Strong business leadership needed

The editorial at http://www.detroitnews.com/article/20131031/OPINION01/310310008/When-government-fails-business-fills-void?odyssey=mod|newswell|text|FRONTPAGE|s titled “When government fails, business fills void” highlights an important consideration often lost in the noise of information.  In order to highlight private industry’s role in society and the economy, the recent Business Leaders for Michigan CEO summit intentionally left out political leaders.  This was not business leaders thumbing their collective noses at politicians.  Rather, it is acknowledgement of the role governments and business leaders should play.

The founders of the United States, and prior to them, of the States envisioned government with a limited role in the daily lives of its citizens.  Governing is necessary for basic needs or general welfare.  Government should create the foundation upon which society and the economy rests.  Public utilities, roads and public safety fall within the jurisdiction of the government.  Laws necessary for the proper execution of contracts and protection of private property fall within the jurisdiction of the government.  Any restriction beyond such placed on private industry or the economy as a whole will be corrected by Adam Smith’s invisible hand.  The overall health and development of a society and the economy, therefore, falls to business leaders.

Why is this the case?  Governments do not generate revenue by delivering products or services.  Governments do not take raw material, add value, and sell at a profit.  Revenue for a government comes from a limited number of sources: taxes, fees and bond issuance.  Bond issuance, though, must be repaid from another source of revenue.  Therefore, governments run on taxes and fees.  Taxes and fees remove money from society and the economy that may be employed by citizens or private industry in other, more beneficial ways.  As such, revenue should be limited to meet the costs of the basic functions noted above to the maximum extent possible.

For the reader thinking to themselves, private industry lacks ethics and morals and we cannot leave society and the economy in the hands of individuals whose sole purpose is to generate income for their owners.  To some extent, you are correct.  There is a social responsibility requisite with being a business or community leader, which sometimes they do not live up to when making their decisions.  Carney, Rockefeller and Ford were great men, who did wonderful things without which the United States would not be the dominate economy it is today.  All, however, lost focus of the social contract at times.  This too is where Government can step in to enforce the social contract.  Beyond that, governments have a social contract with all of their citizens.  To some extent, governments must generate revenue to care for citizens that are in need.

The line between basic necessities and enforcing or fulfilling social contracts is difficult to draw.  Much like the checks and balances built into the Constitution, private industry and community leaders need to offset government involvement and control.  As the above editorial eludes, business leaders cannot abdicate their role to a government whose general opinion can change with each election.  Michigan and Detroit will not grow as a society and economy without strong business leadership.

What's the big deal about the debt ceiling?

This piece should scare you.  It was written by a top notch economist, in plain language. I urge you to read it http://economix.blogs.nytimes.com/2013/10/03/the-loss-of-u-s-pre-eminence/?_r=0.   It in part answers some of the questions I have been hearing lately that pretty much all can be summed up as, “What’s the big deal about the debt ceiling?”

The debt ceiling is the United States Government’s limit on the amount of debt the Treasury Department is legally allowed to issue.  Think of it as the limit on your credit card, but the consequences of exceeding it are much more dire. Among other things, this debt is accrued interest on amounts already borrowed and payments due for money Congress already authorized and appropriated for spending.  To not allow an increase to the debt ceiling is tantamount to being told you could buy something, but when the bill comes not given the money to do so.

The blog included above points out the current fiscal and political environments are sowing the seeds for the decline of the US from its pre-eminent position economically.  Economics is weird.  Is it a science or an art? Is it mathematics and statistics or psychology?  The basis for all economics is the idea of utility; how much an individual wants something.  Utility explains why gold costs more than silver, Coke costs more than Kroger cola and someone is willing to spend $5,000 on Prada; yet pretty much all sugar costs the same.  We as consumers, all things being equal, assign intrinsic values to items based on perception and past performance; and are willing to pay more for items with intrinsic value.  Without utility, advertisers would not have a job.  This phenomenon is the basis for everything we purchase.

Utility plays a role in currency and sovereign debt.  At different points in the recent past, up to 90% of global financial transactions passed through the US, daily.  The United States dollar is the most well respected piece of currency in the world, therefore gets used all over the world.  It is the confidence in the United States economy (not necessarily Government) that accounts for use of the US Dollar, and purchase of US debt.  Without this confidence, the US will have to pay more through higher interest rates.  Recent examples of this are the lack luster performance of debt issuances by Ireland, Spain, Greece and Malta.  A sharp increase in the cost of issuing debt will immediately drain funds from the US economy and begin hyperinflation like that seen in Mexico and Venezuela.  Albert Einstein once said the greatest power in the universe is compound debt.

As for the global economy, simply look to the reaction to defaults by Greece and Malta.  Greece caused a recession in the entire Eurozone, and some experts believe muted growth of both the US and Chinese economies due to the reduction of imports to the Eurozone.  Malta, a very small island nation, almost caused another recession in the Eurozone.  The US Economy is magnitudes of order greater than either Greece or Malta.  The results of a US default would also be magnitudes of order greater.  Too big to fail?  Definitely!

The silence from industry as discussed in the blog above is a warning.  Regardless of personal opinion on Obamacare, Keystone XL or changes to the tax code, Congress and the president CANNOT let this happen.  It’s not a question of whether or not there will be a global recession if the US defaults.  It’s only a question of how severe.  And when the dust settles, the US may no longer be at the top of the heap.