"Roses Among the Thorns"

Sydney M. Williams

Thought of the Day

“Roses Among the Thorns”

November 22, 2010

Rahm Emanuel once infamously stated that a crisis is a terrible thing to waste, but it is also true that, purely serendipitously, good things can came from crises. The recent economic and fiscal turmoil have produced at least two positive developments. One is the preliminary report on tax strategy – overhauling the current tax code by proposing simplified rates for both individuals and corporations that largely do away with standard deductions – from the deficit commission appointed by President Obama. The second is the agreement by unions to accept tiered contracts, described in a front page article in Saturday’s New York Times. The tax strategy plans, at their core, are pro-growth initiatives and are surely the most effective and least painful way of reducing the federal deficit. The second is an acknowledgement that we are part of a global economy and that high labor costs deny us the ability to compete effectively with the East.

It is true that neither proposal is assured of acceptance or continuance, but at least the weather vane is pointing in the right direction. Congress may decide to neuter the deficit commission, or the President may choose to ignore its findings. Labor, once the recession is over, may well resort to their traditional single tier contracts.

The only thing binding about the recommendations that are due from the deficit commission in early December is that if fourteen of the eighteen members approve the statement, Congress must consider their recommendations. However, President Obama has the opportunity to restore economic growth as the best means of tackling the deficit using the cover of the preliminary report issued by Erskine Bowles and Alan Simpson. The President can also cite another blue ribbon commission which came to a similar conclusion regarding the tax system – a group headed by former Republican Senate Budget Committee Chairman, Pete Domenici and Democrat Alice Rivlin who was the founding director of the Congressional Budget Office and director of the Office of Management and Budget for President Clinton. Simplifying and lowering tax rates would benefit everybody except lawyers and those who represent special interests. (Parenthetically, let me add that we all have special interests, but those should be subordinated for what is best for the country.) As N. Gregory Mankiw wrote in Sunday’s New York Times, “I am willing to give up my favorite tax expenditure if everyone else is willing to give up theirs.”

There is little question that the President may lose the far left should he adopt the co-chairmen’s recommendation, but he would gain the approval of the far larger group of independent voters and almost assure his reelection prospects in 2012.

The concept of two-tiered labor agreements is not new to the current recession. They were used, as the New York Times, pointed out, in the early 1980s. However, with recession over, subsequent contracts in the past reverted back to single tiers. Today, though, global competition is far more intense. The United States remains the foremost manufacturer in the world, but China is on the brink of surpassing us. In the past ten years China has, according to Niall Ferguson writing in the weekend edition of the Wall Street Journal, already overtaken Germany and Japan in the past ten years. “The world”, as Professor Ferguson writes in his article entitled In China’s Orbit, “is tilting back to the East.” On a recent visit with two of our analysts to Harley Davidson’s headquarters in Milwaukee – a company highlighted in the Times article – management seemed adamant that a return to prior labor contracts was not in the interests of union members, shareholders or management. The auto industry, brought to its knees by unrealistic union demands, was saved only because of government interference. A government industrial policy is a route fraught with expense, inequality and inefficiency and doomed ultimately to fail. A business that is able to compete is one that is able to grow, thereby providing job opportunities. It does not necessarily mean a return to Boulwarism, but it suggests that expectations by labor will have to be scaled back to allow the businesses they choose to organize to prosper. In biology, a parasite that destroys its host is doomed to die. Today, many failing state and local governments are vivid examples of this hedonistic, delusional attitude. “What we are doing,” Harley president and chief operating officer Matthew S. Levatich is quoted as saying in the Times article, “is not mean-spirited. We have to retool if we want to survive.”

Perhaps I am too Panglossian, but indications of positive change provide hope. We certainly continue to face thorny problems: unsustainable deficits; far too high unemployment; an education system that lags much of the world, and immigration reform. A growing sense of dependency on government, embodied in the healthcare reform bill, is an impediment not an aid to being competitive in today’s globally competitive environment. As an aside, the NHS (the National Healthcare Service) in England, a country one fifth the size of ours in terms of population, is the world’s fourth largest employer, following the Chinese army, Wal-Mart and the Indian National Railway. One can only imagine the bloated bureaucracy that faces us over the next couple of decades, should the healthcare act be implemented.

“What we are living through now”, Professor Ferguson concludes, “is the end of 500 years of Western predominance. This time the Eastern challenge is for real.” One has to only look at the three largest cities in the world (according to World Statistics) – Shanghai, Mumbai and Karachi – to recognize the remarkable change that has been taking place. (In 1900, according to Mr. Ferguson, the three largest cities in the world were London, New York and Paris.) These shifting dynamics present opportunities, but only if we have the will and the wherewithal to compete. It is why the possibility of real tax reform and a more realistic attitude by labor present the possibility of roses among the thorns.