Here We Go Again - 2021 Edition

Fifty years ago, the United States Airforce had a problem: its premiere fighter, the F-4 Phantom II, while exceptionally fast and capable, was also big, heavy, and expensive. For the new generation of aircraft, the service requested a high-performance air-superiority fighter to replace the Phantom in that role, and a simple, light-weight, and relatively inexpensive aircraft capable of flying both air-to-air and air-to-ground missions. The results were the F-15 Eagle, arguably the best pure fighter of its generation, and the F-16 Fighting Falcon, one of the most capable and widely-used fighter-bomber types ever built. Critics complained that the F-16 was still too expensive, and crammed with too much equipment, but it is hard to deny that the plane was very successful, given its combat record…

Thirty years later the United States was looking for a new generation of aircraft to replace the F-15 and F-16 – not unreasonably, considering the technological development during those years. Consider, for example, that in 1971 some of the most capable computers in the world still required most of a small room and were less powerful than the phone in your pocket. The new F-22 Raptor fulfills the air-superiority requirement quite well, and both the manufacturer and the Department of Defense insist that it has never lost an air-to-air combat to a peer competitor. The problem came when the Air Force decided to buy the F-35 Lightning II to replace the now 44 year-old F-16. Intended to be lightweight, inexpensive, and reliable, the F-35 has proven to be none of the above – and now it seems as though even the top brass are admitting that…

An article on the Forbes website this week discusses the request from the Chief of the Air Force for a new lightweight and inexpensive multi-role aircraft to supplement the F-35. The general compares the F-35 to a Ferrari, explaining that you don’t drive your Ferrari to and from work every day; you drive it on Sundays and special occasions. This is true, of course – exotic sports cars generally have a lifespan of 25,000 miles or less, and you’d have to be out of your mind to drive one every day – but it doesn’t speak well for the F-35, which was intended to be a replacement for the F-16 but has instead suffered from massive cost overruns, lengthy teething problems, and the installation of far too much exotic, temperamental, and heavy equipment…

I’ve written in this space before about the problems with government budgets in general, and the Air Force’s problems with vehicles that are insufficiently sleek, thrilling, and pointy to suit their image in particular. In this case, no one doubts that the USAF needs a multi-role fighter, or that it would be possible to develop a more advanced and capable aircraft for this purpose than the venerable F-16. The problem is that with the Air Force’s perennial battle to get a bigger share of the defense budget than the other services, and the U.S. Congress’ tendency to allocate funding based on getting its members re-elected (as opposed to spending money on things we actually need), there is a very real chance that any future attempts to acquire a light, cheap, and reliable multi-role warplane will end up exactly the way the F-35 did…

Now, I don’t mean to suggest that anything about this situation is simple, or easily solved. All kidding aside, it really does take years to develop a new airplane, and getting the balance between offensive capability, defensive capability, and maneuverability just right in any piece of military equipment is a challenge that predates both the airplane and the United States of America. But unless we want to continue throwing money down a rat hole (or a pork barrel), somebody needs to sort out this situation before the next piece of light, cheap, and reliable war gear turns into a gold-plated waste of time – and the whole thing starts all over again…

Pork in Space! Rides Again

I’ve written in this space any number of times about “pork-barrel” spending by the Federal government; mostly stories about expenditures of tax dollars that make no sense from any operational standpoint but are good for companies that donate money to the politicians who vote for those expenditures. It’s important to note that this behavior is not limited to any one political party, geographic region, or level of government; the projects vary a bit depending on who is controlling the budget at the time, but whether the government is spending money on airplanes that the military is sending directly to the Boneyard or entitlement programs that don’t help anyone, the principle is the same. That said, the current Administration’s new “Space Force” initiative is a particularly silly example of the process…

If you missed it, back in March the President announced that he had just come up with the idea of a new (sixth) branch of the U.S. military, which he called the “Space Force.” This isn’t really a new idea, of course; several previous attempts have been made to establish a permanent armed service in space, most recently in 2016 with the ill-fated “Space Corps” proposal. These have generally failed, either because there was no clear mission for the space service to perform, the proposed technology was either unavailable or economically unfeasible, or because the proposed installations contravened the Outer Space Treaty of 1967 (which prohibits the placement of weapons of mass destruction in orbit, on the Moon, or on any other celestial body). None of this has kept various administrations from shoveling money into those projects, however…

What is remarkable about the current incarnation of the program is how little effort the government is making to convince anyone that it isn’t just a giant boondoggle, almost exactly the same concept as the 2016 “Space Corps” proposal only with additional pork-barrel funding for satellites, launch vehicles, and gold-plated bonuses for the extremely wealthy people who own the aerospace companies. It would be nice to think that this had anything to do with forward-thinking defense or security planning, or at the very least, that it was an intelligent effort to stimulate economic growth in a high-tech sector in which the U.S. still has a fairly strong position relative to the rest of the world. Unfortunately, it appears to be the result of significant lobbying efforts by the aerospace industry – and the extraordinary receptiveness of the current administration to anything that gives away public money to its political backers…

You can check out the excellent story about all of this from the Los Angeles Times if you’d like more details on the political aspects. On the business side, the question isn’t so much why our government wants to spend more money on flying pork (every U.S. administration wants to spend more money on every kind of pork), but why this proposal includes a massive duplication of personnel (particularly management levels), headquarters facilities, equipment, and spacecraft, when the Air Force, Army and Navy all have space-oriented units currently operating. One might quite reasonably suggest that an increased focus on (non-nuclear) space-based weapons could be important to national security, given the equivalent programs appearing in both the Russian and the Chinese militaries. What baffles me is why anyone, even aerospace industry lobbyists, would want to do so in the least financially responsible way possible…

Get Out the List

I can’t really say that finding yet another situation in which American business interests have been running amok during this administration really came as a shock to me, although I have to admit that this one is even more despicable than usual. We’ve already seen companies getting the government to let them start dumping mine tailings (poison) into rivers and lakes, pushing to repeal even common-sense regulations on air pollution, trying to gain increasing support for failing industries like coal mining (which even our former coal customers don’t want anymore), and advocating for additional import tariffs that are now threatening several previously solid manufacturing sectors. But allowing the US-led infant formula lobby to interfere with U.N. World Health Assembly’s efforts to promote breast feeding is still a new low…

You can pick up the New York Times article here, if you really want to see things hit their worst, but don’t say I didn’t warn you. All the assembly was trying to do was pass a resolution saying that “mother’s milk is healthiest for children and countries should strive to limit the inaccurate or misleading marketing of breast milk substitutes.” This isn’t exactly a controversial statement; there are quite literally decades of evidence, from hundreds of studies, which support this position. On the other hand, it’s easy to see how the $70 billion formula industry, led by Abbot Labs here in the US, would consider such a resolution to be against their interests…

It’s hard to imagine how, exactly, the industry leadership would justify promoting their business interests over the health and welfare of millions of infants, and the HHS statement that this move was to prevent “stigmatizing” women who want/need to use formula isn’t particularly convincing. It’s even less convincing when you consider that American representatives at this same Assembly meeting were also threatening to withdraw international aide and military support from various small nations if they chose to support the resolution – starting with Ecuador, which was originally going to propose it. American delegates apparently also threatened to slash US funding for the World Health Organization…

Now, I wouldn’t want you to place all of the blame for the United States delegation behaving more like organized criminals than advocates for public health on the shoulders of a single, albeit gigantic, industry. During these same meetings, the Americans were also noted as advocating to limit the ability of countries with rising rates of obesity and diabetes to put warnings labels on sugary beverages, and opposing changes to patent laws that would make it easier for poor countries to gain access to potentially life-saving medications. It might be possible to argue that intellectual property rights and free trade without regulatory interference are good for business in every country, and therefore these other efforts are still slightly into the grey area, but those claims don’t hold up well when accompanied by threats of extortion…

There are times when it really does seem as though the people who are running this place have a checklist of completely disgusting things they want to accomplish, just to make sure that they don’t miss anything. I feel constrained to point out, however, that even if these mainly political moves made sense in a purely business-friendly context – and they really don’t – the degree of international resentment this kind of behavior is generating has potential long-term consequences that dwarf whatever immediate gratification these companies may be receiving. When things get to the point where the Russians have to step in and propose the resolution in support of breast-feeding because the Americans have been threatening everybody else you really know that the regular order of things has been upended…

In the simplest possible terms, we’re still going to have to live on this planet, and do business here, once the current administration finishes lining their own pockets and leaves office. That’s going to be really difficult to do if all of the residual goodwill we might still have had with the rest of the world gets flushed in order to sell more infant formual…

Wagging the Elephant

Some time ago in this space I brought you the story about how many “foreign” cars were now being built in the United States, like the Toyotas being built in Ohio, and how many supposedly domestic cars were being built from parts not made in this country. An investigation team had taken all of the parts from that model year’s Ford Mustang and Toyota Camry and sourced all of the parts, only to discover that while both cars were assembled within 500 miles of where I’m sitting right now, the supposedly foreign Camry had more American-made parts than the All-American Mustang. I wish I could tell you that it comes as a surprise that no one in Washington seems to have read either the original article or my commentary on it, but I’d be lying…

An article on the CNN Money page this week reports that the proposed (or threatened) steel and aluminum tariffs are projected to drive the cost of the Camry up by about $1,800 dollars for the next model year, and possibly more thereafter, depending on how the trade wars develop. There hasn’t been any word yet on how much the cost of a Ford Mustang will go up, but since these (and several other Ford products) use even more foreign metals and parts, it seems likely that the Mustang will be hit at least as hard. Toyota hasn’t said how much of the price increase they intend to pass along to the consumer via a higher sticker price, but unless they want to eat the entire increase out of their profits they are going to have to pass at least some of it on…

It’s hard to say what the overall effect will be on the US economy, let alone the world’s economy, but the impact on anyone in this country who wants to buy a Toyota Camry is certainly clear: they will have to scrape up another $1,800 plus whatever it costs to finance the increase. If a similar increase hits all of the other companies that manufacture and sell cars in this country, including Ford, GM, Chrysler, Hyundai, Honda, Mercedes, BMW, and others, it’s going to make it much harder for ordinary Americans to buy a car, and I can’t imagine that’s going to be good for the workers who build the cars, either. And that doesn’t even consider the effect that having all of those companies losing sales, all of their suppliers losing sales, and all of their employees having less to spend on consumer goods is going to have…

In theory, if this situation was protecting a similar number of workers and consumers it might be worth considering such an action. But with metals production in the United States continuing to drop, it isn’t clear if the developing trade war is going to save any jobs, let alone enough to replace all of the ones potentially at risk if the automotive industry in this country is thrown into a crisis. And I have to point out that cars are only one of the more obvious products that are made out of steel and aluminum in the US; if a similar effect were to cascade across all of the other sectors of consumer goods, the overall effect could make the 2008 economic crisis look like a minor inconvenience…

In politics, the expression “Wag the Dog” is used to mean a stunt intended to divert attention away from an unpopular action, but the term derives from the old saying about “the tail is wagging the dog,” which is more about a minor part of something taking on more importance than the whole. I would say that in this case both expressions apply; the health of one American industrial sector that has been in decline for decades is being given priority over dozens of other sectors, and goodness knows what this fiasco is supposed to keep us from noticing. Except that, when things get to this scale, it’s really more a matter of the tail wagging the elephant…

Difference of Opinion

I regret the amount of political commentary that keeps landing on this page in recent weeks. I try to stay out of those issues because, as previously noted, I don’t usually feel I have anything to add to most political discourse. I’ve been jumping in lately in places where I feel that politics is intruding into management and/or strategy, which do lie within my area of expertise. In too many cases lately, the problems we have been seeing are coming from politicians who like to pretend that they know more about business than I do about politics – and one in particular who likes to claim that he knows more about business than anybody despite having had to declare bankruptcy on at least five different occasions. This sort of thing becomes particularly dangerous when the political leaders involved turn out to be bad at math…

Consider, if you will, the situation with Foxconn in Wisconsin. The company has promised to build a factory in Racine County, if they were given about $3 billion US in various subsidies. Foxconn initially claimed that the factory would bring 13,000 jobs to Wisconsin, although they have been scaling back that claim while raising the amount of money they want from the state and Federal governments even before the deal was signed. The most recent estimates on the project go as high as $4 billion in subsidies and as low as 3,000 jobs, depending on whom you ask. Even worse, though, is the fact that relatively low unemployment in Wisconsin means that the company will almost certainly need to relocate workers from other parts of the country or the world – and there’s no word on how much money they’re going to demand for that purpose…

Now, one could reasonably argue that increasing the population of Wisconsin by the number of employees Foxconn is going to need will increase the tax base and generally improve the economy of the state, since all of those people will need house to live in, groceries to eat, and so on. The problem is that with over $4 billion in subsidies and under 3,000 workers it would take decades for the project to break even. Independent studies cited by CNN and other sources are projecting that no one other than Foxconn itself is going to see any net benefit from this project until around 2043. All of which assumes that the factory is still in operation in twenty-five years and that the company hasn’t shifted production somewhere else…

Opponents of the deal like to point out that for the kind of money under discussion we could just pay the 3,000 people the salaries they are supposed to be getting every year for the next twenty-five years and not bother building the factory at all. Think about how much infrastructure we could rebuild with 75,000 person-years of work (that’s 156,000,000 person-hours, if you’re keeping track at home). Or, if fixing crumbling roads and bridges isn’t you issue, think about how many teachers, nurses, daycare workers, police officers, firefighters, paramedics, social workers, park rangers, and lifeguards we could employ for that kind of money…

The people who are currently running this country, and in particular the state of Wisconsin, are effectively saying that rather than spend $4 billion of public funds employing people to do things we need done, build things we need built, and take care of our own citizens, that it makes more sense to spend that money in order to enable a Chinese company to send even more money home to their own oligarchs. As reluctant as I am to comment on public-sector projects, this really is a matter of business strategy - and I have a difference of opinion about whether this is really a good idea...

Did You Have a Point?

A few days ago I ran across yet another article making fun of the USDA grading system for beef – you know, the kind of thing where they think it’s somehow clever to say things about “Utility” grade beef. I’d be the first to admit that grades like “Utility” or “Commercial” don’t sound all that appealing, while things like “Cutter” and “Canner” make you wonder if they are used for prison food or passed along to whoever makes dog food or hotdogs. I even made jokes like that, back when I was in my early 20s and food safety wasn’t something you could just look up on the Internet (because you couldn’t look anything up on the Internet yet). But today, all this does is obscure a serious business issue with silly wordplay…

I’m not going to link to the article, but if you’d care to see the actual beef grades used by the USDA you can find the link to the official web page here. There are three things you actually need to know about the system, even if you’re just a casual consumer. First, the USDA rating system has nothing to do with food safety. If whatever you are buying (or eating) has a USDA rating in the first place, it has already been inspected and is safe to eat. Second, the eight ratings are based on a variety of measures that should result in better flavor from a piece of beef when you cook it on a grill or a griddle – amount of fat marbling, age and size of the animal it came from, and so on. There’s no way to be sure of how any given cut of beef will actually taste; these are just industry standard estimates. And third, the rating system is a voluntary program…

The upshot is that the only cuts you are going to see in the supermarket, or in a quality restaurant, are going to be from the top three grades: Prime, Choice, and Select. The other five are just as safe to eat (or not; ask your cardiologist about that), but are not going to broil up into something people will pay $12 for at Applebee’s, $20 for at Outback, or $40 for at an actual steakhouse. On the other hand, if you grind them into hamburger, soak them in marinade, braise them in some strong sauce, or slice them up and package them as part of a canned soup or stew (along with the appropriate seasonings) they’ll taste just fine. Or, at least, no worse than those foods usually do…

Where all of this stops being an amusing Internet story (or perhaps a sophomoric joke) is that food safety really isn’t funny, and the rise in international trade is making the whole issue that much more complicated. Consider, if you will, that the US has banned importation of beef from several countries because of the threat of BSE/Mad Cow disease, while several other countries have banned importation of American beef because USDA supervision does not comply with their own national standards for food safety. In the last few years we’ve seen food recalls on everything from romaine lettuce to strawberries to breakfast cereals, for everything from e coli contamination to metal shavings, and who’s even mentioned the whole “Pink Slime” and ammonia controversy yet?

Now, I’m not saying there’s anything wrong with silly Internet articles making fun of the official terminology for something we’d all prefer to ignore. Heaven only knows, if we outlawed silly wordplay on the Internet half of these posts would just be the word “NO!” written over and over again in progressively larger and more elaborate fonts. But the official USDA terminology isn’t really any funnier than most of our Federal regulations. And I don’t know about anyone else, but I’d hate to live in a place where the USDA inspectors weren’t doing their jobs…

At the very least, I’d have to stop going out to lunch…

Protection or Aggression?

There has been a lot of ink lately about the tariffs that our current administration is trying to impose on imports of steel, aluminum, and various other commodities that impact the personal wealth of people who donated to their election campaigns. Measures like this are generally referred to as Trade Protectionism, and are generally enacted to protect domestic producers from unfair foreign competition – cases where a foreign company can use cheaper labor, lower raw material costs, looser environmental regulations, or subsidies from their national government to achieve a price level American firms can’t match. In theory, import tariffs protect domestic companies and their employees, but in practice there are a number of issues with such measures that make their use risky, or even counterproductive…

The obvious problem with import tariffs is that other companies can impose them, too. In cases where we need the imports more than they need our exports, their tariffs can be more effective than ours, and the overall effect on our economy will wipe out whatever advantages our import tariffs might have given the “protected” industries. That’s not easy to determine in advance, either. In the case of the oil wars in the 1970s and 1980s, for example, many people assumed that the US could retaliate for the (seemingly) arbitrary price increases for petroleum with similarly punitive raises in the price of food products. Unfortunately, it turned out that we did need oil as much as the OPEC countries needed food – given that we were using petroleum-based fertilizers, petroleum-fueled farm equipment and delivery trucks, and oil-burning ships to export the crops in the first place…

In the current iteration of trade tariffs, it is harder than usual to see these measures as anything other than political, due as much to the fact that there have been no major changes in those industries or pricing structures in recent years as to the countries being targeted by the tariffs. There have been occasional cases of Chinese and Russian companies dumping cheap steel imports on the US market over the last decade, but our domestic steel industry has been declining for much longer than that, and even if those imports were a factor it’s hard to see how erecting tariffs against Canada or any of the other G7 countries would help. Even if those countries weren’t going to retaliate for our random imposition of tariffs, and they’re already doing so, there would still be negative effects within the US to explain away…

Consider, if you will, the case reported in March of this year by Reuters, about the impact of the steel tariff on a company called Novolipetsk Steel PAO, in Mercer County, Pennsylvania. Novolipetsk Steel imports large amounts of bulk steel from the company’s mills in Russia, which it then rolls and processes in plants in the US. The steel tariffs are expected to have a positive effect in the vestigial American steel industry, with a few idle steel mills being put back into operation, but it will have a much larger negative impact on companies like Novolipetsk’s US subsidiaries, wiping out as many as three times the number of jobs created. And that doesn’t even consider the jobs that will be lost in the American industries that actually still export goods…

It would be nice to think that these tariffs were really intended to protect American workers in general, or even that the effects would be a net positive for the country. As noted above, trade protectionism is generally not a viable long-term strategy, but if applied carefully and limited to cases where unfair competition (low-cost product dumping, for example) really is occurring, it can have some positive effects. In most cases, however, actual trade negotiations between countries involved will be more effective and generally more mutually beneficial. In cases where there are no such trade wars in effect, where the country attempting to erect the tariffs can’t begin to supply its own needs for the relevant commodity regardless of import price, or where the administration in power owes significant favors to people who own companies in the relevant industry, however, it’s difficult to see these actions as protecting anything in the public interest…

Release the Vultures!

By now you’ve probably heard about Toys-R-Us shutting down, either on the news or by seeing someone standing on a street corner holding one of those black-and-yellow “Store Closing” signs. You may also have seen video footage, online or on the news, about long-service employees, in some cases people who have been with the company for 30 or 40 years, being let go with no severance pay. But if you’ve been tempted to blame the failure of the company on Amazon or Wal-Mart, or showrooming, or any of the other scourges of retail businesses these days, I regret to tell you that the answer is much, much, worse – and far sadder…

You can find any number of stories and files online that go into detail about this, but I thought the article on Boing Boing did a good job of summing up the situation. I don’t have much to add to Cory Doctorow’s excellent reporting, but I thought the point ought to be made (again) about who is responsible for this travesty. Basically, what happened to Toys-R-Us was that a cabal of venture capital firms bought it, used the company’s assets to borrow a huge amount of money, took out a reported $200 million for their personal enrichment, and then defaulted on all of the loans. In addition to announcing that they wouldn’t be honoring the loans, the VC firms also revealed that they wouldn’t be keeping any of the commitments them made to their employees…

If you’re wondering how they got away with this, I regret to tell you that as far as I can tell none of the venture capital firms have broken any laws. It’s possible that one or more of their creditors may choose to sue them for defaulting on their loans, but if they’ve worked this out right there should be enough proceeds from the bankruptcy sales to cover most of it, and the lenders can write off whatever is left on their taxes. It’s also possible that the employees might be able to recover something through their own legal efforts, but in any case all of these are civil matters; no one has been charged with a crime – or is likely to be…

This class of financial banditry is sometimes called “Vulture Capital” and the firms involved are referred to as “Vulture Capitalists,” although I have to say I think that the nickname is unfair to actual vultures, who (as previously noted) never bother anything that is still alive. There are no laws to prevent this sort of thing, partly because it would be difficult to prove the difference between somebody doing this in order to extract money and then crash the company and somebody who just borrowed too much money and then failed in their attempt to run the company. You can’t realistically make it a crime to be bad at management (or finance, one assumes), nor would you want to throw people who were actually trying to do the right thing in jail because they overestimated their abilities…

Unfortunately, that means that people like the vultures in this story can abuse the system for their own ends. The other reason no one has been able to establish a standard for distinguishing vulture capitalists from garden-variety incompetents, or implement a law to stop them, is because (as you might expect) a lot of very wealthy people have spent a lot of time and money to prevent it. It might be possible for more progressive political forces to combat this, assuming that there were any and that anyone in the general public cared about this issue before their employer of thirty years was purchased and carved up by vultures. But until such time as the American people start demanding greater accountability, from their political leaders if not from their business leaders, this sort of thing will probably just keep happening…

So the sad truth is, that the people responsible for this travesty, and all of the others like it, are us…

Not Even Trying Anymore

When I realized that I wasn’t even freaking out about the most recent crony capitalism scheme from the current administration I’ll admit I was a bit disturbed. Generally, when government leaders implement a scheme that will harm the people they nominally govern, the country where those people live, or the world in general they will make some effort to explain or rationalize the move; when the scheme enriches their political supporters at the expense of everyone else in the affected industries they will go to much greater lengths to bury their tracks in order to avoid a very real risk of lawsuits. But in the case of the Federal intervention to keep obsolete coal, oil, and nuclear power plants operating for at least another two years which was announced on Friday, the administration doesn’t even seem to be trying to hide the corruption…

If you have an unusually strong stomach you can pick up the ABC News story about this action, but don’t say I didn’t warn you. As announced, the initiative will keep these elements of our national power grid active, regardless of local need or cost-effectiveness, as a matter of National Security. Why, exactly, power generation units that can’t be operated at a profit are critical to the security of the United States isn’t explained in the memo that turned up on Friday. The Department of Energy merely claims that nuclear, coal, and oil-fired power plants are a “critical” part of the national grid, and without them we might be vulnerable to… Well, to something; they didn’t specify what. You’d have to be a real cynic to suggest that this action is being taken solely to curry support from the people who own obsolescent power plants and coal mines – and the people who work in those industries, of course…

Regrettably, the people at ABC News are apparently that cynical, as are industry watchdog groups, government accountability groups, environmentalist groups, and the Energy Information Administration, all of whom have criticized the announcement as nothing more than a political move intended to make good on a campaign promise from the last Presidential election. The truth is that use of coal for electrical generation has been dropping every year for over a decade, decreasing by over 20% in just the last year, and it would be redundant to specify the costs of using oil for power, or the environmental consequences of nuclear power and nuclear waste. Requiring companies to keep those plants open, and (effectively) requiring utility companies to keep purchasing the output from those plants, will result in higher costs to consumers and benefit no one except the coal companies and whoever owns the obsolete power plants…

What makes this particular story so remarkably nauseating is that no one in the Administration has denied any of this, or offered any support for the contention that maintaining these facilities has some strategic or defense purpose. It’s not exactly surprising, given the other abuses of power for personal enrichment that we have seen from this Administration, or given the fact that our current Secretary of Energy does not believe that we need a Department of Energy, or given the fact that our current head of the EPA is openly an industry flak who (apparently) believes that air and water pollution are good for you. It’s just exceptionally brazen, even for American politics, and exceptionally lazy for anyone in this 21^st Century…

I normally stay away from political issues in this blog because, as previously noted, it’s not my area of expertise and I feel there are already more than enough blogs offering political opinions written by someone without any particular qualifications. I’ve also stated for the record that I believe that cronyism, corruption, and pork-barrel politics are an unavoidable part of any representative democracy, and as long as we can keep them down to no more than a slightly regrettable level we will still be doing far better than any other system of government enacted to date. But when the party that is nominally in favor of small government, free-market capitalism, and responsible fiscal policy starts doing things this blatantly self-serving I think we are all justified in complaining about the incompetence, if not the actual policy. Face it, folks, these people aren’t even trying anymore…

Make What Great Again?

Despite my avoidance of political topics on this blog, I am perfectly willing to admit that I am personally pro-business, and against excessive regulation. The problem is, as a Centrist my idea of what constitutes “excessive” does not suit people on either end of our increasingly polarized political spectrum. I don’t agree with the far right, who appear to believe that business leaders are a collection of saints and angels who would never do anything to the detriment of the public good just because it would enrich them personally, and I can’t abide the far left, who appear to believe that all we have to do is meditate, eat organic kale, and keep our carbon footprint as close to neutral as possible, and everything we need will just appear before our wondering eyes...

The unfortunate truth is that regulations exist because without such measures people will cut corners and take chances that make no bloody sense, even if those behaviors have no real chance of increasing their personal wealth. So as much as we would all like to avoid government interference in business operations that chokes off trade and curtails personal freedom, whether that involves increased tax incentives for small business start-ups or legalization of certain controversial agricultural products, I think we can all agree that FAA regulations that prevent passenger aircraft from catching fire and exploding in mid-air are probably worth keeping…

Unfortunately, as a story from the Associated Press last week makes clear, not everyone in our current Administration understands this principle. It seems that under certain conditions lithium-ion batteries can self-ignite, which is generally not a good thing on an airliner carrying hundreds (or thousands) of gallons of highly flammable, potentially explosive fuel. Over the past few years three cargo aircraft have experienced such fires (and have been destroyed in flight), and the UN agency that deals with international flight safety has been trying to get all of the nations that have airlines to adopt safety regulations about transporting these batteries by air. One might think that this sort of common-sense measure would appeal to both the people who own airplanes and the people who fly on them, and so far it has, but that doesn’t consider the people who make lithium-ion batteries…

Sure enough, the battery industry has been lobbying to prevent exactly this sort of regulation, and the current business-friendly government in Washington has placed a freeze on this and all other new safety regulations pending additional study of their effect on business. Apparently, they are arguing that people in remote areas, such as the Alaskan back country, would be unable to get the batteries they need if this regulation was applied to all flights. They also seem to be blaming the Chinese, whom they claim manufacture sub-standard batteries and avoid the existing safety regulations, even though neither of these claims have any relationship with reality…

Now, the truth is, I have no idea how often the need for lithium-ion rechargeable batteries becomes so acute (and so immediate) that it isn’t possible to ship them using surface transportation, let alone cargo aircraft, and requires that large loads of batteries arrive by the first and fastest mode of transportation. I am dubious about how often, or even whether, such a spike in demand is more important than the safety of hundreds of innocent passengers, not to mention the potential loss of airliners that can easily cost hundreds of millions of dollars in their own right. It’s also not clear to me how the battery lobby has been able to push its agenda past that of the airline lobby and the consumer protection lobby…

I can’t tell you if the current Administration in Washington will actually be able to make America great again; I’m no expert on politics or economics, and I think the country is pretty great as it is. What I can tell you with complete certainty is that I’m not going to be purchasing tickets on any airline that is still accepting loads of rechargeable batteries as air freight on passenger flights, and that if I had any stock in any airlines that did this I would be raising every possible kind of stockholder protest right now. And if I was in charge of running an airline, any airline, I’d make absolutely certain that we stopped carrying such cargoes, no matter how much the battery companies were willing to pay. Before things get any worse…

Pass It Along

I didn’t really intend to do a follow up to the “automated ordering kiosk” stories this quickly, but then I suppose I should remember that I don’t make the news, I just report it. Or at least make nasty, sarcastic remarks about the news, anyway. One of the things I’ve been talking about for a while now is the question of how companies that are suddenly forced to begin paying a higher minimum wage will respond to the situation. With rare exceptions, there are only three ways to deal with an increase in a specific cost (in this case Payroll): lower other costs to compensate, accept a lower profit margin, or raise prices. In theory, if the Federal minimum wage were to be increased to $15 per hour, businesses that employ low-paid workers could attempt to lower other operating costs, raise their prices, or just settle for making less money. Unfortunately, as I’m sure you’ve realized by now, things in business policy and strategy are rarely that straightforward…

Consider, for example, one of the hot spots for this debate: the Restaurant business. Unless you’ve worked in the Food Service industry you may not be aware of it, but in addition to the quick-serve personnel, who almost always start at minimum wage, most of the states allow employers to pay anyone who routinely gets tips at an ever lower rate; often as low as $2.13 an hour. Clearly, getting a salary increase to $15/hour, or even to regular minimum wage, would be a significant improvement for any of these employees. At the same time, the increase in salary costs would hit those companies even harder than usual, since they’d be going from $2.13 to $15 instead of the $7.25 to $15 that everyone else would have to absorb. At that point it seems quite likely that companies in this industry would respond by raising prices – especially considering that they are already doing so…

You can pick up the original story off of the Wall Street Journal site, and the Consumerist site commented on it, too, if you don’t happen to have a WSJ subscription. According to the Journal, restaurants in a number of states are experimenting with a “labor surcharge” added to the bottom of your bill to cover the cost of wage increases. It’s not a new idea, really; as the Consumerist people note, other restaurant chains have tried this before, and the cable television and telephone companies have been using exactly this tactic for years to obscure the amount you are actually paying them each month. Whether or not this will work on a large scale in an industry where people will routinely spend hundreds of dollars on a drink and then balk at leaving anything for their server remains to be seen, of course…

Another interesting question is whether any of these companies will abolish tips altogether, and just attempt to pay their employees a living wage. All of the data we’ve seen over the last few years suggests that forcing people to work for tips does not improve either performance or service, and contributes to several kinds of counterproductive work behaviors. Meanwhile, the handful of companies that have tried eliminating tips have reported better performance, higher morale, and improved customer relations, although some people do have trouble adjusting to not leaving a tip after a lifetime of habit…

I’ve worked on both sides of this issue, as well as seeing it from the consumer side, and I have to admit that while I’ve never had a problem leaving a tip, I’ve seen and felt the corrosive effects of people stiffing tipped employees, either because they are miserable cheapskates, or just sadistic assholes having fun. I’d be perfectly okay paying a bit more for my meals to ensure that nobody ever had to experience any of that crap again. I’m not sure how many customers share my point of view, or how many business owners would be willing to take a chance on this new approach. But unless something derails the $15/Hour movement soon, I suspect we’re all going to find out…

Not That Hard

For some time now I’ve been saying, both in this space and in real life, that while I have no quarrel in principle with the $15/hour movement, I don’t believe that the people involved with it have really considered the economics of the situation. As a business consultant and a business teacher I don’t buy into any of the “robber-baron” mythology; business owners are driven by the desire (and occasionally need) to make money, not to make the lives of their employees difficult. No one is saying that capitalists are a bunch of saints and angels, but the concept of them as comic-opera villains, plotting the destruction of their workers, is every bit as silly as the far-right mythos, in that most people would rather work for a living than exist on handouts. Unfortunately, this also cuts both ways…

In most unskilled and labor-intensive jobs, people are used because they are cheaper to recruit and train than it would be to equip the business with automated equipment capable of doing the same tasks. There are exceptions, of course – some civic-minded companies will retain sub-optimal production systems, either out of concern for the communities in which they are based or because without job income their customers won’t be able to purchase their products. But for the most part, if any part of a company’s operations can be replaced or reorganized in such a way as to lower operating costs or increase revenue, one should expect them to do so…

The corollary, and the place where people seem to be having conceptual issues, is that any artificial change in the relative costs of different methods will also impact the desirability of operational changes, such as automation. That is, if the Federal Minimum Wage is increased to $15/hour, the breakeven point for new equipment will rise with it. To take a common example from the last few years, once it became possible to replace a crew member making $7.15 per hour ($14,872 per year, plus taxes and benefits where applicable) with a machine that could fill soft drink cups automatically for less than $14,800 per year, many of the larger fast food chains began buying such machines…

Even worse, however, are the automated ordering kiosks that McDonald’s has been testing, and that Wendy’s is apparently going to start installing starting later this year. Not every fast food location needs to have a dedicated person making drinks on every shift, but every such operation does require order takers whenever it is open for business. For a 24-hour location, that’s 8,760 hours per year, or a whopping $131,400 just on salaries for each available register position per calendar year. When you add in recruiting costs, training costs, retention costs (fast food counter positions turn over several times per year), employee-related shrinkage and accidents, and the aforementioned taxes and benefits, it becomes somewhat surprising that the automated kiosks haven’t already reached widespread deployment…

Now, no one is suggesting that people don’t deserve a living wage in return for a day’s work. Even to a business leader, the concept that you can’t sell goods and services to consumers if there aren’t any who can afford your products and/or services is fairly elementary. What appears to be getting lost in this conversation is that if costs rise, but revenue does not, eventually the company will go out of business. One could argue that if senior management and the stockholders were to accept lower incomes the company could divert those funds into higher salaries, but that isn’t realistic either; if investments with higher returns exist then the stockholders will invest in them, and if higher salaries exist then the top management personnel will pursue them. Unless you are planning to run the entire economy by government commandments – and the large-scale experiments on command economies conducted during the 20^th Century did not end well – then any artificial increase in costs is not the long-range solution to this problem…

And while finding a workable long-term solution to this problem may be difficult, identifying the problem and realizing that a simple artificial salary (cost) increase would not work really wasn’t that hard…

Beyond Our Means

I read with great interest a story that appeared on the Reuters home page this past week, where the authors noted that auto loan delinquencies had reached their highest level in eight years during the last quarter of 2016. Given the number of crises, financial and otherwise, that appear to be rampaging around our nation these days the threat of people not making their car payments on time may seem relatively trivial, but it has a number of disturbing implications, beyond the fact that Americans appear to be spending more than they can afford on motor vehicles yet again…

Regular readers of this blog (assuming I have readers) may recall a story I brought you at the beginning of the 2008 financial crisis about people falling prey to predatory loans, not just on their mortgages or their credit cards, but also on their car loans. It didn’t draw that much attention at the time, and maybe it shouldn’t have – this was a period when people with mortgages they couldn’t afford were choosing to abandon their properties and taking the hit to their credit when the banks foreclosed. But the impact of borrowers using the same tactic to purchase new cars – taking out new loans to purchase new vehicles and leaving the old ones to be repossessed – did not help the ensuing consumer credit situation…

I can’t speculate on the political or legal ramifications of the crisis, but it is possible that too many people failed to grasp the size of the problem. According to the Reuters story, auto debt in America went up by around $93 billion over 2016, which brings the total people in this country owe on their vehicles to just over $1.16 trillion. Yes, I said trillion; we have just caught up to and passed the amount owed on this class of loan at the time the Great Recession started. Of that amount, Reuters is reporting that around $23.27 billion are 30 days delinquent, and another $8.24 billion are 90 days delinquent or more. For comparison, the ruinous student loan debt in this country is at around $1.31 trillion, and total debt is around 12.6 trillion…

Now, you might quite reasonably ask why I am wasting your time with this story, particularly if you are not currently behind on any of your loan payments. Why should you care if the kind of people who spend $80,000 on a car when they make $10 an hour are at it again? I could point out that this type of borrowing behavior is a long-standing predictor of trouble for the auto industry, remind you about the havoc that resulted the last time the Big Three automakers were facing bankruptcy, or even point out that if one or more of these companies does go underwater again, it’s your tax dollars that will be used to bail them out. But what really concerns me about this is the part we’re not seeing – the parts that don’t hit the radar at Ford Credit or its counterparts…

The impact of predatory lending at a local level – the “Buy Here – Pay Here” operations are only one of the more egregious examples – may not have the same impact as GM going into bankruptcy, but the effects on a whole range of people who can’t ask the Federal government to bail them out were hideous. And while our current leadership – financial as well as political – does not like to admit it, if consumer spending drops off because none of our consumers have money to spend on anything except loan payments, none of us are going to like the results…

Unexpected Consequences Ride Again

I found the story about decreasing gun sales this week on the CNN Money page to be somewhat ironic and more than a little amusing. If you don’t follow such things, you may not have been aware that the last eight years have been a bull market for all things gun-related in the United States. Gun sales have been so strong that several manufacturers have expanded production and even some foreign firms have begun setting up U.S. divisions. Meanwhile, ammunition sales have been even more explosive, prompting some manufacturers to move into ammo production for the first time. Several explanations have been given for the increased sales, but the most common cause cited has been the persistent rumor that the Obama Administration was secretly planning to introduce legislation to confiscate all privately owned guns in the United States…

Why, exactly, such a rumor would have proven so difficult to dispense with has never been conclusively proven, and I think we can safely assume that if anyone could produce evidence of a deliberate smear campaign we would have heard about it by now. What we can establish is that these rumors let to panicked buying trends after the 2008 and 20012 elections, and rash of similar rumors about Secretary Clinton (and a widely-held belief that she would be elected last year) resulted in an even more intense buying frenzy last fall. But when a Democratic victory failed to appear, sales of guns and ammunition began drying up, and apparently several of the major weapons manufacturers are having to deal with significant surplus inventory which is showing no sign of ever being sold…

The irony, of course, is that many of the same people and organizations who are most opposed to gun control legislation were significant contributors to the Republican candidates in the last election – and in every previous election over the past fifty years. But while hunters, NRA members and people who participate in target shooting may make up the rank and file of the “gun lobby”, a significant amount of the money that supports the cause – and that goes into getting Republican candidates elected – comes from those same arms companies. And while they have undoubtedly succeeded in getting a candidate more sympathetic to their cause elected, they have also helped to undermine their own sales tactic: scaring people with the specter of gun confiscation…

Now, one could reasonably argue that a better-educated electorate would have known that the outgoing Administration had never made gun control (let alone gun confiscation) a priority issue. There was an attempt to renew the Assault Weapons ban passed twenty years earlier, but this was defeated by the Republican-controlled Congress and never had much of a chance. And while gun control is traditionally seen as a Democratic issue, any attempt to undercut, much less repeal, the Second Amendment would be political suicide for almost any politician seeking national office – and our last Administration certainly knew that. That the gun lobby was able to perpetuate this myth is a strong indication of just how ignorant large numbers of our citizens really are, but it also demonstrates that the companies in question did not follow up their strategy to its logical conclusion…

If the various companies that manufacture and sell firearms had really wanted to maximize their profits, they should have thrown all of their support behind a Democratic candidate that many of their customers (rightly or wrongly) believed was going to take all of their guns away. They could have counted on support from the people who make those air-tight containers that some folks have been using to bury cashes of weapons (you can’t confiscate what you can’t find, right?), and any number of publishers, filmmakers and lawyers who make money feeding the same scare stories to people too gullible to know better. But with a politician in office who will cheerfully sign off on new laws allowing personal ownership of whatever guns people want to buy, the demand for all of these products is already starting to dry up, and the entire industry may be in for a crisis in the new year…

Whether this means the companies and their allies are simply getting their comeuppance for foisting their politics off on the rest of the country depends on your point of view, but it does appear to have had consequences they did not anticipate…

Words Fail Me, Again

There are some stories you encounter on the Internet that will make you wonder if somebody is trolling you, or possibly whoever wrote the article. There are others that will make you want to trace back the source of the information and verify that the article isn’t just made-up misinformation. Earlier today I was trying to authenticate the claim that former Vice President Dick Cheney had joined filmmaker Michael Moore and the Pope in opposing the Muslim immigration ban (which turned out to be true, by the way) when I stumbled onto a notice about a California-based homeopathic company that was being investigated by the FDA for including an unsafe (possibly toxic) level of deadly nightshade in a teething tablet product. Unable to believe my eyes, I went looking for the origin of the story…

Unfortunately, it would appear that this one is a true story. You can find the press release on the FDA website if you don’t believe me, and I can’t say I would blame you if you didn’t. The idea that a company could willfully endanger the lives of teething infants by using an ingredient whose effects the Food and Drug Administration calls “unpredictable” in children under two years old, and has denounced as an unacceptable risk is almost literally unbelievable – unless you are already familiar with homeopathic remedies. Most of these products involve trace amounts (they’re sometimes called “memories”) of various substances, which are supposed to work by triggering the body’s defenses without actually containing enough of the toxin to be dangerous. At least, that’s the idea…

As I’m sure I’ve mentioned before, I have no training in either biology or chemistry, but the people who do research these subjects, including the top people at the Food and Drug Administration, have been almost unanimous in debunking homeopathic products as “pseudoscience” – later-day descendants of the “snake oil” products of the Wild West era. An MD of my acquaintance once described a homeopathic iron supplement as containing roughly the same amount of iron you would ingest if you drank tap water in a building with iron pipes – which is to say, less than you would get from food that was cooked in an iron skillet. Fortunately, these miniscule concentrations usually keep homeopathic remedies from having any harmful effects on the user, since even if you are taking a product made with belladonna (deadly nightshade) there won’t be enough of it in an entire package to actually harm you. Unless, of course, you are under the age of two, with organs and systems that are still developing…

Now, we should probably acknowledge that, for the most part, homeopathic products aren’t illegal. As long as everything in the package is clearly labeled, and the appropriate disclaimers about the contents not being approved for treatment of anything by the FDA are in place, there’s generally no law against ingesting a “mineral supplement” that has less of that specific mineral in it than is normally found in the air you breathe. The problem in this case is that the amounts of belladonna found in the product are not consistent, and neither is effect of this ingredient on young children. The FDA is announcing that at this time they are not aware of any proven health benefit offered by these products, but there have been cases of serious negative reactions, possibly including death, among users in the affected age groups…

I’m not sure how this story will eventually shake out. At the moment, the FDA doesn’t even have enough evidence of wrongdoing to force the manufacturing company to recall the product, and so far the company has not agreed to a voluntary recall. Given the current administration in Washington, it does not seem likely that we will be seeing any more restrictions on highly lucrative products that may possibly have extremely bad side effects, either. For the moment, the best solution I can suggest is to research all unsupported product claims, consult with actual biomedical scientists, and don’t believe everything you read about the magical curative properties of very tiny amounts of deadly poison…

No Credentials Needed

In previous posts I have often noted that I attempt to stay away from political topics in this space, partly because none of my degrees are in any relevant discipline, but also because I find it impossible to believe that anyone needs another political blog. I have also pointed out that no matter how extreme my personal beliefs should happen to become, the diligent reader should still be able to find dozens (if not millions) of bloggers who completely agree with me, completely disagree with everything I believe, or any possible gradation in between. It is only when a political position or legislative action will have a specific impact on business that it comes into my purview, and even then I try to remain within the areas of analysis in which I have the proper credentials. However, this week’s legislative lunacy in the state of Mississippi requires no training beyond that which any pre-teen already has…

If you would like to, you can access the Washington Post article about the situation, which also contains the link to the exact language of the legislation. If I’m reading it correctly, however, this new law would allow any business in the state of Mississippi to refuse service to anyone whom the owners have a “sincerely held” religious belief against serving. While very clearly aimed at the LGBT community, there’s nothing here that would prevent someone from refusing service to Jews, Muslims, Buddhists, Hindus, Atheists, Agnostics, Democrats, Liberals, Native Americans, persons of African ancestry, persons of Asian ancestry, persons of Hispanic, Latino or Chicano ancestry, doctors, lawyers, teachers, soldiers, community organizers, or clog dancers – provided that they had a “sincerely held” belief that serving those individuals was somehow forbidden by their religion…

Personally, I can’t help wondering what would happen if someone were to declare that serving racists, sexists, ultra-nationalists or bigots of any description was against their religion. But even if we leave the obvious logical disconnect out of it, this legislation still makes no sense for at least two reasons that have nothing to do with political ideology. On the one hand, refusing service to anyone on the basis of what demographic group they fall into is a direct violation of the First Rule of Business: When somebody comes to you and says “Hello, I would like to give you money now,” you say, “YES!” No one is asking you to love all of your neighbors and accept them as your brothers and sisters – although if you’re a Christian that’s exactly what your faith is asking you to do – they’re just asking you to do business with them to your mutual benefit…

On the other hand, passing this kind of law will offend many other potential business partners, the vast majority of whom will not have any direct connection to the group or groups of people whom you hate. The fact is, simple pig-ignorant bigotry is bad for business, and being associated with a city or state that condones such bigotry is, if possible, even worse. We’ve seen examples of that recently, with North Carolina’s extraordinary restroom legislation leading to the loss of hundreds of jobs and millions of dollars added to the local economy, and the NCAA threatening to pull out of Indianapolis. None of those previous cases was quite as blatant as this one, however, and the fact that Mississippi is already widely regarded as the poorest and most backward of all of the states is definitely not going to help. Unless something changes soon, any remaining chance the state had of attracting either new businesses or additional tourism is going to evaporate…

Now, I don’t mean to suggest that forward planning is a particularly easy job. I have made my living that way on several occasions, and trying to anticipate all of the factors that can improve or erode performance in advance can be extremely complex, let alone trying to predict the eventual success or failure of an enterprise. But when the action you are considering is so flawed that an ordinary ten-year-old can explain several important reasons why you shouldn’t do it, then it’s probably time to hire someone else to do your forward planning – or at least explain to you why choosing religious ideology (or outright bigotry) over profit is a bad idea…