[Rhodes22-list] FredEx

[Brad Haslett]

And now - a word from my boss.  Brad

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Fred Smith
Washington Is the Problem
FedEx's CEO on McCain, free trade and the tax bias against
capital-intensive industries.
By STEPHEN MOORE

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Memphis, Tenn.

Fred Smith is in an agitated state. He's just returned from a
Washington Redskins game -- played in FedEx field in Washington -- and
the team has been upset by the Arizona Cardinals. "It was just awful,"
he grouses. "My son's one of the coaches, and he was ready to jump off
the ledge of the stadium."

There are few better people to ask about our current economic
precipice than Mr. Smith -- or, as some people call him, "Fred Ex."
His company has $38 billion in sales, employs four football stadiums
full of workers, owns 300 jet airplanes, and tens of thousands of
trucks and vehicles. FedEx moves an incomprehensible seven million
packages each day to every corner of the globe. And the good news is
that Fred is optimistic -- sort of.
[The Weekend Interview] Ismael Roldan

"Oh, 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."

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."

I tour the FedEx command and control center outside the Memphis
airport. It's an awesome sight. FedEx operates its own air traffic
control system and its own weather monitoring services. It takes over
whole airports at night, and it operates its own risk mitigation
operation to prepare for every possible contingency. "We have to know
instantly how we reroute our planes if that storm in Tulsa turns into
a tornado," the operations manager explains. There's a massive screen
covering an entire wall that monitors the location and progress of
every FedEx plane in the sky.

The computer technicians show me a jaw-dropping display on the
computer screen of a fast-motion day of FedEx plane travel. Starting
in the wee hours of the morning, the planes descend from all over the
country into the Memphis airport. A few hours later, after being
loaded with packages, the jets begin their assault on the major cities
of the nation and world. They call this the "ant farm," because it
resembles armies of ants scurrying to every corner of the globe. This
is a company that has staked its entire reputation on getting packages
to their appointed destination, "absolutely, positively overnight."

I keep thinking how many tens of billions of dollars Uncle Sam would
save if it were one-third this efficient. These are the people that
should have been in charge of the rescue operation during Hurricane
Katrina. "We got all our people out -- no problem," Mr. Smith tells
me.

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."

As I walk out the door 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."

Mr. Moore is a member of the Journal's editorial board.