Q: ..Mr. President…Last week you acknowledged that unemployment is likely to reach double digits, being 10 percent. Do you think you need a second stimulus package?

THE PRESIDENT: Well, not yet, because I think it’s important to see how the economy evolves and how effective the first stimulus is. I think it’s fair to say that — keep in mind the stimulus package was the first thing we did, and we did it a couple of weeks after inauguration. At that point nobody understood what the depths of this recession were going to look like. If you recall, it was only significantly later that we suddenly get a report that the economy had tanked.

-- White House transcript of press conference, June 23

Right Action, Wrong Reason

I thought, for a while, that Mr. Obama really understood what was going on. I'm still not sure he doesn't. He's doing many of the right things, but he's not explaining why he's doing them.

At this point, I'm not sure about that. If I were POTUS, I'd surely not try to convince everybody that there's a dramatic sea change occurring, if I could get support from Congress for what I needed done without that explanation. When your child is standing in the middle of the road, and there's a semi coming around the corner, far too fast, you don't explain that you know about the semi because you can see the shadow; you simply grab the kid and get him to safety. Everybody knows kids shouldn't be in the middle of the road, and you don't want to get into a conversation about shadows, and the angle of the sun, and so forth.

And even if someone were to explain what's happening, it's not clear that Congresscritters, whether Representatives or Senators would understand. What's more, they not only have to understand, but they have to sell the electorate on the changes.

Some of the electorate isn't smart enough to catch on. Some is smart enough to catch on, but reluctant to grasp new ideas. Some are smart enough to catch on, but it's not in their self-interest to cooperate. You just grab the kid and get him to safety.

What Needs To Be Done

The economy has been going south since the 1960s. We've been losing manufacturers to overseas, been educating our children far too poorly, we've been saving at far too low a rate, and we've been watching our economy rely more and more on increasingly few corporations.

Over the decades, we've been seeing more and more films made about corrupt businessmen. The fact is, there are many good and decent men (and a few women) running corporations, but the problem is, corporations are inherently evil.

Large Corporations Are Socialist

The problem is that they're a socialist organization. Free markets are based on the notion that capital is valuable. Indeed, in the past, there's been a greater shortage of capital than any other resource. The owner of capital puts it to use, risking it, in exchange for a monetary reward. The greater the risk, in theory, the greater the reward needs to be.

However, corporations are owned by shareholders, but managed by hired hands. If a hired hand takes greater risks and wins, he argues that he should share in the rewards, which is an argument that has sounded fairly reasonable. If he takes those risks and he loses, he can see the bricks falling atop him, and he moves to another job, quickly, before the whole thing collapses. In the 1950s, this was less of a problem, because people were expected to work for the same company for their entire life. An increasingly mobile workforce has made it easier and easier to make risky bets with others' capital, sharing in the rewards but evading the disasters.

Small Business Is Different

Small business is different in that the management of the business and the ownership of the capital is pretty much the same. That's not to say that small businesses don't borrow money, but when they lose money, the loan usually gets paid anyhow, and if it doesn't, it's the owner of the business who suffers a bad credit rating.

While job immobility allowed corporations to be more stable in the past, corporations were also more necessary in the past. Resources - materials, supplies, labor - were all fairly cheap. What was expensive was the machinery to transform raw materials into a finished product. That made it mass production extremely desirable. You may not have wanted a black Model T Ford - but Model Ts sold for $850 when they were introduced in 1909, when other cars cost several thousand dollars. The price had dropped to $360 by 1916, and to $300 in the 1920s, as the River Rouge plant became more and more efficient in producing those flivvers.

And they weren't all black, not in the beginning. Before the assembly line was developed, they were available in other colors, including red. It was simpler and cheaper to make only black cars - and black paint dried faster - and by 1918, half of all cars in the US were black Model Ts.

Nothing Went To Waste

When you're selling that many cars, other companies wanted a piece of the action. For a while, Henry Ford demanded that a certain component - transmissions, perhaps? - should be shipped 6 at a time, in wooden crates of an exacting manufacture, put together with screws rather than nails. They opened the boxes carefully at the factory, because the six transmissions in the box went into six cars - and the six sides of the wooden crate became the floorboards of those same six cars.

Other wooden crates were heated in ovens to become charcoal - to be sold under Henry Ford's Kingsford brand.

But what do you do when everyone has a tin lizzy? Price cuts don't help. Other industries had the same problem. Bethlehem steel grew to prominence making steel rails for railroads. They lasted much longer than the iron rails originally in use - but when the country's trackage was all built out, and all converted from iron rails to steel rails, demand dropped like a rock. They switched to steel for skyscrapers and steel for shipping, but skyscrapers switched to prestressed concrete and international shipping became air freight. Steel's too heavy for airplanes.

Blame It On Computers

The "problem" at this point is that computers have become extremely cheap. That means instead of getting the same mass-produced product your neighbor gets, computers make it possible for you to get exactly what you want.

But that means instead of a huge factory of hundreds of highly-specialized machines, all of which must function in order to produce one gizmo for sale, requiring 5000 people to run the factory at full speed, you can set up a mini-factory in the garage or the barn that can produce custom gizmos, requiring only five or ten men to operate the facility, or possibly only one person.

And instead of a front office that takes one person to sell and process paperwork and payments for every three men who are working, you can set up a website that handles virtually all of that.

Think Horizontal

It isn't only mattress manufacturers who think horizontal. The miracle of Silicon Valley is based on many small producers of components which work together. It's very much possible to set up a one-person computer factory, ordering cases from one company, motherboards from a second company, keyboards from a third, hard drives from a fourth, etc.

And it's not just computers. The Discovery Channel has a television show, "American Chopper" about a small manufacturer of motorcycles, Orange County Choppers, in California. They fabricate some of the parts for their motorcycles, such as gas tanks, but they buy tires, engines, seats, brakes, gauges, etc., from suppliers. It's not a one-person enterprise, by any means, but it's far more horizontal than the Harley-Davidson plant over in York.

And while Orange County Choppers is experiencing a little slowdown due to the economic downturn, they're talking about closing the factory in York. "It's not the big that eat the small, it's the fast that eat the slow." The vertical integration that made Ford's River Rouge the most desirable of all manufacturing facilties in 1910 is highly undesirable in 2024.

Turn On A Dime

The biggest problem with vertical integration is that when things change, you're stuck with facilities you can't use, people you have no need for, obligations you don't want to keep. In the 1970s, NCR laid off 30,000 workers in Dayton, Ohio, people who were highly skilled at machining gears, pouring castings, and other high-skill jobs. The mechanical cash register, which could cost well over $1000, was replaced by an electronic cash register, which amounted to little more than a $4 hand-held calculator and a shoebox. NCR dominated the Dayton economy, and workers who had been making $30/hour were fighting tooth-and-nail for the new $5/hour jobs, stuffing circuit boards.

When Paul Teutul designs a new motorcycle, he orders the components he needs, and the same workers who fabricated the tank on the old motorcycles and painted the old bikes are able to fabricate the tank on the new chopper, and paint it. He doesn't worry about the fact that the new seat is made of naugahyde rather than leather, putting his tannery workers out of operation.

At the other end of the supply chain, you have someone who owns a tannery. The people who make seats are buying less leather from him, because they're selling fewer seats. He repositions his operation to make leather for elegant handbags. Paul Teutul couldn't do that, if he owned the tannery, because he doesn't have streams of customers coming in for elegant handbags - they're motorcycle customers. The tanner, though, can do that.

The GM Answer

It's a mistake to think that GM is repositioned to survive. They've reduced their product lines, selling off Saturn and Hummer, but what they really need to do is become 30 or more companies. Each factory needs to be independent of the other. If you own a factory that makes V-8 engines, you're looking for a way to design products that incorporate V-8 motors. If you don't, you're looking to design products that customers want to buy, whether they use V-8s, jet turbines, electric motors, or tightly-wound rubber bands. Becoming a design agnostic means you have better products - and instead of buying ads to force unwanted products down prospects' throats, you're simply letting customers know you have what they want.

I can think of no company that ought to have more than one factory.

It's quite reasonable for a car dealer to carry more than one model. If someone comes into your dealership, having been your customer for years, and says, "I just bought a horse, and I need a pickup, so I can haul hay and oats," you don't want to turn him away because all you have are subcompacts. On the other hand, maybe you do. Instead of carrying a full line of furniture, with a shallow selection of each item, you might want to open a store that sells only tilt-back easy chairs. If there's a store 5 miles north that has $30 million in other furniture, and a choice of 10 tilt-back easy chairs, and a store 5 miles south that has no other furniture at all, and a choice of 300 different tilt-back easy-chairs, I think I'd be inclined to head south, because they're more likely to have something that matches my carpet and my draperies.

The Perfect Economic Storm

We've been seeing this coming for decades. We just haven't done anything about it in the past. And perhaps it wasn't obvious in the past that we needed to.

But we need to do something now. Instead of regulations that demand that toys be tested for lead content, because large corporations cannot be trusted, we need to exempt unincorporated manufacturers from that requirement while imposing strict liability for damages. If Joe knows that using lead-based paint on toy trucks can cause brain damage resulting in a $3 million lawsuit, and he's not shielded from liability by a corporate shell, he's going to be very careful to avoid doing harm.

The pseudo-conservatives that have kidnapped the GOP would object to such a provision. It's anti-business, they would say. But the basis of conservative thought is not to benefit business owners at the expense of anyone they harm. It's maintaining order. When you have social and legal structures that function well, society is orderly - and making people personally responsible for their actions makes things function better.

And Mr. Obama?

I'm not sure that Mr. Obama really comprehends what's happened, and what he needs to do. It's obvious that the Democratic leadership has no clue, and the GOP leadership (is there such a thing at this point) is unwilling to take a clue. There are some libertarians who understand what's going on, but almost by definition, if you're not leading one of the two dominant political parties, you're impotent.

But if you understand what's going on, you can protect and defend your family against the economic whirlwind. The truth is, we have troubles ahead of us, as a country, much greater than those troubles we've already seen. You need to cash in all your stocks, quit your job, Be Your Own Boss, and get horizontal, if you want to come out of this in good condition.

Other Bloggers On Related Topics:
Barack Obama - computers - corporations - design agnostic - economic stimulus - horizontal economy - manufacturing loss - Model T - Orange County Choppers - Paul Teutul - perfect economic storm - sea change - socialist - vertical integration