Millennial Skips

Last night I had the opportunity to speak with two young people who are supporting Senator Obama. I was interested in their justifications for that support. They disagree passionately about the war in Iraq. But they also are concerned about our continued expansions into international trade. What concerned me most about our discussion was they seem to have skipped some basic understandings about economic issues that are fundamental to our future.

I remain undecided about this election, although I am likely to be motivated as a voter on three issues - Trade, Immigration and Taxes. While I am impressed with Senator Obama's rhetorical skills I am less sanguine about his positions on these three issues. On immigration, the differences between Obama and McCain and Clinton are minimal. (Although McCain has taken a leadership position on it.) And Obama and Clinton seem to neglect the long term implications of moving the American tax system back by increasing rates, when most of the rest of the world is coming to the conclusion that flat simple taxes make more sense. But since Ohio, both democrats have moved away, in my opinion in a pandering manner, from the position that the Clinton administration took on trade. Both want to re-negotiate NAFTA and forestall any further expansions of trade. I believe that it would be a huge short and long term tactical error for us to withdraw from the regime we have supported since Bretton Woods.

What struck me about my conversation with these two people was the depth of their feelings and their denial of the benefits of trade. They expressed no particular concern for attempts to roll back NAFTA. They both seemed to think that Walmart, because of its market power, was somehow evil. One of the two was particularly concerned about Rubbermaid and their problems with negotiating with Walmart. The person argued that Walmart had forced what one business magazine called "one of America's best companies" into a negative position and a merger. That is an argument that was first raised on a Frontline documentary which claimed that part of the reason for the merger was based on the market power of Walmart. Based on a review of the financial documents of Rubbermaid at the time, the Frontline story is inaccurate at best.

Rubbermaid started life as a curtain rod manufacturer. When it began to grow it did so by acquisitions. It made a couple of good moves and then did a merger with Newell (Newell acquired Rubbermaid) and the merger, as many mega-mergers are was a disaster. The Company's 10-Q report at the time of the merger suggests that as with many other companies who try to grow by acquiring new lines, the process of bringing diverse units together can be daunting. But they argue, not altogether convincingly that the merger would improve the ability of the company to compete. For example the 10-Q stated "Due to the diversity of its product lines, the Company does not have material sensitivity to any one commodity. The Company manages commodity price exposures primarily through the duration and terms of its vendor contracts." Translated out of corporate speak, "we can compete in the global marketplace because of our size." Not all observers bought this logic. An article in the Management Accounting Quarterly at about the time of the merger was skeptical of the benefits that would come from this kind of pooling. It commented in part such transactions "Understate(s) the assets of the merged companies; Understate(s) the stockholders’ equity of the merged companies; and Overstate(s) net income by avoiding amortization of goodwill and calculating depreciation expense based on book value rather than current value." From the MAQ article, there is some reason to believe that the challenges for Rubbermaid came not with Walmart but with the very idea of merging these consumer product lines. Bigness was a problem, but not the size of Walmart but the simple idea that by adding assets in the company complicated its operations.

The case for continued improvements in trade is strong. Despite the protestations of trade unions the manufacturing share of the economy actually increased in recent years, although total manufacturing employment declined. (The argument for maintaining the share would be similar to an 19th century argument that we should keep people on the farms because the percentage of workers employed in the agricultural sector was declining.) Ultimately, the benefits from trade relate to comparative advantage or market specialization. The US economy has been able to move from high, but declining compensation, manufacturing jobs to high value jobs in new parts of the economy. Thus, we do not manufacture iPods but our ideas propel them to be made.

But there are costs attached for all this vibrancy. As Gordon Moore said about a year ago, if American employers cannot find workers who come up to the standards of international trade, then they will look elsewhere. Moore said in a speech to Achieve (which is an organization dedicated to improving American education) that Intel never needed to hire another American engineer. That is true, and we should celebrate it. Having more developed economies around the world will benefit us all. But it also means that the American economy which was in a dominant position in the last half century cannot afford to sit on its laurels.

The certain path to a withdrawal of the US from its leadership in global trade is a lower standard of growth. It bothers me that these two very smart young people do not seem to get that simple fact. We can compete, and understand that the assumptions of the past will not always guide us well. Or we can opt out and become a large and not prosperous side street in the economy of the world.