March 2017 Newsletter
 

 

 

 

What's Inside?

 

 

 

 

 

 

 

Q & A with Phil Knight

 

In the closing chapter of "Shoe Dog" you write, "I think constantly of the poverty I saw while traveling the world in the 1960s. I knew then that the only answer to such poverty is entry level jobs. Lots of them. I didn't form this theory on my own. I heard it from every professor I had, at both Oregon and Stanford, and everything I saw and read thereafter backs it up. International trade always, always benefits both trading nations."

 

Three days into his presidency, Donald Trump pulled the U.S. out of the Trans-Pacific Partnership (TPP) that Congress had previously approved. Last May, then-President Obama traveled to Beaverton to promote the pending trade agreement on the NIKE campus.

 

What are your thoughts about President Trump tearing up the TPP? Do you think his argument that binary trade agreements are better for the U.S. than multinational agreements has merit? Do you find it ironic that a liberal Democrat president would be supportive of TPP while a conservative Republican president would be hostile?

 

The TTP was a great idea that fell apart before Donald Trump pulled the U.S. out of it. It had so many amendments and riders it was not a good bill, including cutting the life of medical patents from 17 to 5 years.

 

I think NAFTA and free trade in general have been huge economic pluses for the U.S. and the world. The problem gets to be that in the growth there comes dissolution as well. A guy loses his job in the steel mill and says it is due to the trade agreement. He gets a job at NIKE and says, "I got a job in the accounting department."

 

These points of view have built over the decades until today so much of the public is, unfortunately, against free trade.

 


During President Obama's visit last May, NIKE CEO Mark Parker told CNBC, "We expect that TPP will actually help create more like 40,000 jobs when you look at suppliers, other manufacturers, and engineering in the United States over 10 years."
 

Since then, President Trump has torn up the agreement and threatened a 20 percent Border Adjustment Tax (BAT). Both House Speaker Paul Ryan and Ways and Means Chairman Kevin Brady have initially signaled they favor the BAT. What do you think of a BAT? Why is "globalism" as an economic philosophy/theory suddenly not in favor with a large segment of the American public?

 

I think a Border Adjustment Tax is a disaster for the U.S. economy. I think NIKE will basically be okay, since all competitor shoe prices will go up by a like percentage, but the damage to retailers/consumers would be huge. The company I think gets hurt the most is Wal-Mart with its almost 200,000 jobs.

 


In a 2010 pre-game radio interview in Seattle, then-University of Washington Athletic Director Scott Woodward commented about the University of Oregon: "It's an embarrassment what their academic institution is, and what's happened to them as far their state funding has gone. In my mind it's a wonderful athletic facility, but they've watched it at the expense of the University go really down."

 

Last year, you and your wife committed $500 million to the University of Oregon to build a new science complex, stating, "In an age of declining public support for scientific research generally and declining public higher education support specifically, Penny and I are delighted to contribute to these critically important areas."

 

Though he was forced to apologize at the time by the UW president, was Woodward right about Oregon's misdirected priorities? Did he provide our university with some much-needed neighborly tough love?

 

First, I think the University of Oregon is a very good university. But it has suffered mightily from the continually smaller and smaller annual contributions from the state of Oregon. The university's new president is simply transitioning the school into a private university. He is the ideal person to do that.

 


In 2016, you contributed $380,000 to seven Republican candidates in state legislative races. Why? Did the Public Employees Retirement System's $22 billion unfunded liability have anything to do with your decision to support Republicans? In the next few years, 30 percent of state employee payroll budgets will be dedicated to PERS payments. Do you think the PERS liability/obligations will inhibit companies in the future from moving or expanding into Oregon?

 

I think, left unchecked, PERS will just, very simply, sink the whole state.

 


Your father, William Knight, served in the Oregon legislature, and your business partner Bill Bowerman's father, Jay Bowerman, was governor of Oregon. From your perspective, is Oregon suffering from a leadership crisis? Are there any current Oregon office holders in whom you have confidence to direct our future?

 

I ask myself, why is Oregon so worse off fiscally than Arizona or Indiana? Indiana certainly does not have more natural resources, more educated populace. I conclude it is due to political leadership. Mitch Daniels simply got Indiana straightened out, giving the capability to have a good educational system.

 

I think there are some promising young leaders in the state that could do the same thing here. That is my hope.

 


Your memoir "Shoe Dog" has been on the New York Times Hardcover Nonfiction Bestseller's list since its publication in May. Your book has been praised, without exception, for the quality of its prose. Can you describe the procedure, exercises and daily writing habits you learned/practiced to accomplish such a feat?

 

Three years, eight drafts, two Pulitzer Prize winners looking over my shoulder. That's all there is to it.

 


In Bill Gates' review of your book, he writes, "What I identified most with from his story [was] the odd mix of employees Knight pulled together to help him start his company ? theyy were not the people you would expect to represent a sportswear company. It reminded me a lot of my very early days at Microsoft. Like Knight, we pulled together a group of people with a weird set of skills. They were problem solvers and people who shared a common passion to make the company a success."

 

Do you think future American generations will be as entrepreneurial as past ones? Will they be problem solvers?

 

I think the interesting thing about Bill Gates' comments is that the pioneers at Microsoft, like those at NIKE, came from improbable places. The keys to both places were ability and passion for the challenge. I think there is plenty of that in young people today. I am optimistic about the entrepreneurial attitudes of American young people.

 


Your father was the publisher of the Oregon Journal from 1953-1971. What is the state of American journalism? How important is print journalism to the future of media? What is your take on President Trump's assault on the media and "fake news"? Does he have a point? How much has the collapse of the region's major print newspaper, the Oregonian, hurt our region's civic dialogue?

 

I worked on the Daily Emerald at the University of Oregon for four years and did think about a career in journalism. (Maybe I could have been an editor at the Oregonian).

 

Journalism has deteriorated alarmingly over the decades due primarily, first to television, then to the internet. People get their news from those sources, so the print journalists search for controversy, even when it doesn't exist. And TV has followed suit.

 

It is disturbing, but as long as news can be found someplace there is hope.

 

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Oregon and Free Trade
By Eric Fruits

 

Oregon is one of the most trade dependent states in the United States. The value of exports from Oregon to foreign countries was $20.1 billion in 2015. The state's largest trading partners are Canada, China, Malaysia, Japan and South Korea. Portland is one of the most trade dependent cities in the country, according to research by the Brookings Institution.

 

U.S. manufacturing has been on a decline for years, but Oregon has fared better than the nation as a whole. While U.S. manufacturing employment has dropped almost 30 percent since 2000, Oregon manufacturing jobs have shrunk by about 17 percent. Much of the strength of Oregon's manufacturing sector can be attributed to Intel's long history of expansion in the state. Intel and other high tech companies account for less than five percent of the firms in the state but account for a fifth of the state's GDP and 45 percent of Oregon's exports.

 

In Phil Knight's Q&A, he is right on target noting that that NAFTA and free trade are big pluses for Oregon, the U.S., and the world. It's not just the Nikes and the Intels that benefit. Trade reaches into all parts of the state, from the wineries of the Willamette, to the wheat fields of eastern Oregon, to the forests of southern Oregon.

 

It's easy to find losers from free trade, but much harder to identify winners. Knight notes that when someone loses his job in the steel mill, he'll point and say he lost his job because of a trade deal. But when he gets a job at Nike, he'll say, "I got a job in the accounting department." Most people don't connect the dots that maybe that accounting job was created because of increased international trade.

 

About a decade ago, Phil Knight and I gave presentations on the Nike campus highlighting the company's contributions to the Oregon economy. Much of the legislature and the governor were in attendance and hung on to Knight's every word in a speech that, with hindsight, was the first draft of his bestselling memoir, "Shoe Dog." One takeaway from his presentation was his explanation that Nike has no obligation to expand or remain in Oregon. When choosing where to expand, the company can and will choose from just about anywhere in the world.

 

In a world of increasing globalization, companies big and small have a world of opportunities for investment. Intel has opened fabs in Ireland, Israel and China and has assembly and test sites in Malaysia and Vietnam. As Knight noted in his Q&A, political leadership is a key factor in creating an environment where companies want to grow and people want to work. That leadership is needed in fostering trade, improving the education system, and stabilizing state and local governments' fiscal condition.
 

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Spent
By Philip J. Romero
 
In politics, being attacked from both the left and right is usually evidence that you are on the right track. Congressmen Greg Walden, Kevin Brady, and Paul Ryan's early March release of the American Health Care Act (AHCA), the latest GOP answer to Obamacare, was met with a fusillade of criticism from across the spectrum ? from Heritage and FreedomWorks, to Nanccy Pelosi and Chuck Schumer. It may seem a kind of validation, proof the authors are in the vicinity of the sensible center. Certainly they are claiming they've delivered on a central campaign promise.
 
Grandstanding aside, the central question is: Does this bill actually deflect America's health care system from its collision course with unsustainability? The AHCA's authors can fairly argue that Obamacare did not. (It improved health coverage for millions, but for fewer than claimed, and at a very high cost.) Can we step back from the cliff edge where health care will absorb one in every five dollars in the U.S. economy? In other words, does the bill do anything useful to constrain health costs, not merely move the pea around to conceal who pays for expanded "access"?
 
Make no mistake about it: Underneath all the fights about expanding coverage, tax treatment of insurance, risk corridors and adverse selection, ad nauseum, there is one core problem ? spending on health care has been risinng at several times the rate of inflation, and twice the rate of incomes, for decades. The late economist Herb Stein said, if a trend cannot continue, it won't. Obamacare prioritized "expanded access" far above cost constraint. So, what we got was expanded coverage that is largely theoretical because continued cost increases make it unaffordable. Being "covered," but with a deductible worth more than your car makes a mockery of "access."
 
None of the major reforms of the past generation ? Hillarycare in 1993, Obamacare in 2010, or the AHCA in 2017 ? did more than nibble at thhe fringes of medical inflation. This is because they never confronted its two key enablers:
 
1. Third party payment: You would not shop for a car without quality and price information on your options, because you wish to spend your money wisely. The medical industry treats us as patients, not customers. Comparing offerings is virtually impossible, and prices are usually unknown until after the service has been performed. This is because we do not demand transparency, since we are not spending our own money ? our insurance carrier payss most of the bill. 
 
Conservatives have a religious faith that competition will drive down prices and drive up quality in health care, as it does in so many other industries. They are only right up to a point: Competition works very well in the small segment of health care not covered by insurance, such as cosmetic surgery or LASIK eye surgery. But consumers are anything but sovereign where third parties ? insurers ? pay most of the tab.
 
Like Obamacare, the AHCA accepts the third party payer model as a matter of course. It does offer a back door to expanding a promising alternative -- high deductible health plans, in which consumers spend only their own funds for the first several thousand dollars of care. But the conventional wisdom considers such plans as fit only for the rich or the risk-prone, and the AHCA concedes this.
 
2. The health cartel: Liberating patients to behave like consumers isn't enough to make a functioning market. There also needs to be meaningful competition among firms that supply services (health care, pharmaceuticals, medical devices, or insurance/plan administration, etc.). Large swathes of the $2 trillion-plus health system have become so consolidated by past mergers that it would be more accurate to call it not a market but the "health cartel."
 
The health cartel grew in spurts, as one link in the value chain merged to defend itself against others. Doctors formed medical groups to improve their bargaining position with hospital chains, which in turn drove insurers into each other's arms. Antitrust regulators ? Democrat and Republlican ? stood by passively. They believed that the consolidation of one industry segment (such as hospitals) mandated mergers among its counterparties (such as doctors or insurers).
 
The spider at the center of the cartel's web is the shrinking number of health insurers. It's been noted that insurers have exited a majority of U.S. counties until only one is left. Unnoticed is that only a handful of insurers exist at all. In any event, most health insurers no longer really spread risk via pooling ? the core function of insurance. In tthe non-group market they mainly price based on individual risk, raising premiums and deductibles or outright canceling coverage on sick customers. This shifts costs off of their income statements and onto others, especially individual policyholders and the taxpayer.
 
This explains why no health reform in the past generation has delivered much real cost control. Hillarycare was killed by the insurance industry (remember Harry and Louise), so both Obamacare and the AHCA preemptively conceded. Because insurers see their jobs as claims administrators, not value-added care managers, the provider cartel faces no real counterweight and can raise prices without constraint due to the unlimited demand turbocharged up by third party payment.
 
Serious reform would need to consider options such as: 
  • Ratifying that emergency health care may be an entitlement, but routine health care is an individual responsibility. Government subsidies of catastrophic care (through refundable tax credits or safety net single payer insurance) may be a reasonable compromise between libertarian and collectivist principles. This would break the relentless upward pressure brought by third party payment systems.
     
  • Equalizing tax subsidies for insurance across employer-paid and individually-paid premiums. The current system suppresses labor mobility by locking people into their jobs. The best equalization would be to eliminate deductibility entirely, since the tax subsidy simply aggravates medical inflation.
     
  • Preserving Obamacare's prohibition on insurers' exclusion of customers with prior conditions. The continuous coverage expectation in the AHCA isn't enough if insurers can cancel coverage whenever a patient becomes unexpectedly risky. Allowing exclusion has led to endless games of risk shifting and patient dumping.
     
  • Rolling back health industry consolidation through antitrust litigation. If the courts block it, regulate health insurers as the monopoly utilities they really are in many markets. These firms do not add enough value to justify their profit margins; they mainly exploit their favorable cartel position.
 
Whether you support the ACHA depends on how low your ambitions are. The gibe that it is "Obamacare Lite" is justified. But it may also be unavoidable: The Affordable Care Act has been law for seven years and is built into every business plan. However, the AHCA isn't enough of an improvement from the ACA to justify its flaws.
 
There is a historical parallel, covered in these pages before ? the 19866 Tax Reform Act. It likewise started as a lobbyist-driven faux reform, until braver politicians prevailed, scrapped the original bill and replaced it with one driven by philosophical first principles, not special interests. Tax reform cut rates and eliminated deductions, which expanded investment by killing many sham tax shelters. Few today would argue for the status quo ante.
 
If the AHCA is the best conservatives can do, Americans can be excused if they grasp at a single payer system in desperation. (But this is less heretical than it sounds. Eighty-five percent of Americans are already covered by a single payer system: the payer is their insurer.) 
 
We can thank Obamacare's authors for creating a political energy sink. There is no political will left for meaningful improvements. The AHCA is the last gasp of a health-industrial complex whose ideas are all spent. Passing it will mean another decade in which we tolerate the health care vampire that is sucking the economy's lifeblood.
 

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How Blue Is Oregon Really?

 

Oregon is often painted as a liberal stronghold, unmoved even during big conservative waves, such as 2014. However, when you dig into the numbers, that idea is not as true as many would think. When you look at the statewide results of the 2016 election, it would not be unreasonable to think about telling a different story.

 

While Republicans might not necessarily be popular in Oregon, there is an argument to be made that Democrats aren't all that popular either. During her race for governor, Kate Brown achieved a comfortable seven point victory over her Republican opponent Bud Pierce but still only received a little more than 50 percent of the vote.

 

Brad Avakian, Democrat candidate for secretary of state, and Tobias Read, Democrat candidate for treasurer, both only received 43 percent of the vote. Even in one of the less competitive statewide races, sitting Attorney General Ellen Rosenblum only received 54 percent of the votes cast in Oregon.

 

If you take the average of the percentage of votes received by Democrat candidates for state offices, you only get to 47.5 percent. This is despite Democrats massively outspending their Republican opponents in statewide races.

 

Kate Brown outspent Bud Pierce by around $860,000. Brad Avakian outspent Dennis Richardson by almost $1 million. Ellen Rosenblum outspent Daniel Crowe by a little more than $415,000, and Tobias Read outspent Jeff Gudman by somewhere in the ballpark of half a million dollars.

 

Even in the bluest of blue Oregon, Democrat presidential candidate Hillary Clinton barely received more than 50 percent of the vote. Compare this to California where Hillary got 61.6 percent or Washington where Hillary got 52.5 percent. So, if there is a weak link in the "Big Blue Wall" that is the West Coast, it is most certainly Oregon.

 

It isn't so much that Oregon is dominated by liberals as it is that conservatives just haven't found a way to win. Around half of our fellow Oregonians were not even liberal enough to vote for Hillary Clinton against Donald Trump. Combine that with the solidly "libertarian" streak Oregon voters tend to have on statewide ballot measures and the idea of Oregon as an unshakable bastion of progressivism seems to melt away.

 

Oregon is without a doubt a blue state, and the voter registration numbers support that, but it is not so blue that it should be entirely written off by conservatives.There are places in Oregon where the gap between registered Republicans and Democrats is closing, especially around the coast. Although, a lot of that is driven by people moving away from either party and the large number of Motor Voter individuals registered as non-affiliated voters.

 

So, electoral success for Republicans in Oregon won't be easy, but it is absolutely possible, especially for those clever enough to develop outside-the-box strategies.

 

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Oregon Transformation Newsletter is a project of
Third Century Solutions
Principals: Bridget Barton and Jim Pasero
Send comments to: Jim@ThirdCenturySolutions.com