Where Do We Go From Here?

Like some of you, I saw the State of the Union speech the other night.  And like some of you, I was hoping for great things from the president.  While he did list a series of good things about the economy (i.e., corporate profits are up, the stock market is back trading at numbers investors probably thought they wouldn’t see again in a long time, and by and large the recession is pretty much over), he didn’t mention the fact that so many people do not have jobs.  He did mention a couple of our largest economic competitors (i.e., China and India), but didn’t really say in so many words that because the price of labor in those countries is so low, and many of its citizens are just as educated as Americans, that corporations who are now flush with cash are not hiring at home.  Hell, even small businesses (whom we often hold up as beacons of small-scale capitalism that is virtuous) isn’t driving the recovery like they ususally do. Why? Well, we have a bit of “Let’s bring the price of labor way down” in the U.S. among small business owners.  If you want to know what’s going on in the labor market, start reading the business pages and periodicals.  In Bloomberg Businessweek (January 10-January 16, 2011) there was an article entitled “Small Businesses Keep a Lid on Hiring” that really summed up what’s going on — that is to say, why the so-called recovery hasn’t put much of a dent in unemployment.  They interviewed Josh Frey, CEO of a company called On Sale Promos, who said after laying off six out of seven full-time employees (and then hired them back as contractors), he saved a ton on benefits, taxes, and all that other stuff that goes along with full time hires.  When asked if he was going to hire more full time employees once conditions really improve, he basically said he wouldn’t because “I’ve never been more profitable.”

Republicans say they way out of this mess is to cut spending at the federal level, much like Josh Frey cut his way out of the economic doldrums into profitability. However, the cuts they want won’t make much of a dent in out debt or deficits.  Why? Because they won’t cut the military budget, Medicare, and Social Security to the extent that will make a sizable difference in the budget.  Instead, they will just make bold moves to starve the parts of the beast they can’t stand (i.e., helping the poor, the elderly, parts of the middle class), but because of the nature of the system, it will mostly be symbolic.

The president said that a combination of tax cuts and spending increases (i.e., “investments”)  in new industries where jobs can’t be exported (well, not yet) will create long term prosperity for the middle class.  Investments are risky things (ask any business type who’s thinking about a new, untried venture), but it does show a certain amount vision and bravery.  I mean, investing in new ventures is not an uneducated gamble.  Rather it takes a lot of research, thought, and yes, creativity to launch something untried.  When Obama said “In America, we do big things” he was highlighting the, yes, progressive aspect of our culture that, well, does big things.

Facebook and Google are every day products many of us use, but one cannot deny that they are big things in our lives.  The ability to connect with people through a central hub is not new, nor is the ability to search for information.  But the fact that we can now do these things though the portal of a computer connected to the Internet. If you can, just flash back 25 years ago, and think about our ability to connect with people we knew a long time ago.  Well, there was the telephone and 411, and if you wanted to search for information, you would go to a library. A telephone and the library.  Both can achieve the same results as Facebook and Google (to an extent, that is), but think about how easy it is to find someone online and connect with them nowadays.  And while you’re thinking about the ease of friending, think about finding information about what you’re interested in., think about how you don’t have to go to library anymore.  Now you just type in a search field and hit a button and…it’s delivered to you in a matter of seconds. That’s a big thing that was brought about not because someone cut the budget to innovation. Rather, it was because someone put real money into an idea that was innovative. Whole industries have risen from these simple things, and what Obama wants to do with something like energy is innovation based not on some flight of fancy, but rather on technologies that have been around for a long time, but haven’t been developed into the mainstream.  Now that Obama wants to invest in these technologies, it’s seen as a Big Government waste that will accomplish very little.

Small businesses are going to cut their way to profitability, but it’s not a business model that will create long term profits simply because the more the business community adopt this model, the more they starve their customer base of cash to spend on their products and services.  You simply cannot have declining wages year after year (with tight credit from banks) and expect consumers to spend like drunken sailors.  The only real long term way of creating strong consumer confidence is to have an economy where wages are increasing for the middle class. That’s because the middle class will spend more of their earned income each month — which creates a higher velocity of money going through the economic system.

Now that the political dynamics are very different in Washington D.C., it’s difficult to know what’s going to happen in the next two years.  But one thing’s for certain: if you care about your well-being, you have to make your voice heard to those who make the decisions. Or as Woody Allen once said, “80% of success in life is just showing up.”