January / February - Minnesota Precision Manufacturing Association

MANUFACTURING | MARVELSWorld Economies Are SputteringWHAT CAN WE MAKE OF ITby Fred ZimmermanEconomies struggle for a variety ofreasons. Inventories might be too high,necessitating a cyclical slowdown. Financialmarkets might suffer from insufficientsavings, thus resulting in tighter credit.Indirect costs might be excessive and needto be trimmed. Inefficiencies may needcorrection before production is resumed,to ensure, the industrial sector keeps itscompetitive edge.The U.S. economy has the first four ofthese attributes, but not the last. The UnitedStates, along with several other nations,still has the ability to produce world-classproducts at reasonable costs. Our economicproblems lie not with goods producers(those people employed in manufacturing,construction, and mining), though eachcountry has some companies ill-equippedto face the intensity of world competition.In the main, though, our increasinglystagnant world economy is bogged downby high costs and inefficiencies in othersectors—particularly overhead sectors.Although we have just completeda highly charged political campaignwith competent presidential candidatesfrom both major parties, there was notmuch discussion of the major causes ofa worldwide slipping economy. Thesemajor causes include:1. A financial system excessively geared tospeculation, rather than investment.2. An employment profile with too manypeople employed in occupations unrelatedto production, such as law, healthcare,finance, services and government. Suchan employment profile could never becompetitive in the long-term.FRED ZIMMERMANis a retired professorof engineering andmanagement at theUniversity of St. Thomas.He can be reached atzimco@visi.com.3. Retirement and compensationexpectations that vastly outstrip our abilityto pay—even when the economy is robust.Until these problems get discussedand resolved, we are unlikely to see asmoothly functioning economy again.Economic Problems Not Limited toUnited StatesAll countries are impacted by a slowingworld economy, some more than theUnited States. Most European countrieshave high costs, lucrative retirementpackages and aging populations. ManyAsian countries have export-orientedeconomies at a time when world demandis shrinking. South American and Africancountries often are heavily dependentupon the extraction of rapidly-depletingnatural resources with prices subject towide-price fluctuations in world markets.So, we are not in this economic dilemmaalone. We are all in this together.Some Good NewsOur brotherhood of world citizens doeshave some good news. It has been reportedthat the recent steep declines in the equitymarkets are being triggered by massive,often involuntary, selling by highlyleveragedhedge funds, private equity funds,and mutual funds to satisfy acceleratingwithdrawals and redemptions. These highlyspeculative funds, largely operating onborrowed money, have been influencingmarkets in unsavory ways for decades. Theyhave bought outgoing companies withtheir own assets and destroyed them withinept management. Through derivativesand poorly structured financial pseudoinstruments,they have manipulatedmarkets to their own short-term advantageat an extraordinary expense to others.Operating out of high-rise buildings inlarge, money center cities, these highlypaid,inexperienced people rarely exhibitedfirst-hand knowledge of the businesses theywere managing or where they were placingtheir investments. They fostered a cynicalindifference to quality management as wehave come to know it. It now appears thatmany of them will go out of business—andthat is part of the good news.Unfortunately, many individualsinvested money in speculative funds,such as reckless financial institutionsand imprudent pension funds, and thatmoney is likely to be permanently lost.These tragic situations are unfortunate,but it would be a greater tragedy to keepthese nefarious funds in business to reekhavoc another day.A Historical PerspectiveIn the past 60 years, the U.S.nonagricultural industry has shifteddramatically away from tangibleproduction (manufacturing, constructionand mining). We have neglected it toconcentrate on other things. In 1900, 48percent of the nonagricultural labor forcewas engaged in tangible production. Evenas late as 1950, this figure was still at 41percent. By 1988, it had dropped to 24percent. In 2008, only about 16 percentof employment was in manufacturing,construction and mining, and all of thesewere declining.Meanwhile, employment in finance,insurance, real estate, services andgovernment, what we might call grossnational overhead, has mushroomedfrom 13 million people in 1950 tomore than 50 million today. Minnesotacontinues in the same vein.Percent of U.S. Total16 | PRECISION MANUFACTURING January | February 2009