Head of GAO -- World's Largest Employer Lost $450m Last Year

[WDCRob]

Letter to the Editor of the Washington Post, Christmas Eve day. I figured it might have slipped past due to the timing. Gotta love the first paragraph...


America's Red Ink

Sunday, December 24, 2006; Page B06

The largest employer in the world announced on Dec. 15 that it lost about $450 billion in fiscal 2006. Its auditor found that its financial statements were unreliable and that its controls were inadequate for the 10th straight year. On top of that, the entity's total liabilities and unfunded commitments rose to about $50 trillion, up from $20 trillion in just six years.

If this announcement related to a private company, the news would have been on the front page of major newspapers. Unfortunately, such was not the case -- even though the entity is the U.S. government.

To put the figures in perspective, $50 trillion is $440,000 per American household and is more than nine times as much as the median household income.

The only way elected officials will be able to make the tough choices necessary to put our nation on a more prudent and sustainable long-term fiscal path is if opinion leaders state the facts and speak the truth to the American people.

The Government Accountability Office is working with the Concord Coalition, the Brookings Institution, the Heritage Foundation and others to help educate the public about the facts in a professional, nonpartisan way. We hope the media and other opinion leaders do their part to save the future for our children and grandchildren.

DAVID M. WALKER
Comptroller General of the United States
Government Accountability Office

[EJ]

Re: Head of GAO -- World's Largest Employer Lost $450m Last Year

Several people have written in to ask me what I think of this week's Barron's Cover article by Jonahthan R. Laing, Welcome to Sizzle Inc. (registration requred) wherein the author makes the case that "The 'platform economy' -- a business model focused on knowledge while outsourcing production -- heralds an age of unprecedented U.S. prosperity." The December 24, 2006 letter to the editor of the Washington Post by David M. Walker, Comptroller General of the United States is a concise reply. (Thanks, WDCRob for posting it.)

Here's a more lengthy response.

We've heard this nonsense before. It’s not a new argument. The problem with it is that it fails to take into account the opposite trend, that innovation is growing more quickly outside the U.S. than within. The “platform” business model conceives of China and India, for example, as nations to which production will continue to be outsourced by U.S. innovators. However, within five years the most technologically advanced, highest quality new products will originate from these countries; new technologies will be both invented and produced there. It’s wishful thinking that the U.S. enjoys a kind of long term monopoly on invention. It does not.

As this previously quoted report by the American Institute of Physics explains:

“Fastest-growing economies continue to increase their R&D investments rapidly, nearly five times the rate of the United States: The countries of China, Ireland, Israel, Singapore, South Korea and Taiwan collectively increased their R&D investments by 214 percent between 1995 and 2004. The United States in that period increased its total R&D investments by 43 percent.

“U.S. physical sciences and engineering research budgets significantly lag economic growth: As a share of GDP, the U.S. federal investment in both physical sciences and engineering research has dropped by half since 1970. In inflation-adjusted dollars, federal funding for physical sciences research has been flat for two decades. . . . Support for engineering research is similar.

“Innovators transform new knowledge into products and services. The United States has led the world in innovation and in the creation of knowledge that fuels this progress. Two benchmarks of knowledge creation, journal articles and patents, reveal that change around the world is eroding traditional U.S. leadership in these areas. Other countries are rapidly enlarging their stock of intellectual property assets and are expanding the boundaries of learning and discovery across all fields of science and engineering. Growth in patent applications around the world shows that these countries are also enhancing their abilities to put newly created knowledge to viable commercial uses.”

How about the last bastion of U.S. competitive advantage, defense? The Japanese have changed their constitution and will soon be designing and building weapons. It doesn't take a rocket scientist to imagine the kind of high tech rockets the Japanese are capable of designing. But the worst case scenario for "platform America" believers is biotech, especially apropos stem cell research. China is mostly Buddhist. Buddhist philosophy is that life begins at consciousness, that an embryo is "matter" until it becomes "aware." Thus while here in the U.S. we debate the ethics of research that will deliver the most significant new medical technologies in history, the Chinese continue to build on years of lead time in areas of research that will result in medical technologies that U.S. producers–pharma companies–will some day be licensing from them to cure our Parkinson’s and other diseases, not the other way around. Think of GM licensing hybrid car technology from Toyota. Oh, yeh. I forgot. Asians were are just copy cat producers. Anyone who thinks that needs to spend a few hours over here trying to find American names on patents. The "platform" business model argument in fact rests on a foundation of not-so-subtle racism.

[Spartacus]

Re: Head of GAO -- World's Largest Employer Lost $450m Last Year

Exactly what I thought when I first read that stuff many years ago, and since then the idea seems to have taken a life of its own.

The "platform" business model argument in fact rests on a foundation of not-so-subtle racism.

Or at least the very least, a kind of paternalism regarding artistry, creativity and ingenuity.

[Charles Mackay]

Re: Head of GAO -- World's Largest Employer Lost $450m Last Year

David M. Walker has stuck his neck out and done a service for all of us. I'm going to write him personally thanking him for his effort.

Now, I can count to two fingers for honest people in government... Ron Paul and David Walker.

[Spartacus]

Re: Head of GAO -- World's Largest Employer Lost $450m Last Year

What do you think of the idea that the best R&D today is in financial products and services?

And the companies that establish themselves as the current leaders in the field (JPM, Goldman) will have a first-mover, competitive edge for decades to come? In a field that has the highest margins, the lowest (to date) risk, the best environment for workers to work in (an office instead of a factory where they could lose fingers, toes, etc ..), the best environmental impact of all industry, and so on and so forth ... .

I've never been quite able to "buy" the Austrian school notion that only manufacturing matters.

The difference between credit and savings is fine, no problem.

But if someone comes into a store and buys a pack of gum, can the store owner tell how that money was made - on the farm, in a factory, in a doctor's office or in a bank selling derivatives?

Several people have written in to ask me what I think of this week's Barron's Cover article by Jonahthan R. Laing, Welcome to Sizzle Inc. (registration requred) wherein the author makes the case that "The 'platform economy' -- a business model focused on knowledge

[WDCRob]

Re: Head of GAO -- World's Largest Employer Lost $450m Last Year

David M. Walker has stuck his neck out and done a service for all of us. I'm going to write him personally thanking him for his effort. Now, I can count to two fingers for honest people in government... Ron Paul and David Walker.

IIRC, Walker has has also been doing dog and pony shows around the country making the same point as above in a longer presentation. A quick search of Google shows his letter to the editor isn't a one-off...

Does iTulip offer awards for truth-telling in public service?

* Saving Our Future Requires Tough Choices Today, Fiscal Wake-Up Tour at Denver City College, Denver, Colorado, November 28, 2006

* Saving Our Future Requires Tough Choices Today, Fiscal Wake-Up Tour at the University of Chicago, Chicago, Illinois, November 8, 2006

* Saving Our Future Requires Tough Choices Today, Union League Club, Chicago, Illinois, August 24, 2006

* Saving Our Future requires Tough Choices Today, Atlanta Rotary Club, June 12, 2006

* Saving Our Future requires Tough Choices Today, National Press Foundation, May 22-23, 2006

* Saving Our Future requires Tough Choices Today, Fiscal Wake-up Tour Town Hall Forum, May 1, 2006

[Finster]

Re: Head of GAO -- World's Largest Employer Lost $450m Last Year

I've never been quite able to "buy" the Austrian school notion that only manufacturing matters.

In terms of trade balance, it's exportability that matters. Just happens that historically most exportability has been in manufacturing.

[legacy97]

Re: Head of GAO -- World's Largest Employer Lost $450m Last Year

Oh, yeh. I forgot. Asians were are just copy cat producers. Anyone who thinks that needs to spend a few hours over here trying to find American names on patents. The "platform" business model argument in fact rests on a foundation of not-so-subtle racism.

What is an "American name"? Why look at the names when the patents tell you the nationality of the inventors? Am I being too racially sensitive?

[blazespinnaker]

Re: Head of GAO -- World's Largest Employer Lost $450m Last Year

http://en.wikipedia.org/wiki/Comptro..._United_States

The comptroller's job is to go around making noise like this. He's in a position, unlike that of many other politicians, where his survival isn't undermined by being controversial and, perhaps, obtuse in this fashion.

The Comptroller General is appointed for a fifteen-year term by the President of the United States

The Comptroller General of the United States is the director of the Government Accountability Office (GAO, formerly known as the General Accounting Office), a legislative branch agency founded by Congress in 1921 to ensure the accountability of the federal government.

[blazespinnaker]

Re: Head of GAO -- World's Largest Employer Lost $450m Last Year

I think the argument is right, in many ways, that the US is able to move to a new layer of innovation while the manufacturing / low margin enterprises are being outsourced to 3rd world countries.

Unfortunately, this opportunity is being wholey squandered. It's kind of like the writer with the fat retainer sitting on his laurels, partying all the time, like he doesn't have this huge job hanging over his head.

Government, I think, can do a lot to help make sure the worst of our instincts do not take over... unfortunately, when you have the Chinese just giving it all up, it's so easy not do anything about it and keep getting elected.

Ahh, the Chinese. Why does this not smell of classic Sun Tzu?

http://en.wikisource.org/wiki/The_Ar...29/Section_III

# Hence to fight and conquer in all your battles is not supreme excellence; supreme excellence consists in breaking the enemy's resistance without fighting.

[Jim Nickerson]

Re: Head of GAO -- World's Largest Employer Lost $450m Last Year

Government, I think, can do a lot to help make sure the worst of our instincts do not take over

The US Government is the epitome of our worst instincts.

Our government is the same as hiring bank robbers to guard banks, or foxes to guard henhouses, lawyers to write the laws, accountants to design the tax law, physicians to determine insurance companies payouts.

I guess one of those conveys the point.

[akrowne]

Re: Head of GAO -- World's Largest Employer Lost $450m Last Year

I couldn't agree more, Eric. Here's a diatribe I wrote on the matter, much to the same effect, over at Lee Wheeler's blog:

I see one huge problem with this platform thesis: the US no longer has the technical or organizational expertise to pull it off, so we don’t deserve or necessitate such a privileged position. In reality, we’re just coasting on a US-economy/dollar-centric world order that is very fragile and could collapse at any time.

I don’t care what the stats say: MBA-only, professionalized management these days is quite clearly ripping off the general public; adding little if any value and cashing out extensively (with options backdating, golden parachutes, etc.) at the expense of public shareholders and consumers — often directly using debt foisted on the public to do it.

The other necessary component of pulling the “platform company” economy off is technical expertise. We’re supposed to actually be able to do all this R&D, right? But frankly I don’t see much of that: the US professional scene has gotten fat, stupid and lazy off the easy money and siren song attraction of flipping houses, serving as arbitrage agents and brokers in finance (selling to each other over and over again), and those who actually do or could have technical expertise are squandering it on government defense/homeland security contracting where there is zero oversight (I know from friends and contacts that this area is full of skillless monkeys that undermine and demotivate the only people with talent).

For example look at the pharmeceutical field where over 30% of results are retracted or disproven, and a major company like Pfizer has no significant prospects — its last bet flopping in clinical trials due to killing too many people. Aren’t we supposed to be in a golden age of medicine?

I see an economy and nation in decline where very few are really producing anything of value, and have long since lost the ability to do so. Instead, the society overall is dependent on borrowing from other societies to continue at the present standard of living, an arrangement which cannot last, as these other societies are realizing they don’t need us.

[CanuckinTX]

Re: Head of GAO -- World's Largest Employer Lost $450m Last Year

I think you are being to sensitive. By American name I didn't think he meant 'Bob White' or 'Sally Smith.' I think he meant names of Americans.

[DemonD]

Re: Head of GAO -- World's Largest Employer Lost $450m Last Year

I heard something funny today. As a libertarian, it struck me sort of oddly, but there is a definite ring of truth to it. It goes like this:

If you can read this, thank a teacher.
If you can read this in English, thank a soldier.

The amount of bearishness that gets bandied about here is sometimes overbearing. The one thing itulip does best is disseminate information and connect dots where most places do not see connections. It seems to me that at times there is too much pessimism.

In terms of the GAO reports... does any other country even have a GAO-type governmental agency? I think we can all appreciate the job they do, and we understand the gravity of budget deficits. And on that, we as humans, citizens, and investors, must do what we can to support ourselves for today and the future.

But there are some things that are almost beyond conspiratorial in some of the above analysis that I just do not agree with.

How about the last bastion of U.S. competitive advantage, defense? The Japanese have changed their constitution and will soon be designing and building weapons. It doesn't take a rocket scientist to imagine the kind of high tech rockets the Japanese are capable of designing. But the worst case scenario for "platform America" believers is biotech, especially apropos stem cell research. China is mostly Buddhist. Buddhist philosophy is that life begins at consciousness, that an embryo is "matter" until it becomes "aware." Thus while here in the U.S. we debate the ethics of research that will deliver the most significant new medical technologies in history, the Chinese continue to build on years of lead time in areas of research that will result in medical technologies that U.S. producers–pharma companies–will some day be licensing from them to cure our Parkinson’s and other diseases, not the other way around. Think of GM licensing hybrid car technology from Toyota. Oh, yeh. I forgot. Asians were are just copy cat producers. Anyone who thinks that needs to spend a few hours over here trying to find American names on patents. The "platform" business model argument in fact rests on a foundation of not-so-subtle racism.

I want to take this backwards. The platform business model rests more of a foundation of classism. Nike wouldn't care if it's workers were indonesian, filipino, or irish, as long as they were paying 50 cents a shoe. As always, there is only one color that matters in business, and that is green (or gold, as is your want).

As far as GM licensing hybrid car tech... that is a very cherry-picked argument to support the point. The US auto industry has SUCKED, outright been terrible for the past 40 years. Terrible cars, lagging innovation, business moves that have put their companies at risk. I own a Toyota. It was built in Buffalo, NY. There are a few guys in Japan that got a little money off of my car purchase, but mostly it was the workers in NY and the supply chain and the public shareholders that benefited from my purchase. The American capitalist economy is built upon creative destruction. And as far as licensing, that happens ALL the time in many many many consumer goods nowadays. Just look at your cellphone. No matter who or where you are, you are likely using qualcomm packet technology. Your phone my be running java, or on an openwave browser. yadda yadda yadda. Maybe we should be worried about the italians if a NY pizzeria puts some green olives from italy on their pizza?

By the way... are you reading this on a PC? On a mac? (both would be using american made and licensed OS's). How about your browser... blah blah blah i could go on ad nauseum but the point is made.

As far as defense... the Japanese becoming more militarized is a concern, but last time I checked, Germany has a military and they are our allies. Unless we think Japan is going to go imperialistic again and attack Pearl Harbor (fight the evil power!), we can be confident this would be a better thing than not. I mean, N Korea's got nukes. The US military is spread thing. Come on, it's not that hard to see that a japanese military would be a positive influence, and especially if they were to become allied like Germany... and with all the US military bases, I can't see Japan being anything but a German-type ally. But I mean... defense, if you are going to worry about big militaries, worry about China. China is the only country capably of rivaling the US in military spending, and that indeed is a scary thought.

Finally, in terms of stem cells, and embryos, I love this little factoid. In 1987, Ronald Reagan vetoed a bill that would have injection tens of millions of dollars to Alzheimer's research. Who knows if that research may have born fruition in time, but there is a certain poetic justice about how Mr. Reagan lived out his days.

I posted this under another thread, but here it is again. The US is the world wide leader in research, and if you look at just the nominal numbers, it's hard for me to be believe we are lagging in research investment.

Summary: NIH budget = 28 billion.

http://wistechnology.com/article.php?id=3382

One barometer of research and development in the United States is the National Institutes of Health (NIH) annual list of spending in grant money by states. The NIH's annual budget, some $28 billion, not only funds research activities in its own institutions in the Washington, D.C./Maryland area, such as the National Cancer Institute (NCI) and the National Institute for Allergies and Infectious Diseases (NIAID) - in fact there are 27 different institutions - but funds many universities and research institutions around the country to the tune of about $23 billion per year through extramural almost 54,000 annual grants.

And please realize, the NIH is just the main federal research supporting institute. Other federal institutions give grants for research. States, counties, local municipalities, universities, family trust funds, places like Hughes and Shriner's...

Folks, go find a Shriner's hospital and ask for a tour. And then tell me that China or India are going to obliterate the US in medical/biotech research.

The point I'm making is that there is A LOT of freakin money out there being put into technical, scientific, medical research. While the stem-cell research may spring ahead in china, korea, europe, and japan due to our presidency having been hijacked by a bunch of right-winged extremists, it is not a death-knell for the biotech and nanotech research. Embryonic stem cell treatments are still at least a decade or more away, and the long-term effect of Bush the Idiotic is that stem-cell based therapies will have been pushed out 5-10 years further than they should have been.

I wonder if history will repeat presidential poetic justice...

For example look at the pharmeceutical field where over 30% of results are retracted or disproven, and a major company like Pfizer has no significant prospects — its last bet flopping in clinical trials due to killing too many people. Aren’t we supposed to be in a golden age of medicine?

Yes, while Pfizer has squandered their scale and mass, Merck has no less than 5 very promising drugs in the pipeline, plus their HPV vaccine released this past june will save lives, prevent a lot of expensive medical treatments, and is an overall boon to women's health. And for every Pfizer, well, shall i just list them by ticker name? starting with merck: MRK, AMGN, DNA, BIIB, STJ, JNJ, all profitable, all adding to scientific bio knowledge, plus there are hosts of startup biotechs that start and fail and some succeed all the time. And not to mention the healthcare index fund run by vanguard has had an annual return of almost 20%/year for the past 20 years. So, after having taken a good look at the pharma industry, I can conclude that we are beyond gold - we are more in more of a platinum age of medicine (despite the backwards thinkers in the US White House).

I am by no means an optimist, but if all you can come up with is one big pharma company on the downswing, and one auto company licensing technology, then I'm thinking there are plenty of other companies doing damn well... and the numbers bear that out.

happy holidays all. FWIW I consumed very little this season... but I did hold on to all my mutual funds and stocks and have not sold one thing for cash this year.

[Jim Nickerson]

Re: Head of GAO -- World's Largest Employer Lost $450m Last Year

Demon,

Nice thoughtful commentary above. I enjoyed it. Surely there are more who see the US contrarily to much expressed on iTulip. It is nice to know how some others see things. Keep it up.