Incognito, Nixon, Paterno and the Pope

Last week, I met a remarkable woman, a newly appointed CEO.  We were discussing her institution, a non-profit healthcare provider serving the underprivileged community in the inner city.  She confessed that she and her management team were struggling to re-define their business strategy.  When I asked her about the leadership culture, she professed that she was proud of the culture that her team embraced.

I probed a bit and she told me (I’m paraphrasing):  “we get together on a regular basis to talk about what we’re doing and we remind each other that our mission is more important than our individual needs.” 

It’s often said that culture starts at the top and that’s how it happens. 

 

Miami Dolphins Incognito and Martin

Much has been written about how the 300 pounders in theMiami Dolphins locker room treat one another.  The pundits, including a lot of league veterans, have told us that the team’s leadership has failed if they didn’t know what was going on.  Culture starts at the top after all.  But, while the criticism is well aimed, it strikes me that the pundits deserve a 15-yard penalty for “piling on”.

The ex-players and coaches and the sports journalists from ESPN and other news outlets are part of the community – the league, the veterans, the media – that benefits from the NFL’s continued success.  It’s in their best interest to describe the event as an isolated incident and blame local management.

We’ve seen it many times – Nixon’s White House, Penn State and, perhaps the most egregious of all, the Vatican. 

Nixon addressing the press

Cover-ups are instinctive.  Self-deception is the rule not the exception, which is why so many decision makers behave in ways that will likely hurt them and others in the long haul.  It’s why so many students and alumni of Penn State came to Joe Paterno’s defense.  It’s why so many Catholics continued to admire Pope John Paul II even after it was revealed that the church had covered up the child molestation scandal for decades. 

Cover-ups are strategic too. Those conspiring at Penn State were rational in their belief that adverse publicity would destroy careers and the reputation of their institution.  Unfortunately, it’s not unlike low interest loan.  Sooner or later there’s a balloon payment due. 

 

Sandusky with Paterno

In my days as a naval officer and as a midshipman at the Naval Academy, we often debated whether leaders are born or made.  It’s a variation on nature vs. nurture, often discussed in child rearing.

There are people who are natural born leaders.  There is an indefinable aura about them.   Political and military leaders like Colin Powell and Nelson Mandela come to mind.  Business leaders like Meg Whitman and Steve Jobs also fit the mold. 

But, many good or even great leaders lack charisma.  Former Defense Secretary Robert Gates is a great example.  A quiet even unassuming man, he gave up an easy glide into retirement at a Texas university to help President Bush restore leadership and integrity to the Pentagon.  And, he stayed on when asked by President Obama to ease the transition to a new administration in the midst of two wars.  Clearly, he viewed the mission as more important than his individual needs.

And, it’s fair to say that not all charismatic people are great leaders as anyone who has read Walter Isaacson’s biography of Steve Jobs knows by now. 

Leadership skills and behavior can be learned.  And, it’s important to learn those skills as you grow and develop in your life and career.  You need to know what to do, how to respond, how to lead before the crisis hits.  In the end, you are what you do, especially in the midst of chaos.  And, what the conspirators in Washington, University Park and Rome have done is unworthy of anyone who aspires to leadership. 

Pope John Paul II

As for Miami, time will tell.  But, the central conundrum of crisis management is that doing the right thing doesn’t necessarily save the institution or the people running it.  That’s why it’s so hard for top management to come clean.  What would have happened to the administrators at Penn State, the top guys in Nixon’s White House or the Pope’s Cardinals and Bishops if they had done the right thing?

They would not have been lauded for their honesty.  Whistle blowers usually don’t fare well in modern society.

Our psychological need to think well of ourselves combined with our instinct for self-preservation makes it much more difficult to do what’s right, what’s best for the institution we represent.

That’s why it’s so rare that we meet someone who places mission above his or her personal needs.

WHO WILL LEAD? 

It's Not a Website... It's a Health Plan

My birthday is in January; so I find myself reviewing my new health insurance options during the open enrollment period for those covered by Medicare.  (Yes, that’s right.  I will be 65.) 

Last week, I attended a seminar by a local insurer.  The presenter covered all the options – Medicare Parts A and B, Medicare Advantage, etc. – concisely and congenially.  It was well worth my time having come away from the various government and AARP websites totally confused.  Obamacare will cause premiums to rise.  Aetna CEO Mark Bertolini says it will cost his customers about $1 Billion per year.  But, I am not complaining.

Regular readers know that I believe that government should not intervene in private enterprise.  So, why am I looking forward to Medicare?

Well, my premiums will go down 80% after I sign up.  Moreover, I have grappled with the free market for private individual insurance and I’m familiar with its flaws.  An insurer has turned me down because my blood pressure is below normal.  My doctor says I am too healthy.  However, there was no medically qualified person at the insurer to whom I could make my case.  Just a faceless bureaucracy following a set of guidelines.

Still, I got a chuckle when NBC broke the news about people having their policies cancelled because Obamacare requires insurers to offer only those policies that meet new standards.  The news story featured a middle-aged guy whose premium went up 400% in order to meet those standards, which include coverage for, among other things, maternity. 

Hey, I could afford to chuckle.  I have Medicare!

The hodgepodge of regulations that technocrats will shape from this onerous 2500+ page law will undoubtedly cause us more grief, just as the Healthcare.gov website has in the first few weeks of implementation. 

By now, we shouldn’t be surprised that the government would spend $375 Million of the taxpayers money to build a website that doesn’t work.  So what if that’s more than double what Apple invested to develop the iPhone?  Remember those $600 toilet seats on Navy submarines?

What’s the big deal?

The big deal is that the law doesn’t do what its headline says it will do – make healthcare affordable.  The President has talked about “bending the cost curve”, whatever that means.  But, mandating that young folks who can’t afford health insurance buy it or be penalized doesn’t bend the cost curve.  It just adds people who don’t go to the doctor to the insurance pool with the intent of lowering the average premium. 

The real driver of healthcare cost is the fee for service (FFS) payment system.  From an economist’s perspective, if you provide a financial incentive for doctors to perform medical procedures, they will perform more procedures – especially when there is a bottomless pit of money at the other end of the claims process.

It gets worse.  The best defense against a medical malpractice suit is to follow (or perhaps “over-follow”) published protocols on each patient.  You guessed it.  More billable procedures.

However, there’s hope.  The Affordable Care Act authorizes the creation of Accountable Care Organizations (ACO’s) and healthcare providers are beginning to experiment with this model.  Payment would be based on the quality of care provided rather than the amount of procedures performed.  The financial incentives and disincentives are being studied with results that are, to date, inconclusive.

The Center for American Progress suggests other alternatives such as Bundled Payments, wherein providers would receive a single payment for each patient based upon medical history.  Patient centered medical homes would restructure primary care to focus on preventive medicine, patient education and coordination among healthcare providers.  It would encourage preventive care rather than excessive treatments.

Again, these alternatives to FFS are great ideas as yet untested.  But, they represent potential free market solution within the government’s framework.

All of this confusion and complexity could easily lead one to buy into the liberal Democrat idea of Medicare for all.  Medicare works well for seniors (and, if you don’t believe me, see what happens if you try to take it away).  Why not extend coverage to every American?

Well, you have to ask how we’ll pay for it.  By many estimates, the Medicare Trust Fund will go broke before Baby Boomers go on to their great reward.  Clearly, the current 2.7% payroll tax is insufficient to extend coverage to the population at large.

No doubt, there are many who would propose raising taxes to close the gap.  And, certainly the half of the population that receives subsidized health insurance would sign up for that.  That includes me – I’m on Medicare!  So, it would be easy to tax the other half, wouldn’t it? 

Wait a minute!  That includes me, too!

WHO WILL LEAD?

Don't Send Your Kids to College

Everyone from Occupy Wall Street to those who occupy the White House have noticed the widening of the gap between rich and poor.  It has fueled resentment throughout the country beginning with the TARP bailout of the Too Big To Fail banks and the tone-deaf tendency among its recipients to continue to pay multi-million dollar bonuses to their executives.

There will always be people who get rich on Wall Street. The problem isn’t that bankers make too much money and the solution is not for the government to redistribute wealth. 

The greater challenge is the economic prospects of the middle class.  A new study by the Organization for Economic Cooperation and Development (OECD) concludes, “with manufacturing and certain low-skill tasks increasingly becoming automated… the demand for information-processing and other high-level cognitive and interpersonal skills is growing”.  Throughout the 23 industrialized economies included in the study, “literacy, numeracy and problem solving skills” are lacking.  By now, we shouldn’t be surprised that the United States ranked 21 out of 23 in these critical skills. 

A few weeks ago, I wrote about manufacturing in the United States (The Ford Fusion and How the Media Got It Wrong (Again)).  I cited a study by the Boston Consulting Group (BCG) that projects that the US will again be a global center for manufacturing due to lower costs of labor, energy and transportation.  But, it’s not a bed of roses.  Among the risks cited by BCG is the skills gap among American workers. 

But, what skills are we talking about?  Yes, it’s true that our primary and secondary schools are failing us.  But, would fixing that problem solve the larger problem of a skills gap?

Don’t look to the government, the school board or the teachers’ union for the solution.  If you’re the parent of a school aged kid, the place to look for a solution is the mirror.  Start by second guessing an ingrained assumption.  Sending your kid to a four-year college will not guarantee him or her a good job.  College grads now handle our customer service complaints, check us in at the Marriott and help us setup our iPhones in the Apple Store.  None of those jobs are high paying nor are they the first step on the corporate ladder to the executive suite.  And, they don’t pay enough to raise a family or pay off student loans.

To solve the skills gap, we need to expand our idea of what constitutes an education.

Corporate executives can find all the engineers, financial analysts and marketing professionals they need by sending their recruiters to the top universities.  And, they do.  There is a well-established process by which this type of recruiting has been taking place for the last 60 or 70 years.  So, if your kid is an A student, by all means, send them to the best university you can afford. 

But, finding employees with the skills to support computer networks, assist on a medical research project or operate a CNC machine is a greater challenge.  None of these professions truly require a four-year degree.  They require technical skills coupled with a work ethic and personal habits valued by employers. 

The answer to this challenge will spring bottoms up from companies working with local governments and institutions like community colleges. 

In Texas, Houston Community College provides training and certification to work on oilrigs to satisfy growing demand in the energy industry.  In Minnesota, Anoka-Ramsey Community College works with local manufacturers to provide the specific training needed to work in a modern factory -- geometric dimensioning, process control and measuring tolerances.  A non-profit institution, Corporate Voices for Working Families has developed a set of best practices – a blueprint, if you will – for employers to work with local colleges and community colleges with a goal of increasing employment among graduates.

College tuition is increasing 8% per year, well more than inflation and certainly more than real wages, which have remained flat for more than a decade.  Parents are right to question the value of a degree that leaves them or their children saddled with debt.  But, we shouldn’t expect the solutions to come from Washington or the state capital.  Industry will drive the demand for training and education to close the gap.  Competitive enterprises will develop the programs to satisfy their needs.

It all starts with the students, the job seekers.  They must take responsibility for demanding the skills necessary to get a good job with strong career prospects.  They must have the support of those who pay most of the bills for their education – their parents. 

Blaming institutions of government for their failures will not get your kid a good job.  Taking responsibility for the outcome, discovering what employers want and getting the training and education you need, will.

WHO WILL LEAD?

Hey, Congress! You Are Asking the Wrong Question!

The brinksmanship in Washington has a lot of people upset (including me).  But the reasons differ depending upon where you sit and what relationships you have with the federal government.  Indeed, not everyone is upset.  A client told me he was in the middle of an IRS audit when the government shut down.  He wasn’t upset when the auditors vanished. 

A conservative friend of mine is upset with the direction of the Republican Party.  He quoted Napoleon over lunch.  In his view, Obamacare will collapse of its own weight and Republicans would be wise to let it.  “Never interrupt your enemy while he's making a mistake. That's bad manners,” quipped Napoleon.

However, Wall Street Journal economics editor David Wessel extols the virtues of Obamacare in an Op-Ed piece called “Obamacare – A Game Changer in the Making?” 

The Economist tries to elevate the debate a bit, pointing out “when you are brawling on the edge of a cliff the big question is not ‘Who is right?’ but ‘What the hell are you doing on the edge of a cliff?’ ” 

Meanwhile, Joshua Green asserts that “Republicans Are No Longer the Party of Business” in Bloomberg Businessweek.  Green starts with an anecdote about a Tennessee businessman whose company makes furniture.  He says, “It’s as if House Republicans are playing suicide bomber with the U.S. economy.”  People who make furniture are affected by a slow down in government-funded mortgages. 

None of them are asking the right question. 

Why is the government in the mortgage business?  For that matter, why are they in any business?

One could challenge a lot of things our government does.  The government is the largest landowner in the nation.  By some estimates it owns approximately $128 Trillion of real estate and mineral rights. 

Sell 10% of it and our debt problem vanishes.  Sell another 10% and no one pays taxes for the next three years.

The federal government also distributes between $10 Billion and $30 Billion in farm subsidies each year.  Originally intended to provide support to poor farmers who might again suffer the trials of the Great Depression and the Dustbowl, it now provides support to absentee landowners who are millionaires many times over.  The bottom 80% of recipients gets an average of $587 per year. 

Try to eliminate the subsidies and you’ll run into a buzz saw of mostly Republican congressmen who fight to protect the economic interests who send them back to Washington every two years.

Changing this paradigm doesn’t help to resolve the current budget and debt ceiling crisis.  However, it does go to the core of some foundational principles.

Americans take a lot for granted.  We expect the water from our faucets to be potable, the electric power grid to be reliable and the transportation systems to be safe.  We expect our military to be strong, our economy to be prosperous and our institutions to protect us from ourselves.

We have the luxury of those expectations because of the last 150 years of prosperity.  Yet, we have lost track of what got us here. 

The principles of economic freedom – predictable policy, rule of law, strong incentives, reliance on markets, limited role of government – are no longer on the minds of those who govern.  So, corporate interests have adapted.  In a world where lobbying for favorable tax and regulatory treatment can have a dramatic effect on your bottom line, big businesses benefit by focusing on Washington.  Interrupt that activity and the muddle that is the media somehow draws the conclusion that “Republicans Are No Longer the Party of Business”.

In the lingua franca of today’s political environment, the term economic freedom sounds conservative and Republican.  However, since WW II, the violators have come from both parties.  Starting in the 1960s, Presidents Kennedy, Johnson, Nixon, Ford and Carter approved a succession of laws, regulations and restrictions that violated the core values of the economic system that underpins our economic strength.  Perhaps no violation was more egregious than Nixon’s imposition of wage and price controls in 1971. 

An America that transforms itself from a free market juggernaut to a government that funds its favored interests will not maintain its economic leadership.  Instead, we will continue to be mired in the current slog of low economic growth rates and expansionist monetary policy. 

A reversal of that course will tread on the entrenched interests of big corporations who have benefited from the results of their influence on electoral outcomes.  Yet, that is what’s necessary to restore economic growth, the strength of the middle class and continued American hegemony.  The only question is…

WHO WILL LEAD?

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?