Why Good Economic Data Won’t Make Us Feel Better : Policy: America’s competitive disadvantage is not so much its work force or business leadership as its antiquated political system.
Times are indeed troubling when good economic news is all but indistinguishable from bad. Interest rates are at record lows, the stock market run-up seemingly unending. Yet, even as traditional economic barom eters soar, U.S. companies, including IBM, General Motors, Apple Computer and American Airlines, are laying off employees at a rate more than 20% above 1991, the peak recession year. Forty-one states have higher unemployment rates today than they did a year ago, with the largest increases--well above 2%--in the supposedly booming economies of Nevada, Utah and New Mexico.
This enormous gap between the nation’s industrial reality and popular measures of its success is the product of a political system that has failed to adapt to the realities of a global, information-age economy. Despite the lofty strategic pretensions of Administration officials like Labor Secretary Robert Reich and Council of Economic Advisers chair Laura Tyson, President Bill Clinton’s economic plan is right out of the industrial Stone Age. It seeks lower interest rates through higher taxes and modest spending cuts, largely in defense, and forces major institutional and private investors to pour money into Wall Street stock and real-estate funds in search of higher yields.
Forty years ago, when U.S. industries were dominated by self-contained, domestic oligopolies and foreign competition was virtually non-existent, handing over billions of dollars to Wall Street and encouraging large companies, commercial real-estate portfolio managers and homeowners to refinance their debt might have provided some economic stimulus. But when financial and product markets are global, and when large firms increasingly outsource their manufacturing and service needs, such a strategy only leads to highly visible “successes” that are increasingly irrelevant, if not counterproductive, to solving the novel economic problems of the 1990s.
Our basic problem is that there is no guarantee the cash now pouring into Wall Street or freed up by cheap credit will actually be spent on productive investments in the country. In recent weeks, European companies have been among the most active new-debt issuers in U.S. financial markets, exporting America’s scarce capital to fund investments abroad. Homeowners frequently turn their refinancing savings into high-ticket imported items, keeping the nation’s trade deficit stubbornly high despite the weak dollar, and shifting the wealth intended to jump-start the economy to America’s primary competitors.
Even worse, as Wall Street managers bid up the price of blue-chip stocks, they actually increase the pressure on larger firms to improve their financial results through layoffs rather than productive growth. Faced with stagnant markets, the only way most giant companies can “create” new shareholder wealth is to cut overhead faster than their revenue decreases. Even in declining industries, like defense, companies that make aggressive layoffs are handsomely rewarded by Wall Street traders, generating the apparent paradox of booming financial markets in a time of burgeoning unemployment.
All this results from fundamental misapprehensions about the source of job growth and wealth creation in the new world economy. As nameplate firms throughout the world relentlessly scale back for financial and technical reasons, it is the smaller, specialized vendors of parts, design skills, management and marketing services, and labor on which they rely, that offer the real opportunities for economic success. Countries that adjust their trade, financial, training and technology policies to foster and sustain their domestic contractors and production networks in global competition will ultimately enhance the welfare of their citizens; those that cling to the strategies of the past inevitably decline.
Japan, for example, has not responded to its current recession by trying desperately to reflate the Nikkei stock index--which lost a staggering 60% of its value--and siphon away capital resources from regional and small-firm banks and producers through radical interest-rate cuts. Rather, modest measures to boost domestic demand have been coupled with continued efforts to keep financial and technical resources flowing to the nation’s unparalleled small- and mid-sized manufacturers, while the nation’s giant companies, and real-estate speculators, suffer the most substantial setbacks. Although the Nikkei remains nearly 40% below its pre-recession peak, and despite the skyrocketing value of the yen, Japan’s core manufacturing and technology companies continue to improve their skills, expand supply networks serving key U.S. and global industries, and sustain what is by far the lowest unemployment rate among advanced industrial countries.
Instead of trying to rebuild the economy with outmoded tools, America’s industrial and political leaders ought to be debating how U.S. international and domestic policies can spur the creation and nurturing of the specialized-product and service providers on which the country’s future depends. Yet, because the federal government is locked into representing the interests of the old economy, it repeatedly blocks the development of initiatives appropriate for the new.
A much more aggressive trade policy seeking technology, finance, outsourcing and market-access reciprocity with countries like Japan is essential if American product and service providers are to compete on an equal footing with their foreign counterparts. But many larger U.S. firms in the commercial aerospace and computer industries have been induced to contract for key components and subassemblies from overseas producers in exchange for foreign sales, and they repeatedly lobby against policies that would help U.S. suppliers.
At home, universally available health care is a crucial concern for people working in America’s highly volatile service and manufacturing supplier sectors. Yet, under current proposals, while big-company payrolls would be taxed at a higher rate than smaller firms, the overall cost of large-firm medical expenditures will be cut by close to 50%, while small company and individual costs will dramatically rise. Rather than have larger firms help finance the health-insurance needs of America’s future job and skill providers, the Clinton plan would perversely give away $30 billion a year to the very companies that are downsizing the fastest at the expense of growing domestic enterprises.
As long as U.S. policy-makers remain hostage to the past, they will continue to play to economic interests largely at odds to the welfare of their constituents. Indeed, the country’s competitive disadvantage today is not so much its work-force or business leadership as its antiquated political system. In that light, “reinventing government” has much less to do with improving the efficiency of existing public services than radically changing how Washington defines and achieves the nation’s most fundamental industrial objectives.
