Thursday, June 30, 2011

Racing Headlong, The Wrong Direction

The headline in today's San Francisco Chronicle says, "Poor, students feel pain in new budget."
The Democratically controlled legislature, lead by Democratic Governor Jerry Brown, has passed a new budget which cuts the state's support for poor people, who'll be getting less medical care and welfare support, eliminates services for disabled people, closes down state parks, and increases the cost of tuition for students who want to go to one of the state's public universities.
At the same time, the state will cut its sales tax from 8.25% to 7.25% and drop vehicle licensing fees by almost 50%.
In other words, faced with a budget crisis, the great state of California is going to stick it to the poor, the needy, the sick, the old, and the young who want to get an education, while cutting back two highly regressive taxes--disproportionately benefiting wealthy Californians.
And these are the Democrats!
In Ohio, the Republican governor has produced a two-year budget plan that dramatically changes Medicaid benefits and slashes state support for education and financing for local government. Critics say the Republican plan will lead to lay offs of teachers and cops.
But the governor is proud that his budget keeps in place an $800 million cut in personal income taxes.
From coast to coast, and in the halls of Congress, where President Obama is pleading with the Republicans to consider raising a few taxes on business if he'll make considerable cuts in social programs, America is racing headline the wrong direction.
We are taking a country that is already the most unequal advanced capitalist economy in the world, and making it more unequal.
We are trashing schools, slashing social services--and safeguarding the privileges of the wealthy.
It's worth taking a minute to review the bidding, as they like to say at country clubs where bridge is the game of choice.
How did we get here?
We got here because the super-rich of Wall Street turned the American economy into a casino. With them as the bank. They got to use our money. When the game went well, they got even richer. When the game went belly up, we lost our money--and they got even richer.
Now, in the interest of--well, I'm not too sure what it's in the interest of, actually; maybe in the interest of continuing to play make believe that America is a land without social classes and a country where the game isn't rigged--something, our political leaders seem trapped in brain-lock.
We have huge financial problems, so let's stick it to the poor and the vulnerable, punish our children, who need the best education they can get to have a shot at competing in the global economy, and instead safeguard the interests of the wealthy.
Remind me again: what is it that rich people do for America? Do they actually create jobs? Produce valuable goods and services? Those 11,000 Americans whose combined wealth is greater than the combined wealth of America's poorest 23 million citizens--what do they do that they deserve even more tax breaks?
America has always been the nation on earth that is racing the fastest to get to the future.
Now we're running as fast as we can, in the wrong direction.
I hope we either change direction right now, or else get wherever we're headed soon, so we'll at least have more time to put right all the things we're getting wrong.

Wednesday, June 22, 2011

The German Question

At dinner the other night with friends in San Francisco, the question of Germany came up: The German economy seems to be doing well, much better than the rest of Europe, better than the U.S., with much lower unemployment and much higher economic security.
How do they do it?
A friend at the dinner table suggested it was a function of German industrial policy--that Germany was doing today what we accused Japan of doing in the past with its Ministry of International Trade and Industry, namely orchestrating a set of policies that would favor the competitiveness of national industries, particularly manufacturing. So, while the U.S. has largely let the market dictate what has happened with our manufacturing base--and seen jobs move to other, lower-cost parts of the world--Germany has retained its manufacturing base, its jobs, and its overall economic well-being.
Of course, none of us at the table had a lot of facts at our fingertips, just widely divergent opinions. While this would have made us exceptional pundits on every TV talk show, it left me wondering if there were any facts to be had.
In other words, a job for The Global Detective!
Thanks to some friends in Austria, who quickly hustled together a series of banking advisory reports and newspaper and magazine articles, I quickly had some data, facts, and arguments from informed sources that I could draw on.
Some interesting stuff: for instance, not everything we thought was true, or assumed was true, turned out to be true.
One Economist report noted that a study found that Germany's performance with manufacturing jobs wasn't what we all assumed: Over the last 40 years, Germany has lost one-third of its manufacturing jobs, more or less the same percentage as the U.S., despite, as the economists note, a "union density" that is twice that of America.
Another report explained Germany's current economic performance in light of a rather dismal performance in the decade prior--when Germany was thought of as "the sick man of Europe" (which I mistakenly thought had always been Italy's claim to economic fame).
Yet another analysis pointed out that Germany's overall economic growth hasn't been particularly stellar; what's made it look so good is its declining population, which means that when you calculate growth per unit of population, then Germany starts to look very good.
But overall, Germany today has been getting good reviews.
The question is still, why--and secondarily, what can the U.S. learn?
There are a number of explanations that recur.
One answer has to do with historically strong German corporate brands. For a nation its size, Germany has a substantial number of global brand leaders in a wide variety of sectors. These companies have grown from national champions, when economic borders were more closed than today, to global champions, able to compete and win around the world.
Germany has benefited from its well-documented Mittelstand companies--the mid-sized companies that often specialize as top-quality suppliers, producing the parts and components that other companies then assemble into finished products.
What explains those two factors?
You could chalk them up to history, education, and culture: how the German corporate structure has evolved, how young Germans are trained and educated and brought into the workforce, and what German culture values and stresses.
Another broad set of factors involve labor costs, which Germany has managed to keep relatively low, and management-labor relations, which seem to be generally collaborative and highly productive.
This, along with the overall orientation of German firms toward steady, stable, if unspectacular growth, you can attribute to governance: co-determination, which puts union members on the management board, seems to produce decisions that are aimed at a broader sense of social good and public and national well-being, rather than pure individual financial gain or even "shareholder value maximization," which is the mantra in the U.S.
There is geography: Germany is benefiting from its proximity to Eastern Europe, which is experiencing its own economic burst.
There are factors that seem to relate to social habits, cultural patterns, and personal values: a high savings rate, low personal indebtedness, a general lack of interest on the part of average Germans to leverage themselves to the hilt. Germany didn't get hit by the housing bubble and the derivatives disaster the way America (and the PIGS in Europe) did. Perhaps Germans simply have better and longer historical memories that Americans: after World War I, Germany was seared by inflation and monetary collapse, so much so that generations later, the country still seems thoroughly committed to moderation in all things economic.
To me, however, one of the most telling factors in the comparison between Germany and the U.S. today is the difference in economic equality.
When you look at the Gini Coefficient ratings for the two nations, the numbers tell the tale: Germany, at 27, is one of the lowest, if not the lowest, rated nation among all advanced, industrial, capitalist countries. It is, in other words, the most equal.
The U.S., with a rating of 45, is the least equal.
In other words, it is as if we were two countries playing the same game with totally opposite definitions of victory, totally opposite goals, totally opposite values, totally opposite aspirations.
Germans want stability, predictability, equality, social and economic sustainability. They want a society that is coherent and cohesive.
This is not a function of industrial policy. Rather it is an outgrowth of culture, history, and experience.
Americans, apparently, want the opposite.
We want huge disparities within society, great divergences between the haves and the have nots, an economy with vast differentials that holds out the promise of great fortune for individuals who make it, and the certainty of deep misfortune for those who do not.
What can we learn from Germany?
That you can have a capitalist country and still have much greater social and economic equality than the U.S. does today.
That you can rely on markets to perform, while creating "economic design specs" that channel market choices in directions that benefit society as a whole.
And, perhaps, as the old saying goes, that those who do not learn from history are condemned to repeat it.

Tuesday, June 21, 2011

What's The Point of the Exercise?

Ah, the joys of hanging out in San Francisco!
You get to hear smart people talking about interesting things, for one thing.
Like last night, when the good folks from the Rotman School of Business at the University of Toronto, lead by the truly exceptional Roger Martin, hosted an evening discussion of a new book, Artistry Unleashed, by Hilary Austen, and then this morning, when the topic was Roger's new book, Fixing the Game.
The two books, and the two discussions, had much in common, without actually making the link explicit.
Hilary's book argues for the importance of the artistic instinct in business--using the kinds of creative tools that artists use to make their art. The discussion last night was framed around "quantitative versus qualitative"--business loves what it can measure, fears what it can't. Artists are all about what can't be measured--your instincts, your imagination, your creative spark.
Roger's book takes on the dominance of stock-based compensation as the incentive to drive CEOs and top managers to higher performance, comparing the business game to the NFL. In the NFL, you've got the game on the field, which is all about winning and losing, and the game in Las Vegas, which is all about the point spread. But, Roger points out, the players and coaches can't bet in Las Vegas--which is exactly what CEOs and top executives are not only allowed to do, but encouraged to do through their incentive-based compensation.
Two good discussion, both of which stopped short of asking the fundamental question: What's the point of the exercise?
Why do companies drive creative thinking out--and then hire consultants to bring it back in?
Why do companies believe that their stock price is the true measure of their performance?
The answer in both cases, it seems to me, is that since the last half of the 20th century, American business has lost track of the real point of the game.
We've substituted pure financial return for the larger purpose of business--to create and grow a sustainable organization capable of making and keeping customers, developing a strong group of committed employees, and contributing to the larger benefit of society. And make a profit.
But not just to make a profit.
And not to maximize shareholder value.
Not to make a profit at the expense of sound business practices.
Not to make a few people as wealthy as possible.
According to Marcus Buckingham and others, something like 80% of all Americans hate their jobs (those who still have jobs).
According to the Gini Index, America is the most unequal advanced capitalist society in the world, and become more unequal over time.
The deeper issue that both Hilary and Roger are writing about is the widespread system failure that our current approach to business represents.
What is exciting is the thinking and questioning and commenting that Roger and the folks at Rotman are leading.
Now we need to see it spread.
Spread and go deeper.
Go back to first principles, to first questions.
Questions like, What's the point of the exercise?

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