Wednesday, October 27, 2010

Achieving National Economic Health: More on a United States Turnaround

Yesterday I wrote a post considering the United States as a turnaround candidate. ( My fourth point in the post was that a turnaround needed to begin with a change in culture and that the change in culture had to begin at the top and everything that the leader did or said should reflect that change in leadership.

A change in culture, however, cannot be achieved overnight. In doing turnarounds one must understand that it takes a long time to complete the effort and people can get discouraged and frustrated and anxious during this time because one can go a through long stretches without seeing much improvement.

A turnaround can be compared with a person returning to health after a serious illness, an illness that cannot just be cured over night. Just to take a simple case, let’s assume that the doctor tells the sick patient that to return to health the patient must change his or her lifestyle, lose a substantial amount of weight, and stop living on the edge.

Changing one’s lifestyle does not mean that a successful return to health is based on “short-term” efforts to correct a particular situation with respect to one’s current way of living.

Losing a substantial amount of weight under these circumstances would imply that the weight loss must be maintained and be consistent with the new lifestyle so that the weight, once lost, is not put back on.

And, if one is to “stop living on the edge,” then that person must stop pushing and pushing and pushing and jumping from one extreme situation to another.

Obviously, I would like to compare this picture with the larger problem of bringing the United States economy back to health. Furthermore, I would like to argue that the problems of the United States economy are not transitory in nature and require a substantial amount of time to heal. The problems of the United States economy require a change in lifestyle, a disciplined approach to conducting business going forward, and a need to stop living “on the edge.”

In the first place, the United States has arrived at the place it is in by concentrating on “short term” results. I heard Fareed Zakaria speaking on the Charlie Rose show the other night. Zakaria made the statement that maybe one of the deficiencies of democracy is that democracy seems to encourage behavior focused on the “short run.”

I have commented on the fact that back in the 1970s and 1980s politicians focused upon a four-year election cycle because we have a presidential election every four years. Richard Nixon froze wages and prices and took the United States off the gold standard in August 1971 so that he could begin to re-stimulate the economy so as to get re-elected in 1972.

Now, the time-horizon of the politician has been truncated to two years because the mid-term elections have become so important that economic policies must be aimed at getting people re-elected no matter how much chaos is created in the meantime.

Zakaria stated that all that is considered in these elections are current problems and that there is no constituency that represents those people that would be facing problems down the road. But, of course, this plays right into the way that the quote by John Maynard Keynes is interpreted: “In the long run we are all dead.” Focus on the current problems and let people in the future be concerned about dealing with the problems we create for these future generations.

I have written about some of these longer term problems. ( Because the leaders of the United States have been focused on the short run in order to get re-elected they have created policies and programs that have resulted in long term outcomes that we now have to deal with. In this respect, “maybe things have changed” and this requires the leadership to change their economic policies to deal with current problems, not with the problems that they addressed in the past.

By sticking with out-dated policies they continue to make the problem worse and contribute to the reality that keeping on the same track will only make it more difficult to regain full health going forward.

Other information on this situation has been attracting our attention recently. Some of this work has been summarized by Tom Friedman in the New York Times this morning. ( Friedman quotes a recently released report of the National Academies called “Rising Above the Gathering Storm Revisited: Rapidly Approaching Category 5”. The subtitle, Friedman writes comes from “The committee’s conclusion…that ‘in spite of the efforts of both those in government and the private sector, the outlook for America to compete for quality jobs has further deteriorated over the past five years.’”

By focusing on the short run goals over the past fifty years, America has fallen from “Number 1” to a less lofty position in the world. And, we are currently seeing the consequences of this decline almost daily. (See and

Then Friedman quotes some of the discouraging results of the study: The United States ranks “sixth in global innovation-based competitiveness, but 40th in rate of change over the last decade; 11th among industrialized nations in the fraction of 25- to 34-year olds who have graduated from high school; 16th in college completion rate; 22nd in broadband Internet access; 24th in life expectancy at birth; 27th among developed nations in the proportion of college students receiving degrees in science or engineering; 48th in quality of K-12 math and science education; and 29th in the number of mobile phones per 100 people.”

You can’t keep America competitive by trying to put people back to work in the jobs they were just laid off from; you can’t keep America competitive by stimulating businesses to continue to use their existing capital base; and you can’t keep America competitive by encouraging them to take advantage of inflation (as in housing and cars and other consumer-based capital goods) rather than by working to be productive and also to become more productive in the future.

Yet, these are all the things that the United States government has been trying to achieve over the past fifty years: putting people back to work in the same jobs they were laid off from; keeping businesses using their same existing capital base; and by encouraging people to leverage up their debt loads and take on more and more risk within an inflationary environment with bubbles popping up here and there.

My prediction is that the economic environment we would like to see is a long way off. “Quantitative Easing” on the part of the Federal Reserve System and further fiscal stimulus on the part of the federal government is just more of the same old medicine that has been tried for fifty years or so. It is an attempt to achieve a “short run” solution.

The sad thing is that more of “the same old medicine” will just exacerbate the longer run problems mentioned by Friedman, the National Academies, and myself in the above cited work. Unfortunately, we are now living in the “long run” as seen by the leaders of the American government over the last fifty years. Are we going to pass this “long run” on to others in a more devastating “long run” of the future?

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