How To Kill The Golden Goose

While watching the recent economic blight that has struck America, I am often reminded of the Aesop's fable about the goose that laid golden eggs. There was a farmer who had a goose that laid a golden egg each day, the story goes, which the farmer sold to support his modest living. Until one day, the farmer got greedy and killed the golden goose thinking he will find a stash of eggs inside, only to end up with no golden eggs, and no goose that would have laid them either.

While there may be a lot of morals and interpretations of the tale, the one that appeals to me in the current context is that we have a lot of people around who would like to make a quick killing (no pun intended) rather than find a sustainable way to build wealth. And I don't mean "sustainable" from an ecological perspective, but an economic one. To get into a sustainable, long term growth mode needs long term thinking. And I see the long term thinking being continuously sacrificed for quick, short term gains. That is where, I think, countries like China outdo us consistently. Let me elaborate.

A reporter once asked former Chinese premier Chou En-Lai (Zhou Enlai) what he thought was the effect of the French Revolution, of 1789, on the rest of the world. He is said to have replied (sic) "It is too soon to say", meaning it was too early to tell. It was nearly two centuries after the incident that he made the comment! In my view, what he was exhibiting was a perspective that only someone whose feet are firmly entrenched in thousands of years of Chinese history could show. Also implicit in his response, in my opinion, was that the leadership of China took a much longer term view of the future when it came to decision making. They would, for example, forgo today's return if it meant much better returns ten years, or even fifty years. They focused on educating their young in the most rigorous math and science classes, even though their families could barely afford a decent living. They created a pseudo capitalistic system where individuals can create small businesses focused on export. They backed bright ideas with capital to take to market, even if it did not produce quick gains. Using these and many other longer term strategies, China went from being the begging bowl of the world, to the industrial giant that now has the world's largest automobile market, makes almost ten times the steel compared to the US, exports everything from toothbrushes to air conditioners to practically every country in the world, and has the world's largest standing army. The US owes a Trillion dollars (that is 1 followed by 12 zeroes) to the Chinese government, and there is very little we make that the Chinese want to buy. It is said that 600 of 800 suppliers for Wal Mart, an "American" retailer, are from China.

Going back, it has been nearly half a century since Premier Enlai said those famous words, and he is long gone. But thinking like his, I contend, has shaped China into a giant that every nation has to take seriously, including the United States. The funny thing is, it is not just China that has used this trick. Many nations that rose out of the ashes of WWII used the same recipe to race past us economically, in less than two generations. Germany and Japan were the earliest, followed by the Asian Tigers Korea, Taiwan, Hong Kong, and Singapore. If this strategy has worked for them, it should work here as well, right? Perhaps - if we thought like they did. The big question is, how to get such thinking ingrained into the psyche of the American people so that we too can dig out of this hole?

One possible way is to look to our so called leaders, and see how they think. Maybe there is some hope that a group of them will suddenly snap to a new grid called "long term thinking", and start role modeling it. Then the followers will follow, and the rest will be written in the annals of history. Right? Right. So which one of multiple breeds of leaders are thinking this way? Let us do a quick status check:

Political Leaders: The behavior of political leaders, I am led to understand, is shaped by the election cycles. Deny as they may, getting elected has become so dependent on money that the moment someone gets elected, they get busy raising funds for the next election. Out with the long term focus, and in with reelection tactics. When the focus goes to fund raising, unfortunately, special interests with deep pockets move in to garner influence - often to make quick gains. After all, there is no guarantee the politician will get reelected anyway. Legislation often ends up in short term window dressing, and a lot of pork to keep the deep pockets happy. So, there does not appear to be any cheese at the end of this tunnel.

Business Leaders: Ostensibly, businesses are supposed to be in there to create value by inventing new things and making lives more convenient. They are also supposed to compete in an open market and make manufacturing efficient. But once a business grows large enough to edge out competitors, it behaves more like a monopoly. The leaders, at least in my observation, tend to look towards the next quarterly profits. Often, a long term investment gets shoved under the rug while making the next quater's results look better. Efficiency comes via finding cheaper places to make things (China!) while cutting labor in the US. It has taken retired executives like Bill Gates and Craig Barrett to see the light, but they are quite in the minority, and don't wield the same influence as they did when they were at the helm of their respective companies. Most of the time, I see there is no cheese to be found here either.

Union Leaders: Unions started out with a noble mission of protecting the exploited workers and giving them a steady wage and protection from "the greedy capitalist". In the last half century, however, the collective bargaining agreements have had the contrary effect, of "killing the goose". One example - GM and Chrysler had to declare bankruptcy because they could not afford the $70 an hour total compensation, and pensions, guaranteed by the union contracts. All this while, the transplants like Toyota, Honda, Hyundai etc. employed non union labor at $40 per hour and sold quality cars at competitive prices. In another example, recent movies like "Waiting for Superman" (see my previous blog) have hammered on the teacher's unions for being inflexible when it comes to allowing meaningful reform that actually benefits students. But the actions, as depicted by votes in union elections, have not budged from time worn, ineffective practices. Even though there are a small number of excellent teachers, it seems nearly impossible in the current system to have every teacher be excellent (deny as they may). Hmm, the cheese is getting pretty elusive.

Community Leaders: I have been involved in volunteering in schools and the community for several years now, and most of the time, the so called community leaders are forced into the role of the safety net. When everything else fails, community volunteers tutor minority kids, keep them busy and out of danger after school, mentor at-risk students, and so on. This is one group that probably sees what needs to be done, but is stretched too thin cleaning out today's mess to do anything for tomorrow. After all, there is already a flood of unemployed and underemployed people with families to feed TODAY. Who has time for TOMORROW? Sorry, no cheese here.

So who is left now? That's right, you and I. We have numbers on our side, but no organization. Because the organizations that we created to look out for us have morphed into what I consider unrecognizable entities. It is up to the average person to get into the long term thinking mode. To value education in schools (duh!) and de-emphasize sports. To get real academic competition into our schools, not the fuzzy "cooperation" that has failed to produce results. To goad our politicians to create venture funds to bring good ideas to market instead of sprinkling printed money indiscriminately. To build more science and technology schools, and pay a differential to teachers with scarce skills. To ask our political candidates what their long term goals are for their constituency, instead of spending millions on TV ads telling us how rotten their opponent is. Perhaps then it will start something that will produce results, maybe a little slower than in the past.

Hey, it only takes a couple of generations!

Obama - The Captain of the Economic Ship

Obama survived the first 100 days. And with record approval ratings to boot.

Hooray! Who'd have thunk, right?

Bank defaults, no problem. Obama the CEO to the rescue. GM and Chrysler going under? No sweat, Obama the Chairman of the Board is there to fire the CEO of GM, and order Chrysler to go bankrupt. Millions in the nation needing health care? No problem. Obama the healer is there to help. Bring peace and prosperity to the world? Obama the conciliator is there to bring long lost respect to the US in international arena. So, Obama the miracle worker should be able to get Americans healthy, wealthy and wise once more, and bring the good old days back, right?

I think "not so fast".

This economic ship called the US of A, captained by our own Barak H Obama, has at least three boat anchors that need to be dealt with before it can be turned around, and set sail into clear waters.

Let me elaborate.

The first boat anchor is the demographics. America is aging. There are more and more people reaching retirement age, with fewer and fewer people feeding into the social security system. If it was not for immigration, we would have gone into negative population growth. But a large portion of the immigrants barely make minimum wage. And therein lies the rub. No matter how hard we try, the math of getting more taxpayers paying into the social security trust fund is not going to work, unless they increase the retirement age, cut benefits, or both. So there goes the historical standard of living. Both the young and the old, rich or poor, will have to pay more to keep even bare bones benefits alive. This is a structural issue - which means there are no feasible solutions in sight under the current legal and economic structure, without burning a huge hole into people's wallets.

The second boat anchor is the total debt in the system. I have blogged about his before, but I strongly feel it needs to be stated again. The total debt, which is the combined debt of local, state and federal governments, individuals, and businesses, is now over 50 trillion dollars. Even with 1 trillion dollar government bailout, which is a drop in the bucket, the debt is about 3.5 times the GDP. In comparison, the total debt was about 2.5 times GDP during the height of the great depression. A healthy, self sustaining economy can handle a debt load of 1.5 times GDP. So, we have about 2.0 times GDP's worth of debt to work out. That is like saying a person's maximum tolerable weight is 220 pounds, but the current weight is 500 pounds, and he needs to lose 280 pounds pronto! Those who have lost weight know, this ain't gonna happen overnight. Maybe over years, if we are lucky. And the agony will come when the governments will tax us more just to service debt, companies will charge more for their products and services, and individuals will cut down spending just to survive.

The third boat anchor is our public education system, especially the K-12. Much has been said, correctly I might add, by Obama and his ed sec Arne Duncan, on how dire the issue is. After all, it has been proven beyond doubt that a well educated workforce is more productive, and a more productive workforce can outproduce the competition and bring prosperity and wealth back to this country. But by many accounts, the system is so stuck in its own little world, blissfully oblivious of the raging storm, that any meaningful change will take more than an act of Congress to occur. I have heard archived speeches of every president of the United States, starting in the 1960's that the US will be #1 in education in the world. I have yet to see objective data that show that the goal has been achieved. If anything, in many ways, we have fallen behind more nations in the rest of the world. The worst indictment, I think, is that we are yet to officially convert to the metric system. We are not the only one, we have a banana republic (Myanmar) and a ship licensing republic (Liberia) to keep us company. The rest of the world has moved on...

I wish President Obama the best of luck as he navigates through his next 100 days!

Friedman Nails It - Again

Thomas Friedman is one of my favorite columnists. His columns continue to shed new light on the issues he brought up in his groundbreaking book "The World Is Flat". (It is now one of the required reading books for students of International Economics course at local Clark College.) In his most recent op-ed article, published in the New York Times, he sheds new light on how the lack of progress in K-12 education has hurt the US economy.

http://www.nytimes.com/2009/04/22/opinion/22friedman.html

Headlined "Swimming Without a Suit", it has some shocking numbers. One of the estimates of the cost of poor showing in our K-12 system is summed up here: "If America had closed the international achievement gap between 1983 and 1998 and had raised its performance to the level of such nations as Finland and South Korea, United States G.D.P. in 2008 would have been between $1.3 trillion and $2.3 trillion higher." In percentage terms, the GDP would have been roughly 10 to 18 percent higher. Which in turn would have meant we did not have to have the recession we are going through now, because the economy would still be growing, instead of shrinking.

If there is a bright spot, the article mentions that more and more top Ivy league graduates are signing up for "Teach For America", an organization that provides college scholarships in exchange for two years of teaching in inner city schools. It has produced produced such distinguished alumni as Michelle Rhee, the chancellor of Washington DC schools. For many years, they have attracted top graduates from various fields, with an average college GPA above 3.5. Apparently their applications are up 40 percent this year, and most of them are graduates of top schools such as Yale, Princeton, and Harvard.

One small problem for those living in the Pacific Northwest. Teach For America does not operate here. Wonder why?

Thanks to Charles Hoff for sending me the link.

The Trouble With Ideology And The Dawn Of The Age Of Reason

There have been countless articles in the papers and op-ed pieces on radio and TV recently on why the country got into such an economic mess almost overnight. Some of them have been suggesting that the free market ideology, or the lax regulation policies on banks and mortgage lenders got us into this mess. Some other articles on educational ideologies that believe in constructivist learning suggest that they could be part of the reason why our schools turn out such poor performers. Then there is the all consuming presidential race which keeps bringing racial and religious ideologies into the forefront, whether they are relevant or not. That got me to think about the fundamental concept of ideology. If a certain ideologies got us into this mess that we are in, then is the solution an opposing ideology? What is the guarantee that an opposing ideology will not get us into another mess sometime later? Could the problem be the fact that we cling to various ideologies to save us at different situations, without really questioning the validity of believing in any ideology at all?

I am of the opinion that all ideologies were conceived to simplify life. Ideologies provide simple explanations and prescribe relatively easy to understand prescriptions in certain situations. Religious ideologies belonging to various religions lay down how life should be led, and the consequences of good or bad deeds in this world or an afterlife. Various political ideologies favor control of the society by a certain class of people, assuming that what is good for the ruling class is good for humanity. But to believe in an ideology, an individual must see value in what it has to offer. It could be positive value in terms of direct rewards for following its prescribed practices, or lack of punishment for doing so. The net result is that if the ideology fails to show value, it fails to appeal to the individual. So, what are the characteristics of a successful ideology which shows value? I have come up with some ideas below:

1. First and foremost, a successful ideology must be simple to understand. Even a flawed ideology sometimes succeeds because it appears to be easy to understand. For example, when Communism was first introduced in Europe, it seemed so simple that it appealed to almost half the population of this planet, and caused the masses to take up arms and overthrow their governments. The flaw in the ideology is painfully obvious now. At best, it took away all the incentives for one to excel, and at worst, it spawned party dictatorships or individual dictatorships because the one party system made it too easy to do so. Even though the success of communism was fleeting, in historical terms, its impact, good or bad, has been so powerful that it will be hard to ignore.

2. Second, a successful ideology provides some reasonable and immediate solutions to a pressing problem . For example, when Buddhism was first introduced in India in 6th century BC, it provided a way out for millions of masses who found the existing religion and the social structure it created to be too oppressive.

3. Third, a successful ideology is self-reinforcing. Its followers create a system that rewards the believers and punishes the non-believers, therefore perpetuating its existence. This can be said about any religion currently in existence, but it can also be extended to social and political beliefs. Ideology, by definition, creates exclusive cliques or groups. The followers of an ideology may think this is great, because of the rewards they receive for being part of a larger group.

So, what then is the trouble with the concept of ideology? Other than some obvious ones that failed, we should be fine with the remaining ones, right?

I beg to disagree. Let me attempt to explain:

The greatest strength of ideologies, their simplicity, is also their greatest weakness. Let us take the example of Communism. The earliest treatise, written by Carl Marx, was during the early stages of the industrial revolution. Big money built huge industrial infrastructure with one sole end in mind – maximum output. Working conditions were abysmal, and the wages were just enough for subsistence living in slums. All the profits went to the capitalists, who hired and fired employees at will , at a time when there was no safety net. What the laborer saw was that the bosses hardly broke a sweat and lived a plush life, while they had to constantly toil without even the guarantee of being able to make the same subsistence wages the next day. The workers were not literate, and were not capable of understanding a deep treatise on economic theory of supply and demand. Communism was just the tonic for many of them. Revolution provided a vent for their pent up rage, and the idea of everyone being equal appealed to them. Heck, everyone they knew was in the same boat. It was not hard to imagine life being a little better for everyone.

But it turned out everything was not hunky dory after the first revolution. Russia quickly industrialized after its bloody revolution, only to find Stalin rise to power and establish a long and painful dictatorship until his demise. China followed suit with Mao Zedong. Other Asian and Latin American countries quickly followed. But then, a funny thing happened. The same ideology that led the rise of these nations also threatened their very solvency. Since there was no incentive to work hard and excel, the entire economy eventually became filled with workers who got by with the bare minimum effort. “Everyone being equal” turned into “everyone being equally mediocre”. This, combined with the zeal of the leaders to build big militaries, drained their already weak economies. When the only choice left was to face bankruptcy, the leadership of Russia invented “glasnost” , a thinly veiled attempt at allowing freedom of expression. This was quickly followed by the collapse of the Soviet empire itself. China was on a different path, but came to the same conclusion after the demise of Mao. Still ruling with an iron fist, the leadership allowed private enterprises, and opened its markets. So, the ideology where “everyone was created equal” did not quite hold water. The conditions that made it a sensible ideology did not exist any more. The ideology had helped create an entirely new condition, wherein a completely opposite ideology started making more sense.

So, in short, the simplicity that successful ideologies deliver also is their greatest liability. The simplicity is analogous to that of a stopped clock. It is exactly right twice in a 24 hour period. But it keeps deviating until it is exactly opposite of the correct time. I assert that every ideology suffers from the same limitation. Why? Because simplicity lulls people to believe in certain simple axioms, regardless of the situation. The world has become a lot more complex and intertwined in the 21st century for any ideology to be correct for everyone 100% of the time. Believers of ideologies make their own lives simpler by shutting down the brain circuits that would have otherwise be open to examining new situations in their own light. I have seen the quip “my mind is made up, don’t confuse me with facts”, which is probably a jab at such mentality. And yet, the world needs more and more people who can look at each situation intelligently, and draw their own conclusions. Ideologies create extreme conditions that a counter ideology will destroy, thereby starting the whole cycle all over. The fact that ideologies help create extreme conditions are illustrated even more clearly by the economic chaos in the US today. We have had the opposite ideology to communism operating in this country since its inception, at least in the private sector. It has been forty years since we landed a man on the moon, which was a symbolic pinnacle of capitalist achievement. And yet, today the wealth disparity in the US is the highest in 40 years, so is poverty rate, illiteracy rate, high school dropout rate, unemployment rate, foreclosure rate, bankruptcy rate…the list goes on and on. Does this mean the citizens of the US need a counter ideology, something of the likes of Socialism?

Hardly. I assert that every society deserves to be freed from the endless cycles of ideologies and counter ideologies butting heads every so many decades. The only way to do that is to wean the public from the idea that there is a simple ideological solution to everything. Problems today are complex. To be solved, they need all the knowledge, and processing ability that every individual can bring to the table. Reason must replace blind belief. Every problem must be identified early in its cycle, and must deserve the best people we can throw at it. But it has to start with creating minds that are predisposed to reason, rather than belief in an ideology. Hence my oxymoronic statement – believe that one should not believe.

The 21st century will create many new winners and losers. My hope is that more enlightened societies will see the wisdom behind not following an ideology blindly. Instead, they will focus on creating more objective thinkers. They will have mastered all the relevant facts and skills that humankind has learned so far, and use that knowledge to build a better tomorrow. That will be the dawn of the age of reason.

A Gift from our Fathers

This is a reprint from a message I sent out to Where'sthemath group. There is a lot being said about the rise of China and India as emerging economic superpowers, but most articles I read appear to me as the modern equivalents of "Five Blind Men and an Elephant" story. I think I can relate to at least the US and Indian cultures, having spent roughly half of my life in each. Here are my observations about the cultural differences.
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I recently got a copy of the video "Two Million Minutes" and watched it. I have eight nieces and nephews who go to school in India, and I can get a real time comparison of what they do in school as well. It is funny how often when I call my relatives in India, the "hot news" is what the latest report card is of each one of them. Then they quickly switch to how hard their kids are studying to get into the best colleges. They are not well off, and are strictly middle class. All save one are studying to be engineers. The one who is not is in Accounting and Finance. All require top notch math skills.

Having observed two of the three cultures discussed in this video most of my life, I have arrived at some theories as to why this is the case. Both China and India started with a clean slate almost at the same time. Mao Zedong's communist party came to power in the mid 1940's, about the same time as India became independent. As if by coincidence, about the same time, the US became the sole industrial power left standing after 6 years of WWII. This country received its greatest gift almost by a process of elimination.

Then a funny thing happened. Those who were completely wiped out, namely Germany and Japan, overcame hurdles never before considered conquerable to build the most efficient economies of the world. Several others such as Taiwan, Korea, Singapore, Hong Kong, followed suit. The underlying culture was of saving and sacrifice. Families lived on a pittance just so they could make goods that would sell in the rich countries. They saved for everything. Nothing was bought on credit. Even homes. Foreign currency was jealously shielded from consumption oriented goods, and was only used to purchase capital goods. See a pattern here? The same underlying culture prevailed in China and India, but two key elements were lacking - capital creation, and open markets. Finally, when the Berlin wall and the Soviet Union collapsed, the two large economies capitulated and allowed open markets, and the ascent of the Chinese and Indian economies began. The key elements of savings (which leads to internal capital formation) and sacrifice (which allows the next generation to be better than the current one), are both paying off handsomely.

Did the US get to where it is without these values? Look hard enough, and you will find them buried in the economic history of this country. During the great depression, there was so much disenchantment with everything borrowed, that the savings rate soared. The values of thrift, which were forgotten during the roarin' 20's, again came into fashion. However, the real test came when WWII broke out when people were asked to sacrifice a lot more. This time it included human lives. Both men and women joined to build the largest industrial capacity of any nation in the world. I think this great act of sacrifice by this country's elders was a gift that kept on giving. The post war generations have lived better than their forefathers, and the rest of the world, but this gift is now close to being exhausted. If I were to draw an analogy, the depression and the war were like stocking of a pond with so much fish that future generations had to just reel them in. But when the fish are dangerously close to being exhausted, there is hardly anyone left with the perspective and skills needed to restock the pond. It is as if people are wishing it was a bad dream and it would just go away if you waited long enough.

Now my question is (and for which I have not found an answer), how in the heck would this country get notions of savings and sacrifice into peoples psyches again? Will we need another depression? Another global conflict? Or are we collectively smart and wise enough to change without such drastic events? I think there are enough people who can see what is going on, and a need for this change in psyche. When JFK sad "ask not...." he was tapping into this notion. Maybe that is why Obama is so popular, because his message is about "bringing out the best one can give", rather than the current prevailing sentiment of "taking the most one can take".


Sudhakar