A process is a plan to perform a series of pre-determined tasks in a specific order. If a process is well constructed it will ensure that the desired outcome can be reproduced reliably as often as needed. Every policy needs one or more processes to ensure that the policy is followed and is credible. A policy without comprehensive processes is empty and pointless. A comprehensive process precisely defines who, how, when and where a policy is monitored, measured for compliance/performance, enforced and evaluated for its own value.
A policy may seem benevolent but if the process is designed wrong, its implementation can be a complete failure. So care should be taken not to criticize a policy without also examining the process design and implementation. Matter of fact, the most difficult thing is to design and implement effective processes to ensure the success of any policy. After having many discussions about a wide range of topics, I have found that people are quick to be critical but short on solutions and rarely creative enough to think in terms of effective processes to address issues. In fairness, it’s easy to criticize but it’s difficult to come up with viable solutions.
Metrics
Most times there will be winners and losers. Hopefully, the measure of success will be that more people win than loose with any new policy. There may be exceptions to this metric but then it illustrates how much we need a metric to measure success that we all can agree on.
So a central issue about any process is to determine a “metric for success”. This may be a very difficult thing to gain consensus. Consider the Keynesian Economics Plan to pump public money into the private sector. The theory is that a pump can not work until it is primed. If the only entity that has enough money to jump start the economy is the government then they would have to prime the pump, otherwise it just wont happen. The metric of success for this example is that fact the economy starts to flow again. So the question follows, what amount of money is necessary to start that flow in a sustained way. If you follow the logic carefully you are probably getting a headache about now. Here is why. If you don’t put enough money in or you don’t do it in the right way then the pump stalls and you have to start from scratch. Overdoing it, by putting in too much money has less of a penalty than complete failure. But it is not this simple. There is a reservoir of money behind the government like any other entity. If that reservoir is too low there is not enough money to prime the pump or sustain the flow to the pump.
We would have been much better off if the U.S. Government took the opportunities it had in the past to save for a rainy day but they kept the spigots wide open for too long where there are more obligations then they can possibly meet. So the metric of success now is somewhat illusive and vague. When a large part of the economy depends on the government for their sustenance and the government doesn’t have enough money to pay them then we are no better off than a company going bankrupt. The metric of success has to be other indicators that show that the economy is lowering its obligations and reserves are improving. If we looked at it that way then we can expect that the economy is flowing and the flow can be sustained. The alternative is continued spurts and starts.
No one wants to see anyone suffer. Here is the crux of the problem. We can provide opportunity for people but if they do not avail themselves of those opportunities then what? A metric of success has to evaluate the success of policies which in turn promotes self responsibility, competitive & productive behaviors. Behavior may be very hard to measure but the result of their behavior can be measured. Savings rate, industrial productivity and number of patents filed are examples of these behaviors.
Governments routinely try to promote behavior and social engineering with their tax policies, subsidies and sponsored projects. One curious set of policies is the difference between taxes on capital gains as opposed to savings. Savings are taxed at ordinary income levels. Capital gains and dividends are taxed at lower rates. In essence this is slanted towards riskier behavior and an attitude to gamble on our futures. The government, corporations and individuals have to all take responsibility for the processes that they have created and their effects on behavior. This highlights the magnitude of the fiscal problems we are currently embroiled.
POLITICAL PROCESS
Promote an Ideology
We do not have to accept the status quo. Politically the status quo in the U.S. is a two party system. The goal of having political parties is to promote an ideology. The agenda of the two dominant Parties in the U.S. is to maintain the control they exert over the entire political process. This would not be particularly bad if they promoted the best debate on issues. However, if their motivation is to quiet debate by other people and groups that could provide construction information and/or perspectives then their motivation is not noble.
Worse yet, it is hard to determine the respective central ideologies of these two Parties. There has been a great deal of fragmentation of each Party over the last couple decades. Seemingly minor issues, that have no place in a national debate, have caused members of a party to feel disenfranchised from their own party. A good example of this has been the abortion issue. This issue was used in the 2000 presidential election to help George W Bush to win his first term. The abortion issue was elevated on the national stage to become a major issue.
I am not here to try to argue the merits of either side of the abortion issue. Sadly when an issue of minor importance pushes out the attention and the resolution of other much more important issues then one can only assume that the people that promoted the minor issue were just using it for their own political advantage and not for the national good.
The attention of the country quickly switched on 9/11/2001. All of a sudden terrorism, which has existed for years, vaulted to prominence as the most important issue with the attack on the World Trade Center. In an ironic twist, the terrorist attack was used as justification for invading Iraq when the obvious source was located in Afghanistan. As of 2009, Osama Bin Laden has not been proven to be caught or killed after 100’s of billions of dollars have been spent and the might of the entire US military was deployed to find him. The same people that would argue the importance of stopping abortion were quiet about the lives lost in Iraq from our misguided adventures into that country.
Life is an important issue, from a morality and religious perspective. If you are going to argue the value of a child’s life then life for everyone has to be equally argued. The real question is, how the abortion issue stacks up compared to other national issues? I would argue that the best way to measure the relative importance of any issue by measuring how many people are directly impacted by it. National Security affects everyone in the country. So without question it is a primary responsibility of the national government and should be one of the most important political issues. Further security has been proven to be an immediate and long term issue.
Not every issue can be the most important issue, as some people might like to simplify things. In a recent conversation I had, a single mother’s situation was discussed. She moves with her kids to another state to find employment. In the previous state she could not find any. As a responsible mother she is also concerned about the quality of her child’s education. The schools were not as good in the new state. Both issues are extremely important but if the mother has no job then they cannot adequately live and the schooling becomes a secondary issue to have enough money to line on. These are tough choices but regardless some issues have to be prioritized over others and sacrifices have to be made in the real world.
Former Democrats were convinced to vote Republican due to the masterful job done by the Republicans in promoting the abortion issue. During the ensuing eight years, the major issues of Social Security, Healthcare, Education, the Economy, and Regulation of our Financial Institutions were deemed to be less significant in comparison despite the fact that they are all in crisis. This is a travesty of our political system when issues that affect all people are hijacked by issues that affect a very small minority.
Argue the Merits of Policies consistent with Ideology
A political party has to demonstrate that they understand which issues are the most significant to the country. On a national context, let us assume we agree that the priority is National Security, Financial Stability, Healthcare, Education and Retirement. The first thing we should be is ensure they these issues are adequately discussed, debated, planned and resolved before we take on other more minor issues. If the two dominant political parties want to show they are meaningful parties then they should take a stand on each of these issues and promote a platform consistent with their ideology on each of these issues. I would further argue that if they do not clarify their platform on the major issues and opt to promote minor issues to just win votes then they are committing fraud and subterfuge on the general public. It is a “bait and switch” on issues, like advertising a sale and not carrying any stock of the sale item.
Find Best Candidates
The capability of an individual is just as important as their ideological position. The person that a political party picks speaks volumes about the character of the party and the people that control it. It is absurd to think that we vote for an individual merely based on the political affiliation. We like to think that because someone belongs to a political party that they represent the values of that party. But the values of the party change with the leadership of that party at any point in time. Also the elected official are picked on their elect ability and not based on their capability.
Valuation Process – Pricing
We like to think in terms of the ideal world and one of those ideals is that the free market should determine the price of everything. The reality is that there is always manipulation going on by one party or another to control prices. Taxation, import duties and inventory are used to affect prices and supplies. On the extreme edge is nationalization of various industries by governments. These activities are aimed at exerting control of critical resources namely: labor, commodities and strategic manufactured items. It’s fine to have an ideal to aim to and strive for but we still have to deal with the realities that confront us.
Prices on critical resources are tied to out standard of living. So when prices are manipulated true market forces are distorted usually to favor one group over another. That might be looked at as an entitlement program. The party being entitled is the one benefiting by the manipulation in prices and wins. The party that subsidizes the entitlement is clearly the loser. Think of this whole situation as one big shell game. The shell is constantly moving the money around until someone feels that the right person got their share of the action.
The reality is the industrialized world took advantage of their technology and knows how to leverage the rest of the world for their benefit. This is not necessarily a problem provided all parties involved got appropriate benefits. The point of the game is gain advantage. Therefore, even slavery was justified on economic terms as necessary for the health of the economy at the time. The manipulation in this case was the price of labor which couldn’t get any lower then the cost of feeding and housing the slaves. They weren’t paid a wage or any benefits. Even though we don’t have the degree of slavery that existed centuries ago doesn’t mean the process has fundamentally changed. If the system is setup where there is not an opportunity to elevate your standard of living then you are virtually a slave to the system. The slave owners dictate a minimum wage or terms that provide them enormous power.
Work
A current example of this is IBM and other multi-national companies. IBM is picked due to their recent blatant public announcement about movement of labor from the U.S. to India. Whereby, companies initially dabbled in outsourcing work now it is strategic in nature where a large percentage of low and high skilled jobs are quickly moved. American workers are offered a job but they have to relocate overseas and be willing to work for the local wage there.
If you are concerned about the Indian workers then they are the winners. IBM and others with the same mind-set win due to their cost structure reduction in labor cost. Even the hard of hearing can hear the sucking sound of jobs leaving, unemployment rising and our standard of living being eroded. The U.S. citizen had better listen and pay attention. Our own government is clearly aiding everyone else except the U.S. worker.
Some politicians will be evasive and point to the education system as the way for us to survive. As important as education is it pales in comparison to the economic dynamics of outsourcing and chasing the lowest price labor in the world. Under the Free-market open border approach to labor, it doesn’t matter how educated you are, if an employer can hire some for half the price, they are willing to hire even lower skilled laborers.
We are on a path to eroding the foundations of our society where there will be no point to getting a higher level education because there are no jobs here. The only other alternative is to adjust the price or our labor here to that of third world countries. The magnitude of this situation is even larger. The whole benefits structure grew for decades in the industrialized countries while the third world didn’t have any of it – medical, overtime pay, vacations and retirement plans. So when a company moves a job overseas they lower their short terms wages and their long term liabilities.
I am not advocating a revolt to the new world order but it does need to be recognized how the transfer of wealth is destined to affect this country for decades to come. The world is going to rebalance and there will be a leveling of standard of living between the third world and the industrialized world. It will occur economically and may result in more violent episodes that express the dissatisfaction about what is happening. There is a metered way for this to happen and that might mean coordinated salaries between countries.
What is in it for the third world to coordinate salaries? Security! A stable place to live is worth more then a few extra dollars in your pay. The U.S. comparatively has been a very stable safe country to live and it offers hope to people for a better way of life. The world may not want to think of the U.S as a superpower that controls and manipulates their internal politics. But the world would like to know that there is someone out there that is a beacon of safety and security to all. This is a form of product dumping on our economy. Our friends in the world would not want to see our economy collapse. The others are out to harm us and we need to negotiate appropriately with them.
Commodities
Sovereignty was discussed earlier and is a legitimate factor is formulating all plans for the world’s economy. Similarly, commodities that are resources mined or drilled on sovereign lands and waters are the legitimate property of those countries lucky enough to have them. Another ideal is that everyone would respect the sovereign rights of countries. Many wars have been fought over access to natural resources. The lesson to be learned is that if countries use their resources as political footballs they may not win the game.
As resources become scarcer the pressure to fight over the remaining resources grows significantly. The prices of commodities will spike wildly and become disruptive to the normal functioning of markets. It is better to prepare for this scenario then to just let it happen. China is trying to lock up supplies for as many of these resources as it can. They are preparing well for the inevitable depletion of resources. They are not just locking up these resources for their own use but also to help control pricing in the future. Even though they may not have sovereign resources, they can contractually ensure their supply that will potentially provide them leverage in future negotiations.
During the last oil shock the price of oil spiked to $150/barrel. The airline companies were hit hard by the dramatic increase. It was interesting to note that only one airline company, Southwest Airlines hedged their bets on oil prices and locked in oil at about $60/barrel range some time earlier. While all the other carriers struggled thru the oil spike period Southwest was virtually unaffected by oil prices except for the down turn in the economy in general that caused fewer people to fly. So this is an example of how contracts can be used to buffer disruptive price swings.
In another case inventories are used to buffer prices swings and many other disruptive supply problems. “The U.S. Strategic Petroleum Reserve (SPR) is the largest emergency supply in the world with the current capacity to hold up to 727 million barrels. The United States started the petroleum reserve in 1975 after oil supplies were cut off during the 1973-74 oil embargo, to mitigate future temporary supply disruptions for example fallout with Relations dealing in oil or World War. According to the World Factbook[7], the United States imports a net 12 million barrels (1,900,000 m3) of oil a day (MMbd), so the SPR holds about a 58-day supply. However, the maximum total withdrawal capability from the SPR is only 4.4 million barrels (700,000 m3) per day, making it a 160 + day supply.” [Wikipedia]
What is the noteworthy part of this is the relative amount of inventory to the expected rate of net use and time of period of the disruption. Its like an insurance policy. When you carry the insurance then you are in a much better bargaining position to get the best price. If you put two purchasers next to each other, one with inventory and the other that has none. The one that has no inventory is at the whim of all price fluctuations. The one with inventory then can wait to get a better price when the opportunity comes. In the greater context carrying sufficient inventory for insurance over a long term will keep your prices down on average. An even more dramatic issue is when the sellers of a commodity know you leave on the edge with little or no inventories they virtually know they have you by the throat and can raise process even more than normal.
Hopefully this provides a process picture of how commodities should be treated relative to their national economy. Commodities are a base material from which there is a series of other products made downstream. Oil is used to make plastics and plastic are used is a wide range of other parts and these parts are used in the manufacture of things like cars, boats, appliances, tools and house wares. If there is no oil then all the subsequent products can not be made. As the inventories are depleted, prices will shoot up rapidly causing inflation. After the inventories are depleted, all manufacturing shuts down devastating the economy.
In other words, all sovereign nations need to plan for the proper management of commodities that are necessary to the healthy operation of their economy. The factors involved are Supply Rate, Consumption Rate, Time, Inventories, and Contracted Supplies.
Consumables / Manufactured goods
I spent most of my professional career in the manufacturing and planning of manufactured products. Many things have to be coordinated in order for the flow of raw materials, labor, inventories and equipment to smoothly and efficiently come together at the right time. The point that needs to be made is, the ability to manufacture products is not something that can be developed quickly. If we loose that ability then it will take years and enormous resources to re-establish that capability. Some manufacturing is more strategic than others. The consequences need to be considered for not having specific manufacturing capability.
Having manufacturing capability (like having commodity reserves) provides leverage in the setting of prices. Some manufacturing is highly specialized while others are fairly simple to do. However, the scale and volume of manufacturing may require very large capital expenses, so even if it is relatively simply it cannot be developed quickly. Building manufacturing facilities may take 2-5 years for the construction. That also assumes you have the technical understanding to design and build it. It is the time factor of construction that determines the ability to drive prices up significantly.
Countries have protected their manufacturing for the sake of protecting jobs for years. Manufacturing jobs are typically higher paying jobs as compared to others that employ large numbers of laborers. The skill level of a manufacturing job is higher and would normally command a higher salary commensurate with the higher skill level. Therefore if there were sectors to try to protect it would be those that employ the most and pay the most.
Aside from these arguments, there is also the strategic issue of national defense. The airline and auto manufacturing sectors illustrate several points well. There is the issue of sheer capability, technical progress and the relative cost. Defense is another form of insurance. Hopefully you don’t need it. But if we extrapolate the competition for resources into the future, it is easy to project that there will be enormous competition for an ever deleting supply across the board. Therefore the need for greater defense is very likely.
If you break down defensive capability it falls into these categories: quantity, technology and intelligence. Greater technology offsets the quantity of people and materials that are needed. A technology edge makes an enormous difference in combat situations. There is an annotate that explains this concept. “Two men are in the woods running away from a bear. One man stops and starts to put on sneakers, he had in his backpack. The second guy looks at him in amazement and yells at him, why are you doing that? We have a bear chasing us. The first man replied – All I have to do is outrun you!” If you have nothing to protect then you have no need for defense However, we have a lot to protect and there are always plenty of bears after us.
A healthy airline manufacturing company has both a commercial and a defense division. There is considerable R&D that goes with kind of industry. If the company just existed for the sake of defense then the cost of R&D and manufacturing is born entirely by the government. This same cost can be defrayed by the commercial division. Both divisions will have research with cross-over capability which will advance technology faster.
Intelligence is needed because all the technology and resources in the world are useless if deployed in the wrong place or at the wrong time. Everyone would like to ignore the potential hazards that exist in the world but the greater the number of threats and the magnitude of them individually, make the argument for very strong intelligence and the need will grow.
The advocacy of this book is to have an organized way of dealing with the reality we face. The alternative is chaos. There are factions in the world that would have us return to the stone-age. They would accomplish this is by very violent means. Policing world events and developments is a necessary evil that we are destined to participate in for the foreseeable future. There is a diplomacy element to this discussion. Either countries cooperate to create a more stable future or they will act in their own self interest and this will inevitably lead to polarization of policies and ultimately to more violent conflicts.
Bottom-line, the defense industry is vital to sustain a stable economy under the current and projected situations. The auto industry mirrors the above discussion. The problem is there is a dramatic need for more mass transit. Although I would argue for the same reasons as the airline industry for a healthy auto industry, there needs to be more mass transit to efficiently handle an increasing population while resources of land and fuels become more limited. Proportionately, the about of research and pubic spending should be increasing toward mass transit and quickly.
The price of manufactured goods is increasingly related to the amount of technology in those products. The obvious technology is what appears in the finished product. The hidden technology is the supply chain and manufacturing. There have been enormous strides in making the supply chains more efficient and flexible. Manufacturing automation has been revolutionized with the advent of low cost, complex computer programs. The trend is to make products with greater capability while the cost is offset by more efficient supply chain and manufacturing.
The consumers with higher standards of living will be able to afford the more advanced products. When increasing numbers of people have their standard of living threatened, the will become more value conscious. This group will buy based on necessity rather than convenience or entertainment. The typical business model will be challenged for most corporations. They prefer to design things that have more bells and whistles because these innovations command a higher premium. Value products are by definition lower cost, higher quality (designed and made better) and have fewer bells and whistles. In relative terms, corporations that invest more into their supply chain and manufacturing efficiency will do better that spending as much as they do on product designs that have more frills and don’t add to consumer value.
Trust
All the best well-intended plans and processes depend on trusting the people to understand administer and monitor performance. Accidental breakdowns in processes are random and are bound to happen. Hopefully, when a well trained educated person is responsible for the process, the occurrences of failures are in frequent.
Since people can be corrupted there will be instances where the process will be abused on a regular basis. This makes the number of failures in the process significant. As bad as these sounds, there are systemic problems with processes.
A systemic process failure is where the design of the process is flawed. As a result the process may not work at all. Putting incompetent people in charge of the process; underfunding; and designing a process that does not align with the policy it is intended to execute are examples of systemic process failures. Systemically flawed processes have the highest rate of failures.
The point is, the greater the number of process failures the greater the erosion of trust in the entire process, the policies, the institution and the people responsible for the process. Imagine going to a bank and after you make a deposit that don’t post it properly to your account. What trust would you have after this happened even a few times. One bank failure is an anomaly. A large number of bank failures may be a process failure. However, the magnitude of the Financial Services Industry failure, we just witnessed has brought into question trust in the whole idea of the capital markets and free enterprise.
At the end of the day we do need to trust that the Capital Market System (CMS) will work. Capital markets are clearly a process fro funding development and construction. The beauty of the system is that people and organizations (unrelated to the project) can help fund the project. Far fewer projects would be funded if the only source of funds was these directly related to the project.
External investors have to trust the people getting the funds to spend them wisely. Many times the investors don’t have adequate access to information on the project or the recipients of the funds. The investors then rely upon rating agencies to make that judgment. Ultimately, the investor wants at minimum to get repaid (with interest on their investment). In some cases the investor may be philanthropic and be more interested in the benefits of the project, than the return on their investment.
Practically the entire global business community depends on a well functioning CMS. So the next step after the Capital Markets is “Corporate free Enterprise” (CFE). CFE is primarily a user of the funds generated by the CMS. Corporations and governments may also be investors and participants in the CMS.
The focus for this discussion is the CFE as a user of the CMS and their relative responsibilities. “Freedom” implies order and rules. Freedom does not mean making up your own rules and everyone acting in chaos. There has to be standards for accounting. Corporations have to honestly report their performance and results. Investors and shareholders have to trust the corporate leaders to act responsibly beyond these performance numbers. Performance numbers are short term and can be an illusion.
A good business ensures sustained [performance over a long period of time and growth if possible. Investors and shareholders don’t want the rug to be pulled out from under them by a business that uses short term performance at the sacrifice of long term corporate health. Companies that sell unsafe products, pollute the environment or act in fraudulent ways create long term liabilities that threaten long term profits. Bottom-line, we must trust and verify the corporate leaders to administer the CFE fairly, ethically and for both short and long term performance.
We face a unique challenge these days. What is the regulatory process? Capital Markets and corporations are not bounded by jurisdiction of any one governmental body. Both can act in regionally specific ways to compete in local markets more competitively. The lowest common denominator is no regulation at all. Therefore, some “capitalist” have argued that we have to eliminate regulations to be competitive. I can’t believe that anyone would argue that after the abuses we just witnessed. The serious question is who should do the regulation?
Self regulation is no regulation. Therefore, the natural regulatory body should be the government. With the advent of the Internet, businesses large and small are amorphous and can literally do business anywhere in the world. Clearly, we can not trust the government to regulate businesses today because the two don’t align between jurisdiction and the scope of supply chain and markets. The real solution is global standards for accounting, safety environmental controls, labors rules.
The misalignment between governments and businesses is a systemic problem and calls for a new form of independent regulatory body. What we are seeing and will continue to see is high failures rates in regulating all forms of businesses – financial, manufacturing, and medical and services. The dramatic affect of such a systemic failure at regulating both capital markets and corporations leads people to not trust government to act.
Citizens need to trust their government to maintain order, provide military and financial security and ensure the infrastructure is well maintained to promote business. These are the core responsibilities of government. Governments have taken on additions roles that are often mush less important from a national perspective or higher. Thereby all efforts are diluted. Even the core roles to legislate and regulate on the core responsibilities get diluted to a point where the fabric of society is threatened.
What I am suggesting is governments have to narrowly define their responsibilities straying with the core ones. If they can do a good job with those then they could add others. That is a long ways off.
This situation of governments taking on more then they should is a major systemic flaw in the governing process. It is even a moral dilemma. Here is a parable to illustrate the dilemma:
A boat is filled with people. More people swim up to the boat wanting to get in or at least hold onto the side. However, the boat is filled to the point where water is starting to crest the sides. Any additional weight will cause all to drown. Some in the boat don’t want to deal with reality. The others are frustrated and angry because their lives are at stake.