Changing Economics and Changing Politics

In an article in National Affairs, Jim Manzi, a senior fellow at the conservative Manhattan Institute says that the world’s economy has changed dramatically in the last twenty years or so, and neither American political party knows how to deal with the new economic reality. He says that basically Republicans have become free market fundamentalists, but fail to appreciate that the free market can create a variety of unfavorable conditions that have a negative impact on society. He says that Democrats, in contrast, are far too focused on maintaining social cohesion, often at the expense of a vibrant economy. It is a fascinating article that I recommend to anyone interested in understanding the changes and problems of the modern world. It is currently available on-line at: http://nationalaffairs.com/publications/detail/keeping-americas-edge

I want to address one of the issues that Manzi discusses. He notes that modern businesses need to be flexible to compete in the world economy. If a business is not flexible it will lose out to more flexible competition from other countries. Flexibility means that a company must be able to quickly shift production, merge with other companies or spin off certain production lines, close unprofitable lines of business and nimbly open others. It also needs to be able to find and hire the best people, and on the flip side, let unproductive people go. This flexibility is fundamental to competition and vital to success.

But this flexibility for business equates to lack of stability of workers. The papers are full of stories of companies cutting workers, many due to the recession, but others in order to compete with foreign competition. Downsizing and outsourcing were common throughout the last decade. Some studies indicate that the average worker today will change jobs ten times in his or her career. Companies must be flexible, and so too must be workers. But this flexibility equates to a lack of stability. Polls indicate widespread anxiety among workers as they contemplate company bankruptcies, mergers, layoffs, and outsourcing.

Workers are citizens and voters. And polls indicate widespread concern among the voting public. One recent poll I saw indicated that 60% of the respondents felt that their children would not enjoy the same quality of life and lifestyle that they did. This economic uncertainly leads to political uncertainty. I personally believe that the recent interest in new and untested politicians (including both Barack Obama and Sarah Palin) is due in no small measure to the believe that the old politicians did not do well by the economy and the public.

That is one issue, but the more fundamental issue is that what is good for business is, in this case at least, not good for politics. A modern economy needs – truly and fundamentally needs – flexibility. But that flexibility leads to social and political anxiety.

People entering the workforce in America today know and understand that they will not work for a single company their entire career. They will not work forty years of GM, or Sears, or IBM, or AT & T, and retire with a gold watch and a nice pension. They will change jobs frequently, and as a result they are largely responsible for planning and saving for their retirement. They have no sense that loyalty to a company will result in the company protecting them, not because the company is venal, but because the company is fighting for its own survival in the uncertain seas of the world economy. That is the new economic reality. It is unsettling for workers, and since workers are voters, it is creating political uncertainty as well. And that is the new political reality.     

China as the New Clean Energy Superpower

It’s common knowledge that China is building more coal fired power plants than the rest of the world combined. But what is less reported is that China is now the leading producer of both solar panels and wind turbines. China needs energy to feed growing demand, but it also understands that renewable energy will be a vital part of the energy supply of the future. While it is certainly good for the world that China has embraced clean technology, it could potentially be a problem for the United States. It is quite possible that if the United States does not aggressively pursue renewable technology now, which will result in developing new and improved solar panels and new and improved wind turbines, we will end up buying those products from China.

Currently renewable supply only a small percent of China’s needs, but China intends to produce 8 percent of its energy needs from renewable, including wind, solar and biomass, by 2020. Renewable also produce jobs. According to a recent New York Times article, China employs over 1 million people in its renewable energy sector, and is adding over 100,000 jobs a year.

See, http://www.nytimes.com/2010/01/31/business/energy-environment/31renew.html?ref=science

This growth in renewable energy in China is the direct result of government intervention in the economy, and China recently created a National Energy Commission to oversee all energy needs and to push for increased use of renewable.

The New York Times article notes that China has an advantage in developing renewable energy: it is starting from scratch. It has an increased need, and it is just as easy (actually easier) to build a renewable facility as a coal fired power plant. And since everything is starting from scratch, the cost of installing clean versus coal is roughly competitive. In the United States, and other developed markets, the issue is replacement of existing power generation, and so renewables are competing with an existing market.

Renewable energy does cost more than coal energy in China. Wind is as much as 40 percent more expensive than coal, and solar is about twice as expensive. But increased production drives down costs, and eventually the cost for energy from renewables will come down. And, as coal use goes up worldwide the price will go up as well, and perhaps the two cost models will meet and the cost per kilowatt will be the same.

But Chinese renewable energy companies are also interested in dominating the world market for solar panels and wind turbines. This will allow them to recoup some of their development costs by selling equipment overseas. It will also result in their domination of the supply of these products. So, there is the distinct possibility that we will trade reliance on Middle Eastern oil for our energy needs for reliance on Chinese technology for our energy needs.

So we have a couple of choice. One is to ignore renewable energy, and then when we do need alternate sources of energy we will be forced to go to China to buy the equipment. The other option is to begin developing sources of renewable here at home. I like the second choice.

Simple Solutions and Complex Problems

[Orignally Posted on Campaign Blog on April 25]

The financial problems of the Commonwealth, and of the nation, are serious and significant. They arise from a complex set of issues, from tax policy and the changing nature of manufacturing, to competition from China and globalization. Yet some people see the solution is simplistic terms.          

Representative Stan Lee said “You can’t spend your way out of a recession. You can’t tax yourself to prosperity. You can’t borrow your way out of debt.”

With one simple sentence, Lee rejects one hundred years of evidence that Keynesian economics works. This nation only recovered from the Great Depression because of World War Two. The Great Depression ended because of government spending. Since the Second World War there have been recessions around the world, and nations have tried many possible solutions. Japan and Argentina tried cuts to government to end their major recessions, and those nations are still weekend. In Japan the 1990’s are known as the lost decade. Sweden spent its way out of a financial collapse in the late 1990’s, and the recession lasted less than a year. History teaches that done right, a nation can spend its way out of a recession.

With another simple sentence, Lee shows that he has never even contemplated the world beyond this nation’s borders. Why, for example, do Scandinavian countries have high standards of living (read a rich population) when they have high taxes, while South American countries have low standards of living when they have low tax rates? Until the 1960’s, the standard of living in Argentina, Venezuela, Chile, and Brazil was comparable to the standard of living of most of Europe.     

I know that many conservatives will say that they don’t want to be like Europe. That’s fine. But I don’t want to be like Brazil. And when I hear them talk about their ideal tax and regulatory schemes I think of Brazil: vastly rich and lightly taxed small upper class and teaming slums of the poor.

Finally, Mr. Lee says you can’t borrow your way out of debt. That is probably news to many businesses that routinely borrow money to invest in new technology or facilities all in an attempt to increase their revenue. I often hear conservatives say we should operate government more like a business, but then I hear things like Mr. Lee’s statement, and I wonder if they have any concept of what business really does.

We are faced with many complex problems. We will have a hard time solving these problems if we are so constrained by clichés and sound bites that we can’t think.