VIEWPOINTS : Take the Money and Run : U.S. Firms Are Best at Going Out of Business

Every country has a comparative advantage--the thing it does best. The problem is to figure out where one’s comparative advantage lies. So among all of the things that America does, what does it do best?

The answer is very simple. What American firms do best is go out of business. When it comes to going out of business, they are the best in the world. No one goes out of business faster, with less cost or with less regret, than American firms.

Not too long ago, I was talking with some consultants in a strategic planning firm about situations where there are Japanese, European and American firms in an industry with excess capacity. They said they always tell their American clients to go out of business. If you wished to work for Japanese firms, you couldn’t recommend that they abandon an industry. It is just against the Japanese mind-set; they would look for a different consulting firm. They are willing to listen only to strategies for conquering an industry. In the game of economics, the Japanese only know how to play offense.

The Europeans are also uninterested in strategies for going out of business. They remind their consultants that their government regulations required them to hold onto their employees so long and made it so difficult to fire anyone or to close down any facility that it was simply too expensive to go out of business. No matter how much money they were losing in the industry, they would lose more money if they left it. They are only interested in advice about how one holds onto one’s existing market share. If necessary, the Europeans are willing to play defense forever in economics.

Given this reality--the Japanese won’t leave, the Europeans can’t leave--the consulting firm reports its intelligence to its American clients and recommends that they promptly abandon the industry. With offensive and defensive positions already taken, there is no room for American players. Usually this advice is taken without grumbling.

If you wished to design an economy that specialized in going out of business, you could not have designed a better one than the U.S. economy. America is the only country in the world where labor is genuinely a variable cost. Workers can be fired instantly with no severance pay. In fact, no large payments have to be made to labor if you want to quit a business.

On the capital side, demands for high rates of return on investment mean that American firms fall below their capital hurdle rates before foreign firms do. In other words, Americans will quit investing in new facilities while the Europeans and Japanese still are investing. This leaves Americans with older, more fully depreciated capital equipment. The result is fewer unrecovered capital costs when one abandons a production facility. The capital costs of leaving an industry are usually much less for Americans.

Having a lot more recessions and sharper ups and downs in economic activity means that American managers are more skilled in cutting back. They have done it many times before. When it comes to the learning curve for how one goes out of business, Americans have more experience than all of the rest of the world combined.

Mergers, leveraged buyouts and hostile takeovers mean that there is a ready market for getting out of business. Industrial fire sales are common and the necessary markets well-developed.

Politics never interfere. General Electric is selling its consumer electronics operations to the French with no fuss. In contrast, the proposed sale of Land Rover to the Americans (General Motors, to be specific) created a national political crisis in Britain and eventually was blocked in accordance with public sentiment.

In fact, if Americans do not get out of a business on their own, they are likely to be taken over by those who specialize in throwing companies out of businesses. If the takeover artists throw your firm out of a business before you do, however, they are apt to throw you out with the business. “Get out before you are thrown out” might be the motto of American managers.

In America, to go out of business is not the end of the line for one’s career as it usually is abroad. A bright new future dawns. Using hostile takeovers, you can always imagine going into exciting new businesses. Or even better, you can become a hostile takeover specialist with no intention of ever running anything for long. If you join America’s financial wrecking industry, you are joining America’s most profitable industry. In what other country does the demolition industry pay more than the construction industry?

The system works beautifully. When the dollar went up from 1981 to 1985, American firms quickly and easily withdrew from foreign markets and quickly ceded market share to their foreign competitors at home. Small changes in the value of the dollar had a big impact on the balance of exports and imports. Imports soared and exports fell.

In contrast, now that the yen and the deutsche mark are rising, the system of flexible exchange rates isn’t working at all. Foreign firms are refusing to raise prices and cede market share to American firms. Leaving oil aside, import prices have risen very little relative to domestic American prices despite a 35% fall in the real value of the dollar. To stay in business, foreign firms are reducing profit (Americans never do that), cutting wages and bonuses (completely un-American), and investing to improve productivity and cut costs (only madmen invest in industries with excess capacity--it’s a basic principle taught in every business school).

But this means that it takes a very big rise in the value of the yen or mark to eliminate trade imbalances. This reduces the effectiveness of the current system of flexible exchange rates. Rates have to change by such large amounts that they threaten to disrupt the world’s trading system. If foreign firms were as good at going out of business as American firms, none of these difficulties would exist. Foreigners would have long since eliminated their trade surpluses, and with them America’s trade deficit.

With the invasion of superior foreign products, Americans are starting to have an inferiority complex. They shouldn’t. When it comes to going out of business, Americans are the very best.