World War III has already begun. Most people don’t recognize it because World War III isn’t anything like World War I, World War II, or the Cold War. We are fighting to sustain the highest living standard in world, which ultimately will determine our political freedom. Instead of a simple fight between the Allies and the Axis powers, World War III is a struggle among economic super-powers, countries like China, Japan, the European Union (especially Germany), India, and the U.S., of course. The weapons aren’t ships, planes, and tanks; instead today’s weapons are government fiscal and trade policies, industrial innovation, and cyber-intrusions.

     The winners of World War III won’t capture a single square mile of their opponents’ land. Instead, the victors will control their opponents’ governments through debt instruments and own their businesses and infrastructure by producing significantly more than they consume. By that measure, the U.S. is losing the war badly – but it’s traditional for the U.S. to begin a world war far behind its adversaries. We begin World War III with a leaning toward isolationist trade policies and a government deeply in debt.

     For decades, growth in the U.S. economy was driven by consumer spending enabled by rising real estate values and easy credit. We built bigger and bigger houses, and filled them with more and more stuff. That spending spree caused the U.S. balance of trade to fall from a surplus in 1980 to a deficit of 5 percent of GDP – as a nation we consume 5 percent each year more than we produce. But things changed when the recession destroyed $13 trillion in property and stock wealth. The sudden drop in consumer spending was replaced by record government spending. The $700 billion bailout package and $787 billion stimulus bill combined with anemic tax revenues to produce a 2009 federal deficit three times the previous record deficit.

     Once upon a time, American spending fueled global growth – now it is a drag on that growth. The core question is: Can the U.S. switch from a consumer-driven economy to a trade-driven economy? And, if so, can it be done before the federal government goes bankrupt? Historically, the U.S. has been adept at shifting workers and resources from declining industries to growth industries. But so far the government’s economic policies have failed to stimulate growth, increase trade, or create new jobs. China, Germany, and Japan are winning World War III with large trade surpluses, and are using those surpluses to build their infrastructure, expand their overseas investments, and increase their foreign debt holdings.

     Of the three, China is the most ominous threat. Even after growing only 9 percent last year, China’s GDP is still only one-third as large as the U.S. GDP. On a per-capita basis, China’s GDP is less than one-tenth that of the U.S., and the innovation gap between the two countries remains as wide as the Pacific Ocean that separates us. Further, the U.S. defense budget is six times China’s. So how could China overcome the U.S.? Clearly, a bullets-and-bombs war would fail. The U.S. faced a similar challenge from Japan in the 1960s and 1970s. “Made in Japan” was as prevalent then as “Made in China” is today. But today Japan is losing its place as the world’s second largest economy, even though its per-capita GDP is roughly the same as the U.S. The difference is that China, with ten times as many people as Japan and three times as many as the U.S., has enormous untapped growth potential!

     The U.S. and Chinese economies (the world’s largest and fast-growing, respectively) are linked in ways that neither side can afford to break. China depends on the United States as the largest market for its exports. On the other hand, the U.S. depends on China as the largest foreign purchaser of its treasury bills. It is an economic version of the mutually assured destruction (MAD) stalemate between the U.S. and the Soviet Union during the Cold War. Either side could destroy the other’s economy, but at the same time would destroy its own. Nevertheless, the stage is set for economic war on a global scale.

     I grew up with bomb shelters and the fear of a nuclear attack, but today’s threats are very different. Today, I worry about having my identity stolen and my computer hacked. Economic warfare won’t be as lethal as the 20th century’s shooting wars, but it is likely to be more disruptive to the average citizen. Cyber-warfare destroys enemies by attacking the infrastructure that supports the economy: financial systems, communications, computer networks, power grids, and the like. Our economy depends so heavily on sophisticated computer systems that we are more vulnerable to cyber attacks than nuclear attacks. We must defend ourselves against cyber-attacks even as we maintain the conventional warfare capabilities that make the U.S. the world’s police force, the protector of free trade routes.

     The federal government must meet the challenge of cyber-warfare by regulating cyberspace, establishing security standards, defending against threats and attacks, and enforcing the law. Information technology experts in government and industry fight cyber-security battles daily. The threats include penetrations by foreign users, viruses, worms, spyware, Trojan horses, and data thefts. Inappropriate surfing, dangerous downloads, and violations of security policies by employees open the electronic kimono to these cyber-threats.

     World War III has huge implications for the world of business. Every business, from Fortune-100 companies to mom-and-pop shops, must protect itself from cyber intrusions. On the other hand, cyber-warfare also presents business opportunities on the offensive as well as the defensive side. But the biggest opportunities lie in creating products and services that the world will buy in large quantities. It’s time to reduce the focus on consumers and embrace a focus on trade – even if the leap from the old to the new is uncomfortable. To be successful in times of like these, we must anticipate what the changes will be, embrace the changes, and use them to gain new successes. On a national level, we are at war with ourselves as much as with other countries. Hopefully, Congress and the President will do their part by reversing anti-business policies, making it easy for businesses to compete internationally, and investing in cyber-security.

THE FISCAL TIME BOMB

    The fiscal direction of the U.S. is a ticking time bomb that is pulling us out of the banking and personal debt crisis by pushing us into an explosive government debt crisis. The potential for disaster is widely discussed, but the same spending decisions and tax policies continue. Three years ago economists warned about a collapse in sub-prime mortgages, but we ignored that warning and are paying for it with bailouts, unemployment, and a housing industry on life-support. Who will bailout Washington when this bomb explodes – the Chinese?

    The fiscal year 2009 deficit skyrocketed to a record $1.4 trillion, larger than the last four years of deficits combined. In 2009 the government spent $3.5 trillion, but collected only $2.1 trillion in taxes. The $1.4 trillion gap would have been a few hundred billion dollars more, except several large banks repaid their bailouts rather than face punitive salary cuts by Obama’s Compensation Czar. The tsunami of red ink jeopardizes the awakening economy and the long term outlook for more jobs.

    Future deficits look equally bad. The Congressional Budget Office (CBO) forecasts another $1.4 trillion deficit in 2010, and annual deficits of a trillion dollars or more each year through 2019. Even to get those numbers, the CBO and the President are doing what naïve business leaders do to justify overspending: they inflate projections of growth and revenue. The world (particularly China) is still willing to buy treasury bonds and, at today’s historically low rates, the interest is affordable. But when the ballooning national debt spooks foreign and domestic lenders into fears about rising inflation and defaults, soaring interest rates will divert tax revenues into interest payments.

    Last June, President Obama said: “Paying for what you spend is common sense. Perhaps that’s why here in Washington it’s so elusive.” But instead of choosing among new social programs, tax cuts, and war in Afghanistan, he wants all three and more. Congress is debating a health-care bill that would add hundreds of billions to the federal budget. The only recent idea that has bipartisan support is giving $250 checks to seniors (total cost of $14 billion) because the Consumer Price Index fell 1.3 percent and they weren’t entitled to a cost-of-living increase in Social Security. Actions also are in progress to extend unemployment payments and the $8,000 tax credit for first-time home buyers. No one disputes that Obama began his presidency in a difficult economy, but its problems have been exacerbated by a spending binge like a teenager at the shopping mall with her parent’s credit card – eventually we must pay the bill.

   Obama steadfastly repeats his “clear promise that families earning less than $250,000 will not see their taxes increase by one single dime.” But the CBO has issued data showing that income taxes are already near a historic low for all but the wealthiest Americans. The CBO says that the average American family paid about 9 percent of its earnings to the IRS in 2006, the latest year for which data are available. Middle-class families fared especially well. In 2006, the middle fifth of taxpayers (those earning about $60,000 per household annually) paid 3 percent in federal income taxes, down from a high of 8 percent in 1981. In a recent Gallup poll, 54 percent of the respondents said their federal income taxes were either “too low” or “about right,” the highest percentage since Gallup began that poll in 1956.

    One frightening trend in tax policy is that fewer and fewer people are paying any income taxes at all. According to the IRS, 45 million households (38 percent of taxpayers) paid no income tax in 2006. This year, because of tax credits in the stimulus bill, 43 percent of all households are likely to pay no income taxes at all. Obama wants to keep his no-tax-increase promise class and is reluctant to tell us the truth: if you want bigger government, you must pay for it. Unfortunately, with the percentage of non-taxpayers nearing 50 percent, the balance between those who receive government benefits and those who pay for them is being obliterated. Non-tax paying voters are the majority that elects candidates who promise new spending.

    The keys to restoring the budget surpluses we enjoyed during the dot-com era are more jobs and more innovative businesses. Since the recession began, 8 million jobs have been lost. Total employment is lower today than ten years ago – a 10-year decline in employment hasn’t occurred since the Great Depression. But what can the government do to produce jobs and business growth? The answer isn’t clear. If the economy rebounds and unemployment drops, tax revenues could increase and narrow the budget gap. However, if the economy recovers more slowly than after past downturns (as many expect),the  deficits could double. Economic projections are guesswork, of course. For example, the new health-care plan could cost more or less than expected. The cap-and-trade system for carbon emissions is another wildcard. Congress seems intent on passing a bill that essentially gives carbon credits away, while President Obama is counting on a bill that will generate hundreds of billions in new revenue. Many economists are afraid the exploding federal debt will trigger a new crisis that will destroy jobs.

    There appear to be three alternatives: (1) higher taxes, (2) program cuts, and (3) changes in the structure of social security and Medicare. If we do nothing, the U.S. might default on its debt payments and all three things will be forced on us. For me, the most palatable is higher taxes. Taxes on the wealthy must increase the most, but the revenue required to expand social programs is far too much for high earners to pay. There just aren’t enough of them. Topay for a trillion dollar health care program and keep the national debt from destroying an already weakened economy, federal income tax rates and the number of people who pay them must increase. The government will have to go where there are a hundred million taxpayers – the middle class. A viable alternative to income tax increases is a European-style value-added tax (VAT) that would raise the price of everything from cars to clothes. But Congress has shunned the VAT idea along with other usage-based taxes like the gasoline tax which hasn’t been increased since 1993. The fuse on the fiscal bomb continues to burn while Congress and the president spend.

   This type of fiscal blindness is not limited to government. Business executives face similar challenges when the basics of their industries change:

Conflicting priorities from doing too much. (Which is the government’s highest priority: the economy, unemployment, health care, global warming, or Afghanistan?)

Lack of Focus. When multiple priorities collide, worthwhile efforts fail.

Unrealistic expectations: Yes we can!  But what if we can’t or shouldn’t?

We all want things to change, but change doesn’t mean doing everything. Effective change means we must be willing to give up the old and embrace the new even when the leap from the old to the new is uncomfortable. To be successful in times of rampant change, anticipate what the changes will be, embrace the changes, and use them to produce renewed success – not bigger debts.

     Leaders sometimes take actions that get in the way of the changes they want to make. Ending the current recession is an example at the national level. Everyone wants it to end quickly, but our leaders persist in rhetoric that prolongs it. According to a survey by the Human Resources Association, even with the Fed’s rosy economic forecasts, employers are less optimistic about the future today than a year ago. They are skeptical and cautious, with many planning to freeze salaries and delay hiring. Even worse, they also continue to curtail investments in the capital equipment and R&D that will produce future jobs.

     The economy’s decline is slowing, but nearly seven million Americans have lost their jobs in the last 18 months and unemployment has risen to 9.8 percent. Just last week 500,000 more filed first-time unemployment claims – the lowest number in a year, but still headed in the wrong direction. The recession will be history when unemployment returns to normal levels – say five percent – and the economy consistently generates enough new jobs to keep up with population growth. Despite the $787 billion stimulus act, employment is still way down in manufacturing, hospitality, retail, and construction. Many of the manufacturing jobs probably are gone forever, either off-shored or replaced by new technologies.

     But where will seven million new jobs come from? Name an industry that could create a million new, high-paying jobs in the next year. You can’t because there is no such industry – and we need seven of them to replace jobs lost in the last 18 months, and about one a month thereafter to keep up with population growth. But we have done it before. For example, the U.S. economy created over 20 million jobs during the 1990s dot-com boom, and millions more in the early 2000s during the boom in financial innovations. Unfortunately, today U.S. businesses are keeping their heads low after a barrage of attacks.

     Why are recruiting departments on vacation? When big business is ruthlessly maligned, they retrench which delays the recovery. According to popular opinion driven by Washington rhetoric:

• Financial companies caused the economic meltdown,
• Oil companies caused the astronomical increase in fuel prices,
• Insurance companies caused high health care costs, and
• U.S. automobile companies were grossly mismanaged.

Unquestionably, those industries contributed in a big way to the crises. But so did Congress, federal agencies, labor unions, consumers, and doctors. Until big business (where most of the seven million jobs were lost) begins to rehire, high unemployment will persist – so we are shooting ourselves in the proverbial foot with never-ending attacks on big business!

     It is convenient to blame the recession and job losses on big business. But the real cause is that we have not been creating enough new jobs. American companies have been off-shoring for decades, but we bounced back from recessions in the 1980s and 1990s by generating millions of new jobs through emerging technologies such as personal computers, the Internet, and cell phones. But in recent years, off-shored manufacturing and software jobs have been replaced mostly by low-paying jobs in the retail and service industries.

     The challenges we face today in health care, global warming, food and water supplies, renewable energy, and transportation are actually opportunities for the Federal government to stimulate research investments by dozens of Fortune-1000 companies. We need government-business cooperation like we had on the Apollo Program which not only produced short-term jobs; it also developed computing, communications, fuel cell, and digital-imaging technologies from which whole new industries emerged. Big companies like Exxon-Mobil, General Motors, Microsoft, DuPont, IBM, Hewlett-Packard, Cisco, and Google (to name only a few) aren’t enemies of our economy – they are our economy.

    What can we do to put the economy back on track? Rather than belittle and over-tax industry, government must create a dynamic public-private partnership of research and innovation with supportive actions such as:

• Specific national goals for health care, renewable energy, and other challenges
• Massive R&D spending at government agencies like DOE, DARPA, and national labs
• Multi-billion dollar program where government matches industry’s R&D investments
• Tax credits for corporations that invest part of their R&D budgets in basic research
• Increased spending on education, especially graduate-level research fellowships.

These actions will create lucrative and satisfying jobs by the millions every year but, unfortunately, they will take time to ramp up given today’s anti-business environment.

     President Obama faces enormous challenges. But sometimes his speeches make it seem like political gains from vilifying big business are a higher priority than partnering with business to generate jobs, re-establishing our position as the global technology leader, and ushering in new long-term prosperity. Challenging frontiers like renewable energy, the energy grid, high-speed broadband, and health care could become platforms on which entrepreneurs build new companies, generate millions of jobs, and create new prosperity for all.

     Ironically, the recession itself is an opportunity – U.S. presidents have broad leeway to make bold moves in bad times. Eisenhower started the interstate highway system during the Korean War; FDR provided electrical power in rural areas during the Great Depression; and Lincoln started the transcontinental railroad during the Civil War. Those infrastructure investments created jobs and produced whole new industries in their time. The good news is we’ve started down this path in the stimulus act, and we aren’t that far behind our global competitors. If we stop shooting ourselves in the foot by business-bashing, government and big business can cooperate to build new industries that will rekindle prosperity in our time.

TOO MUCH LEADERSHIP, TOO LITTLE MANAGEMENT 

     After his election victory, President Obama was widely hailed as a visionary leader who would deliver meaningful change. Expectations soared as people chanted: “Yes we can!” But what do the first seven months of his presidency tell us about leadership and change? Perhaps we aren’t as gung-ho for change as we once thought. Perhaps the level of risk we are willing to accept to accomplish change has changed. 

    Regardless of the causes of the current economic crisis, watching our homes lose trillions in value and our retirement plans fall to half their value has diminished our appetite for change. Our tolerance for bold innovation evaporated roughly six million lost jobs ago. As citizens, we are changing our behaviors to spend less and save more, and are increasingly worried that the government is spending too much. So worried that we would rather not have another economic stimulus even if it means a slower recovery from the recession. We aren’t so sure about policing the world in far-away places – the Afghanistan war is looking more like the Iraq quagmire every day. We want to improve the health care system, but not if it adds to a trillion dollars to a run-away annual deficit. Reducing global warming also sounds like a good idea, but let’s slow down and get it right the first time. “Yes, we can” was an invigorating chant a year ago, but what if we can’t?  Or worse yet, what if we shouldn’t? 

     President Obama seems to have relinquished management control of health care reform, climate control, and energy policy to Congress. He is more comfortable marketing grand visions than with the messy details of managing change. Managing change is hard – and in government it’s really hard! Even when he issues directives to implement campaign promises (closing the terrorist prison in Guantanamo, for example), nothing happens until someone comes up with an executable plan, negotiates compromise, and pays attention to the details – in short, old-fashioned management execution. Implementation of the “Cash For Clunkers” program is another example of a good idea poorly executed. 

     The difference between lofty ideals and effective execution is the difference between Jimmy Carter and Ronald Reagan. Despite a cabinet and White House staff with impressive credentials, President Obama has outsourced management to Congress (less than a paragon of management excellence by anyone’s standards) while he delivers speeches around the country. Allowing Congress to develop a flawed stimulus bill was forgivable – we needed a bill quickly and could fix mistakes later. But that strategy with respect to health care reform has spawned health care bills (as of this writing there are several) that fail to contain, let alone reverse, the rising costs of treatment while adding an expensive mandate that everyone be insured. What can President Obama do? Come down from his cloud and start managing the government as the Chief Executive Officer (CEO) that he is. 

     My point is not to bash a president who is working hard to meet the commitments he made to the American people. When I was CEO of my company, I fell into the same trap – albeit not on an international level. I set lofty goals without an executable plan. I pronounced high performance targets without having the resources to achieve them. I issued directives to my management team without establishing boundaries or measures of success. You may be doing the same things in your organization too. 

    As a management consultant, it’s heresy to say I’m tired of hearing about leadership – where is management? I believe a large part of today’s crisis was caused by inadequate management at the highest levels. Visionary leadership has become disconnected from plain old management execution. We got off-track by believing: “It’s more important to do the right things than to do things right.” The logic of that statement is understandable – but if we don’t do things right, doing the right things still leads to failure. Some executives use that statement to justify detaching themselves from the hard work of day-to-day management. They delegate management to lower levels that too often don’t share the vision, don’t have a plan, and/or don’t have adequate resources to pursue the lofty goals. We have too much leadership and too little management. Instead of separating leadership from management, executives must be both managers and leaders. Used together, leadership and management produce measurable results. One without the other either produces nothing, or produces the wrong things. Are you both leading and managing change in your organization?

    When I was six years old, my mother made me eat my broccoli before I could have ice cream for dessert. I wish my mother were in Congress today, because she would make other members raise revenue (i.e., eat their broccoli) before extending health insurance to 46 million uninsured people, issuing free cap-and-trade credits, and sending $787 billion in stimulus (i.e., three flavors of ice cream) to their favorite special interest groups. The plain truth is we either aren’t paying enough to support the government we need or we have more government than we can afford – maybe a little of both. There is no perfect plan that gives everybody everything they want – and allows them to keep everything they already have.

    It’s time to control spending and build new revenue sources, rather than to create new entitlement programs and cut taxes. For example, it makes no sense for Congress to continue ignoring the federal gasoline tax (it hasn’t changed since 1993) while we can’t afford to fix roads and bridges are literally falling down. We can make these hard choices today while the consequences are relatively mild, or delay action until the world forces a bankrupt U.S. government to make more loathsome decisions – like California is being forced to do. Yes, I mean raising income and capital gains taxes (and other revenue sources as well) even though I’m in the income group that President Obama and Congress view as a bottomless source of revenue.

     The health care debate is sizzling. Depending on which one you pick, the draft health care bills in Congress provide coverage for most Americans that don’t already have it, eliminate pre-existing conditions as insurance exclusions, and fund health care research. Those are all good things (ice cream) but, along with millions of other Americans, I don’t believe those actions will reduce the cost of health care. Unless a health care bill addresses controversial issues like the astronomical cost of malpractice insurance, marginally necessary fee-for-service procedures, and expensive end-of-live care (the broccoli), we are likely to see higher insurance premiums, reductions in the quality and availability of health care, restrictions on our choice of doctors and treatments, more expensive government bureaucracy, and trillions in new federal debt.

     The debates on energy policy and the environment, although playing second fiddle to health care, also have lots of ice cream and no broccoli. Certainly, investing in solar, wind, nuclear, and geothermal power (the ice cream) are essential to stimulate the economy, expand employment, and produce environmentally-friendly energy. But we also have a broccoli choice: Do we seize control of our oil supply and its environmental impacts, or continue to out-source those responsibilities to Saudi Arabia, Venezuela, Iran, and Russia? That is what we do when we import $700 billion of oil each year instead of drilling our own oil under appropriate environmental controls. Plus, massive oil imports are pushing us toward national bankruptcy and record unemployment because we buy from other countries what we should produce for ourselves.

     Health care and energy policy are microcosms of the challenges that all business leaders face: making tough trade-offs when we don’t what know the future holds. Every business leader pushes for positive change – that’s what leaders are paid to do. Today, the need for change is intense. Workers are scared about their future and, in some cases, are angry at big business. They want things to change fast. But change isn’t just about doing different things – change means achieving better outcomes. Business leaders must be willing to give up the old and embrace the new even when the leap from the old to the new is dangerous. To be successful in times of rampant change, you must anticipate what the changes will be, embrace the changes, and use them to produce new successes. And that may require you to eat some broccoli before you can have your ice cream.

WHAT’S NEXT?

    Business and government are groping through a period of creative destruction. The old balance has been destroyed and a new order of things is being created. Nobody knows what the new order will look like, but for sure Washington will exert more control over free markets. What is less clear is whether the new order will produce a more stable and vibrant capitalism, or if it will stifle the innovation and entrepreneurship that has lifted America out of previous recessions. But defending the old capitalism is a waste of time. The Enron and Tyco scandals eroded public trust, and the Madoff ponzi scheme and reckless actions by financial institutions obliterated any trust that was left.

    But we don’t trust government either. Most of us hope the $787 billion American Recovery & Reinvestment Act (ARRA) will somehow put millions of Americans back to work through massive spending on education, energy, roads, and health care. Others see ARRA as a pork-filled Trojan horse. ARRA is a make-or-break challenge for Washington. Will the government implement it effectively – or repeat recent contracting fiascos on a $787 billion scale? Years after the events we still hear how taxpayer funds were wasted in the Hurricane Katrina cleanup, in rebuilding Iraq, and in Homeland Security after 9/11. And the Treasury Department’s $700 billion Troubled Assets Relief Program (TARP) seems to be demonizing business and undermining cooperation between government and businesses.

    So far, President Obama has used the crisis to expand government, implement sweeping new programs, and manipulate into mega-industries. He seems sincere when he says he wants to divest the government’s ownership stake in automakers and banks quickly. Meanwhile, rules are being introduced that could do more harm than good, and the ownership is being used to push the government’s agenda regardless of its effects on the companies’ recovery. For example, forcing banks to relent on foreclosures, pushing auto-makers to manufacture cars for which there is no obvious demand, and passing stringent new credit card rules.

    Employment is still the key to recovery. Even in times of high growth, about 15 million American jobs disappear each year but are replaced with 20 million new jobs in industry expansions and start-up companies. We are losing more jobs in this recession than normal, but the bigger problem is that the economy isn’t creating new jobs. Make no mistake about it, businesses create new jobs by the millions – not government. On the other hand, only government can limit environmental damage, ensure competition, protect consumers, and provide health care for those who can’t afford it. In the new order, hopefully those will be the respective roles of business and government.

    When government leaders intervene in the economy, they seem oblivious to unintended consequences. For example, look at the reaction of banks that participate in TARP to compensation restrictions. There is no doubt that the current crisis requires regulatory changes and aggressive (but temporary) government interventions that would be wrong in normal times. But outsourcing rule-writing to Congress for health care, carbon emissions, and financial regulations is like giving an alcoholic the keys to the liquor warehouse. Congress is much more likely than the Executive Branch to allow special interests to shape legislation and derail tough choices.

    Our national energy policy is a prime example. Nearly 70 percent of Americans believe we should drill our own oil instead of spending $700 billion per year to import it. But Congress has yielded to a coalition of special interests whose purposes are served in one way or another by not using our natural resources. Furthermore, under the carbon-emissions bill now being debated in Congress, almost all of the valuable permits to emit carbon dioxide will be given away free - thus creating a huge pot of favors for Congress to give to its favorite lobbyists. That seems plain dumb when the priorities are to fight climate change and lower the federal deficit. A simple and more direct approach would be to institute a carbon emissions tax – but so many special interest groups are against such a tax that almost no one has the courage to propose it.

    Opportunities abound for business and government leaders in this crisis – but it may be the toughest challenge they’ve faced in their careers because there are no sign posts to guide the way. In moving from the old order to an as-yet unclear new order, leaders must let go of the old and embrace the new. The chasm between the old and new is frightening. We are reluctant to admit that the old is gone, mainly because we’re not sure what the new will be like. To succeed in such times of change, anticipate what the changes will be in your industry, embrace the realities of the new order, and use the changes to advance your success.

      The Consumer Confidence Index is rising and surveys report optimism among business leaders despite gloomy labor statistics. Unemployment claims rose to 637,000 in April and 13 million people were unemployed. The projections are that unemployment will peak close to 15 million before the recession ends in early 2010. The labor report also said there are roughly three million vacant jobs that employers are looking to fill. Sounds like promising news – but it’s not. Instead, it indicates an irreversible shift in the U.S. economy and a widening gap between employer needs and worker skills. People who have lost jobs in shrinking industries like manufacturing, construction, and retail generally lack the skills required for open positions in growing industries like health care, education, green technologies, and government. At the same time, the worst fall in 50 years in real estate values has frozen unemployed workers in place because they can’t afford to sell their homes and move.

      The recession is transforming the U.S. economy – and sweeping transformations don’t happen overnight. As bad as it is today, the skills gap will create even worse challenges for employers and the unemployed when the economy begins to expand. The most optimistic economists predict it will take three years of sustained growth to absorb the unemployment created during this recession. Unemployment will stay painfully high because job seekers lack the credentials to compete in areas where new jobs are being created. For employers, the bad news is they may be forced into bidding wars to fill positions from a frustratingly small pool of qualified candidates.

    So far, the unemployed are clinging to desperate hope that things will return to “normal.” It’s hard to accept that their old jobs aren’t coming back, and it will take years to rebuild their savings. For example, many of the 27,000 people laid off when Chrysler entered bankruptcy won’t be rehired when it emerges. People in severely impacted states like Indiana and Michigan are ignoring well-paying jobs in southern states that are recovering because they are reluctant to move and retrain themselves. Similarly, laid-off Wall Street workers are grappling with the stark reality that they must change their lifestyle and accept a job that pays less. It will probably take several years for the realization to sink in that there is an entirely different “normal.”

      Employers need to change their thinking as well, recognizing that the “perfect” candidate may not exist. Some jobs in emerging industries will require skills that salary, no matter how high, will be insufficient to attract enough qualified candidates until a new generation of workers can be trained. For example, the financial crisis has produced a demand for accounting specialties that far exceeds the labor supply. To solve this dilemma, employers and governments must fund new training programs. The stimulus act, unfortunately, provided little funding to retrain the workforce. So, in the mean time, employers will be forced to accept imperfect fits to fill vacancies, and the unemployed will have to accept lower pay to start new careers.

     These broad economic shifts arouse the dragons of change – the emotional resistance we  feel when we’re forced to change. Change is the process of letting go of the old and embracing the new. The chasm between the old and the new is a chaotic but creative period. We struggle to accept that the old is gone, but at the same time we’re not sure what the new will be like. The uncertainty causes some to run away from risky new beginnings and cling to the slim hope that things could be like they were. Business strategies that once produced great results, don’t work any more. To stay on top in such times of change, you can’t just react to changes. You must anticipate changes, embrace the realities of the changes you see, and use them to advance your success.

     Today is the ideal time to hire talent to position your organization for the economic rebound, but you may want to use alternative hiring techniques. For example, hire future employees as part time consultants to minimize compensation costs and verify that they fit your organization. A second idea is to hire employees with deferred start dates and pay them a salary retainer. This technique is particularly effective with new graduates. A third possibility is to hire baby-boomers. Many of them have lengthy experience and are looking for part time work since their retirement has been affected by the stock market crash and drop in real estate values. Companies that put a hiring freeze in effect “until things turn around” run the risk of being forced to hire leftovers with weaker qualifications than they would like. The skills reservoir is as full as it will ever be – now is the time to get the sweetest water!

     During my lifetime, several frightening events have accelerated the pace of change, threatened the world’s economic stability, and ushered in an entirely new way of thinking. The launch of Sputnik (1957), fall of the Berlin Wall (1989), and 9/11 (2001) are examples. After those events, the world changed so fast and so broadly that the new reality could not be accommodated within previous paradigms. Business strategies and practices that once had been effective, didn’t apply any longer.

 

Today’s collapsing financial system and free-falling stock and real estate prices are another shocking event that pushes us into a period of revolutionary change. When the recovery runs its course, we’ll find ourselves in a world that is strikingly different from the one we knew just a short time ago. Changes that were in progress before the upheaval (e.g., globalization, economic emergence of second and third world countries, and rapid technological advances) will be accelerated. To stay on top through such revolutionary change, you can’t just react. To succeed you must anticipate change, embrace the implications of change, and use change to your advantage. Waiting for the “old world” to return is not a viable business or career strategy because it isn’t coming back!

 

The recovery that will carry us into the new world will be rooted in fundamental shifts in our prevailing economic and sociological beliefs.  The new beliefs include:

$  Allowing government to dictate the practices and priorities of major industries,

$  Accepting responsibility to preserve the planet on which we depend for life itself,

$  Rejecting war as a national policy and the expensive weapons that support such policy,

$  Understanding that our future economic success depends on global success,

$  Tolerating massive debt to create new technologies and modernize our infrastructure,

$  Learning to do business in an environment where credit is more difficult to obtain,

$  Searching for a new retirement model for the once-affluent baby boomer generation,

$  Creating a tax structure where 20% of the people to pay for almost everything.

Further political shifts, technological breakthroughs, and natural disasters could intensify or retard the advance of these beliefs, but they are irreversible. These beliefs will form the underpinnings of a whole new business world.

 

The $787B dollar economic stimulus bill signed by President Obama in February indicates how these beliefs affect the recovery. The bill is a buffet of opportunities for any business that offers products or services related to energy efficiency, energy production, education, health care, information technology, cyber-security, infrastructure construction, government contracting, research & development, bio-tech, nano-tech, and the industries that support them. Money is rushing out the door in the form of Federal contracts, grants, tax incentives, and block transfers to state governments. Businesses that could ignore Federal policies in the past, can’t anymore. No matter what business you are in, you must align your strategy with what the Federal government is planning to support. Today, change is a run-away freight train — your choices are to get on board, or get run over.

 

The $64,000 question is: What changes should executives expect, and what actions should they take? Too many executives are trying to survive today’s crisis by reducing staff, curtailing investments, closing offices, and cutting benefits. Such actions are rooted in a belief that old ways of doing business will return when the economy recovers. That belief is the path to oblivion in times of rampant change. Great change produces great opportunity, but only for those who anticipate, embrace, and use change to expand their success. To voice your views on these matters, log onto the change blog at www.dickstieglitz.com.

     Some people feel that change just happens, and there=s little they can do except react. If you=re in that group, I hope this article changes your thinking. Social scientists forecast there will be as much change in the next five years as there has been in the last ten – a Moore=s Law for change. That=s scary because in the last ten years the telcom bubble, the dot-com bubble, the housing bubble, and the credit bubble have all inflated and burst. To stay on top, you must do a lot more than react. To thrive (not just survive) you need to anticipate, embrace, and use change to your advantage.

 

It’s common for a new president to take office in bad economic times. Bush-2 faced the 2001 recession in his first year. Clinton assumed command as the nation was recovering from the 1990-91 recession. And Reagan began a 12-year Republican run during the deep recession of 1980-82. Today=s crisis gives President Obama a mandate for change, and his stimulus package has ignited an economic frenzy. Forget balanced budgets. Obama promises trillion dollar annual deficits for several years. Since the largest changes will happen in the first two years of his administration, now is the time for you to mobilize to exploit the new opportunities.

 

The stimulus package will create immediate jobs for ditch diggers to rebuild highways and bridges, and drywallers and electricians to improve the energy efficiency of buildings and homes. Struggling industries such as homebuilding, banking, and autos hope the package will resurrect their sales. And the far-reaching R&D provisions of the package will move America toward energy independence and hopefully produce a positive balance-of-trade. For example, the nuclear industry may receive help not only to construct new power plants, but also to produce components and systems that can be exported to countries with growing energy needs. That=s a lot of opportunities!

 

To executives who were not in leadership positions during previous economic downturns, today’s crisis may seem like a disaster rather than an opportunity. In the years since the last recession, they have been able to produce growth and profits without breaking a sweat. As a result, they haven=t been pushed to make fundamental changes. But downturns like this test executives’ ability (or lack thereof) to lead their organization through change, rather than merely react to change. It’s an honor for me to help CEOs and their management teams reshape their company=s future in such rapidly changing times.

 

Today is a whole new ball game for buisness. Laissez-faire government has been replaced by intrusive government. President Reagan told us that government was a problem, not a solution. But times are radically different now. Wall Street, the auto industry, state governments facing rising Medicare costs and declining revenues, and homeowners with underwater mortgages are lining-up for hand outs from the Federal government. Businesses that were able in the past to ignore the Federal government can=t anymore. No matter what your business, align your strategy with what the Federal government is planning to stimulate. 

     Many companies hope to survive the economic crisis by closing offices, laying-off employees, and reducing investments and benefits. I’m advising clients to head in a different direction.  Americans are screaming for change, and great change always produces great opportunity. Citizens complain about shifts in the job market, traffic jams, high energy costs, lack of health care, endangered water and food supplies, and rising crime. Each of those complaints represents a whole set of business opportunities. And with government priming the economic pump, they will begin gushing revenue and profits for businesses in many industries.  Are you anticipating, embracing and using such changes to expand your success?

In the last nine months, an aimless Congress passed a relatively small stimulus package and a bailout for the financial sector, and President Bush granted $17 billion in loans to the auto industry when Congress didn’t get the job done. Those wack-a-mole rescues arguably slowed a runaway crisis, but President-elect Obama must do a lot more to restore faith in America’s economy. He must provide a vision for the future and economic stimuli that implement that vision. It may feel counterintuitive, but the Country needs a long term fix, not expensive economic bandaids like we’ve seen so far. 

Obama said: “If this crisis taught us anything, it is that Wall Street cannot thrive while Main Street suffers.” He is 100% right, of course, but the reverse is also true. Main Street cannot thrive while Wall Street suffers because only growing companies produce new jobs. Obama inherits a government that is deeply involved in regulating and owning businesses, and he has the power to pick winners and losers among companies that accept Federal loans. 

That a Republican administration partially nationalized the banking and auto industries may be a turning point in economic history. As the Country recovers from the deepest recession in 75 years, a new capitalism is emerging. One where the Federal government combats fierce global competition by setting the direction of fledgling industries like renewable energies, nanotechnology, and bioengineering in addition to mature industries like financial and auto. At a minimum it means the return of heavy government regulation. Ronald Reagan may be turning over in his grave, but the global economy is very different than in the 1980s. 

The Obama cabinet is preparing an $850 billion stimulus package to submit to Congress in January. It will probably include middle class tax cuts, funding for infrastructure projects, relief for state Medicaid programs, investments in renewable energy research, help for struggling homeowners, and other bailouts. The highly touted “shovel-ready” improvements to roads, mass-transit, water mains, and electrical distribution systems are sorely needed, but they will produce only short-term jobs. After billions have been spent to rebuild the infrastructure, the jobs will end and we will not have produced anything that the world will buy from us. It’s not about trading-off infrastructure jobs against so-called “green” jobs. America needs both to reclaim its global leadership position. 

Obama’s election margin gives him a mandate for fundamental changes. Indeed, the American people expect him to fix a spectrum of long-standing problems including:

$   Increasing unemployment and stagnant wages,

$   40 million Americans with no health coverage,

$   Collapse of housing/construction industry,

$   Imports exceeding exports by $60 billion/month,

$   12 million illegal immigrants,

$   Unhealthy dependence on foreign oil, and

$   Global warming.

These are huge opportunities masquerading as intractable problems! As Tom Friedman says in his book Hot, Flat and Crowded: “This challenge is actually an opportunity for America. If we take it on, it will revive America at home, reconnect America abroad, and retool America for tomorrow. America is always at its most powerful and most influential when it is combining innovation and inspiration, wealth-building and dignity-building, the quest for big profits and the tackling of big problems.”  

Obama must propose a vision that the restores our national pride, stimulates sustainable growth, and enables us to produce something the world will buy. Congress must cure its political constipation and pass a stimulus package that includes an energy policy, tax incentives, and regulations such as: (1) incentives for businesses to develop economically viable alternative energy sources; (2) taxes that stabilize the price of oil so competing energy sources have a stable price target; (3) guarantees that reduce the risk of building nuclear power plants; (4) regulations that require improved efficiency in vehicles, appliances, and buildings; and (5) tax credits that push consumers to buy energy efficient devices even if they are more expensive. All of these actions will put Americans back to work and encourage production of things the world will buy.