Thursday, November 20, 2014
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Who Will Fix the US Economy?

MONTREAL – Much commentary about the American economy nowadays leaves the impression that economists should fix its problems. But Washington is teeming with smart economists, and the problems remain.

An economy is like a cloud: only when inside does one realize how diffuse it is – and that what matters are the particles of vapor that it comprises.

Likewise, an economy is an accumulation of transactions involving goods and services, mostly carried out by business enterprises. Their behaviors are what matters, and they cannot be adequately perceived from the distant perspective of economic models and statistics, but only on the ground – where an economy is built, where it breaks, and where it must be fixed.

On the ground, there are two kinds of enterprises: those that rely on exploration, and those that rely on exploitation. Every economy has both, but a healthy one favors the explorers. This fosters the sense of enterprise that made the United States such an economic powerhouse. Unfortunately, the American economy now favors the exploiters.

Economic development proceeds through a cycle that begins with young, exploring enterprises introducing new products, services, and processes. Over time, however, as they succeed, many explorers become exploiters. They saturate their markets, run out of new ideas, and get lazy. They then extend their product lines instead of developing new products; cut costs by putting pressure on their workers; lobby governments for favorable treatment; merge with competitors to reduce competition; and manipulate customers to squeeze out every last penny.

This, of course, makes these enterprises vulnerable to the creative challenges of the next wave of explorers – the fast new firms that confront the fat old corporations – and the cycle of destruction and reconstruction begins anew.

Contrast this with the America of bailouts, where the fat are considered “too big to fail.” In fact, many are too big – or at least too mismanaged – to succeed. How else to explain why major banks and insurance companies bet their futures on mortgages that a little investigation would have shown to be junk? Their senior managers either didn’t know, or cynically thought that they could get away with it, while the rest of their managers either didn’t care, or couldn’t get through to their bosses.

This American problem goes far beyond the bailouts. For every Apple and Google – explorers par excellence – count the energy companies with their cozy tax deals, the defense contractors that live off government budgets, and the pharmaceutical companies that buy their innovations and price what the market will bear, thanks to patents that governments grant, but without policing their holders.

On top of this, many US startups now leap into exploitation. Whereas America’s entrepreneurs had traditionally been inclined to create sustainable legacies, now many of them strive for an early IPO that will let them cash out quickly. This can be terribly dysfunctional, cutting off much of what still must be learned.

When economists boast about America’s great productivity, what they have in mind is exploration – finding ways to do things better, especially through superior processes. But much of this “productivity” has in fact been destructively exploitative. Think of all the corporations that have fired great numbers of people at the drop of a share price, leaving behind underpaid, overworked employees and burned-out managers, while the CEOs escape with their bonuses.

To see where this leads, imagine a company that fires all of its workers and then ships its orders from stock. Economic statistics would record this as highly productive – until, of course, the company runs out of stock. American enterprise is running out of stock.

Seen in this way, there is no quick fix for America’s current economic problems. Firing workers or even printing money can be easy; changing dysfunctional behaviors is not. The US economy will have to be fixed by its enterprises, one by one, on the ground. Attitudes will have to change, and this will demand great dedication and patience – traits that seem to be in short supply in the US today.

The place to start is America’s executive suites, which should be cleared of mercenaries in order to encourage real leadership. That is the easy part: get rid of the obscene compensation packages and watch the mercenaries disappear. People who care about building and sustaining decent enterprises – and who understand that doing so is a team exercise ­– can then take over.

Successful enterprises take time to create – time spent on inventing better products, serving customers more effectively, and supporting workers in ways that enhance their commitment. Symbols matter, too: the term “human resources,” for example, should be retired, because a great enterprise is a community of engaged human beings, not a collection of detached capital.

Public support should be shifted from protecting large established corporations to encouraging the growth of newer enterprises. And startups should be discouraged from rushing into the embrace of the stock market’s short-sighted analysts (and many an established corporation should be encouraged to escape that embrace). At the same time, regulation and taxation should be used to rein in disruptive day trading and other exploitative speculation that crowds out sustainable investment and disrupts regular business activities.

Above all, what the American economy needs now are managers who know and care about their businesses. Armies of MBAs who have been trained to manage everything in general but nothing in particular are part of the problem, not the solution. So are economists who study clouds without ever getting wet.

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