Geoff Colvin's Blog, page 10
April 6, 2011
Wanted in Japan: A rebirth of innovation
Japan's great innovators rose from the depths of World War II. After 20 years of stagnation, will this crisis bring back the Japanese entrepreneur?
FORTUNE -- There is reason to believe that some kind of material good might eventually result from Japan's disaster, and it's confirmed by the way this thirty-something Japanese manager is responding to it: "I have been a 'risk-averse shosha-man [salary-man]' for 14 years, but I decided to quit my big company job to start my new business this June," he emailed six days after the earthquake. He had made the decision before the catastrophe (and doesn't want to be identified because he hasn't yet told his employer). "After the quake, however, what do you think happened to my mentality? Stronger desire to take the risk to SAVE the nation. Japanese people do a bigger job when they face crisis. My venture will surely start in June, despite the much worse economic situation for a new business to be started."For anyone who thinks it's callous to talk about the economic effects of a staggering human tragedy, this man -- motivated by a deep desire to help his fellow citizens -- shows why it isn't. If he turns out to be typical, if thousands more decide now is the moment to take bigger risks, then Japan just might get back on an upward path.
It could happen. History shows that an upsurge in entrepreneurialism would be normal in these circumstances. Yet Japan's culture offers plenty of reasons for doubt. And if the risk-taking flame dies back down, then even the supposed general salutary economic effects of disaster won't likely come through in this case. This could be just one big, unredeemed horror.Hope lives because swelling entrepreneurialism is precisely what's needed to fix Japan's overwhelming economic reality: 20 years of stagnation. It's a remarkable problem for a country that once revolutionized major industries -- autos, steel, electronics, among many others -- and in the 1960s grew around 10% a year. What changed? The great innovators of the post-war years -- Toyota (TM), Nippon Steel, Sony (SNE), for example -- became huge and successful, losing their propensity to create disruptive new technologies.Stagnation nationThat's typical, as Harvard Business School professor Clayton Christensen has shown. What's unusual about Japan is that it "played the disruptive game once," as he says, but couldn't do it again. New generations of disruptive companies haven't appeared. A culture that frowns on employees leaving their jobs, a financing system dominated by banks rather than debt markets, and a government with a penchant for directing technology investment -- all have combined to discourage new innovators from creating fast-growing new industries. Result: stagnation.Which raises the important question of why the disruptive cycle happened that one time. The answer is that it rose from the desperation of World War II. "Many of the societies that have been hyper-entrepreneurial for extended periods, such as Israel, Taiwan, and Ireland, have had two characteristics: severe adversity and broad-based human capital -- educated, intelligent masses," says Babson professor Daniel Isenberg, an entrepreneurship authority with long experience in Japan. "Look at Japan after World War II, and you see the same conditions."That pattern reflects human nature. As behavioral economists have pointed out, we all see greater value in reducing pain than in gaining pleasure. For that reason, "the biggest opportunities come with addressing acute needs: war, hunger, disease, and disaster," says Isenberg. "People in general become more risk-taking when they have big, threatening problems, and smart and educated people like the Japanese become more innovative as well."Thus the possibility that this disaster might spark a remedy for Japan's most basic economic problem. But if that doesn't happen, it's unlikely the country will realize the often mentioned but poorly understood benefits that often seem to follow disasters. The whole notion of a post-disaster economic gain is suspect, based on squishy accounting. A company must record a charge when major assets are destroyed, but a country does not. The loss of capital isn't included in GDP, but the money spent to replace it is, producing an apparent but often phony uptick.
Economics of earthquakes
Accounting aside, Japan's disaster may be especially costly because earthquakes are different. Over time, countries with frequent climatic disasters such as hurricanes tend to achieve higher economic growth than other countries, says research by Mark Skidmore of Michigan State University and Hideki Toya of Nagoya City University, but not because the disasters lead directly to growth. Weather disasters being somewhat predictable, people can protect themselves, so such disasters tend to wipe out property more than people. As a result, residents in those countries invest relatively less in physical capital and relatively more in human capital, a recipe for economic success over the past century. But earthquakes aren't predictable; they wipe out terrible quantities of human capital, as this one did. The researchers found no evidence of economic benefit.This disaster probably won't push Japan's government over the fiscal edge. The towering national debt, at 225% of GDP, is by far the highest of any developed nation and second only to Zimbabwe's worldwide. If the government now spends, say, 1.2% of GDP on reconstruction, twice the proportion spent on the 1995 Kobe earthquake, the response would still total less than half its stimulus package in the financial crisis. Even Japan's straitened treasury can probably handle that.The likeliest outcome is that Japan will come through this catastrophe with impressive speed, but nothing larger will change. Perhaps no country on earth is better equipped to absorb this blow. "The Japanese can emerge from this strong," says Michigan State's Skidmore. "They have this undergirding, this institutional and social framework that's really important." The danger is that this impressive framework, built to support stability and order, may form a solid wall around Japan's economic status quo.But still -- there's that shosha-man and the many undoubtedly like him who yearn to try their idea for something new, unusual, and possibly disruptive. They've been stifled for decades. The trauma of this moment could release them. These are the circumstances when such turning points arrive.It's definitely a long shot. For now, it's only a hope. But it is, blessedly, a realistic hope.
First Published: April 6, 2011: 12:24 PM ET
FORTUNE -- There is reason to believe that some kind of material good might eventually result from Japan's disaster, and it's confirmed by the way this thirty-something Japanese manager is responding to it: "I have been a 'risk-averse shosha-man [salary-man]' for 14 years, but I decided to quit my big company job to start my new business this June," he emailed six days after the earthquake. He had made the decision before the catastrophe (and doesn't want to be identified because he hasn't yet told his employer). "After the quake, however, what do you think happened to my mentality? Stronger desire to take the risk to SAVE the nation. Japanese people do a bigger job when they face crisis. My venture will surely start in June, despite the much worse economic situation for a new business to be started."For anyone who thinks it's callous to talk about the economic effects of a staggering human tragedy, this man -- motivated by a deep desire to help his fellow citizens -- shows why it isn't. If he turns out to be typical, if thousands more decide now is the moment to take bigger risks, then Japan just might get back on an upward path.
It could happen. History shows that an upsurge in entrepreneurialism would be normal in these circumstances. Yet Japan's culture offers plenty of reasons for doubt. And if the risk-taking flame dies back down, then even the supposed general salutary economic effects of disaster won't likely come through in this case. This could be just one big, unredeemed horror.Hope lives because swelling entrepreneurialism is precisely what's needed to fix Japan's overwhelming economic reality: 20 years of stagnation. It's a remarkable problem for a country that once revolutionized major industries -- autos, steel, electronics, among many others -- and in the 1960s grew around 10% a year. What changed? The great innovators of the post-war years -- Toyota (TM), Nippon Steel, Sony (SNE), for example -- became huge and successful, losing their propensity to create disruptive new technologies.Stagnation nationThat's typical, as Harvard Business School professor Clayton Christensen has shown. What's unusual about Japan is that it "played the disruptive game once," as he says, but couldn't do it again. New generations of disruptive companies haven't appeared. A culture that frowns on employees leaving their jobs, a financing system dominated by banks rather than debt markets, and a government with a penchant for directing technology investment -- all have combined to discourage new innovators from creating fast-growing new industries. Result: stagnation.Which raises the important question of why the disruptive cycle happened that one time. The answer is that it rose from the desperation of World War II. "Many of the societies that have been hyper-entrepreneurial for extended periods, such as Israel, Taiwan, and Ireland, have had two characteristics: severe adversity and broad-based human capital -- educated, intelligent masses," says Babson professor Daniel Isenberg, an entrepreneurship authority with long experience in Japan. "Look at Japan after World War II, and you see the same conditions."That pattern reflects human nature. As behavioral economists have pointed out, we all see greater value in reducing pain than in gaining pleasure. For that reason, "the biggest opportunities come with addressing acute needs: war, hunger, disease, and disaster," says Isenberg. "People in general become more risk-taking when they have big, threatening problems, and smart and educated people like the Japanese become more innovative as well."Thus the possibility that this disaster might spark a remedy for Japan's most basic economic problem. But if that doesn't happen, it's unlikely the country will realize the often mentioned but poorly understood benefits that often seem to follow disasters. The whole notion of a post-disaster economic gain is suspect, based on squishy accounting. A company must record a charge when major assets are destroyed, but a country does not. The loss of capital isn't included in GDP, but the money spent to replace it is, producing an apparent but often phony uptick.
Economics of earthquakes
Accounting aside, Japan's disaster may be especially costly because earthquakes are different. Over time, countries with frequent climatic disasters such as hurricanes tend to achieve higher economic growth than other countries, says research by Mark Skidmore of Michigan State University and Hideki Toya of Nagoya City University, but not because the disasters lead directly to growth. Weather disasters being somewhat predictable, people can protect themselves, so such disasters tend to wipe out property more than people. As a result, residents in those countries invest relatively less in physical capital and relatively more in human capital, a recipe for economic success over the past century. But earthquakes aren't predictable; they wipe out terrible quantities of human capital, as this one did. The researchers found no evidence of economic benefit.This disaster probably won't push Japan's government over the fiscal edge. The towering national debt, at 225% of GDP, is by far the highest of any developed nation and second only to Zimbabwe's worldwide. If the government now spends, say, 1.2% of GDP on reconstruction, twice the proportion spent on the 1995 Kobe earthquake, the response would still total less than half its stimulus package in the financial crisis. Even Japan's straitened treasury can probably handle that.The likeliest outcome is that Japan will come through this catastrophe with impressive speed, but nothing larger will change. Perhaps no country on earth is better equipped to absorb this blow. "The Japanese can emerge from this strong," says Michigan State's Skidmore. "They have this undergirding, this institutional and social framework that's really important." The danger is that this impressive framework, built to support stability and order, may form a solid wall around Japan's economic status quo.But still -- there's that shosha-man and the many undoubtedly like him who yearn to try their idea for something new, unusual, and possibly disruptive. They've been stifled for decades. The trauma of this moment could release them. These are the circumstances when such turning points arrive.It's definitely a long shot. For now, it's only a hope. But it is, blessedly, a realistic hope.
First Published: April 6, 2011: 12:24 PM ET
February 17, 2011
A New American Exceptionalism
China will overtake us economically, so if we're not top dog anymore, how will we deliver greatness?FORTUNE -- What makes America great?That debate has been more heated than usual because of the volatile election results of 2010 (and 2008), Tea Partiers, the recession, and the financial crisis. But it's heating up for another reason as well -- a spreading realization that the widely held current answer to the question no longer makes sense.
The conventional case for U.S. greatness has long rested on our economic success, and understandably so. We're the world's richest nation by far, where the ordinary citizen achieves a living standard unrivaled in any other country of significant size. The problem, the source of our growing identity crisis, is the daily evidence that we're approaching the end of our time at the top. China's economy keeps growing 10% a year, while ours is limping; China, not the U.S., seizes the lead in tomorrow's industries, such as alternative energy; China rolls out a new stealth fighter jet, while we cancel military programs.
A Gallup poll last year found that just 17% of Americans agree that the U.S. "is No. 1 in the world economically." The other 83% are wrong -- our GDP is still No. 1 by a mile -- but only their timing is off. GDP is essentially population times productivity, so it's simple math that China will overtake us, perhaps within a decade. So when we're not the world's top economy, what will make us great? We can learn from our experience going through the opposite identity crisis 70 years ago. In February 1941, Henry Luce published in Life his essay "The American Century," which Luce biographer Alan Brinkley calls "the most influential article he would ever publish." The crisis then was America's reluctance to accept that it had become, as Luce said, "the most powerful and vital nation in the world." It had to reject isolationism and lead the allies through World War II. That began our current view of what makes the U.S. exceptional.
We must move beyond self-esteem focused intensely on output. Andrew L. Yarrow, senior policy analyst at the nonpartisan Independent Sector, explains this persuasively in a fascinating new book, Measuring America: How Economic Growth Came to Define American Greatness in the Late Twentieth Century. "The United States after World War II," he told me, "increasingly saw itself as the world's greatest because of its measurably booming economy rather than its political ideals, its natural beauty, or its people."
A major reason for this was the Cold War. When Soviet leader Nikita Khrushchev said, "We will bury you," he meant it economically. We needed to show that our system was better for the average citizen than communism, and making that case was not always a slam-dunk. So besides discussing democracy and freedom, we taught our kids that America's great achievement was producing widely dispersed wealth on an unmatched scale. When that audacious claim proved true, we didn't move on to a new concept of greatness; our ideas seemed confirmed. "The American Century" was about becoming the world's largest economy. Now we must come to terms with not being that, yet still being great. In a December poll, 80% of Americans agreed that "the U.S. has a unique character that makes it the greatest country in the world," but a large majority of them also believed "we're at risk of losing it." We need a powerful new concept of American greatness that doesn't rely on GDP. For most of our history we saw our unique character arising from the ideals of freedom, democracy, and openness, notions that were feeling shopworn but now gain new vitality as a pointed contrast to China. Shifting to a more economically driven concept was seductively easy. Shifting back will be harder. Whether we can do it -- rather than resenting and denying our changed role in the world -- will be a new test of greatness.
First Published: February 17, 2011: 5:25 AM ET
The conventional case for U.S. greatness has long rested on our economic success, and understandably so. We're the world's richest nation by far, where the ordinary citizen achieves a living standard unrivaled in any other country of significant size. The problem, the source of our growing identity crisis, is the daily evidence that we're approaching the end of our time at the top. China's economy keeps growing 10% a year, while ours is limping; China, not the U.S., seizes the lead in tomorrow's industries, such as alternative energy; China rolls out a new stealth fighter jet, while we cancel military programs.
A Gallup poll last year found that just 17% of Americans agree that the U.S. "is No. 1 in the world economically." The other 83% are wrong -- our GDP is still No. 1 by a mile -- but only their timing is off. GDP is essentially population times productivity, so it's simple math that China will overtake us, perhaps within a decade. So when we're not the world's top economy, what will make us great? We can learn from our experience going through the opposite identity crisis 70 years ago. In February 1941, Henry Luce published in Life his essay "The American Century," which Luce biographer Alan Brinkley calls "the most influential article he would ever publish." The crisis then was America's reluctance to accept that it had become, as Luce said, "the most powerful and vital nation in the world." It had to reject isolationism and lead the allies through World War II. That began our current view of what makes the U.S. exceptional.
We must move beyond self-esteem focused intensely on output. Andrew L. Yarrow, senior policy analyst at the nonpartisan Independent Sector, explains this persuasively in a fascinating new book, Measuring America: How Economic Growth Came to Define American Greatness in the Late Twentieth Century. "The United States after World War II," he told me, "increasingly saw itself as the world's greatest because of its measurably booming economy rather than its political ideals, its natural beauty, or its people."
A major reason for this was the Cold War. When Soviet leader Nikita Khrushchev said, "We will bury you," he meant it economically. We needed to show that our system was better for the average citizen than communism, and making that case was not always a slam-dunk. So besides discussing democracy and freedom, we taught our kids that America's great achievement was producing widely dispersed wealth on an unmatched scale. When that audacious claim proved true, we didn't move on to a new concept of greatness; our ideas seemed confirmed. "The American Century" was about becoming the world's largest economy. Now we must come to terms with not being that, yet still being great. In a December poll, 80% of Americans agreed that "the U.S. has a unique character that makes it the greatest country in the world," but a large majority of them also believed "we're at risk of losing it." We need a powerful new concept of American greatness that doesn't rely on GDP. For most of our history we saw our unique character arising from the ideals of freedom, democracy, and openness, notions that were feeling shopworn but now gain new vitality as a pointed contrast to China. Shifting to a more economically driven concept was seductively easy. Shifting back will be harder. Whether we can do it -- rather than resenting and denying our changed role in the world -- will be a new test of greatness.
First Published: February 17, 2011: 5:25 AM ET
January 5, 2011
Note to Congress: Don't blow this historic chance
Congress members: There's no time for pleasantries at the start of this legislative session. If you want to serve your country, here's a three-item to-do list.FORTUNE -- Dear 112th Congress: Congratulations and so forth, but we don't have time for pleasantries. I'm afraid I have bad news. Do you recall all those charts you've seen showing Medicare costs, Social Security costs, federal interest payments, and the national debt rising steadily for years and then suddenly taking off like a fighter jet? (If not, you can see them in the Treasury's latest Financial Report of the U.S. Government.) Well, the jet's barreling down the runway. Things have been getting fiscally bad for a long time. They're about to get much worse. A new Moody's report says that America could lose its triple-A credit rating on your watch. You've got to decide what to do about it.
Fortunately, what needs doing is perfectly clear. If you want to serve your country -- and your kids, grandkids, and great-grandkids -- here's a three-item to-do list:
Start fixing Medicare
Nothing else you could do approaches the importance of this action. Medicare is overwhelmingly the largest component of future deficits until about 2050, when interest on our swelling national debt becomes an even larger component. You'll need to postpone eligibility for future beneficiaries, means-test them, and stop pretending you can reduce costs through Canute-like decrees to control prices; just look at the bogus mandated cuts in physician fees, which your predecessors triumphantly enacted in 1997 but have overridden every year since 2003 because otherwise too many doctors would stop treating Medicare patients.
It's true that right now is not an easy time to go after Medicare, with the future of Obama's health care reform uncertain. But every year from here on will be an even worse time, because the changes will have to start sooner and will be more frantically resisted. So get going.
Tackle the tax code
Your goal is not to extract more money from taxpayers but to spur economic growth. Everyone agrees that our 3.7-million-word tax code is an abomination that encourages unproductive tax avoidance and burdens our economy with massive compliance costs. The beast has needed slaying for ages. Now, in the space of a few days, the bipartisan debt reduction panel has recommended a total overhaul, and President Obama has said he's ready. Current tax policy is temporary, scheduled to change in two years. This is your best chance.
Don't try to write a code that pulls more of GDP from the private sector into the U.S. Treasury. Even the Treasury's projections acknowledge that getting more than 19% or 20% seems to be impossible. Focus instead on wiping out thousands of deductions, exemptions, and credits, then lowering tax rates. Let businesses and individuals base their economic decisions on economics. What a concept.
Welcome the best and brightest
The reality of America's future is that we're not going to be the world's largest economy for much longer. China's ascent to the top spot is only a matter of time. That needn't be a problem for us, but it means we can no longer rely on our economy's massive size to attract the planet's smartest, most ambitious dreamers and doers. We need a ton of growth to get us through our current mess, and plenty of prospective immigrants would still love to help. Let's make it easy for them. For starters, adopt venture capitalist John Doerr's proposal: Every noncitizen who earns an advanced degree at a U.S. university should have a green card stapled to his or her diploma. If doing all that seems like too much, you do have another option: Do nothing. We might be able to muddle through until the next election. But history will remember the situation this Congress faced when it convened, and how it responded. You can be the Congress that ignored reality and played senseless partisan games, or the Congress that turned the nation in a better direction. It's your choice: You can be the Nero Congress -- or you can be the hero Congress.
First Published: January 5, 2011: 11:31 AM ET
Fortunately, what needs doing is perfectly clear. If you want to serve your country -- and your kids, grandkids, and great-grandkids -- here's a three-item to-do list:
Start fixing Medicare
Nothing else you could do approaches the importance of this action. Medicare is overwhelmingly the largest component of future deficits until about 2050, when interest on our swelling national debt becomes an even larger component. You'll need to postpone eligibility for future beneficiaries, means-test them, and stop pretending you can reduce costs through Canute-like decrees to control prices; just look at the bogus mandated cuts in physician fees, which your predecessors triumphantly enacted in 1997 but have overridden every year since 2003 because otherwise too many doctors would stop treating Medicare patients.
It's true that right now is not an easy time to go after Medicare, with the future of Obama's health care reform uncertain. But every year from here on will be an even worse time, because the changes will have to start sooner and will be more frantically resisted. So get going.
Tackle the tax code
Your goal is not to extract more money from taxpayers but to spur economic growth. Everyone agrees that our 3.7-million-word tax code is an abomination that encourages unproductive tax avoidance and burdens our economy with massive compliance costs. The beast has needed slaying for ages. Now, in the space of a few days, the bipartisan debt reduction panel has recommended a total overhaul, and President Obama has said he's ready. Current tax policy is temporary, scheduled to change in two years. This is your best chance.
Don't try to write a code that pulls more of GDP from the private sector into the U.S. Treasury. Even the Treasury's projections acknowledge that getting more than 19% or 20% seems to be impossible. Focus instead on wiping out thousands of deductions, exemptions, and credits, then lowering tax rates. Let businesses and individuals base their economic decisions on economics. What a concept.
Welcome the best and brightest
The reality of America's future is that we're not going to be the world's largest economy for much longer. China's ascent to the top spot is only a matter of time. That needn't be a problem for us, but it means we can no longer rely on our economy's massive size to attract the planet's smartest, most ambitious dreamers and doers. We need a ton of growth to get us through our current mess, and plenty of prospective immigrants would still love to help. Let's make it easy for them. For starters, adopt venture capitalist John Doerr's proposal: Every noncitizen who earns an advanced degree at a U.S. university should have a green card stapled to his or her diploma. If doing all that seems like too much, you do have another option: Do nothing. We might be able to muddle through until the next election. But history will remember the situation this Congress faced when it convened, and how it responded. You can be the Congress that ignored reality and played senseless partisan games, or the Congress that turned the nation in a better direction. It's your choice: You can be the Nero Congress -- or you can be the hero Congress.
First Published: January 5, 2011: 11:31 AM ET
November 19, 2010
Is bipartisan debt-reduction for real?
Recommendations from a panel of lawmakers are sure to change with the power shift in congress. Here are 4 easy ways to find out if it'll work.FORTUNE -- The Republicans' midterm surge has given the federal debt-reduction commission -- whose recommendations are due Dec. 1 -- a chance to stand up and be counted. The panel is bipartisan, but as long as Democrats were able to have their way ultimately in both houses of Congress, Republican members had little clout. Now that the balance of power has shifted, the ideas of the panel's deficit hawks, such as Rep. Paul Ryan (R-Wis.), may get a bit more respect. Co-chairs Erskine Bowles (chief of staff for Bill Clinton) and Alan Simpson (former GOP senator from Wyoming) have offered a proposal, but it's only a draft. We'll know the commission blew its opportunity ......if it loudly trumpets how it's meeting its mandated target for 2015. The commission was given a bogus goal: Show how "to balance the budget, excluding interest payment on the debt, by 2015," since that would "stabilize the debt-to-GDP ratio at an acceptable level once the economy recovers." No, it wouldn't, as retiring Sen. Judd Gregg (R-N.H.) has pointed out and as common sense confirms: The deficit would still be compounding at the rate of interest on the debt (which would probably be greater than the rate of GDP growth), plus other technical reasons Gregg has identified. In addition, the projected 2015 deficit is based on a Congressional Budget Office forecast that shows real annual economic growth at a knockout 4.1% for 2012, 2013, and 2014. If that doesn't happen, then the panel's proposed actions would fail to achieve even their inadequate purpose.
...if it doesn't hit Medicare head-on. Besides its 2015 assignment, the panel has another, more important job: Recommend policies "to achieve fiscal sustainability over the long run." That goal cannot be reached without significantly cutting back Medicare. Everyone on the panel knows it. The danger is that the panel won't have the stomach to charge back at that issue so soon after the Obamacare battle. "There is health care fatigue," commissioner Alice Rivlin told the New York Times. Watch out if the panel tries to mask its failure by playing up proposed fixes to Social Security or cuts in defense. Those changes are important and must also be made. But without a proposed Medicare solution, the panel hasn't done its job.
...if it even mentions reliance on the Medicare and Social Security trust funds. The panel might try to soothe worried citizens with a reassurance that we still have time -- the Medicare Part A trust fund won't be exhausted until 2029, and the Social Security trust fund not until 2037. Yet every commissioner knows that's nonsense. Those trust funds are invested in Treasury securities; they're just more government debt. Medicare and Social Security start to bite not when their trust funds run out but when the programs go cash-flow negative. For Social Security that happens this year; for Medicare it was last year. We do not still have time.
... if only bland, vague proposals can win the backing of at least 14 of the 18 commissioners. A presidential commission's only hope of true influence is to make substantive recommendations that are strongly bipartisan. On this panel that means getting at least 14 votes -- all of one party's members plus more than half of the other's. Both parties' leaders in Congress have said they would take up any proposals receiving at least that much support. So the commission holds at least a tiny chance of serving its purpose, giving political cover for meaningful action in Congress. But if its widely backed proposals are weak -- or even worse, if the only strong proposals are in some kind of minority report -- there's no chance.Despite all those warnings, there's reason for hope. The panel's members are serious budget wonks who understand the urgency. They're also veterans who know what will happen if they blow this chance. The two parties in Congress will squabble endlessly and won't be brought together on this issue except by that one tried-and-true motivator of real bipartisanship, a terrible crisis. In this case, it's already on the way.
First Published: November 19, 2010: 5:43 AM ET
...if it doesn't hit Medicare head-on. Besides its 2015 assignment, the panel has another, more important job: Recommend policies "to achieve fiscal sustainability over the long run." That goal cannot be reached without significantly cutting back Medicare. Everyone on the panel knows it. The danger is that the panel won't have the stomach to charge back at that issue so soon after the Obamacare battle. "There is health care fatigue," commissioner Alice Rivlin told the New York Times. Watch out if the panel tries to mask its failure by playing up proposed fixes to Social Security or cuts in defense. Those changes are important and must also be made. But without a proposed Medicare solution, the panel hasn't done its job.
...if it even mentions reliance on the Medicare and Social Security trust funds. The panel might try to soothe worried citizens with a reassurance that we still have time -- the Medicare Part A trust fund won't be exhausted until 2029, and the Social Security trust fund not until 2037. Yet every commissioner knows that's nonsense. Those trust funds are invested in Treasury securities; they're just more government debt. Medicare and Social Security start to bite not when their trust funds run out but when the programs go cash-flow negative. For Social Security that happens this year; for Medicare it was last year. We do not still have time.
... if only bland, vague proposals can win the backing of at least 14 of the 18 commissioners. A presidential commission's only hope of true influence is to make substantive recommendations that are strongly bipartisan. On this panel that means getting at least 14 votes -- all of one party's members plus more than half of the other's. Both parties' leaders in Congress have said they would take up any proposals receiving at least that much support. So the commission holds at least a tiny chance of serving its purpose, giving political cover for meaningful action in Congress. But if its widely backed proposals are weak -- or even worse, if the only strong proposals are in some kind of minority report -- there's no chance.Despite all those warnings, there's reason for hope. The panel's members are serious budget wonks who understand the urgency. They're also veterans who know what will happen if they blow this chance. The two parties in Congress will squabble endlessly and won't be brought together on this issue except by that one tried-and-true motivator of real bipartisanship, a terrible crisis. In this case, it's already on the way.
First Published: November 19, 2010: 5:43 AM ET
November 2, 2010
As Europe cuts, America spends
It's the ultimate economic experiment. Europe is tightening its belt while the U.S. is betting on stimulus. Someone's got to be right - and someone's got to be wrong.FORTUNE -- Everybody loves a fight. So I'm delighted that we're about to witness a heavyweight title bout between two of the most important ideas that can shape our material lives. The vital question: What's the best way to grow after a bad recession? We in the U.S. are betting heavily on one popular strategy, while Britain and the Euro zone are backing exactly the opposite approach. Rarely do we see such stark conflict in fundamental economic policies on a mammoth scale. The results of this natural experiment will be highly valuable because they'll teach us so much. But they will also be very bad news for one side or the other. The New World approach, billed as Keynesian, is for the government to pour hundreds of billions of borrowed dollars into the economy to stimulate demand. Companies will hire more, consumers will spend more, and the wheels will resume turning. Then, in future years, the government can reduce the big deficits it has created. As icing on the cake, that stimulus spending can be focused on infrastructure improvements that will make the nation more competitive for decades to come. That's why the U.S. has run trillion-dollar deficits for two years in a row, and why the administration wants still more stimulus spending.
The Old World approach, called "consolidation" by its proponents, holds that people are far likelier to spend and invest in a country that's working to reduce its deficit right now, even though near-term growth may be slow or non-existent. They figure such a country is less apt to raise future taxes or to inflate its currency to ease the pain of repaying debt. That's why 35 of Britain's top business leaders recently endorsed British Prime Minister David Cameron's plan to abolish 192 government agencies and cut the budgets of major departments by 20% to 25%. "Addressing the debt problem in a decisive way will improve business," they say in an open letter. European Central Bank president Jean-Claude Trichet, consolidation's staunchest advocate, says it's good "not because it is an elementary recommendation to care for your sons and daughters, but because it is good for confidence, consumption, and investment today." In theory, the New World policy makes some sense when the economy is still fragile, as America's is. But it cannot work in practice for at least three reasons. People don't trust Washington to reduce the deficit two years from now. Putting off the pain until tomorrow never works, because in Washington, tomorrow never comes. People don't believe that the administration's purported future deficit reductions are real, such as the claim that the new health care reform law will reduce the deficit. People don't trust Congress to spend stimulus dollars on worthwhile infrastructure projects rather than on useless pork. Why? Google "John Murtha airport" for one example. I fear that one result of the U.S. strategy will be little faith in America's fiscal future. Just as confidence begets more confidence, lack of it becomes a vicious cycle. As people lose confidence in a country's financial strength, they take their investments and innovations elsewhere, worsening the country's plight, driving more business away, and so on. New figures show that as U.S. companies earn impressive profits, they're stockpiling cash rather than building new U.S. operations or hiring more U.S. workers.
The opposing sides in this battle have a tough time debating each other because they have deeply different views of human nature. The New World approach regards people more as economic beings whose macro-behavior can be described with equations. The Old World approach regards people more as psychological beings whose individual behavior can be understood but not easily charted. When we have a winner, the losing side will rationalize the results, saying they don't prove much, because the two situations were different going in, and that with a little bit of tweaking, their strategy would have prevailed. We should resolve to cut through the inevitable spin and declare a winner. Whatever the results, I'll embrace them. But I think I know how this will turn out, and it won't be good news for America
First Published: November 2, 2010: 11:05 AM ET
The Old World approach, called "consolidation" by its proponents, holds that people are far likelier to spend and invest in a country that's working to reduce its deficit right now, even though near-term growth may be slow or non-existent. They figure such a country is less apt to raise future taxes or to inflate its currency to ease the pain of repaying debt. That's why 35 of Britain's top business leaders recently endorsed British Prime Minister David Cameron's plan to abolish 192 government agencies and cut the budgets of major departments by 20% to 25%. "Addressing the debt problem in a decisive way will improve business," they say in an open letter. European Central Bank president Jean-Claude Trichet, consolidation's staunchest advocate, says it's good "not because it is an elementary recommendation to care for your sons and daughters, but because it is good for confidence, consumption, and investment today." In theory, the New World policy makes some sense when the economy is still fragile, as America's is. But it cannot work in practice for at least three reasons. People don't trust Washington to reduce the deficit two years from now. Putting off the pain until tomorrow never works, because in Washington, tomorrow never comes. People don't believe that the administration's purported future deficit reductions are real, such as the claim that the new health care reform law will reduce the deficit. People don't trust Congress to spend stimulus dollars on worthwhile infrastructure projects rather than on useless pork. Why? Google "John Murtha airport" for one example. I fear that one result of the U.S. strategy will be little faith in America's fiscal future. Just as confidence begets more confidence, lack of it becomes a vicious cycle. As people lose confidence in a country's financial strength, they take their investments and innovations elsewhere, worsening the country's plight, driving more business away, and so on. New figures show that as U.S. companies earn impressive profits, they're stockpiling cash rather than building new U.S. operations or hiring more U.S. workers.
The opposing sides in this battle have a tough time debating each other because they have deeply different views of human nature. The New World approach regards people more as economic beings whose macro-behavior can be described with equations. The Old World approach regards people more as psychological beings whose individual behavior can be understood but not easily charted. When we have a winner, the losing side will rationalize the results, saying they don't prove much, because the two situations were different going in, and that with a little bit of tweaking, their strategy would have prevailed. We should resolve to cut through the inevitable spin and declare a winner. Whatever the results, I'll embrace them. But I think I know how this will turn out, and it won't be good news for America
First Published: November 2, 2010: 11:05 AM ET
October 20, 2010
Uncertain of future regulation, businesses are paralyzed
Companies have rarely felt so unsure of what the laws and rules governing their industries will be, which has put the brakes on economic growth.FORTUNE -- Dick Kelly wishes he knew what his industry should do. "If we had a national policy and knew what the rules were, we could take action," says Kelly, CEO of Xcel Energy and chairman of the Edison Electric Institute, the association of shareholder-owned electric utilities. But Kelly's industry knows only that momentous changes in the federal laws governing it are probably on the way; what those changes might be, and when they might happen, managers have no idea. So they "are holding up decisions," Kelly says, on multibillion-dollar investments to convert old coal-fired power plants to natural gas. "Is there going to be a price on carbon?" he asks. "Will there be a timeline? Will we have to use a certain percentage of renewables?" No one knows, so nothing is happening. Multiply the utilities' experience across the economy, and we begin to see an important reason why growth is getting slower rather than faster as the recovery creeps along. When people aren't sure what's going to happen, they freeze. We all know it, and if you require validation of your instincts, check the scientific literature on "uncertainty paralysis." When we're unsure, we turn especially cautious.
Life is inherently uncertain, of course, but this is different. As I travel around the country, businesspeople tell me they've rarely felt so unsure of what the laws and rules governing their business will be. Like Kelly, they sense major changes ahead -- but what? So instead of investing and hiring as usual in a recovery, U.S. companies are sitting on more cash than ever. We shouldn't be surprised. It has always been true that the more activist the administration in Washington, the more uncertainty it spawns. The reasons are several. Sweeping new laws -- like the 2,400-page health care law and the 2,300-page Dodd-Frank financial services law -- create winners and losers, but the horsetrading continues almost until the President's pen signs the bill. Did you know that Dodd-Frank exempts car dealers from the oversight of the new Consumer Financial Protection Bureau? Such oddities are legion, but in major legislation still to come, such as an energy bill, no one knows what they'll be. Once these mammoth laws are enacted, government agencies must write new rules to implement them. For example, the Dodd-Frank law requires 243 new rules, by the count of the Davis Polk & Wardwell law firm, and no one yet knows what they'll require. It takes a long time to figure out what the new rules really mean, especially at 2,000 pages. When I asked AT&T (T, Fortune 500) chief Randall Stephenson whether the new health care law might cause him to drop medical coverage for his employees, he did not say anything to reassure workers. "We don't know exactly what we've got here yet," he said. "But something will change." McDonald's (MCD, Fortune 500) recently said it might drop medical coverage for 30,000 employees because of a rule buried in the new law. Such surprises are only beginning. These historic new laws bestow significant new powers on administrators, who are not elected and are highly unpredictable. For example, the new Consumer Financial Protection Bureau has been granted extremely broad powers; its director (not yet nominated) is apparently "beyond the control of the President, the Fed, and the Congress," says Investment News magazine, citing the new law. What new rules will it promulgate in its first five years? Uncertainty is a Republican talking point in the midterm elections, so Democrats disparage it, maybe leaving ordinary citizens to dismiss the debate as partisan sniping. That would be a shame. The businesspeople I talk to aren't libertarians who want a minimalist government. They're pragmatic managers who want to make an honest buck. As Dick Kelly says, "If they explain the rules, we'll figure it out. We've always figured it out, and we'll figure it out again." More than at any time in many years, businesspeople just don't know what the rules are. They're frozen. Writ small, that's a frustration. Writ large, it's an economy that can't get going.
First Published: October 20, 2010: 5:12 AM ET
Life is inherently uncertain, of course, but this is different. As I travel around the country, businesspeople tell me they've rarely felt so unsure of what the laws and rules governing their business will be. Like Kelly, they sense major changes ahead -- but what? So instead of investing and hiring as usual in a recovery, U.S. companies are sitting on more cash than ever. We shouldn't be surprised. It has always been true that the more activist the administration in Washington, the more uncertainty it spawns. The reasons are several. Sweeping new laws -- like the 2,400-page health care law and the 2,300-page Dodd-Frank financial services law -- create winners and losers, but the horsetrading continues almost until the President's pen signs the bill. Did you know that Dodd-Frank exempts car dealers from the oversight of the new Consumer Financial Protection Bureau? Such oddities are legion, but in major legislation still to come, such as an energy bill, no one knows what they'll be. Once these mammoth laws are enacted, government agencies must write new rules to implement them. For example, the Dodd-Frank law requires 243 new rules, by the count of the Davis Polk & Wardwell law firm, and no one yet knows what they'll require. It takes a long time to figure out what the new rules really mean, especially at 2,000 pages. When I asked AT&T (T, Fortune 500) chief Randall Stephenson whether the new health care law might cause him to drop medical coverage for his employees, he did not say anything to reassure workers. "We don't know exactly what we've got here yet," he said. "But something will change." McDonald's (MCD, Fortune 500) recently said it might drop medical coverage for 30,000 employees because of a rule buried in the new law. Such surprises are only beginning. These historic new laws bestow significant new powers on administrators, who are not elected and are highly unpredictable. For example, the new Consumer Financial Protection Bureau has been granted extremely broad powers; its director (not yet nominated) is apparently "beyond the control of the President, the Fed, and the Congress," says Investment News magazine, citing the new law. What new rules will it promulgate in its first five years? Uncertainty is a Republican talking point in the midterm elections, so Democrats disparage it, maybe leaving ordinary citizens to dismiss the debate as partisan sniping. That would be a shame. The businesspeople I talk to aren't libertarians who want a minimalist government. They're pragmatic managers who want to make an honest buck. As Dick Kelly says, "If they explain the rules, we'll figure it out. We've always figured it out, and we'll figure it out again." More than at any time in many years, businesspeople just don't know what the rules are. They're frozen. Writ small, that's a frustration. Writ large, it's an economy that can't get going.
First Published: October 20, 2010: 5:12 AM ET
August 31, 2010
The staggering pace of technology
10,000 transistors now cost less than a grain of rice. Here's why that matters.FORTUNE -- I have more transistors than neurons. So do you. That's something worth caring about, because it signals the advance of a weird new world that most of us aren't prepared for. Yet we'd better get ready, for the world of the Syfy channel is looking startlingly plausible. Remembering how proud I once was to own a transistor radio with five transistors, I wondered how many transistors I own today. (For those...
August 12, 2010
Desperately seeking math and science majors
The number of China's engineering grads are growing while Americans major in fitness. Why?FORTUNE -- Applied Materials had to fly in 100 interviewers just to screen all the job applicants for its new Solar Technology Center in Xi'an, China, last year. The company wanted to fill 260 high-tech jobs. It got 26,000 resumes. A fraction of those applicants were invited to interview. The final selectees, board member Andy Karsner tells me, "were top-of-their-class, English-speaking engineers. They'r...
July 28, 2010
Who's to blame at BP? The board
BP's directors are all at the top of their careers, but despite their A-list credentials, you can hold them responsible for the disaster in the Gulf.FORTUNE -- BP's Gulf disaster is the board of directors' fault -- and not just in the sense that everything is ultimately the board's fault. This board has earned its blame in a very direct way. Yet you'd never suspect it from the directors' all-star credentials. If you're looking for doddering peers who prefer liquid lunches in the House of Lord...
June 14, 2010
Nielsen's $78 million CEO
David Calhoun left a big job at GE to run Nielsen in 2006. With an IPO on deck, now we know why.FORTUNE -- What was he thinking? That's what many wondered when David Calhoun left a vice chairman's job at General Electric to run the Nielsen TV ratings company in 2006.At GE, he managed businesses with revenue of $40 billion. Just months earlier, a Fortune cover story had declared him headhunters' "No. 1 draft pick in the game of grabbing top executive talent, the most lusted-after managerial st...
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