Posted by: dstieglitz | June 26, 2009

What’s Next?

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.

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Responses

  1. From what I hear, President Obama seems intent on forming a socio-economic system that caters to/supports the low-middle income populace without recognizing a necessary role in the economy for ‘big business’ or high income folk. His program seems to boil down to a welfare state, a ‘green’ nation, and a systemic prejudice that will eventually eliminate ‘the rich’ (including the larger companies that make them so).

    Can his idea succeed? Is it possible to have a sustainable socio-economic system where nobody makes more than X amount of money yet the basics are provided for every citizen? It sounds like a revised socialism…your needs are provided by the government, if you want more you are free to pursue it up to a limit. I wonder if this is a feasible reality?

    If such a concept is in fact do-able, the government will need to sieze economic control of all large companies (at least by taxing and thus taking any money they make above X) and use it to meet the needs of the poor. Could/would such companies continue to exist under such circumstances? How much of an incentive is being rich to those who initiate, develop and sustain such companies? Would people continue to strive for profit if they knew personally they were only allowed to reach a certain financial level? Would they continue to build the company after they did reach that level?

    If, on the other hand, larger companies actually ceased to be; what would a sustainable socio-economic reality look like? Certainly people would need to work, invest and trade more locally. Would we see more local farms and fresher, healthier food? Would we see a re-emergence of seamstresses, potters and woodworkers? Perhaps communities would develop local energy plants using sources that are best suited for the area, e.g. solar, wind, water, etc.. The small business entrepeneur, e.g. the plumber, electrician, mechanic, corner store, etc., would probably thrive without competition from the larger, more efficient and thus cheaper big businesses. How important would efficiency be if profit was limited? It would certainly be a different world!

    What about things a community can’t produce for itself…electronics, cars, coffee :-)? Would the government have to make them or force someone to? Would we have to do without them? What about technological innovations? Would they end? Would people invent and develop for the sheer joy and interest of it?

    Anyway, just some thoughts on where our nation might go in the future…just trying to prepare my mind so I can embrace the change!!!

    Thanks for your thought-provoking newsletter Dr. Stieglitz.


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