The Russians are coming; the Russians are coming!

When I was a kid, we had A bomb drills in school.  The fear of a Soviet sneak attack was that great.  It was part of our national psyche.  My parents didn’t build a bomb shelter in the backyard but we wouldn’t have been alone if they had. 

When the Soviet Union collapsed, it revealed the weaknesses of an economic and political system that ignored sound principles of economic freedom and human rights.  We have had little to fear from Russia since.  Not only are they weak economically but also they are weak militarily. 

The Russian sphere of influence has shifted east and west for centuries.  It has never extended so far to the west as it did during the Cold War and it has never been so far east as it is now.  The Russians would like to change that. 

Toward that end, they have struck deals with countries like Ukraine, Poland and Germany to sell them oil and gas. And, they haven’t been shy about using their customers’ reliance upon them for energy as a means to influence international events.  Energy exporting nations in South Asia and the Middle East are their economic competitors.  So, they seek to extend their sphere of influence southward as well. 

By contrast, the United States is an economic and military juggernaut, a maritime nation whose integration into the global supply-chain (and our ability to keep it secure) makes it in everyone’s interest to be our ally. 

So, how does Russia end up taking us to school over the handling of Syria?  Or, to put it differently, why we are playing a weak hand when we have a strong one?

The U.S. has a conflict between ideology and military strategy.  Our beliefs – the why of what we know we should do – are based on human rights, the manifestation of which, at least in the case of Syria, is our opposition to weapons of mass destruction.  Moreover, we’ve been sensitized to the specter of mass genocide.  Many people – despite their opposition to war – think we could have prevented the death of hundreds of thousands if we had acted sooner in Rwanda and Bosnia.

So, there is constant friction between what we believe and what we do.  Firing missiles, dropping bombs and sending in the Marines is not the best way to promote human rights.

Our original strategy vis-à-vis Syria was to strike in a limited way.  It would not have had a big effect.  It wouldn’t have destroyed the chemical weapons and wouldn’t have toppled the Assad regime.  It would have been painful while it lasted but not debilitating to a dictator who is in the middle of a long war and who would easily be resupplied by his Russian allies. 

So, why do it?  Like most diplomatic moves played out on the world stage, it’s a gesture.  A gesture to express our unhappiness. 

Unfortunately, the result was to send a signal it doesn’t really matter if we are unhappy!  Our military power should be feared but our diplomatic waffling undermines our intentions. The outcome has been to hand Russia an opportunity to appear to be our equals (or perhaps our superior) by brokering a solution that allows us to back down in the face of popular opposition. 

Our President seems unable to decide if he wants to be George W. Bush or Jimmy Carter and is, therefore, ineffective at being either.  Nations with a strong interest in becoming reliable allies in the region – from Azerbaijan to Turkey to Poland – may now see us as unreliable partners.  The image of Russia forcing us to back down and appearing to be our equals for the first time since the Cold War is bound to have an influence for a very long time. 

International diplomacy is a game of carrots and sticks.  We should reserve our carrots for those who mirror our values and reserve our sticks for those who pose a serious threat. 

The economic and military power of the United States provides us an opportunity to LEAD.  Our values, our economic and political systems are based on human rights, economic freedom and the rule of law.  Promoting these values and helping our allies develop liberal institutions to implement them will lead to global stability and prosperity.  Our long-term national and economic security depends upon it.

WHO WILL LEAD? 

The Ford Fusion and how the media got it wrong (again!)

2013 Ford Fusion

I had a pretty intense discussion with a guy from Detroit at a dinner party a couple of years ago.  Okay, so some would say it was more of a debate.  Well, it was an argument.

Anyway, the Detroiter, a visitor to South Florida, was decrying the tendency among the locals to buy foreign cars.  “Why not buy cars made by the Big 3 and create jobs in the U.S.?” he argued.  I might have asserted my preference for the design, features and quality of foreign cars; but I didn’t.  Instead I pointed out that it’s not so easy to figure out what’s a foreign car and what’s a domestic car. 

The Big 3 have focused their investments on foreign markets while manufacturers of “foreign cars” have been investing in factories in the U.S.  Capital investment creates jobs.  So, would you rather buy a Ford Fusion made in Mexico or a Honda Accord made in Ohio?

Well, pretty soon, the question may be moot.  Ford has announced that its Fusion sedan will no longer be made only in Mexico.  They will be expanding their capacity to produce their best selling car in Michigan. 

Ford’s decision is only one example of manufacturers investing and creating jobs in this country.   The media reported this story as though Ford was living up to a promise they had made to the unions to add 12,000 domestic jobs by 2015.  As usual, the media got it wrong.

I’m not saying that Ford didn’t make that promise.  I’m saying other forces drove their decision.  U.S. exports have been growing seven times faster than the economy at large since 2005.  Most of that growth has come at the expense of other large manufacturing economies in Europe and Japan.

To understand this, you need to wrap your head around a new set of economic facts.  By and large, Americans (fed by an uneducated media) focus on jobs and wages. It’s something we can all understand.  But the cost of labor in the economy at large is driven by productivity.  And productivity improves because of automation and labor regulation.  Robots populate automobile assembly plants where workers used to stand.  And, American employers have more flexibility than their European and Japanese counterparts to lay off workers when economic conditions dictate.  In Germany, for example, rules governing notice to workers and requiring severance pay drive costs to shut down a factory.  Lay off 1,000 workers and it may cost you more than $40 Million in severance in addition to mandated worker training and asset write-down rules.

If you are running a global manufacturing company, you have to consider these factors before you invest in a new factory.  So, in a way that some may consider perverse, the absence of those rules in the U.S. is creating more jobs.

A new study by the Boston Consulting Group (BCG) identifies the key drivers of this trend as lower cost of labor (when adjusted for productivity), transportation and electricity.  By their estimates, leading industrial nations – the U.K., Germany, France, Italy and Japan – will have costs ranging from 8 to 18% higher than the U.S. by 2015.  China? Their costs will be lower but the gap is closing.  At 95% of U.S. manufacturing costs, the added transportation cost to get products to our shores erases their advantage completely.

BCG cites some interesting examples of foreign manufacturers investing in plants here so they can export to other countries.  Chinese computer giant Lenovo has opened a plant in North Carolina.  Toyota is exporting Camry’s from Kentucky to China and Russia.  Rolls Royce is making aircraft engine parts in Virginia.  France’s Michelin is building a new factory in South Carolina. 

For sure, there are gaps that need to be addressed.  Technical education is one.  The shortage of degreed engineers and technically qualified factory workers will only grow as time goes on.  Importing engineers from other countries requires reform to our immigration policy.  But, there are ways to address these concerns.

Siemens AG, a German manufacturer of telecommunications equipment, has built a factory in Charlotte, NC.  Their decision to locate there was the result of state and local governments investing in infrastructure and working with local junior colleges to develop programs that will give local workers the skills they need to work in Siemens’ factory. 

Despite the valid complaints of many business people about government regulation, the U.S. still has a high degree of economic freedom.  Capital seeking a high return is coming back to the U.S.  But, the needed reforms to both education and immigration policy are tied to emotional debates between the hard right and the hard left.  A deadlock, as we know, that will not be broken soon. 

WHO WILL LEAD?