Monday, June 20, 2011

Real Estate Trend Expert Tom Ruff's May 2011 Report - Multiple Personalities


"A child of five would understand this. Send someone to fetch a child of five." - Groucho Marx

While researching the definition of robo-signers, I came across this partial definition in Investorpedia: “robo-signers assume the paperwork to be correct and sign it automatically, like robots.” This is a perfect description of how I was at my last loan closing. I think I may be a robo-signer.

Distressed Inventory Continues Slide

The big news in Maricopa County’s housing market in May continues to be the rapidly declining distressed housing inventory. This decline is not subtle folks; it hits you over the head like a sledge hammer. We define distressed inventory as the number of homes with an active notice combined with the number of bank held properties.

On January 1st of this year Maricopa County had 39,724 homes with an active notice and another 18,889 REOs. Our distressed inventory began 2011 at 58,613 homes. At the end of May these numbers had fallen to 27,396 and 18,451 respectively, combined 45,847.

In the last five months distressed inventory has fallen on average 2,553 homes per month. During the last two months these declines have continued at an accelerating pace, reducing inventory to 3,704 in April and 4,265 in May.

The decline we saw in May was the highest on record indicating the snowball is gaining momentum and heading down hill. Our early June numbers are projecting the same accelerated pace.

Simple math tells us that if distressed inventory continues to decline at its current rate, in 10 months it will dry up, but then, that’s merely simple math. When I present my simple logic, readers and other experts counter with complex math factoring together a Massive Backlog of “Shadow Inventory”, "Robo-Signings", a declining demand as QE2 ends and the ever popular bank conspiracies.

Sometimes, I feel like I’m conversing with Hollywood screen writers. Maybe there is a need for Rocky 7. Stallone is going to be 65. Maybe it’s time he quit competitive boxing. Maybe it’s time for him to leave the ring and get his real estate license.

“Yo, Adrian, we’re moving to Phoenix, two warm up bouts with ‘Robo’ and ‘Shadow’, and I think I’ll be able to take down da champ, Russell Shaw. Cut me Mick, I’m going 15.” Boom. Sorry, sometimes I drift.

Since January 1, 2007 Maricopa County has seen 165,385 home foreclosures, a numbing number in anybody’s book. One of the main reasons I believe we’re heading into the home stretch is how far we’ve come.

The news links above talk about the same decline in distressed inventory that I just mentioned; only they attribute the decline to massive processing delays. These same articles talk about how foreclosures rose through last summer, and then began their decline in September when the robo-signings scandal broke.

Information Market numbers tell a slightly different story, a short-lived Bank of America moratorium in November and December briefly lowered foreclosures. In January foreclosure numbers picked back up resuming their steady and consistent flow. In May, Maricopa County saw 4,206 homes sold at auction with 1 in 3 being purchased by investors, leaving only 2,800 reverting to the lender.

So, at the end of the day while our detractors have similar numbers, their explanation as to where we are and where we’re headed is completely different. Since January 1, 2007, Maricopa County has seen 165,385 homes removed from the “bad mortgage” file leading loan delinquencies to their inevitable decline.

I believe the decline we’re seeing in new notices runs parallel to the report of Jay Brinkman, the chief economist of the Mortgage Bankers Association, where in he states, "Of particular importance is that the drop in the percentage of loans 90 days or more past due was driven by improving numbers for loans originated between 2005 and 2007. These are the loans that drove the mortgage market collapse and now represent about 31 percent of loans outstanding but 65 percent of the loans seriously delinquent. Given that loans originated during this period are now past the point where loans normally default, and that loans originated since then generally have better credit quality, mortgage performance should continue to improve.”

The Wall Street Journal article would disagree, arguing that banks have decided to slow the foreclosure process while they perfect their procedures, in turn stabilizing property prices while minimizing losses and legal issues. There are two points in the WSJ which I have difficulty grasping.

First, I find it hard to believe that the banks would foreclose on 165,000 homes in Maricopa County and just now realize they have a problem with declining home values. Second, why would you be concerned about robo-signings and legal issues when many of your current foreclosures are strategic defaults?

How can there be vast legal issues when the majority of home owners facing foreclose, are saying in Henny Youngman fashion: “Take my house-please”. Why would the banks conduct a more thorough review when the party with the “alleged” claim is mailing in the keys?

I may be wrong, and the Wall Street Journal article may be right; but in life, I’ve always found the simplest explanation is usually the best.

The following graph compares the number of homes with an active foreclosure notice on March 1, 2010 to homes with an active notice on June 1, 2011 by origination date.

May’s Sales Activity

Case-Shiller, announced the dreaded double dip in home pricing in its May 31st report. In response to the report, David Blizter, chairman of the S&P index committee reportedly said, “Home prices continue on their downward spiral with no relief in sight.”

In response to Mr. Blizter’s statement the Phoenix housing market immediately responded the next day by registering its 6th consecutive month with a resale median home price of $115,000 while quoting Mark Twain, “The reports of my death are greatly exaggerated.”

May’s Sales Summary

Final Thoughts

There has been a lot of speculation in a series of recent articles regarding the purchase of a home in Scottsdale by one Sarah Palin. Questions swirl, is she running for President? Is she making a run for John Kyl’s seat? One article even questioned whether or not she has title issues.

In a recent Huffington Post article, Massachusetts Register of Deeds John O’Brien and Forensic Mortgage Fraud Examiner Marie McDonnell gave this opinion, “the title to Sarah Palin’s new home in Scottsdale is clouded by robo-signers.”

They even published a copy write protected "McDonnell's Mortgage Map" exploring the property’s chain of title in depth. Ms. McDonnell, what were you thinking? Not once in your report do you mention the “livery of seisen” ceremony. Did it take place or not? What was symbolically passed? A token cactus? A clump of dirt? Was the cactus of native variety? Was the soil clayish and high in alkaline content?

Ms. McDonnell, these are the rudimentary tenets of common law, the Normans are not pleased. I drifted again, didn’t I? The simple explanation is probably best. I’m certain Ms. Palin’s local attorney required title insurance, and I’m also certain our local title experts are confident in their $1,700,000 guarantee.

In parting, the speculation as to why the home was purchased, I’m going with Scottsdale is a good investment opportunity and a great reprieve from Alaska’s frigid temperatures.

Contact Tom Ruff at The Information Market.

Tom is a graduate of the University of Nebraska. He founded "The Information Store" in 1982 and quickly became known as “The Source” of publicly recorded real estate data in Maricopa County. In August 2005 he formed "The Information Market" specializing in foreclosure data and housing studies.

Mr. Ruff is an expert on publicly recorded data and is known for his monthly housing opinion which shares an inside and sometimes irreverent look at the Phoenix Housing Market. He is often quoted in local and national publications.

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Friday, June 17, 2011

Bringing U.S. Manufacturing Back; Part 5 of 5, Success Realities

Photo Credit - Flickr Common

Even with the U.S. growing debt crisis, the U.S. has a more stable power structure, innovation history, and entrepreneurial culture than its global neighbors with few exceptions. U.S. foreign policy must support bringing U.S. manufacturing back by allowing U.S. production to be globally competitive in cost comparison and product quality superiority.

U.S. money and debt policy must balance supporting a strong dollar value and a stable credit confidence with understanding the strength must not worsen U.S. trade imbalances and competitive disadvantage. U.S. foreign policy must have the integrity that Free Trade will only be granted if it is Fair Trade policy.

Politicians and those negotiating U.S. global trade must not be intimidated by the threat of a trade war with any country. They must have the yet to be displayed courage to negotiate from a position of Americans being a sought after large consumer base for any other country.

Internally, the U.S. must also reflect political courage in getting a realistic handle on illegal immigration policy that puts realism and what is best for all American citizens above politics, voting blocks, special interest, Union interests, and political correctness. This may involve a controlled Guest Worker Program.

It will not involve comprehensive immigration reform that ignores secure borders or offers front or back door amnesty. This will not be tolerated by the American people and is already seen for what it realistically is – political demography rhetoric for the upcoming 2012 election.

It is vital the new American manufacturing workforce is trained in 21st century manufacturing methods including the newer skills required that are advanced technology and robotic based. As in days gone by, high schools, community colleges, and trade schools must pick up this mantle.

In addition, private sector leadership must be more exposed to the knowledge now studied and proven in calculating the “real” costs of off-shoring manufacturing and American jobs. They must consider rising shipping costs, instability risk costs, error duplicity work costs, overall quality costs, and fractured staff location costs. A re-shoring challenge must be adopted in the U.S.

Dr. MatthewLieber answers some success realities questions:

BKH: What is the balance needed in having a globally competitive tax policy and structure – lower corporate tax, less loopholes, offshore tax changes, flat tax, fair tax?
ML: Politics aside, reform options may include tax simplification, a value added tax, a gasoline or carbon tax. A grand bargain would have exemptions and loopholes phased out while significant rate reductions are phased in.

Rates may be lower on individual and particularly corporate income and stay revenue neutral provided the taxable economic base is expanded. Brackets are retained but with a reduced number.

This requires a compromise on taxation levels in line with historic norms. A consumption tax offers efficiency gains and would allow further income tax rate reduction. A fuel tax enhances energy efficiency and independence while providing revenues for infrastructure improvements.

Building in credits to lower income persons is one way to offset regressive effects. Rural constituencies and energy industry presently exercise a veto blocking debate of these. Reform requires consensus building with strategic political planning and transition steps.

BKH: What is the balance needed in government deficit spending, inflation, a strong dollar, reasonable interest rates, and credit availability?
ML: The national debt matters more than the budget deficit. It is a serious long-term problem that requires adjustments on both revenue and spending side. This discussion started last year. Nothing is more important to reducing the debt than ensuring that the U.S. economy grows at the fastest possible sustainable rate.

Implementing austerity immediately would injure the economy and worsen the debt. Reductions and revenue increases should take place in three to five years. The risk is Washington promises but never takes the painful medicine. The President needs a more consistent and forceful message - Growth and jobs first, long-term planning on the debt, deficits now and surplus in three to five years.

A stable dollar has replaced a strong dollar as the touchstone of the Treasury. Fed policies under Greenspan and Bernanke have allowed a great deal of monetary growth for many good reasons. Today’s commodity inflation has not yet undermined price stability, despite much market anticipation, because wages and consumer demand remain depressed. Steady, gradual depreciation of the dollar will support export-led growth in the U.S., whereas a zero-inflation strong dollar policy would freeze recovery and prolong household deleveraging.

BKH: What is the balance needed in government infrastructure investment and sound taxpayer money stewardship?
ML: We should expect both. The federal government’s role in infrastructure was a philosophical debate for the first half of the republic. Today, we take it for granted we have interstate highways and safe skies and airports. Rising fuel costs and oil dependency make more comprehensive transport development crucial. Our system suffers from piecemeal actions and an absence of long term planning.

There could be great national gains for a more massive effort, but many states and localities do not presently share the same agenda. The rejection by Wisconsin and Ohio of high-speed rail funds demonstrates this. We will remain auto-dependent, but better intermodal systems of light rail, electric cars, shuttle buses and other linkages will also be needed. Best financial efficiency is ensured with a national strategic plan which implements combining direct, mixed, and market mechanisms.

BKH: What is the balance needed in collective bargaining rights and private sector sovereignty in making business decisions in expansion?
ML: From the point of view of the enterprising worker, an important principle is access to the market. In 21st century economies, capital-intensive production makes many workers reliant on corporations. The recent decades have released the chains restraining corporations. They have boosted productivity and cleaned up financially, but it has not played out as well for working people of all stripes lately.

Organized labor has a vital role to play in defending labor interests. The material reality of skilled technical and professional people makes collective organization dubious, since they negotiate directly with their employer. The ideology of the knowledge economy and the entrepreneurship model appear overstretched.

Many may be entrepreneurial but lack the capital required to be business entrepreneurs. Helping them put themselves to work is an opportunity for leadership on the part of labor, private sector and government.

BKH: What is the balance needed in national security and immigration reform?
ML: Washington’s doctrine of the “war on terrorism” gave license through media framing to anti-illegal immigration groups, such as the Minutemen, who claim being patriotic by defending the country from an invasion of Mexican workers. While this sounds absurd to some, the emphasis upon border security and illegals has spurred real fear in mainstream segments and exerted a powerful chilling effect on immigration reform.

Reform would actually aid national security by inducing greater rule of law and government knowledge. Its absence has created growing zones of illegality in trafficking, corruption and document fraud.

BKH: Crisis proportion drug trafficking, increasing murder and violence upon Americans living or vacationing on or even miles from the border, and the federal government’s refusal to enforce border security and illegal deportation must be realities addressed also.
ML: I am well aware of the growing violence in Mexico, but militarizing US policy will not increase border security. Effective rule of law requires we recognize the underlying economic logic. Every president since Nixon has asserted the “war on drugs,” but national security has proven itself a poor framework for foiling transnational crime. The illegal traffic increases because it is good business. The same is true with immigrants.

Militarizing the border actually has increased the profitability of illegal activities. Enforcement needs to be smartly crafted within a comprehensive regional strategy aimed at supply, trafficking, consumption, and workplace elements. That requires an active and vigilant stance on the border. The Obama Administration has continued to uphold border security but has smartly reviewed some of the more wasteful and ineffective parts of the deportation system.

BKH: What is the balance needed in growing the American workforce base, eliminating illegal immigration costs and gaming of the American taxpayer, a Guest Worker Program, and penalizing companies that hire illegal immigrants?
ML: Much of U.S. immigration policy is political spectacle designed to assure Americans that the U.S. is “in control” of the border. Billions of dollars were paid to contractors to build a wall to keep foreign workers out. They hired undocumented Mexican workers. The billions spent have boosted organized fraud and crime.

Policy needs to take into account economic logic and the rule of law. Undocumented immigrants are by far net contributors but cannot access lawful status. Increasing the volume of visas and the types of work permits for foreign workers would better suit the reality of U.S. involvement in the global economy. A Guest Worker Program could be part of that. Increasing the allowances generates greater worker and firm compliance for workplace as well as border monitoring.

BKH: What is the balance needed in the Environmental Policy Agency energy policy and killing the business and manufacturing optimal environment as well as negating job creation?
ML: A green economy is a huge economic opportunity the U.S. is missing by letting one particular vision veto reform and block off debate. Burning fuel is neither economically virtuous or wasteful – it depends what you do with it – but it does have environmental and political costs that are not priced into the cost.

I believe an energy consumption tax, rather than mandates and bureaucracy, offers efficiency advantages and could channel resources to finance a smart grid, transport upgrades, etc.

The challenge in creating green jobs is to set standards that allow U.S. industry to race ahead into these industry projects. Germany is now leading, and China and India threaten to begin domination.

BKH: What is the balance needed in environmentalist priorities and not destroying an industry or company that supports people’s livelihoods?
ML: Green causes cannot thrive and endure without a sustainable economic basis. It is interesting that bringing the two together remains a challenge for environmentalism in the U.S. Throughout the world, resource conflict is increasingly making them come together.

As an example, the Gulf oil spill had a devastating effect on the Gulf economy. Transforming our economy from an extractive heavy industry-based production to specialized, knowledge-based industries will require investment. The challenge is to make policy that aligns business interests with that direction.

BKH: What is the balance needed in granting ObamaCare waivers to some businesses as an expressed hardship and being honest in what additional costs and regulations will do to the economy and job creation in general?
ML: The complexity of the challenge facing health care regulators following the 2010 reform is precisely what advocates of single payer reform foresaw. We are preserving a private insurance system while seeking to achieve universal coverage and cost reduction through regulation. This will actually result in more regulation than a single payer system where people would be transitioned into government insurance like Medicare.

Either way, coverage expansion can and must bring cost reductions. The 2010 Act has a number of such mechanisms in it. Firms have an interest in keeping their employees healthy, so a wellness agenda and a preventive approach, rather than high-tech profit-driven care, strikes me as one basic opportunity for business to offer contributions in return for waiver or allowance requests.

BKH: What are the main local and regional government policy changes that are needed in general?
ML: States and localities have been innovative in different ways. Beloit, Wisconsin has expanded a successful business opportunity zone that provides up to $5 million in state tax credits annually. The project was originally dedicated to an area by I-90 and resulted in several new warehousing and logistical investments. State Assemblywoman Amy Loudenbeck has expanded the coverage so the tax breaks are available to new investments throughout this diverse city of 37,000.

In Rockford, Illinois, Mayor Larry Morrissey has worked to attract direct investments in the airport and in auto manufacturing. Why these state and local leaders opt for different tools and which work best is something I am investigating.

BKH: What are the main federal government policy changes that are needed in general?
ML: Policy design can improve from new understanding about human behavior and the limits of rationality. One vital area for applying that is in the realm of economic security. Market reforms of recent decades shifted risk from corporations to individuals. As pensions became 401-Ks, there was always the underlying notion that more individual choice and information would make Americans better off. The housing market events offer dramatic evidence that that vision far too rosy.

BKH: What main considerations reflect 21st century manufacturing is similar to manufacturing history?
ML: Manufacturing remains about making stuff. What and how is made evolves and advances over time. The premium on technological innovation endures. America’s long history of innovation has contributed to making it the greatest industrial economy. That leading edge is in question with the rise of China, the recent recession, and a range of internal difficulties that have begun to set in.

To remain a leader, the U.S. needs to do more manufacturing and more innovation, but not necessarily both at the same time. Much of the manufacturing, and many of workers, need not be innovative. Workers must be employed at producing goods and services at a living wage. The U.S. attracts foreign-born technological innovators, but perhaps we need to encourage more home-grown entrepreneurs too.

BKH: What main considerations reflect 21st century manufacturing differs from manufacturing in the past?
ML: I recall a point made by Alan Greenspan during testimony to Congress around 1998. The Fed Chairman noted that the total physical volume of production by the U.S. economy in 1997 was equivalent to the volume in 1945. The real value of the production, meanwhile, had increased something like 500% during that time. Greenspan’s point was that U.S. economy had transformed from industrial production into a post-industrial consumer economy.

Exaggerations about a “new economy” followed then were replaced by the 19th century extractive industry mindset that dominated the last decade. However, Greenspan was right about the basic direction of manufacturing pointed out by the rise of consumer economics, service industries, and information technology.

In the 21st century, the advancement of civilization and human happiness requires a finite amount of raw industrial production but moves forward more dramatically with high-skilled services and knowledge industries that need less and less physical stuff.

BKH: Thank you Professor Lieber for your points of view.

No matter your political leaning, it is evident bringing manufacturing back to the U.S. will be one of the major contributions to stabilizing the American middle class and moving out of a recession economy. U.S. global neighbors and competitors are a factor in 2011. Manufacturing cost include labor, taxes, and regulation. The future of American jobs and the ongoing acceptable “normal” unemployment rate will depend on the balancing competing U.S. internal identities with government policy that incentives business to maintain and expand the U.S. as its production location.

American taxpayer monies being used to invest in manufacturing and/or oil production in Mexico, Brazil, China and other countries by the U.S. government, while denying American companies in the same industry the same support, adds even more pressure to U.S. jobs and the economy.

U.S. manufacturing can not be brought back if there is a deliberate pull-back of global competitiveness in higher tax talk and crushing new regulations for large corporations and several industries that do and can create thousands of U.S. based jobs.

The bottom line is we have an “uncertainty effect” as a direct result of poor political private sector success realities understanding. This has a devastating impact on business investment and job creation in the U.S. for all size business - small, medium, and large companies.

There must be policy certainty to plan expansion within the private sector, reasonable business credit possibility, and an environment where it is prudent and responsible to risk capital expenditure. There must be a pro-business attitude in America to bring manufacturing back. Business and manufacturing investment must also be pro-American workers and job creation.

One constant in success reality is true political leadership starts at taking responsibility and not using demography to demonize those that do choose to lead in the interest of Americans. The U.S. needs the courage of true leadership in both politicians and private sector CEOs to move forward.

See also:
Part 1, Who is Professor Matthew Lieber?
Part 2, Global Neighbors & Competitors
Part 3, U.S. Foreign Policy
Part 4, Competing Internal Identity


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Thursday, June 16, 2011

Bringing U.S. Manufacturing Back; Part 4 of 5, Competing Internal Identity

Photo Credit - Flickr Common

President Obama campaigned in 2008 on “transforming America.” Many Americans may not have completely understood what image of America was in Obama’s identity philosophy. In 2011, his vision has been characterized by some as an America more in the model of a European style socialist country.

It is apparent through his actions, Obama believes in a stronger Union presence in America’s labor and increasing taxes paid by the higher earners to support bigger government. Obama’s vision has proved out to be one of bigger and more intrusive federal government into the free enterprise private sector.

American business and the unemployed, as an example of competing ideology, are concerned about what impact the Environmental Protection Agency (EPA) would have on bringing U.S. manufacturing back if Cap & Trade policy is instituted by the EPA, led by President Obama, and around Congress?

The National Economic Research Associates (NERA) recently “evaluated impacts of EPA’s Clean Air Transport Rule 9CATR) and Utility Maximum Achievable Control Technology (MACT) proposals. The study found under these proposed regulations “electricity sector costs would increase by $184 billion or $17.8 billion per year.” NETA also found, “Net employment in the U.S. would be reduced by more than 1.4 million job-years over the 2013 2020 period, with sector losses outnumbering sector gains by more than 4 to 1.”

More regulation directly impacting industry, and the jobs and livelihoods of those in the specific affected industry, is an extreme competing internal identity already being seen in the U.S. Thousands of San Joaquin Valley farmers have been put out of business to save smelt fish. There are talks currently regarding West Texas oil fields being shut down to save sand dune lizards. These types of examples leave Americans considering the realisms of environmentalist priorities with regard to the necessary economics of people, production, and maintaining jobs and industry.

Numerous other relative factors in a competing U.S. internal identity are also being weighed and debated. Dr. Matthew Lieber shares his thoughts on some of these competing factors in the shaping of the internal identity of the U.S.

BKH: Thinking in terms of the Great Depression history and Hayek versus Keynes, Hayek was eventually proven correct. What are your thoughts on modern day Reaganomics versus Obamanomics in creating jobs and restoring low unemployment?
ML: It is all about communications. Presidents preside over, but do not manage the economy, with economists supplying ideas and policy options. We know what Reaganomics is – tax cuts, military spending, deregulation and monetary tightening. Clarity comes from historical perspective but also from President Reagan’s effective real-time communications.

Obamanomics is a branding triumph of political conservatives over the White House. Conservatives know what they mean by it, while liberals disagree defensively. Mixed results and criticism are less surprising than the President’s ineffectiveness as economic communicator. Guiding public opinion calls for narrative more than analytic messaging. Toughness in support of vision breeds confidence.

In fact, Obama’s policies have mixed continuity with Bush (bailouts, tax cuts extended) and a Clinton-style third way. The stimulus was well conceived and resulted in jobless recovery instead of a Depression. Deficit fixation now will kill the recovery and worsen the debt, but a tougher opposition has exploited existing narrative structures to define today’s austerity agenda.

BKH: All liberals and the majority of Democrats believe taxing the rich, now defined as $250,000 income for couples and $200,000 for an individual, will pay for continued government spending that will result in recovery from the current Great Recession. What are your thoughts on this?
ML: This controversy involves one debate about fiscal multipliers and another about fair tax policy. Technically, you should stimulate by running a deficit not raising tax rates. Then there needs to be an adjustment to balance after recovery.

We were running a deficit throughout a growth cycle due to war and tax cuts. Ideology entered as Democrats viewed Bush tax cuts as temporary and objectionable in a time of shared sacrifice. They fear wealthy lobbies will make a two-year extension permanent. Most of the revenue in question is on income above one million; everyone enjoys the same low rates up to 250,000.

Regressive tax policy has concentrated wealth, boosted unearned income, and deepened national debt. How much concentration is too much? Henry Ford’s wisdom was that capitalism required worker incomes sufficient to fuel consumption. Relying on 2% super-rich consumption in a democracy is questionable - economically, it is just not working.

BKH: Every tax dollar taken from private business is potential capital available for expansion and hiring. Every tax dollar taken from taxpayers is potential personal income to be spent in the economy. What impact does taking money out of the private sector have on private sector job creation and production returning to the U.S.?
ML: The impact of tax policy on investment is a marginal factor, distinct from direct job-creating effects of investment. Fundamentally, states and markets are two different ways to allocate capital. The U.S. model of private sector job creation succeeded in the 1980s and 1990s. In the 2000s, private investment in housing and finance was inefficient, with fewer jobs created pre- and post-recession. This calls into question a tax-cut fixation.

In retrospect, government should have curbed, not subsidized, risky borrowing and lending that fed the housing bubble. What drives business investment decisions are opportunities for profit beginning with market demand. Favorable taxation be supportive on the margin, but beware jurisdiction-shopping. Private firms play one state against another, which relocates but does not raise productivity.

BKH: The U.S. has the second highest corporate tax rate in the world. What impact does this have on maintaining existing and creating new U.S. location of private sector business and manufacturing and resulting U.S. job creation?
ML: It would be more efficient and attractive to investment if the U.S. simplified and reduced tax rates for corporations and individuals. Well-funded interests intervene to write industry- and firm-specific loopholes into the tax code, as General Electric shows.

Private interests are motivated to pursue lucrative subsidies, whereas the national interest in a rationalized, pro-investment regime lacks such champions. This environment stalls U.S. action, which requires concerted efforts by reform-minded industry leaders, analysts and lobbyists. Naming GE Chairman Immelt to head the competitiveness panel could yet prove helpful.

BKH: If infrastructure and other work programs set up by the government run over budget and over completion time, which is a majority of projects, costing millions and billions more than originally agreed in funding, what is the impact on the taxpayer investment dollar in practicality and public trust?
ML: Comprehensive analysis of taxpayer-funded projects is complicated by the need to evaluate effectiveness on multiple non-quantifiable policy goals. Beyond financial return on spending, considerations include job creation and moral hazard in relation to a baseline scenario without intervention.

The 1995 bailout of Mexico generated financial gains for the Treasury, and more importantly, prevented a Mexican collapse that could have destabilized world markets.

Stimulus projects confront structural feasibility and micro-level difficulties. Structurally, the U.S. lacks a government apparatus, other than the Pentagon, capable of dispensing outlays on the scale required -- $1 trillion or more – to kick start the US economy. Thus the doubts about the impact scale of Obama’s stimulus: under $1 trillion over 2-3 years amounts has been too little.

In the tradition of Hamilton, Clay and Lincoln, we should create a national infrastructure corporation staffed by elite talent with a Marine Corps ethos . Hard budget constraints, which discipline organizations to control outlays and meet deadlines, are uncommon in public sector enterprise. But excellent leadership, shared spirit, and a bit of autonomy enhances accountability and limits wasteful spending in needed public projects.

BKH: Could the National Mediation Board (NMB) and the National Labor Relations Board (NLRB) in fact be killing jobs and U.S. plant location with anti-business attitudes and lawsuits and anti-private sector biases?
ML: Perhaps Boeing claims so, but I see this as a contest over the returns from federally-subsidized aircraft manufacturing. Company moves from high-cost northern states to right-to-work states are rewarding for management and shareholders as firms reduce exposure to benefit liabilities, strikes, and higher wages and taxation. Relocation benefits conservative areas and hurts union employees and surrounding middle-class communities. One person’s efficiency gains are another’s corporate greed.

BKH: Unions tout they are for the workers in America. Considering they are a part of the special interests in Washington receiving special political favor over tapped out non-Union working taxpayers, how can they be seen as of the “powerless and poor” class in America?
ML: There are status quo unions and a smaller number committed to social change. It depends whether activism goes beyond narrow organizational interests. American Federation of Teachers is a professional union, while the Service Employees International Union (SEIU) more aggressively addresses lower income issues. The latter is joining a larger battle for rhetorical and organizational initiative between political actors on left and right within a downwardly mobile society.

Poverty has been increasing in recent years, with Food Stamp rolls growing and expanding into white suburban populations. “Get your hands off my shrinkin’ state” – thus Palin and the Tea Party use populist rhetoric to defend conservative budget priorities, with unions as foil.

On the other hand, should economic grievances form, labor activists may manage to overcome cultural wedge issues and revitalize class politics in America. That is unlikely but not unimaginable. Bringing poor people together is controversial and difficult. By leading issue coalitions, strategic union activism can broaden its impact and counter defensive strategies and membership attrition.

BKH: What is the morality of working Americans funding extraordinary job security, higher pay for equal work, and Cadillac benefit plans and retirement packages for public Union workers that many themselves do not and will never have?
ML: The morality issue depends on what you see unionized labor doing for ordinary Americans in white, blue and pink collar positions. It is about how and where you see a fairness problem. The greater the focus on union privileges, the more it looks like an assault on free enterprise.

On the other hand, pointing out the deeper break between wealthy and ordinary Americans recasts the distinction between haves and have-nots. A broadly frustrated spectrum of working and middle class people would respond to progressive campaigns that communicate common sense truths and crossover aspirational themes. On morality, public sector unions should emphasize competitive accountable service provision. That would build support beyond their membership core.

BKH: Can U.S. manufacturing realistically come back to America and be competitive in product pricing in a global economy with Union cost and control demands, intrusive and costly government regulation demands, and the second highest corporate tax rates compared to manufacturing in other countries?
ML: Absolutely, US manufacturing can come back, but the question is in what form. Recent months have shown export recoveries in Indiana, Wisconsin and Connecticut. A business-friendly environment is one factor, but we should avoid a “race to the bottom.” Reducing our wages and living standards to levels in China and India in order to compete would be absurd.

The greatest resurgence would combine investment- and demand-led manufacturing. High-value manufacturing is popular and obviously desirable, though not a jobs machine. For a U.S. scale workforce, we need mid-level and service activities that employ millions at compensation levels sufficient to support a family. That will take years but is possible by expanding specialized manufacturing, rebalancing trade with China, and gradually reflating the economy via export-led growth.

BKH: May/2011 job figures reflected 83,000 private sector jobs were created, and a closer look reveals 60,000 of those were created by McDonalds. McDonalds received an ObamaCare waiver recently. Could they have created these jobs if they had not? What is the impact ObamaCare additional regulations and cost will have on maintaining existing U.S. jobs and bringing new jobs to the U.S.?
ML: I don’t know about the hypothetical. Employee healthcare burdens should not prohibit McDonald’s hiring. We want business realities, not benefit policies, to drive hiring.

The 2010 Patient Protection and Affordable Care Act allowed multiple ways to boost coverage and enable flexibility. Where should Americans access health insurance? Universal government insurance would have been simpler, but the 2010 Act maintained private insurance with multiple pathways.

Reform aims for more Americans to obtain insurance at work. Transitioning to employer mandate requires flexibility, especially in a recession. Workers under 26 can be covered on parents’ plans. The Act established the individual mandate Romney instituted in Massachusetts. In an interdependent economy, persons inevitably consume healthcare and bear responsibility for paying into the system that provides it, just as drivers are required to purchase auto insurance.

BKH: What is the impact on private sector job creation and bringing U.S. manufacturing back if Wall Street and banking sector jobs and public Union jobs seem to have a favored security in Washington policy over Main Street and private sector jobs?
ML: Actions by Presidents Bush and Obama increased federal direct intervention into U.S. industries. Big banks and the auto firms received massive taxpayer financing. The fall 2008 credit crisis forced an unsavory choice between compromising market principles and a catastrophic Depression.

No one stood up and said let the whole thing go, except Ron Paul. Allowing Citibank and Bank of America to fail would have ripped apart Main Street. Liquidating Big Three automakers would have undone the industrial Midwest.

The bailouts, while ugly, were sound bipartisan decisions. The absence of restructuring has been less sound. When you buy a company, you take over its management. There should have been more aggressive prosecution of fraudulent bankers.

BKH: What is the impact of politicians ignoring or fighting the reality that Right to Work states, states with zero or lower income tax, and states with business friendly regulation attract job growth?
ML: Politicians on the left represent constituencies that lose from labor market deregulation. They oppose policies that benefit shareholders and boost inequality and early retirements.

The opponents’ posture is understandable. Their ability to block pro-business policies is being tested. I suspect they will slow down but not stop the business reform agenda. They would be smart to use messaging that appeal to all the working stiffs, half of whom are not left-wing.

Their messages should be “End privatized profits with socialized losses.” and “Competitive markets, access for all.” Those are perhaps too abstract to rally activists. As political stakes increase, each side is going into campaign mode and seeking red meat messages.

BKH: What would be the overall economic impact of the federal government bailing out high budget deficit states many see as a result of anti-growth policies like higher tax rates, extreme environmental cost and interruption, miles of business red-tape regulations, and huge failing social programs?
ML: This undesirable pathway could further politicize economic policies, since the states in question lean Democratic. Emergency in California, which alone is the seventh largest economy in the world, could spur national interest arguments to justify temporary support. I doubt many Americans want to pay for any one state’s long-run deficits. Establishing a precedent would be controversial, so state leaders would be reckless to expect a bailout.

BKH: Is it possible to maintain existing manufacturing and attract new manufacturing if investors perceive a President or major political party to be anti-business, anti-wealth, pro-Union, pro-over regulation, and pro-tax hikes?
ML: Yes, but a delicate dynamic is involved. Perceptions of the President rank below business factors in determining investment patterns. But, they can become a negative political factor.

President Franklin D. Roosevelt’s handling of similar epithets of his critics is instructive. He responded with a warm laugh and rhetorical elbows to the ribs. Roosevelt had to include industry after overreaching and during wartime. Roosevelt realized throughout that profits motivate business actors.

Winning the Future is a positive slogan for President Obama to sell the U.S. to investors with trillions on the shelf. He can make that slogan meaningful with a multi-faceted engagement with industry leaders-- behind the scenes, from the bully pulpit, setting incentives and sanctions—to interactively realize a shared vision for industrial resurgence.

Roosevelt’s economic leadership demonstrated a feisty, yet flexible charisma and positive communications. Kennedy, Reagan and Clinton all drew from that. Obama has all the ability and now should emulate Roosevelt’s positive style.

See also:
Part 1, Who is Professor Matthew Lieber?
Part 2, Global Neighbors & Competitors
Part 3, U.S. Foreign Policy
Part 5, Success Realities

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Wednesday, June 15, 2011

Bringing U.S. Manufacturing Back; Part 3 of 5, U.S. Foreign Policy

Photo Credit - Flickr Creative

When business is booming, the unemployment rate is low, government spending levels are balanced by tax revenue receipts, and the economy is stable, the majority of Americans are not deep in thought about how U.S. foreign policy is affecting their job prospects and income stability.

Manufacturing leaving the U.S. and the recession has resulted in Americans noticing where the products they buy are made.

When productivity levels and wages allow business to remain profitable, and U.S. tax rates allow business to remain globally competitive, U.S. companies are not deep in strategy to compensate for U.S. government intervention into the private sector through foreign or domestic policies. The business strategy lately has resulted in U.S. jobs and production being moved off-shore.

Everyone in the U.S. has come to realize Free Trade Agreements are not always Fair Trade Agreements. Everyone has seen foreign oil prices hold Americans and business, and therefore the entire U.S. economy, hostage and powerless. U.S. foreign policy must support U.S. strategic business planning, good taxpayer benefit money investment, and fair money and trade policy.

Dr. Matthew Lieber shares his thoughts on a few specific U.S. trade and foreign policy questions.

BKH: What is the significance of trade between China and the U.S.?
ML: The U.S.-China trade is at the center of global growth. China’s growth has been a huge positive for the world economy, and the U.S. should continue to play a leading role in integrating China into the world system.

My critique is aimed at the terms and direction of the trade. We should embrace a two-way engagement, but we will be doing the world a service by moving to resolve the imbalances. Presently, third-party competitors such as Japan, Brazil, and South Korea are forced to choose between matching Beijing’s artificial depreciation with the inflation it brings or suffering a competitive disadvantage.

BKH: What should be done by the U.S. regarding China’s currency manipulations against the dollar?
ML: Yuan appreciation would immediately boost U.S. employment, aid U.S. exporters and Chinese consumers, and check a defiant People’s Republic of China (PRC). Efforts under Bush and Obama to persuade China to give up its major competitive advantage have failed.

The U.S. has not exerted a sufficiently forceful economic diplomacy. A “Build China” coalition is bullying U.S. legislators into fear of a trade war and a flawed assessment of the balance of power.

We all love cheap Wal-Mart goods, but massive outsourcing makes us a second-rate economy. The U.S. does have the upper hand. Go ahead China, sell the Treasury Bonds.

Getting tougher would support our long term industrial interests and our principles. There are options from aggressive naming and shaming, multilateral efforts, direct economic steps such as tariffs on Chinese imports or taxes on Chinese assets.

BKH: What is the impact on the U.S. economy, now and in the future, regarding the trade imbalance with China?
ML: In 2010, the US current account deficit from trade in goods and services was $500 billion. This is 3.5% of our Gross Domestic Product (GDP). A full 60% or $300 billion came from our trade with the PRC. The U.S. borrows and consumes, while China saves and exports.

This deficit has survived the recession and is coming back with a vengeance. A major underpinning lies in the PRC’s managed currency regime. Normally, left to market forces, such an imbalance would cause an appreciation of China’s currency against the dollar. PRC intervenes to hold the Yuan to an artificially low exchange rate against the dollar. PRC’s massive purchases of dollars have amassed some $3 trillion in reserves that it stores in US Treasury bonds.

The deficit speeds the deindustrialization of the U.S. It’s not inevitable, for the present pattern appears unfavorable for society and the national interest. The effects of the managed currency regime are socially and politically regressive. It boosts inequality in the US and China; blocks China’s workers from consuming US products, subsidizes Beijing’s favored exporters; and enriches Communist elites denying workplace rights.

BKH: Is it possible for China and the U.S. to maintain a good relationship with continued Chinese human rights violations and intellectual property (IP) theft?
ML: International relations scholars debate whether the U.S.-China relationship will evolve into one of partnership or one of enmity. In reality, the relationship is extremely multifaceted, with mutual dependence and a range of cooperation, tension and confrontation depending upon the issue.

Human rights are a perpetual source of disagreement, whereas IP appears to offer some hope for improvement. As China continues to grow, the chances increase that its leadership will recognize the need to reduce or at least confine IP theft.

BKH: What is your opinion of the alliance offered to Pakistan and Iran by China?
ML: These moves, while short of an alliance, are part of a great power game on a Eurasian chessboard aimed at countering U.S. influence and perceived threats from India, Russia and Israel – a game that is complicated by nuclear strategy and internal politics.

Diplomatically, China has partnered with Pakistan to balance against India. It shares interests in energy and domestic control with Iran. Nuclear strategy is about acquisition and regime survival. The spaces on the chessboard are not whole but marked by ethnic separatists and other groups committed to asymmetric warfare. Dueling states partner with these non-state actors, but China prefers to work with established states.

BKH: What is your opinion of Russia building pipe lines across Europe?
ML: Since I am not expert on this, I would just ask three questions related to issues of security, leverage and competition. Security: will the flows be reliable and what territories does it pass through? Leverage: what if any are the risks that Russia would stop flows and sacrifice revenues to advance its political ends? Competition: what impact does the pipeline have on the U.S. backed pipeline from Azerbaijan through Turkey to the Mediterranean?

BKH: What impact will the “Arab Spring 2011” have on the U.S. economic outlook?
ML: It’s difficult to know for sure, but we should watch closely the oil markets and the political situation in Saudi Arabia. Consider the sequence of political and economic events: booming Asian growth boosts grain and fuel prices, which help spur youth-led wave of revolt against Middle Eastern governments unable to raise subsidies, which leads to rebellion then intervention in Libya and further pressure on oil prices.

Perhaps at some point a correction to the high oil prices occurs. Generally the Middle Eastern states, other than oil, have not been integrated in the world economy. The fate of the reform movements will affect the future of terrorism and prospects for peace. But it’s hard to pinpoint further market effects.

BKH: What role should U.S. foreign policy be in promoting democracy in authoritarian countries?
ML: Democracy promotion always sounds good, but the more we go ballistic, the less our efforts succeed. It makes sense for the US to provide moral support for those resisting tyranny. We must avoid direct interventions that backfire and discredit us reducing our influence.

It is not our role to decide the form or face of foreign governments. Instead, a strategy of technical support and international partnership is most consistent with our enlightened self-interest. In practice, each case involves distinct prospects and complications.

Least auspiciously, in Libya, an oil-rich dictator terrorized tribal opponents and spurred the ongoing allied effort to topple him. In Pakistan, a divided government stands shakily over a torn society mired in poverty and fundamentalism. In Egypt, a dictatorship cooperated with the U.S. but failed its people and ultimately crumbled - not much of an ally, and the best reform bet of the three.

We should support a process for building the institutions of democracy and law that ensure competitive elections, full participation and economic reform.

BKH: With the U.S., and Europe for that matter, tackling crushing debt, how should liberation from dictators and democracy promotion be funded?
ML: Austerity actually is an opportunity to do so more smartly, not with a heavy hand. The most effective political strategy for democracy promotion will also be the most efficient. Occupying more countries is not an option, fortunately, nor is pouring more money into them. Foreign aid is a miniscule budget item, so it should not be a political target.

In some places like Pakistan and Afghanistan, we will need to reduce our footprint, but it is equally important to maintain smaller-scale programs that have shown the best results. These keep US prestige alive and continue to deliver U.S. intelligence even after big operations are done.

BKH: What is the impact ultimately on the U.S. being favorable to doing business and trade deals with radical Islamic or communists led countries?
ML: Short of total war with a country, trade policy offers a means of engagement as well as a punitive option in the case of sanctions. Domestic politics play a large role in determining whether the U.S. engages with an ideological foe or not, a fact evident in our contrasting treatment of China and Cuba.

Sanctions offer more political appeal as a meaningful symbolic move than direct material power, especially over time as we see with the ineffectiveness in Cuba. The largely ineffective record of economic sanctions has shifted the policy community to targeted sanctions, which can be effective security instruments if U.S. authorities use them carefully and discriminately.

BKH: What is your opinion of Venezuela working with Iran to support missiles securing a U.S. missile launch range?
ML: Venezuela is lamely attempting to bandwagon against the U.S. Presidents Chavez and Ahmedinijad naturally both gain in prestige when they meet bilaterally or stand together at the U.N. in open defiance of their great superpower foe.

We should keep a close eye on the Iran dealings, but not overreact. Mostly it sounds like a far-fledged scenario convenient for military contractors. Venezuela’s greatest weapon is its oil resource, but Chavez’ has misused it and mismanaged the economy. In the international arena, he has not been able to match the political savvy of his role model Fidel.

BKH: Should the U.S. continue financial foreign aid to countries aiding U.S. military enemies or those working for U.S. economic destruction?
ML: This sure sounds like a bad idea. The US needs to review its Pakistan strategy. Foreign aid offers a means of exerting leverage, but that is overrated. Generally, foreign aid should be managed and evaluated in relation to development objectives.

Ultimately at the bilateral and executive level, it is up to the President and the Ambassador to signal how U.S. foreign aid fits into a country strategy. New research is suggesting many receiving country executives do not want U.S. aid due to the stigma factor. This again points us back in the direction of aid policy on the basis of program merits and outcomes.

BKH: What are the global economic blocks and alliances emerging in reality?
ML: The “rise of the rest” refers to the emergence of formerly peripheral economies in the non-western developing areas. In the 1960s, the economic miracle was West Germany. It was Japan in the 1980s. It was Mexico and Russia, then South Korea and Brazil, in the 1990s. In the 2000s, it is India, China, and Indonesia.

The U.S. and fellow Organization for Economic Cooperation and Development (OECD) economies must recognize and carefully accommodate new growth. We see such adjustments taking place in the respect accorded to developing country concerns over the selection of the next International Monetary Fund (IMF) Director.

While there are several regional groupings, advances in transport and technology have made trade relations more fluid than the Cold War notion of three blocs. The US must pursue multilateral as well as bilateral strategies, since institutions like the World Trade Organization (WTO) provide a rule-based authority for advancing our interests and legitimizing our leadership.

Letting China in without more conditionality now looks questionable. From a U.S. perspective, the story loses appeal with the onset of “decoupling,” in which the non-western spheres fuel growth and the traditional industrial powers stagnate. But this is a concern to raise confidently not defensively.

BKH: Which countries does the U.S. need to watch most closely to verify fair mutual interests?
ML: Russia. China. Pakistan. Saudi Arabia - In that order.

BKH: What are the three most important emerging negative economic realities the U.S. must counter in a global economy?
ML: The single-most important factors threatening US international competitiveness are internal: healthcare costs, the achievement gap, and industrial erosion. Resolving double-digit healthcare cost growth is fundamental to economic competitiveness and long-run fiscal balances. The achievement gap or low test scores by minority students, feeds an underclass and undermines the entire society.

I am concerned with the national debt but critical of the regressive solutions offered. Comprehensive healthcare reform and innovative no-holds-barred education reform would support an investment-led resurgence.

BKH: What are the three most important emerging positive economic realities the U.S. must actualize in a global economy?
ML: With the victory over Bin Laden and al Qaeda in the same year as the Arab Spring, the U.S. can confidently observe as the Islamic world distinguishes between what happens when you kill 3,000 Americans and what happens when you join a political movement with powerful positive ends.

The expansion of capacities to disseminate information, productivity and entertainment (Facebook, Google, Skype, etc) is a resource for every person within reach of a computing device as well as a strategic industry. The US should ensure competitive and accessible markets.

Having an African-American President and consecutive female Secretary of States across Administrations sends a powerful message to the world and our youth about the land of opportunity. Enhancing our merit-based open society should be a foremost priority.

See also:
Part 1, Who is Professor Matthew Lieber?
Part 2, Global Neighbors & Competitors
Part 4, Competiting Internal Identity
Part 5, Success Realties

Follow Brenda Krueger Huffman on Twitter and join her on her professional Facebook page.

Tuesday, June 14, 2011

Bringing U.S. Manufacturing Back; Part 2 of 5, Global Neighbors & Competitors

Photo Credit - Flickr Creative

Financial institutions and banking are interconnected globally. It’s one of the reasons the U.S. taxpayer funded Troubled Asset Relief Program (TARP) bailout orchestrated by the Federal Reserve was seen as a necessity to avoid a “global” economic meltdown and not just an American collapse.

The U.S. neighborhood includes more than cul-de-sac neighbors Canada and Mexico. In a manufacturing sense, China and India are down the block neighbors. Europe and Japan are the old neighborhoods looking a little frayed around the edges.

The Middle East is an old neighborhood with the tension and instability of reconstruction. Mexico and Latin America in general have their own instability, yet they can be good neighbors. Albeit, some Americans believe good fences make good neighbors in reality especially in hard economic times.

China, India, and Mexico are neighbors some Americans love to hate as they are ardent manufacturing competitors too. China doesn’t always play fair. All three are seen as being a large factor in lowering the American manufacturing wages. Yet, along with African neighbors, China and India belong to the largest emerging markets for U.S. manufactured goods. They are a part of the very strong BRIC (Brazil, Russia, India, China) countries.

It usually always comes down to money no matter the rhetoric. Capital is still being invested in the U.S. of course, yet developing countries, like China and India, are providing a private investment upside adding pressure to the U.S. capital investment and economy.

American taxpayer monies being used to invest in manufacturing and production in Mexico, Brazil, China and other countries by the U.S. government adds even more pressure to U.S. manufacturing jobs and the economy.

Here are Dr. Mathew Lieber’s thoughts on just a few specific global neighbors and competitor questions.

BKH: What do you see as your student’s attitudes on America in reference to global neighbors and competitors in general?
ML: Overall, the recurring attitudes expressed are concerns about declining U.S. prosperity and prestige. There is also a positive desire to study and travel abroad, participate in a globalized education, and prepare for a career in an integrated world.

Close to 50% of them spend a semester abroad, which raises interest in foreign relations and a grounded sense of reality about what foreign relations means on a human level.

Military veteran and foreign students play a largely positive role on campus, for they directly link our community to foreign lands, demonstrate enormous motivation and introduce viewpoints that lead students to question their stereotypes.

BKH: How is the U.S. exceptional on the global economic stage?
ML: The U.S. remains the largest single national economy even as it recovers from an ugly recession. It is the single largest consumer market and source of business innovation.

The US dollar is the global economy’s reserve currency, and Treasury Bonds its most liquid asset. The U.S. retains the leading position in international economic institutions. It is also the only military superpower, with 766 bases worldwide and more spending than all other countries combined.

Altogether, this has allowed us the “exorbitant privilege” to consume more than we produce and to run enormous fiscal deficits, because others willingly take our dollar credit. The U.S. has less than 30% of its economy in foreign trade whereas China has about 90%.

BKH: How is the U.S. normal on the global economic stage?
ML: For decades, the U.S. has been getting more normal, in the sense of relative decline, but the recent recession and the rise of Asian economies have accelerated that trajectory. Except for military power, the duration of U.S. leadership is being called into question.

China’s Gross Domestic Product (GDP) is on path to exceed the U.S. by 2020. In 2010, China became the number one automobile market.

After the housing crisis, the U.S. model of bank and financial industry led growth no longer looks so good worldwide. In the International Monetary Fund (IMF) and the World Trade Organization (WTO), the U.S. faces more difficult scenarios for advancing its positions as more powerful players assert themselves.

The G-8 (most industrialized nations) is now the G-20. With China, the U.S. has experienced a defiant competitor exercising its will and the means to resist U.S. pressure. The most basic rules of power and economics do apply to the U.S. We need to tend our power, assess the landscape, and devise a strategy.

BKH: You were in Mexico recently. What is your opinion of Mexico’s violence and its effect on the shaping of U.S. immigration and economic policy?
ML: It is tough to see Mexico’s drug war having much of a positive effect on U.S. immigration policy. It generates fear with 30,000 deaths in 5 years and accelerating.

Beefing up border security may make us feel safer but will not fundamentally resolve anything. We should look at root causes on both sides of the border. I am a realist. We should anticipate its persistence and possibility for deterioration and spillover into the U.S. At the moment, the conflict is regionalized in Mexico but gradually expanding in their territory.

Fueling it are a combination of huge profit margins, a large U.S. market of users and addicts, an ample supply of impoverished youth, an absence of alternative employment pathways, and an aggressive drug war by a corrupt and under-capacitated Mexican government. It can only change with a comprehensive regional strategy encompassing supply, trafficking and consumption.

Effective border and customs policing is essential as well as steps to stop the flow of assault weapons to traffickers. The U.S. should continue to support Mexico’s efforts to develop better legal and police institutions and to promote alternative industries in its territories. We should consider some decriminalization.

BKH: What are the positive and negative effects of the “Dream Act” passage on U.S. relations with Mexico as a neighbor and a manufacturing competitor?
ML: The Dream Act will create positive incentives for responsible behavior for a generation at risk -- to complete high school and not join a gang, to pursue college studies in return for military service. It would stop thousands of youths from turning to welfare and crime. We would have fewer Mexican-born American-raised delinquents to deport and a greater number of more successfully integrated Mexican-American citizens.

An effectively designed Dream Act could provide broad grounds for mutually beneficial cooperation. But there is also a competitive aspect. Mexico will begin aging as a society too. Soon the need for good workers will be even greater, so the young already here could become an honest rule-playing and well educated human resources fueling the U.S. economy.

BKH: What is the significance of immigration and trade between Mexico and the U.S.?
ML: These are two of the main issues on the U.S.-Mexico agenda along with security, rule of law, energy, and economic development. The 1951 mile U.S. - Mexico land border sees more human and economic traffic than all land borders, but today a growing share of the cross-border flows are via air, sea and cyberspace. Mexico is our third largest trading partner after China and Canada.

In the 1990s, a consensus formed, with elite bipartisan support in Washington and in Mexico, in favor of moving toward more North American integration. The 1994 trade agreement was a breakthrough, though the deal neglected labor mobility consequences.

Since 2001, the U.S. has shifted its focus to security, while lapses in Mexico’s democratization have reduced its ability and promise as a strategic partner. The result has been a stalled agenda held back by a hostile political environment.

Economically, we could all gain tremendously and reap potential huge benefits from more cooperation considering we have such extensive trade and business and societal relations. A realist in Washington would point out the U.S. does not have to cooperate. However, it benefits U.S. firms, workers, and tourists to actively and effectively lead a cooperation agenda.

It’s a two-way street of course, and the Mexican government is not a perfect partner. Powerful interests on both sides of the border make out well from the status quo.

BKH: Some European leaders, including United Kingdom Prime Minister David Cameron and German Chancellor Angela Merkel, have declared multi-culturalism has flailed. What are your thoughts to relation to U.S. policies and political economy?
ML: The European states face similar challenges to the U.S. of balancing a dynamic economy open to foreign labor, capital and entrepreneurship with the need to retain national traditions and identities. The pronouncements by Cameron and Merkel are in line with Nicolas Sarkozy’s campaign to ban the use of the traditional Islamic veil in France playing to key conservative segments of their domestic society.

The European countries differ from the U.S., in two aspects driving these negative statements, which I would not expect even the most conservative U.S. President to repeat. First, the European countries lack a traditional ideology and custom of immigrant absorption. Second, they have much more extensive social welfare programs. This provides more generous benefits for Europe’s immigrants and more expansive doctrines of equality, which rankle their conservatives.

This suggests a relative advantage for the U.S. in our shared creed of responsibility, self-help and opportunity—a creed Americans adopt and practice on a widespread basis. It also permeates our policies and institutions. Europe does not have that creed, and its policies have moved further to the left of its cultural conservatives.

BKH: From your travels and research, which countries are the U.S.’ best neighbors and honest competitors?
ML: Surveys reflect Americans’ wisdom of this, and I mostly agree. The United Kingdom, Canada, and Israel are in the first tier. Then there is France, Germany, Japan and the remaining NATO allies in Europe. Mexico is a bit below.

The Caribbean needs us, and the Cuban people are warmly favorable. Brazil is a potential strategic partner we could reach out to and have more interaction. Chile, Colombia, South Korea, and Poland merit mention as do Australia, Singapore and most of the English-speaking world. Throughout Africa, much of the world, there is U.S. goodwill.

A big factor affecting favorability is the rule of law, including enforcement capacity, which varies.

BKH: Is it realistic to have U.S. free trade agreements without exportation of American jobs to developing countries?
ML: Experience shows reducing trade barriers generates more economic efficiency and simultaneously dislocates employment. According to the Economic Policy Institute, the proposed free trade agreements with Colombia and Korea will spur plant closings in U.S. auto manufacturing and other industries.

U.S. trade diplomacy has been generally less effective at ensuring that implementation brings gains in U.S. exports equal to the rise in imports. U.S. consumers benefit from cheaper foreign goods. Well-represented U.S. firms such as Boeing and Cargill and their workers see benefits from exports, but there have been net employment losses.

With the long-run growth opportunities abroad, the US should maintain a free trade strategy involving both bilateral and multilateral avenues. The U.S. must also scrutinize deals more carefully to ensure they generate investment and avoid deindustrialization in the U.S.

One idea is a more proactive effort to bring U.S. and foreign firms into a pre-negotiation phase in order to build a shared expectation among industry and government elites regarding U.S. strategy for opportunity development in the U.S. This would not be a binding or legalistic approach, but one to build a positive long-term vision and determine policy reform areas.

BKH: What U.S. economy impact is there to federal government investing in other countries while hampering U.S. business in those same industries like investing in Brazilian oil exploration while refusing U.S. oil companies new drilling permits?
ML: To my knowledge, Brazil prohibits or strictly regulates foreign investment in its energy sector. Their national champion PetroBras, the dominant player, has a savvy strategy of strategic partnership with foreign state-owned and private multinational enterprises. By contrast, the U.S. has failed to formulate a national energy strategy.

My understanding is the Obama Administration had responded to oil industry demands to open up drilling selectively. It is chastised by the environmental left for such flexibility, while industry complains he has not been flexible enough.

Have we forgotten the BP spill so quickly? We will need to rely on fossil fuels for the foreseeable future, but a smart strategy would be to seek to reduce our dependence on imported oil. There is an associated vulnerability to the political fragility of the Saudi kingdom and the voracious Asian demand for fuel.

A gasoline tax would increase efficiency far more than CAFÉ fuel economy standards and generate revenue for financing a more efficient grid and other transport infrastructure. Would you rather pay Uncle Sam or pay the Saudis and then pay again to police the Persian Gulf?

Imagine having a meter at the pump allowing every American to see how much one’s driving behavior fuels Middle Eastern oil kingdoms, along with other despots like Chavez and Qaddafi.

See also:
Part 1, Who is Professor Lieber?
Part 3, U.S. Foreign Policy
Part 4, Competiting Internal Identity
Part 5, Success Realities


Follow Brenda Krueger Huffman on Twitter and join her on her professional Facebook page.

Monday, June 13, 2011

Bringing U.S. Manufacturing Back; Part 1 of 5, Who is Professor Matthew Lieber?

Many believe bringing manufacturing back to the U.S. will be one of the major contributions to stabilizing the American middle class and moving out of a recession economy. It’s a complicated issue.

The U.S. is immersed in a 21st century global economy with global neighbors and competitors as well as U.S. foreign policy, immigration policy, and free trade agreements that combine together to create a complex success reality for reviving U.S. manufacturing.

U.S. students lagging behind in competitive math and science education scores along with the overall effectiveness of universities realistically preparing students for work and careers compared to international counterparts are being questioned and examined.

Unstable governments, and even internal violence, enters into the international world economy concerns of this effect on developing business and manufacturing environments. U.S. and international investment policy, capital and profit tax policy, and international politics overall also add to the mix. Private sector versus public sector solution is also being pitted against each other in various ways.

Add to all of this the competing national internal identity fueled by competing political philosophies currently in the U.S., and it may take a rocket scientist to figure it all out. Or, maybe someone with a PhD with a field of research in global politics actively engaged with economic policy, government, and migration issues at local, regional-transnational and international levels has knowledge worth exploring.

A Visiting Assistant Professor & Research Associate at Beloit College, Matthew A. Lieber received his PhD in 2010 from Brown University. He is presently publishing his research on diaspora voting politics, pursuing a tenure-track and/or research appointment, and advancing a project on foreign investment rules and industrial transformation in the Midwest.

Dr. Lieber aims to stimulate “a more involved engagement for (his) students,” and his teaching experience has convinced him of “the value of tying the social sciences curriculum to biographies and active practitioners.”

Do schools, even higher education, effectively prepare students for the life changes that will come after graduation and into adulthood? Lieber explains, “This question challenges us to think seriously about what expectations we hold of our schools and colleges. My short answer is that too many schools are turning out graduates without the raw tools for success in life – basic literacy and math skills, and a healthy sense of self and purpose in the world. There is no shortage of evidence in the national reading and math test results.”

“This is as much of a failure of parents and communities as it is of the schools. It’s a bit harder to assess the performance of the university system, since we lack agreed-on indicators of critical thinking ability, complex reasoning and problem-solving skills, ethical awareness, and mastery of one’s field of knowledge. Developing that general foundation is the best preparation we can offer our students, immediately and in the long run.”

“They will have to get themselves through the life changes and personal challenges of finding jobs and navigating careers as well as building meaningful relationships and forging positive family ties.”

He continues, “The movement to standardize assessments for higher education now underway is arousing some of the controversy associated with school testing. My own view is that universities should engage this process seriously but carefully. Let’s establish quantification as a potentially useful tool and not as an end goal, and let’s avoid over centralization of procedures that force unity across different fields. In principle, though, more systematic assessments of college learning should be a good thing.”

What is the main delusion students may have about their future while in school that most quickly evolves after graduation? Dr. Lieber offers, “It’s funny the way that it depends on the individual, but there is a polarization. I think university studies in the U.S. seem to push students in two opposite directions. Some have a great deal of faith in one or another ideology, whether liberalism, the United Nations, free markets, or science and technology.”

“A greater and growing number of students are deluded into believing they cannot change the world. They look out at a world of environmental degradation, stolen elections, shallow politics, corporate theft, etc. and conclude the existence of self-interested humans dooms all prospects for cooperation. So there has been a shift from naive liberalism to naïve realism – cynicism – that is a reflection of the times.”

He adds, “What all students need though is more experience. Experience will teach them lessons in how we can and do change the world – one day and one person at time, in incremental and imperfect ways – not always satisfying or always good, but change nonetheless.”

What is Dr. Lieber’s best advice for a graduating college class regarding transferring what they have studied into their future success moving into adulthood realities? “First, bask in your success a bit. Relish your achievement for a moment before you move on to the next chapter in your life. Second, try not to take unsuccessful job searches personally, since you have graduated during a recession out of your control.”

He concludes, “If you have to adjust your immediate plans, maintain your goals and map a strategy to get you there. Specifically, speak to people in the field, build up your resume, and network strategically. Manage your debt and plan for graduate school within a few years. Update your goals and strategy regularly as your experience leads to new insights. But also try out a few different things if you desire – now is the time. Five and certainly ten years from now, it will be harder for you to change and do something new.”

Lieber travels a lot for his research. What was his most interesting recent trip? “I went to Mexico in April to visit two universities, where I was invited to present my research and teach a few special classes. Overall I spent a week between Mexico City, which I know well, and Monterrey, a new city for me -- with my entire senses alert to the politics and economic state of that country. I talked with faculty, political advisors, many students, and a lot of taxi drivers and waiters, too.”

He notes, “What impressed me was the odd combination of persistent drug violence and a remarkably lively economy in Mexico. On an earlier visit in 2009, the streets had been practically empty. Today, incomes, profits and insecurity are all up in Mexico, as all of the most recent news has confirmed.”

What led Lieber to his specific areas of research focus? “My research focuses on the politics of migration, and I can give you a broad reason and couple of more precise ones that led me there. Academia is actually a lot like business in the need to be entrepreneurial and strategic in identifying and developing a market niche with one’s specialty.”

He details, “My field has a lot of good research and theories on why and how people vote or on the relationship between investment flows and security cooperation. But how do individual and group migration experiences affect political leadership, national projects, diplomatic relations and conflicts? In a capitalist system that relies on growing labor flows of both masses and elites, this question matters in many ways. But on the politics of migration, we know far, far less, so that we even lack well developed categories of knowledge.”

“Each biography, each country is studied as a singular case and not cumulated. So this is a big area of opportunity, though it has been tricky for me and others to break in because our work upsets existing ways of organizing and thinking about the field. More precisely, I chose to focus on developing country migrant-sending states, to complement the much greater body of work on immigration in wealthier, receiving states like the U.S. and Germany.”

Lieber concludes, “Lastly, Mexico and the Dominican Republic are two of the countries in our region at pivotal historical moments with massive numbers of their people in our country. Considering the fate of their democratization and quest for economic stability- which will inevitably have an impact for the United States-- is their immigration an opportunity and a resource to work with? Or is it a liability and an obstacle to progress of democracy in the region? I find that interesting and worthwhile to bring up. The question certainly is complicated—migration often cuts both ways-- but I don’t think it will be a non-factor.”

Lieber is a participating author in writing of the book “Foreign Aid and Private Sector Development” published by the Watson Institute for International Studies.

In general terms, as we will explore in detail in this series, how does Dr. Lieber’s research most contribute to the valuable and practical knowledge that is needed today by real world firms and policy makers?

Dr. Lieber shares, “My research is part of a broader body of more systematic analysis that can inform a more enlightened regional approach to migration policy on the part of government, business and civic leaders in the U.S. and the neighboring countries – so we can lead our politicians, rather than vice versa.”

“There is a gulf separating academic political science from policy making in the U.S. – which I find unfortunate. Amidst so many major challenges, the country ought to utilize all sources of serious insight, particularly those capable of helping expand and transform the public debates that are now overly narrow or obstructed.”

He advises, “Political scientists are partly to blame since we have offered long-winded answers when government and business actors need situational intelligence rather than grand theories or elaborate models in order to make good decisions quickly. This interview series is a welcome opportunity to make a small step toward bridging that gulf.”

We will explore the thoughts of Professor Matthew Lieber in our 5-Part series. The series will include:
Part 2, Global Neighbors & Competitors
Part 3, U.S. Foreign Policy
Part 4, Competing Internal Identity
Part 5, Success Realities


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