Wrap Up America

Respice, Adspice, Prospice

Going through 75 years of my life in just over 200 pages is not as simple as it may appear. Many of my stories, for lack of direct relevance, had to be excised from this latest draft, but I believe the purpose of this book has been fulfilled. Reciting every event would have its value in a fragmented way, but the most important lessons of my life are contained here. My experiences in other countries, like Israel, South Korea, France, and Italy speak to the varied cultures and communities with which I have had the pleasure and privilege to work. I have been able to draw new lines of contrast and comparison among the different nations, some of which are obvious and others more nuanced.

For example, I learned that the South Korean business mentality is more similar to the American one than to Western Europe or anywhere else in the Far East. There is an aggression among executives that one may only find in these two countries. When South Korean businesspeople want something, they do everything in their power to get it. In the United States, we see a similarity but it is couched in a different set of cultural values and ethics. Israel and Japan share similar business cultures as well. The kibbutz mentality of keeping business in the family extends to almost all areas of Israeli industry. The value of currency takes a lower priority to the quality of life for the individual. In Japan, business is the employee and the employee is the business. Managers traditionally don’t take drastic measures to get the job done. In Israel, I have found it to be similar.

A number of years ago, I befriended Meir Amit. As a young man, Amit became the head of the Mossad and the Aman (military intelligence). As his career advanced, he became the head of Koor Industries, which at first was an arm of the Histadrut (government labor union of Israel) and later become the massive conglomerate that it is today. Amit proposed I take a trip to see how a kibbutz functions and see if I could help some of these economically failing socialist communities. After multiple trips, I learned that the cost of manpower to create a product that the kibbutz would sell was far greater than the income derived from the sale. Additionally, the cost of living for each individual member of the kibbutz was far greater than revenues produced. The members of the kibbutz had a limited understanding of the workings of capitalism—and why would they? Members of the kibbutz have ancestral lineages that go generations back. These people have no real experience with capital and, therefore, no sense of economic value. Today, kibbutzim are primarily supported by the Israeli government as cultural institutions, I believe, because changing the way they operate was not an option as it would alter the culture.

In Japan, we see similarities. Traditional Japanese companies don’t fire employees even if they underperform. In a way, the Japanese company is like a kibbutz: once a member, always a member. Japanese companies are hesitant to change. Indeed, it is safe to say that the Japanese nation as a whole is hesitant to change. The failure of many Japanese companies in their real estate ventures of the 1980s until the bubble-burst derives from a business culture with no conception of the outside world of capital. Japanese businesses didn’t understand the importance of altering how one does business abroad even if it was to their benefit. Israeli companies, like the kibbutz, traditionally do not like outsourcing.

I once consulted for an Israeli refrigerator company that was a division of Koor Industries. At the time, a handful of different models were in production. Many were not selling. I told them to focus on the ones that were and discard the others. The executives understood the need to focus their energies, but did not want to lose business. I proposed they buy refrigerators from an Italian manufacturer wholesale and resell them. They hesitated to take my suggestion, but after review, they realized they needed to do this, otherwise their operations would fail. The cost of manufacturing too many refrigerators in-house was far greater than the reward, and if another manufacturer was making a similar model, it made more economic sense to resell that model despite cultural inclinations. Getting these executives past this first stumbling block was one of my first successes in Israel. For Japan and Israel, looking for help from the outside for whatever reason is an obstacle.

These comparisons could be an entire book on their own—perhaps my next project. Sketching a quick meta-examination of culture’s impact on industry holds importance to this narrative because I want to use these short anecdotes as the backbone for the analysis of the past, present, and future of the United States. Having seen firsthand how the rest of the world (dys)functions has opened my eyes to what needs to change and what needs to remain the same. Since the past 40 years of my life have been in the United States, I feel a responsibility to outline my thoughts: respice, adspice, prospice.

Although I had direct contact with Americans almost all of my life, I did not move to the United States until around 1980. I began doing business in the United States in the 1970s and slowly moved to where I saw the most opportunity. Japan had begun to falter a bit and Takihyo Ltd. was suffering from the broader economic conditions. I saw more value in owning an American fashion company and I had a handful of ideas to implement, delineated in the second part of this book. I have discussed much of my thoughts on the past as a result, but I have drawn no ink on the present problems and what I believe to be their future resolution.

Unless you were in a cave for the past three years, you would have witnessed the worst economic meltdown since the Great Depression. Unemployment shot through the roof and has hovered at around 10 percent for the past year, double the historical average of 5 percent. The largest market in the United States, housing, imploded. Banks were lending money they didn’t anticipate getting back. There was an assumption that real estate prices would continue to rise. (Does this sound similar to the Japanese bubble that burst in the 1980s?) In many cases with limited to no documentation, banks would lend money at adjustable rates to people who could never pay it back. The first couple of years would be easy sailing for the debtor. The loan would then reset, and by that point, the banks assumed the property value would have risen to a point that refinancing the loan would be the next step. Kicking this can down the road lasted for some time until refinancing was no longer an option for the debtors. Predatory lending occurred in many cases in which property owners took a mortgage after having owned the property outright so the bank could seemingly raise its bottom line. When real estate prices stopped rising, the loans reset, and the market turned inside-out. Debtors could no longer refinance, and they could not pay the new rates. Real estate went to hell in a handbasket. Since the real estate market is the largest market in the United States, everything else followed.

The government’s response to this crisis was and remains a bit weak. The Obama administration and Ben Bernanke’s Federal Reserve have pumped tons of money into a system without real significant legislative reform. The government has chosen to print more money and buy more of its own debt in the hopes that it will keep inflation under 2 percent and spur investor confidence in the equity markets. Hopefully, this will work, but it looks like another kicking of the can down the road rather than replacing the rotten foundations. The debt-to-capital ratios for the banks have improved, but few loans are being given so there is minimal leverage in the markets. People aren’t buying houses and many people are out of work. Consumer spending has been significantly cut back even by those with the money to spend. Like Japan, the United States is not consuming the way it had before. Consumers have become more price-conscious as well. With the likes of Amazon, Newegg, Google, and eBay, along with a host of other niche online marketplaces, physical retail stores have taken a hit with the exception of dollar stores and bulk grocery stores like Costco and Walmart. Another unfortunate similarity between the United States and Japan is the fear of a future deflationary environment.

Making matters worse, the United States also has no real industry to speak of. Americans hardly manufacture anything here and most US businesses outsource to other countries. Like Japan, the United States has an aging population. The figures don’t read as dramatically as the Japanese problem, but if nothing is done to combat this, the United States will age and all the fears I have for Japan will become an American reality. How can one go about fixing such deep-seated issues?

Considering how events have played out, it appears that the best route is to take the bumpy road of inflation. The Fed should monitor inflation so it doesn’t get out of control, but inflation will allow wages to rise. Inflation may be the key to increasing the size of the American workforce because the less the dollar is worth, the more dollars one may receive and more money will be available for labor. Although there would be a rise of general wages, this does not mean there is a need to increase minimum wage. If the dollar is worth less tomorrow and minimum wage stays the same, many companies may begin to find it profitable to begin manufacturing in the United States again. Other than the automobile industry, the United States could begin to sustain its own domestic markets for goods. This hope equates with a strong, stable, and self-sustaining United States.

Another major problem with the US economic system is trade protectionism. Though many believe trade protectionism has helped America become the economic powerhouse it is today, I believe they are wrong. The United States is too careful about what comes into the country and indifferent as to what leaves it. For example, Japanese beef may be the best beef in the world. American beef is rated second for many other countries, and it lags in comparison to Japanese beef. The US government has made strict quotas for beef to prop up the industry. Without this crutch, the government fears the beef industry would shrivel up. I believe that at first, the US beef industry could take a hit. However, increased competition in the beef market might increase the quality of the beef in the United States to a level that could compare to Japanese beef. History has shown that no matter how hard times become, innovation yields better and more economic solutions. Beef and every other industry suffering from the misguidance of trade protectionism would benefit from increased competition.

The execution of trade protectionism is closely related to labor unions in the United States. Even though labor unions provide a service to American workers, it is a double-edged sword. The labor union has developed a “not-my-job” mentality in the United States in terms of shielding responsibilities. US workers are given responsibilities but because one union represents this job and another the next, workers don’t overlap their responsibilities with others for fear of stepping on one another’s toes. This viewpoint, I believe, destroys the relationship the workers have with their colleagues as well as their company. There is no sense of team within the company; instead, the team is the union and allegiance to that union is paramount to the company. So, if the company fails as a result of a union member not wanting to help another union worker, no accountability occurs on the part of the worker. The brunt of it falls on the shareholders or owners of the company. Since legislation differs from state to state, this level of responsibility changes with location. If teamwork could be emphasized as a part of labor union education, collaboration with companies could be more streamlined. Another problem with unions is the price one is required to pay. Part of the reason the American auto companies needed to be bailed out was the requirements unions had on these companies for their workers.

Toyota and other foreign automobile manufacturers have cut their labor expenses nearly in half by setting up plants outside of Michigan. Instead of paying union workers somewhere around $80 per hour, Toyota and others have reduced that expense to around $40 per hour. In both cases, these workers make quite a bit of money, but the auto unions in Michigan had a major hand in the unraveling of the business. The best solution for business owners may be to disband unions altogether so workers can compete with one another in the marketplace for jobs rather than be handed one despite past performance. Of course, unions would benefit workers if they were more friendly to business and less self-serving. For instance, how labor unions strike tends to hurt businesses, particularly if businesses cannot afford to pay new wage raises or other benefits. In many ways, the failures of the kibbutz system parallel those of companies forced into constraining union relationships. If and when unions understand how they can benefit the worker as well as the companies to which they are tied, a more economically viable solution could be found. Though I would be in favor of disbanding unions altogether and increasing competition among workers for jobs, which may increase productivity and/or the quality of work, I don’t see this as a reality.

I have many other qualms with how the US economy and industry functions, but the last one I’d like to discuss is taxation. Everyone knows that federal, state, and city governments are running out of money. Credit default swaps, which are insurance against the default of a bond, for the state of California are more expensive than those of some third-world countries. Social Security is a joke and the new health bill will probably hurt the medical industry more than help it 50 years from now if nothing is done. As I discussed at the end of Part 1 of this book, my prescription for Japanese taxation holds true for the United States as well. I believe the United States could gain from dissolution of the current system and a small city/state/federal deduction from all banking transactions. The only exception to this rule would be to leave real estate taxes the same. This solution may wind up killing a ton of jobs at the Internal Revenue Service and accounting/auditing firms, but at the end of the day, this kind of a system will be more beneficial for companies, individuals, and the state.