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I still think this is incredibly on point. It is nigh on eight years old and 90% of it still holds true. That's why I pass it on to you in full.TL;DR:Why we hate HR:HR people aren't the sharpest tacks in the box.HR pursues efficiency in lieu of value.HR isn't working for you.The corner office doesn't get HR (and vice versa)That does not go for some of the stellar people in HR that I have worked with, or those people in HR who do things differently, to add a nuance. You know who you are. Many people in HR I passed this on to had this article lying on their desk prominently as a badge of honor.Why We Hate HR:In a knowledge economy, companies with the best talent win. And finding, nurturing, and developing that talent should be one of the most important tasks in a corporation. So why does human resources do such a bad job -- and how can we fix it?From: Issue 97|August 2005 | Page 40 By: Keith H. HammondsWell, here's a rockin' party: a gathering of several hundred midlevel human-resources executives in Las Vegas. (Yo, Wayne Newton! How's the 401(k)?) They are here, ensconced for two days at faux-glam Caesars Palace, to confer on "strategic HR leadership," a conceit that sounds, to the lay observer, at once frightening and self-contradictory. If not plain laughable.Because let's face it: After close to 20 years of hopeful rhetoric about becoming "strategic partners" with a "seat at the table" where the business decisions that matter are made, most human-resources professionals aren't nearly there. They have no seat, and the table is locked inside a conference room to which they have no key. HR people are, for most practical purposes, neither strategic nor leaders.I don't care for Las Vegas. And if it's not clear already, I don't like HR, either, which is why I'm here. The human-resources trade long ago proved itself, at best, a necessary evil -- and at worst, a dark bureaucratic force that blindly enforces nonsensical rules, resists creativity, and impedes constructive change. HR is the corporate function with the greatest potential -- the key driver, in theory, of business performance -- and also the one that most consistently underdelivers. And I am here to find out why.Why are annual performance appraisals so time-consuming -- and so routinely useless? Why is HR so often a henchman for the chief financial officer, finding ever-more ingenious ways to cut benefits and hack at payroll? Why do its communications -- when we can understand them at all -- so often flout reality? Why are so many people processes duplicative and wasteful, creating a forest of paperwork for every minor transaction? And why does HR insist on sameness as a proxy for equity?It's no wonder that we hate HR. In a 2005 survey by consultancy Hay Group, just 40% of employees commended their companies for retaining high-quality workers. Just 41% agreed that performance evaluations were fair. Only 58% rated their job training as favorable. Most said they had few opportunities for advancement -- and that they didn't know, in any case, what was required to move up. Most telling, only about half of workers below the manager level believed their companies took a genuine interest in their well-being.None of this is explained immediately in Vegas. These HR folks, from employers across the nation, are neither evil courtiers nor thoughtless automatons. They are mostly smart, engaging people who seem genuinely interested in doing their jobs better. They speak convincingly about employee development and cultural transformation. And, over drinks, they spin some pretty funny yarns of employee weirdness. (Like the one about the guy who threatened to sue his wife's company for "enabling" her affair with a coworker. Then there was the mentally disabled worker and the hooker -- well, no, never mind. . . .)But then the facade cracks. It happens at an afternoon presentation called "From Technicians to Consultants: How to Transform Your HR Staff into Strategic Business Partners." The speaker, Julie Muckler, is senior vice president of human resources at Wells Fargo Home Mortgage. She is an enthusiastic woman with a broad smile and 20 years of experience at companies such as Johnson & Johnson and General Tire. She has degrees in consumer economics and human resources and organizational development.And I have no idea what she's talking about. There is mention of "internal action learning" and "being more planful in my approach." PowerPoint slides outline Wells Fargo Home Mortgage's initiatives in performance management, organization design, and horizontal-solutions teams. Muckler describes leveraging internal resources and involving external resources -- and she leaves her audience dazed. That evening, even the human-resources pros confide they didn't understand much of it, either.This, friends, is the trouble with HR. In a knowledge economy, companies that have the best talent win. We all know that. Human resources execs should be making the most of our, well, human resources -- finding the best hires, nurturing the stars, fostering a productive work environment -- just as IT runs the computers and finance minds the capital. HR should be joined to business strategy at the hip.Instead, most HR organizations have ghettoized themselves literally to the brink of obsolescence. They are competent at the administrivia of pay, benefits, and retirement, but companies increasingly are farming those functions out to contractors who can handle such routine tasks at lower expense. What's left is the more important strategic role of raising the reputational and intellectual capital of the company -- but HR is, it turns out, uniquely unsuited for that.Here's why.1. HR people aren't the sharpest tacks in the box. We'll be blunt: If you are an ambitious young thing newly graduated from a top college or B-school with your eye on a rewarding career in business, your first instinct is not to join the human-resources dance. (At the University of Michigan's Ross School of Business, which arguably boasts the nation's top faculty for organizational issues, just 1.2% of 2004 grads did so.) Says a management professor at one leading school: "The best and the brightest don't go into HR."Who does? Intelligent people, sometimes -- but not businesspeople. "HR doesn't tend to hire a lot of independent thinkers or people who stand up as moral compasses," says Garold L. Markle, a longtime human-resources executive at Exxon and Shell Offshore who now runs his own consultancy. Some are exiles from the corporate mainstream: They've fared poorly in meatier roles -- but not poorly enough to be fired. For them, and for their employers, HR represents a relatively low-risk parking spot.Others enter the field by choice and with the best of intentions, but for the wrong reasons. They like working with people, and they want to be helpful -- noble motives that thoroughly tick off some HR thinkers. "When people have come to me and said, 'I want to work with people,' I say, 'Good, go be a social worker,' " says Arnold Kanarick, who has headed human resources at the Limited and, until recently, at Bear Stearns. "HR isn't about being a do-gooder. It's about how do you get the best and brightest people and raise the value of the firm."The really scary news is that the gulf between capabilities and job requirements appears to be widening. As business and legal demands on the function intensify, staffers' educational qualifications haven't kept pace. In fact, according to a survey by the Society for Human Resource Management (SHRM), a considerably smaller proportion of HR professionals today have some education beyond a bachelor's degree than in 1990.And here's one more slice of telling SHRM data: When HR professionals were asked about the worth of various academic courses toward a "successful career in HR," 83% said that classes in interpersonal communications skills had "extremely high value." Employment law and business ethics followed, at 71% and 66%, respectively. Where was change management? At 35%. Strategic management? 32%. Finance? Um, that was just 2%.The truth? Most human-resources managers aren't particularly interested in, or equipped for, doing business. And in a business, that's sort of a problem. As guardians of a company's talent, HR has to understand how people serve corporate objectives. Instead, "business acumen is the single biggest factor that HR professionals in the U.S. lack today," says Anthony J. Rucci, executive vice president at Cardinal Health Inc., a big health-care supply distributor.Rucci is consistently mentioned by academics, consultants, and other HR leaders as an executive who actually does know business. At Baxter International, he ran both HR and corporate strategy. Before that, at Sears, he led a study of results at 800 stores over five years to assess the connection between employee commitment, customer loyalty, and profitability.As far as Rucci is concerned, there are three questions that any decent HR person in the world should be able to answer. First, who is your company's core customer? "Have you talked to one lately? Do you know what challenges they face?" Second, who is the competition? "What do they do well and not well?" And most important, who are we? "What is a realistic assessment of what we do well and not so well vis a vis the customer and the competition?"Does your HR pro know the answers?2. HR pursues efficiency in lieu of value. Why? Because it's easier -- and easier to measure. Dave Ulrich, a professor at the University of Michigan, recalls meeting with the chairman and top HR people from a big bank. "The training person said that 80% of employees have done at least 40 hours in classes. The chairman said, 'Congratulations.' I said, 'You're talking about the activities you're doing. The question is, What are you delivering?' "That sort of stuff drives Ulrich nuts. Over 20 years, he has become the HR trade's best-known guru (see "The Once and Future Consultant," page 48) and a leading proponent of the push to take on more-strategic roles within corporations. But human-resources managers, he acknowledges, typically undermine that effort by investing more importance in activities than in outcomes. "You're only effective if you add value," Ulrich says. "That means you're not measured by what you do but by what you deliver." By that, he refers not just to the value delivered to employees and line managers, but the benefits that accrue to investors and customers, as well.So here's a true story: A talented young marketing exec accepts a job offer with Time Warner out of business school. She interviews for openings in several departments -- then is told by HR that only one is interested in her. In fact, she learns later, they all had been. She had been railroaded into the job, under the supervision of a widely reviled manager, because no one inside the company would take it.You make the call: Did HR do its job? On the one hand, it filled the empty slot. "It did what was organizationally expedient," says the woman now. "Getting someone who wouldn't kick and scream about this role probably made sense to them. But I just felt angry." She left Time Warner after just a year. (A Time Warner spokesperson declined to comment on the incident.)Part of the problem is that Time Warner's metrics likely will never catch the real cost of its HR department's action. Human resources can readily provide the number of people it hired, the percentage of performance evaluations completed, and the extent to which employees are satisfied or not with their benefits. But only rarely does it link any of those metrics to business performance.John W. Boudreau, a professor at the University of Southern California's Center for Effective Organizations, likens the failing to shortcomings of the finance function before DuPont figured out how to calculate return on investment in 1912. In HR, he says, "we don't have anywhere near that kind of logical sophistication in the way of people or talent. So the decisions that get made about that resource are far less sophisticated, reliable, and consistent."Cardinal Health's Rucci is trying to fix that. Cardinal regularly asks its employees 12 questions designed to measure engagement. Among them: Do they understand the company's strategy? Do they see the connection between that and their jobs? Are they proud to tell people where they work? Rucci correlates the results to those of a survey of 2,000 customers, as well as monthly sales data and brand-awareness scores."So I don't know if our HR processes are having an impact" per se, Rucci says. "But I know absolutely that employee-engagement scores have an impact on our business," accounting for between 1% and 10% of earnings, depending on the business and the employee's role. "Cardinal may not anytime soon get invited by the Conference Board to explain our world-class best practices in any area of HR -- and I couldn't care less. The real question is, Is the business effective and successful?"3. HR isn't working for you. Want to know why you go through that asinine performance appraisal every year, really? Markle, who admits to having administered countless numbers of them over the years, is pleased to confirm your suspicions. Companies, he says "are doing it to protect themselves against their own employees," he says. "They put a piece of paper between you and employees, so if you ever have a confrontation, you can go to the file and say, 'Here, I've documented this problem.' "There's a good reason for this defensive stance, of course. In the last two generations, government has created an immense thicket of labor regulations. Equal Employment Opportunity; Fair Labor Standards; Occupational Safety and Health; Family and Medical Leave; and the ever-popular ERISA. These are complex, serious issues requiring technical expertise, and HR has to apply reasonable caution.But "it's easy to get sucked down into that," says Mark Royal, a senior consultant with Hay Group. "There's a tension created by HR's role as protector of corporate assets -- making sure it doesn't run afoul of the rules. That puts you in the position of saying no a lot, of playing the bad cop. You have to step out of that, see the broad possibilities, and take a more open-minded approach. You need to understand where the exceptions to broad policies can be made."Typically, HR people can't, or won't. Instead, they pursue standardization and uniformity in the face of a workforce that is heterogeneous and complex. A manager at a large capital leasing company complains that corporate HR is trying to eliminate most vice-president titles there -- even though veeps are a dime a dozen in the finance industry. Why? Because in the company's commercial business, vice president is a rank reserved for the top officers. In its drive for bureaucratic "fairness," HR is actually threatening the reputation, and so the effectiveness, of the company's finance professionals.The urge for one-size-fits-all, says one professor who studies the field, "is partly about compliance, but mostly because it's just easier." Bureaucrats everywhere abhor exceptions -- not just because they open up the company to charges of bias but because they require more than rote solutions. They're time-consuming and expensive to manage. Make one exception, HR fears, and the floodgates will open.There's a contradiction here, of course: Making exceptions should be exactly what human resources does, all the time -- not because it's nice for employees, but because it drives the business. Employers keep their best people by acknowledging and rewarding their distinctive performance, not by treating them the same as everyone else. "If I'm running a business, I can tell you who's really helping to drive the business forward," says Dennis Ackley, an employee communication consultant. "HR should have the same view. We should send the message that we value our high-performing employees and we're focused on rewarding and retaining them."Instead, human-resources departments benchmark salaries, function by function and job by job, against industry standards, keeping pay -- even that of the stars -- within a narrow band determined by competitors. They bounce performance appraisals back to managers who rate their employees too highly, unwilling to acknowledge accomplishments that would merit much more than the 4% companywide increase.Human resources, in other words, forfeits long-term value for short-term cost efficiency. A simple test: Who does your company's vice president of human resources report to? If it's the CFO -- and chances are good it is -- then HR is headed in the wrong direction. "That's a model that cannot work," says one top HR exec who has been there. "A financial person is concerned with taking money out of the organization. HR should be concerned with putting investments in."4. The corner office doesn't get HR (and vice versa). I'm at another rockin' party: a few dozen midlevel human-resources managers at a hotel restaurant in Mahwah, New Jersey. It is not glam in any way. (I've got to get a better travel agent.) But it is telling, in a hopeful way. Hunter Douglas, a $2.1 billion manufacturer of window coverings, has brought its HR staff here from across the United States to celebrate their accomplishments.The company's top brass is on hand. Marvin B. Hopkins, president and CEO of North American operations, lays on the praise: "I feel fantastic about your achievements," he says. "Our business is about people. Hiring, training, and empathizing with employees is extremely important. When someone is fired or leaves, we've failed in some way. People have to feel they have a place at the company, a sense of ownership."So, yeah, it's corporate-speak in a drab exurban office park. But you know what? The human-resources managers from Tupelo and Dallas are totally pumped up. They've been flown into headquarters, they've had their picture taken with the boss, and they're seeing Mamma Mia on Broadway that afternoon on the company's dime.Can your HR department say it has the ear of top management? Probably not. "Sometimes," says Ulrich, "line managers just have this legacy of HR in their minds, and they can't get rid of it. I felt really badly for one HR guy. The chairman wanted someone to plan company picnics and manage the union, and every time this guy tried to be strategic, he got shot down."Say what? Execs don't think HR matters? What about all that happy talk about employees being their most important asset? Well, that turns out to have been a small misunderstanding. In the 1990s, a group of British academics examined the relationship between what companies (among them, the UK units of Hewlett-Packard and Citibank) said about their human assets and how they actually behaved. The results were, perhaps, inevitable.In their rhetoric, human-resources organizations embraced the language of a "soft" approach, speaking of training, development, and commitment. But "the underlying principle was invariably restricted to the improvements of bottom-line performance," the authors wrote in the resulting book, Strategic Human Resource Management (Oxford University Press, 1999). "Even if the rhetoric of HRM is soft, the reality is almost always 'hard,' with the interests of the organization prevailing over those of the individual."In the best of worlds, says London Business School professor Lynda Gratton, one of the study's authors, "the reality should be some combination of hard and soft." That's what's going on at Hunter Douglas. Human resources can address the needs of employees because it has proven its business mettle -- and vice versa. Betty Lou Smith, the company's vice president of corporate HR, began investigating the connection between employee turnover and product quality. Divisions with the highest turnover rates, she found, were also those with damaged-goods rates of 5% or higher. And extraordinarily, 70% of employees were leaving the company within six months of being hired.Smith's staffers learned that new employees were leaving for a variety of reasons: They didn't feel respected, they didn't have input in decisions, but mostly, they felt a lack of connection when they were first hired. "We gave them a 10-minute orientation, then they were out on the floor," Smith says. She addressed the weakness by creating a mentoring program that matched new hires with experienced workers. The latter were suspicious at first, but eventually, the mentor positions (with spiffy shirts and caps) came to be seen as prestigious. The six-month turnover rate dropped dramatically, to 16%. Attendance and productivity -- and the damaged-goods rate -- improved."We don't wait to hear from top management," Smith says. "You can't just sit in the corner and look at benefits. We have to know what the issues in our business are. HR has to step up and assume responsibility, not wait for management to knock on our door."But most HR people do.Hunter Douglas gives us a glimmer of hope -- of the possibility that HR can be done right. And surely, even within ineffective human-resources organizations, there are great individual HR managers -- trustworthy, caring people with their ears to the ground, who are sensitive to cultural nuance yet also understand the business and how people fit in. Professionals who move voluntarily into HR from line positions can prove especially adroit, bringing a profit-and-loss sensibility and strong management skills.At Yahoo, Libby Sartain, chief people officer, is building a group that may prove to be the truly effective human-resources department that employees and executives imagine. In this, Sartain enjoys two advantages. First, she arrived with a reputation as a creative maverick, won in her 13 years running HR at Southwest Airlines. And second, she had license from the top to do whatever it took to create a world-class organization.Sartain doesn't just have a "seat at the table" at Yahoo; she actually helped build the table, instituting a weekly operations meeting that she coordinates with COO Dan Rosensweig. Talent is always at the top of the agenda -- and at the end of each meeting, the executive team mulls individual development decisions on key staffers.That meeting, Sartain says, "sends a strong message to everyone at Yahoo that we can't do anything without HR." It also signals to HR staffers that they're responsible for more than shuffling papers and getting in the way. "We view human resources as the caretaker of the largest investment of the company," Sartain says. "If you're not nurturing that investment and watching it grow, you're not doing your job."Yahoo, say some experts and peers at other organizations, is among a few companies -- among them Cardinal Health, Procter & Gamble, Pitney Bowes, Goldman Sachs, and General Electric -- that truly are bringing human resources into the realm of business strategy. But they are indeed the few. USC professor Edward E. Lawler III says that last year HR professionals reported spending 23% of their time "being a strategic business partner" -- no more than they reported in 1995. And line managers, he found, said HR is far less involved in strategy than HR thinks it is. "Despite great huffing and puffing about strategy," Lawler says, "there's still a long way to go." (Indeed. When I asked one midlevel HR person exactly how she was involved in business strategy for her division, she excitedly described organizing a monthly lunch for her vice president with employees.)What's driving the strategy disconnect? London Business School's Gratton spends a lot of time training human-resources professionals to create more impact. She sees two problems: Many HR people, she says, bring strong technical expertise to the party but no "point of view about the future and how organizations are going to change." And second, "it's very difficult to align HR strategy to business strategy, because business strategy changes very fast, and it's hard to fiddle around with a compensation strategy or benefits to keep up." More than simply understanding strategy, Gratton says, truly effective executives "need to be operating out of a set of principles and personal values." And few actually do.In the meantime, economic natural selection is, in a way, taking care of the problem for us. Some 94% of large employers surveyed this year by Hewitt Associates reported they were outsourcing at least one human-resources activity. By 2008, according to the survey, many plan to expand outsourcing to include activities such as learning and development, payroll, recruiting, health and welfare, and global mobility.Which is to say, they will farm out pretty much everything HR does. The happy rhetoric from the HR world says this is all for the best: Outsourcing the administrative minutiae, after all, would allow human-resources professionals to focus on more important stuff that's central to the business. You know, being strategic partners.The problem, if you're an HR person, is this: The tasks companies are outsourcing -- the administrivia -- tend to be what you're good at. And what's left isn't exactly your strong suit. Human resources is crippled by what Jay Jamrog, executive director of the Human Resource Institute, calls "educated incapacity: You're smart, and you know the way you're working today isn't going to hold 10 years from now. But you can't move to that level. You're stuck."That's where human resources is today. Stuck. "This is a unique organization in the company," says USC's Boudreau. "It discovers things about the business through the lens of people and talent. That's an opportunity for competitive advantage." In most companies, that opportunity is utterly wasted.And that's why I don't like HR.Keith H. Hammonds is Fast Company's deputy editor.Copyright © 2005 Gruner + Jahr USA Publishing. All rights reserved.Fast Company, 375 Lexington Avenue.,New York , NY 10017

No.The Department of Health Care Services (DHCS) and Covered California have a Single Application for health care coverage in California. The qualification for health coverage, including free or low cost Medi-Cal, has very clear requirements. Who someone worked for in the past has no impact on the application process or decision.Once someone is enrolled, they have 30 days to choose a plan in their area. There are over 70 carriers in the state, but most counties have maybe a few from which a participant can choose. Not all plans participate in all counties. If you do not pick a plan, the agency will pick for you.This is from the Medi-Cal website on how to qualify. Kaiser Permanente is not involved. They are only one of many carriers.Who Is EligibleDifferent eligibility requirements apply as new enrollees are phased in to Medi-Cal, depending on age and income; those enrolled in some other low-income benefit programs are automatically eligible for Medi-Cal.Ages 19 to 64. Medi-Cal covers California adults who:Were former foster youth enrolled in Medi-Cal at age 18, until they turn 26Have incomes at or below $16,105 for an individual and $21,708 for married couples (138% of the federal poverty level)“Income” is defined as adjusted gross income plus any tax-exempt income; to compute it, add lines 8b and 37 on a 1040 tax form. A person whose income is within those limits will get Medi-Cal coverage free until 2016, when they are slated to begin paying 10% of the cost.Age 65 and older, blind, or disabled. Under former rules still in effect, Californians who are at least 65, blind, or disabled can qualify for Medi-Cal coverage if they have either:A low income and few assets and savingsPersonal resources reduced due to health care expensesIncome limit.This Medi-Cal income limit is calculated as a percentage related to federal poverty guidelines, which change every year. The current limit is about $1,188 monthly for an individual and $1,603 for a couple.Asset limit. Individuals may own assets not worth more than $2,000; married couples may own $3,000 worth. But not all assets are included in the count. Exempt assets include:A primary homeOne vehicleHousehold itemsPersonal belongings including clothing, heirlooms, and wedding and engagement ringsBurial plots and any money in a designated burial plan fundLife insurance policies and the balance of pension funds, IRAs, and certain annuitiesHigher limits for high medical expenses. Some people who have few assets but relatively high incomes may qualify for Medi-Cal if a designated amount goes exclusively to paying medical costs. This is called paying a “share of cost.” The amount may change with an individual’s monthly income.Automatically eligible. Individuals enrolled in some programs automatically qualify for Medi-Cal.Supplemental Security Income (SSI) or State Supplementary Payment (SSP): Federal and state programs providing income to those 65 and over, blind, or disabled who meet income and resource limits. For a quick analysis of eligibility, use the SSI Benefit Eligibility Screening Tool.California Work Opportunity and Responsibility to Kids (CalWORKs): Provides income and services to some families with special needs. It is administered through the county social services department. Learn more through the Department of Social Services or apply for benefits online.Foster Care or Adoption Assistance Program: This program is run by California’s Children and Family Services Division.Refugee Assistance: Among other help, this program provides a limited time of Medi-Cal benefits to refugees, asylum seekers, and federally certified human trafficking victims. For more information, contact the local Office of Refugee Health.Special categories. A number of additional specialized provisions make Californians in need of medical care eligible for Medi-Cal, including those who are any of the following:Under 21PregnantResidents in skilled nursing or intermediate care homesParents or caretakers of disadvantaged children under 21Diagnosed with breast or cervical cancer

The trade deficit is high because our economy has gotten more advanced over time.At first glance, this may sound counter-intuitive, but hear me out:The “stuff” we produce today is more sophisticated than before. Generally, this means that it is by nature less physical and more intangible (i.e. software, services and intellectual property). Instead of producing physical things with our hands and physical labor, the value has shifted to producing intangible things with our minds and creativity.Our economy has gotten more specialized over time. Instead of handling every single piece of the manufacturing process, we have broken it up into a series of discrete steps and analyzed each step to decide whether certain activities are worth more of our time to handle than others. As above, this typically means activities where we use more of our brains vs. our hands. To free up resources on the higher value-add activities (which includes living more comfortable lives), we have diverted some of the more labor-intensive activity to our trading partners.As our economy has become more sophisticated, traditional metrics like “trade deficits” are less representative of how real economic value flows in international trade. To gain a more holistic view of it, we need to understand something called “Balance of Payments” or “BoP”.Even BoP is unable to fully capture all of the economic value flows. The increasingly intangible nature of the products and services we produce has led to a rise in the artificial shifting of trade offshore for tax purposes, to the point where goods and services created by Americans and sold to our trading partners do not even show up in our international trade accounting.After accounting for all of these points — which I will explain in greater detail below — it is important to note that we do still run a fairly large deficit with the rest of the world. However, this number is much smaller than the headline figures that are often bandied about.Also significant is the concept that we need to run some level of deficit with the rest of the world as part of the U.S. Dollar’s role as the global reserve currency, which turns out to be a very powerful and highly advantageous tool at our disposal.International trade is complicated and not the easiest thing to understand but I will try my best to explain using real-world examples. I believe it is worth taking the time to think about this topic so we can be better equipped (as a society) to make smart decisions when it comes to trade policy, especially at this critical juncture in history. The decisions that we make today will have long-lasting ramifications that will impact us for decades to come.To start, we will examine why the traditional “trade deficit” is really just one piece — that is becoming less significant over time — of international trade. To understand why, we need to get a little smarter on the intricacies of international trade and Balance of Payments accounting.Then, we will take a look at how the increasing sophistication of our economy has shifted value flows within BoP from “trade deficits” to other categories. We will also take a look at how certain trade flows aren’t even captured due to tax tricks that multi-national corporations utilize to minimize taxes. Finally, we will look at how this impacts our thinking on trade policy.Specifically, we will examine this question through the lens of the U.S.-China bilateral relationship, as it is one of the most important economic relationships in the world today and one that has been dominating news headlines in recent months.Welcome to class, my friends. It’s time to put on your learning caps. There might be a pop quiz at the end.BONUS: There will be guest appearances by Alec Baldwin and Emily Ratajkowski. And to spice things up even further, you are encouraged to channel the voice of Ben Stein, who plays an economics teacher in Ferris Bueller's Day Off:“Balance of Payments” 101: The Current Account“Balance of Payments” represents … anyone? anyone? … money flows coming in and out of a country for things like international trade and cross-border investment.At a very high level level, one can think of this as all of the various cashflows going in and out of your banking and investment accounts, perhaps as captured in an online personal finance service such as Mint.One difference is that most of the money flows for a household take place externally whereas for a country — especially a large one like the United States — most economic activity takes place internally, i.e. within the borders.BoP does not measure activity that does not cross the border. So if the foreign subsidiary of an American company sells in that foreign country, and decides for whatever reason not to send the profits back to headquarters, this activity is not captured in the BoP (at least not directly).In other words, BoP represents only a small percentage[1] of the economic activity of a large country like the United States — and it only measures the economic activity that officially crosses the borders. This is a really important idea that will become more evident as you read further.Within the Balance of Payments, there are two major types of money flows:Current Account — regular, ongoing economic activity like trade and income from foreign investments. In the household example, this is analogous to your salary, business income and income on passive investments/assets like dividends and interest income.Capital/Financial Account — investment-related economic activity like investing in foreign subsidiaries, issuing debt, etc. This is analogous to investing in stocks, or buying a house (both the equity down-payment as well as the mortgage you take out).We will first go through the Current Account. In 2017, the U.S. ran a $449 billion deficit on its Current Account — this is the number in the bottom-right corner of the table below. (Note: This is an important table; I will refer back to it a number of times throughout the discussion.)Source: U.S. Bureau of Economy Analysis (BEA)Outside of the trade in goods and services, the other big components are “Primary Income” (Line 2) and “Secondary Income” (Line 3). These categories represent, among other things, income generated by foreign subsidiaries, investment income generated on holdings of foreign securities, salaries paid to expatriates, remittances from foreign labor, etc.The other side of the BoP equation is the Capital/Financial account. We will get to this later but for now, let’s look at how the value flows from international trade are captured by the BoP. Specifically we will take a look at how our evolving economy has shifted certain values within the various Current Account line items.Economic Trend #1: Paper to SoftwareIn 1992 cult classic Glengarry Glen Ross (adapted from the 1983 Pulitzer Prize-winning play), Alec Baldwin plays the role of an experienced salesman who is tasked with motivating a few low-energy brokers in a sleepy branch office of a real estate firm. In one of the most electric single-scene performances in modern film history, he delivers a masterful and vicious monologue on the art of selling. He is our first guest lecturer.As you watch the monologue, pay attention to all the various selling tools of the day — index cards with the sales leads, spinning Rolodexes, poster advertisements on the walls, office supplies, landline telephones, and motivational prizes like cars and steak knives. (Note: You may have to watch a couple of times because Baldwin really does deliver a captivating performance.)Seven years after the film was released, software executive Marc Benioff left Oracle to start a new type of software company, one that delivered its services through the browser on an on-demand basis instead of having to be purchased up-front and delivered as an application on a PC or workstation. The first business department that it targeted was the sales department and was named, aptly, salesforce.com.Today, its software powers everything from selling, marketing, customer service to communications for thousands of businesses with operations spanning the globe.In just a few decades, the shift from the “pen and paper” era of Glengarry Glen Ross to sales automation software delivered as a service represented a shift from the physical world to the intangible. And the same shift can be seen in countless other industries and businesses across the globe.On the BoP, trade of physical goods is accounted for differently than trade of intangible goods. This is rooted in history.When modern nation-states started to keep detailed records of their international trading activity, essentially all trade was comprised of physical goods. Physical goods would cross borders and money would be exchanged. Nation-states were particularly interested in keeping detailed records of international trade because it was one of the most popular ways to raise money to fund governments and armies. For example, in 1915, approximately 30% of U.S. Federal Government revenue was funded through customs duties compared to 6% from the newly instituted income tax[2].As the economies and technology advanced, it became possible to start trading non-physical things. For example, let’s think about leisure travel. Back in 19th-century America, round-trip international tickets were not common. Usually international travel was a one-way ticket, i.e. permanent immigration and settlement. But improvements in the speed and cost of new transportation options opened the door to leisure travel. Today, leisure travel is one of the larger intangible services that is traded between countries. On the BoP statement, international travel is accounted for under Line 1.B.iii “Net Exports of Services / Travel” and contributed a $76 billion surplus to the American economy in 2017. Living in Lower Manhattan, which draws over 14 million visitors a year, many of them international, I witness this on a firsthand basis every day.Going back to our Glengarry Glen Ross example, whereas Rolodexes (or is it Rolodices?[3]) and steak knives would show up on Line 1.A. on the table above (“Net exports of Goods”), software and intellectual property would show up elsewhere, possibly under Line 1.B “Net exports of Services”.The good news is that when most people refer to the overall “U.S. trade deficit”, they refer properly to “Net exports of Goods and Services”. (Unfortunately, “most people” does not include the Leader of the Free World as we will see down below.)For example, from a February 2018 Wall Street Journal article[4]:The U.S. trade deficit in goods and services grew 12% last year to $566 billion, its widest mark since 2008 and a challenge for President Donald Trump, who has pledged to re-balance the nation’s books with the rest of the world.However, I have seen issues arise when when we start talking about bilateral trade surpluses/deficits — such as the one between the U.S. and China — where they only focus on the goods portion. For example, from the very next paragraph in that article (emphasis mine):The goods deficit with China alone rose 8% during Mr. Trump’s first year in office to a record $375.2 billion, or nearly half the total global gap between U.S. imports and exports, the Commerce Department said Tuesday.By including services in the first paragraph and ignoring it in the second, this presents a misleading picture of the U.S.-China trade relationship. Specifically, it overstates the “true” deficit we have with China. The slightly better figure to use would be $336 billion[5], which nets out the positive surplus that the U.S. gets from the trade of services with China.Further, since much intermediate trade goes to China via Hong Kong, an even better figure to use would be $301 billion, which factors in the trade surplus the United States has with Hong Kong — which is accounted for separately from Mainland China[6].But as I will explain in the next section, due to the increasing specialization in global supply chains, even this $301 billion figure over-states the “true” value deficit between China and the United States.Economic Trend #2: Global/Special-ization of Supply ChainsGlenn Luk's answer to Where does the money I pay for an iPhone go?In this earlier answer, I took the reader on a journey around the world, from the initial purchase of an iPhone in London, to its manufacture in China, to its original design in California. At the end, I summarized by showing how the economic value of a £999 iPhone is split up between the various contributing economies.One of the key takeaways in the answer — which should be fairly evident after all of the frequent flier miles accumulated on the journey — is that the global supply chain today has gotten really complicated. Components are designed in one place, manufactured somewhere else and shipped to a third place to be assembled by machine-assisted hand. IP is invented in one region, domiciled in another (for tax purposes) and monetized in an increasing number of creative ways.This was, of course, very different two centuries ago, when “goods” were largely manufactured from start to finish in a single economic zone or region. Think back to the Triangular Trade of the 18th and 19th centuries when manufactured goods would flow from industrialized England to the Americas, raw commodities would flow from the Americas to Europe and, of course, the despicable trade of humans from Africa to the Americas[7]:Because of this, trade surpluses and deficits back then were pretty accurate reflections of the true economic value flows between nation-states. But as supply chains specialized over time — driven by a massive reduction in friction costs, primarily in the form of lower tariffs and lower transportation costs — international trade accounting has had a tough time keeping up with the changes. This is especially true when applied to measuring bilateral trade relationships such as the one between the U.S. and China.The particular issue here is that China captures only a fraction of the economic value of the (primarily) physical goods that it exports to the United States. But from an international trade accounting and BoP perspective, “Made in China” gets full credit.For example, I showed in the iPhone example how China captures at most one-eighth of the production value (BOM) of an iPhone … and an even smaller amount of the retail value:It needs to import dozens of expensive components from places like South Korea, Taiwan, Germany, Japan as well as the United States.It needs to import crude oil from Saudi Arabia to power the trucks and ships that ferry the components and finished goods back and forth.It needs to import advanced industrial equipment to perform many of the intricate manufacturing steps needed to produce hundreds of millions of iOS devices every year.Despite all of the impressive advances the Chinese economy has made over the years, it is still really only capturing a thin layer of value-add of the iPhone, as well as many other common export categories.This shows up in international trade accounting in the large trade deficits that China runs with many of the upstream component and intermediate goods manufacturers. It imports sophisticated capital equipment from places like Japan and Germany to build out its factories. It imports energy and commodities from places like Australia and the Middle East to power its manufacturing operations. It imports the high-value components that make up the innards of the finished products that it assembles.In other words, much of its bilateral trade surplus with the United States is merely passed along to other countries. We can see this in some of the large bilateral trade deficits China has with other countries:Sources: China Statistical Yearbook, MIT Observatory of Economic ComplexityOne quick way to gauge how much pass-through trade surplus China takes on from the United States is to look at Balance of Payments data from its perspective. In 2017, China generated a Current Account surplus of $165 billion, or around 1.4% of GDP. This was down from a peak of $421 billion in 2008 on the eve of the Global Financial Crisis, which represented almost one-tenth of China’s (much-smaller) GDP at the time.The difference between the $336 billion and the $165 billion is a rough approximation of the “pass-through” trade surplus to other countries and $165 billion is a much more accurate reflection of the true economic value flows.(Note: One side takeaway from the chart below is that China is far, far less reliant on a mercantilist, export-centric economic development strategy today compared to a decade ago.)Source: State Administration of Foreign Exchange (中国国际收支平衡表_国家外汇管理局门户网站), TheGlobalEconomy: China Current Account (% of GDP)On top of this, we also need to remember that the United States is not the only trading counter-party that China runs a large trade surplus with. In particular, it runs large trading surpluses with the U.K., India and much of Europe (ex-Germany). In other words, perhaps only 60–70% of its Current Account surplus is actually attributable to the United States.But even the more holistic Current Account metric fails to capture all of the international flows of economic value. This because in many cases, the money flows from U.S.-produced IP never even directly crosses the U.S. border. Value is still captured by Americans but mostly indirectly and spread out over a long period of time. To see why, we need to look into international tax accounting and the Capital/Financial Account portion of Balance of Payments ledger.Economic Trend #3: The Absurdity of International TaxationGlenn Luk's answer to How will the race to 5G dominance play out between Qualcomm and Huawei?In another recent answer, I discuss how Qualcomm built up a massive patent portfolio over the years and monetized it largely by collecting licensing fees from smartphone and network equipment OEMs. Like Apple in the earlier example, much of this IP sits offshore for tax reasons.If the end customer is American, the money flow will show up through the importation of what is typically a physical hardware device, like an iPhone. Because of some of the quirks in BoP accounting I described above, even though most of the iPhone’s IP originates from the U.S., it still ends up contributing to our bilateral trade deficit with China.This absurdity can be seen in an example from an earlier answer[8] that shows how this might work for an iPhone:Things get even more non-sensical when the end sale takes place outside the United States.For tax reasons, the IP is domiciled offshore, in a tax-friendly jurisdiction like Ireland. When Apple sells an iPhone to an end customer in London, the profits are collected offshore. None of the money ever flows back “onshore” to the United States, lest it be subject to something called a “repatriation tax”. (Note: this may change with the new 2017 tax laws but is relevant for all of the data we are looking at here; see Explanatory Note i)As such, even though this is clearly an export of American IP, much of it is not even captured in any of the BoP line items.To be fair, a small portion of it would show up in Line 1.B. “Exports of services”, likely under the “charges for the use of intellectual property” sub-category. This is because there are rules around something called transfer pricing[9] that govern intra-company asset transfers:For example, say Qualcomm engineers in San Diego come up with a new invention and patent it. The company’s tax accountants want the IP to sit in a tax-friendly place like Ireland so it needs to arrange the transfer of IP. It must follow some transfer pricing rules, which means selling the IP at some nominal “cost-plus” markup. It would recognize a nominal amount of onshore U.S. profit, on which it would pay a small amount of tax. From Ireland, Qualcomm can sell the IP globally and pay a much lower tax on profits than it would have if it had sold it from the United States.(Note: I am not an international tax accounting expert and I might be missing some steps and/or jurisdictions but this should be directionally correct based on discussions I’ve had with actual experts.)The net effect is that international sales of this IP do not generate any onshore money flows and, accordingly, are not calculated in the U.S. BoP accounts. But this does not mean that we are missing out on the benefits of the trade. It just shows up in different line items and is spread out over time. To find out how, we now have to learn about the Capital/Financial Account section of the BoP.“Balance of Payments” 102: The Capital/Financial AccountWe’re back in the classroom, students. Kudos to all of you who decided to come back for second semester.I’ve been writing this darn thing so long that I’ve aged quite a bit since we last met:As you might guess from the name, Balance of Payments ultimately needs to … anyone? anyone? … balance.So if you run a large Current Account deficit, the deficit will need to be funded somehow. If you run a large Current Account surplus, you will need to send the surplus capital outside the country. These transactions are captured in the Capital/Financial Account.As we have been running large trade deficits for most of the last three decades, as Warren Buffett likes to say, we have been issuing “claims checks” to our foreign trading partners to pay for all of the extra stuff that they send us[10].These claims checks generally come in two forms: debt and equity. The debt is primarily made up of U.S. government bonds, debt backed by various forms of real estate, and debt issued by our corporations. The equity is made up of publicly traded equity as well as private (non-traded) investment, also known as “direct foreign investment”.Over the years, our foreign trading partners have accumulated quite a large stash of claims checks. But how much exactly?The U.S. Treasury releases monthly data on the market value of traded securities held by foreigners and the number is around $19.0 trillion as of September 30, 2018[11]. This figure is comprised of:$6.6 trillion in U.S. Treasuries and Agency bonds$3.8 trillion in U.S. corporate bonds$8.6 trillion in U.S. equities$19 trillion is a whole lotta skrilla.But this figure needs to be reduced, or netted off, by foreign assets held by Americans of around $11.8 trillion[12], comprised of:$2.9 trillion in government and corporate bonds$8.9 trillion in other securities (e.g. corporate debt, equities)These figures exclude foreign direct investment (FDI) but the good news here (for those of us who are less mathematically inclined) is that outbound FDI stock is almost exactly equal at $6.4 trillion each[13].So, netting everything out, foreigners own about $7.2 trillion more of America than Americans own of the rest of the world. As a sanity check, this number ties (roughly) to the accumulated Current Account deficits that we have generated since 1999 (which was about the time we started to generate large deficits) of $9.3 trillion[14]. (Note: it will not be exact because there are other line items in the Capital/Financial Account like straight-up currency and direct loans, as well as a plug account “statistical discrepancy”).Also, remember all of that cash that never made it onshore because American multi-nationals (“MNCs”) were trying to avoid taxes? This cash (and re-invested foreign profits) — some $2.6 trillion[15] of it sitting in foreign subsidiaries of the MNCs — is part of this $7.2 trillion net figure.If MNCs had been repatriating their overseas profits as it was earned, it would likely reduce our Current Account deficit by at least $150 billion per year. It supports the market/intrinsic valuation of the companies, and the mostly American shareholders of these MNCs benefit from this value, but from an international accounting perspective it does not show up directly.Over the very long run, the benefit will show up in the Balance of Payments accounts, via foreign purchases of equity and securities that have increased in value value over time. But the key point here is that the BoP effect will show up over a long period of time and also be subject to fluctuations in market sentiment (affecting valuation multiples).Phew! That was a lot of math and big numbers. The good news is that our final guest lecturer has arrived!Photo Credit: Sports IllustratedJust kidding, we are are not going to talk about Emily Ratajkowski. I just noticed some of you in the back falling asleep and I needed to get your attention because the next point is an important one.(Note: Yes, I know, that was quite shameless. But before I get inundated with #MeToo hashtags, remember y’all got young Alec Baldwin earlier in the lecture. Not to mention a young-ish Ben Stein.)Economic Trend #4: The Almighty U.S. DollarSo … $7.2 trillion is still a lotta skrilla. As a country, you would rather have a net positive international investment position than a negative one. But America has another trick up its sleeve: Our currency is the global reserve currency.Without getting too much into the details, one of the advantages you get by controlling the global reserve currency is that you end up owning a much more productive pool of foreign assets than foreigners own of you. To illustrate this point, we will make our last reference to Balance of Payments.Here’s the important table repeated from up above. Line 2 is something called “Primary Income”. Most of this line item is made up of investment income earned on bonds (interest income), stocks (dividends) and foreign direct investment (repatriated earnings).Despite the fact that foreigners own over $7 trillion more in American assets than Americans own of theirs, the United States generated $222 billion more Primary Income than it exported in 2017. In other words, the mix of overseas assets that we hold is significantly more productive than the U.S. assets held by foreigners.The main reason for this is that a large portion of the $19.0 trillion in liquid assets held by foreigners is made up of low-yielding U.S. Treasury government bonds. Whereas the majority of liquid foreign assets held by Americans are higher-upside (and often higher-yielding) equities — and even the bonds that they hold typically generate higher yields than U.S. Treasuries. Moreover, American outbound FDI tends to be comprised of more productive business assets while inbound FDI from foreigners includes more passive investments like real estate.It’s not that foreigners like holding low-yielding American assets. It’s that they are effectively forced to because of the U.S. Dollar’s status as the main global reserve currency. As the de facto global store of value, it becomes the standard place to “park” assets. So when countries like China run massive trade surpluses year after year, they are essentially forced to acquire low-yielding U.S. Treasury assets. As long as the U.S. Dollar dominates global trade, we get to set the rules.Having your currency as the dominant reserve currency gives you the world’s Most Amazing Credit Card: One that comes with unlimited credit, low borrowing rates and the general right to “not give a f—” when it comes to monetary policy.Like this, but made out of an Adamantium-Vibranium alloy.It also has no expiration date — provided you remain the dominant reserve currency. And to remain the dominant reserve currency, you need to be willing to take a leadership role in trade, not turn your back on the world. I do very much hope that we are doing our very best to make sure this card is in our wallet for decades to come.The Bottom Line: What Needs to be Fixed and How Do We Fix it?To fix things, we first need to get the facts straight. The problem with our trade policy decision-making today is that we are using the wrong numbers … and this will inevitably lead to the wrong prescription.During the 2016 Presidential Debate, Donald Trump said that America had an “almost $800 billion trade deficit”[16]. After becoming President, he has continued to repeat this $800 billion figure[17] ad nauseum.As I have described above, this number is completely misleading. Our economy is not a goods-based economy, it is a knowledge-based economy and if we account for this, the true deficit is much closer to $300 billion than $800 billion:The other problem is that President Trump appears to be almost singularly focused on China for taking our jobs, attributing “$500 billion” of the trade deficit to them. But again, to ground ourselves with the right facts and reality, we need to look at how other countries stack up:What’s really going on here is that the Anglophone (English-speaking) countries as a group are importing capital (and exporting jobs) to two major economic regions: East Asia and Northern Europe.China is only part of the issue — it makes up less than one-third of the aggregate “East Asia” surplus. Even more importantly, the labor-intensive jobs that we have lost to China are probably not the ones we want. It’s the high value-add, highly paid knowledge worker jobs that we should aspire to and those are more likely found in places like Japan, Germany, South Korea and Taiwan, not China.If we look at things on a per capita basis, the contrast is even more stark. At least from the traditional definition of mercantilism, China barely registers.Note: Data may not sync up exactly with previous table; data was pulled from an older answer[18].If we put all of our trade policy focus on China, we are going to have a tough time solving the real economic realities that we face.Now there may be other strategic and geopolitical reasons to focus on China these days and that might very well be the right course of action. But if that’s the case, let’s be up front with ourselves about call a spade a spade. Moreover, enacting trade policy that leads to us pulling back global trade is probably exactly opposite action we should be taking from a geopolitical perspective.Let’s make decisions based on facts and reality, not falsehoods and blind populism.Anyone Left? Anyone?For the few remaining readers who have made it to the end, I have a special bonus for you. Pop quiz time!! (Chill … they are all true-false questions. Plus you were warned at the beginning of class.)True or False?The modern evolution of our global economy has meant that the goods we trade are less physical and more intangible.Traditional ways of measuring international trade flows like “trade deficits” are having a hard time keeping up and accurately representing modern trade.Using more holistic measures of trade, the U.S. trade imbalance is much smaller than the headline numbers.In particular, the “true” bilateral deficit with China is significantly lower than the headline numbers once you account for “pass-through” surpluses and the crazy things that companies do to avoid paying taxes.Running a manageable deficit is not actually a bad thing, especially if it is part of controlling the world’s dominant reserve currency.It’s important to get smarter on trade so we can avoid enacting stupid trade policy.Alec Baldwin was pretty awesome in Glengarry Glen Ross.The U.S. trade deficit is high in large part because our economy is more advanced and sophisticated than ever.(Answer Key: All TRUE)Class dismissed.Explanatory note[Note i] With the passage of the Tax Cuts and Jobs Act of 2017, changes in the tax system have reduced the disincentive for companies to repatriate taxes back to the United States[19]. While it seems likely that this will change the onshore/offshore cash dynamic, history has shown how the amazing creativity of investment bankers and accountants when it comes to creating new and sophisticated tax structures.Footnotes[1] Glenn Luk's answer to Why is the USA so rich if its trade balance is negative?[2] How Has Federal Revenue Changed Over Time? | Tax Foundation[3] Is the plural of "Rolodex" called "Rolodexes" or "Rolodices"?[4] U.S. Trade Deficit Grew to $566 Billion in 2017, Its Widest Mark in Nine Years[5] Glenn Luk's answer to What is the cause of our trade imbalance with China?[6] Hong Kong - International Trade and Investment Country Facts[7] Triangular trade - Wikipedia[8] Glenn Luk's answer to Do any countries have a trade surplus with China?[9] Transfer pricing - Wikipedia[10] America's Growing Trade Deficit Is Selling The Nation Out From Under Us. Here's A Way To Fix The Problem--And We Need To Do It Now.[11] http://ticdata.treasury.gov/Publish/slt2d.txt[12] http://ticdata.treasury.gov/Publish/slt2f.txt[13] https://fas.org/sgp/crs/misc/RS21118.pdf[14] Balance on current account[15] Apple Leads These Companies With Massive Overseas Cash Repatriation Tax Bills[16] Read the Transcript of the Second Presidential Debate[17] Trump Hates the Trade Deficit. Most Economists Don’t.[18] Glenn Luk's answer to What is the cause of our trade imbalance with China?[19] Evaluating the Changed Incentives for Repatriating Foreign Earnings