How the Government Gets it Right (In spite of the Liberals and Conservatives)

All we hear these days is “the government is the problem”. Conservatives and their mouth piece, Fox News, keep up the chant. The conservatives have a basic set of ideas that are repeated infinitely. We are expected to accept the truth of those ideas based on the number of times they are spoken. So, if we believe the conservatives then:
1) Only the free market can generate the innovation and jobs for our future
2) Government is the problem
3) Faceless bureaucrats are the enemy
4) Government must be prevented from developing ‘industrial policy’, supporting one industry over another
5) Government is incapable of doing anything

I don’t have the deep pockets of the conservatives propaganda machine so I will get by with data. There are the facts, they are all easy for you to check, but first a little background:

During and following WWII the government, first the Department of Defence (DoD) and later Department of Energy (DoE) worked to advance Science and Technology (S & T). This was done directly in government laboratories, partnering and funding university labs and through contracting and paid Industrial Research & Development (IR&D) with industry. The funds were from the taxpayers and were contained in the Department of Defence and Department of Energy funding requests. Each year the Congress voted to approve these requests.

The Conservatives, who believed in a ‘bigger is better’ defence budget voted for almost anything requested. The Liberals, trying to avoid the ‘wimp’ label voted in favor also. Ideologically the Conservatives spoke loudly and frequently against ‘industrial planning’ and any other effort that deviated from ‘free market’ ideas. The Liberals spoke loudly against wasting money on defence that could be used for social programs but voted for it anyhow. As a result the military-industrial complex collects billions of taxpayer dollars every year. Today’s defence budget is huge and growing.

Hidden in this Crony Capitalists’ delight are the data that the government is actually the source of our innovation. In the record of the last 60 years is the evidence that our great success in innovation has come from doing exactly the opposite of the conservative policies. A superficial look at the history since WWII proves the government is not inept but the innovation leader.

Reviewing the DoD and DoE innovation by decade:

1940’s Atomic Energy       Department of Defence paid for and led the design of power plants for Navy ships and submarines. Those designs were commercialized to become the nuclear power industry. The industry still resents any design that did not flow out of the government paid development.

Before the first power plant could be built the government had to provide insurance. The free enterprise private sector refused to insure the new industry.

Government/university laboratories developed the understanding of radioactive isotopes that could be used for medical applications. The nuclear medicine industry rests on that work.

1950’s Jet Engines      During WWII the US government paid two companies to become capable of manufacturing jet engines. When the war ended the Department of Defence paid to further develop engines for military aircraft and bought the developed engines. When the industry was well established it took those designs and worked with aircraft manufactures whose government funded work had developed advanced jet aircraft to apply all that government paid R&D to commercial designs. The new generation of aircraft reduced the cost per seat mile enough so that flying could be more than a luxury/business industry. Of course the industry was already dependent on government built airports and the air traffic control system.
(Actually when the Wright brothers first flew at Kitty Hawk the second thing they did was go to Washington to look for government help.)

1960’s Space     The government space program provided the technology, facilities and even the actual vehicles (early military rockets were declared obsolete and modified as the first commercial space boosters). We got global TV and communications, weather, oceans and crops surveillance etc. There would be no national real time sports broadcasting without satellite TV.
(Will the NFL please stand up and thank the government for the billions they get for TV rights!)

1970’s Semiconductors & Computers    It is estimated that 50 to 75% of the funding for semiconductors came from Department of Defence. As the first weak transistors became available it was Department of Defence contracts that kept buying to provide the new industry with funding. (Industrial policy if I ever saw it) As the semiconductors became better they were applied to computers. The early mainframes were developed on government funds for military applications like missile warning systems. These early Department of Defence funded designs were commercialized into the Third Generation Mainframes that dominated the period. The IBM 7xxx series from Ballistic Early Warning System and the GE 600 series from military radar systems are two examples. Improvements in semiconductors led to the mini-computer and then the micro-computer that is ubiquitous today. The early software industry was supported by Department of Defence contracts. DoD contracts were the first place the concept of software licensing was used so the government was even a leader in establishing new law.

1980’s The Internet      While the Net did not explode as a commercial entity until the 1990’s the basic work was done in the 1970’s and 1980’s by the Defense Advanced Research Projects Agency (DARPA). The government created the design and implemented it among its sites and cooperating universities. (If you haven’t heard of DARPA it is a small group of ‘faceless bureaucrats’ within the defense department. ‘Grandstanding’ is not allowed by project managers who have no perks, no bonuses, stock options or other extras. In spite of this opposite approach to what conservatives say is required to stimulate innovation DARPA has a track record of amazing innovation that surpasses private companies. That is only what we see since much of their work is classified.)
The World Wide Web came from a government research facility (CERN) in Europe. So the most profound innovation of the 20th Century was pure government innovation given to the free enterprise capitalists.

1990’s GPS & cell phones      GPS was another Defence Advanced Projects Agency project for government use that became so popular that it was opened for commercial use. It is now a multi-billion dollar industry and supports everything from surveying to inter modal freight to identifying were you took your latest photo. In geology, GPS proved the plate tectonic theory.

The needed satellite constellation is totally government supported and the ground receivers that we use are the result of government paid development.

Cell phones depend on the government led R&D for the military communications systems and high frequency semiconductors that were government financed.

2000’s LED Lighting   Department of Defence funded work in high temperature semiconductor materials to support both white light LED’s and very high power high frequency transistors. Fledgling companies like CREE lived on these contracts while improving the materials processes needed. LED lighting is in the early phases of transforming lighting and increasing efficiency by 80+%.

2010’s Fracking      The DoE started work on fraking in the 1970’s and has matured the technology enough so that ‘free enterprise innovators’ can use it. We now expect the US to be energy independent in the decade and shift US coal fired power plants to cleaner natural gas. To net it out, the innovation by the government has significantly reduced the price of gas at the pump for all of us. Cheaper gas from fraking has increased the conversion of power plants to ‘Greener’ natural gas from dirty coal. You might say the conservatives have inadvertently funded a Green Energy initiative!

These are just a few of the high points in the government R&D effort aimed at keeping the United States at the forefront of technology. In achieving that goal the ‘faceless bureaucrats’ of Department of Defence and Department of Energy have picked winners and losers (industrial policy), they have led the way in what technology to pursue and demonstrated a leadership that would make any private company proud. DARPA has spun off monumental products; The Internet and GPS for example, that are global in scope and revolutionary in their impact. We also need to remember that DARPA is really working military projects that can’t be talked about and these techno-blockbusters are mere sidelines for those ‘faceless bureaucrats’ the conservatives sneer at.

Is it bad to spend hundreds of billions on the military when so much is wasted? Yes, but there seems to be no other way to work around the liberal and conservative ideological barriers and get the technology we need to be the global leader. It also warms a cynics heart to see a process where the conservatives, year after year, happily fund a process that is living proof that their ideology is wrong.

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.