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DEEP THOUGHTS FROM A CEO IN THE TRENCHES

The following note comes to me from a frustrated CEO of a company that manufactures large components for computer controlled numeric railway braking systems.  His firm is at the heart of the economic downturn and he has given me permission to republish his excellent comments:

Good day, Cullen

I’ve had some random thoughts, expressed for our Board, that I might run by you.

As a nation, driven by the business news media and politicians shading matters to suit their goals (i.e., more government spending), we need to stop agonising over what is or may be wrong in the economy, and what may or may not happen as a result, and focus on righting the Ship of State. The bills are coming in from the Great Society, decades of truly irrational and self-delusionary spending, and must be dealt with. This will be a major test of our democratic system—given that members of the executive and legislative branches of government place a higher value on their personal ideological and position-maintenance goals.

The private sector is our sole engine of economic progress. Government is, at best, a (highly inefficient) re-allocator of resources. Government does not produce anything and, in particular, does not generate employment other than by capturing resources from the private sector and allocating them to spending on people. One would hope this might dawn on a majority of the people in this great country. We have ~108MM persons employed in this economy (private sector), and their work week hours are steadily rising. That’s the key, how many persons are employed and generating economic activity for the nation, not employed and draining funds from the nation. I have always suspected the number of government employees (civilian) truly required to maintain the infrastructure within which the income producing economy functions would be a statistic that would shock the body politic.

We agonise over the housing market, including the home improvement industry. Has it occurred to anyone that the housing market, and its ancillary segments, is no longer a driver of economic growth? Has it occurred to anyone that there is a strong case to be made that home ownership may have been overrated as a family goal, and that for many families it represents a misallocation of resources. Perhaps those funds should go into education of the young? My take: home ownership and sunscreen are overrated!

We agonise over consumer spending not rising to previous levels. In 2007 we were concerned because the US savings rate had declined to essentially zero. Now the savings rate is up substantially (perhaps as evidence the consumer is more perceptive and has a greater degree of self-discipline than the government) and consumer spending, while at higher levels, is more modulated. Hello? Is anybody home?

The labour markets are, in reality, neither well understood nor effectively measured by the BLS. Given to reality of the status of government, the private sector employment of human resources is the sole issue that has any economic relevance. There is a substantial body of literature (see Larry Summers’ work) indicating that extended unemployment benefits are a clear deterrent to both employment and re-training of workers whose skills are no longer marketable. But on we plunge, rather than thinking this through in a segmented, methodical and goal-orientated way—which as we learned by watching the Congress fail to deal with health care system is not leadership’s strong suit.

A major inhibitor of the re-allocation of labour amongst industries where labour currently is in demand is our now substandard secondary education system. Imagine where we might be today if our “leaders” had dealt with secondary education in an effective manner 30 years ago.

We agonise over employment, but 70% of the jobs in this economy (per the FT) are provided by corporations and proprietorships where revenue is less than $20MM per annum. Yet, they are talking about increasing taxes on this group—“the rich”. I recall hearing then Senator Phil Gramm respond when asked if tax cuts didn’t benefit the wealthy, “I never had a poor man offer me a job”. Government can do very little to generate (economically useful) employment beyond creating an environment with legal framework and security, policy certainty and economic incentives for employers. And, government could stop wildly spending everybody’s hard earned gains—like a father who works and comes home and learn his child just signed up for a $500 fraud scheme.

Finally, as I had previously noted, we need to hear far less from the Federal Reserve. Their view of economic trends should be, at most, semi-annual. These trends do not lend themselves to frequent issuance of opinions—and they’re just opinions—any more than corporations should be issuing quarterly guidance. Just look to the last two weeks where the Fed view appeared to flip in days. It’s all to feed the business media machine, and the Fed chairman appears to think he is a media personality. This is truly destructive.

Remember the sunscreen!

Charles

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