Skills Don't Pay the Bills

http://www.nytimes.com/2012/11/25/magazine/skills-dont-pay-the-bills.html?pagewanted=all

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"Bottom line thinking makes it possible for you to measure outcomes more quickly and easily." (John C. Maxwell)
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Adam Davidson's "Deep Thoughts This Week:"

1. There is no skills gap.
2. Who wants to operate a highly sophisticated machine for $10 an hour?
3. Not a lot of people.
4. As a result, there is going to be a skills gap.

Nearly 6 million factory jobs, almost a third of the entire manufacturing industry, have disappeared since 2000. And, while many of these jobs were lost to competition with low-wage countries, even more vanished because of computer-driven machinery that can do the work of 10, or in some cases, 100 workers. Those jobs are not coming back, but many believe that the industry's future (and, to some extent, the future of the American economy) lies in training a new generation for highly skilled manufacturing jobs -- the ones that require people who know how to run the computer that runs the machine.

According to Adam Davidson, the secret behind the skills gap is that there is not a skills gap at all. In a recent study by the Boston Consulting Group: "...outside of a few small cities that rely on the oil industry, there weren't many places where manufacturing wages were going up and employers still couldn't find enough workers. Trying to hire high-skilled workers at rock-bottom rates is not a skills gap." (starting pay at a metal fabricating manufacturer: $10 per hour; starting pay as a shift manager at McDonald's: $14 per hour.). "Many skilled workers have simply chosen to apply their skills elsewhere rather than work for less, and few young people choose to invest in training for jobs that pay fast food wages."

So, manufacturers, who face increasing competition from low-wage countries, feel they can't afford to pay higher wages. Potential workers choose more promising career paths. According to Howard Wial, an economist at the Brookings Institution who specializes in manufacturing employment: "It's individually rational. But it's not socially optimal."

If that isn't bad enough, it's hard to train people who are willing to learn these manufacturing skills (even at low pay rates) when they graduate from high school without the basic skills in math and science that these companies need to compete.

So: "The so-called skills gap is really a gap in education, and that effects all of us." (Adam Davidson)

How the Tax Burden Has Changed

http://www.nytimes.com/2012/11/30/us/most-americans-face-lower-tax-burden-than-in-the-80s.html?adxnnl=1&emc=eta1&adxnnlx=1354303994-qkpQ9uKXVj2vzfYK5Otlfg

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"Think of the bottom line as the end, the takeaway, the desired result." (John C. Maxwell)
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With some of the best graphics I've seen, the Times has come up with a set of charts picturing how the our taxes have changed over the years. All of this relates to the current negotiations going on about the "fiscal cliff."

According to the charts, most Americans paid less in taxes in 2010 than people with the same inflation-adjusted incomes did in 1980, because of cuts in federal income taxes. At lower income levels, however, much of the savings was offset by increases in federal payroll taxes, state sales taxes and local property taxes. About half the households making less than $25,000 saved nothing at all.

Now that we may be reaching the end of an era of tax cuts, what's next? The "mortgage interest expense" deduction is on the table. That will alienate everybody that owns a house.

Spending by federal, state and local governments makes up a growing share of U.S. economic activity. While state and local taxes have increased, federal revenues have declined to the lowest level in decades. This results in annual deficits and increasing long term debt. And then, we wonder why we have problems.

It will be interesting to see what happens.

HP and the Big Four

http://www.nytimes.com/2012/11/30/business/auditors-clash-in-hp-deal-for-autonomy.html?ref=business

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"Learn, earn, return -- these are the three phases of life." (Jack Belousek)
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So HP is crying "foul" because they spent big money on a company that had been "audited" before they bought it. Where were the auditors? Well, according to Floyd Norris, they were everywhere: "They were consulting. They were advising ... on strategies for optimizing revenue. They were investigating whether books were cooked, and they were signing off on audits approving the books that are now alleged to have been cooked. They were offering advice on executive pay. There are four major accounting firms, and each has some involvement."

The Autonomy dispute (and HP's $8.8 billion write-down of that "asset") breaks down into:

                    * HP buys Autonomy for $11 billion in October, 2011;

                    * Last week, HP says Autonomy has been cooking the books in a variety of ways;

                    * Autonomy was audited by the British arm of Deloitte. HP, which is audited by Ernst &
                       Young, hired KPMG to perform due diligence in connection with the acquisition.

                    * That's three of the big four. So, it should be no surprise that PricewaterhouseCoopers
                       was brought in to do a forensic investigation because of a "whistle-blower." And, 
                       PWC found bad things.

So, unless Floyd Norris has it wrong, that makes the Big Four tally two for Autonomy and two for HP. For me, if that is the case, why do we have Sarbanes and why do we have international accounting principles? And, what do the "Big Four" do?

I like the Floyd Norris perspective: "To an outsider, making sense of the brouhaha is not easy. In a normal accounting scandal, if there is such a thing, the company restates its earnings and details how revenue was inflated or costs hidden. That has not happened here and may never happen ..." HP took an $8.8 billion write-off for a company that never earned more than $1 billion in a year. The write-off represents much of the good will that HP booked when it made the deal. In other words, HP paid way too much and should have known better.

So what we have here is: "Two of the Big Four were fooled, at least according to the other two. Perhaps coincidentally, the firms tended to reach conclusions desired by those who paid them."

I could go on but the "Big Four" don't look so big right now and I'll leave it at that.

Third Quarter GDP Growth Revised

http://www.nytimes.com/2012/11/30/business/economy/third-quarter-gdp-growth-is-revised-up-to-2-7.html?hp

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"The person with a plan, a picture, will go after thoughts that add value to their thinking." (John C. Maxwell)
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After initially saying output increased at an annual rate of 2%, the Commerce Department revised its estimate to show growth at 2.7% in the three months ended September 30.

Consumer spending is up and housing is coming back in several regions. This is good news and I don't want to put a damper on it by pointing out that several prominent economists have predicted 1% or flat GDP growth for the fourth quarter if nothing is done about the "fiscal cliff." Frankly, some have predicted a direct correlation between the fiscal cliff and another U.S. recession. "Dr. Doom" (Nouriel Roubini, economist and rock star) has consistently predicted over several quarters that GDP growth is at "stall speed."

 Warren Buffet was on the "Today" show this week and indicated that he thinks the economy is coming back. He also said his companies will be spending $9 billion in capital on plant and equipment in the coming year or years. That was his answer to the "fiscal cliff" issue.

According to the Federal Reserve's Beige Book Survey released Wednesday, growth improved in 9 of the Fed's 12 regional banking districts. Growth was weaker in New York, Philadelphia and Boston - not unexpected based on the problems Sandy caused. The Fed noted that growth was better despite nervousness about the fiscal cliff.

The Fed's Beige Book covers economic conditions around the U.S. from October thru November 14th and will be used for the Fed's December 11-12 meeting. In the Fed's Dallas region, the economy expanded modestly, with reports on manufacturing and transportation services mixed. Auto sales were flat. Home sales and construction increased and energy production continued to be strong.

Here's a quote from Robert Williams who is a senior fellow at the Tax Policy Center: "If we go over the fiscal cliff, revenues will rise, even though the economy will likely fall back into recession. If President Obama and Congress reach a compromise, taxes will likely rise less. In either case, the government will need more revenue to balance its budget."

In spite of Warren Buffet's confidence, the pent up capital spending in Top 500 companies is still there. Once the fiscal cliff issue is resolved, let's see what happens with pent up capital.

So, What Do We Do Now?

http://knowledge.wharton.upenn.edu/article.cfm?articleid=3111#.UJ1veStQ1MQ.email

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"Most people spend more time planning their summer vacation than planning their lives." (Source Unknown - John C. Maxwell)
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While I'm not sure what the economy is doing (and, I don't think anybody else is either), it looks like "housing" is finally beginning to move up. For me, that's one of the two indicators I look at (the other is "employment").

So, what should President Obama push for over the next 4 years? Well, it's nice to have a Wharton faculty summary of what they think he ought to be doing. According to Franklin Allen, the first thing he needs to do is solve the "fiscal cliff" problem. That would appear to be what President Obama is doing. According to Allen, the second thing he needs to be doing is reform Medicare. I don't see lots of people clamoring for that one.

Another voice of the Wharton faculty argues that the top priority should be getting the economy going again - Robert P. Inman, professor of business economics and public policy. He favors another round of fiscal stimulus (probably because the first round wasn't enough): his method would be broad-based tax cuts.

There is a general consensus that if the fiscal cliff problem is not solved, the overall economy will go back into recession. That would be as opposed to what it's in now - something Nouriel Roubini calls "stall speed."

Another faculty member sees the fiscal cliff crisis as long term opportunity to reform the tax code and spend a little smarter. Not bad. The problem is, as I told somebody recently, we are becoming Italy: members of Congress can't agree on what time it is. Or, as one member of the Wharton faculty puts it: "You used to have grown ups in the Senate...The grown ups just aren't there anymore. It's becoming so fragmented."

Susan Wachter, a Wharton real estate professor, feels the fragile housing market could falter without a fiscal cliff solution. This, just as that housing market appears to be coming back! Wachter defines "weak" as construction starts at 600,000 which is well below the 1.6 million peak before the recession.

There are so many considerations but it's interesting to see what one faculty thinks about an immediate need to do "something!"