The Gathering Norm

Abstract

Abstract needed here….

Article

“…the future well-being of the whole world community of man also depends on achieving the unity of peace within the vast diversity of national policies.” Lester Pearson 1967

Introduction:

Recently, the National Academy of Sciences, the National Academy of Engineering, and the Institute of Medicine published a research/recommendation to Congress called: Rising Above the Gathering Storm- Energizing and Employing America for a Brighter Economic Future.

The title was taken from Sir Winston Churchill’s The Gathering Storm, as he contemplated the threat to England during WWII. The concept here is the same. The gathering storm for the US, though, is the loss of our competitive and economic standing in the world. Clearly, we have been building up to this storm for a long time. From crashing bubbles, crashing towers, crashing economies, all masking the storm arriving on our shore.

David Walker[1] gave a speech last year that frames the challenges ahead:
. . .

Mr. Walker went on to state in another speech about the liabilities of the United States—that the deficit was constantly growing, up to $7b (as of last year). But he also explained that with our accounting system we don’t actually state all the debt. The so-called Trust Funds (Social Security and Medicare) also have IOUs for a later time, that are not considered in the standard number.

Here is what he said in one of his key speeches to the National Press Club in 2004…sounding the warning…again….

He warned:


And he has been warning and writing…but we are not sure who is listening. Just to provide an update:

______________________________________________

The Outstanding Public Debt as of 14 Mar 2006 at 06:59:05 PM MST is:

$ 8 , 2 7 9 , 5 9 5 , 6 5 7 , 8 0 9 . 6 3

The estimated population of the United States is 298,774,453
so each citizen’s share of this debt is $27,711.86.

______________________________________________________

This number has increased by over $1,200,000,000,000.00 in a year! And we have another tax break coming along, without a known requisite increase in income. In fact, we know it is going to get worse. Ironically, the Bush administration’s response is to have John Snow ask Congress to raise the ceiling, stating that unless the current $8.2 trillion debt ceiling is raised by mid-March, “we will be unable to continue to finance government operations.”

Talk about a storm brewing…its here! But we are not in the eye—that comes in 2010, when my brother retires and all those post WWII babies start hitting Century Village! Katrina will look like a cake walk!

The Gathering Storm

The leaders of the creation of Rising Above the Gathering Storm research and report was impressive indeed—heads of industry, Nobel prize holders, etc. And although the recommendations hold some value, we think they missed some critical gaps in how businesses run, as well as the government’s ability to pay for these ideas. Therefore, these recommendations, if implemented, will fall short of succeeding at weathering and mastering the threats of the gathering storm.

The study focuses on Math and Science—no doubt a key driver of innovation. But these smart people will need a business to work in. The lack of addressing Supply Chain expertise and underlying Supply Chain economic drivers is the missing dynamic of Rising Above the Gathering Storm.

While the US Slept

The erosion of our competitive position has been on-going since the late 1990s. Significant debates occurred during the re-engineering craze about the long term impact of outsourcing and virtualization, by some people. But not by the heads of corporate America who thrilled to the ideas of better financial positions, and therefore significant improvements in their own personal wealth.

The dot-com extravaganza accelerated and yet masked the outsourcing and the rise to prominence of global trade. A title as a take-off from Winston Churchill, While England Slept, could be While the US Slept, or more appropriately, While the US Partied.

Dot-com wealth, cheaper Wal-Mart goods, and inflationary prices on real-estate, had created a party atmosphere that masked the gathering norm. Huge and growing trade deficits, excess government spending—regardless of how you think it should be spent—right or left or center, you have to admit—that is a lot of hay! We had declining focus on innovation in curriculums in US schools, and then 9-11, which reduced the US’s appeal as a destination site for the brightest minds.

The Gathering Norm

I was amused recently when Lou Dobbs was accused of being a left winger—he laughed and said “no, I am not a Democrat”. I felt I was in good company with Lou when I got a very angry letter from one of our readers calling me a left winger so and so. But I also want to protest being placed in this box.

We have to talk about these issues and really understand them. Again, I think like a Supply Chain person
(you and I ). We know what happened. We were there! (And I hope we still ‘are’ there.)

Our insatiable appetite for cheap goods (on the consumer side) and cheap labor (on the business side) continually erodes our key competitive differentiators:

  • Innovation (really smart people inventing things that can make money)
  • Manufacturing

This chart reflects the story:

US Consumption of Foreign Goods[2]

CATEGORY DESCRIPTION

CONSUMPTION

Apparel and leather and allied products

64%

Computer and electronic products

45%

Miscellaneous manufacturing

39%

Electrical equipment, appliances, and components

36%

Machinery

32%

Transportation Equipment

32%

Primary metals

24%

Furniture and related products

23%

Chemical products

22%

Textile mills and textile product mills

21%

Wood products

16%

Nonmetallic mineral products

15%

Fabricated metal products

12%

Paper products

11%

Petroleum and coal products

11%

Plastics and rubber products

11%

Food and beverage and tobacco products

6%

Printing and related support activities

5%

Innovation feeds the few. Manufacturing feeds the many. The US was the middle class miracle. Today, India’s middle class is over 300 million—larger than the entire US population. In reality, this is a good thing. Reducing suffering across the world is a noble outcome of education, the web and global trade. I think we need more industry—and more markets to consume the innovations.

But we will have to experience a truly wrenching generation or two of declining expectations.

Besides Churchill, there is another parallel with great English thinkers—Charles Dickens. As young Pip in Great Expectations wonders about how he will rise above his humble means, we too are beginning to worry about our future. Pip learned that, although he has a financial benefactor (will ours be the US government), he needs to create his own skills and make his own way, in both a stable career and social path, if he is to achieve happiness.

The Gathering Storm looks to government interventions as the main source of transformations. The role of government is critical, but it will not be the whole or even a major part of the story. We applaud the research effort that was conducted and, on balance, the ideas are quite good.

But will it be implemented, and will it work?

Key points and disputes:

  • Funding scientific research. As researchers, we applaud the concept of increasing the research dollars. But the recommendations make these research dollars almost the inclusive domain of Universities. The reality is that certain universities, generally well endowed, are masters of acquiring the bulk of both industry and government research grants. Research should also be available to the young entrepreneurs, and the private sector, who have the where-with-all to actually create an employee—aka create a tax base, to implement (government term: commercialize), create a company, and to sell the research or product to a customer!
  • Math and Science in K-12 and beyond—again a great idea. But sixteen year olds don’t wake up one day and decide that they want a career in Bio-Tech—ok, some do. But that is after 12 years of being ‘handled’ well by the ‘system’. Now this is going to be a tough thing to say, and not very surprising, but the trend in schools—home schooling included—is significantly far from creating a system of creative and healthy citizens.
  • How about security and Maritime? If we are looking for the government to spend more money on these issues, why not fund more research, technology and innovations in these areas. Technology can play a large role in securing our borders—why not direct more funds here for educational programs and technology research?

For example, DARPA has a big research prize–$2M for auto research. Why not create more of these programs that catch the imagination of the innovative entrepreneurs?

  • Scholarships—yes, a must. But to what schools, and what majors? Look at the bell curve in many major American universities and you will see an alarming trend. Students are just being passed through the system. Without a major revision in the curriculum, and investment in preparation and programs to ensure success, the schools themselves need to create new programs that will be able to attract and educate the best and the brightest. Do this in Missouri, or Idaho or Alabama, (Not MIT and Stanford—they are already full)[3], but educate them on par with Berkeley. The study does recommend teacher development programs, as well. But they must make sure that there is a match between program, teacher, and study, and then measure the outcomes.
  • What about Supply Chain and Logistics?

    Here is the real source of much of the problem—why not more education and innovation to make our manufacturing base more competitive in operations? Without that, the wonderful innovations of the math and science grads will be manufacturer in Laos!


  • Intellectual Property Protection

    —strengthening the US Patent Office won’t cut it. There are varying estimates, but the software and high tech industries claim a huge percent of IP violations—not just causing lost revenue, but more important for this discussion, a loss of product positioning in the market. The issue with IP is abroad, not here. We would be amazed to see the political will to address this issue with our trading partners—not just by the US government, but more importantly by the companies themselves, who live in fear of losing certain markets.


  • Cost of Health care—Look at the woes of GM, whose name should be changed from General Motors, to UAW Motors. Americans need health care. The question is, where we will get it from? Over 40% of US citizens have no healthcare insurance plan, and as companies declare chapter 11 and bail from their pension and healthcare responsibilities, it becomes an even larger issue for the society. No doubt, United got out of chapter 11, but not without decrementing the financial expectation of its employees to a new low.

We don’t want to be accused of right or left positions here, but the statistics stand for themselves
on this Gathering Norm

:

  • Major holders of US debt are outside the US these days…with our largest trading partners carrying the largest load (they have to keep our economy humming so they have some place to sell their goods)
  • The balance of trade continues to look bleak
  • The US is no longer the destination point for the best and brightest from foreign shores.
  • On average, you can get 10 Chinese factory workers for every 1 in the US.
  • On average, you can get 3 or 4 programmers in India for every 1 in the US
  • On average you can get 3 or 4 call center employees for every 1 in the US (usually from India)
  • Over 85% of the management of US Ports is from foreign Maritime firms

Considering these thoughts:

  • Out of the top 10 auto models ranked by Consumer Reports as the most reliable, only one was a US automobile.
  • The 9-11 Commission stated that the real cause of this event was ‘a lack of imagination’. Witness the current Moussaoui case where he clearly was an intelligence ‘red thumb’—lots of cash—wanting to learn how to fly a 747!!!!

Challenges are Inside

Now I only bring up Moussaoui and the auto industry for one reason—the challenges are inside, not outside. We are not being invaded as much as we are failing to act! I don’t buy the unfair trade practices or currency game of China. We accused that of the Japanese as well. But history tells a different story.

Remember our first Toyota Opals in the 1960s—and look at the Lexus now. Those clunkers were not very attractive, but the Japanese learned and grew. A free economy means the ultimate choices are made at the cash register—not by protectionist philosophies. Look at the textile industry. It left anyway, even with trade and tariff restrictions.

It takes a long time for the storm to gather, and now it is here. We have been writing about this issue for several years.

At ChainLink we have differing opinions—some are focused on ‘may the best man win’ strategy, and some are more concerned about the impact to the US alone. There is a lot at stake, so we want to open a dialogue on this issue. Please send your comments to the editor and we will publish them in the next issue—whatever your perspective.

[1] For those of you who don’t know David Walker, he is the comptroller of our nation—The Comptroller General of the United States—and he sits atop the General Accounting Office.

[2] This data comes from US Bureau of Economic Analysis (US GDP Output by Industry and Commodity)

[3] I was extremely impressed with organizations like DeVry who graduate and place over 90% of the technology BS students and have programs in security, intelligence, technology, etc.


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