BOOK REVIEW: 'The Selling of the American Economy' Explores Impact of Foreign Companies -- Including Toyota -- on U.S. Economy, Especially Manufacturing

Reviewed by David M. Kinchen

Toyota is in the midst of its biggest quality crisis ever, which is somewhat unfortunate for the latest book on the auto industry by New York Times senior business correspondent Micheline Maynard, The Selling of the American Economy: How Foreign Companies Are Remaking the American Dream (Broadway Business, a division of Random House, 272 pages, $26.00).

The widening recall crisis facing the Japanese auto giant -- a truly global country with a big manufacturing big presence in the U.S. and more than two dozen other nations -- shows a company famous for its quality reputation that is also infamous for its inept crisis management handling of recalls involving sudden acceleration and now problems with brakes in its halo Prius model.

Maynard's book came out late in October, well before the latest revelations of problems with many models of Toyotas, and -- to be fair to her, much of the book deals with three other foreign companies in the U.S.: Tata of India, Haier of China and the European Aeronautic Defence and Space Company (EADS), a French-German firm that manufactures helicopters in Mississippi. Also to be fair to her, she discusses the quality control problems of Toyota that antedated the latest ones.

Still, Maynard, who calls her book the continuation of a previous book on the American auto industry, The End of Detroit, comes across all too often as a cheerleader for Toyota. She drives a Prius and lives in Ann Arbor, the Berkeley of Michigan, an upscale community home to the University of Michigan and a far cry from the gritty streets of Detroit.

Maynard argues that despite the lingering xenophobia that colors American perception of foreign-owned companies, foreign investments are actually an overwhelmingly positive force. Not only do they create thousands of jobs and pump billions of dollars into national and local economies, she says, they reinvigorate and strengthen communities, foster innovation and diversity in the marketplace, and teach Americans new ways to live and work.

In the manner of her Times colleague Louis Uchitelle (The Disposable American, Knopf, 2006) Maynard
presents us with moving stories of workers whose lives have been transformed by the arrival of companies like Toyota, Airbus, and Tata. She also interviewed many government officials, including Michigan's Canadian-born governor, Jennifer Granholm, who have fought -- often against the will of their supporters -- to lure foreign companies to their communities and states. She also obtained a rare interview with Toyota's new president, Akio Toyoda, who has just apologized to one and all for the recalls and the damage to Toyota's reputation for building quality vehicles.

Akio Toyoda on Friday, Feb. 5, 2010  held a press conference, two long weeks since the U.S. gas pedal safety recall was announced. Toyoda tried to rescue the situation by apologizing for the inconvenience to customers around the world. The company ascribes the alleged brake problems to customers misunderstanding the feeling of the ABS braking system and says that only the 2009 model Prius is involved. Since January, the company has fixed the software so that the ABS responds more quickly.

Observers have said that the apology is too little and too late, that Toyota -- and Akio Toyoda, grandson of the founder, who was named president in 2009 -- still haven't gotten the need for a full-bore crisis management effort, on the order of the Tylenol recall.

As the cliche goes, only time will tell if Toyota will regain its stellar reputation. Its operation in Putnam County, West Virginia, which manufactures engines, has long been one of the firm's best operations and apparently has nothing to do with the problems involved in the recalls. Still, like all the other plants in the U.S., it's affected by the halt in Toyota production.

What does "Buy American" mean anymore, when Maynard's own publisher is owned by Germans (Bertelsmann), when the iconic Eight O'Clock coffee (my day starts with their Hazelnut flavor!) is owned by Tata of Mubai, India, which also bought Jaguar and Land Rover from Ford? Haier was thwarted in its attempt to buy Maytag, Maynard writes, losing out to Whirlpool of my native state of Michigan, which quickly shut down Maytag's Iowa plants, shifting manufacturing overseas.

How about Chrysler, along with General Motors forced into bankruptcy? Fiat, of Turin, Italy, is bailing out  one of our oldest and most iconic automakers, not out of altruism, but to gain access to Chrysler's extensive dealer network. If Americans can accept the view that Fiat's notorious quality control problems of the past ("Fix It Again, Tony" is what many Americans think Fiat stands for) are ancient history, Chrysler may soon have the fuel-efficient cars that Americans want.

Nestle, an American icon?  It's based in Switzerland. Budweiser, which commands more than half of the American beer market,  is now owned by a foreign company (I only hope that some day Budweiser would taste like Stella Artois, a premium beer from inBev).  In 2008 Anheuser-Busch sold the majority of their stock to Belgian-Brazilian beer giant InBev, to create the largest brewing company in the world.

Maynard mentions tiny Buffalo, West Virginia, where Toyota makes engines  and how its employees come from 27 of the 55 counties in the Mountain State. She also tells fo the revitalization of Georgetown, KY, just north of Lexington, and how Toyota's massive plant there has brought revitalized Georgetown's dying downtown.

Let me be a cheerleader for a moment, something I just accused Maynard of: I hope that Toyota will solve its problems and regain its reputation for quality vehicles. I believe in globalization as long as it helps the nation, as Haier's purchase of Maytag probably would have. My own vehicle, a 2001 Ford Ranger pickup, is manufactured by a global company that has overcome quality problems of the past and also avoided the bailouts of Chrysler and GM.
 
So, despite the continuing Toyota problems, I recommend Maynard's book for its insights into the positive side of globalization.

Micheline Maynard is the Senior Business Correspondent at the New York Times, and the author of the acclaimed book, The End of Detroit. The recipient of the 2009 Nathanial Nash award for excellence in business journalism, she has written for USA Today and U.S. News and World Report, and appears regularly on CNBC and NPR.


Ron Paul: Fed Threatens Depression, $100 Bills Worthless

Copyright © 2006-2010, Basil & Spice. All rights reserved.

By Loyd Eskildson

David Rhodes and Daniel Stelter are Europe-based senior partners in the Boston Consulting Group. In Accelerating Out of the Great Recession they purport to offer solid advice on how American business can survive and thrive in these trying times. They begin by observing that it would take a 32% increase in China's private consumption to offset a 5% reduction in U.S. consumer spending - something they believe is not going to happen. Thus, when combined with various spending inhibitors, they conclude business leaders should instead look for growth in the U.S., albeit slower than in the past. Accompanying that slower growth will be unwanted increased efforts at government regulation, anti-immigration action, and trade protectionism.  Other economic drags include downward price pressure due to deleveraging, and bank reluctance to lend due to their failure to recognize the extent of their potential losses and recapitalize.
 
Continuing, the authors point out that U.S. household wealth shrank an estimated $13.9 trillion (22%) in the last few years, while the savings rate rose from -2.7% in 2005 to +5.9% in 2009. Both factors reduce demand. Meanwhile, the GDP-boosting U.S. trade deficit (4.6% of GDP) cannot continue, unemployment and underemployment remain high, and most surveyed business leaders are not optimistic about soon returning to record 'pre-recession' profits. 
 
Soaring U.S. health care costs (17.3% in 2009, expected to hit 25% in 2025 and 37% in 2050 without fundamental change - Congressional Budget Office) receive almost no attention in Accelerating, despite the obvious fact it cannot continue. (Suffice it to say, health care reform will not occur on its own, and will have major impact.) Rhodes and Stelter continue, finally concluding that consumers will become more "value-conscious," obvious old news to most. Eg. Guess what has driven Wal-Mart from nothing to become the world's largest public corporation in 40 years and the U.S. largest grocery retailer in 21 years, while department-store market share fell from 38% in 1995 to 19% in 2002? Home equity financing reached almost $1 trillion in 2006 (7% of GDP), before home values began tanking - guess what that does to demand, especially for big-ticket items? Up to 70% of homeowners are underwater on their mortgages in some areas - those homeowners will not lead any economic recovery, period. Just two years ago the U.S. finance industry generated 41% of corporate profits - that won't be repeated soon either.
 
Worse yet, Rhodes and Stelter are oblivious to the reduced impact and opportunity from today's consumer sales. Decades ago when Americans bought a car, toaster, toy, shirt, tank of gasoline, or a shrimp dinner they not only boosted retail sales, but generated added activity for the U.S. auto, appliance, textile, toy, oil, and fishing industries and their U.S. employees as well. Today, that second level of activity is largely gone, both in the preceding areas and many, many more - mostly off-shored to China. Thus, adding a dollar of U.S. consumer sales not only requires more credit than before ($1 in the 1950s, $3 in the 1990s, and $5 in the last decade - per the authors), but also far less impact on total GDP. Regaining that stronger impact requires protectionism, despite Rhodes and Stelter's unconvincing counter-arguments, unless one proposes ballooning the trade deficit - which they also oppose. What does this mean for business leaders - that major economic improvement requires government to reverse course on 'Free Trade.'
 
The second section of Accelerating covers suggested business strategies. Those looking for new, sophisticated strategies and insights, however, will not find any. The material is simply a superficial rehash of Finance 101 - protect your cash position, negotiate with suppliers, focus on inventory management and reduce debt levels, divest non-core businesses, focus on bloated R&D, focus on innovation, . . .. Easy to say, not so easy to do when surrounded by excess world production capacity (U.S. - 20%, Japan - 15%, European Union - 18%, India - 30%, China - 40%, Brazil - 30%), with Asian producers especially advantaged by much, much lower operating and capital costs. Clearly, America's economic future will not be found through just working harder at more of the same.
 
Bottom-Line: The U.S. cannot accelerate out of the great recession without creating a new, significant, sustainable, strategic advantage, or at least a similar defense - especially in the industries of tomorrow. The New York Times (1/30/2010) reports that China is already the world leader in green energy wind and solar power, and pushing hard to build nuclear reactors and more efficient coal-fired plants. It also is leading in electric bicycles, and the "smart money" (Buffett's Berkshire) is betting on a Chinese state-owned company developing electric cars and their batteries. Meanwhile, China is also significantly boosting R&D efforts in nanotechnology and bio-sciences.  All this while erecting trade barriers to outside competition in new areas, and refusing to revalue its currency - thus protecting old areas as well. Little, if any of these current (or former) initiatives occurred through purely private initiative, or simply across-the-board Chinese business tax-cuts. Nonetheless, Accelerating Out of the Great Recession ignores or takes a negative posture on the potential role of U.S. government, probably because many Americans believe it should have no role in private enterprise.
 
China became a modern power by facing down its anti-capitalist roots en route to a heavy government role in lifting private businesses; further, its on-going economic vibrancy is assisted by much, much lower health care costs (admittedly the government is working to expand this area) and an undervalued currency. The U.S. similarly needs to face down its anti-government roots to help maintain our modern status through government-led  health care reform, severely limiting illegal immigration, imposing tariffs to counter China's under-valued currency, and guiding/helping the development and protection of nascent industries.


David Rhodes is a senior partner and managing director of the London office of The Boston Consulting Group and the global leader of the Financial Institutions practice.

Daniel Stelter is a senior partner and managing director of the firm’s Berlin office and the global leader of the Corporate Development practice.

Loyd Eskildson is retired from a life of computer programming, teaching economics and finance, education and health care administration, and cross-country truck driving.  He's now a reviewer for Basil & Spice.

Review: Cornered By Barry C. Lynn (Wiley/2010)

Review: Too Big To Save By Robert Pozen (Wiley/Nov 2009)

Copyright © 2006-2010, Basil & Spice. All rights reserved.

John M. Mason--

Looking at the Federal Reserve figures for Wednesday, February 3, 2010, one could argue that just about everything seems to be in place for the Fed to execute its exit plan. The Fed will still purchase some more Mortgage-backed securities and there are some other residuals left from the world financial crisis that still remain, but these are now relatively minor parts of the picture.

On Wednesday, February 3, 2010, the Total Factors Supplying Reserves to the banking system totaled $2,231.3 billion or a little more than $2.2 trillion. The Securities held outright by the Federal Reserve amounted to $1,911.6 billion or approximately 85.7% of the total factors supplying reserves.

To put these numbers in perspective, on Wednesday, December 5, 2007, Total Factors Supplying Reserves to the banking system equaled $920.4 billion and Securities held outright amounted to $779.7 billion or 84.7%. The Fed did have outstanding $46.5 billion in repurchase agreements which, if included, made about 89.8% of their balance sheet related to securities.

On February 3, 2010,the Federal Reserve had no repurchase agreements outstanding.

I go back to December 2007 because one has to go back that far to get to a Fed balance sheet that does not include “special” line items that were constructed to combat the financial crisis. In December 2007, the Term Auction Facility (TAF) was initiated. During the time the TAF existed total funds supplied through this facility reached several hundred billion dollars. On Wednesday February 3, 2010, funds supplied to the banking industry through the TAF were only $39 billion, down $37.4 billion over the past four weeks and down by $101 billion in the last 13-week period.

In preparing to remove excessive amounts of reserves from the banking system the Federal Reserve has been allowing the “special” facilities that have supplied reserves to banks to “run off” while the Fed has replaced these funds with open market purchases.

Another area in which this has taken place has been in central bank liquidity swaps. This facility was also started in December 2007. At one time central bank liquidity swaps were in the hundreds of billions of dollars. On Wednesday, February 3, swaps totaled $100 million.

In the last four weeks and the last 13-weeks, the other items on the Federal Reserve statement did not change dramatically. To me what I have presented in the last three paragraphs pretty well sums up what the Fed has been doing to get itself ready to begin removing excess reserves from the banking system…when it decides it is time to do so.

Over the past 13-week period, reserves have been removed from the banking system by a reduction in funds available through the TAF ($101 billion) and through a decline in central bank liquidity swaps ($32 billion) or a total of $133 billion.

During this time, the Federal Reserve has purchased open-market securities of $214 billion. Thus, total factors supplying reserves during this time rose by $81 billion from these factors.

Over the past 4-week period, the TAF has been reduced by $38 billion and central bank liquidity swaps declined by $10 billion or a total of $48 billion.

Federal Reserve purchases of open market securities totaled $66 billion. Total factors supplying reserves from these factors rose by roughly $18 billion.

I have not discussed the factors that have been absorbing bank reserves over the past 4-week and 13-week periods because they have been impacted by some wide swings in the deposits of the federal government, much of which are technical in nature. And, these factors should not play any important role in how the Fed removes reserves from the banking system.

The bottom line in this discussion is that it seems to me that the Fed has basically eliminated or reduced most of the facilities that it created over the past two years that can have a major impact on the creation or destruction of bank reserves. The two major facilities are, of course, the TAF and central bank liquidity swaps.

The Federal Reserve now has one thing to work with in withdrawing reserves from the banking system: its portfolio of open-market securities. The Fed’s balance sheet is composed of roughly 85% open-market securities held outright. (A shown above, as a percentage of the balance sheet this is not too far off what the composition of the balance sheet was in early December 2007.)

The Fed has already had some recent test runs using “Reverse Repurchase Agreements” (reverse repos), or, selling securities to securities dealers under an agreement to repurchase. The idea here is to test the market’s reception to the withdrawal of funds from the banking system. Since the reverse repos are only temporary, the funds withdrawn will be put right back into the system avoiding any disruption that might be caused by the sale of the securities.

In this way, the Fed can “feel” its way toward withdrawing the excess reserves from the banking system. On one side is the question about is how the Fed will react to a pickup in bank lending and a rapid rise in the growth rates of the money stock. On the other side, the Fed wants to avoid a catastrophe like the 1937-1938 period in which reserve requirements were raised at a time when banks seemed to have had a lot of “excess reserves” on their hands, but really wanted to keep excess reserves on their balance sheets.

Bernanke, a historian of the Great Depression knows this lesson all too well. That is why a suggestion like that of Andy Kessler, a former hedge fund manager, which appeared in the Wall Street Journal last Thursday morning, “Bernanke’s Exit Strategy: Tighten Reserve Requirements” seems a bit absurd.

My belief is that Mr. Bernanke and the Fed are going to, at least initially, take things slow. When they begin to exit they are going to engage in some reverse repos and see how the banking system reacts. Then they will do some more…and then some more. The strategy: basically stepping out into the river to see how deep the water is. And, then stepping out a little further…and then a little further. The hope is to avoid falling in over their head, causing a further contraction in the banking system that would lead to another financial crisis.

In doing this the Fed keeps the reserves in the banking system if the economy remains slow or if the banking system wants to hold onto the funds. However, in this plan they start to remove the reserves, testing the market all along the way, so as not to pull the reserves out too quickly.

The problem is on the “up-side.” If bank lending does start to accelerate then the banks will want those “excess reserves” for loans. And, the funds are already on their balance sheets. In such a case the questions will be “How fast will the Fed sell the securities on its balance sheet?” and “How high will the Fed drive up interest rates in order to avoid a credit inflation from breaking out in the United States?”

As we have seen in other periods of time, we can simultaneously be in a period of economic stagnation and still experience a credit inflation. Bernanke has not earned his “star” yet! He still has $1.1 trillion of EXCESS RESERVES in the banking system that must be removed.

John M. Mason writes on current monetary and financial events. He is a professor at Penn State University and has taught in both the Management Division and the Engineering Division. He formerly was on the faculty of the Finance Department, Wharton School, the University of Pennsylvania. Dr. Mason has been President and CEO of two publicly traded financial institutions and the Executive Vice President and CFO of a third. He has also served as a Special Assistant to the Secretary of the Department of Housing and Urban Development in Washington, D. C. and as a Senior Economist within the Federal Reserve System. Dr. Mason has served on the boards of venture capital funds and other private equity funds. He has worked with young entrepreneurs, especially within the urban environment, starting or running companies primarily connected with Information Technology.

Review: On The Brink By Henry M. Paulson, Jr.(Business Plus/2010)

Copyright © 2006-2010, Basil & Spice. All rights reserved.

Reviewed by David M. Kinchen

Job security is today's ultimate oxymoron. Don't believe me, just look at the unemployment statistics. The latest weekly numbers were  released as I sat down to review Dan Miller's No More Dreaded Mondays: Ignite Your Passion -- And Other Revolutionary Ways to Discover Your True Calling at Work (Broadway Business, 272 pages, $14.99)  and were considered good news by commentators: "initial jobless applications declined to 470,000 in the week ended Jan. 23, higher than anticipated, from 478,000 the prior week, Labor Department figures showed today in Washington. The total number of people receiving unemployment insurance dropped to the lowest level in a year...."

If that's the good news, I don't want to hear the bad news. More and more I agree with Miller that we're in a post-employment world. I'm glad I'm not a college senior looking at a May or June graduation with no job prospects (come on, it's not that bad....or is it?).

Miller -- a life coach (now there's a job title that didn't exist when I started my first job out of college in 1961) and the author of 48 Hours in the Work You Love book, DVD and seminar series -- sounds like a preacher on the subject of finding satisfying work outside the traditional parameters of employment, where job security is a joke. The days are long past when you started a job and stayed with it until gold watch time.

I learned about job security in 1990, when, after more than 14 years at a job I loved, I was told at my exit interview by the head honcho that "we're all temporary employees here." This was at a place that had long been noted for the closest thing to permanent employment outside a tenured college position or a government job. Job security was even enshrined in the employee handbook, which I still have. A few years later, that honcho was gone.

Think: "We're all temporary employees" and you're on your way to understanding Dan Miller's message.

Miller writes that if a steady paycheck and the promise of a secure retirement is what's keeping you celebrating TGIF (Thank God It's Friday) and dreading showing up Monday mornings, you're in for a big disappointment. In today's volatile economy, there is nothing safe about punching the clock for a job you hate.

If your job is making you sick or stupid, find something you like, even something as simple as the lawn care business started by one of Miller's friends near his home in the Nashville, TN area. Find something you like and go for it. Selling on eBay? Many people are making a living or supplementing their incomes doing just that. (I'm personally enriching quite a few of them!) Buying hotdog vending carts and leasing them out in an urban area... go for it!

I saw a pickup truck in the Walmart parking lot today that had on its doors the sign: "Pimp Your Golf Cart." Hitched to the truck was a gigantic flat bed trailer for hauling the golf carts. Golf cart rental, customizing and service was a job I never thought of, but somebody found a way to make a satisfying -- and profitable -- living doing just that.

Miller -- big on quoting people from all walks of life -- notes that Adam Smith, author of The Wealth of Nations,  the classic book on economics,  wrote that a person who spends his life performing the same repetitive tasks generally becomes as stupid and ignorant as it is possible for a human creature to become.

Not a pretty picture, but think about it: It's not only assembly-line workers who are stuck with boring, repetitive tasks; professionals like doctors and lawyers are too. Maybe that's why so many lawyers have turned to writing thrillers. Think Scott Turow, John Grisham, Lisa Scottoline, etc., etc.

I read a fascinating New York Times magazine profile of the world's best-selling author James Patterson (Along Came a Spider and the other Alex Cross novels, to start with). Patterson is a virtual writing factory, hiring many co-authors to churn out his best-sellers. He came from the advertising business and is his own best ad man, the profile notes. Remember the guy who buys a number of hotdog stands and leases them to his friends? This ensures a steady stream of income, much the same way Patterson can afford to live on an island in Lake Worth, FL, near Palm Beach. He's a cash cow to his publisher, Little, Brown and Co.

You say you're a loyal, faithful, dedicated employee, bringing value to your employer. Think again, buster! There's somebody in China or India who can do your job. One of the best examples I've heard of is a newspaper in Pasadena, CA that outsourced its copy editing tasks to a firm in India. Copy editors are one of the most important, if unsung, people at a newspaper, but soon their profession will be as dead as the dinosaurs, in the States, at least. Judging from the spelling errors and factual goofs in many online news sites that I read, copy editors are not on the employee roster.

If you're tired of the long commutes and being tied to your desk like an ox yoked to a cart and you have ideas whirling around your brain that you think could create new income and freedom, No More Dreaded Mondays might just be the catalyst that will change your life. You don't even have to quit your job; you can start your dream career in your spare hours -- hours that could very well become your full-time new career.

Author's web site for comments and up-to-date resources (there's a big list of them in the book)  www.NoMoreMondaysBlog.com

Ron Paul: Fed Threatens Depression, $100 Bills Worthless

Copyright © 2006-2010, Basil & Spice. All rights reserved.

By Loyd Eskildson

National governments will issue an estimated $4.5 trillion in debt this year, almost three times the average for mature economies over the last five years, says Daniel Fisher in Forbes, 2/8/2010. Meanwhile, U.S. debt increased by 50% to $12.3 trillion since 2006. Fortunately, repayment pain is not yet felt because U.S. interest rates are so low. Most states are also having debt problems, especially due to unfunded pension and health care liabilities. Fisher then spends the rest of his article speculating on possible inflation and lower economic growth consequences of our debt, but offers no solutions.
 
The 'bad news' is that Fisher significantly underestimates total U.S. debt ($56 trillion after including Social Security and Medicare, per David Walker, former U.S. Controller General, in his book Comeback America), and does not clearly quantify state-level debt (another $500 billion, per the GAO) or the estimated costs of repairing our infrastructure ($2.2 trillion). The 'good news' is that there's a straight-forward path to solving these issues - benchmarking other nations en route to reducing our expenditures by nearly $3  trillion/year. The following is a brief overview of how to begin, presented in order of descending economic impact.
 
1) Reduce our expenditures on health care from 17% of GDP to Taiwan's 6%, saving $1.5 trillion/year. Paths to accomplish this include:

*Shifting physician pay from predominantly fee-for-service (encourages extra utilization) to salary (aka the high-quality V.A., and Cleveland, Geisinger, and Mayo Clinics),

*Using regulation to reduce our average charge/service by about 50% (much easier to do while also reducing utilization),

*Providing physicians with easy computerized reference to the latest best practices information - especially for the 5% that account for 44% of all spending, ending anti-trust exemptions for health insurers,

*Negotiating with drug companies for substantially reduced Medicare Part D costs,

*Ceasing to provide extra reimbursement for 'rework' caused by poor quality.

Creating a single-payer system would also help, though is not imperative. How to get from 'here to there'? Follow Taiwan's 1995 restructuring example.
 
Some additional health care comments:

*President Obama is correct stating that reforming health care is essential to fiscal soundness. Not only would this reduce future state and federal expenditures (source of 45% of total health spending), but halving the biggest component of our $56 trillion in unfunded liabilities as well. 

*Reform would make covering the current 15% uninsured more feasible politically, saving the 18,000+ lives estimated lost due to lack of insurance.

*Facilitating physician access to best practices information as a means of reducing costs, along with increased use of hospital intensivists for ICU care and computerized drug ordering, would save most of the nearly 100,000 lives estimated lost due to medical errors (Institute of Medicine, The Leapfrog Group).
 
2) Reduce our expenditures on defense and Homeland Security from about 7% of GDP (equal to or greater than all other nations combined) to the world average of 2%, saving about $700 billion/year. Accomplishing should include eliminating all/most overseas bases (865 in 130 nations, some for 70 years), ending the 'War on Terror' (WOT), and consolidating the current 16 separate government intelligence agencies, perhaps to four.

Rationale:

*China is making money in Afghanistan and Iraq, while we bleed. 

*The problem is spreading to Somalia, Sudan, and Pakistan, at least partly because Muslims are not happy with our WOT.

*Few Americans feel safer now than in 2001. 

*We can't fight everyone - of the 48 fastest-growing countries, 28 are majority Muslim or have Muslim minorities of at least one-third.

*Having sixteen separate intelligence agencies cannot avoid extensive duplication of effort, coordination problems, and time wasted in endless meetings.
 
Especially important to rationalizing U.S. defense expenditures is slashing the U.S. Navy and Air Force. Our Navy's battle fleet tonnage is greater than that of the next 13 largest navies combined (Wikipedia), while ICBMs from China and Russia, silent submarines, and sea-skimming missiles with up to a 150 mile range (China and Russia, soon also Iran) make the U.S. Navy's 11 main battle groups and aircraft carriers extremely vulnerable; we would be much better served by atomic submarines with cruise missiles and ICBMs.

As for the Air Force, Predator drones ($4.5 million) have proven more useful in Afghanistan, and much cheaper than the planned $299 billion for 2,400 F-35s would be at $125 million each. (By 2013 the Air Force expects technology to permit one pilot to fly three Reapers, a Predator successor, and even four in a crisis; it already is training more drone than cockpit pilots - Washington Post 8/11/09.)
 
Finally, it is essential that we recognize that Osama bin Laden and others, using asymmetric warfare, are bankrupting us. His 9/11 expenditure of less than $500,000 has triggered a $3+ trillion response (6,000,000:1 leverage). A shoe-bomber attack probably costs terrorists less than $2,000; protecting against it costs hundreds of millions over the years. Don't bet on the terrorists running out of money first. 

3) Reduce our expenditures on education from about 6% of GDP to Japan's 3.6%, saving nearly $500 billion/year. Paths to accomplish this include accepting the decades of research showing that increased expenditures do not provide sustained improvement in pupil outcomes. This is further substantiated by our having increased inflation-adjusted per-pupil spending by a factor of 2.5 times in the past three decades, without demonstrable benefit.

The key, per Japan, China, and South Korea is parental and pupil motivation, accentuated by high-stakes testing for college admission. Thus, expenditures on public schools can advantageously be decreased by about half to levels comparable to most private schools. Similarly, we can:

*'Encourage' colleges and universities to cut their expenditures in half by doing away with most funded non-science research  (most of their peers don't value the results of this research enough to even cite it),

*Return to professorial class-loads and support staff levels of the 1970s,

*Encourage two- and three-year programs (six is often required today),

*Encourage more Advanced Placement testing in high-school,

*Reduce the proportion admitted to college but unlikely to graduate (about half fail to do so).
 
4) Reduce our expenditures on prisons, the Departments of Agriculture, Commerce, Health and Human Services, Labor and State, NASA, and other discretionary spending by 50%, saving about $120 billion/year. Sample rationale:

*The U.S. has about 5% of the world's population and 25% of its prisoners (largely minor drug violators). Aside from our becoming the world's leading jailer, the 'War on Drugs' still cannot establish its effectiveness (National Research Council).

*Between 2001-2006 the Washington Post found that at least $1.3 billion was paid to farmers who had planted nothing since 2000; worse yet, economists generally agree that farm supports both violate NAFTA and have driven most of the increased influx of illegal immigration from Mexico.

*It is incomprehensible why the State Department needs eg. 5,000+ personnel in Baghdad - worse yet, our aid to Israel is directly linked to inciting terrorism (Osama bin Laden). (The cumulative and indirect costs of our aid to Israel is probably at least $6 trillion - includes the Arab Oil Embargo and 9/11.)

*We've already put a man on the moon - doing it again is silly, especially by ourselves.

*What does the Federal Reserve, another example, need 20,000 employees for?
 
Bottom-Line: Other nations have proven that they can function quite well spending much less than the U.S. on government and health services. Leading U.S. firms have proven that using benchmarking to reduce costs cannot only reduce costs, but improve effectiveness as well - but only through massive change. Incremental tools such as hiring and budget freezes, management exhortation, cutting or eliminating minor programs, efforts to improve efficiency, employee suggestions, improved motivation, automation, re-engineering, and privatization cannot accomplish the job. The good news is that many reductions have synergistic benefits by reducing problems elsewhere. Regardless, our foremost competitor, China, has proven massive change can be accomplished, with worthwhile results. It is time for America to do the same.

Loyd Eskildson is retired from a life of computer programming, teaching economics and finance, education and health care administration, and cross-country truck driving.  He's now a reviewer for Basil & Spice.

Review: Too Big To Save By Robert Pozen (Wiley/Nov 2009)

Copyright © 2006-2010, Basil & Spice. All rights reserved.