How Did We Get Here

Why is the US in the mess that it seems to find itself?

That is the nagging question that caused me to start digging into how we got here. I am a product of an earlier time, an engineer from the second half of the 20th Century when anything was possible. The view at the time was that the impossible just took a little longer.  We were forward thinking and optimistic, we had to be if we were to go to the moon. I was working at Cape Kennedy  on the Apollo Program and never doubted we could achieve our goal.

Then something took hold of the country and we lost confidence and started turning inward. Instead of making a bigger pie we chose to try to carve the existing pie with the rent seekers grabbing more and more. Government became the enemy. Politics became very polarized and conflict the norm. The science and technology that had created great wealth and prosperity was attacked. While everyone seemed to want the ‘free lunch’ that technology provided there were many that opposed the ‘reason based thinking’ that it required.

I had a nagging question from 50 years of being in the front lines of aerospace technology. If the government was the enemy why was it that my personal experience was that the government was the technology facilitator? That government had been there to nurture the technology before it was strong enough to stand on its own two feet. The more I listened to the anti-government platitudes the more confused I became.  When I retired I started looking at the issue through the eyes of a working engineer.  The more I dug into reality the more the pontificating around me seemed nonsense.

As I followed what I remembered and researched the various technologies I kept going back farther and farther trying to determine when the government had started to facilitate technology. It turned out that the government was a leader, a sponsor or a critical supporter of most of the key technologies of the last 200 years.

Back in 1830’s the government funded several companies to develop the techniques for replaceable parts. At the time precision devices, in this case rifles, were made by hand. A set of parts were given to a person known as a ‘filer’. He filed and fit the rough parts until they fit together into the final product. This process meant that if any part needed to be replaced it had to be hand fitted. The government armories could not have armies in the field dependent on skilled workmen far away to maintain their weapons.  The solution was make each part so precisely that any part could replace any similar part. This of course was considered unnecessary by the standards of the day and there was little interest.  At the time the precision needed was very difficult, new tools, precision measuring devices and new work methods were needed. Government funding over a period of years lead to the final process. This key process for modern mass production became known in the 19th Century as ‘the American Method’.  Some of the machines from the original government contracts can still be seen at the American Precision Museum in Winsor, Vermont.

The first use was in the manufacture of government weapons but the government insisted that the information on the process and how it was done should be distributed openly. The result was a large number of new industries  making consumer products like typewriters, bicycles and alarm clocks. These new industries made a major positive impact on the wealth of the New England states and changed the face of America.

The replacement parts concept was critical for the development of the auto industry. Bill Knudsen, auto pioneer for Ford and GM was said to have taken every file and hammer from the auto production lines in the early 1900’s to enforce the standardization of parts. Today ‘the American method’ of production is the global standard process.

So even back in the early days of the country the government was funding the critical technologies that we depend on.  Through the years much of the invisible infrastructure that we depend on was developed by the government. One of the problems with infrastructure is that it is ‘invisible’ and so it’s ‘out of sight out of mind’. Those attacking government can ignore  almost invisible government efforts knowing that most people will not even realize they are there. Take air travel for instance. When the Wright Brothers flew the first airplane the second thing they did was to go to Washington to try to interest the government in their airplane. But that is another story of government support and innovation.



If the US Government Were a Corporation

It has become popular to cast the United States government as the foolish, bungling bureaucracy that has no vision and that only unfettered free enterprise can efficiently run things. Of course, the government cannot defend itself, it stands mute. It can’t waste our tax dollars defending itself from attacks no matter how biased, while private groups can spend millions on the attacks.
What happens if we look at the real story? Has government done anything right? How inefficient is the government? Has the government shown any vision? Has the government ever effectively helped? Is it true that the most frightening words are “I’m here from the government and I’m here to help”. Could the government be as worthless as represented? Perhaps we should take a page from the critics and evaluate the government as a business. We want to know about the history, corporate vision, prospects, financial position and growth. What is the real track record of Government USA, Inc.? Would you rate the stock a buy?
Corporation USA
The company USA started as a forced breakup from the ‘parent corporation’, Great Britain in 1781. At that time the company consisted of 13 largely independent divisions (colonies) clinging to the Atlantic Coast. It was of a new, untried organizational structure that even the Board of Directors (Founding Fathers) called “an experiment in democracy” and it had significant debit and no defined income. This was truly a ‘penny stock’ in the high risk category. Since then Government USA, Inc. has invested in land, people, businesses and technology.
Land Investment
The young ‘company’ invested by purchasing Louisiana, Alaska and Gadsden. (The Gadsden Purchase was solely for the southern route of the transcontinental railroad.) It acquired land from Mexico and Spain through hostile takeovers known in international circles as war. It has grown from the original 13 colonies of less than 360,000 square miles to 2,959,064 square miles stretching from the Atlantic to the Pacific and beyond. It produces great agricultural and mineral wealth. Just the ten major crops produced $77.2 billion and last year mineral output was $64 billion. The gas and oil wells supplied 70 Billion cubic feet per day of gas and 7.5 Million Barrels per day of oil and that was before fracking.
People Investment
America Inc. invested in people through education. Consider universal education and the land grant colleges in the 19th Century and the GI Bill in the 20th Century among other programs. It supported individuals with Unemployment Insurance, Social Security, Medicare, and housing programs. The Tennessee Valley Authority, National Park System, and the Interstate Highway System show the variety of programs aimed at making peoples’ lives better. In the past, the Homestead Act and Rural Free Delivery had a significant impact on peoples’ lives and helped open up the West. Rural Free Delivery also provided the delivery infrastructure making the early mail order companies like Sears and Montgomery Ward possible and created the model for the modern mail order industry.
Business and Agriculture Investment
The government invested in business directly through contracts, subsidies, special grants, and tax breaks. The Department of Agriculture provided research, support and outreach to farmers creating an agricultural surplus beyond anything seen before. The Commerce Department and the Small Business Administration provided services directly to business at home and abroad. The government has supported the development of whole new industries through infrastructure programs like the Federal Airways System and the Interstate Highway System. These infrastructure projects laid the foundation for trucking, air freight and airline industries. Competition in the private sector was made possible by the ‘level playing field’ of government infrastructure. The transcontinental railroads were created using government subsidy and the automobile is only practical because the government provides the roads. The government lead space programs for the many years before space became profitable for private corporations. Most of the early communications and TV satellites went into space on refurbished US military rockets launched using government facilities.
Technology Investment
In terms of innovation, Government USA, Inc is the leading supplier of technology to the world. In spite of all the current propaganda to the contrary, most current technology depends on, or has depended on, the government to get started or is dependent on the government for infrastructure. The government has been in the technology business going all the way back to the 1830’s. The critical core process of the machine age, interchangeable parts, came from the government. The process was transferred to private companies that went on to make things for the civilian market like bicycles, typewriters, sewing machines and clocks. Without the replaceable parts concept, the automobile as we know it would not be possible. The process, called the American Method, is now universally used for making the mechanical things we see around us.
The government organization, Defence Advanced Projects Agency (DARPA) invented the internet and GPS among many others. Either of those would provide major bragging rights for any private company. Many of today’s drugs came from government laboratories and supported university research. Fracking which may make the US independent of mid-East oil was the result of many years of government led development.
While many of these programs are old and some discontinued, it is important to see that the government has been investing in the people, private business and technology since the beginning. In these ‘giveaway’ programs the government invested in people and industries by giving them opportunity and providing the infrastructure for new industries.
Looking at the record, it is clear that the government has gotten excellent pay back for its investment. In terms of vision, the government has supported new technologies like aviation and electronics for years until the risk was reduced to the point that free enterprise was willing to support final development and create the products we enjoy.
The government has come to the rescue when the private corporations got in trouble in 1929 and 2008. By pouring money into the collapsing economic system the government managed to stabilize key industries and get the economy going again. Like when your child falls off his bike, Uncle Sam picked up the private sector and got it back on its bike and moving again. (Just like the kid, the private sector never said thank you.)
When the nuclear power industry was starting up and no private insurance company would provide insurance because it was too risky they went to Uncle Sam for insurance. (Without government indemnification there could be no industry.) Then the industry promptly accused the government of making it hard on them with too much regulation.
Government USA Inc is now the bluest of blue chip ‘companies. While the debit load is large from the first decade of the 21st Century due to war and bad judgement, the debit ratio is manageable. Even with the current debit load its bonds are in demand, its interest rates are low. With income last year of $2.9 trillion and a gross domestic product of $15 trillion it is a far cry from 1781. For well over 200 years Government USA has grown larger and stronger. Looking at the record, it is easy to see that stock in Government USA Inc. should be in any prudent portfolio. Certainly the rest of the world thinks so.

Walmart and the $15 Wage

Walmart and the $15 Wage

Walmart is the largest business in the world with over 1 million employees, a gross income of $44.4 billion and a profit of $15.8 billion in 2012. In the classic strategy of drive to the bottom they are focused on relentlessly pushing all costs down. This strategy is exactly what you would expect from conservative, professional managers who are focused on the next quarter bonus check. In a conservative world no one would ever challenge the correctness of this strategy.

The fact that more and more people are viewing Walmart as a pararia company in of no real concern. Walmart owns (or rents) enough congresspersons that no ‘problem legislation’ could ever get passed. There are attempts to organize the workers but, at least so far, propaganda and intimidation are keeping labor at bay. So Walmart will continue its policies until one day the black swan will arrive. (Remember when Montgomery Ward, Sears and Kmart could do no wrong.) That will be the quarter that the management bonus checks will not be so large, but since next quarter looks OK, what me worry?

Now it is very unlikely that any one in the Bentonville headquarters will think outside the box, but just for fun let’s think about alternatives. Suppose a liberal thinker were to wander in to headquarters and propose that Walmart grow at a faster rate than the current plan. Let’s assume that the management was tired of the holidays and it was too cold for golf so they let him give his pitch.

Here is his presentation:

I propose that Walmart immediately set the wage for associates at $15/ hour. GASP! This will cost the company about $7 billion.

After the ‘are you crazy’ and ‘that’s impossible’ comments die down he continues.
Here are the reasons:

1) Take the moral high ground. In one stroke the business that has been the pariah company that everyone loves to hate will become the champion. The world will be hailing Walmart and probably even Pope Francis will be applauding. While Walmart doesn’t care a whit for the moral high ground this move would generate $100’s of millions in free positive publicity. It would also cause a significant group of middle class shoppers who care about human values to shop Walmart rather than picket its stores. This would be hard to quantify but some where between $100 million and a billion per year would be a good SWAG (Sill Wild Ass Guess).
2) Walmart would suddenly gain a growth advantage over its competitors. As the leader in positive labor relations Walmart could expect that a lot of the pay raise to employees would come back to the store. Employees, now with some money , would spend with their benefactor. This would be about 20% of $7 billion their raise represents, or $1.4 billion.
3) The big kicker is that if Walmart went to $15/hr there is no way the other low pay companies could not match or come close. This would create a lot of money for a lot of people. They would know that their raise came from Walmart so off to Walmart they would go. Based on the S&P Capital IQ Database there are 6,800,000 non-Walmart low wage workers in large US corporations. If we make a first order assumption that the median wage will rise to, say $14/hr. That would add about $48 billion to the available spending at the bottom where it will all be spent as fast as it comes in. Walmart, as the new leader in retail in the eyes of the poor will get 20% or more of that or about $10 billion per year in new business.
4) There are thousands of small businesses that have low wage workforce that would need to increase wages. The wage increase would likely be less, say $3 or $4/hr but it would still put money in a lot of hands. Here again that would drift to Walmart. Perhaps difficult to quantify but still in the billions through Walmart’s front door.
5) When you consider that if Walmart went to $15/hr there are also a lot of ‘light skill’ jobs paying $10 to $15/hr that would also need to increase by at least $5 to keep the employees from going to Walmart for a job. This would add another few billion to the Walmart income.
6) The sales growth would continue as the secondary effects of the Walmart raise flowed through the low income segment of the economy. Only Walmart could get this kind of return. It is the place all low wage workers will go and is big enough and profitable enough to make this kind of move. The result would really be a transfer of cash from all the other low wage employers to Walmart. For example, fast food workers with a $7 raise would not be likely to eat many more hamburgers but they would all spend more at Walmart.
7) This move would gut the competition. The low price brands would need to increase labor pay to meet Walmart but as a follower there would be little positive benefit for them. They would probably get an increase in sales but it would not cover increased costs so they would need to raise prices which would put them at a greater disadvantage to Walmart.
8) The current labor problems would disappear. Instead of having to close stores to stop unionization as they did in Quebec they could let the labor relations staff go and save some money.

Is there any president for this? Yes, it turns out there is. In 1914, exactly 100 years ago, Henry Ford was producing cars but he wanted to sell more. He knew he could reduce the price of the car if volume increased. Marketing could only do so much and competitors were making gains. So he announced he was more than doubling wages to $5 day for workers. At that rate the workers could afford to buy Fords and buy them they did. He was attacked as a Communist and he was vilified by the business community, but he sold his Fords to the workers and he laughed all the way to the bank.

Now it is safe to say that there is no one in Bentonville that would suggest following in the footsteps of Henry Ford and that is the difference between entrepreneurs and professional managers.