The Obama crash

The media are not doing president elect Barack Obama many favors.   The fawning over Mr. Obama during the campaign was rightly criticized as cheer leading. The fact that it continues after the election will lead to disappointment, disillusion and a very tough time for the country and Obama.

The praise and analysis have been a mile wide, and less than an inch deep and the coming crash could be disaster writ large on the history of America. 

I'm not speaking of an economic crash, but something even worse.  A crash in optimism that will rival a heroin junkies withdrawal.  President Obama is taking over an economy that is on the rocks, but appears to be leveling out a little.  Credit markets are starting to move again, albeit slowly.  This economy is changing the fundamental rules of economic theory that have stood for decades, if not centuries. 

Adam Smith, John Maynard Keynes Karl Marx, and all other economist over the past two hundred or so years have seen economies based on the prinicple of a division of labor and workers bored with menial tasks.  The resultant mix of philosphies kept the economy rather humming for most of the post world war II years, and for a large portion of the entire nineteenth century.  In the early decades after World War II, infrastructure rebuilding and a huge shrinking of the labor pool allowed nations to enact very high tax rates on income and capital investment, without adversely affecting growing economies.    These tax rates allowed the U.S. and many other more advanced economies to keep the workers happy and secure without wrecking the profit incentive. 

Over the past twenty years or so, the dynamic has changed dramatically and will continue to do so at an accelerated pace.  Technology has changed the entire paradigm of labor.  No longer does a young man out of high school or university aspire to insert himself in to the division of labor within a specific company. Today he must insert himself in to the economy at large.  Laissez-faire economic principles were developed by Smith because there simply is no effective way to legislate effectively millions of transactions without negatively effecting the economy.   Econonmists who espoused redistribution of wealth, were really trying to calm and secure a labor force engaged in large clumps with very boring jobs.  This is all going away.  The mid-level technician now must broaden his skill set.  He no longer fixes a single component of a single machine, but uses technology to fix hundreds of problems. Even the skilled workers like engineers and accountants no longer focus on one specific issue.  The jobs are no longer divided by specialty. Technology has allowed these people to work on countless different projects and issues.  Which computer programmers write in only one language? 

Just as all of this change is evolving the economy has been shocked in to a sudden reality.  We don't know very much about the future of labor, or money. 

The real challenges Barack Obama will face.

Global economic shocks often lead to military adventurism.  The next great global conflict is not likely to be between the western world, and radical Islam.  No, history tells us that our next great war will come from a place we perhaps least expect.   Japan is on the verge of a catastrophic meltdown.  The fruits of a long overdue economic growth in Russia are about to be swept away.  A global economic depression would hit China very hard and leave a billion people angry at the loss of security and living standard. The West may very well get the blame.


Recent well intentioned regulations (think ADA, Family leave act, HIPPA and Sarbanes Oxley) have led to a much higher over head when hiring new employees.  This at a time when companies and employees should be lowering the number of hours worked per week, and hiring more employees.  Increases in producitivity through technology should have increased the number of hours the average worker spends away from work.  Instead the productivity has gone towards buying more stuff.  Why?  Because the overhead associated with adding employees (entirely mandated by the government) has made it more costly to add workers. It's cheaper to work the existing employees longer hours. 

The uncerainty Obama has placed on markets is already creating an environment where investment is riskier than sitting on cash.   Will he raise capital gains taxes?  Will he introduce sweeping new regulations of the financial and labor sectors? Will he revisit Smoot-Hawley?  Until business understands clearly the direction, investment will remain largely frozen.

The big crash
The media have already created a mythological god like leader in Obama.  This is not Barack Obama's fault.  But he and the Democratic party in power will likely pay a heavy price.   We are walking in to a future we simply do not understand.  Through the fog of technologic advancement we can see a very bright future, but along the path, we can also clearly see the global economy coming apart at the seems.

The greatest danger to America and the rest of the world.
Ponder this question for a moment and you will clearly see the danger.  What if the global economy goes in to a tailspin resulting in unemployment rates of twenty percent and the other eighty percent are not directly affected?
What if eighty percent of the labor force can provide comfort and security for themselves, while providing a subsistence level of survival for the other twenty percent? 

This is not just a possibility, it is a probability.

How do we fix the problem?
We must let the economy take its natural course.  This means we must take our hands off the controls.  The governments of the world are demanding more regulation and more "oversight".  This is precisely the wrong course of action.  The cost of labor will increase, and those without a job, will be permanently unemployed. Those who are employed will work longer hours to pay maintain their standard of living, and give basic food and shelter to those less forunate.

If we lower the cost of adding employees, we can lower the number of hours each employee works.  The productivity increases will be spread among a greater number of people.  This will provide employment and a better standard of living for all.  This means that every piece of regulation not directly related to public safety will have to go. 

If we raise taxes to strengthen the social safety net, the number of people needing the safety net will overwhelm the system, and we'll be stuck with the permanent unemployment.  The rest of the working classes will have an incentive to lower the safety net to the basic needs of survival.   The end result will be a constant cycle of civil unrest as those without the pleasantries of a life, will impose violence to get what they want.

President elect Barack Obama is facing a world the likes of which we have never seen.  The media have told the people of America, and indeed the people of the world, that he is brilliant and capable of fixing all of our problems.  If the wheels fall off, this disillusion will quickly turn to panic, and anger.  The pressure is on Obama and the Democrats to fix everything and fix it fast.  This is also the fault of the media.  They have allowed the Democrats for years to blame George W. Bush for every problem in the world.  The sub-prime housing crisis is a perfect example. This problem was and is entirely the fault of Democrats in congress and Bill Clinton.  The blame Bush and the Republicans hold is only in not being forceful enough in demanding and end to the silly practice of forcing banks to loan money to people with very little chance of paying the loan.  

The facts.
Technology is changing the world.  The economic theories that have worked so well, and not so well, are now all but useless.  Most of today's prestige economists build from a flawed foundation. In the ivory towers of higher education, they cannot see what is so clearly happening on the shop floor and the cubicles across the nation.  They are not just off track, they are off time by a few decades. 

Obama cannot fix the problem, because he cannot know exactly what it is at this point. To figure it out will require the one attribute I feel certain he does not possess, patience.

When bad economic times spread across the globe, some nations will lash out with military force to divert attention from the masses and focus blame on a perceived enemy. 

Very few politicians on either side of the aisle in Washington D.C. have any idea what I am talking about.  These are not intelligent people with a thirst for knowledge.   Even fewer people in the media get it.

But many in big businesses and small businesses know exactly what I'm talking about.

I'll leave you with a picture of horror from a conversation I had just a few weeks ago.
I was having lunch with a friend who works in one of the largest companies in the world.  The topic was the economy and the unemployment rate. 
    We worked together years ago at another very large company.  I said that I remember layoffs in those days, and how a few months later, the people weren't even missed.  I also mentioned how even in some smaller companies with less than a hundred employees, there still seems to be so much over head.  Then I asked if he still saw traces of this in the company he is working at today.

He literally put his head in his hands.  When he looked up at me he smiled and said,
    "You would be shocked at how many people in this company don't contribute directly to the bottom line."  "They are there to offer assistance, and make it easier for other more productive people, but if they left, it wouldn't change much, and in a few weeks, you wouldn't even kow they were gone."
    Having seen this in practice first hand, I pressed him just a little further. "How many could you do without?"

His reply?  This very large company could easily go without ten percent of the workforce, and perhaps as high as twenty percent.

Why is this a picture of horror?  Because it confirms my darkest fears concerning the economy.  If you look around your workplace tomorrow, try to pick one person out of every ten. Could the company function without that person?  If the company could, could the country? 

Change may be needed.  But we as a nation had better make sure we understand the problem, before we try to fix it.