Sorry Not Sorry

Apologies should mean something. If they don’t reflect an inner change of heart, they aren’t genuine and most people can tell if you aren’t serious. We’ve been accustomed to the forced apology since fights in grade school got settled by teachers who wanted a quick end to the dust up. “Now say you’re sorry” was part of the deal. Anything else meant getting kicked out or suspended.

Celebrity apologies aren’t new but they’ve been taken to an absurd level. We get ‘sorrys’ via the internet more frequently than rain in spring time. The reasons are simple, a misconception exists that saying sorry gets you back in everyone’s good graces. I can’t prove it, but I don’t think it works that way. It’s frustrating to watch anyone beg forgiveness over something they did publicly when a sorry isn’t warranted. It’s even tougher to hear (or read) a forced apology from someone being coerced into saying it.

Jay Feely (former NFL player) recently apologized for posting a picture (above) with his daughter and her date on their prom night. He is holding a handgun (where is my fainting couch?) in the picture. The subtext of the photo is clear “Don’t take advantage of my little girl dude”. I guess some people were offended by the gun, and blasted him over it. He issued one of those weak kneed ‘sorry if anyone took it the wrong way’ type apologies that are practically cut and pasted from the last celebrity who wrote one.

This isn’t a real apology and he doesn’t have to give one. The picture was set up in the way all prom night pictures are, dressed up kids about to enjoy the night. He can’t be sorry for the photo, only the reaction to it. He didn’t do it accidentally. He meant to post it and he meant for it to be funny. Just because some people didn’t like it, he felt like an apology was due. It wasn’t. If you don’t like something about a particular person, a half-hearted apology won’t change your opinion of them. We know what a forced apology sounds like. Kathy Griffin held a fake bloody Donald Trump head in a now infamous magazine cover. She apologized because the backlash was so strong. But it was as forced as Jay Feely’s. CNN dumped her immediately after the shoot. I can’t imagine anyone who didn’t already like Griffin was moved by her teary apology spectacle. As disrespectful as the cover was, she should have stood by it.

Both are examples of non-apologies of pictures that were well planned. When Michael Richards (Krammer from Seinfeld) was videotaped blasting a heckler with racist tinged language he was roundly criticized. I thought his apology was genuine at the time because his reaction was something done in a moment of anger. Also, he didn’t blame the heckler for his outburst when he could have. He didn’t hedge. He still feels terrible about it. I watched a Comedians in Cars Getting Coffee episode where he talked to Jerry Seinfeld about the incident. The event still bothers him. After all these years he is still saying how awful he felt for grilling the man with racial epithets. 

One way to tell if someone is really sorry is to read (or listen) to the words they use. If the person talks about what they meant to say, or how they mischaracterized, chances are someone is making them do it. Harvey Weinstein famously talked about how ‘in his day’ or ‘I grew up in different era’ as explanations for his behavior. He opted for the explainer version, another way of saying “Sorry I got caught”.

There’s an advantage to letting famous people do what they do without remorse. It allows us to understand what type of person they are and decide for ourselves whether to ignore them or not. Fake apologies allow true scammers a pathway back to the mainstream. It allows companies who threatened to pull sponsorship a way to check a box and forget the whole thing. Instead of letting market forces drive demand, say bad TV ratings, Sponsors try to get in front of the incident by insisting on an apology. We are supposed to believe that companies are looking out for their bottom line and not wanting to lose business over an angry public. But they aren’t worried about Joe Sixpack and his opinion of some celebrity. They’re worried about activist groups bombarding them with threats. Even small motivated groups can cause a real ruckus. Public opinion matters far less than group determination.

I do understand that famous people are held to different standards (I didn’t say higher). Public access and public image is their currency. But public apologies have been cheapened worse than a nineties sitcom remake. I don’t know how much stock individuals puts in them. Corporations that sponsor TV shows or run ads for upcoming films are supposedly the first aggrieved parties. We are supposed to believe they are moved by public opinion. But the same ones who get offended over gun pictures are likely same ones putting pressure on companies to pull support because of an incident. How big a group is this exactly? Something tells me it is small but noisy.

Here’s a prescription for future apologies; if you’ve done something egregious whether in the heat of the moment or after further consideration, by all means say you made a mistake and mean it. If you do something that you don’t feel is wrong but ‘offends’ a lot of people, don’t apologize. Nothing is worse than a glib ‘if anyone was offended’ Twitter message. We aren’t buying it.  

'Like' for Limited Oversight

Facebook started out as a sharing platform for ‘friends’. We’re all familiar with the story by now. It has morphed since they were a small private startup into something otherworldly. Most people think time has come to rein them in. They hoover up user information and allow third parties to ‘share’ from their trough of data. A good portion of their income is in allowing companies access to sell everything from running shoes to bank loans to its users. It is a problem for privacy, but federal regulation at this stage is the worst option.

 There are good reasons to not regulate FB at the federal level. First, what sort of business does Facebook fall into? If it’s a tech company than it’s nearly impossible to regulate in any meaningful way. Congress doesn’t completely understand what Facebook does or how it works. How can any piece of legislation expect to fix that? Second, anything requiring new laws needs experts to help write them. Who better to write the bill than Zuckerberg and his employees? You can bet they’ll want a seat at the table when the Congress gets serious about restricting them. This would be terrible for anyone competing in the same realm even tangentially. Facebook could easily push out competitors with a few expensive (anti-competitive) measures designed to stay on top. Third, if regulation is a forgone conclusion than let the states sort it out. Illinois and California already have some pending legislation designed to ensure privacy.

The largest tech companies (Amazon, Google, Apple) have been a boon to consumers for the nearly free services they provide. Online shopping is cheap, search algorithms are more precise and iphones make daily life easier than ever. It’s easy to tell when a bank, for instance, has ripped off its customers. Check the excessive and opaque fees against the law. If they misled or lied, easy case. Most law functions this way. Social Media is different. It’s tricky to decide if a law has been broken, especially when user information is offered up freely. Facebook has opt in and opt out requirements for most of their users. It prevents third parties like Cambridge Analytica from scooping up data that hasn’t been opted in to. It doesn’t always work well and often users don’t understand that opting in often means access to portions of their friends’ page. But mostly it works as designed.

With so many people offering up info and ‘sharing’ like hippies in a beach commune, the available information to the third party grows exponentially. In this pile of shared stuff is often private, non-agreed to information. Privacy breaches make people very angry. Facebook is really a platform offered as a service in exchange for personal information. Since they’ve started shutting down websites they don’t like and disallowing certain viewpoints, they’ve moved from platform to media. Media comes with a different set of rules and restrictions. This is a lot more complicated for defining what they actually do. It would be easier for them to merely manage and sell access like they’ve done for most of their existence. With pressure to control what is written, shown and shared they’ve made themselves a target. This one is FB’s fault.

As far as experts go, only a handful of people are equipped to put regulations in place to significantly alter the social media business. A lot of them probably work for Facebook. We’ve grown up with internet connectivity being a constant tool, but few of us (me included) really understand the business enough to write laws. Questions like, who can use personal data and how can it be used, are not as simple to codify they are to say. The consequences of a heavy regulatory hand could be disastrous for companies that rely on social media to spread awareness of their services.

By limiting core functions of what FB does, it would alter the business model of thousands of online services that depend on FB for views.

Once Americans decide they want some consumer protection law, Facebook will insist on writing the details. Not directly of course. They’ll use lobbying efforts to get key pieces inserted into bills. At this point FB isn’t just concerned with staying afloat, they’ll be trying to keep rivals out. No one can compete directly in the same realm as Facebook, but startups may offer cursory services that don’t exist on the social media giant. Instagram had a great cursory service (photo sharing) for while. Facebook purchased the site because of its popularity. After regulation a likely outcome for Instagram type platforms is getting sued by FB for minor infractions or not even getting off the ground, the cost to continue too high.

I can imagine a company like Lifelock offering a social media protection plan and using it as a selling point for consumers.

If states really are the labs of democracy we will soon see how far specific measures can go. The Illinois law that limits certain facial recognition curbs what FB can do in that state. It might be poorly written and it might be overturned by an exasperated public. We don’t know yet. But going at these companies in precise ways might force them to change key structures of the business. Or, they buy companies that offer better privacy tech. There is reason to believe tech companies will go with the flow on privacy measures if the public mood shifts against them in states.

What would be better for consumers, a federal law or no federal law? Consumers benefit when regulation is loose and competition is tight. FB will grow more entrenched with federal oversight and be impossible to change if regulation gets off the ground. Facebook is miles ahead of whatever federally designed law would try to stop. The individual state laws governing consumer information will probably be enough to rein in the tech giant.

Regulation hurts small companies more than big ones.

     

Amazon's HQ2

Amazon is planning to put up a new facility. A lot of cities are vying for the affections of the top hiring company like would-be grooms hoping the prettiest girl picks them. The internet behemoth is expected to hire upwards of 50,000 employees to fill out its ranks next year. That alone is enough to make most cities give away nearly everything in tax breaks. You can hardly blame them. City governments spend a lot of their time trying to get businesses to locate within. When giant corporations call, you get in line and make the best offer.

From the letter Amazon sent out to possible locations, it certainly eliminates a few right off the top. They want cities with more than a million people (sorry Tulsa). They insist on a business friendly environment (sorry Chicago). They insist on cities with a university system, ostensibly used as a feeder for corporate talent. Some of the final cities selected are kind of on the bubble in terms of size. Raleigh, Nashville and Newark are well below the threshold of a million. But Newark is so close to Philadelphia and New York it probably doesn’t matter as much. Raleigh has great Universities, NC State is located in the city and Duke and North Carolina are just a few hours away. Nashville is the largest of the three and probably selected for its business friendly environment within the state.

Since the details of the tax proposals are private we don’t know what was offered. We can bet there were some sweet deals though. The online retailer certainly wants a workforce that is easy to replace. I don’t know how many they expect to relocate from other areas. I imagine cities would rather Amazon hire as much talent from within the state as possible. Mayors constantly work to retain talent and bring additional business to their cities. With a large group like Amazon Co. they can expect other businesses to move along with a growing population. Not to mention, the increased tax revenue from workers who’ve seen a jump in wages.

It shouldn’t make a difference to me who ultimately gets the corporate behemoth, but for some reason I’m rooting for Indianapolis, Columbus or Nashville. Tennessee has no income tax and I like to see states rewarded for their fiscal discipline. Indiana has a very low income tax which was recently reduced. Ohio has seen countless factories shuttered and a lot of workers cut loose due to offshoring.  

Nothing against cities on the costs but it seems like the New York and Los Angeles are already stuffed with high earners and the best of city life. It would be nice if something growth oriented happened in the Midwest (minus Chicago). Maybe Nashville isn’t considered the ‘Midwest’ but there are other cities on the list where Amazon could have an outsized impact. Even Raleigh and Austin are good options.

A lot of business writers think Washington DC has the advantage because of the proximity to the national government. It makes sense. The next decade will probably see some increase in regulation directed at online companies like Facebook and Amazon that don’t do enough to protect personal data. Jeff Bezos will want to lobby for smart legislation, limited in scope and oversight. They could also make it tough for other online sellers to compete through regulation. This is always the worst part of new legislation. I don’t think he needs to be located in the district to make that work though.

There is a lot of criticism of turning cities into playgrounds for companies that leave a massive footprint. Amazon will certainly cause housing prices to rise in and around the city. The well paid tech workers tend to push out lower paying city dwellers. San Francisco is famous for driving up rents to a level that makes it impossible to live there without significant income. But San Francisco is the hub for most of the major tech companies in the country. That kind of wealth creates an environment all its own. If Amazon chooses one of the smaller cities (relatively) on the list it would make a difference, but as long as the zoning requirements aren’t rigid it won’t cause a drastic change.  

Some complain about losing the ‘local character’ of an urban area. This seems silly. Most cities experience this at some point every 30 years or so anyway. Whether through immigration or career moves to other regions of the country, most cities change as economies change. New York, Philadelphia, Detroit all experienced influxes and outflows as immigration patterns moved from Western Europe to Eastern Europe and South America during the last century. Local character is a subjective measure anyway. You’ll probably miss that famous Greek restaurant in the downtown area, but jobs are more important to most people.

The retailer will make a decision this year and start hiring next year. I don’t know the timetable but it has to be soon because this kind of construction takes a while.  

Relabeling Welfare

There are no free lunches in economics, only trade-offs. A job offer in a large city like New York or Chicago comes with certain benefits. Big city life means a bigger salary and access to bigger attractions like professional sports and theaters. But the trade-off comes from the higher cost of living, the distance (potentially) from home and more competition at work for prized slots. Not everyone prefers to live in a big city and ride public transport to get around. Many do though. It’s how we self-select in a free country.

The problem with a Universal Basic Income (UBI) is it trades dignity for cash. The trade-off would create more dependency and generational poverty. For a couple of reasons this is the worst idea for leveling out ‘inequality’. It seems proponents of cradle to grave welfare have dispatched with the term ‘welfare’ and the restrictions surrounding it. At least now the system has certain quotas like work requirements. ‘Welfare’ in the United States is a term associated with laziness, so wisely they dressed it up in clever language.

“Basic” suggests a right, and “Income” suggests something earned. Both are laughably misleading but designed to draw an emotional connection to the plan. Once people think of it as a right, it becomes impossible to take away.  

Since it is just theory now, I can only explain what I’ve read. Everyone is given certain a set amount of money every month. It might be $600 bucks or more, not enough probably to live on by itself but enough to discourage full time work. This stipend acts like a cushion for periods of unemployment or underemployment. Supposedly this frees up people to have enough cash for basic allowances.

Work is critical to the individual and society. It takes many forms, a few of which are labor intensive and a few of which are managerial or intellectual. Work doesn’t have to mean muddy boots and sore joints at the end of the day. But it should be tied to individual responsibility. The worker is responsible for himself or herself, and makes choices about the amount of hours they put in and the life they live. For a lot of Americans luxury cars and boats aren’t an option, nor a primary interest. Our salaries affect the type of house we buy, the neighborhood we live in and the vacations we take. No one can change that but the worker. If riches and high living is important, figure out how to get there. Start a company or buy and sell businesses. Go back to school and study something with higher average incomes. But the choice is up to the individual.

The worst argument in favor of the UBI is that it supposedly levels out inequality. This isn’t even remotely true. By “inequality” I guess they mean in purely financial terms. The wealthy keep getting richer and so on. This ignores the first principle of economic law, giving everyone the same thing only moves the baseline of poverty up. We need to think of money in relative terms. When everyone has a Porsche its value goes down.

 Think about the TV. When color televisions first hit the market (late fifties) very few could afford them. They weren’t manufactured in great number because demand wasn’t high, expensive as they were. By 1971 roughly half of American households had a color set. Simply, manufacturing got cheaper as did the price tag allowing middle class families to afford them.

Paying everyone a stipend from the federal budget increases the price of nearly everything else, to say nothing about the inflationary problems of adding layers of cash to economy. In short, money becomes worth less than before because there is so much of it in circulation.  

A slightly less moronic argument for UBI is that if done right it could replace other hefty federal payouts like Medicare and Medicaid. By giving the subsidy allotted for low income Americans in direct payouts the shift allows people to manage their own lives. Nonsense. Their support reflects a staggering ignorance about human behavior. People manage their lives when they earn money, not when they get handouts. Besides it requires federal bureaucrats to eliminate programs they directly benefit from. This never happens. Remember when Fanny Mae was supposed to be eliminated because of poor management? It’s still there. Remember when Obamacare was supposed to replace Medicaid for seniors? It’s still there. Exim Bank (Export/Import) was slated to be cut as well, guess what? Still there.

Since the big spend on welfare programs got going in the late sixties poverty has increased ever since. Extra spending on entitlements leads to the exact opposite of its intended purpose. It adds a layer of dependence for the next generation used to its regularity. The waste in human progress is the saddest part of the whole ordeal.

It’s also the hardest to undue. Even if the savings do manifest (highly unlikely) we have increased entitlement to an incomprehensible level. This is something policy wonks will never understand. Lives get wasted, not just money. The ones left behind in the economy are the ones who can’t, or won’t, do for themselves. Who can blame them? When no expects anything from you, why put in the effort?  

The UBI movement is gaining steam due to the supposed joblessness the tech boom is likely to create. Robots might replace a lot of the jobs we do now but trying to replace income with welfare is bad for people and societies. We can’t know the future but shifting technology has always lead to disappearing jobs. From agriculture to manufacturing, we’ve been here before. Almost no one worked in software before the 1980s. Fracking for natural gas wasn’t widely used until after the 1950s. Something always comes along.

This UBI is just the latest effort to create a dependent class from ‘experts’ who don’t care about the cost of human dignity. Yes, work is dignity. Work is essential for purpose and strong communities. Whatever the numbers are that will never change. It’s a first principle rooted in societal progress.

 The trade-offs aren’t worth it.     

Building a Blog

Writing is like building. There are steps to complete before you can open for business. Starting with a thought or topic is like digging the hole and pouring the foundation. Nothing can proceed without a direction for the essay. I never worry if my topic seems off color or disconnected. I have plenty of time to rework it. It’s a starting point and holds the rest of it up. A business article could start with a news item about Walmart breaking into the online selling market. I would add opinions at this stage and include at least some direction, the basic point.  

After the foundation comes the framing. Framing is the discipline stage. It takes the longest and forms the largest part of the project. This is tying ideas together and stress testing them with research and logic. No one writes an essay and makes up the details. Details are like the steel beams. You need to understand how ideas fit together and strengthen the structure. History, philosophy, personal experience and statistics reinforce the thesis. The Walmart story needs some background and figures for a fuller picture. Framing helps fit those into place and support whichever conclusion is needed.

Without proper research your ideas fall flat like a camping mattress when the air is let out. I try to avoid generalities like "really big" or "very expensive" without including objective facts.

After the framing is up the floors and infrastructure get added. By infrastructure I mean plumbing, electrical, drywall and windows. I’ve missed a few key installations but you get the point. This isn’t really about building, it’s about writing (so settle down carpenters). I think of this as the second draft of the essay. The first draft is putting your ideas into a type of vertical grid. It’s a way of telling yourself, this the general point of what I want to say. Stay within the frame. The second draft is where cleaning happens, the rough sentences shaved off, ground down. On closer inspection some areas need more depth and some just need to go. After a thorough edit the article is almost ready.

The last phase is the exterior phase. Add whatever article links or graphics will help make the words pop, I add them and do a grammar check. I always find more sloppiness to clean up even in this phase. After a final inspection, the essay is ready to post.

 Most of these phases happen automatically now. I don’t consciously realize when phase 2 or 3 have happened, I just kind of roll into them. What’s helpful for me is to avoid trying to say everything perfect in the first phase. I tell myself “Don’t do it”. That’s what editing is for. Besides, you’ll make yourself crazy cleaning up every error and the ideas won’t flow. They jam up in the brain like water in a kinked garden hose. I’ve learned in writing that perfect is the enemy of good.  The ideas are supreme. Get the thoughts out of your head first and then edit. Edit a few times if you have to but don’t slow down because of mistakes. Just write.

I've heard a lot of writers describe their process. They’re all a little different but the ‘stages’ thing seems to be true across the board. Stephen King uses a “Door Open/Door Closed” policy when comes up with new material. He writes with the door closed first to get out all the nastiness in his head. I take that to mean he uses poor grammar, run-on sentences and weird ideas to get some of his thoughts on the page. Some ideas are too weird even for King apparently. Then, he opens the door and cleans it up so it takes on a polished look for presentation. His stages take on the same form, rough at first but presentable later.

Some of the stuff I write requires more research and verification than others. Anything with economics means I’ll fire up the Google machine at least a few times. I need a sense of numbers even if when I don’t need specifics. If not I’ll be guessing. The “here’s my story” classic blog bits don’t demand as much (like this one for instance). My memory isn’t great, but details can be inferred if I remember a setting or a general conversation.

As much as I love to read fiction I have trouble composing dialogue in general. Non-fiction and essay writing come more natural to me. I can’t say why. I guess it has something to do with understanding a character’s motivations and writing from different points of view. Not everyone talks or thinks or acts the same way. We all understand situations differently and our speech reflects our underlying biases and philosophies. It’s tricky for me to vary patterns in dialogue and shorten sentences so the speech sounds like actual people talking. My speaking parts often read like professors giving oral histories on niche topics, too long and too wonkish. People don’t talk like that.

 I just think fiction takes more work. I am building it just the same.

Economics and Snapshot Thinking

There is a tendency in all of us to think in terms of immediacy. In other words, to look at the world as it’s currently structured and imagine it will always be that way. I call it snapshot in time thinking. By trying to make legal changes in the system we ignore the technological changes making those rules obsolete. Snapshot thinking leads to bad policy ideas and lack of innovation. American companies naturally want to protect their industries from competition, both foreign and domestic. They assume the current economic situation will remain steady. But it never does.

Take a look at the auto industry in the fifties and sixties. Assembly workers put in overtime nearly every week and made good salaries. America was king in cars. There were hurdles in countries with high tariffs but basically no one could compete. The snapshot in time view insists, this couldn’t change anytime soon. The good times went on until about the late eighties when Japanese car makers started selling in the US. In the 1990’s American dominance had dropped off, primarily due to foreign sellers putting lower cost autos within reach of price conscience consumers. Also, the costs of building cars increased. As a result, American car makers like GM and Ford cut back on the workforce.

The auto industry shows what can happen to any industry over time. Technology, labor costs, free trade deals and shifting demand all force businesses to change. Cars are better now both from American makers and from foreign. Better because they run longer and need less repairs. Competition helped this improvement along but mostly, the cost of materials and labor in countries like Japan fell. After that, Toyota set up factories in the US to sell direct to Americans and save on freight and taxes, not to mention pesky quotas. Even though Toyota is a foreign owned company, the jobs they provide are for Americans. 

The auto manufacturers’ business didn’t change dramatically, but economic realities forced change in the nature of the work. More automation and less physical labor allows companies to run leaner than before.

Computers changed the way people work as well. An old photograph of an office environment in 1965 (above) would show rows of desks with typewriters and adding machines. Everyone has a computer now. If you sold typewriters you couldn’t imagine being out of a job. Almost no one uses them anymore. Typewriter sales fell very quickly. Thinking about economics in the snapshot stunts possibilities for growth. It hurts the prospect the business will break new ground, see additional opportunities. The best companies are the ones that innovate. It doesn’t require seeing the future as much as taking risks and spending wisely.

Uber is starting to do this. By now we all know, and have probably used, the car shuttle service that ferries riders around like discount taxis. Their model is innovative because it took an old idea, taxi cabs, and improved it by making it cheaper and quicker. GPS linked phones allow drivers unfamiliar with big cities to transport customers anywhere. Now they are starting a food service. Called UberEATS, restaurants use the service to deliver their orders. It’s still quite new and no one knows for sure how big the demand for delivery food is. But the ride share innovator isn’t sitting back and hoping to keep doing taxi service forever.

Amazon still sells books after all, but the business they developed is more online box store than niche library. That isn’t even counting their cloud services (AWS) that raked in over 17 billion last year.

Snapshots equal short term thinking.

The industry with the biggest need for innovation is health care. It needs to innovate because it’s too expensive. From hefty insurance premiums to expensive hospitals and high co-pays, the whole bloated sector is ripe for pairing down. Trying to untangle the mess and understand how we got here is difficult. But more important is finding a way out. People want to be responsible for their own health and not have to sign a stack of forms at every clinic and verify employment while cross checking medication coverage. Only by taking out all the layers (middlemen) does this mess begin to correct. Too many insurance companies and drug wholesales take a percentage at every level. These layers between hospitals and patients lead to expense and confusion. Once health care becomes affordable for workers outside of employer plans, it will get easier.

I am confident that health care (and skyrocketing costs) will be less of a concern for people in 30 years. For all our problems of over-regulation we live in a dynamic country that keeps growing and changing old models. One promising area for reducing costs for healthcare, is in tech. A few companies are using blockchain technology to keep patient data secure and easily accessible by doctors. Because of the decentralized nature of blockchains, the costs of medical billing are greatly reduced because verification of patient information is instantaneous. It may not radically change the industry but it’s a good example of where to start.

Every business changes over time. What worked in a previous generation may not in the next. Snapshot thinking is the culprit. The rule for the future is “stay flexible with your offerings and don’t overextend”.

  

Business As Usual in the PRC

I once heard a sporting goods salesman explain the technology of their new composite wrapped baseball bat. “You get more distance relative to other bats. More distance equals more home runs.” I know they test these things so I pressed a little. “Does it really work that much better than other high end bats?” He looked a little confused “Um...It should.” It reminds me of how the business community thought of China’s growing economy over 20 years ago. Many thought the country could be ‘turned’ into a free market capitalist society. Based on foreign investment and market reforms it seemed to some that “It should.”  

Turns out that reality is more complicated and what a lot of corporate types hoped would happen, didn’t.

 Early last week China’s president Xi Jinping announced that he was ‘changing’ the constitution so as to serve unlimited terms as the leader. Previous presidents served two terms of 5 years each. It’s doubtful that any constitution had law binding capabilities that would be upheld by the Communist Party. But in the late nineties the State Department and a lot of CEOs believed that a growing market economy in China would force a softening toward the West. If the Chinese could become consumers and build a middle class they would insist on democratic reforms and more freedoms like Hong Kong, it was thought.

   

How realistic was it to assume that with a little prosperity and lower trade barriers, China could transition from the closed world of protectionism to a free market nation? Depends who you ask but the idea was pervasive. Right now though it seems foolish to assume an authoritarian government would relinquish any control, whether financial or cultural. In order to understand why smart people thought this way we have to understand the time.

During the late nineties the Communist Party began experimenting with privatization and banking reform. Led by Deng Xiaoping, reforms in certain industries like agriculture began turning a failing sector into a secure and profitable enterprise. They encouraged foreign investment and deregulated much of the economy. The poor nation needed money so it looked to the West. It was limited in scope and most of the really profitable industries (energy, manufacturing) remained state owned. But the reforms worked and created a sense, among some, that the one party state was opening up to the rest of world.

Two big events happened after that. First the British began handing back Hong Kong to Beijing with certain exceptions. Hong Kong would retain the ability to govern itself, keep its valuable currency and operate in a free economic zone apart from Beijing’s interference. The Brits had operated Hong Kong as a territory and set it up as a free trade zone after ceding control. Hong Kong had been separate from China before. 

Second, the United States and other Western partners admitted China into the WTO (World Trade Organization) if they met certain benchmarks, mainly they had to make their economy open to foreign business and ensure self-governance. Also China agreed to abide by the rules of trade for members of the WTO. Rules on tariffs and quotas have to be voted on by members and international courts preside over disputes among member countries. It’s worth noting that the PRC (People’ Republic of China) did make some drastic moves at home (at least superficially) to show their commitment to joining the club. In 2001 they were admitted as a full member and the mainland economy grew exponentially.

The internet was seen as a positive development that could bring democratization to Chinese citizens and introduce them to new ideas and, hopefully, Western thought. This wasn’t completely naive. When people are connected across vast swaths of the country leaders are held to account for bad behavior. But the Chinese were never going to let any new technology into the country until they had a way to control it. They periodically blocked news websites like the BBC and Bloomberg for various reasons. Certain words or phrases like “democracy” or “Falun Gong” (a religious group) would not return any results with a Google search. The censors blocked countless websites viewed as subversive. Arrests and detentions of journalists and Christians still happened but less so, since more the government needed to appear conciliatory. If not conciliatory at least they understood the importance of hiding the uglier aspects of a police state.   The economy was growing so well no one wanted to slow it down and hold Beijing accountable for obvious infractions. Neither did the Chinese government want to rock the diplomatic boat over some display of police brutality or arrest of a prominent journalist. China didn’t change dramatically in the 2000s but did learn to hide a lot their moves.

American businesses that entered the market mostly became frustrated by the lack of cooperation and intellectual property theft that is as common as the cities’ smog.

Intellectual property theft is more serious than people realize. If patents aren’t respected in foreign countries companies can’t sell product and demand the same value. It works like this, if Nike designs a running shoe for sale in retail stores around the world they expect to be the only ones making that shoe. Chinese factory owners frequently copy the design to sell to their own venders. DVDs create the same problem, as do software and tools and anything that carries a patent. Knock off copies of nearly everything exist within the country because the law doesn’t effectively crack down on theft. The authorities do some token sweeps of sellers from time to time but it doesn’t amount to deterrence. I once asked a Chinese business man why the authorities don’t enforce the law. “Why should they? The factories that make the fakes create thousands of jobs for unemployed workers and shoppers like cheap options. From a Communist official’s point of view, it doesn’t make sense to curb it.” 

Another aspect of opening a Chinese branch of your particular business is the ‘shared’ aspect of making money in the country. Big companies like Yum Brands (Pizza Hut, KFC) have to partner with a Chinese local company and share profits in order to open a location. This creates friction when the regulations change and rules aren’t clear. Having a partner means sharing financial information and intellectual property. Not every foreign company is doing poorly but the trend is toward less control in decision making.

I’ve wondered how much of the optimism toward China was genuine and rooted in positive changes the government was making, and how much purely driven by new markets. When the opportunity to make money presents itself you take it. Did American shareholders really believe that China was on the cusp of a global opening for democratic norms, or did they just pretend to in order to expand. The old saying about business is that if you aren’t growing you’re dying. What better opportunity to grow than in a country with 1.6 billion consumers? Like my baseball bat salesman, something tells they didn’t really know but figured “it should” work.

Since 2012 the Communist Party has started reverting back to old tactics, crushing dissent and purging the ranks of powerful cadres. The first big move Xi Jinping made was to start a ‘corruption drive’ to weed out bent officials and purify the party. It turned into a ploy aimed at removing rivals. Not that party corruption wasn’t a problem, citizens are all too aware of it, but it served a larger purpose for the young president, eliminate competition and send a message. Since then he has taken a wide swath of leadership positions and chairs that other presidents never assumed. He has tightened the noose of internet censorship and built up military bases along the South China Sea. The military buildup in particular is a direct affront to the US which patrols the region under a freedom of the seas initiative. Freedom of the seas ensures rights to travel through the ungoverned parts of the ocean. Building bases on shoals and tiny islands threatens this concept for both commercial and US Navy ships. Almost weekly we hear of Vietnamese and Philippine fishing vessels turned around, told to leave the area.

The US is in a tough position now. We have to determine what is important to national security first, economic considerations should be second. We should have learned by now that as long as the Communist Party is running the show, open markets and liberal reforms are a nonstarter or at least very limited. Keeping the South China Sea open for commerce is essential. America's Navy should double its presence in the waters as a show of force. If the Chinese restrict movement and dominate the sea our influence in the entire region is over. Conflict is almost certain in the future. It doesn’t have to lead to a full scale war, but our objectives on clear shipping lanes should be enforced. Better an economic war than a military one. Hopefully is doesn’t come to that. Our optimistic notions of China a bastion of free trade was always a pipe dream. 

Whether we really believed it or not is a mystery.