at traditional measures of K-12 education including test scores, class size and spending. We also considered the number of higher education institutions in each state.

It appears as if the aforementioned gains were offset in the overall rankings by a big dive in the ranking of Access to Capital, which CNBC explains

Companies go where the money is, and venture capital—an increasingly important source of funding—flows to some states more than others.

Plus we're still way at the bottom in most other categories. So it would appear that the business climate in this state is so poor that even our relatively attractive workforce can't lure businesses to open up shop. Instead, they stay away. And that young and educated workforce? They leave.

The Sweet Simplicity of Progressivism

If only progressives' plans were always this straightforward:

Statewide Wifi available everywhere to everyone... for free .

And let the cable/telephone companies bid on the right to be the State's sole provider. How would it be paid for? The company winning the bid to provide the service will maintain sole rights to sell advertising space on the statewide network.

So, we take a centralized power with tax and police powers and invest it with the authority to determine the single corporate provider of Internet services in the state, and that provider wouldn't charge a penny because it would reap its rewards by selling advertising targeting its monopolized captive audience. No chance of corruption and ossification there!

Where would the ads appear, again?

Innovation and the entrepreneurial business culture revisited

A recent post, Lessons for Rhode Island from Silicon Valley: An historical reflection on an actual innovation economy, discussed what made Silicon Valley's entrepreneurial culture so unique and what some of its economic growth policy lessons are for Rhode Island.

In the latest edition of The Weekly Standard, Thomas Hazlett has written about the book, Overcoming Barriers to Entrepreneurship in the United States, in a review entitled Mastering the Game: The business of America is small business - and entrepreneurship.

Hazlett has these words to say about the entrepreneurial culture of Silicon Valley:

...The entrepreneurs who stir the pot in brash and productive new ways are a mysterious force, difficult to chart with PowerPoint bullets. There is no doubt that innovation and risk-taking--the contributions of these master chefs of the economic stew--drive progress. But they are elusive, and will not hold still for measurements.

This sleek, nifty volume of essays seeks to pursue the beast--and if not to capture it, then, at least, to triangulate its position. Edited by labor economist Diana Furchtgott-Roth, it teaches us why venture capitalists cluster in places like Silicon Valley...

...the book is, caveat emptor, not a cheerleading manual: Neither Henry Ford nor Sam Walton nor Bill Gates is mentioned. The authors are social scientists at prominent institutions who probe substrata economic formations looking for clues as to what factors drive the self-employed to leave their wage jobs behind, and how public policies impact this migration.

For instance, the chapter on Silicon Valley's venture capital hub offers a fascinating window into the sociology of entrepreneurial nurturing. Venture capital investments in Silicon Valley appear to be made differently than elsewhere: They come earlier to start-ups, and lavish more capital on firms. Either due to this, or the other way around, start-ups there outperform those elsewhere, on average.

Why is this? The answer seems to lie in the commercial culture. Unlike investment bankers doling out high-risk, early-money investments on the East Coast, Northern California financial sources are run by technical experts possessing business experience--entrepreneurs funding entrepreneurs. These capitalists operate like bankers, but they know more. Which may account for the more frequent huge payoffs in Silicon Valley and a higher wipeout rate. No irony here: Risk is hardwired into the entrepreneurial economy, and ugly failures are inputs into spectacular successes.

Economist Junfu Zhang, the author of the VC chapter, concludes that the mission launched by many local or state governments--to replicate the Silicon Valley experience--is a fool's errand. The social networks that form are key; capital chases smart people connected to other smart people. Wealth is created when those dollars and networks combust. The best strategy is to eliminate the underbrush of tax and regulatory disincentives that inhibit productive economic activity generally. Or somewhat more ambitiously, create a Stanford University and let the graduate students figure out the rest.

After 17 years in Silicon Valley, I have worked as an interim executive in numerous cities east of the Mississippi River over the last decade. One of the most striking observations from these experiences is how many people tried to replicate Silicon Valley without understanding or paying attention to any of the fundamentals which made the Valley successful. The social network out West (or in the Cambridge/Boston area) did not spring up overnight and the operating companies and the services infrastructure which support them are now firmly rooted in an entrepreneurial culture where explicit and tacit knowledge flows freely.

On a broader policy level, Hazlett writes:

...In the essay on tax policy, written by Donald Bruce and Tami Gurley-Calvez, an interesting body of research is presented. It shows that the vast majority of business owners in the United States pay taxes as individuals, not corporations. This means that rate increases for high-income taxpayers reduce pay-offs for the start-up entrepreneur. And tax hikes on capital reduce the pool of risky funds that these new ventures seek to tap.

Soaking the rich sinks this ship. Entrepreneurship is all about creating new wealth while tax redistribution is premised on the assumption that resources are static and the collateral damage from tax hikes is no more than the cost of ear plugs to block out the whining at the country club...

Therefore, given the tax filing nature of small businesses and entrepreneurs described above, the Left's negative description of the recent reduction in RI income tax rates for higher earning individuals as only tax cuts for the wealthy and their desire to roll back the reductions has a clear economic impact: Restoring higher taxes is likely to take away cash flow from many of the very small businesses which could otherwise invest the higher profits in expanding their operations and providing more jobs.

Rhode Island's economic engine will only begin to heal itself when the lessons articulated above and in the earlier post are heeded.

Environmental Mania Claims Jobs

Something has seemed forced — in a "just a bit too perfect" way — about the promise of "green jobs" as some sort of savior of our economy. Ben Lieberman suggests that, even if such jobs do proliferate, they don't match up with the number of jobs lost to the larger ecological zeitgeist:

According to a study conducted by the Heritage Foundation, the bill would cost half a million manufacturing jobs by 2018, 1 million by 2022, and more than 2 million by 2027. Of course, most of these displaced workers will eventually find something else to do, but often at lower wages.

Some proponents claim that new "green collar" jobs would make up the difference. For example, there will be more work at solar-panel manufacturers and other industries helped by the bill. But these jobs will be swamped by the number of those lost. The Heritage figures are net of any manufacturing jobs gained, and also exclude blue-collar jobs likely to be lost for reasons unrelated to the global-warming bill. ...

To add insult to injury, as many households struggle with layoffs and shifts to lower-paying jobs, they also will have to endure higher prices for electricity, natural gas and gasoline thanks to this bill — a costly double whammy.

All for the promise of an ultimately minor benefit to the environment, if any. As some of us have been unable to avoid noticing, however, "green" is more of a religion than a considered reaction. It brooks no dissent and tabulates no costs, but permits the insertion of all manner of prior political preferences.

Lessons for Rhode Island from Silicon Valley: An historical reflection on an actual innovation economy

With the economic crisis in Rhode Island, there is much talk (e.g., my recent post and Ian Donnis) about what it will take to generate real change and economic growth in the state.

Leonard Lardaro, professor of economics at URI, offers his thoughts in a ProJo editorial Only RI Cure: Cut spending and taxes, where he writes:

...There is a great deal of angst about our state’s economy by both citizens and lawmakers. In a recent exchange, a member of the legislature’s Joint Committee on Economic Development took the head of the Economic Development Corporation (EDC), Saul Kaplan, to task for his alleged contribution to our state’s current economic dilemma. According to a May 2 story on the exchange (“EDC is grilled on bad R.I. economy”), EDC was: “chastised . . . for allowing the state to slip into . . . the Northeast’s only recession.” Wow! I never imagined Mr. Kaplan was powerful enough to single-handedly draw us over the edge into recession!

Pardon my sarcasm, but I remain stunned by what this quote reveals: how grossly out of touch with economic reality some of our state’s legislators are. What a vivid illustration of the paropic (parochial and myopic) mindset held by so many of our state’s leaders!...what was sorely missing from this exchange is cause and effect.

To understand the state’s problems, it is necessary to go back to the end of 1987, when Rhode Island first became a post-manufacturing economy. The rules of the economic game today are very different from those in the “good old days” of manufacturing. Because job loss today often entails the permanent elimination of jobs, job creation has become job initiation, not job resumption (factories rehiring after usually temporary layoffs). And since the initiation of new jobs is more risky and costlier than job resumption, production and employment costs are more critical to the success of states in creating jobs.

Taken by itself, this presents one glaring problem for Rhode Island in the post-manufacturing era: Our tax and cost structure (which includes fees, regulations and potential problems with the skills of our labor force) is nowhere near as competitive as it must be for us to be successful in this post-manufacturing environment...

But, getting back to the exchange with the EDC, given Rhode Island’s current non-competitive tax and cost structure, what “cards” does EDC have to play in attempting to expand businesses and employment here?...

This brings me to the second problem for Rhode Island: What is our state’s dominant niche? Recently, we decided to move toward biotechnology, pharmaceuticals, life sciences and oceanography. Is our tax and cost structure consistent with success in this niche? I doubt it. How far will our existing economic climate be able to carry us? Will we be able to generate the levels of employment, income and tax revenue that will allow us to attain our desired economic goals?

It is on this count that the glaring deficiency of our non-competitive tax and cost structure exacts its toll. All too often, EDC is forced to make deals with individual companies or industries to generate these types of economic gains. How large have these gains been? Generally, not large enough, as employment here has continued to fall since January of 2007.

In terms of fairness, these deals add insult to injury for existing firms here, which wonder why they can’t receive better treatment all the time. Efforts to expand existing businesses and to get new firms to locate here absent specific incentives have not been sufficient for us to be as successful as we should have been in this post-manufacturing era...

Because the legislative and executive branches, along with the EDC, have jointly failed to produce a competitive tax and cost structure, economic growth here has suffered...

The deficits we now face are largely self-imposed, resulting from unsustainable spending practices over the last 20 years, the failure of our paropic leaders to redefine our state in terms of a niche with a compatible tax and cost structure until very recently, and a separation of economic leadership that, as the exchange between the EDC and legislature shows, is all too often "us" versus "you."

Deficits are not pleasant, especially when largely self-imposed. But they will serve our state’s long-term interest by forcing the type of fiscal discipline that has been so sorely lacking, and, hopefully, an end to factionalized economic policymaking.

Tax and spending policies by RI government do matter in a big way and fixing those problems in the short-term is an essential part of an overall solution. But unwinding the taxation and spending disincentives in RI only opens the door to a positive future. There are more changes which have to happen as part of a total solution.

One way to look to the future is to learn lessons from the past. And no place has been an economic growth engine like the innovation economy of Silicon Valley over the decades, a place I lived and worked in for 17 years.

What were the critical success factors which powered entrepreneurial innovation there? It is a conversation I have been having with friends and colleagues for years. And in the last few weeks, I went back to venture capital, investment banking and university technology licensing friends from Silicon Valley to continue the conversation.

Here is what we pulled together as some of the critical success factors:

• Stanford Engineering School Dean Fred Terman: Terman hired faculty with industrial experience and encouraged academic/ industry relationships. This dated as far back as the 1930's so there was a cultural legacy of interactions between the two communities. More on Terman here and here.
• Stanford University Office of Technology Licensing: With its outstanding engineering/science/medicine programs, Stanford was both a center of technology development and had more liberal technology licensing practices which encouraged commercialization of innovation. The university also allowed faculty to spend time doing outside work. This provided a pipeline for new technologies which, over time, was supplemented by technology within companies.
• Management Development: Businesses can't grow without a pool of talented and trained management. The early growth at both Hewlett Packard and Fairchild/Intel, including both their legacies of excellent management practices and at least HP's original practice of regularly spinning off new divisions, provided a number of decades of management training and development. Their efforts, like Genentech later in the life sciences area, provided much of the original management team infrastructure as newer ventures were launched.
• California's Entrepreneurial Culture & Services Infrastructure: While the nice weather didn't hurt either, California's historical culture was inherently entrepreneurial and, over the decades, an entrepreneurial culture took root and led to an ongoing practice of starting new companies and providing infrastructure services to those companies.
• Capital Gains Tax Rate Reduction Powers Early Stage Financings: The capital gains tax cut in 1978 really launched the growth in the venture capital world and provided the financial capital infrastructure to fuel early growth.
• Local Investment Banks Provide Later Stage Capital: Local investment banks, such as Hambrecht & Quist, Robertson Stephens, and Montgomery Securities, themselves entrepreneurial organizations, were formed to provide later stage capital. In addition, led by Frank Quattrone, some leading New York City-based investment banks set up operations in Silicon Valley, creating an even more competitive environment for later stage capital.

Here are some comments from my friends:

• You're spot on with the influence of Fred Terman. His should be a household name for all the contributions he made and culture tone he established. I think he's the real hero of the story and more should be written about him.
• By way of contrast, it's noteworthy that RTP in NC has been promoting itself as a tech center since the 1950's, only gained traction from the 1980's on, and built itself primarily through the Chamber of Commerce route of attracting large multi-national companies, with start-ups being an after-thought until they started to evolve and grabbed some of the spotlight.
• At a time when universities are paranoid about blurring the distinction between academia and industry it's instructive to recall that the Varian brothers's company made and shipped Klystron tubes from a Stanford lab during WWII, and that technology transported back and forth between Stanford labs and HP in the early days. We should collectively learn that current conflict-of-interest phobias preclude arrangements such as these, which ultimately were of tremendous benefit to both the local and national economy.



• Current practice of most tech transfer offices impedes entrepreneurism, and the most productive approach is found in those offices that minimize these barriers. For those who think there's some abdication of the public trust in this view, I query why it is better from a public policy perspective for [a big pharma company] to profit from a new drug than a local start-up, so long as the drug comes into public use...and I would postulate that the amount of financial return that Stanford would have obtained from the most perfectly optimized licenses from all that early technology traipsing out to HP is dwarfed by the magnanimous giving of the Hewlett and Packard families--giving born out of the goodwill generated by Stanford being helpful to them in their early days.
• The Stanford Licensing Office was formalized in 1970, and Niels Reimers ran it with an approach different from any other university licensing office. Rather than staffing it with JDs, PhDs and/or bureaucrats who focused on filing patents, Niels focused on marketing, and filing patents only when a licensee was identified (see article). Most importantly, Niels made his priorities clear: our job was to ensure Stanford technology was efficiently put into public use and benefit; that the best technology transfer is the graduating student; that our job was to create opportunities for research staff and students; that exclusive licenses were not only acceptable but desirable to provide companies incentive to commercialize; and that--whenever possible with the above, we should try to obtain a financial return to Stanford (as opposed to many offices, where they act to maximize every dollar they can up-front, which is to their long-term detriment). Niels kept a long-term view on creating opportunities, with faith that our activities in promoting industry - university connections was justification in itself, and that the financial returns would take care of themselves. As the office grew, Niels maintained an entrepreneurial and marketing-oriented approach. Every licensing person had a high level of freedom to negotiate a license, with review only at the end of the process (we knew what terms were important to safeguard, and were given freedom to negotiate other--mostly financial--terms to the best of our judgment). This enabled us to work expeditiously. It also kept us focused on industry, with a respect for their needs. Stanford's overall attitude enabled researchers to devote time to outside activities and consulting--as you point out. Although the amount of time for outside consulting was the same as other institutions (such as UC), the key difference was that Stanford encouraged researchers to interact with industry. At many institutions, the culture has in the past been (and often still is!) adversarial to this. Seems like every researcher I knew at Stanford kept a business plan in the top left drawer of their desk--they'd pull it out after every meeting and would ask if I knew any VCs...The cultural issue is huge, and has been tough for other institutions to duplicate. The strongest lever for change is the Faculty Club Effect, where researchers sit at lunch and stare enviously at the guy who just made $10 million from selling his company, and gripe to themselves that they're at least as smart as him...Every institution seeking to replicate Stanford's culture has to have at least one success story, place that guy in the Faculty Club, AND change top administration's attitude so they're more enlightened (and not sending out the conflict of interest police to find alleged corruption underneath every desk).
• ...the risk taking/supportive culture [was] a shocker coming here from the East Coast. There were all sorts of services - VC, banking, legal, real estate, equipment leasing, etc. that would believe and take chances on these companies and enable them to take risk. If they succeeded, they would be celebrated. If they failed - most importantly - that was not viewed as a disgrace but instead a learning experience that made them more valuable to the next venture. A few more modern day success stories that sprang from Stanford - SUN, Silicon Graphics, MIPS (of which the current Stanford President was a founder), Cisco, Yahoo, and Google all started as projects within Stanford.

There are some clear lessons for Rhode Island in this review:

• Consistent, long-term incentives drive lasting economic behaviors: People and institutions respond rationally to explicit and implicit economic incentives. Consistent, long-term incentives matter the most and drive structural changes in behaviors. Offering taxation incentives and then taking them away, as has been proposed recently during the budget crisis by some on the Left, sends a clear signal to the marketplace that RI is not serious about creating the necessary long-term incentives which will lead to favorable investment decisions in RI.
• Competitive alternatives exist and will be favored until RI's taxation and regulatory policies are competitive: The greater Boston/Cambridge area, with the influences of many existing companies, MIT, Harvard, Massachusetts General Hospital, etc., is a place where experienced management and services infrastructures already exist without the uncompetitive taxation burden and budget problems of RI. One-off solutions like selling portions of the Lottery do not solve the fundamental competitive disadvantage problem and are, therefore, not viable solutions which will make RI a place to favor for new business development, especially given the nearby alternatives.



• No economic czars are needed: If broad economic incentives are consistent, favorable and there for the long-term, individuals and organizations will have all of the proper incentives to act rationally and bring business into the state. There is no need for an economic czar or targeted tax incentives here. As the Frenchman Bastiat wrote in the 1800's: Paris gets fed...without any central planning and it occurs because knowledge is shared and the right incentives exist for people to act, people who don't even know each other. A future post will explore further how the role of knowledge, tacit and otherwise, drives economic decision-making and why centralized economic planning will always fail.
• Quality of state services and public education matter: A crumbling infrastructure and lousy public schools create a disincentive for people to bring their families into RI. Why pay higher taxes for worse services? Why pick mediocre RI public schools when MA schools just across the border offer a better education to kids?
• A sense of urgency is critically important: One of the central lessons from Silicon Valley is that its economic growth engine did not come about overnight. Building the management development engine and the services infrastructure took time. Yet there is no sense of urgency among state leaders in RI to either grasp the lessons from Silicon Valley or implement policies which create the required consistent, long-term incentives that will lead to such infrastructure solutions.

We will see the budget proposals shortly from state officials. Will they show any real leadership and offer serious proposals for change? Will they change the long-term economic incentives which will contribute to economic growth? Or will they dither and make it even more likely that the only solution for RI will be to let it blow up and then pick up the pieces? Bluntly, there is little reason to be optimistic. I hope I am wrong.

Attacking the Wise for the Sake of the Fools

The immorality of wealth is a notion that has been in the air lately, with the latest example being David Brooks's lamentation of "The Great Seduction" in the New York Times:

The United States has been an affluent nation since its founding. But the country was, by and large, not corrupted by wealth. For centuries, it remained industrious, ambitious and frugal.

Over the past 30 years, much of that has been shredded. The social norms and institutions that encouraged frugality and spending what you earn have been undermined. The institutions that encourage debt and living for the moment have been strengthened. The country's moral guardians are forever looking for decadence out of Hollywood and reality TV. But the most rampant decadence today is financial decadence, the trampling of decent norms about how to use and harness money.

Inasmuch as I believe conscience and social pressure to be ultimately more likely to precipitate the sharing of wealth than political demands (short, perhaps, of violent revolution), frequent and visible criticism of the unproductive amassment of wealth is certainly to be encouraged. Brooks's allocation of blame, however, misses the critical other side of the coin:

The agents of destruction are many. State governments have played a role. They aggressively hawk their lottery products, which some people call a tax on stupidity. Twenty percent of Americans are frequent players, spending about $60 billion a year. The spending is starkly regressive. A household with income under $13,000 spends, on average, $645 a year on lottery tickets, about 9 percent of all income. Aside from the financial toll, the moral toll is comprehensive. Here is the government, the guardian of order, telling people that they don't have to work to build for the future. They can strike it rich for nothing.

Payday lenders have also played a role. They seductively offer fast cash — at absurd interest rates — to 15 million people every month.

Credit card companies have played a role. Instead of targeting the financially astute, who pay off their debts, they've found that they can make money off the young and vulnerable. Fifty-six percent of students in their final year of college carry four or more credit cards.

Congress and the White House have played a role. The nation's leaders have always had an incentive to shove costs for current promises onto the backs of future generations. It's only now become respectable to do so.

Wall Street has played a role. Bill Gates built a socially useful product to make his fortune. But what message do the compensation packages that hedge fund managers get send across the country?

Failing to mention those who've sought the instant gratification facilitated by debt (a group that most definitely includes me) leaves open a frame of mind that greatly contributes to our culture's financial problems. We whom the above listed role-players have affected are taken to be reactive children with no capacity to withdraw our demand in response to the pushed supply. We're "vulnerable."

Brooks lauds Ben Franklin as an archetypal advocate of "hard work, temperance and frugality," so it's conspicuous that his emphasis is so different from the founder, who penned such aphorisms as the following:

Fools make feasts, and wise men eat them. ...

Wise men learn by others' harms, fools scarcely by their own. ...

Get what you can, and what you get hold; ’Tis the stone that will turn all your lead into go.

Well, 'tis better to be wise than to be a fool, so "rather go to bed supperless than rise in debt." To some extent, the steps toward healing our financial culture that Brooks enunciates are determined by his audience, which probably includes more lenders than lower-income borrowers.

What is needed before all else, however, is confirmation of the individual's agency and responsibility, because without a sense of those, we're all just waiting for that winning lottery ticket, heedless of Franklin's suggestion that "diligence is the mother of good luck."

The Demographics of Joblessness

It would seem that there's something cultural about young-adult joblessness:

Much of the spike in unemployment was caused by an unusually large surge of teenagers and people in their 20s into the labor force. And those young workers had little success finding work. The jobless rate among 16- to 19-year-olds rose to 18.7 percent from 15.4 percent in April. Retailers, who employ a large number of unskilled teenagers during the summer, cut 27,000 positions in the month.

Rising unemployment, however, spread well beyond young people. The jobless rate rose among almost every other group -- men, women, blacks and whites. The rate was unchanged among Latinos.

This recent article on H-2B visas comes to mind:

Several factors make recruiting American workers for seasonal jobs difficult, Venturini said. Some people just don't want to clean dirty rooms, she said, plus the jobs are temporary and often require working weekends and holidays. ...

As for college students, they are increasingly more interested in internships or jobs that will directly enhance their career prospects. And with Newport and Block Island trying to create "shoulder seasons" before Memorial Day and after Labor Day, college students are often not available when employers need them. ...

"We would love to hire American workers, and not have to deal with housing, airline tickets, fees. As a business, why would you go through all this unless you had to?" said the Hotel Viking's O'Donnell. "We're a hotel, first and foremost. We need clean rooms. We need to have skilled housekeepers."

In the fashion after which issues tumble and blend, some cultural readjustment may result from and alleviate economic hardship. (Maybe.)

Ignoring a Force of Market

Here's a statement that I've read multiple times with reference to "alternative energy", specifically the bills to provide incentive to National Grid to buy it that have just passed the RI House:

Matt Auten of the advocacy group Environment Rhode Island denied that renewable energy would drive up electricity costs, describing the bill instead as a "prudent response to skyrocketing prices for electricity [and natural gas] because it will lock in a fixed price not tied to polluting fossil fuels for a portion of Rhode Island’s electric needs."

What am I missing in the provision of "alternative energy" that makes it free from market forces? As far as I can tell — letting legislators mandate what they will — the price of any energy will ultimately be "tied" to non-alternative energy prices, among other things. (One can foresee future conversations about the lack of wind in a given year.)

And that doesn't take into consideration the side effects of solidifying National Grid as a state monopoly through mandates and regulations.

URI Experts Worried About Fixing the State

Dan Yorke had URI Professor Dr. Ed Mazze on yesterday (podcast and related column here), who sketched out how we got in this mess (sub-prime collapse and overall housing problem in RI was the leading cause of recession in the state; 6000 jobs lost since January). Such things contribute to a simultaneous lack of consumer and business confidence in RI's economic future. His colleague, URI Economics Professor Leonard Lardaro has been sounding the warning bells on this too.

Mazze also explained that, since at the end of day its about getting better paying jobs that can lead to higher tax revenue, we are in a bad spot because people, talented people, are leaving the state. So how do we keep them here? Well, stop being one of the highest taxed states, for one.

We also need to get focused on attracting businesses to the state. Mark Higgins, Dean of the College of Business Administration at URI, was recently on A Lively Experiment and emphasized that the State needs to focus on aid to higher education because an educated work force attracts employers, etc. Further, Higgins also noted that we don't have an overall economic strategy and instead rely on ad-hoc incentives to different businesses (like movie studios). The smart thing would be to focus on making the state attractive to a few key industries. Instead, we have a Legislature that wants to immediately spend "new" casino money (from 24 hr gambling) instead of finding a way to strategically invest it.

For his part, Mazze believes that health care and oceanography would be fruitful areas for RI to focus on. The latter makes sense given Bob Ballard's presence at URI and the proximity of Raytheon and other maritime related businesses in our state.

Mazze stated we had to be realistic about size of state and the size of government. There are too many superintendents and fire & police chiefs: top dollar jobs. He thinks a centralized school system and a 5 county system would help. He believes that the Governor has done what he can, but too many cuts, which will result in top level, experienced people leaving to take buyouts, will affect the quality of state government services. Higgins echoes this concern, noting that Democrats haven't taken action and that cuts across the board weaken everything. Further, Higgins agrees that legislators should be asked to sacrifice (health care, pensions) like the private and portions of the public sector already have. (Not sure if he's keen on revoking free tuition for the progeny of college professors, though.)

Mazze is not in favor of raising taxes, but isn't sure if we can get out of this situation without raising taxes. He fully expects to see tax hikes after the November elections. There is simply no other way to raise revenue, shortsighted though it may be. In short, we've lost too many people (taxpayers) and the revenue they generate. Those of us left behind will have to pay more. Of course, we could also demand that we shrink government!

Finally, Mazze said he was "freaking out" because he hears talk from our elected officials, but sees very little action.

Everybody's the Boss

There's a certain wrongheadedness — an insecurity — to the feeling of which Rita Lussier's expression is merely one example of many:

"Yeah, the $4-dollar-a-gallon thing is hard to take," he says as he puts the hose back on the hook and screws the cover on his tank. All the while, he keeps smiling, smiling, smiling.

And then, just before he hops in his truck, this is what he says: "I just pass the cost along to my customers."

I JUST PASS THE COST ALONG TO MY CUSTOMERS.

He's not alone.

The electric company is asking for another rate hike. The airlines are raising their fares, some are even charging for baggage. No question, when companies have to pay more for fuel, what else can they do?

That's right. They just pass the cost along to their customers. ...

So here we are, standing at the pain station and what are we supposed to do? Who do you and I pass our costs on to? We, who are bearing the brunt of all the landscapers, the painters, the plumbers, the electric companies, the natural gas companies, the grocery stores, the buses, the trains, the airplanes, the state and federal government and everyone else who's putting their load on our backs.

What a declaration of helplessness! Sure, Lussier goes on to offer some ways to use less fuel, but she nonetheless misses the reality that everybody is both supplier and customer. I mean this in the sense that the landscaper with whom she's speaking still has costs for the fuel that he uses for his home and his private vehicles, but I also mean it in the sense that anybody with a job is ultimately supplying something to somebody and every business is seeking to "buy" money from clients with their goods and their services.

So, pass your costs on to your employer. If you don't think you've the grounds to seek more, find ways to make yourself more apparently valuable. On the other side (and probably more easily), pass your costs on to businesses by doing your own landscaping, painting your own house, learning basic plumbing and electric, perhaps growing some of your food, walking more, and demanding that your government take less from you.

Nobody's passive in the economy, and to turn to federal legislators for help — as Lussier suggests, even providing Sheldon Whitehouse's phone number — is to dig one's nation more deeply into helplessness, because nothing's free, especially when it comes from Washington.

Michigan's Lesson to Rhode Island

From an editorial in today's Wall Street Journal:

[T]he latest news of Michigan's deepening budget woe is a national warning of what happens when you raise taxes in a weak economy.

Officials in Lansing reported this month that the state faces a revenue shortfall between $350 million and $550 million next budget year. This is a major embarrassment for Governor Jennifer Granholm, the second-term Democrat who shut down the state government last year until the Legislature approved Michigan's biggest tax hike in a generation. Her tax plan raised the state income tax rate to 4.35% from 3.9%, and increased the state's tax on gross business receipts by 22%. Ms. Granholm argued that these new taxes would raise some $1.3 billion in new revenue that could be "invested" in social spending and new businesses and lead to a Michigan renaissance.

Not quite. Six months later one-third of the expected revenues have vanished as the state's economy continues to struggle. Income tax collections are falling behind estimates, as are property tax receipts and those from the state's transaction tax on home sales....The tax hikes have done nothing but accelerate the departures of families and businesses. Michigan ranks fourth of the 50 states in declining home values, and these days about two families leave for every family that moves in. Making matters worse is that property taxes are continuing to rise by the rate of overall inflation, while home values fall. Michigan natives grumble that the only reason more people aren't blazing a path out of the state is they can't sell their homes. Research by former Comerica economist David Littmann finds that about the only industry still growing in Michigan is government. Ms. Granholm's $44.8 billion budget this year further fattened agency payrolls.

There's another national lesson from the Granholm tax dud. If Democrats believe that anger over the economy and high gas prices have put voters in a receptive mood for higher taxes, they should visit the Wolverine State.

On the Golden Path to Debt

Related to Andrew's "Finance and Demography" post, I've been wondering, lately, how much economic growth of late has relied on increasing debt. Sure, production expands the economy, but somehow it has to correspond with consumption, no?

In particular, I'm thinking of Spenlger's line: "The financial markets, in turn, found ways to persuade Americans to borrow more and more money." It brings to mind Michele Singletary's suggestion that people make a comparison of their spending on and off credit cards:

I'm reasonably sure that many people do not make the same purchases when they pay with plastic. This isn't just a feeling or anecdotal evidence. Researchers have found that people's willingness to purchase more products or services increases with the use of plastic.

In their groundbreaking research, Drazen Prelec and Duncan Simester of the Sloan School of Management at MIT found that study subjects paid more when instructed to use a credit card rather than cash. In fact, they found that people were willing to pay up to 100 percent more with plastic. ...

"This customer behavior is at odds with standard economic theory, which argues that the method of payment should have no effect on spending, so consumers seem to be indulging in 'irrational' behavior,' " Davies says in a research article, "The Realities of Spending."

Davies explains that credit cards boost spending because of the psychophysics of how our brains work.

When one's spending fits within a tight budget, like mine, some of the "psychophysic" tendencies run into other limits (although I'm sure I slip more often than I would with cash). And it's nice to get those periodic checks for things that we'd be buying at BJs anyway. Still, that money isn't just a gift without cost; it's just that the cautious consumers are overbalanced by the not-so-cautious.

Meaningless talk and inaction in a crisis: Why Rhode Island's crisis will get worse before it gets better & what to do about it

The state of Rhode Island is in a deep financial crisis. Resolving its large budget deficits will require real and significant structural changes to the status quo.

The status quo was best summed up in a passing comment by Representative Gorham last night on the Matt Allen show: Gorham talked about how the state budget deal is typically reached in a "clandestine" fashion in the office of a just a few state legislators and then rapidly moved to a vote.

That approach is, in no small way, how RI got into its current mess and maintaining such practices won't yield successful and lasting change.

As someone who has led corporate turnarounds for nearly 20 years and has read extensively on what it takes to lead successful change initiatives, it is appalling how little progress has been made to effect real change in the face of the current crisis here in RI. It's not like these structural problems are a new development!

One of my favorite authors on leadership and change is Harvard Business School professor John Kotter. He has been writing for years about the topic of leading change and is a world authority on the subject. More on his books can be found here.

For the last decade, Kotter has been writing extensively on what he calls the "Eight Step Process of Successful Change." Here is an excerpt from his "Iceberg" book, a book which uses a fable to describe what it takes to realize successful change. Easily accessible to the layperson, I recommend reading it.

Set the Stage

1. Create a sense of urgency: Help others see the need for change and the importance of acting immediately.

2. Pull together the guiding team: Make sure there is a powerful group guiding the change - one with leadership skills, credibility, communications ability, authority, analytical skills, and a sense of urgency.

Decide What to Do

3. Develop the change vision and strategy: Clarify how the future will be different from the past, and how you can make that future a reality.

Make it Happen

4. Communicate for understanding: Make sure as many others as possible understand and accept the vision and strategy.

5. Empower others to act: Remove as many barriers as possible so that those who want to make the vision a reality can do so.

6. Produce short-term wins: Create some visible, unambiguous successes as soon as possible.

7. Don't let up: Press harder and faster after the first successes. Be relentless with initiating change after change until the vision is a reality.

Make It Stick

8. Create a new culture: Hold on to the new ways of behaving, and make sure they succeed, until they become strong enough to replace old traditions.

As we all reflect on the severe crisis here in RI, one of the most disconcerting conclusions is how RI is currently 0-for-8 in moving in the right direction.

Where is the sense of urgency?

Where is the powerful guiding team?

What is the change vision and strategy?

There will be no successful structural changes in RI until those questions are answered in tangible and affirmative ways. If they are not, the crisis will worsen instead of getting better.

Avoiding the hard choices which go with implementing difficult changes is a part of human nature and, at one level, perfectly understandable. Which is why it is so important for there to be leaders who display the requisite courage to initiate the change dynamic.

The structural status quo in Rhode Island is built on a foundation of economic fiction. And, whether certain people like it or not, economic fictions simply cannot persist - even if many people choose to ignore the problems in the hope they will just go away. Which is exactly what causes bad situations to turn into crises.

Tackling RI's economic fictions matters for reasons beyond just balancing a budget. The well-being and futures of many families will be affected. As I wrote back in 2004:

...Even so, this debate is about more than current taxation levels and today's family budgets. It is about freedom and opportunity for all -- and family budgets in the future. The greatness of our country is that people can live the American dream through the power of education and hard work.

High taxation and mediocre public education create a disincentive for new-business formation in Rhode Island. That means fewer new jobs, and less of a chance for working people to realize the American dream. It also means people have an economic incentive to leave the state -- and the ones who can afford to do so will continue to leave.

Unfortunately, the ones who cannot afford to leave are the people who can least afford the crushing blow of high taxation and mediocre education. The status quo dooms these families to an ongoing decline in their standard of living. That is unjust...

We are at a crossroads in Rhode Island. If we tackle issues now, a turnaround with only some pain is possible. If we delay, we will doom multiple generations of working families and retirees to further tax hell and a reduction in their standard of living. That is wrong.

This public debate is about breaking the chains of bondage and giving all citizens the freedom to live the American dream here in Rhode Island. What greater legacy can we leave for our children than a fair shot at the American dream here in their state?

...Let's tear down this wall of economic fiction, and let freedom ring out across the state. Let's make Rhode Island a vibrant land of freedom and opportunity, for all working families.

Either we will do change here in RI or change will do us. The failure to act over the last 4 years means the changes will now be far more painful. And the pain will only deepen more if further inaction accompanies the passage of yet more time.

So, have you done your part to increase the sense of urgency? Have you stepped up to become part of a team dedicated to real change? Have you worked, even at your town level, to identify a vision for change?

One of the most striking observations I regularly find when going into troubled companies is how many people at all levels instinctively know what is wrong. One of the most heart-warming outcomes is how many of those people want to pitch in and be part of a solution. And one of the most satisfying developments is watching those people rise to the occasion, often in ways that would never have been predicted. Never under-estimate the power of the human spirit to be selfless and do great things. Even when it requires going through pain.

But before those wonderful developments can ever occur, we have to start with the basic first steps of a successful change initiative. Unlike the business community where companies die if they base their plans on economic fictions, change in the political world is much more difficult because entrenched special interests have no incentive to be part of constructive solutions. They have no incentive since their demands are funded by third-parties - taxpayers - while the special interests suffer no direct adverse economic consequences from making unrelenting demands.

Any real solutions in the RI public sector will require taking enough power away from those special interests so that the economic price of their demands is reduced. Yet the people to do that - politicians - usually have a focus on their own re-election and thus have no incentive to challenge the very interests who can subsequently cause them to lose an election. The problem is compounded further because the same politicians and bureaucrats have no incentive to help solve the problems because they also suffer no direct adverse consequences from their failure to act.

So any solution to RI's problems will require some selfless and courageous politicial leaders who care more about change and doing the right thing than winning elections. Part of their challenge will be to build a large enough coalition of citizens committed to change. It is only then that a courageous citizen coalition can exert the requisite pressure on enough fence-sitting politicians, providing the latter with a sufficient re-election incentive to join the change initiatives and the majority votes for change.

Bluntly, I don't see any of those dynamics even starting to happen in RI right now. Which says things will get far worse before they have any chance to get better.

We are faced with an ongoing political stalemate in place in RI: The window of opportunity for "reasonable" solutions passed some years ago. When RI already has one of the highest taxation rates among the 50 states, raising them even higher is a certain doom loop. It is too late to solve the problem by tinkering on the margin. Yet the special interests have shown zero willingness to back off their entitlement demands so as to make structural changes possible. With each passing month, there will be even less flexibility.

We are on a treacherous path as a state. But sometimes it takes going through sheer hell before the will to make tough decisions arises. Given the incredibly powerful and entrenched special interests and the political balance of power, maybe the only viable solution for RI is to let it all blow up and then pick up the pieces. Maybe we just have to become a statewide version of Vallejo.

Since the status quo political debate on these problems is an abject failure, here is my provocative proposal for public discussion:

Building the sense of urgency: Begin talking publicly and bluntly about exactly how bad the structural problems are. No sense of urgency will be built until after these problems are crisply defined and transparently obvious for citizens across the state. Simply saying we have a budget deficit of $X million is insufficiently compelling; we need to talk about the ongoing budget deficit and how we have masked it previously, the structural problems which have caused recurring deficits, the unfunded pension liabilities, and the unfunded healthcare liabilities - all of which were incurred despite extremely high taxation levels.

Pull together a team of leaders and active citizens: There has to be a conscious building of a powerful group of people from across the business community, policy community, and political community who are committed to change. It is a group which will only coalesce when we stop being so delicate in our conversations about the crisis. In RI, that means we need some people who are willing to take on previously unseen levels of personal risks. As they say, we need a few good men and women who have both the sense of urgency and the willingness to talk about the stark challenges faced in RI. Who are equally willing to talk bluntly about how the inaction of politicians and bureaucrats as well as the resistance from powerful special interests make it necessary to either do some major restructuring immediately or implement a radical solution of throwing the state into receivership/bankruptcy. Said another way, we need leaders who are willing to use that blunt public conversation to shake the foundation, thereby either stimulating real and previously non-existent policy ideas for serious change outside a legal restructuring or making the case on why there is no other alternative.

The change vision for RI: By the middle of the next decade, do what Massachusetts did in recent years by going from taxation levels which earned it the nickname "Taxachusetts" to middle of the pack among the 50 states.

The strategy for achieving the change vision: Set a specific and firm near-term time deadline for implementing the necessary major structural changes to realize the change vision. If the changes don't occur by the deadline, throw the state into some form of receivership/bankruptcy and then restructure everything by brute force.

What do you want the future of RI to look like? How are you willing to help bring about change?

Free Trade Is a Two-Way Street

Trade isn't a topic on which I can express all of the relevant arguments, but this suggestion from University of Maryland School of Business Professor Peter Morici sounds reasonable to me:

China is the biggest problem. It subsidizes foreign purchases of its currency, the yuan, more than $460 billion a year, making Chinese products artificially cheap at Wal-Mart. The U.S. trade gap with the Middle Kingdom has swelled to $250 billion. ...

As long as China subsidizes the sale of yuan to Wal-Mart and other U.S. importers, the U.S. Treasury should tax dollar-yuan conversions. When China stops manipulating currency markets, the tax would stop. That would reduce imports from and exports to China, create new jobs in the U.S., raise U.S. productivity and workers' incomes, and reduce the federal deficit.

Free trade has to go both ways. No doubt, there are economic arguments having to do with investment and leverage that support the allowance of manipulated imbalance, but then, once again, I think we're shifting toward the topic of government's appropriate behavior as a business entity.

Class Warfare Is a Highway, and I Wanna Ride It

Things aren't equal on the highway. Some folks happen to pull into pockets of traffic that engulf them for an entire commute, while some ease into the lull just five minutes earlier. Some folks have faster cars; some folks have bigger, more-imposing cars. Some have drivers; some have GPS; some have government plates. Some are in a rush, and some have all the time in the world to cruise. Some have quick reflexes; some have bad vision; some are hung-over; some are on those fancy new clarity drugs that (I've recently read) are increasingly popular among academics.

During a trip, you pull onto the highway and you go, making the best of what you've got, driving according to your personality, state of mind, and various pressures. That's all you can do.

I bring this up because something about David's comment to a recent post of mine won't leave me alone, and the highway metaphor may help to clarify how I view class strata:

Justin, you argue for wealth redistribution favoring the wealthy with your personal anecdotal evidence. True, wealthy people do employ people, own and hold large tracts of land as open spaces that otherwise would be chopped up and developed. Evidence of those positive effects can be seen in our state in Newport, Jamestown, and Westerly.

A veritable army of leaf blowers, cleaning crews, painters and other service people clog the streets of the east side of Providence. Diaper services, too. (since it is less polluting) But you fail to convince with any evidence that the Bush tax cuts are a cause for this. The wealthy are always going to employ people to maintain their property. They have the means and desire to add to their holdings. Good for them! Bravo! And you are right to suggest that they are a positive part of the whole. But the tax cuts were nothing more than a looting of the treasury. The top pays less than what fairness requires. Warren Buffet acknowledged this when he pointed out that he paid a lower percentage in taxes than his workers. Sometime stinks in America. Taxes should be fair and should reflect the democratic construct – we are in this together. You seem to be the one doing the social engineering – let the wealthy few own all of the goods because they know how to handle it. We dummies would just screw it up.

Right from the beginning, David illustrates that my argument didn't traverse the space between us. I have not argued for wealth redistribution favoring the rich; I've argued that commerce is a better mechanism for distributing money away from the wealthy than government dictat. I most definitely did not argue that the rich ought to be considered the masters of economic allocation or that average citizens ought to be deprived on the grounds of ineptitude.

There is nothing fair about a society in which talented and hard-working people fail time and again to achieve just the modest income that would support a reasonably comfortable life with sufficient room for intellectual and spiritual improvement while others sit back and watch fortunes grow that are several generations removed from anything that might be recognizable as earning. I know of families that have kept pets on expensive life support for months on end to bring them back from the brink of death after coyote attacks, while we had to put our otherwise healthy dog down last year because we couldn't afford diabetes medicine. No, the unanswered question isn't whether the situation is fair; it's how we address that inequity from our place on the road as we've found it at the end of the entrance ramp.

Here I must correct another misunderstanding on David's part: neither of my posts in this run have had anything to say about tax policy except to this degree:

For the most part, the funds that support so many local workers building and rebuilding summer homes for the rich are not available for taxation. The owners tend not to be full-year residents, and if they were to find that they could no longer afford to lavish themselves in this way in Rhode Island, they'd find somewhere else to do it. Even with full-year residents, the difference is mainly one of threshold for redistributive pain. The progressives' willingness to insist on the right kind of commerce would certainly result in lost revenue to the state, less money in the state's economy, and lost jobs.

Because I see its circumstances as acutely dire, my focus for commentary has overwhelmingly been within Rhode Island's borders for several years, and in that context, heavily redistributive taxation schemes are an invitation for the rich to avoid paying Rhode Island taxes altogether (or, more likely, to pay somebody else to avoid those taxes for them), and that will hurt working Rhode Islanders both by draining our public coffers and by stemming the economic activity from which all tax revenue is ultimately derived. If a driver knows that you intend to pull in front of him to slow him down below his preferred speed, he won't let you get alongside him in the first place, if he can help it.

To this perspective, I would add one way in which David may have me right that "We dummies would just screw it up": if by "we dummies" he means the population operating by means of a government structure (rather than as individually responsible economic entities). Siphoning off wealth for the government's usage to the degree that left-wingers would consider to be "fair taxation" creates a pinch-point for power, and that is an ineluctable lure for precisely the sorts of people whom a fair — and wise! — society would keep far from the steering wheel. (In some ways, this is Rhode Island's tale.)

If we want fairness, we must pursue freedom. Putting up roadblocks generally proves to be to the advantage of those who already have an edge and to hinder those who would otherwise break free from the snarl of traffic.

The Carpenter You'd Rather Be

PROEM:

We'd like to encourage this sort of conversation, so commenters will have a very short leash for ad hominem with this post.

---

Matt Jerzyk's response to my post about the rich giving their money to we in the working class strikes me as so tangential as to raise a wholly separate topic, and as so misrepresenting what I've written as to be a response to a wholly separate person. That said, I think he raises some interesting points of distinction between his worldview and mine:

I have seen you write on several occasions about how much you appreciate this rich family's wealth; a wealth that allows you and your coworkers to keep working on their many luxurious projects.

You reason that if this rich family moves or if they stop spending money, then you and your coworkers would be out of a job.

I can understand your concerns about your own job. That is a baseline concern for all of us.

But, doesn't your point limit the opportunities that are facing the 21st century American tradesman? Is your crew truly confined to working for one rich family? Do the presence of rich people define opportunities for carpenters in RI? Are there no entrepreneurs among you who could strike out on your own and work on building green homes and commercial spaces (quite an emerging and lucrative market these days)? Or, you wouldn't rather be rebuilding America's crumbling bridges, roads and infrastructure?

I don't doubt that you want your particular job to continue - we all do. However, there is something to be said for untethering the American entrepreneurial spirit and seeing what can happen- in the construction industry and in all industries.

Relying on the presence of only a few hundred wealthy families for the economic development of our state just seems a tad naive, a bit unrealistic and incredibly hopeless.

To begin with the non sequitur, the statement of my post was that we do have a mechanism for transferring wealth from the rich to the working-class: it's called the marketplace, capitalism. It does not follow from that suggestion that my primary concern is for my own specific job. It follows even less that I'm arguing for total economic reliance on our state's few hundred wealthiest families.

As to my professional biography, the company for which I work has had clients across the spectrum, several at any given time, and all of my side work has been for working-to-middle class families. There are some notable differences from one project to another, although I don't know that I'd rate any as preferable on their basis. Moneyed projects offer the opportunity to do some very interesting, very involved work that makes a hammer swinger feel a bit more like an artisan. In my industry, the worker has a sense of "the right way" to do things, but that often must be compromised for the sake of budgets, usually at the direct request of the client. With the rich, the fight between funds and workmanship is not as dramatic.

On the other hand, lower-end work brings the satisfaction of efficiency and, more importantly, of appreciation. Those who've worked for what they have are tangibly more excited by improvements, and that's a very gratifying thing to see.

Me, I like variety, so I'd surely be unhappy with either niche's being my foreseeable future. It speaks to the difference between Matt's point of view and my own that (1) he's so compelled to drape a job like carpentry with political meaning, and (2) he throws commercial spaces in the mix and asks about transportation construction.

From the carpentry perspective, I'm sure there would be new and interesting aspects to an explicitly "green" project, and I'd love to take one on. But, contra Matt, I'm not interested in limiting "the opportunities that are facing the 21st century American tradesman." The game isn't zero sum, and a casual observer can see that there are not "green" projects languishing for lack of carpenters. (If they were, the general pay of the trade would be going up.)

As for commercial work, to my experience, it lacks both the edification of the high-end project and the appreciation of the lower-end private work. Concerning bridges and roads, while I'd love to undertake an old-style New England covered bridge, transportation and infrastructure projects are generally for the heavier tradesmen, such as masons, welders, and excavators, not carpenters.

This thread all unravels to the truly peculiar apex of Matt's comment:

... there is something to be said for untethering the American entrepreneurial spirit and seeing what can happen- in the construction industry and in all industries.

What could he possibly mean by that? It would stretch credulity to the breaking point to suggest that I was (or am) advocating for the high-end construction submarket to be an especial area of focus at the expense of other submarkets. Yes, as a tally of man-hours, my current project has probably kept a couple dozen people employed full time for a cumulative year, while proportional projects for the working class have kept a few people busy for a cumulative month. But for Matt's riposte even to make logical sense, he must be implying a government forced shift of private construction dollars to publicly funded construction projects. That's not just a "tad" and a "bit." That's dangerously naive, unrealistic, and hopeless.

For the most part, the funds that support so many local workers building and rebuilding summer homes for the rich are not available for taxation. The owners tend not to be full-year residents, and if they were to find that they could no longer afford to lavish themselves in this way in Rhode Island, they'd find somewhere else to do it. Even with full-year residents, the difference is mainly one of threshold for redistributive pain. The progressives' willingness to insist on the right kind of commerce would certainly result in lost revenue to the state, less money in the states economy, and lost jobs. (Emphasizing that mine might be one of them is merely an attempt to invalidate my testimony.)

Bringing about this shift of opportunities would add layers of unnecessary government bureaucracy, as the public sector goes about its inefficient business of transferring the wealth, deciding to whom to give it, overseeing its distribution, and regulating its usage. The entire process, moreover, would funnel money and power through a limited social point that would be sure to attract manipulators and despots.

Jerzyk's mode of "untethering the American entrepreneurial spirit," in other words, can only result in lost jobs and less varied, less gratifying employment for those in the working class who manage to stay employed. The vision dehumanizes us as cogs who must find meaning in the political wonderfulness of a more restrictive system. And (perhaps not without calculation) it benefits a class of people — not doing too poorly, already — of meddlers and would-be social engineers.

Taking from the Rich

Over on Kmareka, David Jaffe suggests that, thanks to those awful ultra-rich, working-class Americans have every reason to be bitter. Joins in commenter Miami Mama:

If those ultra-rich would spend just a fraction of their wealth to help the poor and middle-class instead of selfishly splurging on themselves, it would be a much better world.

Don't I know it! If only the rich family on whose summer house my boss’s crew has been working for almost two years would find some way to give its money to the dozens of working-class folks who’ve been employed on the project.

I’ll tell ya: talk about splurging! They’ve been so lavish that they’ve had to hire carpenters, electricians, masons, plumbers, roofers, drywallers, painters, security system technicians, audio/video installers, glass installers, cabinet makers, custom window makers, pool installers, sauna installers, gas & oil technicians, tilers, welders, sheet metal fabricators, excavators, form builders, and concrete pourers. And that doesn’t even include the architects, engineers, landscapers, contractors, construction material suppliers, waste disposal professionals, porta-john suppliers, and professional cleaners! And that doesn't include all of the manufacturers, service providers, and other professionals that all of those companies must bring into the picture at some point.

If only we could come up with a way to encourage the rich to transfer just a fraction of their wealth to working-class people…

We are the Free Market Change We are Waiting For

The April 7, 2008 edition of National Review (dead-tree: subscriber only) contains a piece by Stephen Spruiell, "The Buckeye Stops Here," that focuses on the Ohio economy. Here's an illuminating excerpt:

Robert S. “Steve” Miller, the CEO of Delphi when it declared bankruptcy, has some experience managing distressed companies. His previous jobs included CEO of Bethlehem Steel and board member at United Airlines. Addressing reporters in 2005 on the subject of the Delphi bankruptcy, he analyzed the painful transformations occurring within each of the industries he’s worked for (steel, airlines, and autos), and argued that import competition wasn’t the primary force driving any of them to change.

“In the steel industry,” Miller said, “we were being run off the road, not so much by imports, but by domestic competitors such as Nucor and Steel Dynamics.” (These companies operate “mini-mills” that are more flexible and less costly than the large, integrated mills Bethlehem Steel operated.) “They paid equally good wages,” he added, “but needed half the labor hours per ton to do the same job.”

In the airline industry, Miller said, “Delta and Northwest were shot down by JetBlue and Southwest, not Air India or Air China. Worker productivity is a big part of the difference.”

And in the auto industry, Miller pointed out, “Toyota, Nissan, and Honda are competing from assembly plants in our back yard, but without the crippling work rules and social costs embedded in [GM, Ford, and Chrysler’s] labor contracts.” The example of Honda is particularly relevant to any examination of Ohio’s economy. The Japanese automaker opened its first plant in Ohio in 1979, and since then it has opened three more and become one of the state’s top employers. Workers in Honda’s Ohio plants don’t belong to a union, but the company pays competitive wages and benefits and has never laid off any of its Ohio employees.

“In each case,” Miller said, “the old oligopoly has crumbled, not so much from globalization, but from upstart domestic competition.” Standard Textile’s Gary Heiman, the upstart competition in his old-line industry, couldn’t have said it any better himself....

[Heiman] wrote the sentence, “Rather than banking on high-powered lobbyists to stave off the march of globalization, we welcome the end of [import] quotas.”

That sentence can be found in an op-ed Heiman wrote for the Washington Post in 2005 titled “Innovation, Not Quotas,” in which he called on the American textile industry to stop asking the government to protect it from import competition. Compare his attitude to the one expressed by eight out of ten Ohioans who voted in the Democratic primary, and who told exit pollsters that U.S. trade with other countries “loses jobs.”

“That entire notion is nonsense,” Heiman says. Trade takes the blame when people lose their jobs because it’s an “easy target,” he says, absolving shortsighted industry leaders and labor unions when companies run into financial trouble and jobs are eliminated. Rather than take responsibility for failing to adapt, “it’s much easier to say, ‘It’s their fault. It’s China’s fault. The Chinese are taking away our jobs,’ when in fact, that’s just not the case,” he says, citing five years of consistently low U.S. unemployment rates.

While other basic industries “expected the government to protect them from foreign competition,” he says, his company embraced trade, tapped into foreign markets, and doubled the number of workers it employs, both in Ohio and in the U.S., over the past ten years. “We understood the map,” he says, “and we expanded so that today we have about 23 manufacturing facilities in 13 countries, including seven manufacturing facilities in the United States.”

Standard Textile’s U.S. manufacturing centers are not in Ohio — they are located in the southeastern United States, the traditional home of the U.S. textile industry, where Heiman bought defunct mills from bankrupt companies and refurbished them. But as his company grew its manufacturing operations in the U.S. and overseas, it added hundreds of product-development, logistics, customer-service, and finance jobs at its Ohio headquarters.