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Sunday, July 17, 2011

The Great Wealth Shift

These days we hear and read a great bit about the possibility of a shift in wealth away from the United States. The pundits all say that we need to get our financial house in order soon or we will be in deep trouble. I agree about the urgent need to get our house in order but I do not see the problem as new as many seem to be saying.

Let us go back a few decades. In 1967, one of my brothers and I spent virtually an entire summer in Europe. We mowed lawns, shoveled snow and did other odd jobs to pay for the trip. People laughed at our audacity but everyone wished us well when we boarded the flight to Paris. The trip clearly changed my life. I realized that there was a world beyond my New England roots; there were people vastly different from me who also had dreams but had a completely different sense of life than I. Today, I attribute my willingness to pursue investment opportunities globally and to see other nations points of view on political issues to what I learned on that amazing trip.

The country that impressed me the most was Switzerland. It was stunningly beautiful, squeaky clean, and everything seemed to work efficiently which was not what I experienced in other European countries. The other striking thing about the country was how inexpensive things were. Their currency, the Swiss Franc, was worth 22 U.S. cents. When I returned to Zurich in late 1973, the Franc was worth 30 cents and Switzerland was no longer such a bargain. Today, the Swiss Franc is worth approximately $1.20. That is a five and a half fold increase in the Swiss Franc relative to the US dollar in 44 years. Admittedly, in recent weeks, with Greek, Portuguese, Spanish, Irish, and Italian money woes making the news, Europeans have bid up the value of the mighty Swiss Franc as a safe haven for their cash reserves. But setting that aside, the appreciation of the Swiss Franc has been five fold relative to the dollar.

How does this tiny landlocked country with virtually zero natural resources do it? Well, they are famous for their work ethic and thrift. Internationally, they mind their own business. In fact, they have not been involved in a war since Napoleon marched through a portion of their turf early in the 19th century. Taxes are fairly low but it is hardly a tax haven. They have many thousands of foreign workers but no illegal immigration. After your term of a few years is up, you go home. Citizenship is not an option except for the occasional film star or wildly successful businessperson. The federal government is pretty weak and does not spend much. Balanced budgets happen far more often than not. People are affluent and the schools are first rate with very high standards.

Some countries have emulated many of these features. Take the four Asian Tigers—Korea, Hong Kong, Taiwan, and Singapore. All have shown spectacular growth in recent years. A vibrant middle class is emerging across Asia and portions of Latin America. China and India add 20 million new middle class consumers each year but proportionately these smaller players along with Malaysia, Indonesia, and Vietnam may be doing equally as well.

In the United States, it seems, our middle class is dwindling, with a huge group of maybe 15 million households hanging on to a middle class lifestyle by their fingernails. One more dip in housing prices could drop several more million out of the middle class over the next 18 months.

So, yes, the problems that we face are daunting. But, remember, that they did not happen overnight. Just, as the Swiss Franc has appreciated steadily vis a vis the dollar with some ups and downs, the same thing can be said for our world economic dominance. It has slipped away gradually and not in a straight line but it has been relentless.

Right now, the news media and politicians are obsessed with our Federal debt limit and raising it by August 2nd. To me, this is a distraction from the real issues (yes, it should be raised to calm already jittery international markets). But the core issue is making us competitive again and that is no easy chore. Singapore, increasingly referred to as the Switzerland of the East, is basically a city-state. Policies can be enacted quickly. They and others are highly maneuverable. In China, freedom is lacking. If the government promulgates a change (i.e., a massive shift to wind generated power), it gets done. Part of the charm and strength of our democratic system is that everyone has a say so things happen more slowly than in smaller countries or autocratic ones.

Here are some ideas, all mine, but hardly original, that we might undertake to change things:

1) Start making things again—most of you who read this make or made your living as I did in some form of marketing endeavor. We are the best in the world at it. But, we need an industrial policy again in America. It will be hard to implement but all of us cannot be cable sales people, media directors, writers, day traders or gigolos.
2) Stop playing adventure around the world—virtually all of us applauded when George W. Bush invaded Afghanistan. We had been attacked and we were going after the people who did it. Well, 10 years later, we seem to be “nation-building” on paper but really supporting a corrupt regime to the tune of $2-3 billion per week. And, some American kids are still dying. From now on, we should never put a boot on the ground unless it is absolutely imperative to our domestic security. Trade with more nations, talk with everyone, make unlikely friends but be very spare with formal military intervention.
3) Education needs a facelift—every president in recent memory has talked about how he was going to “be the education president.” What nonsense. The states and counties control their schools-- not Washington. Here are two ideas sure to annoy a lot of people but also to me the ONLY way to make the American educational system competitive again:
a. Lengthen the school year—I dare you to take a look at all the countries around the globe that have better math, science, geography, history and reading scores than the U.S. Without exception, they have longer school years. Our school year is approximately 180 days per year (some schools may go to a four day school week next year due to lack of funding!). The better performing school systems abroad tend to be open 210-230 days per year. It makes sense. If you are in school longer, you can cover more material and get a stronger understanding of it. Some say that we must have 9-10 weeks off in the summer. Absurd. That was put in during the 19th century when our country was largely agrarian and there was no air conditioning. Today, less than 3% of Americans live and work on farms. So, the kids do not have to be home to help with planting and harvesting.
b. Pay teachers a lot more money—Did you ever notice how some of the best teachers are now near retirement age? Well, they have nearly 40 years of experience, which is a big plus. But, also when they entered teaching it was considered a profession and relatively speaking, the pay was okay. If you want to get the most talented, imaginative, and dedicated young people to go in to teaching, then jack up their pay big time. Is your child’s teacher as important to society as your tax accountant? I would say yes so pay him or her accordingly. Right now, many naturally gifted teachers are doing something else simply due to financial imperatives.

Can these suggestions be implemented? With many states and counties facing bankruptcy, it will be tough. But, the kids are our future and they need better than what they are getting now in many cases.

4) Energy Independence—since 1973 when Dick Nixon called for energy independence, every president has embraced the concept. No one has done anything. In Europe, renewables are up to 22% of total electricity production and Sweden claims that they will be not importing a drop of oil after 2020. We have done very little—the corn based ethanol effort of recent years was nothing more than an agricultural subsidy. Yet, we could do a lot more in wind, solar and nuclear, as well as sugar based ethanol plus use our vast domestic natural gas holdings to cut back on importing oil from countries who do not like us and share our values. If we spent our energy dollars here, it would create hundreds of thousands of jobs and improve our dismal balance of payments.
5) Close loopholes in the tax code—get this straight, kids. Closing a loophole is not an increase in taxes. It is usually just enforcing or tightening up the existing code. Some big corporations are paying little or no taxes. Hedge fund managers hold a position for under a minute and get to claim the profit as a tax favored capital gain rather than a short-term fully taxable gain. This can raise some money and not hurt economic growth. Emotionally, people will like the fairness of it.
6) Cut back on entitlements—this is political dynamite and I applaud President Obama and Speaker Boehner for trying to address it. Social Security could be fixed in an afternoon if several of us sat at a table and ran a few what if scenarios on a laptop. Raise the retirement age gradually over the next forty years, means test it so those with a high net worth get most of it taxed away, and soften the cost of living adjustments. Also, you could gradually raise the income ceiling on Social Security contributions. Presto! The system is saved. Most people under 30 will tell you that they will never get Social Security anyway. So, why the big stink when people want to raise the benefit to begin at age 68 forty years from now?
How about Medicare? Congressman Paul Ryan of Wisconsin wrote a bold plan that would attempt to balance the U.S. Federal budget over the next two decades. It was trashed as many people thought his treatment of Medicare was too draconian. I have only read snippets of it so I cannot in fairness say much. One thing he did shine the light on took great political courage. He said that the average American would pay out about $150,000 in Medicare payments in their working life but receive about $450,000 in benefits. That is not sustainable over the long term but most Americans blithely ignore the arithmetic. There is another sacred cow that almost no one brings up. Let us say that Granny is 92 years old and terminally ill. In the last six weeks of her life, perhaps $1-1.5 million will be spent to prolong her life. Were she in Norway, Denmark, Sweden, or Great Britain where socialized medicine has existed for generations, she would be made comfortable but extraordinary means would not be employed to keep her alive. This will be a huge issue in the U.S. in a few years. Right now we spend 17.3% of GDP on health care and many are not covered. In the Netherlands, they spend 8.2% and everyone is covered. If we are to contain health care costs, some terribly hard decisions will have to be made. When to pull the plug will be the biggest one.

7) Immigration—this topic generates a lot of hysteria. We are keeping out engineers, doctors, computer experts, and entrepreneurs because we lump all immigrants as people working in the underground economy. America should never turn away the talented and the eager. Why did our ancestors come here? A rational policy is needed.

Will we implement some or all of these changes? I just don’t know. But if we ignore them all, I can assure you in 10 years, the Swiss Franc will be $2.00, the Singaporean dollar will double, and our middle class will be a lot smaller.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

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