Friday, September 23, 2011

The New American Dream


10th and last in a series on the evolution of economic growth in the U.S.

Any intelligent fool can make things bigger and more complex. It takes a touch of genius - and a lot of courage - to move in the opposite direction.
                                             Albert Einstein

Too often we lament an economy that grows too slowly and adds jobs at a rate that disappoints. An economy is a living, breathing organism - and like most living, breathing organisms, it was birthed, it experienced a period of remarkable growth, then that growth slowed, as it matured, and ultimately began to age and slowed even more. This is where we are today – sitting on top of the largest economy in the world – two-thirds of which has been created since 1970. That level of growth simply cannot – will not - be sustained.

In many ways we are victims of our own success. We wanted bigger and by almost any measure we got it. But what exactly is it that we got? A higher standard of living? Standard of living is a quantitative measure often expressed as GDP per capita. But such a metric fails to accurately reflect reality for tens of millions of poor and working class Americans and more recently a growing number of those in the middle-class. Conventional wisdom has always suggested that a rising standard of living naturally equated to a higher quality of life. That more equals better. But if quality of life is defined as spending more time doing the things that fulfill us, that make us happier, that make us healthier, that make us smarter, then we have failed miserably at increasing the quality of life in America.

The American Dream is dying a long, slow death – its core premise – a better life – has been badly misinterpreted by multiple generations of Americans as a bigger life. Now a bigger life is achievable by fewer and fewer Americans. And ironically, that may not be a bad thing in the end. Perhaps this is what it will take for us to finally realize that bigger does not necessarily mean better – and that the quantity of our lives is not always a relevant measure of the quality of our lives. The truly hopeful thing is this: If we interpret the American Dream to mean a better life – and no longer a bigger life – then we make it possible for every American to achieve the American Dream.

Our growth-at-all-costs strategy has cost us dearly, resulting in an embarrassingly dismal social report card – especially over the last 30 years. From record amounts of personal debt, to record numbers of personal bankruptcies, to record numbers of home foreclosures, to record low SAT scores, to record numbers of people living in poverty – our quantitative pursuits have yielded an undeniable qualitative failure. Right now, that’s our legacy, and to those who feel compelled to blame someone - it has little to do with any one administration.

Unfortunately, the Great American Dream has become the Great American Lie - the concoction of both political parties and multiple administrations. The Kennedy administration made unemployment figures look better by eliminating discouraged workers from the stats. The Nixon administration introduced the core-inflation concept that eliminated fuel and food from the basket used to determine inflation in the form of the Consumer Price Index (CPI). Clinton helped introduce even more accounting magic to the mask the true reflection of inflation by adopting substitution, weighting and hedonics, thereby suppressing the CPI even more. Bush 43 ushered in a new era of GDP imputations that shamelessly inflated the measure of what we produce by at least 15 percent today based on the Bureau of Economic Analysis’s own public data. Some economists estimate that GDP is artificially boosted by at least twice that figure.

We’ve also artificially inflated the size of the Dow Jones Industrial Average – for many of the gullible masses, the absolute measure of the health of the U.S. economy. The Dow appears to defy logic reflecting Wall Street’s requirement of the unattainable – growth in perpetuity. Poor stock performers are jettisoned in favor of stronger stocker performers. Sears out. Home Depot in. Woolworth’s out. Walmart in. For the 30 years from 1960-1989 a total of 9 companies were replaced as part of the Dow. For the 20 years from 1990-2009, 20 stronger performing companies replaced 20 poorer performing companies - the shell game only gaining momentum as the maturation of individual corporations accelerated.

Over the last 60 years, the U.S. economy experienced its greatest period of growth, and erroneously set expectations for growth levels that are simply not sustainable. Our relatively short history since World War II shows just how much we have grown, how much growth has slowed, and how much we have manipulated our measurement of growth in order to create the illusion that strong growth in perpetuity is possible. Let’s review:

·      The U.S. economy experienced a once in a millennia growth anomaly in the decades following WWII. The confluence of four unique elements helped create the perfect storm for expansion in the post-war years:
o   Pent-up demand from 16 years of war and sacrifice;
o   The arrival of 76 million new babies in just 18 years;
o   The introduction of hundreds of new consumer products;
o   The introduction of network television enabled unprecedented and instantaneous marketing of those products to millions

·      The economy nearly tripled in size from 1950 to 1980. That level of growth is both unprecedented and unsustainable

·      But as the economy grew bigger and bigger, the pace at which it was growing started to fade - unable to sustain its post-war meteoric rise and instead slowly declined into the 2000s:


DECADE
AVERAGE
RATE OF GROWTH
1950s
4.17%
1960s
4.44%
1970s
3.26%
1980s
3.05%
1990s
3.19%
2000s
1.69%
2010s
1.85%*
* 2010, plus first two quarters of 2011

·      This slowdown in growth ushered in an era of radical micro and macro changes in terms of how businesses were managed and measured and how elements of the U.S. economy were managed and measured. The natural slowdown in growth spawned the advent of new economic inflators and deflators for the purpose of creating the illusion that growth in perpetuity was possible, including:

o   REDUCING COSTS IN ORDER TO INFLATE EARNINGS
Introduction of corporate re-engineering or cost-cutting
Revenues for many corporations started to grow at ever-decreasing rates in the 1980s negatively impacting earnings and causing corporations – for the first time in history – to begin to focus on cutting costs out of the enormous infrastructures that had been built during the decades following WWII

Reduced tax liabilities for publicly-traded companies
Expanded our ability to grow by enabling companies – especially Dow Component companies – to negotiate tax relief in order to artificially inflate earnings

-   Reduced the Quality and Quantity of Products and Services
Expanded our ability to grow by enabling companies to reduce the size and quality of products using deceptive strategies such as unit pricing to generate more revenue for selling less

o   UNNATURAL INFLATION OF REVENUE
-   Increased Retail expansion in the 1990s
By expanding distribution enabling greater access to products through unnecessarily aggressive retail expansion in the 1990s, consumers were treated to unprecedented access to everything from coffee to hammers to tax prep. The number of Walmart locations more than doubled in the 1990s, while the number of Home Depots grew by seven-fold and Starbucks by 24 fold

-   Increased Mergers & Acquisitions in the 1990s
By forcing inorganic growth through hyper-aggressive Mergers & Acquisitions initiatives. In 1989, General Electric posted revenues of $29 billion and by 2000 had added nearly $100 billion to the top line – almost exclusively through Mergers & Acquisitions. While they rapidly grew revenues and earnings during this period, it was at the expense of many employees who were shown the door

Increased Product Individuation in the 1990s
The 1990s also ushered in an era of product individuation. This narcissistic trend helped further expand growth by promoting the concept of a product per person instead of just one product per household. A phone in every household became a phone in every hand. Individuation was also aided by unnecessarily aggressive retail expansion in the 1990s

-   Increased Easy Access to Credit
Expanded our ability to grow by enabling consumers to buy more through access to easy credit. The insidious side of credit – consumers - and even some businesses - used credit to ring up purchases only to flush all of those liabilities by filing for bankruptcy. In the end, were those sales purchased with credit that inflated results really sales?

-   Reduced Prices
Increased the purchasing power of consumers by artificially keeping gas prices low and by encouraging the notion of everyday low prices at retail

We have squeezed the lemon dry. We have pulverized the lemon. We have nuked the lemon. And now we are trying to find ways to use creative accounting schemes to create the illusion that there is still juice left in the lemon. We have recalibrated our thermometers and blood pressure devices to make us feel better about our health. We have run the course of clever ideas from freshly minted accountants from the Harvard Business School on creative and mostly misleading ways to count things.

So where do we go from here? Do we keep kidding ourselves about the potential of our economy or do we finally look at the overwhelming evidence and admit that we have reached the end of an era. Pretending that we have not will only delay the paradigm shift necessary to reinvent the American Dream – a reinvention that could truly make the American Dream a reality for more and more Americans.

What we have to remember is that what we are experiencing now with our economy is part of the natural evolution of a living, breathing organism. There is no shame in it, and there is no blame in it. The U.S. economy is like a 235 year-old mountain ash tree.  During its youth it grows rapidly – often seven to 10 feet per year. But by the time it’s 100 years old, its growth slows to about one foot per year. At about 150 years, it completely stops growing taller yet can still live for another 100 to 150 years. And even though the tree does not get any taller, it still yields new seeds every year – still provides shade from the heat every year – still supports a child’s swing every year. The tree still thrives, still provides value and quality even though it never gets any taller.

It’s time to change our perspective on how we view and define growth. We have posted a remarkable quantitative record since World War II – growing ever taller. But our qualitative record since 1980 has been dreadful by almost any measure. Quantitative growth has run its course and is largely a part of our past. Pretending that it is the key to solving our quite significant current and future problems is truly na├»ve and destructive and will only result in more suffering.

In his 1999 book Inner Revolution: Life, Liberty and the Pursuit of Real Happiness (Riverhead Trade, 1999), Author Robert Thurman suggests that our current quantitative culture almost requires someone else to lose in order for us to win:

How can we overcome our addiction to this pervasive competitiveness that allows us no rest, no ease, no contentment? We need to develop the ability to enjoy the happiness of others, empathize with them, and take delight in their good fortune. If we can sincerely wish one other person well (particularly someone close to us), we can create a wave of tolerance that can wash through an entire community.

Standing before us is the incredibly rare opportunity to reinvent ourselves as a respected world leader by creating momentum around a qualitative revolution – a movement that focuses on expansion of the quality not the quantity of our lives. Imagine for a minute a culture, a country that stands for qualitative growth. It happened before 235 years ago in 1776. Now we have an opportunity to do it again – not to birth a Republic but perhaps this time to save it.

Tuesday, September 13, 2011

Why Growth is so Difficult


Ninth in a series on the evolution of economic growth in the United States

There is a notion in this country that more is the only outcome that is worthwhile – that bigger is almost certainly always better. That an entity can and should grow forever. People do not grow forever. Plants do not grow forever. Products and brands do not grow forever (Kodachrome, Pontiac, Max Factor). Businesses do not grow forever (AOL, Blockbuster, MySpace). Industries do not grow forever (auto, newspaper, postal).

If none of the individual components of an economy grow forever, why do we believe that an aggregate economy will forever grow? Is it because whenever an important measure of economic “progress” begins to fade we change the means of measurement, simply prolonging the illusion? The Dow Jones Industrial Average is losing steam? Just swap out mature, weak performing companies with younger, stronger performing companies to infuse some new energy. GDP is slowing? Then just identify and impute the value of services like that of a bank teller and simply add it to GDP.

I will never forget the assertion of an infamous cable-TV investment analyst one holiday season a few years back. A colleague asked him if holiday sales in the important fourth quarter might ever shrink one day as opposed to always growing from one year to the next. “No, it’s not possible for holiday sales to shrink,” was his immediate and rather indignant response.

This is our perspective today. This is what we have taught our business school students. This is the expectation that we have created. That there is no top. This is the disturbing pathology that is at the core of a bigger is better mentality – a belief that without growth we cannot possibly live full and satisfying lives.

But here’s the problem with growth:

1.    The more you grow and the bigger you become, the harder it is to grow even more. It was far easier to grow a $29 billion General Electric in 1990 than a $182 billion General Electric in 2008.
2.    The more you push for more growth, the faster you will reach saturation and the faster your growth will slow down. We are already seeing this with the number of Facebook users – well in advance of its planned IPO.
3.    The more product variations you introduce, the more likely you are to cannibalize existing products. Crest has 41 different variations of toothpaste – yes you read that correctly – 41 variations. Adding a 42nd variation will not increase the aggregate sale of toothpaste.

Austrian-American economist Joseph Schumpeter coined the term Creative Destruction in his 1942 book Capitalism, Socialism and Democracy which described a “process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one while incessantly creating a new one.” In other words, one of the natural outcomes of innovation is the development of products, services, processes that are better, faster, and cheaper than those that already exist – all at once creating something new while effectively destroying or at least initiating the decline of something that already exists.

Many of us witnessed the creation of audio-tape which led to the destruction of vinyl records followed by the creation of CDs which led to the destruction of audio-tapes and followed by the creation of digitized music which led to the destruction of CDs.

So in a culture that is constantly introducing new innovations it becomes harder and harder to create net growth – or accretive growth because as the innovation of new products accelerate, so too does the destruction of existing ones.

This is not to say that growth is impossible – it is just to say that it is getting harder and harder to introduce products and services that are simply added to existing consumption resulting in 100 percent incremental addition and no subtraction whatsoever.

There are effectively 11 sectors that make up the U.S. economy. Most of the products and services that make up U.S. GDP fall somewhere inside of these existing sectors:

1.    Healthcare (Johnson & Johnson, Pfizer, GlaxoSmithKline)
2.    Financial (JP Morgan, Citigroup, BankofAmerica)
3.    Energy (ExxonMobil, ChevronTexaco, BP Amoco)
4.    Utilities (Southern, Duke Energy, Exelon)
5.    Capital Goods (General Electric, United Technologies, Catepillar)
6.    Basic Material (Dow Chemical, DuPont, Alcoa)
7.    Transportation (UPS, FedEx, Delta Airlines)
8.    Consumer Staples (Coca-Cola, Pepsico, P & G)
9.    Telecom (AT&T, Verizon, Vodfone)
10. Technology (Apple, Microsoft, Google)
11. Consumer Staples (Walmart, McDonald’s, Home Depot)

While there are new companies constantly joining each sector, there are also mature or failed companies constantly exiting each sector. The youngest of the sectors is Technology, but even that sector is beginning to mature.

Some say it’s only a matter of time before a new sector is introduced. That may be so, but I am definitely not smart enough to even venture a guess at what the next new sector might be. And here’s the thing about a new sector: unless it introduces products and services that are simply added to what we currently produce and consume without cannibalizing existing products and services (like technology did with personal computers), it is unlikely to help economic growth.

Others say that green initiatives or new energy initiatives that can cut across and positively impact all sectors will provide new economic growth. But unless green initiatives translate into a new ways to raise revenues or to cut costs, don’t look for GE or IBM or any existing public entity to sign up for initiatives. While green initiatives might be the right thing to do for the environment, unless they provide a bottom line benefit for shareholders, don’t expect the slaves of Wall Street to sign up to pay a premium for ethical behavior. So it’s more likely that significant green and/or non-carbon-based initiatives will be driven by start-ups and for those with a bigger appetite to risk what little R & D funds they may have left.

Unless the introduction of new products and services results in a net gain to aggregate consumption (accretive growth) then the economy will not grow. Can it happen? Sure. But it is getting harder and harder to accomplish. Our economy is already huge. Our consumption has already reached record levels by almost any measure. Our lives and homes are full of products – in many cases duplicated several times over. And yes, the replacement of existing products happens all the time – but the trend of sales cycles for products such as cars, homes and even cell phones are lengthening every year. Instead of buying a car every three years we are now buying cars every six or seven years. Instead of replacing our cell phones every year and a half, we are now replacing them every two to two and half years. These types of behavioral trends result in fewer sales each year spreading sales out over a much longer period of time and negatively impacting consumption.

And here’s the thing: most conventional wisdom suggests businesses need to spend more time and resources trying to convince people to drink 48 servings of Coke a month instead of 24, buy cars every 24 months instead of every 72, good luck with those quests. And if you believe you have a real shot at influencing those macro-consumption trends, then maybe you believe that your home will appreciate this year too.

It was a whole lot easier to grow the economy in 1950 than it is today because most Americans did not own a home, most of us did not own a washing machine or dryer, an oven, or a television, a car, or a telephone. Now many of us own multiple homes, multiple televisions, multiple cars, multiple telephones.

The generations right behind the Boomers – Generations X and Y – are unwilling and in some cases will be unable to live life like their parents did – in a world where more and bigger was better. This dose of sanity is a good thing for us and for the planet on which we live. But not for the bigger-is-better economy.

We need to realize that - as much as we want to believe that ours is an economy without limits – we are wasting time and money trying to live up to that lie instead of trying to figure out what we really need to live satisfying lives. It is possible. But we need to first realize that our current more and bigger path is far more destructive than it is creative. From there, perhaps, we can finally begin to explore, and perhaps redefine a new and achievable American dream that is far less about quantity and much more about quality.


NEXT UP: WHERE WE ARE – THE SIMPLE TRUTH ABOUT THE U.S. ECONOMY