Another Failure Spiral
America's Special Interest Economy
What does the typical homeowner do when something turns out to be broken? Perhaps there’s a puddle of water on the floor in front of the refrigerator. Or the garbage disposal has seized up. The heater fan in the car no longer works. We have faced such problems before. We know what to do. We look around for a repair service. Refrigerator guys fix refrigerators. Appliance guys fix garbage disposals. Auto repair shops replace broken heater fans. Find the fix-it person. It’s a simple paradigm.
But what if the American economy is broken? It hasn’t come to a dead stop, but it malfunctions badly. Then what? Years ago in my taxicab days I had a passenger who told me that he’d bought an old Hudson off a farmer and driven it thousands and thousands of miles without ever changing the oil. Now the Hudson wouldn’t run. Pretty simple diagnosis. Operator error. The vehicle stopped working because the operator hadn’t bothered to take care of it. It’s not a bad analogy for what ails the American economy. It malfunctions rather badly because we, the American public, have committed a long string of operator errors. As business leaders, we have made operator errors, choosing corrupt answers that undermine the national interest. As voters we have made operator errors, electing politicians who haven’t a clear sense of how to advance the national interest. The American economy malfunctions because operator error in high places is so common.
Operator error is easy to fix when the rules are known. One changes the oil in one’s car every five thousand miles.
Operator error is more difficult to avoid when the rules are unclear. It isn’t altogether clear which principles are best for running an economy. Many of us firmly believe in operating principles that don’t work out well in practice. We have absorbed a worldview that seems to make sense; by the millions, we proceed to act on that worldview, regardless of its flaws; in the long run, its principles end up damaging the nation.
It is difficult to let go of deeply held beliefs. Our habits teach us to defend them; our peers teach us to defend them. We may be in the grip of a poorly chosen paradigm but we stay with it because it feels right. Isn’t this the way the world is supposed to work?
When I hired on with Cummins, at its engine plant in Jamestown, New York, I landed in the midst of an exciting and tense time. The old manufacturing paradigm wasn’t getting the job done. Japanese rivals had shifted to a new paradigm, boosted their quality, cut their costs, and mounted a serious challenge to Cummins’ strong market position. The old factory paradigm wasn’t adequate any more, but we couldn’t imagine anything different. The old paradigm came to be called by many names. “Push Manufacturing.” “Just In Case Inventory.” “Corrective Action Quality.” It was the only paradigm that many people knew.
Had Cummins stayed with its old habits, it would have been a very serious case of operator error. A new paradigm was needed. Cummins executives were more than ready to shift paradigms, if that’s what it took. The Jamestown Engine Plant got swept into the change. We had to learn a new paradigm; we had to make the wrenching decision to let go of the old paradigm. The rules had changed. Old ways of doing business were now seen as a high level case of operator error.
The new paradigm was built around new ideas, new concepts, new language. Pull Manufacturing. Just In Time Manufacturing. Zero Inventory. Total Quality. In time the quality standard came to be called Six Sigma, statistical jargon for failure rates so low that they are six standard deviations away from the mean.
When an organization sets higher standards for itself, the consequences for its employees can be wrenching. It takes many rehearsals, if you will, to unlearn the old dance and get the new dance embedded in muscle memory.
Those who worked at the Jamestown Engine Plant made the transition. Those who worked at Plant One, in Columbus Indiana, failed to make the transition. They could not unlearn the old, they would not accept the new. Cummins management grimaced in dismay, closed Plant One, and transferred its product line to Jamestown. New ways of doing business take hold unevenly.
This is America’s challenge in a nutshell. We are wedded to ways of doing business that undermine our national interest. Operator error is everywhere, but we don’t recognize it because we have yet to unlearn the paradigms that lead us astray. Too much muscle memory from the past, too little ear for the music that awakens a successful future.
One cannot run a car forever on the idea that its oil never needs changing. One cannot run a modern economy on the idea that integrity at scale simply doesn’t count. It is time to acknowledge our errors and pledge ourselves to a better path in the years ahead.
An earlier chapter used a Failure Spiral diagram to make the point that urban America is stuck because we have never acknowledged the cumulative impact of a long series of policy misjudgments. It is time to employ a similar diagram to make a similar point. The American economy of today is run on special interest principles. Corruption at scale is more often the rule than integrity at scale. Each compromise seems clever to its sponsors. The cumulative impact is damaging. Should a nation make one or two major errors of judgment, it will find it has dug itself into a modest hole. Should that same nation make a succession of major errors, it will find itself in quite a deep hole.
This chapter offers a diagram of “America’s Special Interest Economy.” In the urban diagram, the box in the center was labeled “Underclass Culture.” A similar box in this diagram is labeled “Overclass Culture.” It is a culture compounded of two major parts, the Overclass culture of the nation’s business elites, and the Overclass culture of the nation’s political elites. It is a culture driven by reciprocal favors. Political elites write laws that dispense special interest rewards; special interest elites make a point of rewarding their political friends and punishing their political enemies.
Arrayed around the outside of the diagram are three broad groupings: America’s Middle Class, at the bottom; Business, on the left; Government, on the right. Each is further subdivided.
America’s middle class is represented by two broad headings, “Workforce” and “Retirees.” Two distinct groups. Two distinct sets of issues.
Business is divided into two broad categories, “Tangible Business” and “Financial Business,” and the tangible economy breaks out two major sectors for special consideration, the Energy Sector and the Medical Sector. Each is exceptionally large, and each operates unwisely. One might imagine adding other sectors as well; these two will get the discussion started.
Government is examined under four headings – Federal Reserve, Tax Collections, Spending Programs, and Borrowing. The nation’s competence is tested differently in each.
Taken as a whole, the chart suggests the story of a nation that cannot bring itself to operate its economic affairs in a competent and responsible manner. Its ideas lead it astray, its behaviors carry it astray. On one front after another, this chart suggests a larger story of operator error.
Begin in the upper left, with the non-financial side of American business. Two major forms of operator error must be recognized. Washington hasn’t protected America’s manufacturing sector. And Washington has also given up on American Dream Capitalism.
America cannot prosper without a competent manufacturing sector. The Information Technology and Innovation Foundation identifies five major reasons to defend America’s manufacturing capabilities. Only with healthy manufacturing can America restore its trade balance. America’s ability to create good jobs requires a healthy manufacturing sector. Manufacturing drives R&D, and vice versa. Manufacturing and services require each other. We cannot have a strong services economy unless we also have a strong manufacturing economy. And manufacturing capabilities are essential to our defense and our national security.
Yet manufacturing is in decline. The Commerce Department tracks the nation’s manufacturing capabilities under nineteen separate headings. The American economy is shrinking in fifteen of those nineteen. (The Information Technology and Innovation Foundation studies these trends; see http://www.itif.org/files/2011-national-manufacturing-strategy.pdf, pp 19-20)
Both national parties have shown themselves to be incompetent defenders of America’s manufacturing capabilities. Free trade ideology hampers the Democrats, free market ideology hampers the Republicans. In a competent America, Democrats and Republicans would work together to protect America’s manufacturing capabilities.
The loss of American Dream Capitalism is another distressing indication of America’s economic incompetence. The switch to Gated Capitalism depresses the earnings and the buying power of the American middle class. Faltering demand within the middle class depresses America’s overall GDP growth rate.
A competent nation protects its manufacturing sector. And it protects the earnings and the buying power of its middle class. America has fallen behind on both counts.
A competent United States would take a careful look at fossil fuel energy and ask the hard question. What happens if the world’s energy industry stays with fossil fuels? A competent nation would look at the Earth’s natural cooling system. It would acknowledge scientific reality – the more carbon dioxide we humans dump into the atmosphere, the more we interfere with the Earth’s natural cooling processes, and the more we tamper with all the different parts of the global climate. The Earth gets irreversibly warmer. Climate behaviors are irreversibly altered. Carbon dioxide in vast quantities is just too dangerous. Fossil fuel energy has to be phased out, as rapidly as possible. Renewable energy has to be phased in, as rapidly as possible.
"We don't have to read the operator's manual for planet Earth," we are told. "If we pretend that carbon dioxide doesn't matter, then it won't matter."
Competence begins with integrity. A rising stock of carbon dioxide has unavoidable consequences for the Earth's natural cooling system. It is a fundamental law of physics, one that cannot be repealed. Citizens of good character accept the laws of physics and adjust their behaviors accordingly. And a truly competent nation does the same. Its energy strategy affirms the dangerous link between fossil fuel consumption and irreversible climate change. Its energy strategy also acknowledges the presence of renewable energy in abundance.
That is not today's America. Today's energy strategy is a toxic mess that gravely damages our nation's energy future. "Operator error" is a polite term for a corrupt and dangerous course of action.
This topic got a thorough workout in the chapter before last. Overpriced medicine damages the nation’s economic interests in a number of ways. Other nations have affordable medical care, and this gives their companies a significant – and unnecessary – competitive edge in global markets. As the Boomer generation retires, American demand for medical care will rise sharply. Organize the nation’s medical industry responsibly and the Boomer retirement surge has a chance of being manageable. Allow today’s unaffordable system to continue, and the Boomer retirement surge will blow all the fuses. Nothing as costly as medicine can make us stronger if the nation’s special interests are allowed to write the rules.
For many years, the nation’s financial sector served the nation reasonably well because New Deal rules forced it to operate with a measure of responsibility. In the late 1990s, Republicans and Democrats together cast those rules aside. A process of rational irrationality took over.[i] Players maximized their own self-interest without regard for the consequences the nation might suffer. The Federal Reserve looked the other way, federal regulators looked the other way, the Congress looked the other way. And then the financial system seized up. Supposedly impregnable firms were suddenly at the edge of bankruptcy. The financial system as a whole had pushed the nation to the edge of a major Depression. The whole process is best understood as a massive self-inflicted wound. Rules that protected the national interest had been set aside; special interest priorities were given a green light. A competent America would never have put itself in this hole. But America isn’t run by those who pursue the national interest; America’s economic rules are being written on behalf of the nation’s special interests.
Government (Federal Reserve)
The Federal Reserve can be a force that protects the national interest, but that’s never a given. In the Greenspan years, the Federal Reserve operated in ways that undermined American Dream Capitalism and favored the advance of Gated Capitalism. Chairman Greenspan’s policies fostered just enough unemployment to put the American middle class at a perpetual disadvantage.
It is difficult to say where the Fed’s loyalties will be when/if the American economy finds its way back toward full employment. Will the Federal Reserve be a force for full employment and equitable wage and salary growth for all Americans? Or will it be a force for chronic unemployment? Much depends on the nation’s larger sense of direction.
18.1 Version 2011-06-27.
[i] “Rational Irrationality” is a central concept in John Cassidy’s book, How Markets Fail: The Logic of Economic Calamities. Picador. 2010.