Skip to comments.Truth and the Dismal Science (C'mon folks, a 4% GDP Growth is not that hard)
Posted on 10/11/2012 6:46:22 AM PDT by SeekAndFind
When Bob Litan and I were discussing the premise of Better Capitalism, our sequel to Good Capitalism/Bad Capitalism, we thought we might build the book around the idea that entrepreneurs could push the economy to a sustainable 4% annual growth rate. In the depths of the Great Recession of 2008, this idea was decidedly out of sync with prevailing economic thinking.
The grandees were declaring that the economy had somehow shifted as tectonic plates do. The new frictional unemployment was going to be 8% and not 4%, as in the past. The old average of 3% annual GDP growth was going to now be 2%. (Current growth is estimated to be slightly more than 1%!) The reasons are all tired by now but revolved around everything but the real causes. The point was we would spend the rest of our days in chronic low growth because Europe was our future.
Litan and I wondered how credible we would be writing a serious policy book that envisioned a future of robust growth driven by the most forgotten character in the American economic drama the entrepreneur. Yes, those college dropouts and inspired middle-aged innovators who invent cool stuff and companies that make them rich. Gone are the days when our future depends on companies with belching smokestacks, sweating workers with heavy tools, making stuff moved by railcars.
Happily, our marvelous former colleague, Dane Stangler, had dug up the report of the Rockefeller Brothers Fund, Prospect for America, issued in 1958. It declared that in the next decade our growth rate ought to be 5% or 6%! Among its authors were real giants of economics who agreed. Its too bad that todays economists are so tortured by such cramped visions! Perhaps its a symptom of wanting to make sure politicians believe they are credible. Economics as a discipline/profession, after all, counts elected officials among the constituency that pays attention to what we have to say.
Among the Rockefeller reports authors was Walter Heller, who became President John F. Kennedys chief economic adviser. Facing a recession at the outset of his administration, President Kennedy was inclined to a Keynesian plan of deficit spending recommended by John Kenneth Galbraith, the self-pronounced keeper of the Keynesian candle in the U.S. But after seeing that a round of deficit spending was not bringing job growth, President Kennedy decided over a course of two years that the circumstances would be better served by a reduction in federal taxes. This was heretical remember, the notion that FDR had saved the economy by borrowing for public works was universally accepted. FDR would not have cut taxes! Economics was a nearly data-free enterprise, in relative terms, in those days. Expert opinion counted even more then. Only subsequent careful historical analysis has enabled us to see that FDRs actions likely lengthened the American experience of the global depression.
The economic expansion that resulted directly from Kennedys tax cut is legendary. It led to a burgeoning demand for new things and likely established the adventurous culture of American consumers that, Amar Bhide argues, stimulated the era of entrepreneurial capitalism that crystallized in the 1980s. Todays entrepreneurs might not have been able to emerge if Kennedy had slowed the recovery with continued deficit spending.
Paul Ryan pointed me to another critical influence: an IMF paper by Robert Mundell that influenced JFKs thinking. It persuasively argued that only a tax cut could stimulate the economy. Armed with Mundells thinking, President Kennedy reversed course over the fierce objections of eminent economists.
It is worth noting that several accounts of the Kennedy decision omit the influence of Mundell. Perhaps because there is a strain among academics to call Mundell the first supply-sider, a school of thinking that is dismissed these days much as Milton Friedman was treated as a fringe thinker back when I was studying economics in a decidedly Keynesian university. A lesson may be taken here as to the cost of ideology in economics.
Which draw us to the larger lessons of this tale. For me, apart from noting that one young member of Congress happens to be schooled in economics in some depth, there are lessons in what it is that motivates politicians and economists as they interact. President Kennedy is exceptional in terms of his insistence that the ultimate goal of economics and economic policy is to make policy that delivers growth above all other objectives. Without growth there are no new jobs, no new wealth, and no gain in human welfare.
And Mundell stood alone in seeing what the data told him and not what a school of thought said he was seeing. He was an empiricist before he was a supply sider, if indeed that term ever meant anything other than a right-half Keynesian. Heller was a model of pragmatism, and a courageous one at that. He was a committed Keynesian. But he encouraged Kennedy in considering the tax cut. Galbraith and Leon Kesserling were fierce in insisting that the president hadnt spent enough; the recovery needed more deficit spending and a little more time. (Sound familiar?) Heller, on the other hand, behaved as if he knew that the practice of economics was much more an art than a science.
To hear economists pontificate today, they sound as though they enjoy the certainty of, say, electrical engineers, who really do know how electrons move. Unwittingly, and ironically, todays economists bask in the reputation of economics as a science that the discipline got partly because of Heller. His support of the successful tax cut made the job of economic adviser to the president a much more serious professional post. Today, economists with vainglorious career aspirations ready themselves for public service by choosing ideological sides early on. They seem like so many politicians office seekers, not truth seekers. The discipline and the economy probably suffer as a result. Expanding human welfare as a goal is lost in the drama.
Oh, it can be hard enough. Mostly, “capitalists” today seem to be simple thieves who do not add anything whatsoever to production. Even a best-case company has just a short shelf life before it’s taken over by a top layer of parasites.
Think parabola. Upwards, apex with parasite infestation, down with a whimper.
“Mostly, capitalists today seem to be simple thieves who do not add anything whatsoever to production. “
I agree with you 100%.
The core competency of every organization is product. Companies are founded by an entrepreneur with a new product idea. He/she builds and markets a better mousetrap. If the product concept is compelling, and the company astutely markets it to customer, it will grow and prosper.
Unfortunately in the 1960’s and 1970’s there was a major shift in the management of American companies. Prior to that time the product people, i.e. the manufacturing, marketing and sales executives dominated the executive suite and set corporate strategy. They understood product development, meeting customer needs, and designing optimal manufacturing and logistics systems to deliver product to the customer. However, by the late 1960’s the financial people and MBA’s were taking over the CEO and COO roles. Whereas the historical focus of the entrepreneur and product focused executives had been growing the business by growing sales, the financial executives reduced investment in product development and pulled capital out of internal manufacturing. They focused on bottom line growth through cost savings, lower investment in product development, and reducing capital investment. By the 1970’s, growth and innovation were slowing down so the financial leaders shifted direction to growth through acquisition. Instead of developing products and new business ventures internally, they used debt to buy smaller innovative companies and integrate those organizations into the larger company. As the large organization swallowed the small one, the product innovators and creative people that drove the growth of the small organization left as they could not cope with the financial disciplines and rigid structures of the financially driven conglomerates. The truth, which many organizations have not realized, is that financial people do not add value to an organization or its customers. They are reporters of results and allocators of resources, not creators of value.
A second major shift occurred in the 1980’s as corporations were taking on more debt to buy smaller companies. Wall Street financial speculators began buying up companies with unprecedented amounts of debt (the LBO). Their objective was not to invest in the business and grow it. Their objective was simply quick financial reengineering to flip the company. Takeovers involved stripping the business of assets, firing employees, and outsourcing production to free up cash to enrich the private equity firm and report improved performance so the much weaker organization could be flipped or taken public in an IPO.
One of the major reasons for our sluggish economy today is the absence of product innovation and obsessive customer focus in American business. Look at the success of Apple. Apple is successful because of its relentless focus on product design and development supported by a customer friendly retail experience designed to allow customers to experience the uniqueness of its products firsthand. Apple is not successful because it has a superior CEO who can manipulate the balance sheet and strip cost out of the organization.
Look at other examples of strong successful growing US corporations and you will see them driven by product innovation, risk taking leaders, and a focus on customers. Alan Mulally, Ford’s CEO, was an engineer by education and benefited from a career in product development and manufacturing at Boeing before coming to Ford where he has focused on producing a strong pipeline of greatly improved products. Lew Frankfort at Coach has created a growth company in the fashion accessories market through product design supported by a strong company owned retail network. He is a marketer, not a financial person. Contrast with struggling companies, Hewlett Packard and Sears for example, where it is difficult to understand the core product proposition or see a commitment to understanding and serving the customer base.
One hundred years ago Wall Street invested money for the long term in productive assets (factories, ships, railroads). These investments added value to companies and the nation’s economic infrastructure. Today Wall Street employs computers to speculatively flip stocks in nanoseconds. No real economic value for the companies or the nation’s economic infrastructure is created by these “investments”. Instead Wall Street is merely spinning billions of transactions to generate fees on the savings of average citizens.
We conservatives talk about the 47% who comprise the entitlement society. What we fail to recognize is the entitlement society is well entrenched in the leadership of American companies. A year after the 2008 financial crisis the same Wall Street bank CEO’s who brought the economic system to a collapse requiring a government bailout, were back to paying themselves billions of dollars in bonuses for improving financial performance with government bailout money and through the transaction fees related to the flow of printed money from the federal reserve. No value added here. The parasites who destroyed the banks stayed in their positions and continue to be handsomely rewarded while they return to the depositors who capitalize the bank less than the rate of inflation in interest payments.
Likewise we see corporate CEO’s who know nothing about the products their companies sell, and never talk to customers, meet low earnings targets through cost reduction and other value depreciating activities. They pay themselves millions in bonuses for poor performance. Should their crony boards actually dismiss them, they receive additional millions in severance pay.
Contrast the failed CEO experience with the entrepreneur. If the entrepreneur fails to grow the business, he cannot generate the cash required to sustain the business and will be forced to liquidate the business and lose all of his invested capital. The price of failure is economic failure for the entrepreneur as well as the company.
Today parasites rule the economy. As long as crony capitalism continues to reward mediocre performance with millions of dollars in compensation, the system will perpetuate itself and the financial manipulators will stay on top.
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