20 Jul 2012 Seek First to Understand

Earlier this week, Stephen Covey, a hero of mine and a champion of how to live a better life, passed away. Covey was best known for his mega-bestseller The 7 Habits of Highly Effective People. His common-sense, yet profound counsel to “Begin with the End in Mind,” to “Be Proactive,” and to “Seek First to Understand, Then to Be Understood” have been fundamental concepts in the shaping of Beacon. We thank him and will miss him greatly.

The week has been a mixed bag of positive, discouraging, and downright worrisome data. Spain tops the list of worrisome as euro-leaders hastily approved a rescue package for ailing banking and governmental systems. Here at home the data has been sufficiently mixed for economists to predict either slowdown, or continued stagnation. But there is simply not enough optimism in the data to support hopes for robust recovery any time soon.

Spain’s governmental regions face about 15 billion euros ($18 billion) of debt redemptions in the second half of this year, with Catalonia and Valencia the most indebted states, as reported by Bloomberg. Finance chiefs in Europe signed off today on a rescue package of at least 100 billion euros to prevent the collapse of the nation’s financial system. Spanish bond yields have climbed to a euro-era record in response. The gap between Spanish and German 10-year bond yields widened to a record of 606 basis points today. Spain said their recession will extend well into next year, so it may be some time before the selling pressure on Spanish sovereigns lightens.

Germany holds the key to the long term solution in Europe. As the euro-region’s strongest economy and arguably the most fiscally responsible, they are reticent to go along with plans to monetize the debts of weaker economies. In other words, the German taxpayer will be asked to take on the burden created by his spend-thrift neighbors.

In an article placing a large part of the blame for Europe’s current woes on the difference in labor cost, Randall Forsyth of the WSJ points out that “from 2000 to 2009 labor costs rose 50% in Spain and 35% in Italy, versus 18% in Germany. It would take 10 years of adjustment to close the gap. But that risks unsustainable deflation in the periphery, which would worsen the crisis by raising the ratio of debt to gross domestic product.”

Sebastian Mallaby, the Paul A. Volcker senior fellow for international economics at the Council of Foreign Relations says that “if the ECB prints enough money to hit its target of 2% inflation across the Continent, this is likely to mean zero inflation in the crisis countries, where unemployment is high, and 3%-4% inflation in Europe’s strong economies, where workers are confident enough to demand wage increases. By delivering on its inflation target, in other words, the ECB can help Italy and Spain compete against Germany and the Netherlands, gradually eroding the gap in labor costs that lies at the heart of Europe’s troubles. That would boost the competitiveness of the crisis economies against the rest of the world, further increasing the odds of an export-led recovery.”

We see the same thing with companies like General Motors. When their labor costs had grown too far beyond those of their Japanese competitors and they were near bankruptcy, it took the US Government, excuse me, the US taxpayer to bail them out. Did they learn anything? Yes; if they fail to keep their labor costs in check, the US government will bail them out again. Similar reasoning in Europe perpetuates the problem.

Continuing to ignore problems of mismanagement and excessive debt in business eventually leads to bankruptcy. Among sovereign nations, it eventually leads to collapse or revolution. Germany will soon reach its limit for helping its weaker neighbors. When that happens, Spain, Italy, Greece, and even France will be forced as a last resort to undergo the same kind of painful reforms that Germany undertook in 2003, making them Europe’s leader today.

In the US, the best news came from the housing market. According to the nation’s homebuilders, the housing market “has turned the corner.” The Housing Market Index surged 6 points in July to 35, reflecting the largest monthly gain in nearly 10 years, according to Econoday. But a later report on the sale of existing homes failed to support the trend. The index measuring the measuring the ongoing sales of existing homes fell 5.4% in June to a 4.37 million annual rate, which is the lowest of the year. The report did show that the median price of $189,400 reached its highest level in 2 years.

The Conference Board’s index of Leading Indicators fell 0.3% in June following an increase of 0.4% in May. Negatives in the report included new orders, consumer expectations, building permits, jobless claims, stock prices, and new orders for non-defense capital goods excluding aircraft, according to Econoday. The report indicates the recovery is slowing, but it is still growing, as far as the coincident index is concerned. It rose 0.2% in June, matching May’s rate.

The consumer is not helping in the recovery either. Retail sales in June fell 0.5%, following a 0.2 percent decrease in May. Motor vehicle sales dropped 0.6%, following a 0.8% bounce in May. Excluding motor vehicles, retail sales decreased 0.4% after declining 0.4% in May. Gasoline sales also contributed to the decline as they dropped 1.8% after a 2.0% decline in May. The consumer sector has lost momentum with total sales excluding autos and gasoline in negative territory for three months in a row.

Whether our economy is trending sideways or down is a matter for debate. Mr. Bernanke says it is slowing and continues to warn Congress that the ‘fiscal cliff’ is real and present danger. Failure to address the looming draconian spending cuts (largely aimed at the military – arguably the most productive segment of the government) and increases of the personal income tax rates, threaten to send the US economy into a “mild recession.” Mr. Bernanke might as well have been the veritable tree falling in the uninhabited woods. Obama, Democrats nor Republicans show any signs of budging before the elections.

In fact, the rhetoric grew even louder this week as the president ratcheted up his class warfare by opening a new front against those who start businesses. In a speech last weekend he said:

“I’m always struck by people who think, well, it must be because I was just so smart. There are a lot of smart people out there. It must be because I worked harder than everybody else. Let me tell you something — there are a whole bunch of hardworking people out there. If you were successful, somebody along the line gave you some help. There was a great teacher somewhere in your life. Somebody helped to create this unbelievable American system that we have that allowed you to thrive. Somebody invested in roads and bridges. If you’ve got a business — you didn’t build that. Somebody else made that happen. The Internet didn’t get invented on its own. Government research created the Internet so that all the companies could make money off the Internet. Watch the president’s speech. Watch Mr. Romney’s reply.

While no one who has started a business would argue that the support of loyal employees, infrastructure, and all kinds of events along the way didn’t play a vital role in their success, the president’s comments and tone were deeply offensive to anyone who risked much to step outside the safety of employee to create a business and to become an employer.

We would do well as a nation to re-read Stephen Covey 7 Habits, particularly the part on Seeking First to Understand, Then to Be Understood. The problem is Democrats seek only to understand Democrats and Republicans seek only to understand Republicans. If it continues, the election outcome, as indicated by current polls will make little difference. The great divide will continue unless we Seek First to Understand, Then to Be Understood.