That Used to Be Us: How America Fell Behind in the World It Invented and How We Can
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With start-up manufacturing, said Sridhar, the big question is always “Who is going to buy those first 5,000 cell phones that will actually cost more than landlines” but the sale of which is crucial to bringing down the price? “That is the second valley of death, where governments can help.” Once a manufacturer has achieved those economies of scale, the factory he has built, the machines he has invested in, and the jobs he has created become “very sticky,” added Sridhar. It is very costly to move those jobs—and the suppliers and service providers that grow up around them—to another country.
Finally, any jobs strategy has to involve the government clearing “the path for investing and hiring,” the McKinsey report argued. “Uncertainty over the direction of regulation—and the time and expense required to comply with current regulation—has made companies hesitant to invest. Speeding the resolution of investment decisions, too often delayed by overlapping or conflicting environmental and land use regulations or by their unnecessarily slow application, is critical. ‘Plug and play’ enterprise zones—pre-approved for most zoning and environmental permits—could cut in half the time to bring a new plant online. Another critical obstacle to job growth is the backlog at the U.S. Patent Office, where it can take more than 3 years to get approval … The United States still scores well on the World Bank’s Doing Business survey, but it has slipped in some key areas, falling to number 27—behind Thailand and Saudi Arabia—on ease of getting a construction permit.”
We need regulations and we need standards; they are essential to a properly functioning economy and to give innovators incentives to achieve higher and higher levels of performance. But more attention has to be paid to making these standards clear and easy to address, with onestop shopping, and to pruning constantly those that are obsolete. Said Sridhar: “Countries that are open for business will assign you an official who is your one point of contact to work with you and the local government to make what you need to happen, happen—whether it is a road or utility connection or a some other permit.” Sridhar said he is obviously ready to abide by all the laws on the books, “but if I do, I don’t want to still get tied up in [local red tape and lawsuits] in a way that bogs down my ability to start my operations.”
Regulatory and tax uncertainty is a silent job killer. “I don’t care what society decides about the level of taxes and health-care costs, but I need to know exactly what they are going to be for the next five years,” concluded Sridhar. “Because when you invest in a factory you have to know exactly how long it is going to take to recoup your capital.”
Fortunately, more and more of the fifty U.S. states are getting this message. For instance, Delaware’s governor, Jack Markell, said that when he was recruiting the start-up electric car company Fisker Automotive to locate its factory in an abandoned General Motors plant in Delaware, he saw it as part of his job “to understand their business better than anyone else.” When the Fisker team visited, Markell assembled the state’s entire congressional delegation, the state leadership from himself on down, and the county leadership to join him in enticing them to Delaware. He called Ellen Kullman, the CEO of DuPont, and persuaded her to commit to buying a certain number of Fisker electric cars and to partner with the start-up on paint for its vehicles. Then Markell topped it all off with a $21.5 million five-year no-interest loan that converts to a grant if Fisker creates a certain level of jobs and other milestones in his state. “I made a personal commitment to buy the first car off the line, and the head of our economic development office is buying the second one,” said Markell. “You want to reduce the friction and make it impossible for them to go somewhere else.”
The larger point is this: We cannot ride on our reputation from the last century, or on the sort of public-private partnership we had then, to get through the new century. If we are going to generate the number of decent-paying jobs we need, we need a jobs strategy in line with global best practices. That strategy will almost certainly have to involve more government investment and incentives in generating start-ups than Republicans have traditionally favored, and it will almost certainly require more public assistance and incentives to corporations than Democrats have traditionally favored. That is what it means to update our formula for prosperity—melding ideas from the left and the right with the new and the old. We need a hybrid approach that takes the best of both parties.
“Waiting for the U.S. job market to correct itself and clinging to the solutions of the past will not hasten the return to full employment or set the stage for sustained job creation in the years to come,” the McKinsey study concluded. “To create the jobs that America needs to continue growing and remain competitive, leaders in government, business, and education will have to be creative—and willing to consider solutions they have not tried before. Workers themselves will need to acquire the right skills and adapt to a future of lifelong learning and new ways of working. As Peter Drucker warned, ‘The greatest danger in times of turbulence is not the turbulence; it is to act with yesterday’s logic.’”
Hope in the American Dream
Byron Auguste, the management consultant who specializes in education and social issues and has been an important guide for us, summed up where America finds itself today in a March 5, 2011, speech to the Harvard Business School community: “We face some big challenges right now, short term and long term,” he observed. “But if the goal is to have the most prosperous and dynamic economy ten years, twenty years, fifty years from now, I’d rather be us than anyone else. Compared with the other rich countries, we have youth, openness, dynamism, the best minds from around the world, enormous human capital, the deepest capital markets, unparalleled institutions of innovation, and a market no global businesses can ignore. Compared to the big developing countries, we have high social trust, low corruption, an historic link between effort and achievement, and democracy, as messy as it sometimes is.
“These issues are very personal for me,” added Auguste, whose parents grew up in the Caribbean, “and they inform the work I do both at McKinsey and in Hope Street Group [a nonprofit group of professionals and entrepreneurs who promote innovative policies to expand the American middle class]. My parents came to this country when I was a toddler, in 1970. My father worked as a factory shipping supervisor, and my mother made $6,000 a year as an architectural assistant. They bought a little brick house for $28,000 near 7 Mile Road in central Detroit. They saved enough money, and felt secure enough, that my dad quit his factory job and went back to school to become a computer programmer. He changed jobs and we moved to Arizona, where I attended pretty good public schools and won college scholarships. At every step, the institutions and values of this country made a difference, gave us a chance, and made our progress possible. But that American dream can’t be taken for granted. I visited my old neighborhood in Detroit a few years back. Our clean little brick house sat in a derelict block, with no middle class in sight and atrocious local public schools. People doing work my parents did often can’t afford to buy a home in a safe neighborhood. Many can’t take the chance to change jobs or go back to school, as my father did, for fear of losing health coverage, which costs far more now than then. The jobs that got my parents started in the 1970s now face much more intense and global competition. This isn’t a reason to despair; but it is a reason to act differently—to reform our institutions and strengthen our shared values.”
Acting differently will require putting in place a different set of incentives for our political leadership, to loosen the grip of extreme polarization and powerful special interests on our public policies. That, in turn, will require a shock to the system. It could come from the market or Mother Nature or the middle of the political spectrum. We vote for the one from the middle, and the next chapter explains why and how it might come about.
FIFTEEN
Shock Therapy
Alexis de Tocqueville was a French aristocrat, born in 1805, who visited the United States in 1831 and 1832 with the intention of studying its priso
ns. In 1835 he published Democracy in America, based on his travels and investigations. Of all the thousands of books written about this country, Tocqueville’s remains one of the best, with insights into American society, American values, American institutions, and the American national character that remain valid and relevant 175 years later.
Suppose that Tocqueville, with his intellectual gifts and powers of analysis, had been born in, say, 1970. His aristocratic background would have had no bearing on his career. He probably would have gone to one of France’s elite schools but might not have taken part in French politics, as the original Tocqueville did. Nor would he necessarily have joined, and risen in, the country’s national bureaucracy, as men of his caliber did for much of the twentieth century but did less frequently at that century’s end. Instead, he might well have continued his education abroad. He might have studied history at an English university, spent a few years in Asia, earned a degree from Harvard or Stanford business school, and then done what many people with a cosmopolitan background and analytical gifts did at the end of the twentieth century and the beginning of the twenty-first: join an international consulting firm.
Suppose, further, that that firm was commissioned by a large multinational corporation to prepare, under Tocqueville’s direction, an assessment of the United States as a place in which to invest and to do business in the second decade of the twenty-first century and beyond. The report that emerged from that assessment would be the work of many hands, filled with charts, graphs, statistics, and PowerPoint presentations. Tocqueville himself would likely write the conclusion, based on his own travels, conversations, and ruminations. We think it might read something like this:
Twenty years ago, even ten years ago, a report such as this one would never have been commissioned. The United States was the best country in the world for business of any kind, the one with the largest and most open market, the most transparent legal system with the strongest property rights, the biggest and most efficient financial system, the most modern infrastructure, and the most dynamic ongoing research and development in almost every field. It was a magnet for capital and talent. No company of any size, indeed no company that merely aspired to international growth, could afford not to operate there, and none needed a consultant to tell it that.
Now, alas, things are different. Over the past decade especially, America has changed, and not for the better. The country still has many of its major and distinctive economic strengths, but worrying signs of stagnation, and even decline, have begun to appear. Unemployment remains stubbornly high even though the Great Recession of 2007–2009 has officially ended and productivity is at record levels. The federal budget deficit keeps rising, without a credible long-term plan to bring it truly under control. Consumption of foreign oil keeps rising as well, also without any strategy for reducing it. American students consistently score lower on international achievement tests than their age-mates in other countries. The country’s roads are crowded, its public transportation systems are decaying, its bridges occasionally collapse. Major American firms are moving research-and-development facilities outside the United States. Low-skilled immigrants arrive in the country illegally in large numbers, while America fails to take steps to attract and keep the best-educated and most energetic people from abroad, the kind who have founded and built so many high-tech enterprises. The national debate is consumed by absurd distractions, such as establishing beyond a doubt that the president was born in the United States, or increasingly partisan social issues, such as abortion, with scant time and attention paid to discussing the fundamental changes in the world in which Americans are living and the need to adjust to them.
Americans understand that something is amiss, and they worry about it. Polls show growing pessimism among them about their country’s future. I myself have limited faith in these surveys. For gauging the mood of a society polls are, in my opinion, a poor substitute for firsthand and in-depth observation. With all due respect to my number-crunching associates, anthropologists are more reliable guides to a society than statisticians. But the conversations I have engaged in across America in the course of compiling this report—with old friends, new acquaintances, and American colleagues—paint the same picture as do the data in these surveys. The people with whom I have spoken share a gnawing fear that their country is slipping and that the characteristically American promise that the future will be better than the past will not be kept. Those who are fortunate enough not to have to worry about their own jobs and their own economic futures are worried about the future of the country as a whole. They are right to worry, but they are not the only people with cause for concern.
The future of the United States has important implications for your company, of course. You will have to decide, on the basis of your assessment of that future, how much to invest in the country, how many people to station there, and the volume of sales in the American market on which you can count in the years ahead. The American economic future obviously matters a great deal to Americans as well: It will largely determine their personal wealth and security.
What happens in and to the United States has a far wider significance, however, of which everyone who has a stake in the global economy should be mindful. This is the country most responsible for organizing and sustaining the international economic system in which the present era of globalization has flourished. Its economic and military strength have underpinned the vast expansion of cross-border trade and investment during the last six decades, and especially the last two. America is in our era what the historian Plutarch said Rome was in ancient times, “an anchor to the floating world.” Weaken that anchor and the world will drift in directions we cannot foresee and probably will not like. A declining America will be bad for business—all business, including yours.
Let me be clear: The country’s traditional strengths have not disappeared. American society is as vibrant as ever. As I traveled the country, I encountered, as I always do, impressive local businesses, creative teachers, active civic organizations, and visionary leaders. Yet all of that energy and talent is not adding up to the national vitality that the world has come to expect.
What is needed to revitalize the United States—to reverse the worrisome trends, harness all its grassroots energy, spur economic growth, restore the national morale, and assure American global leadership into the next decade and beyond? The answer may surprise you, for it is the same kind of answer our firm gave you twenty years ago when you asked us what we thought were the preconditions for investing in the former Soviet Union and other postcommunist emerging markets. Do you remember our answer? It was “shock therapy.”
Yes, you read that correctly. American politics are stuck, and it now seems to be in need of the kind of jolt that economists and consultants recommended for the country that America defeated in the Cold War, and on occasion for other emerging markets beset with severe economic problems.
It is not hard to see why. Neither of America’s two major parties seems able to address in serious fashion the challenges the country confronts. Their political philosophies are worlds apart, and neither outlook is suitable for the present moment. The Democrats act as if government is the solution to all of America’s difficulties; the Republicans act as if government is the cause of all of them. The Democrats behave as if virtually every program the government created in the twentieth century is perfect and cannot be changed in any way; the Republicans seek to send the country back to the nineteenth century, before any of those programs existed. Neither approach will give the country the policies it needs to succeed in the decades to come.
In fact, the parties have reversed their historical positions. A generation ago Democrats stood for progressive change. Now they defend every federal program as if each were sacred. They have become the most conservative force in American politics. The term “reactionary liberalism” is not a contradiction in terms; it is an accurate description of the Democrats’ approach to governance. The Republicans used to be t
he conservatives in the original, genuine, European sense, opposed to sudden, rapid shifts in public policy and prudent when it came to public finances. Now they are the party of fiscal radicalism and recklessness, cutting taxes without reducing spending and thereby pushing the United States ever deeper into debt. The two parties are, however, united on two things—unfortunately. Neither has the courage to take the necessary serious steps to address the dangerously high budget deficits: reduce spending on the main entitlement programs (Social Security and Medicare), raise taxes, and invest in the programs on which economic success depends. And neither has the courage to reduce America’s, and therefore the world’s, ruinous dependence on oil by raising the price of gasoline.
I know what you are thinking. When operating in emerging markets, your business usually seeks political stability. Indeed, the very stability and predictability of its politics were always major assets for the United States. Now, in our view, they have become liabilities.
To forestall American decline now requires a certain kind of political instability. The country needs to refocus its attention on what is important and unblock its clogged channels of government. Neither will happen if present trends continue. Business as usual in American politics is a recipe for national decline. George Voinovich, a retiring senator from the Republican Party, made the point dramatically in 2010, when he said of the Congress in which he was completing his second term, “I think we have to blow up the place.”