I Thought You’d Never Ask

To my latest post of many criticizing the government, NAM, Wall Street and voracious Fortune 500 outsourcers, the comment was made asking just what my solution would be.  It deserves an answer, with the caveat that everyone understand that these are great big thorny issues and, for all my pompous oratory, I cannot possibly have the solution to all of this huge, great country’s economic challenges.  So I answer the comment with my opinions, hoping that many others out there join the discussion.

Start by understanding that the government already has a tax code that is aimed at raising revenues through certain behaviors.  You get a tax deduction for the interest on your home mortgage because the government wants to encourage home ownership.  The existing laws create powerful incentives for people and businesses to behave in the manner that best serves their financial interests, so all of you hard core "keep the government out of my business" folks – the government already is deep into your business.  I am merely suggesting that they be in it in a different way.

Capital Gains

The Republicans want to get rid of the capital gains tax entirely; the Democrats, having never seen a tax they don’t like and riding a tradition of reaping political hay from sticking it to the rich, want it kept in place or even raised.

How about both, or neither, depending on your point of view?  How about zero taxes on investments held for over five years, and an 80% tax on gains held for less than two years, with a sliding scale in between?  If people and funds want to make money investing in business, they can do so over the longer term (and five years is hardly a long term investment by any means); but day traders can get out of Ford and General Motors hair.  Let them go to Las Vegas where games are supposed to be played and get their foolishness out of manufacturing.

GAAP

The accounting principles that drive financial reporting to the SEC and the IRS are based on Generally Accepted Accounting Principles (GAAP) that have not changed as they relate to manufacturing since 1953, and even then all they did was to codify what Donaldson Brown and Alfred Sloan put together at GM in 1923.  How about a major overhaul, including:

Get Inventory off of the balance sheet.  Inventory valuation is a joke, it encourages bad manufacturing practices, and makes a company that becomes leaner look unprofitable.  With a stroke of the pen, the regulations can be changed to make the fundamental principle of lean manufacturing a fact – namely, that inventory is waste.  American manufacturing cannot become lean and competitive by the principle that inventory is waste when the official law of the land is that inventory is an asset. Full absorption and the Matching Principle undermine manufacturing excellence.  The investment and taxing communities should be given reporting that says if a company buys or makes more than it sells, then that company did not make money. Every family owned business knows that, which is why family and other privately owned businesses have a track record of adopting lean, and sustaining it.  That principle should apply to publicly traded businesses, as well.

This, by the way, is a tough, ugly battle to be fought that is essential to lean manufacturing.  As long as accounting is done under current GAAP, our public companies cannot become lean and stay lean.  Rebirth of American Industry attempts to explain this; Jim Womack knows this and avoids the issue – hence my frustration with him; and many, many CFO’s and Corporate Controllers know this and duck the issue.

Put people on the balance sheet.  A company says "People are our most important asset"?  The records indicate otherwise – that people have no value to the business, at all.  In fact, people are nothing more than an immediate detractor from profits.  How about putting 5 0r 10% of everyone’s paycheck on the balance sheet instead of to expenses, to be written off when they leave the company? That would create a balance sheet that indicates that a company with a core of long term, experienced people has more value than a company that has constant turnover, which is very true.  And it creates financial reporting that would drive General Motors and Ford to report a huge loss corresponding to the act of booting 30,000 trained and experienced people out of the organization.

Norman Bodek, my co-author in Rebirth of American Industry, advocates capitalizing the cost of training and education directly.  I like the flat percentage approach because it includes the inherent value of experience.  Either way, we all know that in a competitive, lean company, people are the most important asset, but that will never become reality until the financial system reflects it.  Without that, the value of people is just empty talk.

Social Security

The notion of you, me or anyone else actually having a social security account is ridiculous.  If you die tomorrow, your heirs don’t get the money you and your employer put in; if you live to be 125 and take out more than was put in your benefits don’t stop.  The idea of social security accounts makes no sense.  It also doesn’t make any sense for Texas Instruments to lay off 6,000 people and stop matching their payroll contributions and replace them with Indian folks.  If you don’t work at all and never contribute and don’t qualify, you will still get money when you retire, just from a different government pocket.  No one is going to starve in America when they get old, so why not abolish the mess all together?  Instead, get rid of employee contributions and employer matching and all of the paper work and complexity, and charge a business revenue tax instead?  Implement a tax of a couple of percent on every business’ gross revenue, while eliminating all of the Social Security and Medicare taxes on payrolls.

The effect on a business with a lot of foreign employees will be a net increase in taxes.  The effect on a business with a lot of American employees will be a net decrease.  And all businesses will see a great simplification of their payroll accounting.  Best of all, a business will not be able to walk away from the need to pay for American workers retirement by replacing them with foreign manufacturing like they do today. At the very least, it will eliminate the current tax on having American employees.

How about getting both unions and businesses out of politics?  No political contributions of any kind, directly or indirectly from company or union accounts.  Unions are supposed to represent their members in bargaining with the employers.  They are not political lobbies.  Reduce the dues and if their members want to plow some of it back to candidates or political organizations, fine.  The same with companies.  If the owners want to invest some of the profits in political issues or candidates, let them have at it, but the companies themselves should spend their money on company business only. The owners of the Ford Motor Company may have deep interests in political issues – the Ford Motor Company itself should be only interested in making cars. If the owners think that the car company will be more profitable as a result of political action, let them spend their money on it.

And most controversial …

I agree with the principle of putting an end to terrorism by toppling terrorist friendly regimes in Iraq, Afghanistan and elsewhere.  My son spent a year in the 173rd Airborne with his life on the line along the Pakistan border for that principle. I think people – all people, not just American people – have been "endowed by their creator with certain inalienable rights, and among these are life, liberty and pursuit of happiness." If America is going to stand for this lofty ideal, how about if our government puts money on an equal footing with my son’s life, and the lives of every other young person fighting terrorism and promoting democracy?  How about if a country is not democratic, then no American company can own a factory there, there is a serious export tax for anything made in America going there, and there is an even more serious import tax on anything made there coming into this country? And free trade is limited to democratic countries that protect people’s rights to life, liberty and the pursuit of happiness? That means China, for anyone who missed the none too subtle point.

If the altar of freedom is worth laying 2,500 or so American lives on in the interest of putting an end to state sponsored terrorism and instilling fundamental human rights, then it ought to be worth forcing the wizards of management at Texas Instruments and so many others to settle for Mexican and Taiwanese labor costs, instead of Chinese.  American business has to stand for something greater than the Dow Jones Industrial Average.

You asked what my solutions would be – and there you have it.  What do you think the solutions should be? Whatever your views, you better do better than to spout the Republican or Democratic party line – we’ve seen plenty of both over the last 25 years and neither extreme has stopped the slide in American manufacturing, or created an environment that fosters lean.