Geoff Colvin's Blog, page 9

Harry Brekelmans on the future of Shell

Interview with Harry Brekelmans, EVP Royal Dutch Shell

What really has the 99% up in arms

It's not that the rich are getting richer. It's that the rest of America isn't.

Even all-star executives need awesome coaches

What makes an Executive Dream Team even better? A superconnected, no-nonsense board of directors.

Jim Collins: In his own words

What's behind a giant multiyear research project like the one that became Great by Choice? Fortune's Geoff Colvin asked Collins what inspired him, what surprised him, and what may be next.

Obama: Looking for jobs in all the wrong places

The president has a very clear vision of how to solve the jobs crisis. The problem is he's completely misguided.

Motorola's uphill battle

Can Sanjay Jha revive the cellphone legend in a world dominated by Apple and just about everyone else?
FORTUNE—At least there was no place to go but up: When Sanjay Jha joined Motorola as chief of its cellphone business in 2008, the division was losing billions and on the verge of failure. The RAZR phone's success had evaporated, Apple's (

Why can't we fix Medicare once and for all?

The largest element in America's worsening debt outlook is the growth of Medicare. If we don't fix it the right way, the country will become dramatically poorer and weaker.FORTUNE -- We can try to fix Medicare in two ways. One is a proven winner, the other a proven loser. The stakes could scarcely be higher -- and right now we're betting on the loser. Medicare has become the largest issue in America because it threatens the country's economic future. Ten former chiefs of the Council of Economic Advisers, from both parties, warned in March that if we don't get the national debt under control, the result will be "a crisis that could dwarf 2008." The first worrying signs have since appeared; the cost of insuring against a once-unthinkable U.S. debt default rose by more than 50% in late May, and Moody's and S&P have warned that the country's debt rating is in peril. By far the largest element in America's worsening debt outlook is the growth of Medicare. If we don't fix it the right way, the country will become dramatically poorer and weaker.

One way to fix it is the Brute Force approach. That's the concept on which Medicare was built. The federal government dictates which services are covered and how much will be paid to doctors, hospitals, and others for everything they do. To keep costs under control, Washington restricts what it covers or dials down what it pays. How well has the Brute Force approach worked? "It never works," says Mark McClellan, former head of the Centers for Medicare and Medicaid Services. The House Ways and Means Committee predicted in 1967 that the new Medicare program would cost $12 billion in 1990. Actual 1990 cost: $110 billion. (2010 cost: $523 billion.) The problem is that eternal irritant to grand Washington plans, the market. Turns out that if you unilaterally cut prices, some providers will quit providing services and some patients won't get care, so you can't cut too much. And if you pay providers barely profitable rates when they perform a given service, they will overperform those services, grossly inflating the government's costs. That's what has happened. The other way to fix Medicare is the People Aren't Dummies approach. It's the concept on which most markets operate. Let people spend their own money -- even if it's given to them -- and let providers compete for it. Providers aren't dummies, so they'll innovate in ways that bureaucrats would never think of. Consumers aren't dummies, so they'll choose what works for them. Quality rises, and costs stay reasonable. The People Aren't Dummies approach has a proven record, and it's the opposite of Brute Force's record. Medicare Part D, which took effect in 2006, lets users choose from competing private plans for prescription-drug coverage. "Most of those plans aren't at all what the law envisioned," says McClellan. Instead, they're what consumers actually want. And Part D costs are about 45% below what was predicted when it was created. So which approach are we banking on? You guessed it. Brute Force is the guiding principle for controlling Medicare in the health care reform law. An Independent Payment Advisory Board would control costs in any ways it sees fit; in practice its choices would be limited to cutting prices or limiting care. We've seen this film before. The approach that would work, People Aren't Dummies, is at the heart of Rep. Paul Ryan's Medicare rescue proposal and has been demonized by Democrats and even some Republicans. But in fact it has a long history of bipartisan backing. Premium support, as it's called in Ryan's plan, was first proposed by two Democratic economists, Henry Aaron and Robert Reischauer. The Bipartisan Policy Center's Debt Reduction Task Force last year proposed gradually converting Medicare to premium support. The proposals' details differ, and hammering out agreement wouldn't be easy. But the basic approach is solidly in the center. That's the good news. The bad news is that reasoned debate on Medicare seems to have become impossible. Just remember: Our future depends on choosing what works. So far we aren't choosing it.

First Published: June 20, 2011: 6:05 AM ET

Mitch Daniels tips his presidential hand

With decision time approaching, the Indiana Governor shows (noncommittally, of course) why he'd make a perfect candidate for the GOP.

FORTUNE -- Indiana Governor Mitch Daniels still hasn't decided whether he's running for president, but he knows time is running out. "I have to make a decision within a few weeks," he said in an exclusive interview with Fortune. Of the many possible Republican contenders, Daniels has attracted the most speculation because his success fixing Indiana's fiscal mess positions him best to address the nation's looming debt crisis. Pundits, including Time magazine's Joe Klein and the New York Times' David Brooks, have publicly urged him to run, and many Republicans have beseeched him privately. He has said he'd make no decision until after the Indiana legislature concluded its session -- which it did at the end of April -- and the demands of fundraising probably require that any candidate declare his or her intentions by June. So Daniels knows the clock is ticking.<

It's far from clear whether Daniels burns to be president, but he is genuinely passionate about the fiscal threat to America's future. He's a fan of Paul Ryan's multi-year budget proposal: "I think it's terrific. It's clear and visionary and courageous -- the boldest and bravest effort that we've seen. It's already improved the debate, so it's a real contribution." Ryan proposes fundamental changes to Medicare, and though they wouldn't take effect for a decade, some seniors are already beating up Republican representatives who've backed Ryan's plan. Is Medicare still an issue that elected officials can't touch? "Better not be," Daniels says, "because it'll wreck America if that's the case."To Daniels, changing Medicare as Ryan advocates is good news, not a painful sacrifice: "What people will eventually understand is that the real enemies of Medicare, the real enemies of Social Security, are these people who are saying leave them as they are. They will explode, or implode. Ryan and people who want to go a similar direction are out to save the safety net."As a candidate, Daniels would make a near-perfect anti-Obama. He scorns President Obama's signature policy triumph -- health care reform -- which Daniels calls "a travesty." Asked why, he says, "How much time do I have? All the claims made for it were false. It's going to balloon the federal deficit, not tame it. It's going to raise health care spending, not lower it. It's going to cost a lot of people the coverage they have -- that was supposedly not true. It doesn't reform anything."While Obama has expanded the federal government, Daniels has shrunk Indiana's to the point where the state now employs fewer government workers per capita than any other state. Washington is running record deficits, but Indiana now runs a surplus; the U.S. Treasury's credit rating is under threat, but Indiana's has improved under Daniels, to triple-A.More contrasts: While Obama has made federal regulators far more activist, Daniels says, "I'm in favor of at least temporarily setting aside some of the regulations that make it almost impossible to start a business and hire people in this country -- making sure that we still protect vital interests like the environment and worker safety." While Obama has been extraordinarily friendly to labor unions, Daniels reduced the bargaining rights of the Indiana government's unionized workers six years ago, long before the recent controversies in Wisconsin and Ohio. (Granted, it was easier for him because he could do it by executive order.)

Daniels (Princeton '71) seems every bit as smart as Obama. He has also shown promise against him politically: In 2008, when Obama won Indiana, Daniels won reelection in a landslide.But Daniels still has work to do making voters feel the urgency that he feels about America's fiscal peril. Asked how he can do it, he says, "Look, debt and its consequences became very concrete and very personal for tens of millions of Americans recently. I don't know what could be more real than the experience many Americans have had, having gotten over-extended themselves, or someone in their family, or the business they once worked for. There's a lot more concern that the nation could go broke, with terrible consequences, especially for low-income people." But exactly what those consequences might be, he doesn't say. If he wants voters to feel good about changing Medicare and means-testing Social Security, he'll have to create a vividly burning platform, and he doesn't seem to have found the words yet.Daniels is an attractive candidate on paper. The big question is whether he wants the presidency bad enough to go through the experience of running for it. He has been perfectly clear that his real passion is preventing a national financial disaster, and he'll run for president if he decides that's the best way he can help do it. But that's not the same as a deep desire for the office. In today's political environment it's hard to see how anyone gets there without that.That's the calculus undoubtedly going through Daniels' head. We'll know how it comes out soon enough.

First Published: May 13, 2011: 2:46 PM ET

Corruption: The biggest threat to developing economies

It's gone beyond petty palm-greasing. Graft across the globe has reached staggering dimensions.FORTUNE -- "We're thinking of pulling out of Brazil," the CEO of a large American corporation told me a week ago. The company has been operating there for a few years, doing several million dollars of business. The problem? A series of court judgments so inexplicable, and so crushingly expensive, that the CEO doubts his ability to manage the business. He doesn't see how the rulings can be honest -- even former President Luiz Lula da Silva called Brazil's judiciary a "black box" that's "untouchable" -- and if the system doesn't work, this CEO is bailing out. This is corruption, a problem we'd rather not think about that now threatens the ascension of developing countries into the top tier of world economies. Given its history, optimism on the subject would be foolish. But while the media and Wall Street focus on more tractable issues like inflation and exchange rates, world leaders seem perfectly clear on the greatest threat to the future of the BRICs and other emerging economies. Corruption is the "biggest threat to China," Premier Wen Jiabao told the National People's Congress in March. When U.S. Vice President Joe Biden visited Russia recently, he cited corruption as the No. 1 impediment to better economic relations and pointedly mentioned Sergei Magnitsky, a lawyer who died in custody in 2009 after accusing the police of corruption.

The problem is not just the petty palm greasing that's common worldwide, though that has its own corrosive effects. Developing-market corruption has reached staggering dimensions. India's telecom ministry apparently siphoned $30 billion from various projects over the past few years. A Russian activist posted online documents apparently showing a $4 billion fraud in a state-run company's trans-Siberian pipeline project. In China a minister overseeing the new high-speed-rail network is accused of skimming $152 million (and maintaining 18 mistresses). The threat is broader than it may seem: Corruption discourages the investments needed for economic progress. In India "high-level corruption and scams are now threatening to derail the country's credibility and [its] economic boom," says a report from KPMG. The societal effects are subtler and arguably worse. Initiative and ambition shrivel: Why try hard when effort isn't the source of success? Respect for authority evaporates. Anger and resentment build, especially as a society becomes richer and the gulf between ordinary citizens and the officially tolerated crooks grows wider. When Premier Wen declared corruption the biggest threat to China, he wasn't talking about its effect on foreign investors; he's worried about "social stability." He knows that while massive corruption isn't the only grievance of the revolutionaries in North Africa and the Middle East, it's a big one.
Many people shrug at corruption because they figure it's eternal and incurable. Not so. England was deeply corrupt in the 17th century, Sweden in the 19th, notes professor Michael Johnston of Colgate University, a corruption expert. Singapore and Hong Kong virtually eradicated corruption in a generation. Still, reform is extraordinarily hard, he says, especially in big economies where "huge stakes are on the table." Reform "can degenerate into political payback" by the reformers. Where to begin? "One of the best predictors of whether a society will do well on corruption is the strength of property rights," Johnston says. "That's not a bad place to start." An insidious feature of corruption is that it's hard to talk about. I can't identify the CEO who's thinking of leaving Brazil because doing so could imperil his company's ability to operate there. More generally, accusing people in power is inherently dangerous. Graft operates in the dark. So, like the man looking for his keys under a lamppost not because he lost them there but because the light is better, we focus on economic issues that are rich with statistics and susceptible to math. But we're missing a giant danger. It's naive to think the recent official attention to corruption will amount to much. If it doesn't, the progress of the emerging economies could turn ugly.

First Published: April 20, 2011: 10:49 AM ET

Income inequality: How to fix it

A close look at new data sheds light on the real reasons income inequality is a problem, plus how we can solve it.FORTUNE -- The hot topic of income equality gets especially emotional now, at tax time, and will get even more so this year, with the latest IRS data showing what happened in the recession. A close look at the new data from the past few years -- and from the past few decades -- illuminates some of the real reasons inequality is a problem, plus the reality of how -- and how not -- to fix it. Key points:

Incomes are getting more unequal...
Yet they grew more equal in the recession. The long-term trend is indisputable: High-income Americans have been receiving a growing share of total income for the past 30 to 40 years. The latest IRS data show that in 2008, the top 1% of taxpayers accounted for 20% of total pretax income; in 1986, by contrast, they accounted for only 11%. Over that same period, the share of income going to the bottom 50% of taxpayers fell from about 17% to 13%. You can poke holes in the statistics, as the Cato Institute's Alan Reynolds has done, but there's no mistaking the big picture of growing income inequality. Yet during the recession, the trend reversed. The bottom half's share of total income actually increased slightly, while the top half's share declined. The people whose income shares shrank most dramatically were the top 10%, top 5%, and top 1%. The rich got poorer, and the middle class got relatively richer. The same thing happened in the recessions of 1990-91 and 2001 and in the Great Depression. So here's one proven way to achieve greater equality: Make the country poorer. No one wants to do that, of course. A popular alternative is to extract more in taxes from the highest earners. Candidate Obama pledged repeatedly to do that, a campaign promise that he prudently broke when he signed the bill extending the Bush tax cuts. It's just as well, because when it comes to income inequality ...

Soaking the rich won't fix it.
Another eye-opener from the latest IRS data is that in the recession the top 5% and top 1% of earners actually paid tax at a higher effective rate than they did in the boom year of 2007, while everyone else paid at a lower rate. That is, the tax system did what it's supposed to do in tough times, taking from the rich and giving to the rest even more than it normally does. The larger point is that redistributing wealth through the tax code can be taken only so much further. Consider: In 2008 the top 0.1% of earners paid more total income tax than the bottom 75% did. The most surprising fact in the latest IRS data is that in 2008 the proportion of total income tax paid by the bottom half of earners sank to its lowest in decades: 2.7%. If we raise taxes on the rich so that we can cut taxes on the rest -- thus making incomes relatively more equal -- we'll create an even larger class of Americans with little or no stake in financing the government. It's a recipe for social and political instability or even chaos.

Worker education is the key.
It will make them more productive -- and richer. Harvard economists Claudia Goldin and Lawrence Katz have shown persuasively that the largest factor in inequality's rise is the slowing pace of educational attainment since the early 1970s. Workers' skills aren't keeping up with the advance of technology, so the shrinking proportion of workers with the needed skills command a larger share of the pie. Get high school and college graduation rates rising again, and the economic forces reverse, spreading the benefits of economic growth more evenly.

There's no clearly ideal level of income inequality, but it is a problem, and your Form 1040 symbolizes one of the most serious reasons why: Too few people now pay most of the country's bills. It could also symbolize the solution. The best news for the bottom half of earners will be when they're making a larger share of the nation's total income -- and paying more taxes.--This story appeared in the April 11, 2011 issue of Fortune Magazine