By Roger O'Daniel
Laurence D. Fink, CEO & Chair of the Board of New York-based BlackRock, the world’s largest asset manager, was a guest of Bloomberg Television’s “Market Makers” recently. The following talking points caught my attention:
Mr. Fink concluded with this statement. “Europe is a great wake-up call and they’re [US Lawmakers] still snoring away. We need more clarity, and that is my message to every politician I see. It’s all about confidence. No one is investing for tomorrow.”
This is a link to the published story: BlackRock's Fink: US Leaders ‘Snoring Away’ Amid European Wake-Up Call
Politicians think short-term, not long-term. If the long-term solution conflicts with the short-term solution, the short-term solution wins. Politicians know they have to face a re-election. A win requires votes, activists and campaign money. Politicians also know that their constituents think short-term and support candidates that support their own interests. Their more liberal constituents also support long-term solutions for the so-called “common good” if they believe that someone else will pay for it.
If the electorates are polarized, the politicians cannot please or satisfy everyone. Non-controversial projects trump controversial projects, even when the controversial projects are critically important. If pragmatic solutions conflict with moral solutions, pragmatism wins. This conundrum creates an irresistible urge to spend political energy on the wrong things.
The Ship of State is like a ship at sea. The bigger and heavier it is, the longer it takes to change course. The faster it moves, the longer it takes to come to a complete stop. It takes a lot of energy and time to get it moving in the right direction, with sluggish steering control until it regains measurable speed. Private-sector management knows this. Government regulations require up to 60-day notice for a layoff. Reference talking point 4 above.
Those government contractors invested in tooling, specialized infrastructure, and subcontracted for long lead-time components. They also invested in research and development (R&D), design, prototyping and test facilities for military equipment that the Department of Defense (DOD) is forced to cancel or reduce the buy quantity under sequestration. That action creates contract termination costs. Contract renegotiation and termination creates cost overruns of astronomical proportions with more dead-end expense to come. Ironically, it costs money instead of saves money, short-term. Worse, the money spent to terminate is money wasted.
For example, the last lot of F-22 fighter aircraft had a fly-away cost of $135 million. Economists call this the incremental cost of building one more unit. The average total cost of each F-22 was about $500 million because fixed costs invested to build the first unit were allocated over a lot fewer units.
The people these contractors hired and trained to build this new stuff are no longer needed. All of the sunk costs required to build the first product are spread more thickly over fewer units. These contractors are going to get big bucks for renegotiation and cancellation of prior DOD commitments. The employees are going to become unemployed seeking work and drawing unemployment compensation. These same employees will be under tremendous financial pressure. That puts home mortgages at risk and forces reduced spending. Together, these consequences cause our economic engine to cough and sputter at the worst possible time.
Our government is struggling over two highly-opposed ideologies. This ideological warfare has no exit strategy or plan for reconciliation.
One ideology is led by the Administration with support of a US Senate majority and liberal US Court system. They want to convert the United States into a modern version of a Socialist Federal Republic with provincial State and Local government. These people see no problem with debauching the US currency to “rebalance the economy.”
The other ideology, led by the US House of Representatives and US Senate minority, advocates Constitutional, Fiscal and Social Conservatism with disputed dosage of social moderation. Issues include a balanced budget, FED reform, border protection, right to work, repeal “ObamaCare”, and strong national defense.