Category Archives: Business and economics

Is China a threat or an opportunity? Both

Business and economics, Politics

By Steve Brawner
© 2016 by Steve Brawner Communications, Inc.

Is China a threat? Yes, but not the kind you might think, and it also represents an opportunity for Arkansas, says a professor and entrepreneur who knows more about this subject than I do.

Jeremy Haft, author of “Unmade in China: The Hidden Truth About China’s Economic Miracle,” says his experiences building companies in China have left him without fear that the country will soon overtake the United States. For all the talk about China’s ascendancy, the gap between the two countries’ wealth is widening, and for good reason.

The system just works better here than it does there, he said at the Clinton School of Public Service Feb. 11. Holding up a bottle of water, he said only a few companies are involved in the production thanks to America’s efficient, transparent supply chain. The United States has been producing goods for the free market for centuries and has a well developed system of corporate law and a climate of individual freedom. Chinese products require 15-20 firms, many of which lack basic governance skills, and each step in the production process adds risk.

I know all American regulators such as the EPA are supposed to be terrible, but after listening to Haft, our system sounds pretty good. China’s regulatory system is “broken and fragmented,” leading to corruption and unsafe practices, he said. China has had many safety scandals in recent years, including 300,000 babies suffering from renal failure because baby powder was contaminated by an industrial chemical. Sales of American dairy products to China quadrupled that year. And when something bad happens in China, rather than challenge the system, the one-party Chinese government tends to find one person to scapegoat and “take him out back and shoot him,” he said.

Chinese consumers know about these safety and quality problems, and as a result will pay a premium for American products. In his export company, farmers export their goods to China at a high price and sell pork products like organs that Americans won’t eat but Chinese like.

China represents a huge opportunity for Arkansas food producers. Agriculture is Arkansas’ number one export to China, while China is the state’s second largest export market after Canada. The country of 1.4 billion people contains only enough land suitable for farming to fit inside the state of Texas, and 90 percent of the country’s aquifers are contaminated. For all of the country’s supposed technological advancement, most farming is done on 140 million small farms tilled by hand. That means China imports a lot of agricultural products – cotton, soybeans, pork and soon, rice. Many Chinese aqua farms also are contaminated – chicken coops are placed over ponds and the fish are fed by the waste – so catfish is another potential export product.

China represents other economic opportunities for Arkansas. China’s deforestation activities have left it short of forestland, which is why it recently announced it was investing $1.3 billion in a pulp mill in southern Arkansas. Aerospace – a major Arkansas export – also represents an opportunity because the Chinese are less adept at such advanced manufacturing processes.

The real threat from China isn’t from continued trade dominance, but from substandard, often unsafe products. Remember the baby powder scandal? The United States imports four billion pounds of food annually from China. Risky Chinese raw materials are used to make American medicines and other products. When California contracted with a Chinese company to repair the San Francisco Bay Bridge, the welds connecting the decks were cracked and the quality random. When U.S. inspectors sounded warnings, California fired the inspectors.

So instead of creating trade barriers to China’s huge and growing market of 1.4 billion people, American policymakers should be finding ways to capitalize on those people’s desire to buy our stuff, Haft said. Meanwhile, policymakers should concentrate on the real threat from China – unsafe and shoddy products.

Haft made a compelling case. As he was saying all this, I noticed I was taking notes on my Apple laptop while keeping an eye on my iPhone, both of which were invented by an American company but made in China. Apple took my money; China got most of the jobs. So is China a threat or an opportunity? Both, I guess, like a lot of things.

To watch Haft’s address at the Clinton School, click here.

Priorities and the Hogs

Business and economics, Health care, State government

Football on tee - transparentBy Steve Brawner
© 2016 by Steve Brawner Communications, Inc.

Merriam-Webster’s online dictionary defines “juxtaposition” as “the act or an instance of placing two or more things side by side.” On January 27, an interesting one occurred at a University of Arkansas System Board of Trustees meeting.

The trustees were led on a tour of the University of Arkansas for Medical Sciences hospital campus in Little Rock. While parts are new and gleaming, what once was the main hospital needs $13 million just to become fire code-compliant, and even then it would be badly outdated and inefficient. UAMS would like $97 million to spruce up that building and other facilities, all for administrative space. Tearing the building down and replacing it would cost $250 million.

Board members later heard from the University of Arkansas at Pine Bluff. Students there enjoy a new science and technology building and a new fitness center, but in the middle of campus is an unused old multistory facility with weeds growing from the roof, and not as part of a science experiment. The campus security headquarters is an aging house, which can’t be reassuring to parents, and after a good rain, parts of the campus are underwater. UAPB would like money, too.

Then came the University of Arkansas Athletic Department, which seeks a $160 million expansion of its football stadium that would include 3,200 premium seats along with other amenities, such as a video board. The project would be funded through $40 million in donations and a $120 million bond issue repaid through higher ticket prices, paid mostly by fans not sitting in those 3,200 premium seats.

The trustees gave Athletic Director Jeff Long their blessing to continue gathering information, but not before former Sen. David Pryor had questions and abstained from voting. He said he was not necessarily opposed, but priorities should be discussed. This would be, he said, “the largest single bond issue in the history of higher education in the state of Arkansas.” He asked who would benefit, and how much of the costs students would bear.

“A bond issue is a debt of the University of Arkansas,” he said. “It is a debt of the people of Arkansas, and ultimately if something goes wrong, who’s responsible? And that’s the people.”

This is where the columnist perches in his ivory white tower and wags his finger at the trustees, right? Well, not necessarily. Pryor had it right. A discussion is needed.

True, it was quite a juxtaposition to see the state’s teaching hospital and one of its universities asking for money that’s currently not available for boring but necessary stuff like medical administration and drainage, which was then followed by a mostly celebrated $160 million request for football seats used six or seven times a year by rich people, along with other amenities.

However, the needs UAMS and UAPB are seeking to fill would be met partly by tax dollars that haven’t yet come from the Legislature. Moreover, it should never be assumed that public entities are spending the money they already have as efficiently as can be expected (or that they’re not).

Long, in contrast, was asking to pursue money paid voluntarily by donors and fans who, if they don’t like the higher ticket prices, could choose to watch the games on TV, which is what I do. The UA Athletic Department is one of the nation’s few big time college programs that turns a profit and is self-sustaining. In fact, it’s given money back to the university for academics for the newly built Champions Hall.

Finally, at what point do the Razorbacks add to the university, and at what point do they distract from it? The head football coach, Bret Bielema, is by far the highest paid state employee, including the doctors saving lives at UAMS. That seems like a misplaced priority. On the other hand, the Razorbacks are the university’s best marketing tool and a tie that binds the state together. And on the third hand, does all this send a message to young people that while we adults tell them to hit the books hard so they can become doctors, what we really value is how hard the Razorbacks hit the opposing players in the SEC?

It’s a complicated discussion, and it’s worth having before letting people spend $160 million of their own money on a football stadium, and making taxpayers responsible if something goes wrong.

Arkansans of the year

Business, Business and economics, Inspirational, State government

arkansasFlagBy Steve Brawner
© 2015 by Steve Brawner Communications, Inc.

Time magazine names a “Person of the Year.” Sports Illustrated has a “Sportsperson of the Year.” Who are the Arkansans of the year?

In politics, it’s not even close. On issue after issue, Gov. Asa Hutchinson either achieved his objectives or appointed a study commission to buy time to achieve his objectives. He wants to continue but change the private option, the controversial program that uses Medicaid dollars to buy insurance for lower-income Arkansans, so he asked the Legislature to fund it two years while a replacement can be found. That’s what’s happened – so far. He and the State Board of Education butted heads over the Common Core-related PARCC exam. He wanted to replace it; the Board wanted to keep it. It’s gone. In the debate over the Religious Freedom Restoration Act, Hutchinson was perhaps the only elected official who pleased (too strong a word?) both sides. His signature education issue, requiring high schools to teach computer coding, has resulted in 4,000 students taking a class. The only downside to Hutchinson’s year is that next year can’t be this good.

Honorable mention: Baker Kurrus, superintendent, Little Rock School District. A non-educator in one of the state’s most high-profile education jobs, he’s trying to smooth ruffled feathers while telling hard truths. Does the Little Rock school superintendent belong in the “politics” category? He certainly does at the moment.

In business, I’m going with Donnie Smith, president and CEO of Tyson Foods. He and his company were questioned last year when Tyson bought Hillshire Brands for $7.7 billion. That was a lot of money, but buying the makers of Jimmy Dean Sausage and Ball Park Franks expanded Tyson’s already considerable reach. Tyson’s operating income rose 37 percent this year to $2.25 billion, and its sales of $40.6 billion are an increase of 9 percent over last year. That’s not chicken feed.

Honorable mention: George Gleason, CEO of Bank of the Ozarks. The $800 million purchase of Georgia-based Community & Southern Bank was the largest bank buy in Arkansas history and made Bank of the Ozarks an instant major player in Georgia. Full disclosure: I own a journalist-sized amount of stock in the company – meaning, not much.

In health care, I’m making New Hampshirite John Stephen an honorary Arkansan. Hired by the Health Reform Legislative Task Force to consult on reforming Medicaid, he and his firm, The Stephen Group, have offered information, insight and solutions, and as a result have much influence over Arkansas policymakers. They’ve argued the state shouldn’t completely ditch the private option while also shining a light on Medicaid’s problems. When he speaks, lawmakers listen, and he’s been speaking a lot.

Honorable mention: Hospital CEOs Troy Wells (Baptist Health), Dan Rahn (UAMS) and Chad Aduddell (CHI St. Vincent) are leading three of the state’s big institutions in a consolidating industry. You know how other areas of the economy such as banking and retail are increasingly dominated by a few players? It’s happening in health care, too.

In sports, it’s Brandon Allen, Arkansas Razorbacks quarterback. Has an athlete ever made such a quick turnaround from supposed “choker” to “clutch”? After missing late-game passes early in the season, he’s become one of the SEC’s most reliable quarterbacks and was one of the main reasons the Razorbacks won five of their last six games.

Honorable mention: Bret Bielema, Razorbacks football coach. He stuck with Allen and never lost faith in the team even when some were losing faith in his coaching ability. The Hogs have improved every year since he was hired.

In charities and nonprofits, The CALL and Project Zero are finding foster and adoptive homes for kids who really need them. The issue attracted attention this year when a report detailed problems with the state’s foster care system, and when Hutchinson spotlighted those children’s needs at his faith-based summit. Since 2007, The Call has brought 758 foster and adoptive families into the system, its website says, with more on the way. Project Zero, meanwhile, raises awareness through its Heart Gallery photos of waiting children.

Honorable mention: Too many great ones to name.

So who is the Arkansan of the year? There’s no way for me to know. What seems noteworthy today will be forgotten tomorrow, while seemingly minor events will have lasting consequences. (“Baby born in manger” probably didn’t make many headlines.) Maybe the names I’ve listed were important, or maybe they were just important to me.

At any rate, that’s my list. What’s yours?

Free market requires moral core

Business and economics, Politics

By Steve Brawner
© 2015 by Steve Brawner Communications, Inc.

Life, the pope is telling us, is about more than the bottom line. This past week has given two examples of why people should listen to his big economic message even if they disagree with some of his little ones. One involves a giant automaker. The other manufactures a little pill.

The automaker, Volkswagen, doctored its diesel engines so they would temporarily meet EPA emissions regulations while they were being tested, and then they would emit much higher levels when actually driven by car buyers. As a result, those cars performed better on the highways while releasing up to 40 times more pollution than the legal amount. Volkswagen did this in 11 million vehicles sold worldwide.

Environmental considerations aside, the company lied and cheated its competitors and its customers. People thought they were buying a clean vehicle that ran great. Rule-abiding competitors were selling products that had a disadvantage against Volkswagen in the marketplace.

The pill manufacturer is Turing Pharmaceuticals, which bought the rights to Daraprim, a niche drug that fights deadly parasitic infections. The drug has been on the market for 62 years and has no generic equivalent. Shortly after buying the rights, the company raised the price – from $13.50 per tablet to $750 each.

This is not the first time a drug has been purchased and then inflated recently. But the company’s owner, a 32-year-old former hedge fund manager, seemed particularly proud of himself. He said the price needed to be raised to make the drug profitable (which would mean the previous rights holder must have been losing a ton of money at $13.50). Frankly, the drug would be cheap at $750, he said.

If your only guiding principle is the bottom line, then those arguments make sense. Guy’s just charging what the market will bear, right? Everything he’s done is legal. Under traditional laissez-faire economics, the free market’s unseen hand will correct all wrongs, and somebody eventually will produce a generic version if they can make money doing it.

But humans are more than economic beings. We’re also spiritual, moral and social ones. In fact, we must be for the free market to function.

The free market is the greatest anti-poverty mechanism ever created by humanity. It allows entrepreneurs to produce goods and services valued by the marketplace, thereby creating jobs and raising a society’s standard of living. Those who do this exceptionally well – people like Steve Jobs and Warren Buffett – are celebrated and richly rewarded, as they should be.

But the free market is only as good as the values of its practitioners. It can be perverted by those who, instead of producing goods and services, merely play games with money and take advantage of others. While Jobs created world-changing products, Turing’s hedge fund manager produced nothing new. He just bought the rights to a pill and then jacked up the price knowing people had to pay or die, and knowing there probably won’t be a generic competitor soon, if ever.

I watched a brief cable “news” segment where the host and a couple of his guests either defended the hedge fund manager or expressed ambivalence about his actions. The host said this kind of situation is preferable to having the government in charge of health care.

Which is ironic, because if the free market isn’t governed by both the unseen hand and a moral core, then bigger government is unfortunately what we’ll get. Two days after Turing Pharmaceutical’s price hike came to light, Hillary Clinton announced a plan to limit drug price gouging. Supporters of a single-payer government health system can use this episode to bolster their arguments. Meanwhile, Volkswagen’s actions likely will add to the regulatory burden faced by all automakers. They’ll have to do more to prove they’re not cheating.

In these two cases, it’s all ending as it should. Volkswagen stock has tumbled, it faces huge fines, and its CEO, who said he knew nothing about the cheating, has resigned. Meanwhile, overwhelming public condemnation wiped the smirk off the young hedge fund manager’s face, and he announced he would reduce the price hike.

That happened because humans are still spiritual, moral and social beings, instead of merely economic ones. Most of us know it’s wrong to cheat, and we know it’s wrong to take advantage of the vulnerable, or to use the vulnerable as a tool to take advantage of society.

We’re going to be governed by something. Preferably, it’s a conscience.