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Paul Ryan’s Fairy-Tale Budget Plan

 August 13, 2012

More crony capitalism

By DAVID A. STOCKMAN                                                                   Greenwich, Conn.

PAUL D. RYAN is the most articulate and intellectually imposing Republican of the moment, but that doesn’t alter the fact that this earnest congressman from Wisconsin is preaching the same empty conservative sermon.

Thirty years of Republican apostasy — a once grand party’s embrace of the welfare state, the warfare state and the Wall Street-coddling bailout state — have crippled the engines of capitalism and buried us in debt. Mr. Ryan’s sonorous campaign rhetoric about shrinking Big Government and giving tax cuts to “job creators” (read: the top 2 percent) will do nothing to reverse the nation’s economic decline and arrest its fiscal collapse.

Mr. Ryan professes to be a defense hawk, though the true conservatives of modern times — Calvin Coolidge, Herbert C. Hoover, Robert A. Taft, Dwight D. Eisenhower, even Gerald R. Ford — would have had no use for the neoconconservative imperialism that the G.O.P. cobbled from policy salons run by Irving Kristol’s ex-Trotskyites three decades ago. These doctrines now saddle our bankrupt nation with a roughly $775 billion “defense” budget in a world where we have no advanced industrial state enemies and have been fired (appropriately) as the global policeman.

Indeed, adjusted for inflation, today’s national security budget is nearly double Eisenhower’s when he left office in 1961 (about $400 billion in today’s dollars) — a level Ike deemed sufficient to contain the very real Soviet nuclear threat in the era just after Sputnik. By contrast, the Romney-Ryan version of shrinking Big Government is to increase our already outlandish warfare-state budget and risk even more spending by saber-rattling at a benighted but irrelevant Iran.

Similarly, there can be no hope of a return to vibrant capitalism unless there is a sweeping housecleaning at the Federal Reserve and a thorough renunciation of its interest-rate fixing, bond buying and recurring bailouts of Wall Street speculators. The Greenspan-Bernanke campaigns to repress interest rates have crushed savers, mocked thrift and fueled enormous overconsumption and trade deficits.

The greatest regulatory problem — far more urgent that the environmental marginalia Mitt Romney has fumed about — is that the giant Wall Street banks remain dangerous quasi-wards of the state and are inexorably prone to speculative abuse of taxpayer-insured deposits and the Fed’s cheap money. Forget about “too big to fail.” These banks are too big to exist — too big to manage internally and to regulate externally. They need to be broken up by regulatory decree. Instead, the Romney-Ryan ticket attacks the pointless Dodd-Frank regulatory overhaul, when what’s needed is a restoration of Glass-Steagall, the Depression-era legislation that separated commercial and investment banking.

Mr. Ryan showed his conservative mettle in 2008 when he folded like a lawn chair on the auto bailout and the Wall Street bailout. But the greater hypocrisy is his phony “plan” to solve the entitlements mess by deferring changes to social insurance by at least a decade.

A true agenda to reform the welfare state would require a sweeping, income-based eligibility test, which would reduce or eliminate social insurance benefits for millions of affluent retirees. Without it, there is no math that can avoid giant tax increases or vast new borrowing. Yet the supposedly courageous Ryan plan would not cut one dime over the next decade from the $1.3 trillion-per-year cost of Social Security and Medicare.

Instead, it shreds the measly means-tested safety net for the vulnerable: the roughly $100 billion per year for food stamps and cash assistance for needy families and the $300 billion budget for Medicaid, the health insurance program for the poor and disabled. Shifting more Medicaid costs to the states will be mere make-believe if federal financing is drastically cut.

Likewise, hacking away at the roughly $400 billion domestic discretionary budget (what’s left of the federal budget after defense, Social Security, health and safety-net spending and interest on the national debt) will yield only a rounding error’s worth of savings after popular programs (which Republicans heartily favor) like cancer research, national parks, veterans’ benefits, farm aid, highway subsidies, education grants and small-business loans are accommodated.

Like his new boss, Mr. Ryan has no serious plan to create jobs. America has some of the highest labor costs in the world, and saddles workers and businesses with $1 trillion per year in job-destroying payroll taxes. We need a national sales tax — a consumption tax, like the dreaded but efficient value-added tax — but Mr. Romney and Mr. Ryan don’t have the gumption to support it.

The Ryan Plan boils down to a fetish for cutting the top marginal income-tax rate for “job creators” — i.e. the superwealthy — to 25 percent and paying for it with an as-yet-undisclosed plan to broaden the tax base. Of the $1 trillion in so-called tax expenditures that the plan would attack, the vast majority would come from slashing popular tax breaks for employer-provided health insurance, mortgage interest, 401(k) accounts, state and local taxes, charitable giving and the like, not to mention low rates on capital gains and dividends. The crony capitalists of K Street already own more than enough Republican votes to stop that train before it leaves the station.

In short, Mr. Ryan’s plan is devoid of credible math or hard policy choices. And it couldn’t pass even if Republicans were to take the presidency and both houses of Congress. Mr. Romney and Mr. Ryan have no plan to take on Wall Street, the Fed, the military-industrial complex, social insurance or the nation’s fiscal calamity and no plan to revive capitalist prosperity — just empty sermons.

David A. Stockman, who was the director of the Office of Management and Budget from 1981 to 1985, is the author of the forthcoming book “The Great Deformation: How Crony Capitalism Corrupts Free Markets and Democracy.”

Hidden Champions

August 13, 2012

German Small Businesses Reflect Country’s Strength


FRANKFURT — A growing number of Germans may want to see the euro zone dissolve, but Dagmar Bollin-Flade, owner of a small machinery company here, is not among them. Like many German businesspeople, she is keenly aware of the economic benefits of a common currency — and willing to pay a price to keep the euro intact.

“All those who say, ‘We want to get out of the euro’ — they don’t remember how it was,” Ms. Bollin-Flade said.

Her company, Christian Bollin Armaturenfabrik, belongs to the country’s vast swath of small and medium-size companies that are known as the Mittelstand and account for 60 percent of German jobs. Most feel no nostalgia for the days when they and their customers had to keep an eye on the value of a dozen European currencies, a time when the German mark sometimes became so strong that it threatened to price them out of foreign markets.

Amid loose talk about letting Greece leave the euro, or even reintroducing the mark, German business leaders are often the ones reminding the public what the economic consequences might be. Markus Kerber, president of the Federation of German Industry, last week called for more European integration and criticized what he said was “persistent political indecisiveness and disunity” that has undermined trust in the euro.

More than most, the Mittelstand has benefited from the euro, which has made it easier for small companies to behave like multinationals. Bollin, with about 30 employees in a small factory, sells its specialty shut-off valves to customers in China and around Europe.

So far, companies like Bollin have endured the euro zone debt crisis remarkably well. Ms. Bollin-Flade said she has not seen any effect on sales. But she and her peers are concerned about the future. In a poll commissioned this year by the industry federation, the number of Mittelstand companies that expected business to improve in the next 12 months slumped, while the number expecting a turn for the worse soared.

Ms. Bollin-Flade, who was one of about 10 businesspeople invited to discuss Mittelstand issues with Chancellor Angela Merkel in her office last year, said she supported the German leader’s strategy of insisting that financial aid be granted to troubled euro zone countries only if they show more fiscal discipline and economic reforms.

“We should get something in return,” Ms. Bollin-Flade said.

What people like her think is important. While companies like BMW and Siemens spring to mind when people think of German business, the Mittelstand is arguably the soul of the German economy, and also reflects many of the values that Germany is known for.

In fact, the Germany economy sometimes resembles one big Mittelstand company: it is built for stability more than growth. Debt is bad, prudence a higher virtue than profit.

That characteristic often frustrates Germany’s neighbors, as well as some economists, who wish Germans would spend more to stimulate growth in the rest of the euro zone. But Germans argue that their approach has helped the country avoid downturns like those that have hit Spain and Italy and are threatening France. While Greece was racking up debt during the last decade, Mittelstand companies were resolutely cutting theirs, according to data from the Institute for Mittelstand Research in Bonn.

They want to increase their independence from banks and external financing,” said Christoph Lamsfuss, an economist at the institute. “They want to make sure that the next generation inherits a solid company. In the final analysis that is good for the German economy.”

Companies like Christian Bollin Armaturenfabrik, named for Ms. Bollin-Flade’s grandfather, who founded the maker of specialized valves in 1924, will play an important supporting role in determining how much the German economy will continue to provide a crucial counterweight to the recession in Southern Europe.

Data scheduled to be released Tuesday is expected to show that the German economy continued to grow modestly in the second quarter of this year. Not so the euro zone as a whole, which had zero growth in the first quarter and was unlikely to have shown growth in the second. France may join Spain, Italy and several other euro zone countries that have experienced declining output.

There are signs that the crisis is now beginning to hurt German industry. Production in the country’s factories fell 0.9 percent in June from May, according to official figures. New orders have begun to slump.

Yet there are also reasons to believe that the Mittelstand is well armored for a downturn. The turmoil of the 20th century, the years of stagnation that followed German reunification and then a sharp recession in 2009 have taught Mittelstand companies to be prepared for the worst.

A few years ago, Ms. Bollin-Flade did something that may help explain why the German economy has been so resilient. She turned down orders from her biggest customer.

Ms. Bollin-Flade was worried about becoming too dependent on any one source of revenue. So she and her husband and business partner, Bernd Flade, enforced a rule they still apply today: no customer may account for more than 10 percent of sales, even if that sometimes means turning away business.

“If 20 percent of your sales fall away, that’s difficult,” Ms. Bollin-Flade said. “If 10 percent falls away it’s not nice, but it’s not dramatic.”

In places like Silicon Valley or Shanghai, leaving money on the table like that would probably be enough to get an entrepreneur drummed out of the local chamber of commerce. But the risk aversion, and the preference for slow, steady growth rather than a quick euro, is typical of the Mittelstand.

“My machines are paid for,” said Ms. Bollin-Flade. “I have no bank credit. That’s what sets the Mittelstand apart. You set aside something for bad times.”

Yet — illustrating one of the strengths typical of Mittelstand firms — Bollin Armaturenfabrik has an international reputation and exports its high-end niche products around the world. On a recent day, a wooden pallet sat on the workshop floor stacked with cardboard boxes marked for China.

“That’s going to Beijing on Friday,” said Marcus Franz, the production manager, speaking above the whir of metal lathes and drill presses.

Bollin specializes in making parts to order and delivering them quickly — sometimes within hours, if need be. Customers will pay what they have to for a component that may be essential to keep a factory running, Ms. Bollin-Flade said. “The price is not the issue. Delivery time is the issue,” she said. “There aren’t too many companies that do what I do.”

She summed up the frugal Mittelstand approach to business by quoting an old saying. “You can only wear one pair of pants,” said Ms. Bollin-Flade, who was wearing a pantsuit. “The second one is in the closet and you don’t need the third.”

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