We are cruising for an economic bruising.
Our government is spending WAY more money than it takes in. The total national debt accumulated between the signing of the Constitution and 1980, when Ronald Reagan was sworn in as president, was about $1 trillion. (A billion is a thousand million; a trillion is a thousand billion.) We fought a lot of expensive wars before Reagan, including World War I, World War II, Korea and Vietnam.
The national debt now is headed for $9 trillion like a late freight. That is $30,000 for every man, woman and child in the United States.
Of the 28 years in which this huge debt was accumulated, 20 of them were under Republican presidents. The only Democrat, Clinton (love him or hate him), actually paid it down about $500 billion. (His opponents say he was lucky and was president during an economic miracle he had nothing to do with. Even if they are right, he did not spend the money, even though he had it. Don’t you wish others had shown similar restraint?)
But, bad as it is, the fact that our government is spending money like a sailor on shore leave isn’t the real problem. The real problem is Big Business. Recently I saw a bumper sticker that said, “If you are not outraged, you are not paying attention.” Every American company of any size seems to have adopted the business plan that sank the Soviet Union. I don’t mean they embraced communism. I mean they run on short-term results.
Reagan is widely credited with collapsing the Soviet Union. No doubt he hastened the process by spending wildly on national defense and causing them to follow suit (he also ran up a bunch of that debt). But the collapse of the Soviet Union was inevitable because of one thing: All planning was short-term. Nobel Prize winning economist Milton Freidman predicted it in the middle 1960s. He was a professor at the University of Chicago, and if I had not been going to school there, I probably would not have heard what he had to say. It was not popular. He drew a lot of criticism because he said the downfall of the Soviet Union would be its reliance on five-year economic plans. He was right.
In Soviet Russia, if you were a plant manager, you had a five-year quota to make. If you made it, you got a better place to live and a better job at a bigger plant. If you failed, you wound up in a Siberian hovel where it freezes more days than not. You got no credit for closing the plant down for a while to modernize it. All the government cared about was how much your plant produced in the last five years. So you patched the aging machinery together and tried to get through another five years. If you made it, the problems would be left for someone else to solve. That manager would do the same thing until some unfortunate found himself in charge of a plant that simply wouldn’t work anymore.
In the Soviet Union, the government imposed that short-term system. Here, the same thing is happening because of the stock market.
The average chief marketing officer of a large company will be in place for fewer than two years. The average chief executive officer (that means president) of a company will be in place five to eight years. Their pay and benefits depend on how the company performs that quarter or that year.
Why should they shut the plant down to modernize it? By the time the lack of modernization is crippling the company they will be three jobs away. So they don’t do the long-term planning they would do if that company were the only place they were ever going to work. They do what they can to get the short-term gains that get them bonuses and raises. Then they move on with fat severance packages in their pockets to their next opportunity to worship at the altar of the Dow Jones. The devil take the hindmost.
The same goes for insurance, banking and investments. Unfortunately, many managers of these organizations look for short-term profits to make their fortunes so they can move on to greener pastures, leaving the mess for those who follow.
Cal-Farm was an old-line, conservative insurance company that understood the business of insuring farmers. In the 1970s, when interest rates were well into the double digits, somebody decided the company could make a fortune in the construction performance bond business. They could get a 17 percent or 18 percent return on all that premium money.
Nobody stopped to think that the same forces that were driving up interest rates would also drive up building costs. Contractors could no longer build within their bids, and claims came in on those performance bonds in an avalanche. It sank Cal-Farm without a bubble. There is still a Cal-Farm, but it is not the same company in anything but name. The reserves and retained income from the old Cal-Farm are long gone.
The same kind of short-term thinking resulted in Orange County nearly going bankrupt because somebody was trying to make a killing in the short run, investing in something called derivatives.
Who does not remember savings and loans buried under a huge pile of junk bonds? Further, where do you think the current mortgage crisis came from? Lenders made loans that anyone could see would be trouble in a few years. People borrowed money using plans that caused interest to be re-set at levels they could not afford.
Then there was the French banker in the news lately who lost $7 billion of the bank’s money on some currency scheme.
Everybody assumed that the gravy train would go on and nobody would have to pay the piper. But the piper must be paid. And that is not going to be pretty because the piper is looking more and more like a thousand-pound gorilla.
We will talk about what it is going to take to tame the gorilla next time. I don’t expect you to like it. I know I don’t.
Dugan Barr started practicing law in Redding in 1967 as an insurance defense lawyer working for William W. Coshow
In 1973, he formed his own firm doing plaintiff and defense work, primarily in the areas of personal injury and wrongful death. Since that time he has tried more than 200 civil jury cases to verdict. These cases cover a broad spectrum of the law,including personal injury, wrongful death, products liability, airplane crashes, boating accidents, dangerous condition of public property, legal malpractice, medical malpractice, realtor malpractice, accountant malpractice, insurance bad faith, lender liability and securities fraud.
He is married and has five children.
The offices of Barr & Mudford, LLP, are located at 1824 Court St. in Redding and can be reached at 243-8008.
