sum2llc

assessing risk|realizing opportunities

To Regulate or Not To Regulate: Is That a Question?

Last year during the height of the banking crisis I remember Larry Kudlow stating that the US market has a choice. It could pursue the EU model of high regulated markets producing low consistent returns or the American model of less regulation and volatile cycles of high risk and potentially higher returns. If the sole focus of government was the peace of mind and well being of investors Mr. Kudlow’s observation would be valid. Government however must consider a larger community of stakeholders in its scope of concern. Regulatory oversight, the harmony of capital and labor and the incubation of an economic culture that is favorable to and supportive of SMEs are the critical questions confronting all governments particularly those in developed economies.

The EU’s social democratic economic models embody the best and worst aspects of these issues. The social democratic state attempt to combine entrepreneurial impulses of capitalism with the management and administration of social welfare for all its citizens. Democratically “elected administrators” use the apparatus of the state to facilitate and manage the competing interests of capital and labor, free markets and regulation while seeking to balance an entrepreneurship friendly culture with long term sustainability.

Yesterday a toxic tsunami of aluminum sludge coated 16 square miles of pristine Hungarian countryside. It is a telling example of a severe risk event that confronts modern life. A lassiaz-faire approach to the event is not viable and offers no solace to those harmed by this assault.  Communities cannot be asked to suffer a market response that promises to correct the problem of the next instance of this event.  The construction of better berms and the implementation redundant protection devises to safeguard against this risk  for the future is little compensation to those who were killed, injured and lost property or livelihoods as a result of MAL Zrt poor risk management practices.

Better to suffer a regulatory initiative that is based on an understanding of an economic ecosystem as complex and inhabited by competing interests of diverse stakeholders.  The ecosystem including the shareholders of MAL Zrt, residents of the surrounding communities, plant workers (also community residents), small businesses (SME) and down stream farmers making a living on arable land and access to clean water all have a stake,  albeit competing,  in the safe operation of the plant. The possibility that the toxic sludge may find its way into the Danube poses a threat to the water supply of other eastern European nations.  This elevates this catastrophic event to other EU jurisdictions. The inter-dependencies and interconnectedness of the pan-regional and larger global economy requires vigorous regulatory safeguards, mitigation initiatives and enforcement response.

The true cost of this event is potentially staggering. It supersedes the narrow interest and economic value of shareholders rights and capital invested in MAL Zrt.  Bad economic behavior exemplified by BP’s Horizon Deepwater failure to install redundant protective devises to keep production costs to a minimum, ended up costing BP shareholders and Gulf Coast stakeholders dearly.

State intervention in markets and the reemergence of managed economies is a reality of the global economy. The “managed economy” of the Peoples Republic of China places western style “free market” economies at a disadvantage. The managers of the PRC efficiently deploy and manage capital, effect trade and market protections and scrupulously manage currency valuation. It has created enormous social wealth for China and has contributed to its rapid rise as a preeminent world power.  China’s rise requires better coordination of private capital and government to marshal a competitive market response to the challenges posed by managed economies to free and open markets of western democracies. The massive pools of capital deployed by sovereign wealth funds of oil producing regencies and the growing insurgency and power of underground economic activity also pose significant challenges to the viability of unregulated markets.

America’s free market model that eschewed regulation since the 1980’s evolved into a mercantile economy with a weakened economic base. The outsourcing of manufacturing infrastructure loosened free market impulses that left in its place a debtor nation whose warped economy depended on housing/commercial real estate construction (collateral creation/securitization), credit marketing, retailing and a service sector that was designed to support the new economic paradigm. It is a model that has proven itself to be wasteful, costly and unsustainable.

Deregulation has led to the dislocation of the capital markets from the real economy. It has contributed to the massive disparities in social wealth and a crumbling infrastructure.  Milton Friedman’s mistaken belief that free market impulses would preserve infrastructure investment has been proven incorrect. Ironically this has added to the government’s burden to provide social assistance to segments of the population disenfranchised from economic participation. Some believe that the basis for the prosecution of the wars in Iraq and Afghanistan are economic stimulus programs designed to keep the economy going due to the vacuum created by the loss of manufacturing.

China’s example nor the resurrection of the soviet socialist model is not a desirable alternative for western democratic capitalist societies. Centralized control and state economic planning is rife with inefficiencies. State run economies threatens liberty, stifles innovation and encumbers economic dynamism. The virtues of capitalism (innovation, dynamism, liberty) needs to be encouraged and blended into the new economic reality of a highly dependent and interconnected world that requires cooperation, coexistence, sustainability, fair asset valuation, and the equitable sharing of resource and responsibility. SME’s are at the forefront of innovation, value creation and dynamism and will play a leading role in the creation of new social-political values as sources of sustainable growth and wealth in the emerging economic paradigm.

You Tube Music Video: Chevy Chase and Mike Myers: I’m Looking Over a Four Leaf Clover

Risk: regulatory, capitalism, sustainability

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October 6, 2010 Posted by | capitalism, compliance, economics, infrastructure, labor | , , , , , , , , , , , , , , , , , , , , , , , , , , | 2 Comments

Rutgers Job Study: Full Employment By 2017!

help wantedRutgers University has released a sobering study on expected recovery rates in employment levels for the United States economy.   The study,  America’s New Post-Recession Employment Arithmetic indicates that the employment deficit has grown so large that it may take until 2017 for the nation’s labor market to return to its pre-recession level.

The study, released by the Edward J. Bloustein School of Planning and Public Policy is a cause for concern.  The study reports that the US economy has shed over 7 million jobs since the recession officially began in December 2007.  This has reduced the total number of jobs in the United States by 5.8%, the largest drop during any downturn since World War II.  The authors of the study, James W. Hughes and Joseph J. Seneca, project that the employment deficit will total 9.4 million private sector jobs by the end of the year.

The study estimates that if the economy adds more than 2 million jobs annually starting next year, it would take until August 2017 – more than seven and a half years – to both recover the jobs lost since December 2007 and create new positions for the roughly 1.3 million people who join the labor force each year.

Hughes and Seneca believe that a recovery in 2017 may be an optimistic assumption.  An economic expansion that lasts for seven years is about 50 percent longer than the average for postwar recoveries.   Hughes and Seneca refer to the last ten years as “The Lost Employment Decade,” because the U.S. is on track to finish this year with 1.3 million fewer total jobs than it had in December 1999. “This is the first time since the Great Depression of the 1930s that America will have an absolute loss of jobs over the course of a decade” the report states.

The past decade has witnessed a startling reversal in economic fortunes for the US economy.   The U.S. finished the 1990s with 19  million more private sector jobs than it had at the start of the decade.   Approximately 16 million jobs were created during the 1980s.  Before the recession,  annual rate of job growth was about 1 million jobs per year, about half of the growth rates of the previous two decades.

Hughes and Seneca believe that this will force states into fierce competition to realize job growth.  States must respond by creating desirable environment for business based on costs, affordability, business climates, support infrastructure, labor force quality and tax policies.

We believe that joblessness and unemployment continue as significant threats to economic growth.   The conception of  the unemployment rate as a lagging indicator is emerging as a lead driver inhibiting economic recovery.  High unemployment continues to inhibit consumer spending and works against a rebound in the housing market and related construction industries.  Retailers are already bemoaning the bleak forecast for this years holiday shopping season.  State and local governments reeling from dwindling tax receipts are beginning to crack under the strain to fund basic community services, public schools and social assistance programs.

The structural dysfunction of the  American economy is a critical issue that must be addressed.  A concerted program aimed at the development and incubation of SME manufactures will encourage the entrepreneurial energy and kick start badly needed economic drivers  to ignite a recovery.  Sum2 advocates the adoption of The Hamilton Plan and the creation of an SME Development Bank to reestablish sustainable growth and national prosperity.

You Tube Music Video: Bruce Springsteen Seeger Sessions, Pay Me My Money Down and Erie Canal

(RU and Bruce, Perfect Together)

Risk: unemployment, job creation, SME, political stability, recession,

October 8, 2009 Posted by | associations, business, commerce, economics, government, Hamilton Plan, labor, manufacturing, poverty, recession, risk management, SME, unemployment | , , , , , , , , , , , , , , , , , , , | 2 Comments

Honda Motors Practices Enlightened Capitalism

Amidst all the layoffs, business closures and shutdowns the hard edge of capitalism is a painful experience far too many people are forced to endure. During times of plenty, the relationship of labor and capital is harmonious and symbiotic. Both parties recognize the value that each bring to the corporate community and each parties enrichment and well being is served by the degree of harmony present in that relationship. During down business cycles management may resort to layoffs to preserve the enterprise. Unfortunately this often causes resentments and hard feelings on the part of workers who have lost the means of earning a living. When workers return to their jobs this can cause problems and hurt an affirmative corporate culture that is critical to maintaining a sustainable business enterprise.

In the face of the meltdown in the automobile manufacturing sector, Honda Motors is one of a very select few that is not resorting to layoffs. Honda Motors known for product quality and leadership in product innovation and business processes is also highly respected for its treatment of employees. Honda Motors places great emphasis on the creation and maintenance of an affirmative corporate culture to sustain profitability and market leadership.

Honda Motors decision to restructure the work force, and give workers a period of paid leave until business conditions improve speaks volumes about how management respects and values the contribution labor makes to the long term sustainability of the enterprise. Any remuneration workers receive during the leave will be paid back to the company with unpaid overtime when the workers return to the production line.

The value of good will on the Honda Motor balance sheet has increased exponentially. The sustainability of an affirmative corporate culture will drive profitability, product innovation and market leadership for the many years to come.

We applaud Honda Motors for this innovative and enlightened response to the current market challenges.

You Tube Video: June Carter Cash & Johnny Cash, One Piece At A Time

Risk: sustainability, labor relations, corporate culture

February 3, 2009 Posted by | labor, reputation, risk management, sustainability | , , , , | Leave a comment