Dean Barber

A Story to Remember

In Corporate Site Selection and Economic Development on April 9, 2018 at 8:50 am

The founding fathers of this country were of the belief that history, above all other subjects, was the most important for people to study. History gives us insight as to who we are, where we have been and where we are going.

I love to read history and believe that it can be a gauge to the future. That said, I realize that even those who know historical facts are still liable to repeat the mistakes of that past.

Indeed, we often view history much as we do current events, through a very subjective lens. Those things that support our beliefs, we latch onto. Those things that don’t, we conveniently ignore. In short, we tend to cherry pick.

In telling this story, I’ll do my best to be objective and keep to the facts. Now is an especially good time to remember what actually happened.

A Wealthy Businessman

Our story begins with a wealthy businessman, a man with no elected office experience, running for president. Despite that, he easily won the Republican Party nomination. During his campaign for the presidency, he was known to frequently insult African-Americans and scapegoat Mexican-Americans.

But Herbert Hoover, the former mining engineer once quoted as saying, “If a man has not made a million dollars by the time he is forty, he is not worth much,” won the presidency in 1928. Hoover defeated Democrat Al Smith, with the Republicans maintaining comfortable majorities in both the House and Senate.

Less than a year later, the Wall Street Crash of 1929, also known as Black Tuesday (October 29), happened, signaling the beginning of the Great Depression.

The Farm Crisis of the 1920s

In some respects, the Great Depression came a decade earlier for American farmers. While most people were enjoying relative prosperity in the 1920s, farmers were finding it a tough going.

Horses and mules had been replaced by expensive trucks and tractors. With up to one-quarter of farmland previously devoted to feeding horses and mules freed up for production, supply soon outstripped demand, and commodity prices dropped by as much as 60 percent.

In his bid for the presidency, Hoover promised to help farmers by increasing tariffs of agricultural products. At that time, about one-third of American families were living on farms.

True to his word, soon after taking office in March 1929, Hoover called a special session of Congress to ask for an increase of tariff rates for agricultural goods and a decrease of tariff rates for industrial goods.He said he wanted to keep the overall tariff burden even.

Lobbyists immediately got to work, and it soon turned into a special interest feeding frenzy with every industry seeking protection. The result was increased tariffs on both agricultural and industrial goods. Even tombstone makers got an increase in tariff protection with the bill that passed the House in May 1929. The Senate refused to act on the issue of tariffs before adjourning in November.

A Congressman from Oregon, A Senator from Utah

1930 was a pivotal year. The worm had started to turn with the economy worsening. On a lighter note, 3M began selling Scotch Tape in January, and Mickey Mouse was born in a comic strip. In February, Elm Farm Ollie became the first cow to fly in an airplane. (She also became the first cow milked in flight.) And in April, Hostess Twinkies were invented.

Also in April, the Senate, feeling pressure because of the deteriorating economy, passed a bill that increased tariffs, albeit less than the House version. A conference committee then reconciled the two bills, mostly favoring the House version.

The result was the Hawley-Smoot Tariff – named after its sponsors, Willis Hawley, a congressman from Oregon, and Reed Smoot, a senator from Utah. The legislation, calling for the highest set of tariffs in American history, became a testament to economic isolationism of that era.

Vicious, Extortionate, and Obnoxious

To be sure, many people were opposed to the bill. No fewer than 1,028 prominent economists signed a petition in May 1930 asking Hoover to veto the bill. Henry Ford spent an evening in the White House trying to convince Hoover to veto Smoot-Hawley, which Ford called “an economic stupidity.”

Wall Street banker Thomas Lamont, a partner at J.P. Morgan, said he came very close to groveling. “I almost went down on my knees to beg Herbert Hoover to veto the asinine Hawley-Smoot Tariff,” he recalled. “That Act intensified nationalism all over the world.”

Hoover actually didn’t like the bill, calling it “vicious, extortionate, and obnoxious,” noting that it would undermine his commitment to international cooperation. Despite that, he yielded to the pressure from his own party and signed the bill into law on June 17. The Tariff Act of 1930 as it was formally known raised U.S. tariffs on over 20,000 imported goods.

Hoover’s reservations were well founded. Countries that began warning of retaliation in 1929 followed through with their threats in 1930. In May, Canada, the U.S.’s most loyal trading partner, imposed new tariffs on 16 products that accounted for about 30 percent of U.S. exports to Canada.

(When Hoover was elected president, Canadian Prime Minister, Mackenzie King wrote in his diary that it might lead to “border warfare.”)

Disastrous Effects

While most economists don’t believe Smoot-Hawley caused the Great Depression, it certainly did not alleviate it and may have made it worse. Certainly, Smoot-Hawley failed to lower unemployment. In 1930, the unemployment rate was 8 percent. It would jump to 16 percent in 1931 and peak at 25 percent in 1932-33.

The Tariff Act also poisoned the well in terms of international relations with other countries. The League of Nations, of which America was not a member, had talked of a “tariff truce,” but Smoot-Hawley killed that idea.

In the aftermath, world trade collapsed. American exports, which had been $5.24 billion in 1929, were worth $1.16 billion three years later, a 78 percent decline.

And Hoover, Smoot, and Hawley paid the price. They were taken to the woodshed by the voters, all three being decisively defeated for re-election in 1932.

Today there is a broad consensus among historians and economists that the Smoot-Hawley Tariff only made a bad situation worse. As a result, most economists today view protectionism as a blunting force to economic growth and that it often harms the very people it was meant to help.

It Could Get Very, Very Bad

In the fall of 2016, I was saw the Trump signs posted in farm fields throughout rural America. They were the size of school buses in western Nebraska and eastern Colorado.

And now farmers are waking up to the realization that a president who they helped put in office is instigating a trade war with China, the second largest economy in the world, and that it is they, the farmers, who will pay the price.

Trump last week instructed the U.S. Trade Representative’s Office to consider tariffs on an additional $100 billion in Chinese imports, bringing to $150 billion the range of Chinese goods under consideration.

China, which had proposed duties on $50 billion in American goods including aircraft, soybeans, corn and other row crops after the first U.S. move, has said it will respond proportionately.

“This could get very, very bad,” an economic developer from Iowa told me last week. Iowa is the No. 2 U.S. agriculture state in terms of farm cash receipts.

A wide swath of the U.S. farm economy could be impacted if China goes ahead with tariffs on soybeans, cotton, corn, wheat and beef. China buys roughly half of the U.S. soybean exports, or about $14 billion annually, and is the second-largest buyer of American cotton. In all, U.S. agricultural exports to China represent almost $20 billion annually for American farmers.

History can be a great teacher, but only if we allow it so. History tells us that no one wins in a trade war, and that working people on the ground get hurt. Like Hoover, President Trump is ignoring the warnings from the experts. He is certainly ignoring the warnings from the past.

I’ll see you down the road.

Dean Barber is the principal of Barber Business Advisors, LLC, an economic development and corporate location consulting firm based in Dallas. Dean is available as a keynotes speaker and can be reached at dbarber@barberadvisors.com. Visit us at www.barberadvisors.com to learn more.

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In an AI Future, Watch the Machines … Carefully

In Corporate Site Selection and Economic Development on April 3, 2018 at 9:13 am

We will always be curious about the future. People wonder, which is generally a good thing, until they go and ruin it by making predictions.

I could provide you with a litany of quotes from people viewed as thought leaders who said things that are laughably wrong.

One of my favorites: “Two years from now, spam will be solved.” — Bill Gates, World Economic Forum, 2004

That alone should have me resist pontificating about the future, at least in public. And yet, when I have an audience, I cannot resist.

No doubt, when the Southern Economic Development Council meets in Dallas in about two weeks, and I will be on a consultants’ panel discussing manufacturing, I will point my index finger skyward and say, “I believe …”

Which reminds me of an old Steve Martin standup routine (abbreviated):

“I believe in rainbows and puppy dogs and fairy tales.
“And I believe 8 of the 10 Commandments.
“And I believe in going to church every Sunday, unless there’s a game on.
“And I believe in equality, equality for everyone … no matter how stupid they are, or how much better I am than they are.
“And … I believe that robots are stealing my luggage.”

It’s that last point where I think he might be onto something.

AI Will Change Us

My “I believe” statement, which I may make at the upcoming SEDC conference, is that artificial intelligence (AI) will not only transform manufacturing, but it will change all of lives for the better or for the worse, depending on we how control it. And we best control it.

AI is the ability of machines to be “smart,” to learn, imitate, and dramatically accelerate or replace human decision making and behavior. Machine learning refers to teaching computers how to analyze data for solving particular tasks through algorithms.

Data is the lifeblood of AI. Almost every enterprise generates data in one way or another: think market research, social media, school surveys, automated systems. Machine learning applications find hidden patterns and correlations in the chaos of large data sets to develop models that can predict behavior.

But the machines in themselves cannot distinguish between good and evil, and there are bound to be some people who are feeding them with data and instructing them with tasks that have unsavory motives.

It’s precisely for that reason that more than 100 leaders of AI companies, including Elon Musk, have signed an open letter to the United Nations, voicing concerns that companies building AI systems could convert the technology into, I am not making this up, autonomous killer robots.

This goes well beyond stealing your luggage.

Is There a God?

The fact that there could be malicious use of AI, probably would be, was the warning from the late Stephen Hawking. In a 2014 interview with comedian John Oliver, the world-renowned theoretical physicist displayed a wonderful sense of humor.

“There’s a story that scientists built an intelligent computer. The first question they asked it was: “Is there a God?” The computer replies: “There is now.” And a bolt of lightning struck the plug so it couldn’t be turned off.”

Still, there are “experts” (people who point their fingers in the air and say, “I believe ….”) who contend that the threat of AI is not real and that an AI Terminator is perhaps hundreds of years away, if at all.

We know that AI is not a matter of just installing software. It requires certain levels of expertise, vision, and information that few of us possess.

And certainly, very good things can come from AI, from self-driving vehicles, drones overhead, traffic management, preparing tax returns, identifying and treating rare cancers, setting up meetings. The list goes on and on and will invariably grow.

But bad things, mischievous things can also result. We know of videos generated by machines that have President Barack Obama saying things that he never said. We know that machines can learn from news, social feeds and just from listening to us around the house, (Alexa, I am unplugging you) and thereby deliver targeted ads aimed directly at us, based on our likes and dislikes.

Determining what is true and what is not may become only become more difficult as “fake news” will proliferate beyond the realm of our traditional news media gatekeepers.

Industry 4.0

Some “experts” (finger pointers all) say we are currently in our fourth industrial revolution. The first, beginning in the 1760s, was characterized by mechanization, water power and steam power; the second, started in the 1870s was characterized by mass production, assembly lines and electricity.

The third industrial revolution got its start in the 1950s with computers and automation; and now we’re in the fourth, aka Industry 4.0, characterized by artificial intelligence and deep machine learning.

In every one of these industrial revolutions we have had the loss of jobs and the creation of new ones. In that regard, disruption is not new. Somehow, we have always been able to figure it out, to adapt.

But this latest industry revolution may be different in that the technology we unleash may be somewhat mysterious even to its creators. And there is a chance, and I know this sounds outlandish, that we could lose control of the machines. More on that in a moment.

Dramatic Improvement

Will AI change your job? Yes, probably so. Will it be slow and gradual? Well, I’m not so sure. Most AI experts agree that they would never have thought any of the major achievements in AI would have happened so quickly.

“The rate of improvement is really dramatic, but we have to figure out some way to ensure that the advent of digital super intelligence is one which is symbiotic with humanity. I think that’s the single biggest existential crisis that we face, and the most pressing one,” warns Musk.

Which begs the question, should we not be imparting to the machines a certain level of human ethics? Algorithms may not be free of the biases of their programmers, but should we teach, guide, and provide socially acceptable boundaries for the AI systems that we use? In short, can we, should we, input some basic goodness into the machines so that they will not, well, turn on us?

Those might sound like ridiculous questions on their face, except for the fact that no one really knows how the most advanced algorithms work. Now here is where it gets spooky.

Alien Behavior

Will Knight, a senior editor for AI at MIT Technology Review, tells the story of a self-driving car developed by the chip maker Nvidia that didn’t follow a single instruction provided by an engineer or programmer.

Instead, the car relied entirely on an algorithm that it taught itself by watching a human drive. The researchers working on the project found that a bit, well, unsettling.

The CEO of DeepMind Technologies Limited, a British AI company owned by Google, reported in December that his company had developed an algorithm, called AlphaZero, that achieved within 24 hours a superhuman level of play in the games of chess and shogi (Japanese chess) as well as Go, and convincingly defeated a world-champion program in each case.

AlphaZero made moves unthinkable to a human chess player, said Demis Hassabis, the founder and CEO of DeepMind and an expert chess player himself.

“It doesn’t play like a human, and it doesn’t play like a program,” Hassabis said at an AI conference in Long Beach, Calif. “It plays in a third, almost alien, way.”

Last year, Facebook shut down an experiment after two AI programs appeared to be chatting to each other in a strange language that only they understood. The two chatbots created their own changes to English that made it easier for them to work – but which remained mysterious to the humans who were there to oversee them.

This raises the spectrum and poses a question: Could we actually lose control? Could something akin to Hawking’s lightning bolt happen in which we could not unplug?

As AI becomes more commonplace, “I believe” (I am pointing my index finger skyward) that machines will learn to talk to each other, drive cars, beat, dream, filter applicants for a job, paint pictures, tell stories and help make scientific discoveries. They may also do corporate site selection, an area of focus for me. These are all things the machines have already started to do.

And in the process, they may also confound us, their human creators, with mysterious “alien” behavior. We should watch for that very carefully. I know I do not want to lose my luggage to some larcenous robot.

Dean Barber is the principal of Barber Business Advisors, LLC, an economic development and corporate location consulting firm based in Dallas. Dean is available as a keynotes speaker and can be reached at dbarber@barberadvisors.com. Visit us at www.barberadvisors.com to learn more.

 

 

A Trade War Would Be A Bridge Too Far

In Corporate Site Selection and Economic Development on March 13, 2018 at 7:05 pm

We live in a world at risk. That should be obvious to anyone who pays even a modicum of attention to the news.

Last week, Vladimir Putin was boasting that Russia had developed a new batch of “invincible” nuclear weapons that could foil any defensive system employed by the United States, cold war rhetoric to be sure.

There are a slew of other big risks that could, by extension, threaten the world economy. They include territorial disputes in the South China Sea, major cyber-attacks, war on the Korean Peninsula, an escalation of proxy conflicts in the Middle East, a big drop in oil prices, and the withdrawal of countries from the Eurozone.

Another threat emerged last week, which I hate to say, could be precipitated by the U.S. — a full-blown trade war, the costs of which could be very, very bad.

Mind you, we’re not there yet. But we could be if things escalate, which is the nature of these conflicts.

A Simplistic View

It is obvious that President Donald Trump views trade in very simplistic terms as a win or lose proposition, disregarding the nuances that come with it. Most concerning was his statement on Twitter, one day after announcing tariffs of 25 percent on steel imports and 10 percent on aluminum imports, that “trade wars are good and easy to win.” History would show that is far from the case.

It should be noted that the tariffs in themselves are not signs of a trade war but could be a catalyst to spur one on if other countries choose to retaliate. Already, the tit-for-tat threats have emerged.

Electrolux, Europe’s largest home appliance maker, said on Friday it would delay a planned $250 million investment in Tennessee in reaction to Trump’s announced tariffs. The European Union is now considering duties on U.S. imports worth about $3.5 billion if the White House pursues its plans.

“We will put tariffs on Harley-Davidson, on bourbon and on blue jeans — Levi’s,” European Commission President Jean-Claude Juncker said, according to Reuters news service. “We would like a reasonable relationship with the United States, but we cannot simply put our head in the sand.”

Trump naturally could not let that go unanswered and lashed out on Twitter Saturday, saying the U.S. may levy a 25 percent tax on cars exported from Europe.

My point is that trade skirmishes can snowball into an all-out trade war. And contrary to what the president may believe, there are no winners in that scenario.

A Consistent Message

Trump’s abruptly announced statement that he would go through with tariffs caught Washington and Wall Street off guard, with markets reeling as a result. But it is consistent with what the man has been saying since the 1980s — that America is being “ripped off” by other countries, hurting U.S. jobs and factories.

In his bid for the presidency, Trump made the renegotiation of the North American Free Trade Agreement (NAFTA) a hallmark of his campaign, calling it “the single worst trade deal ever approved in this country.”

Signed into law by Democrat President Bill Clinton in 1993 with Republican support, NAFTA created a managed trade zone among Canada, Mexico, and the United States. In his third presidential debate with Democratic nominee Hillary Clinton, Trump said what he had been saying on the campaign trail:

“We’re going to renegotiate trade deals. We’re going to have free trade . . . But we have horrible deals. Our jobs are being taken out by the deal that her husband signed, NAFTA, one of the worst deals ever. Our jobs are being sucked out of our economy. You look at all of the places that I just left, you go to Pennsylvania, you go to Ohio

“. . . Our jobs have fled to Mexico and other places. We’re bringing our jobs back. I am going to renegotiate NAFTA. And if I can’t make a great deal—then we’re going to terminate NAFTA and we’re going to create new deals.”

Trump’s message resonated with American workers, which catapulted him, to the shock of many, into the White House. And now as president, he is acting on his perpetual belief to the consternation of most economists, who contend that such protectionist measures could damage economic growth worldwide.

Some NAFTA Progress

Believe it or not, some progress actually has been made in negotiations between the U.S., Canada and Mexico to rework NAFTA, a 24-year-old, $1.2 trillion treaty which Trump has threatened to walk away from unless major changes are made to benefit American interest.

In the latest (and seventh) round of negotiations which began last week in Mexico City, the three countries have agreed on regulatory best practices. With that done, on top of work on anti-corruption measures, rules for small- and medium-size businesses and for competition now done, it’s taken six months to complete four of the roughly 30 chapters likely to form the updated deal.

Rules of Origin Stumbling Block

And while nobody thinks these negotiations will end anytime soon (An eighth round of talks is being planned for Washington later this month), as long as the parties are at the table, well, progress is progress.

But there remain big hurdles ahead. Agreeing on new rules of origin for autos is just the latest. Under the current treaty, 62.5 percent of the net cost of a passenger car or light truck must originate in the NAFTA region to avoid tariffs.

Trump wants that threshold raised to 85 percent, and add a U.S.-specific requirement of 50 percent.

Again, reflecting his binary view on trade as win or lose, the president last week said the U.S. was probably losing $130 billion a year to Mexico. The U.S. 2017 trade deficit in goods with Mexico was $71.1 billion and $17.6 billion with Canada.

A False Assumption

Apparently, the president is under the belief that if trade deficits go down, economic output rises. Most economists say it doesn’t work that way. Having a trade deficit — which happens when a country imports more than it exports — reflects more about robust U.S. consumption than about unfair trade.

When calculating a country’s Gross Domestic Product, it is true that economists will count a trade deficit as a negative, but that is more a matter of accounting. Most economists believe a trade deficit does not cause GDP to be smaller.

Unintended Consequences

What they will also tell you that raising import taxes on goods (which is what tariffs are) can have all sorts of unintended consequences. Research by economists Nicholas Bloom, Mirko Draca, and John Van Reenen indicates that while exposure to Chinese competition did destroy U.S. jobs, it also forced U.S. companies to innovate faster and become more productive.

Erecting trade barriers and protecting domestic industry groups tends to inhibit innovation. In other words, the shielded companies get fat and lazy while consumers pay more for goods and services.

To be sure, corporate America was happy to see a reduction in the corporate tax rate from 35 percent to 21 percent. We have not seen a spate of new capital investment because of it yet, but it is still early. U.S. companies have also been quite happy with the Trump administration’s attitude toward reduced regulation.

But a trade war would be a bridge too far. Let’s hope we don’t go there.

Dean Barber is the principal of Barber Business Advisors, LLC, an economic development and corporate location consulting firm based in Dallas. Dean is available as a keynotes speaker and can be reached at dbarber@barberadvisors.com. Visit us at www.barberadvisors.com to learn more.