Several years back one of my sons played on a little league baseball team that happened to be losing 15 or 20 to nothing, which happened quite often with that team that year. At any rate, toward the end of the game, a kid on my son's team was called out in a close play at second base and the coach stormed onto the field to argue with the umpire. The umpire didn't engage in the debate. Instead he just laughed and pointed to the scoreboard and said, "You're probably right coach, but I am about the last problem you need to solve."
The economists remind me a lot of that hapless coach. According to Tobin Smith of Change Wave Research, the financial services sector has gone from accounting for 16% of all profits in the United States a few years ago to almost 50% – up until the whole thing blew up, any way. During that time, the amount of borrowed money being used by these folks to post these fantastic profits quadrupled. In other words, they took a real dollar from some innocent guy, leveraged it with 3 pretend, margin dollars to call it 4, put it into some derivative scheme and turned it into 5 or 6 on paper, and paid themselves a whopping bonus.
Over that same time period, we lost another 2,000,000 manufacturing jobs. Over the last 10 years, we have lost better than 5 million manufacturing jobs.
So we are rapidly converting ourselves from a country that actually creates value to one that plays paper games. Of course, paper games are not real – as we found out quite painfully over the last several months – so here we are approaching double digit unemployment and passing legislation to borrow trillions of dollars from our grandchildren to pay for what has quite obviously been very, very bad behavior.
Where are the economists in all of this? They are arguing about how many angels can dance on the head of a pin, debating with each other over arcane nuances of Keynsian theory and attempting to trump each other with new insights into the details of Friedrich Hayek's thinking. In short, they are ignoring the real problems and engaging in issues that are about the least of our problems.
The economists are rendering themselves largely irrelevant because they accept cost as a fait accompli – a done deal, an absolute. The notion that money out the door should be categorized as an expense or an asset according to a detailed code of Generally Accepted Accounting Principles, and that the code is an accurate methodology for doing so is taken as fact. Economics begins where accounting leaves off.
But those GAAP principles are by and large a load of arbitrary nonsense. When the economists try to build their theories of taxation and government involvement – or lack of it – on a foundation of accounting mush, their theories are mush. Numbers like GDP are all based on GAAP rules. Change GAAP and you change GDP. The cost of labor and the value of companies all depends on what your definition of is is, to quote our esteemed former President.
Lean manufacturing is the key to manufacturing growth and health. And lean manufacturing has lean accounting as its prerequisite. In particular, getting inventories off of the balance sheet and eliminating the nonsense that follows when the law of the land says that companies can make a bunch of stuff, assign huge buckets of fixed overhead to it and move those overheads over to the balance sheet, making themselves look more profitable. If we were to return to a cash based accounting scheme, our sense of good and bad business would change radically, our management principles would all change, and our understanding of our economy would be completely different.
The economists who grapple with how money affects behavior ought to grapple with this one. Very well educated business leaders over-spend and over-produce to play games with the balance sheet and inventory; make the company look more profitable than it really is; pay unnecessary taxes on those artificially goosed up profits; then complain that the USA is a lousy place to manufacture because we have the highest tax rate in the world.
Those business leaders complaining about the tax rates, and the economists who focus in on the how taxes impact the economy are a lot like the little league coach – probably correct but completely irrelevant. Free markets? Free trade? Free enterprise? Nothing but trivial theories that have little bearing on how our economy works compared to how capricious accounting rules drive the economy.
In 1953 the law of the land was set in place that determined that a vast amount of our national wealth was going to be put into warehouses, where it would consume even more of our national wealth and the fruits of our citizen's labor to take care of it. The government dictated that every cost – including the kitchen sink if the company had one – would be added to the GDP, added to the value of our businesses, and called profit. We set in place economic policies that sowed the seeds for our national exit from manufacturing. What some politician may or may not do with NAFTA or the capital gains tax at this juncture doesn't really matter.
The economists need to get in the game, for the sake of their own relevance and for the sake of the country. Buying into the patently phony productivity numbers spewed out oy the Bureau of Labor Statistics, defending a global theory of economics because some guy in Malaysia will work for a few pennies, all the while ignoring the fact that reported costs, profits and the worth of companies are miscalculated by orders of magnitude doesn't get the job done. Price elasticity theory is a waste of paper and brain cells when all of the prices are the product of an increasingly foul accounting stew.