And You Thought We Lost Manufacturing Jobs & The Middle Class Forever ?

Here Is How To Bring It Back!

“Not knowing how to prevent economic decline — is tragically regrettable. Knowing, but not preventing — is pitiful and inexcusable” — Oleg Feldgajer

BROAD STROKES GIVEAWAY

Fixing disappearing middle class problem is not simple. Neither is restoring of manufacturing jobs. And, as with any complex problem — the solution is multi-faceted.

On a surface, it looks as if cutting taxes is all we need. But history proves otherwise. Tax cuts in the past haven’t eased, or ended, the decline of the middle class. Taxes were cut by president Ronald Reagan during the 1980s, and by president George W. Bush in the 2000s. Yet, the middle class steadily shrank and declined, ever since.

Therefore, I’m recommending a much more balanced and more comprehensive approach. Balance, means: lower taxes CONTINGENT upon spending on corporate investments, innovation & training! And comprehensive: involves topping it up with much deeper financial reforms — to avoid 1980s’ mistakes.

PROBLEM

As per recent report by Washington Post: “the typical 27-year-old man’s annual earnings in 2013 were 31 percent less than those of a typical 27-year-old man in 1969. The data suggest that today’s young men are unlikely to make up for that decline by earning more in the future”

So, it’s not surprising to see the findings from Pew Research, such as:

· In 1971, the middle class represented the majority of American earners. The percentage of middle class Americans has fallen from 61% in 1971 to 50% in 2015

· The share of aggregate income held by middle-income households plunged from 1970 to 2014 and is now less than the share held by upper-income households

Not that manufacturing jobs in US are showing healthier statistics than the embattled middle class. As WEF reports: “In the two decades from 1979 to 1999, the number of manufacturing jobs in the United States drifted downward, from 19 million to 17 million. But over the next decade, between 1999 and 2009, the number plummeted to 12 million”

And MIT concludes that: “A massive 30-year decline of employment beginning in 1980, led to the liquidation of more than a third of U.S. manufacturing positions. Employment in the sector plunged from 18.9 million jobs to 12.2 million”

In addition: “Since 2000 alone, millions of workers have lost manufacturing jobs paying $25 per hour plus health and retirement benefits. Often the only alternatives were service-sector jobs without benefits, paying $12 an hour”

The only positive signs are attributed to advanced manufacturing industries — that led to increased productivity. Strangely enough, and despite significant losses of manufacturing jobs — the total output of the U.S. manufacturing sector is growing, impressively:

For years, though, middle class shrinkage and disappearing manufacturing jobs were attributed to globalization. And nobody encapsulated it better than United States presidential candidate, Ross Perot. His description of the “giant sucking sound” — remains the most recognizable quotation on anticipated job losses, caused by North American Free Trade Agreement (NAFTA).

More recently, however, and due to Artificial Intelligence (AI) Renaissance — there is a new manufacturing jobs nemesis — the AI Boogeyman. And Boston Consulting Group reports: “that it costs barely $8 an hour to use a robot for spot welding in the auto industry, compared to $25 for a worker — and the gap is only going to widen”

So according to Bureau of Labor Statistics, although since 1970s, more than 7 million factory jobs have disappeared — the total job market, as a whole — has added more than 50 million jobs over the same period. Just not in….manufacturing.

As much as blaming robotics and automation for job losses is fashionable — a quick look at employment figures at Amazon, begs to differ. As company grows, and increases the scope and size of its offerings — so do their job figures! Robotics and automation allows Amazon to do more, much more. And to do more, the company is hiring more people. A good example of “Keep It Simple, Stupid” principle at work!

It’s also worth noting, that some of the automation technologies introduced almost 50 years ago — didn’t eliminate the jobs they were supposed to vaporize. Instead, humans and machines COEXIST- to the benefit of happier customers.

Does Manufacturing Still Matter To The US Economy?

According to McKinsey, as a country, USA still ranks second in the world for manufacturing output:

· “The United States continues to lead the world in some manufacturing product categories, including aircraft and refined petroleum products. It is the world’s second-ranked producer in other categories, including computers, plastics, and cars (a category in which it ranks behind China but ahead of Japan and Germany)

· It accounts for 60 percent of the nation’s exports and 70 percent of private-sector R&D. It is one of the biggest drivers of trade, innovation, and productivity growth — all factors that define a nation’s competitiveness in the global economy”

SOLUTION

If there was a silver bullet that could have solved both declines — reducing marginal tax rates in the US would do the trick! Or so it goes — if you subscribe to such theories.

Well, don’t get me wrong: tax reform is a good thing. According to WSJ:

· “Corporate tax reform is one of the few issues that attract bipartisan support in Washington. Lawmakers from both sides agree that the current system is deeply flawed. Because the U.S. hasn’t updated its tax code in 31 years, Congress has a once-in-a-generation opportunity to level the playing field for American businesses and workers”

· “The U.S. corporate tax rate was among the lowest among developed countries after the 1986 tax reform. It is now the highest. A recent study confirms that even after accounting for deductions, credits and other tax-reducing provisions, U.S. multinationals face among the highest effective tax rates in the world. Many U.S. companies opt out of the corporate tax system by organizing as partnerships and “pass through” businesses. In 2013, corporations accounted for only 44% of business income in the U.S. compared with about 80% in 1980”

· “Current law allows U.S. multinationals to defer U.S. tax payments on foreign earnings until they are repatriated. Most American companies take advantage of this option for at least some of their foreign earnings. As foreign earnings have grown and foreign corporate tax rates have plummeted, the deferral option has become more attractive. An estimated $2.6 trillion of U.S. companies’ foreign earnings is now trapped abroad. This is money that might otherwise be used to finance investment, job creation and domestic growth”

So, on a surface, it looks as if cutting taxes is all we need. But history proves otherwise. Tax cuts in the past haven’t eased, or ended, the decline of the middle class. Taxes were cut by president Ronald Reagan during the 1980s, and by president George W. Bush in the 2000s. Yet, the middle class steadily shrank and declined, ever since.

Therefore, I’m recommending a much more balanced and more comprehensive approach. Balance, means:

Lower taxes CONTINGENT upon spending on corporate investments, innovation & training!

And top it up with much deeper financial reforms — to avoid 1980s’ mistakes.

Contingent Marginal Tax Reduction

Corporate tax should be lowered when corporate entities are spending predefined percentage of their revenues on Innovation & Training. I’m not throwing around any specific numbers, or Key Performance Indicators (KPIs) — but here is a simple high-level example: to qualify, spend 10% of your EITDA on:

· Corporate Venture Capital (CVC) investment

· R&D

· Training of existing and new employees

Of course, KPIs can be adjusted up, or down. But since I always look at the OPPOSITES — until such corporate investments are made, all stock buybacks should be EXTREMELY costly. Disallow tax cuts — until all the cash coming home is used to prop innovation, and not the ailing stock!

As per recent Forbes article: The Ugly Truth Behind Stock Buybacks

· “American companies have been spending wildly lately, but that cash isn’t being used for R&D or innovation. Rather, it’s being spent to buy up gobs of company stock”

· “In November 2016, Goldman Sachs’ chief equity strategist David Kostin estimated that, in 2017, S&P 500 companies will spend $780 billion on buybacks — a new record”

· “For most of the 20th century, stock buybacks were deemed illegal because they were thought to be a form of stock market manipulation. But since 1982, when they were essentially legalized by the SEC, buybacks have become perhaps the most popular financial engineering tool in the C-Suite tool shed”

Granted, some companies will still choose financial engineering gimmicks — to fake their economic performance. But unless such moves are properly balanced with investment in future innovation and training — they should pay much higher taxes. Benefiting present shareholders while disregarding future generations — should be costly, in deed.

Deeper Financial Reforms

And yet, even if all KPIs are in place, and stock buybacks are much more expensive — we still need to prevent corporate raidings, in the name of “greater efficiency”

Activist investors and over-zealous hedge funds may buy and sell options — all they want. They shouldn’t be, however, allowed to manipulate legally issued stock — through short selling. Even worst, naked short selling should never be allowed, period. It should be criminalized!

And high-frequency trading? Do you really believe that trading the same stock 10,000 times a minute, addresses deep fundamental values? Better yet, you trust and have confidence that only few financial engineering Einsteins understand it? Move aside, Warren Buffett! Please…

Are We There Yet?

So how can we see that the above changes are truly working? The answer can be found in some of my previous posts, entitled:

· Corporate Venture Capital — The Most Underutilized Factor Endowment Of Corporate Giants

· How To Turn Corporate Venture Capital Into A Magnet For Raising SEED CAPITAL

If current investment ratio between CVCs and Institutional Venture Capital (IVC) investors is: 20/80 — a healthy comeback would REVERSE it. I’m convinced, that the exact OPPOSITE of 80/20 would indicate that North American Corporations are back on track!

Yes, modifying tax code and making share buy-backs expensive — will release enormous funds for corporate investments, innovation and training. And as new capabilities emerge, so will the jobs.

One more thing …. innovation doesn’t need to be always DISRUPTIVE. As Peter Thiel so elegantly explained in his book: Zero To One: “Disruptive kids get sent to the principal’s office. Disruptive companies often pick fights they can’t win”

Since corporate innovation may occur in all of McKinsey’s Three Horizons (3H) of Growth– CVC’s can address BOTH: current performance & future opportunities of their parent companies. IVCs can’t.

Horizon 1

Represents core businesses that provide the greatest profits and cash flows. The focus is on improving performances, increasing sales, reducing costs, and maximizing overall value

Horizon 2

Encompasses emerging opportunities linked to substantial expansion of the existing business models — which could require considerable investment

Horizon 3

Contains ground-breaking ideas for exploring emerging opportunities that could cannibalize existing business, but also reposition the company — for the future

IN CONCLUSION

Fixing disappearing middle class problem is not simple. Neither is restoring of manufacturing jobs. And, as with any complex problem — the solution is multi-facetted.

The good thing is, however, that we already know what didn’t work in the past. And since, like in any business, no business plan survives the first contact with the real customer — the fiscal policies must also be tweaked.

It’s time to add more substance to our fight for future prosperity. Experience brings wisdom, and no Twenty Something analyst at IVC can have a better understanding of corporate pain — than their CVC counterparts. All CVCs need is more money to invest in evolving economy — much more!

And no, I don’t care if IVC investment analysts are wearing designer T Shirt on a West Coast, or a pair of proverbial red suspenders on Wall Street….

Oleg Feldgajer is President & CEO of Canada Green ESCO Inc. Oleg is positioning the company to become a leader in financing AI enhanced green energy projects and ventures. CGE’s mission is to guide DISRUPTIVE businesses in ENERGY & TRANSPORTATION toward profitable business models. Oleg is passionate about such mission, and firmly believes that without AI based innovation, we will all prematurely choke on polluted air and dirty water. CGE delivers 100% financing (levered and unlevered) to its clients — and utilizes large equity pools, and non-recourse debt. Oleg offers creative, fresh ideas to open-minded businesses — that embrace both: logic AND opportunistic intuition. CGE stands against mediocrity & its modus operandi is quite simple: If CGE is not invited to join your BOD, or Advisory Board — we failed!

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