Alternatives for the People?

IPE.com reports that the U.K.’s Personal Accounts Delivery Authority has found that 80% of “stakeholders” polled said they supported the use of alternative investments in personal retirement accounts.

The PADA, as it’s known, is a quasi-governmental body charged with setting up a kind of national pension program for those without workplace retirement funds. As part of that process, the PADA has been in consultation with stakeholders it describes as the pension and investment industry participants, employer organizations, unions, consumer groups, academics and pension fund trustees. In May of this year, the PADA began reaching out to these stakeholders to gather feedback on what this sort of national pension scheme might look like, including asset allocation options.

Perhaps surprisingly, given alternatives’ negative portrayal over the past couple of years, 37 of 46 respondents said they saw a place for alternatives in personal retirement accounts. “Alternative asset classes were felt by most respondents to be suitable for a scheme that is likely to be significant in size and could offer important ways of increasing returns or managing risk,” according to the report that came out of the PADA’s consultations. They specifically cited property and commodity investments.

Which sounds fine, until the kicker:

“… [I]nvesting in alternatives was identified by stakeholders as creating challenges around liquidity, daily pricing and costs, [however] they thought these challenges could be overcome.”

So, alternative are great … except for, you know, the liquidity, pricing and cost issues.

Where have we heard that before? It seems those questions are never adequately answered. We simply move on, justifying the status quo by pointing to improved returns. Until the next crisis, when we once again realize that sometimes everything is correlated.

Outsource this….

We like cheap stuff.

How else to explain this good post from a couple of days ago by Jeff Matthews, in which he quotes at length a harangue by David Farr, chief executive at Emerson Electric Co.?

In it, Farr laments Washington policies he says are destroying the U.S. manufacturing industry, and heaps special scorn on the proposed health care legislation.

“I listen to everything Washington is doing—wasting money, raising the deficit to 10, $12 trillion—the debt level to 10, $12 trillion, going to $23 trillion; raising taxes; putting regulations and requirements on me as a manufacturing company.

“What do you think I’m going to do? I’m not going to hire anybody in the United States. I’m moving.”

Farr is a hoot. And while you can disagree with him about the rightness or wrongness of shifting jobs overseas, his broader point is that it costs too much to do business here.

The bigger question, though, is why is it “too expensive” to do business here? Is it because we overpay workers? Because corporations are overtaxed in order to fund government?

No.

It’s because we demand cheap stuff. There’s no way you can save $10 on a hair dryer at Wal-Mart if that hair dryer is manufactured here, because labor rules here dictate that workers be paid minimum wage. Add to that benefit costs, safety costs, taxes … it adds up.

So what’s Farr’s answer? The same as a lot of other companies. They’re moving.

“Why do you think we’re moving our companies into the emerging markets? Because that’s where the growth is. That’s where the jobs are going to be. That’s where we can create value.”

Moving manufacturing to emerging markets countries allows companies to exploit cheaper labor and lower raw materials costs. Automation of the manufacturing process helps negate the importance of a skilled workforce. In essence, you can make a hair dryer anywhere and ship it anywhere, so long as the price of oil stays below a certain point.

Here’s where the importance of us wanting cheap stuff comes in: Since almost nobody in America is willing and/or able to pay an extra $10 for a hair dryer, eventually all hair dryer manufacturing moves to inexpensive labor markets. It would not make sense if that didn’t happen.

Meanwhile, moving manufacturing to emerging markets also creates economic growth in those countries thanks to the addition of jobs—manufacturing, managerial and ancillary. Economic growth fosters demand for the manufactured goods. So in a sense, moving manufacturing overseas naturally creates demand in those same markets for those goods.

And back here in America, we lose manufacturing jobs, the economy suffers and demand falls, increasing the desire for even cheaper stuff.

So as tempting as it might be for some to criticize Farr, first look in the mirror. If you’re not willing to pay more for a product in order to support higher wages and other attendant costs of doing business in the U.S., don’t complain about the loss of jobs to cheaper labor markets.

The good news is, if we all manage to live long enough, economic growth and increasing regulation in those emerging market countries will once again force manufacturers to strike out in search of cheaper manufacturing locales. By then the U.S. should be a prime location.

A Turkey Day Treat

On this Thanksgiving Eve, here’s a clip from a classic: the “Turkeys Away” episode of WKRP in Cincinnati that originally aired Oct. 30, 1978. WKRP was arguably the best original sitcom to come out of the ’70s. It’s sad that licensing issues involving the original music in the show have prevented later viewers from seeing the shows as they originally aired, but that’s show business.

In the meantime, enjoy, and Happy Thanksgiving.

-Chris Clair

This entry was posted on Wednesday, November 25th, 2009 at 4:34 pm and is filed under Wednesday's Random Shots. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.