Barry Lynn at INET, Decoupling our Corporations (via Rortybomb)

I have been assigning some of my students the mission of discovering how the Japanese disasters are effecting the United States. This would be a good place for them to start.

The invaluable web site, Rortybomb, talks about the problem of specific parts made largely or only in Japan and what that lack is doing here in the United States.

Unfortunately it is likely we are only seeing the beginning of the dislocations caused by the loss of Japanese manufacturing.

James Pilant

If you are not subscribing to Rortybomb, you should be.

As you may know, Toyota has many plants in the United States. This kind of regional diversification has to be good for the company in the wake of the Japanese earthquake, right? Even though the Japanese plants are in trouble the US ones can up production, hopefully making as many cars as the Japanese-based plants cant, balancing out what is a scary time for the company. Well, no. The US ones cant run without specific parts from Japan, and since … Read More

via Rortybomb

The Work of Luke H. Lee

Example of supply chain

Image via Wikipedia

Keeping a web site and maintaining it can be a real pain but one of the great pleasures of it, is that you get to provide support to your friends to get the word out about their ideas. Here is a piece from my blogging friend, Luke H. Lee.

The article is significantly longer than this small excerpt and you probably need to see the diagrams for full understanding. So please read the whole thing.

James Pilant

Realizing a better world

If a public information-based supply chain infrastructure system is developed and fully implemented in the real market, the existing efficiency-oriented market process would be changed to a more effectiveness-oriented market process, which is more suitable for the modern information market. This would significantly contribute to the improvement of employment on the whole. The self-generation capability of the market would improve as well.

Luke Ho-Hyung Lee

With the influence of this new, more effectiveness-oriented supply chain process, the existing competition by size would change into competition by quality and service. The existing efficiency-oriented mass production process and mass-market consumption model would also be altered into a more effectiveness-oriented, diversified, or individualized production and consumption system. Owing to these changes, local employment conditions would improve considerably, and the business environment for middle- and small-sized companies and for the general service industry would improve significantly. Moreover, companies that off-shored and outsourced to lower labor cost countries would come back to the domestic arena

Realizing a better world

Enhanced by Zemanta

How the Bubble Destroyed the Middle Class (via Yahoo! Finance)

There is a new article on Yahoo. It’s written by  Rex Nutting.

These are key paragraphs –

There are a hundred different ways of looking at the economy, and a million different statistics. But if you wanted to focus on just one number that explains why the economy can’t really recover, this is the one: $7.38 trillion.

That’s the amount of wealth that’s been lost from the bursting of housing bubble, according to the Federal Reserve’s comprehensive Flow of Funds report. It’s how much homeowners lost when housing prices plunged 30% nationwide. The loss for these homeowners was much greater than 30%, however, because they were heavily leveraged.

In brief, the economy can’t turn around. There isn’t any money. The American Middle Class has been flattened. With stagnant wages for more than two generations, the great American Middle Class no longer has enough money to recover.

It was inevitable. From the time of the Reagan Administration when the financial industry supplanted manufacturing as the key economic engine of growth, the great majority of Americans have been losing their standard of living. Why? Because manufacturing is the actual making of value. It requires cooperation among many. It requires time, skill and large bodies of organized workers. This kind of process spread value around. Workers profit. Companies profit. The nation profits.

The Financial Industry, when it loans money for production goods, like housing, automobiles, business startups and business improvements is a powerful engine for growth, a great asset for any society. Many banks serve the interest of their community in this way.

But finance for the sake of finance is a different animal. Money made in community investment is low-interest, long-term money. That is small potatoes. So, they speculate. They take the money entrusted to them for investment and invest in foreign nations, risky new industries and most strange (and horrifying) they create never before seen instruments of finance that they themselves do always understand. These kinds of investments divert money from creative and useful endeavors and siphon that cash into more and more speculation creating enormous financial profits that give the illusion on paper of a prosperous society.

What happened during the 1980’s? The financial industry became predators, buying up companies and disassembling them like toys. It’s been like that ever since. Every few years the great masters of finance develop a new method of making huge profits. One these phases which continues today is out sourcing. Outsourcing is where you take stable, profitable, American companies and move them overseas to corrupt or totalitarian or, just plain, unstable nations to maximize profit. World communism has been one of the greatest benefactors of out sourcing as the Chinese regime (and now the Vietnamese) had previously lurched from one financial disaster to another. American “entrepreneurship” helped them become a stable nation whose industrial and military power will increasingly challenge our own.

It is obvious that an intelligent person acting morally, patriotically and with an eye toward the long-term would find the United States with its well-educated population, immensely dedicated, highly productive workforce, a fully developed infrastructure, and a stable, well-organized system of business law, an ideal place for manufacturing. In fact, large companies like Toyota have located here on that basis.

But the financial industry acting to maximize profit on the short-term, turns all these facts upside down. An uneducated population is easily manipulated, cheap workforces while less productive and efficient over the long-term are effective in the short-term, nations with educational systems and fully developed roads and highways are to be avoided because of higher taxes, and a legal system where a company can be held accountable for its crimes is to be avoided at all costs.

Patriotism, morality, even religion are intellectual burdens the financial industry shed a long time ago.

The process of looting the American people continues.

Globalization is considered by many to be an inevitable process. This is nonsense. There have been previous periods notably in the 1920’s when free trade was in vogue. But that ended with the financial crisis of 1929. These historical movements are not mindless changes like continental drift, they are the result of decisions made by governments, opinion leaders, philosophers, industrialists, financiers and speculators. People can make choices. People can do things differently.

That Fascism would triumph in all Europe was considered a straightforward inevitability by many in the 1930’s. Yet even today the war criminals of that defunct idea are still being chased down like the pitiful rats they are.

What will history think of the American financiers who bankrolled the Communist resurgence? In 1989, it seemed that all the remaining Communist dominoes would fall. That will not happen as long as the cash flows, American cash.

What will future generations think when they look over these days and see a nation looted by speculators with scarcely a complaint from a compliant judiciary, legislature and presidency?

I believe that people should make money and a good amount of it from making and doing useful things. I don’t think that’s radical. But in many circles it is.

James Pilant

Please read the attached article from Yahoo Finance.

Despite China’s might, U.S. factories maintain edge (via

U.S. factories out-produce Chinese manufacturers by more than 40%

Surprising statistic. My impression gathered from the media is that manufacturing is long gone. But America is still number one.

Yet America remains by far the No. 1 manufacturing country. It out-produces No. 2 China by more than 40 percent. U.S. manufacturers cranked out nearly $1.7 trillion in goods in 2009, according to the United Nations.

The story of American factories essentially boils down to this: They’ve managed to make more goods with fewer workers.

The United States has lost nearly 8 million factory jobs since manufacturing employment peaked at 19.6 million in mid-1979. U.S. manufacturers have placed near the top of world rankings in productivity gains over the past three decades.

That higher productivity has meant a leaner manufacturing force that’s capitalized on efficiency.

China is using its political power to enhance its manufacturing, offering tax free zones, only allowing companies to enter their markets if they build in China, and bending or breaking the rules whenever possible. And yet, the United States still wins the contest.

The United States will be the number one economy in the world for the next fifty years. That is my belief.

I find America’s largest competitors to be a pretty sorry lot.

China is a totalitarian state. In terms of quick economic growth, they have great advantages over more democratic societies. They can do what the Chinese are doing. Let me make a brief list for you – subsidize any critical industry to make sure foreigners cannot make inroads in that area; require foreigners to “partnership” with locals for admittance to the economy; use the resources of the state, particularly the intelligence sources and the military to enhance competitive advantage; act ruthlessly against parts of the nation or its population or its minority groups while favoring others; and manipulate economic statistics to paint a rosy, optimistic picture of progress. They might even say something like, “We will bury you.” Perhaps not.

China is a Communist state. It seems at times, that this part of the equation simply doesn’t figure in economic and political discussions. What about the words, Communist State, do American and multinational corporations not get? There were 12 Communist nations in 1989. Now there are five. Does history favor the Communist system?

Will China be the world’s greatest economic power? No. Their economic statistics may one day say so, but reality will still be reality.

If we believe in the idea that capitalism is the most efficient and productive form of economy, how does China even figure in that? Look at the rules and regulations for business in China. Is that the free market?

In Communist China, the law is a creature of the state. In the United States business law is extremely stable and predictable. Is this a predictable safe business environment?

Let me predict what is going to happen to these foreign investments in China.

They will end badly. They will end whenever the Chinese see a profit in doing so. They will end whenever China has an international dispute with a country whose citizens are involved in that investment. And they will end whenever corrupt Chinese officials decide it is profitable and they have a good chance of safety.

China will not be the next great power on earth. What they will become is in many ways is not clear but the one thing we can be sure of is that a Communist dictatorships will not end well.

James Pilant

Financial Roulette – America Loses

Twenty percent of the American economy is the financial sector, the largest proportion in all of history.

For most of American history, banking was a vital part of economic growth. Bank loans provided the capital for small businesses and government to build factories, stores, highways and other public works. This is no longer the bank’s major function. While bank lending is still a critical part of the function of banks as far as the welfare of the nation is concerned, the profits are elsewhere.

It is hardcore speculation, casino capitalism, where the real money is made. This is not wealth creation, it is more similar to the board game, monopoly, you try to make money speculating on property although in the modern sense this is more likely stocks, mutual funds, derivatives, etc. This is not a benefit to the economy. It is a drag and a danger to the larger economy. When the financial sector loses, the taxpayer picks up the losses, while taxpayers share nothing in the winnings. This is because the nation insures deposits and because changes in the law in 1999 allows banks to speculate with these federally insured funds – Corporate welfare on a scale of trillions of dollars.

This gambling has far reaching societal effects. Those who benefit from this no way to lose game make more and more money while those who insure them against loss make less and less.

From the New York Times Article – Scrutinizing the Elite, Whether They Like It or Not

Olivier Godechot, a French academic on the sociology panel, presented research that quantified just how skewed the increase in wealth at the very top has become. Mr. Godechot, a researcher at the National Center for Scientific Research in France, said that two professions — finance and business services — accounted for almost all of the increase in income inequality.

Professor Godechot has put his finger on it. Our society has focused, fixated on finance as the only mode of economic growth. Everything else from services to manufacturing are poor relations whose share in the wealth and even the concern of the government continues to dwindle.

Because of these changes we have an enormous inequality of income in the United States. From wikipedia

Americans have the highest income inequality in the rich world and over the past 20–30 years Americans have also experienced the greatest increase in income inequality among rich nations. The more detailed the data we can use to observe this change, the more skewed the change appears to be… the majority of large gains are indeed at the top of the distribution.

The big incomes in America are strongly aligned with the world of finance. So, many of the great incomes in the United States are associated with a socially negative activity that not only produces no value to the large economy but actively endangers the economy through its taxpayer guaranteed bets.

It this wasn’t bad enough, hundreds of thousands of graduates from the most expensive and prestigious universities in the United States pursue careers in this field often starting at a quarter of a million dollars in annual salary, a massive diversion of talent from every other field of endeavor. So, our focus on finance weakens the nation and diverts its future leadership into the same unproductive path resulting in further devastating losses to society as a whole.

What can be done? Well, we could consider making things. We could make actual products in this country, televisions, stereos, building materials, etc. We could base our economy on things of value. We could rise in morality and ethics to a point where the idea of making money by financial speculation becomes an abomination to any upright citizen with even a smattering of civic conscience.

We will do it. Either by choice or by necessity.

You see, the financial way of making money, this casino capitalism, when applied to a society as large is a disaster that unfolds over the years. It hollows out a society diverting the money that would have built manufacturing and countless other useful investment, diverting the young from useful and productive enterprise and diverting the attention of society away from the important endeavors of life and nation building and into a life of profit based on speculation. Why work, when you can gamble with other people’s money?

When this cardboard edifice falls, once again we will find virtue in the making of value.

James Pilant

Chinese Corruption

Russell Flannery covering the China beat for Forbes has an interview with Chinese ethicists. This is an excerpt from the article. This is only the introductory part I recommend you read the rest.

Last week brought a reminder of China’s troubling business ethics landscape when the government was forced to investigate reports that infants who consumed milk powder supplied by Nasdaq-listed Synutra International had premature breast growth. The Ministry of Health cleared Synutra, yet the allegations recalled the sale of tainted infant formula in 2008 and a long list of product safety and other problems involving business ethics  in the country.
Ultimately, what can be done to improve business ethics in China? I talked to two professionals working at the front line of research and education here, Professor Hengda Yang and Stephan Rothlin from the Center for International Business Ethics at the University of International Business and Economics in Beijing.  Yang is the author of a pioneering Chinese book about business ethics, “The Conscience of Business.”   Rothlin is also associated with the University of Zurich and the Insead Business School in Singapore.

Wikipedia has an entry on Chinese Corruption. Below is an excerpt.

The People’s Republic of China suffers from widespread corruption. For 2008, China was ranked 72 of 179 countries in Transparency International’s Corruption Perceptions Index. Means of corruption include graft, bribery, embezzlement, backdoor deals, nepotism, patronage, and statistical falsification.

Cadre corruption in post-1949 China lies in the “organizational involution” of the ruling party, including the regime’s policies, institutions, norms, and failure to adapt to a changing environment in the post-Mao era. Like other socialist economies that have gone through monumental transition, post-Mao China has experienced unprecedented levels of corruption, making the ruling Chinese Communist Party (CCP) “one of the most corrupt organisations the world has ever witnessed,” according to Will Hutton. Public surveys on the mainland since the late 1980s have shown that it is among the top concerns of the general public. According to Yan Sun, Associate Professor of Political Science at the City University of New York, it was corruption, rather than democracy as such, that lay at the root of the social dissatisfaction that led to the Tiananmen protest movement of 1989. Corruption undermines the legitimacy of the CCP, adds to economic inequality, undermines the environment, and fuels social unrest.

Since then, corruption has not slowed down as a result of greater economic freedom, but instead has grown more entrenched and severe in its character and scope. In popular perception, there are more dishonest CCP officials than honest ones, a reversal of the views held in the first decade of reform of the 1980s. China specialist Minxin Pei argues that failure to contain widespread corruption is among the most serious threats to China’s future economic and political stability. Bribery, kickbacks, theft, and misspending of public funds costs at least three percent of GDP.

Corruption as a key factor in the collapse of the former Soviet Union and its Eastern European client states. While there are no numbers to tell us the gravity of the problem in economic terms, it would a reasonable to conclude that only the rapid growth of manufacturing, the huge quantity of national resources, and the highly favorable media portrayal of China have prevented an accurate perception of the problem.

But there are stories of economic corruption in real estate and manufacturing. There are troubling accounts of disasters both natural and artificial concealed from the West and unreported in China itself.

I predict that by the end of this decade, corruption in China will become a brake on foreign economic investment.

James Pilant

Can Manufacturing Come Back?

Joseph Stiglitz, one of my favorite economists, believe that Asia is “decoupling” from the United States and Europe. You see, the United States is a 300 million population but if you sell to India and China alone of the nations in the region, you have 2.6 billion consumers. It’s a better market in the long term than the United States or Europe as well as providing necessary long term benefits to the nations themselves.

But there are other reasons, the great nations of Asia are likely to shift more to domestic production and investment. In the past, China, India, South Korea, Japan, etc. invested in the United States. They as well as many European nations bought into the housing bubble as well as many more reliable investments. They did this in the belief that the United States was reliable investment environment and that, more importantly, Wall Street had great skills in the banking and other investment industries. Of course, the “legendary” expertise of Wall Street was no more than successful propaganda protecting a rotting edifice that through financial “innovation” and simple greed severely damaged the world’s economy.

If you were a government official would you encourage investment in the United States or take the advice of any Wall Street investment firm? I’m sure there are some officials remaining who can hold that view but the long term does not bode well for U.S. investment or purchasing, you see, the development of the domestic market in these countries means a rise in the standard of living, an increase in wages and rise in prices. All of these factor mitigate against the corporate dream of an endless stream of off shored jobs pushing their profits.

But this is an opportunity. As these other nations develop higher standards of living and their purchasing power increases, we can sell them products. We can make things again. If we start now, and by now I mean by the end of this decade, for not only is there no political will, intelligence or leadership, the current business philosophy will not allow the government to encourage such investment. The United States government since the 1980’s has pursued a policy of the financial sector as a priority as opposed to the poor stepchild of manufacturing. The result of this policy are all around us. We can do better.

James Pilant