by Mitt Romney
In contrast, Japan resisted many of the same innovations we embraced. In that country, small farmers held such political power that Japanese leaders enacted laws and regulations that stymied agricultural productivity. Japan similarly prevented the adoption of higher productivity innovations like supermarkets, not to mention big-box stores and hyper-markets. Retailers were historically governed by the so-called large-scale store law, which restricted store size to one thousand square meters or less. Today, strict environmental regulations on new retailers achieve the same objective, and a skilled bureaucrat can keep a supermarket out of virtually any Japanese town. According to a comprehensive study by former McKinsey & Company partner William Lewis, the result is that productivity in retailing is about half of what it is in the United States.
Yet Lewis also found that in heavy industry and manufacturing, Japan’s productivity is well above our own. In that sector of the Japanese economy, a total of only about 1.5 million workers manufacture steel, cars, consumer electronics, auto parts and computers, compared with over 8 million workers in the country’s retailing and food processing sectors. The net result is that Japan’s innovation and productivity disadvantages in those two sectors—as well as in agriculture—swamp its achievements in industry, depressing Japan’s overall economy and the wealth of its people. Japanese governmental policy that is purposefully designed to prevent creative destruction also inevitably blocks innovation, lowers productivity, and depresses the income and wealth of its citizens. Japan’s leaders surely understand the consequences of their job protection policies, but the politics are simply too compelling for them to resist.
In post–Soviet Union Russia, it appears that the nation’s leaders failed to fully appreciate the beneficial implications of creative destruction. Lewis’s productivity analysis of that country found that in 1990, it produced virtually as much steel as the United States. Three large-scale plants had adopted world-class technology that enabled them to achieve productivity equal to 95 percent of that of the U.S. steel industry. But across Russia, thirty-three small, highly unproductive steel mills operated with antiquated open-hearth technology and subscale production. The Russian government attempted to protect them with subsidies, massive tax and energy-cost breaks, and by allowing them to reduce worker wages. The result was that in 1997—just seven years later—Russian steel productivity had fallen from near parity with that of the United States to 28 percent of our level.
Had the Russians followed one of the two better alternatives—either by investing in new facilities and technologies to make the small mills competitive or by allowing them to fail and devoting financial resources and available labor to new and more productive enterprises—the outcome would have been far different for the Russian economy and people. It takes a leap of faith for governments to stand aside and allow the creative destruction inherent in a free economy, but it’s a leap that has been successfully made by every advanced economy in the world. As Alan Greenspan has observed, Deep down that is probably the message of capitalism: ‘Creative destruction’—the scrapping of old technologies and old ways of doing things for the new—is the only way to increase productivity and therefore the only way to raise average living standards on a sustained basis.
Creative destruction is unquestionably stressful—on workers, managers, owners, bankers, suppliers, customers, and the communities that surround the affected businesses. The pressures these groups put on political leaders to block game-changing innovations can be intense. Back when I worked as a venture capitalist, I was approached by an entrepreneur whose new company had developed software and an integrated system that could complete the legal work required by banks to close a mortgage—and the company could do it for a fraction of the cost being charged by lawyers for the same service. My partners and I invested in the company, convinced that the huge cost advantage it could offer would quickly build business, and we were right. Banks soon signed up for the service, and it looked like we were on our way to taking over the lion’s share of the industry. Borrowers saw much lower closing costs, and the costs for banks came down as well.
But the company’s growth was not good for real-estate lawyers. And because we were not yet fully appreciative of the realities of state government, we were surprised when legislators—many of them were part-time real estate lawyers themselves and many others had friends and contributors who were real-estate lawyers—enacted legislation that put us out of business.
Despite the benefits to the country, the consumer, and the overall workforce from productivity-enhancing innovations, they often face considerable opposition. Managers of corporations that are disadvantaged by a competitor’s productivity-enhancing innovation may lobby to prohibit the innovation or the competition. Walmart, for example, pioneered a retailing concept that has propelled it to national leadership, but mom-and-pop and Main Street retailers often do their best to get local governments to prohibit or forestall Walmart’s stores from being located in their vicinity. Unions as well often oppose productivity innovations that will lead to reduced employment; understandably, they aren’t persuaded by arguments that workers will eventually find employment in new enterprises. And they may worry that even if new jobs are created, these jobs will not be in their union. Typically, they work to block such innovations in two ways. First, they threaten to strike the company that wants to adopt a productivity-enhancing new technology. Second, they exert their considerable political clout to convince government to impede the innovation.
In the hotel industry, for example, hospitality managers have learned that productivity is improved if they cross-train and cross-assign—doormen, bellmen, and the check-in staff are trained to do one another’s jobs. If there’s a backup at check-in, the person at the bell desk can cross over to help, and if the bellmen are busy, the doormen can take luggage to a guest’s room or even fill in at the check-in desk. Because of this ability to move workers to different posts as needed, the overall staffing level needed by the hotel is lower, creating higher productivity.
But hotel unions routinely oppose cross-training and cross-assignment, even though such training increases the skill sets of the employees. At union hotels, the result may be that larger staffs are needed, productivity is lower, and hotel guests are more likely to be irritated while they stand in long lines and observe hotel employees who aren’t busy. These kinds of work rules pervade many companies and most managers say such artificial barriers to productivity exact higher cost penalties on their business than do the typically higher wages won by the union. In fact, nonunion hotel companies typically go to great lengths to make sure their nonunion workers receive the same or higher wages than their competitors’ union counterparts.
Government often supports union efforts that block productivity gains by prohibiting government contracts from being performed by nonunion companies. And it can bolster them, too, by requiring a certain staffing ratio by law, as is the case with proposed legislation that is being aggressively promoted at both the state and national levels to establish minimum levels of nurse staffing at hospitals. As hospitals have begun to adopt telemetry and monitoring technology that reduce the number of nurses needed in wards and other hospital settings, nursing unions have lobbied hard to see legislation enacted that fixes the ratio of the number of patients per nurse throughout the hospital. Under these rules, a hospital would be obliged to staff to the mandated level whether or not that number of nurses was necessary for the care of patients and the effective operation of the hospital, thus adding to the cost of health care for everyone.
Sometimes the government’s complicity is even more direct. The most naked pro-union power play in decades is the AFL-CIO demand for Congress to change the process by which a union enters a company’s workplace as the designated bargaining unit. The proposed statute, known as card check legislation, would represent a massive imposition on the freedom of workers to choose whether or not to become part of a union. Currently, the decision about unionization is made by a secre
t-ballot vote by the company’s employees, but because unions haven’t been winning a lot of elections lately, they want to change the rules. Under the AFL-CIO plan, there would no longer be any secret-ballot elections where employees can vote without the union knowing how they voted. Instead, the union would collect pro-unionization signature cards from a majority of employees, cards that could be collected over an extended period of time and without the knowledge of the employer that an organizing effort is under way; thus, employees could be targeted and pressured, one by one. This is a remarkable departure from one of the prerequisites of any democracy—that of a secret ballot.
It’s easy to imagine how this system could lead to employee harassment and coercion. Ironically, the proponent’s name for this proposed card check legislation is the Employee Free Choice Act. But what are the chances that it would promote free choice rather than stifle it? I’m convinced that in some cases it would effectively impose unionization on reluctant workers, as well as on small and big businesses across the country. It would also slam the door on countless innovations routinely opposed by unions, driving down or stalling completely productivity growth, and virtually ensuring that, over the long term, America’s economy and household incomes would suffer.
There is no intrinsic reason why unionization must reduce productivity, of course. Some unions go to great lengths, in fact, to provide their members with training and skills that make them more efficient and productive. Forward-thinking unions look for ways to help their employer become more competitive.
Unfortunately, some union CEOs are less concerned about an industry’s competitiveness than they are with how many of their union’s jobs they can protect, how much they can increase wages, and how they can impose even more favorable work rules. In some cases, this mind-set has contributed to companies or to entire industries falling so badly behind their competition that they lose market share or fail altogether, resulting in even greater job losses. Airlines, textiles, tires, steel, aluminum, consumer electronics, and autos include cases in point. The decline in unionized workplaces in the private sector reflects a recognition by working people across America that continual improvement and innovation are required in order for an employer to survive in the global marketplace. Unionization continues to grow in the public sector, however, because there is no competition to drive out a government entity that is inefficient, unproductive, or high cost—government is a protected monopoly.
How Government Can Help
Again, the most important thing government can do to promote innovation and productivity is not to block it, as by preventing creative destruction. Likewise, if government prevents or impedes foreign competition it depresses productivity. Trade improves a nation’s productivity and raises its citizens’ incomes. But as with creative destruction, embracing the often disruptive and painful effects of foreign competition can be more than a bit counterintuitive.
Imagine that a foreign television maker develops a manufacturing process that improves the quality of televisions and makes them less expensive as well. You can bet that the U.S. government would immediately hear from our own television manufacturers. In the 1950s, America was the home to ninety different television companies, including RCA, Magnavox, Zenith, General Electric, and Motorola. They would argue that they would be driven out of business if the foreign TVs were allowed into the U.S. market without the imposition of a hefty tariff. The electronics-workers union would join the outcry, as would parts suppliers and the mayors of communities where American television plants are located. From their perspective, if the government didn’t protect the U.S. industry, jobs would be lost. The collective outcry would be loud and sustained.
What is less clear to many is what the government should do: What is best for the American economy and for our people? Obviously, lower-priced and better-quality televisions would be good for American consumers. And if the U.S. companies were unable to match the foreign competition, jobs lost by U.S. television manufacturers would be replaced by jobs in industries making goods in new or growing businesses in which American companies were more productive and more successful than their foreign counterparts, leading to growth here and abroad. The inefficient manufacturers would inevitably disappear, but new ones would grow and thrive.
The math here is quite straightforward: replacing jobs in low-productivity industries with jobs in high-productivity businesses raises the nation’s average productivity and per capita wealth. The process of expanding exports from more productive industries, Harvard Business School professor and author Michael Porter concludes in his cross-nation study, shifting less productive activities abroad through foreign investment, and importing goods and services in those industries where the nation is less productive, is a healthy one for national economic prosperity.
Employing subsidies, protection, or other forms of intervention to maintain such industries, Porter continues, only slows down the upgrading of the economy and limits the nation’s long-term standard of living. The best course for the nation—and for our citizens collectively—is not to obstruct foreign competition.
U.S. companies faced with innovative and less costly products from overseas have to make one of two choices. They can invest in new technologies, innovations, and productivity improvements themselves and beat the foreign competition at its own game—a process that usually necessitates convincing investors to back them with new capital. It also often requires unions and suppliers to make adjustments. When Finnish manufacturer Nokia entered the American market with its high-quality and inexpensive mobile phones, for example, U.S. manufacturer Motorola didn’t panic or cave in; it fought back with new investment and the cooperation and dedication of its workers and suppliers. Motorola continued to thrive.
Alternatively, U.S. companies can argue for protection, hold on as long as possible, and slowly watch their market share wane—aware all the while that sometime down the road they will be forced to liquidate, at the expense of their workers’ jobs and the investment of their shareholders. Sadly, the foreign-television scenario wasn’t hypothetical. In the nation that patented the first electronic television, very few if any TVs continue to be manufactured.
The case for trade, like that for creative destruction, makes good economic sense—trade improves the wages and standard of living for the average citizen. Trade also strengthens the overall economy. But trade can disrupt and devastate those individuals directly affected. Owners and shareholders may lose money, of course, but that is not an unexpected or unfair aspect of investing—they have encountered the unfortunate half of the no risk, no reward maxim. But it is the employees and managers, from the shop floor to the drafting tables to the delivery trucks, who take the brunt of the pain. Trade is good for the nation and for the average citizen, but it is decidedly not good for everybody.
Some years ago, I served as a lay pastor. In the Mormon Church, we don’t have full-time or paid pastors, so individual members like me are asked to assume that responsibility. I served a congregation or a group of congregations in the Boston area for about fourteen years. Among these were inner-city and Spanish-, Chinese-, and Portuguese-speaking congregations. I cannot count the number of times I consoled or counseled a person who had lost a job. Not one of them, of course, saw their unemployment as a good thing for the national economy. It was instead a deeply traumatic personal experience. The resultant stress caused a few people to gain weight, but most lost quite a lot. When the unemployment lingered, people often aged. Sometimes problems in the marriage or at home developed. And these things occurred even though these people were not destitute; when needed, they received help from the church and from family as well as unemployment benefits they may have earned.
For some, when they found new jobs, they received better or at least equal opportunity and pay. For many, that was not the case. When the new position was an upgrade, people tended to overcome the unemployment experience. But when people could not find at least equal opportunity in a new position, and do so relative
ly rapidly, there often were sustained and meaningful personal costs. Marriages faltered, faith dwindled, illnesses appeared, countenances changed. Ever since these experiences, unemployment is not merely a statistic to me.
Given the beneficial effects for the economy, for the nation and for the average citizen, we should not restrict trade or burden productivity. But as a nation we must do everything we can imagine to help the affected people transition to new and more productive employment. Effective employment centers can help. For those who lack English proficiency, language programs at community colleges or similar institutions are essential. Other adult education programs can, of course, be extremely helpful. In my own experience, I have seen that the best training often occurs in the workplace where it is targeted to a job that is actually needed. That is one reason why I favor programs that incentivize employers to hire and train people who have been out of work for an extended period of time, who have disabilities, or who have been affected by the failure of a company or industry. As governor, I was able to establish a program that paid employers 2,000 toward the cost of training anyone they hired who had been out of work for more than a year. For all the benefits that productivity improvements bestow on the many, we need to make sure that the cost is not borne by the few.
Personally, I don’t like to see America lose any good jobs. But when I see an American company challenged by a foreign competitor, I don’t look for protectionist policies as an answer to the company’s problems. Instead, I look to see how that company can become competitive once more, drive off its foreign foe, and propel its own products into foreign markets.