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.

9 comments:

  1. Thank you for this. I am glad that there are people who understand that unlimited growth is untenable.

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  2. You are most welcome - and thank you for your comment. The hard part is in convincing people to opt out of more and bigger. That's the challenge. The Qualitative Revolution will be a bottoms-up effort - not top down. The top has way too much invested in the current model to abandon it. Instead, they will bleed it - along with those unable to find a way to opt out. So much suffering. Opting out is not easy. But if enough of us opt out of Quantity of Life and into Quality of Life, I believe there is enough energy just under the surface to create surprisingly powerful opt in. We can only hope.
    Best,
    Tom

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  3. I expanded my own thoughts on my WP blog:

    http://wp.me/s4VSn-185

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  4. nice post.. sometimes back I read about capitalism and how it affected US for last few decades...

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  5. Capitalism is not the enemy. It's the distorted use of Capitalism to serve a very small few that's the enemy. Just as some say money is the root of all evil, if you look more closely at the origins of that sentiment, it is the "love" of money that is the root of all evil. And the very same issue is what haunts Capitalism and gives it a bad name.

    A prime example of how Capitalism and the equity markets can be misused was the 2006 IPO of Burger King which made a small number of people at Bain, Texas Capital and Goldman Sachs billionaires. They took a well-known brand that was already mature (50+ years old), brought it out to the public, raised $431 million (yes with an M) for Burger King when the stock sold for $17 on the first day of trading. Then most of the insiders bailed months later when the stock hit $28 leaving many unsuspecting individuals and perhaps institutions with with a stock that would retreat to its original strike price of $17. But the insiders were out with close to $12 billion. Then in October 2010, BK was taken private by a Brazilian company for $3.6 Billion and was delisted from the NYSE.

    This is what is wrong with Wall Street. It has become transaction-fixed and cares little about long-term investors.

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  6. Tom - based on this article (Good write up btw) what is the tangible action steps we can take as individuals to help get out of the "bigger is better" mindset? How do we overcome our addiction to this pervasive competitiveness? Are the solutions only from the top? (i.e Congress? Fed? President?) or are there things each of us can do to help?

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  7. Inspired2b,
    Thank you for your comments. Almost certainly the solution will not be TOP DOWN - though it certainly would help if we had more creative, cooperative leadership in Washington. No the Qualitative Revolution will most certainly be a BOTTOMS UP solution where people begin to adopt an entirely new paradigm for living - driven in large part by the the 8 principles of Qualitative Expansion:

    1. Take less
    2. Give more
    3. Work less
    4. Play more
    5. Judge less
    6. Compliment more
    7. Talk less
    8. Listen more

    While this approach might appear to take longer, I now believe that it will be imminently faster than if we wait for radical change to happen from TOP DOWN. My advice is to plan for the worst and hope for the best and in that I mean make small changes in what you control each and every day. For example, when we go out to eat now, we never order two meals. We instead order one and split it- and even then we have more than enough and often leave with a doggie bag!

    I really believe that BOTTOMS UP will win in the end and will ultimately result in much better leadership in Washington.

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  8. What a terrific article. Well done.

    I'll need to give it a think. My worry is the degree to which we have collectively lost our ability to contemplate, consider, and empathize, however. It seems to me people are too busy trying to grab pieces of an inevitably shrinking per capita pie and that our politicians lack the ability to lead this heterogeneous mess of people we've become.

    Thanks again for your excellent article.

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  9. To dougmartinmd,
    Many thanks for your feedback. I think your assessment of the mess we've become is correct. We have greatly lost our way - driven by the need to increase shareholder value. That alone has destroyed a vast amount of conscience and ethics. The challenge is now to come up with creative and achievable solutions that appeal to not just a few but to many. The current political climate is so polarized it's hard to envision anything getting done. This is why I believe that it has to come from the BOTTOM UP - a Qualitative Revolution of sorts. It won't be easy but most revolutions aren't. Thanks again.

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