FedEx Chair Smith on the Economy, Stupid!

Fred Smith has a lot of kids and his youngest son, Cannon [Fred Jr.] is a redshirt freshman third-string QB for the Miami Hurricanes. Last year, he was in a math class with my daughter and they ended up texting each other for a while---however, my daughter's boy-friend is a former linebacker who hates QBs and that relationship with young Cannon is currently moribund, if not room temperature.

Niki only met Cannon's dad, "Frederick," at a restaurant during the Doral Open when Fred Smith was presiding over the FedEx Cup rites during golf's biggest race for the moola. Oh yeah, Fred Smith is also Co-Chair of the McCain Campaign. Here's Fred:

....the country is going to get through this and the financial markets will stabilize," he assures me, but only after we go through a period of "trauma and readjustment."

I ask him just what he means by "trauma." He attributes the financial crisis to "the intersection of four long-term developments." Reckless mortgage lending policies; high energy prices; mark-to-market accounting rules; and national policies that favor what he calls "the financial sector over the industrial sector."

"Rather than in our business where you have to have a dollar of equity for, 10 cents or 15 cents of debt," he explains, "it's exactly the opposite in the financial sector where you have one dollar of equity for 10, 25, 50 times risk." "Things became so flipped upside down," he explains, that "the assets at these banks became the liabilities and the liabilities became the assets. These people were making these fantastic returns -- at places like Fannie Mae and Freddie Mac -- but in reality they weren't adding a lot of value. I have said time and again that there is a fundamental tendency in good times in the financial sector to over-leverage. Our national policies actively encouraged all this debt."

How so? "The United States has a completely uncompetitive tax structure in general and it has a particularly onerous tax structure for firms that are asset-intensive. If you run an industrial company like FedEx, which employs 290,000 folks, most of whom are blue-collar people, the way we have to run this business is to equip those workers with billions of dollars of assets that allow them to pick up and deliver millions of things around the world."

His theory is that the tax bias against capital explains why so much top U.S. talent got whisked off to become investment bankers. "Not too many young people coming out of school are studying to be production managers at General Motors." He says that most of FedEx's first line managers come not from the top flight universities, but out of community colleges and the military. "The top talent has wanted to go to Wall Street."

He has come to hold the get-rich-quick Wall Street financiers in more than a little disdain. He views the heroes of the U.S. economy as the companies that actually produce real goods and services. He sees the Wall Street collapse as an inevitable byproduct of investment bankers building multitrillion dollar debt pyramid structures.

So how do we fix this problem and retool our industrial sector in a pro-competitive fashion? "We've got to reduce the taxes on equity. Let companies expense their capital purchases."

He uses an example from FedEx. "Look, our capital budget as we went into this year was about $3 billion. We went out to Boeing in July for our board meeting to see the new triple seven, [the Boeing 777] which we have bought. If we had a lower corporate tax rate with the ability to expense capital expenditures, guess what? We'd buy more triple sevens. We absolutely have to cut the corporate tax. Our current tax rate is about 38%. Even Germany has a 25% rate." [my emph]

We turn to the election. Mr. Smith is one of the most enthusiastic supporters of John McCain among the Fortune 50 CEOs. When I ask why, he says instantly: "Because I agree with him on trade, taxes, energy and health care."

Next I ask Mr. Smith about the class warfare theme of the political debate. "The politicians deplore the fact that we have a disparity of income," he says, but "the only way to make a blue-collar person earn more is to invest in capital, training and infrastructure. So the more you tax capital, the more you hurt workers." He estimates that about 70% of the return from FedEx capital expenditures is captured by workers in the form of higher wages as their productivity rises.

He sees a big problem in that so few Americans now pay any income tax. "We're now at a point where a very large part of the population pays no federal income tax at all. When you have a majority of the population that realizes that you can transfer money from the productive to themselves, that's one of the great questions for the future of civilization, as far as I'm concerned."

As for CEO pay, Mr. Smith concedes that in some cases corporate management pay scales have gotten far out of line with shareholder interests. But he is quick to add: "I don't think anybody begrudges somebody making a large amount of money as long as it benefits everyone else. The problem is when they make a large amount of money and the shareholders get clobbered." As he sees it, "There's only one solution, and that is for a competent board of directors to oversee managers and give them incentives which are long-term in nature and which are irrevocably tied to the fortunes of the shareholders."

........Considering FedEx's world-wide operations, and its rapid expansion in China, it occurs to me that there is perhaps no other company in the world more dependent on international trade. Sure enough, Fred Smith is a fanatical supporter of free trade. So much so that he says, "I think the best thing the United States could do is to unilaterally disarm. It should open up markets. The agricultural subsidies are terrible. They're just immoral."

On economic grounds, he continues, "I think the history is very clear, that trade is the main reason that the world has enjoyed the prosperity. Look at China. They've drug hundreds of millions of people out of poverty through trade."

Trade aside, no issue is of greater consequence to FedEx than energy policy. FedEx consumes 1.3 billion gallons of jet fuel a year, and is the largest user of energy in the world next to the U.S. military. Mr. Smith sits on the board of the Energy Security Leadership Council, which issued a report a few months ago advocating a huge expansion of domestic energy supply. How do we do this?

"Two things," he insists. "The first is we should maximize oil production in the United States in every respect. Everything, offshore, Alaska, shale, nonconventional, coal to liquid, gas to liquid, and nuclear. Let the market work.

"Second, and this is where I am an apostate on the free market, and also where I disagree in the main with, with Boone Pickens," Mr. Smith adds. "The United States has only one real way to reduce our dependence on foreign petroleum, in terms of reducing demand while we're increasing our domestic supply, and that is to electrify the short haul transportation system, to go to battery powered cars. The technology that brought us laptops and cell phones has reached a point where these lithium ion batteries can now produce cars like the Chevy Volt and the new plug-in Toyota Prius." Many FedEx trucks are already using this technology, though he admits they aren't yet cost efficient but are 42% more fuel efficient.

Mr. Smith ends our interview with a little sermon about what the U.S. must do to retain its global economic superpower status. "Many of our current policies are not conducive to continued economic leadership. We restrict immigration when we have thousands of highly educated people that want to come to the United States, and some of our greatest corporations [are] crying out that we don't have the scientific talent that we need to develop the next generation of innovations and inventions . . .

"That's where all wealth comes from . . . It's not from the government. It's from invention and entrepreneurship and innovation. And our policies promote a legal and regulatory system which impedes our ability to grow entrepreneurship. Lastly, if we want to make [America's workers] wealthier we have to quit demonizing quote, big corporations."

And what about the marxist opponent of McCain who believes BIG GOVERNMENT is the end-all and be-all of a thriviing economy"

....I ask Mr. Smith if he's communicated these ideas directly to Barack Obama. "I haven't met Barack Obama," he replies. "He's certainly a charismatic fellow and well-spoken. I just disagree with him on trade and taxes and energy and health care."

Wise words, but wisdom is out of fashion in an election cycle ruled by snarky blog-led economically-illiterate marxist media mavens.