Category Archives: Economics

The Elephant and the Dragon

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dragonThis book by Robyn Meredith, with has the subtitle, “The Rise of India and China and What it Means for All of Us,” is fascinating. I keep notes as I read a book I intend to review, and my list of interesting facts was too lengthy to be able to include many of them in this review. The description of how China has become the world’s factory and India has become the knowledge and call center and how that is affecting the U.S. is important reading. One flaw that is not the fault of the book is that it was published in 2007. Some companies have taken back call centers and computer development work. Quality of product produced in India suffered from communication problems, and sometimes the cost of workers making a fifth of what was paid to American workers came to a higher final cost because of continual requirements for corrections and rework. That is the subject of a blog post on that link of this web site.

The book begins with the description of the Prime Minister of India visiting China in 2003 and being astonished at the ultramodern Beijing airport, the new highways with new cars, and countless construction sites with hundreds of cranes looming over the city. China had opened its doors to the world in 1978 and India did not. The outcome was that foreign companies had poured $600 billion dollars into China by 2003, which eclipsed the amount the U.S. spent on the Marshall plan in Europe after World War II. India remained stranded in the past with crumbling infrastructure and oppressing poverty while China was marching toward being a world economic (and military) power.

The book has fascinating summaries of recent Chinese and Indian histories. Gandhi and latter Nehru had frozen development in India. Gandhi had been so committed to his policies that his wife died from an infection when he deemed that an injection with an antibiotic was a violation of his “non-violence policy.” The Socialist policies combined with refusal to join the global economy made Indian companies lazy and uncompetitive and locked millions of Indians into poverty. Oppressive bureaucracies controlled everything to the point of absurdity. Procter and Gamble was worried they would be punished for breaking antimonopoly rules if they made too much Vicks VapoRub during a flu epidemic.

Mao destroyed China’s capacity to produce enough food to prevent famine with the Communist Great Leap Forward. Collectivized farming imposed in1955 and caused a 40 percent reduction in food production. People resorted to trading children so that they did not have to cannibalize their own child. Everything steel was taken from the peasants. Even cooking pots and bicycle frames were melted down for the purpose of meeting Mao’s steel production goals. Grain rotted in the fields because the peasants were told to focus on operating backyard furnaces to produce steel. The universities were closed, and the only education allowed was study of Communist propaganda and Mao’s Little Red Book.

The recent changes in both China and India have lifted millions of people out of the poverty that Socialism and Communism had produced. “We got more done for the poor by pursuing the competitive agenda for a few years than we got done by pursuing a poverty agenda for decades.” “Capitalists from corporate America and elsewhere surely did not set out to help Asia’s downtrodden, but they did.” Highly “…paid U.S. and European workers now face long-distant completion for jobs: India and China each added more college graduates to their workforces annually than are produced by the United States and Europe combined.”

There is an interesting story that may or may not be factual that villagers of Xiaogang broke China’s collective farming rules to illegally divide the collective into individual plots and production increased by 35 percent. China now celebrates Xiaogang as the birthplace of rural reforms. Deng Xiaoping came to power when Mao died, and he immediately shifted from the planned economy to a market economy. That was the beginning of successful capitalism under authoritarian control. Deng visited Singapore in 1978 for three days and was impressed with the results of a free market. The People’s Daily stopped referring to Singapore’s leaders as lackeys of the west and touted the achievements in affordable housing. Deng sent four hundred delegations to Singapore in just the year 1992. Deng also had new roads built, a quadrupled electric power generation, and modernized the power grid. China is also committing to nuclear power, and intends to triple the amount of energy produced by 2020. State-owned enterprises have dropped significantly to be replaced by private companies.

Building China into the world’s factory did not come without challenges. Workers who were supposed to build billfolds had never needed one and no idea what they were supposed to look like. The workers also did not understand that they were expected to continue to work after the boss left the factory floor. However, China one billion people experienced rising prosperity without a shot being fired. Political stability is demanded by the State at a cost to individuals who protest or are caught in the rampant corruption that results in execution. The Tiananmen Square protests in 1989 and the young people who disappeared afterward remain fresh in the minds of the free world. There also continue to be coerced abortions and sterilizations to meet the population control requirements.

The recent history of India is just as fascinating as that of China. In 1991 after the Socialism of Gandhi and Nehru India was broke. Forty percent of Indians were below the poverty line. Planeloads of Indian gold were being delivered to the west to meet financial obligations. P.V. Narasimha Rao was the prime minister dealing with the crisis, and he turned to the “…utterly uncharismatic economist Manmohan Singh.” Singh began the economic transformation of India by lowering income taxes, cutting bureaucratic red tape and licensing, and allowing investors to buy shares in Indian companies. The economy began to grow.

There are several interesting stories of individuals who developed successful businesses in both India and China. Most of the American business powerhouses have large operations in both countries. China is currently more successful than India thanks to the authoritarian control maintained by the Communist central government. Indian businesses have to deal with less stability since the poor people in that country vote while the middle class doesn’t. The result is relatively frequent changes in government. Some but not all of the bureaucracies that had suppressed economic growth have been discarded. An example of how the country lurches forward a bit and then stops is the beginning of construction of new highways toward in Bangalore. “The new overpasses stop in midair, as if waiting for Infosys (the Indian version of Microsoft) to invent technology that allows cars to fly.” Indians recognize that the control by the Chinese government gives that country an advantage. They tell a joke that the Chinese premier is being driven and the driver stops at a sign that says turn left for communism or right for capitalism. When the driver inquires what to do he is told, “Just signal left and turn right.”

There are interesting discussions of outsourcing that are pertinent to the political dialogue still prevalent today. There have been U.S. jobs lost from outsourcing, but it is difficult to count because the rise of China and India has created jobs. The concern is that the jobs being outsourced are now including the white collar jobs instead of mostly factory jobs. There is a hidden warning to American politicians. It is mentioned that John Kerry’s frequent berating CEOs who had sent jobs overseas during his presidential campaign inspired more American companies to outsource.

Outsourcing

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I just finished reading and reviewing a fascinating book “The Elephant and the Dragon” by Robyn Meredith that describes the growth of the Chinese and Indian economies. The Chinese are characterized as becoming the world’s factory while India is becoming the knowledge center. The Chinese are building what Wal-Mart sells and the Indians are providing the call centers and computer development work. The problem with the book is that it was copyrighted in 2007, and a relative who is very savvy about computer work tells me things are changing. He said it is true that Indian companies theoretically could develop programs much less expensively than American companies because they pay their people a fraction of what is required in the U.S. However, he has direct experience about the often poor results. He said that deliverables often did not meet requirements despite numerous and lengthy conference calls to describe what was wanted. The work would eventually be revised by Americans who were able to communicate sufficiently to understand the requirements and develop the desired products.

I searched and found a source called the “Ashbourne College’s Business Studies Blog.” It refers to one company bringing all of its call center work back to Britain from India because of complaints about a center in Mumbai, India. “The reason for placing back the call centres to UK is that India has low quality of staffs (which) would lead to worse services…”

Another site that offers some insight into the problems with outsourcing to a foreign country is a blog by “Programmer for Hire.” The warning flags go up with the source, who I would guess would prefer to be hired to do programming. However, the content seems appropriate. Friends had hired an Indian company to do programming based on the lure of $12-14/hour rates compared to typical rates of $125/hr for a U.S. company. The author admits he wasn’t the correct choice for a project that had high hopes and a small budget. However, the project did not have a usable product after they had “…paid for something between 600-700 hours of development with a firm in India, and they should have launched 6 weeks ago.” The client asked whether they were available, since to fix the problems they decided it would take the correct person 10 hours, instead of 50 or more with these guys.”

The book “The Elephant and the Dragon” mentions that more companies began to outsource as the result of John Kerry berating CEOs of companies that had already gone that route during his presidential campaign. Politicians sometimes actually are able to inspire. The book observes that the best way for the U.S. to come out ahead is to do a better job of educating its citizens to compete in the world economy and to get our deficits under control.

Cabela’s and Trickle Down Economics

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The curious title originated with my first visit to the Cabela’s store in Sydney Nebraska while “trickle-down economics” was being used to criticize President Reagan. I was impressed with the massive sporting goods store with huge aquariums full of trophy-sized fish, mounted game animals from around the world, and the extensive amount of sporting merchandise. However, the most impressive part of the visit was the employees. Everyone I spoke with presented themselves as genuinely happy to be at work; they could have taught classes in customer relations. It occurred to me that this business that was founded and expanded to an impressive size could be used to demonstrate the power of “trickle down economics.”

President Reagan actually never used the term, but that didn’t stop the opposing politicians from using  to infer wealthy people selfishly only allow a few scraps of money to make their way into the pockets of average people. (The “Occupy” movement uses the one percent versus the ninety-nine percent to make the same argument.)

The term “trickle-down economics” had its origin in the “Cross of Gold” speech given by Democratic Presidential candidate William Jennings Bryan in 1896. He said, “There are those who believe that if you just legislate to make the well-to-do prosperous, that their prosperity will leak through on those below.” Wikipedia says they first known use of “trickle-down theory” was in 1954. Lyndon Johnson said after leaving the Presidency “Republicans… (are) so busy operating the trickle-down theory, giving the biggest corporations the biggest break that the whole thing goes to hell in a hand basket.”

It strikes me that trickle-down economics isn’t such a bad thing if the Cabela’s story is an example. The stores across the country (with one in Canada) were possible because two businessmen continued to invest as their successful stores brought in profits. I’m grateful that the government didn’t take the money used for those investments in taxes and I’m guessing Cabela’s employees feel the same.

The history of Cabela’s is interesting and impressive. The business began with one sale of a dozen hand-tied flies for a dollar by Dick Cabela in 1961. One could say sales picked up quite a bit after that first sale. The kitchen table operation moved to the basement of the father’s furniture store in 1964. The business now has thirty-five retail stores, extensive catalog sales, and over 3000 well paid employees. The stock of the company is publically traded, so anyone can participate in the company’s quest for solid business performance and profits.

The company web site says employees have health, dental, and prescription drug insurance, life insurance, accidental death and disability insurance, a 401k retirement plan, an employee stock purchase plan, and a college savings plan. Sydney’s unemployment rate is reported to be about a third of the national rate.

I was fascinated to think that that the term “trickle-down economics” might be applied to a business built by two entrepreneurial brothers. I came to realize that the Cabela’s story is really a story of the power of free enterprise and capitalism. It would probably be political suicide for a politician to claim that capitalism is unfair because it only allows prosperity to “leak through to those below.”  It is safer politically to use the demeaning term “trickle-down economics” or to continually tell the country the people who have succeeded at building wealth aren’t paying their fair share of taxes.

It’s My Fault

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Art Buchwald (bless him) wrote an unforgettable article apologizing that the Vietnam War was his fault. The gist of the article was that several people warned him that there would be a full scale shooting war in Vietnam if he voted for Barry Goldwater for President. I haven’t found documentation of the article, although I remember it quite well. What I have found is the introduction to a 1965 Time Magazine article that asks the question, “How would the U.S. have fared if Barry Goldwater had been elected President? The mind boggles to think of it, mused Columnist Art Buchwald last week in the New York Herald Tribune. Nonetheless, Buchwald did his deadpan best to guess how things really would have turned out under Goldwater. To begin with, he wrote, the Viet Cong would have blown up an American barracks. Goldwater would have immediately called for a strike on military bases in North Viet Nam and announce a ‘new tit-for-tat policy.’ Democrats would make speeches that Goldwater was ‘trigger-happy’ and was trying to get us into…”

Unfortunately, the link ends at that point and indicates, “To read the entire article, you must be a TIME Subscriber.” However, I will ask you to depend on my less-than-reliable memory. I recall what followed was humorous and thought-provoking. I remember that Mr. Buchwald apologized (in this or some other article), saying something to the effect, “They told me there would be a war in Vietnam if I voted for Goldwater. I voted for Goldwater, and they were right. It’s my fault.”

That brings us to the current political situation. I was told that several bad things would happen if I didn’t vote for Barrack Obama. I was told the economic condition of the country would not improve. I was told that the unemployment rate would continue to exceed eight percent (not counting people who are underemployed or have given up on finding a job). I was told Guantanamo would remain the imprisonment site for suspected terrorists. I was told Guantanamo and military tribunals that would be held there would be the source of recruitment of others who wanted to commit terrorist acts against the U.S. In summary, I was told there would be many, many bad things that would happen if I didn’t vote for Barrack Obama. I ignored the warnings and didn’t vote for Obama. How can I possibly atone for my mistake?

I’ll end the sarcasm with the observation that I understand politicians will say many things to be elected. Newly elected Presidents then sit at the desk in the Oval Office and begin to receive classified intelligence briefings which explain why some of their promised policies might not be wise. They also apparently learn (perhaps to their dismay) that they do not control the legislative branch of government or the private economy. They are the leader of the most powerful country in the world, but there are limits for even them. I suggest we all keep that in mind as the Presidential campaign, which is predicted to be the most vicious in at least recent memory, proceeds.

Common Sense in 2012: Prosperity and Charity for America

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This book was written by Art Robinson, and in his words, “…for the voters of Congressional District 4 in Oregon. It explains, to the best of my ability, the issues facing us all in the 2012 elections.” A copy of the book was mailed to all subscribers of Dr. Robinson’s newsletter “Access to Energy” along with a request for donation. I donated despite the fact that I am a resident of Colorado. I believe it is important to support someone offering to serve as a citizen volunteer in Congress who promises to use common sense. His son Matthew is running against the incumbent Peter DeFazio in the Democratic primary. Dr. Robinson judges that Oregon’s District 4 will have a significantly better representative regardless of the general election outcome should Matthew win the primary.

I’ve followed developments in Oregon District 4 since Dr. Robinson and his family began his campaign for the 2010 election. I donated to that campaign in hopes of helping an honorable and ethical scientist who was willing to take the slings and arrows of a long time politician. The back cover of the book provides endorsements of Dr. Robinson from several renowned scientists. However, to illustrate my point about what he faces, the back cover ends with a quote from opponent Peter DeFazio, “Robinson is a ‘pathological nut job’.” I suggest readers consider donating to the campaign to replace DeFazio and request a copy of Dr. Robinson’s book.

The book is provides details of the Constitutional. Countless quotes by the Founders and other great thinkers explain Dr. Robinson’s positions. The erosion of liberty created by growth in government is documented with several examples. There is a graph that shows the percentage of U.S. population with jobs. Jobs began to be lost by the year 2000 “…in an economy that was gradually being strangled by Big Government.” Government has expanded relentlessly since taxing of income began in 1913. Manufacturing jobs have been hit especially hard. Reference is given to the astonishing mass of regulations that have been created that has made the U.S. increasingly unfriendly to all businesses. The federal debt “…has grown so large that service of this debt is draining away huge amounts of resources that are needed for the production of goods and services by American industry and workers.”

Chapter 1 is titled “Who is Art Robinson,” and introduces him as “…a successful scientist, businessman, and father. He lives with his family on their family farm…and works at the Oregon Institute of Science and Medicine.” He introduces his wife Laurelee and their six children. The children were all home schooled and developed a home schooling curriculum that has been used by 60,000 American children for grades 1 through 12. The family business, which also publishes children’s books, has allowed the children to put each other through college and graduate school.

Laurelee tragically died after a 24 hour illness in 1988, but the strength of the family’s belief in each other and God led to “A silent, almost eerie calm…” I challenge anyone to read about the family and their successes and not be both touched and impressed.

It also is not difficult to be the opposite of impressed with the Congressional opponent. There was a billboard prominently displayed that showed Art Robinson and the words “Energy company CEO’s shouldn’t pay taxes.” The only very thin thread that connects this statement to the truth is that Dr. Robinson had suggested solving a national energy crisis by “…forgoing taxes on the industries and workers required to solve this problem…” It is true that CEOs are energy company employees. DeFazio, in the same vein as saying “Robinson is a ‘pathological nut job’,” also said that he lived in a “survivalist compound” and his campaign was supported by “money launderers.” In fact 99.3% of Robinson’s campaign contributions came from individuals. DeFazio also said that Robinson wanted to allow drinking water to be contaminated with nuclear waste.

There are some personal stories in the book that are quite interesting. Some are sad stories. One of those is about the Robinson’s research on “metabolic profiling,” which could have had significant impact on diagnosis of disease. They learned years later that a competing scientist entered the laboratory and scrambled the labels on the samples, which of course destroyed the experiment. You can almost feel the pain as Dr. Robinson wrote that the research “…could have saved Laurelee’s life in 1988, by getting her to surgery in time, and the lives of countless other people.”

There are also some fun stories. I particularly enjoyed one about Dr. Robinson being stopped by an officer who asked to see the permit for the wide load he was hauling. The officer inquired why the map for the route wasn’t attached to the permit. He was told it had been taken apart to allow the map to be unfolded and read. When asked where the staple was that had been removed to separate the map, he was told that the staple hadn’t been saved. Dr. Robinson was allowed to proceed if he promised he would get a staple at the next station. He was stopped again, and informed, “We know all about you. We heard about you on the radio. You’re the guy without the staple.”

Another quite sad story is the targeting of the Robinson children at Oregon State University. The remarkable academic achievements are listed for each of the Robinson children. Three of the children are in graduate studies at Oregon State University, and after Dr. Robinson began his campaign against DeFazio, “…DeFazio supporters at OSU seriously interfered with their graduate work. The actions against them were, in my experience, unprecedented in American academia.”  It was difficult to misrepresent Dr. Robinson’s academic achievements when “Everywhere DeFazio looked there were Robinson young adults with doctorates…or earning doctorates at Oregon State University.” An OSU professor stepped in to assist the three students, and was blackballed. “An outpouring of public support for the students and Professor Higginbotham made the rescue of the students possible.” Dr. Robinson writes that he did not want to make this public, but was forced to do so when he learned that one of his children and the professor were in immediate danger of permanent dismissal without cause from OSU.

There are always two sides in a dispute, and I’ll be open to considering the other side when Mr. DeFazio publishes his book. In the interim, I suggest you donate to Art Robinson’s campaign and request a copy of his book.

Underground Economy

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Dr. Art Robinson’s wrote a book “Common Sense in 2012,” and a quick summary is that it presents his positions for his campaign to be elected to the House of Representatives from Oregon. He is running for Congress as a citizen volunteer committed to help stop Congress from exceeding the powers granted by the Constitution. I mention in the review that reading the book prompted me to send a donation to Dr. Robinson’s campaign despite the fact he is running for office in Oregon and I live in Colorado.

Reading the book made me wonder how many more businesses are going underground to avoid the interference of government. I want to make it clear that Dr. Robinson does not mention or suggest “going underground.”  An article with the title “The Rise of the Underground” in the Wall Street Journal by Patrick Barta looked to be a good place to start in researching the subject. Most of the article is about people in India peddling on street corners because they have been laid off or couldn’t find a job in the first place. There are several examples given, and most people make a few dollars a day selling food and other commodities. One creative woman was earning $10 a day selling shots of “medicinal wine,” wine mixed with herbs, to truck drivers and motorcyclists. The article called it “…an adult version of the neighborhood lemonade stand.” Of course such a stand would face numerous problems in the United States. There are many localities that require a license to operate a lemonade stand, and I doubt that could be expanded to selling alcohol.

The article also describes “informal workers” in the U.S. “…including off-the book maids, gardeners and ‘gypsy’ cab drivers…” It is estimated as much as 10 percent of the U.S. economy is off-the books (not including the large illicit drug trade,) and the percentage is undoubtedly growing as people are laid off and are forced into doing all manner of part-time contract work.

An article titled “The Mysterious Case of the Disappearing Prosperity” by Baron Bodissey provides some interesting analysis about why the underground economy exists. It is no surprise that taxes play a role. An example is given of someone repairing a computer, and the job is worth $200. You can accept the job to do the repair and reduce your income by paying taxes, demand that the purchaser pay more so you can pay the taxes and still make the $200, or both of you can agree that the money will change hands without the government being told. Massachusetts has created a bureaucracy with the strange title, “Joint Task Force on the Underground Economy and Employee Misclassification” with a toll-free number to allow crooks who aren’t reporting income to be reported. Apparently that allows some people to earn money by being a paid government informer.

The federal government also wants to get its share of any “earned income.” There is a part of Obamacare that requires businesses to file forms not only for non-employees who are paid more than $600 but also for every business they paid more than $600. That’s good news for people with accounting experience, because businesses will need more employees to file all the required forms. That will give government more money to mismanage, but I can’t think of a benefit to the businesses.

Barter is also becoming more popular. Perhaps someone offers to mow your yard if you will prepare them a resume. No money changes hands, although I expect Massachusetts would expect both parties to pay taxes on the value of the services exchanged if they are reported by an informer. The IRS certainly believes taxes must be paid on barter. The link gives instructions on which forms are to be submitted to “…include in gross income in the year of receipt the fair market value of goods and services received in exchange for goods or services you provide.” The IRS is aware that “The internet has provided a medium for new growth in the bartering exchange industry.”

The article by Mr. Bodissey and Dr. Robinson’s both mention a comment by Ronald Reagan. “The government’s view of the economy could be summed up in a few short phrases. If it moves, tax it. If it keeps moving, regulate it. If it stops moving, subsidize it.”