Challenge for the Next President: Productivity
Dear Senators McCain and Obama:
It is now clear that the upcoming election will be mostly about the economy and jobs. Your first weeks and months in the White House will undoubtedly be spent on these issues, barring an international crisis. The statisticians by then will have officially confirmed the recession most Americans already know is here. Things may get worse before they get better. Your leadership skills will be challenged right out of the box, and you may have to butt heads with some of those who helped put you in the White House. So it's important that you understand not only what's wrong with the U.S. economy, but also what's right—and what works.
First, it is important to remember that the U.S. is a highly mobile nation with a very flexible economy. People for decades have gone where the jobs are. And for decades jobs have been shifting from the Northeast and the Rust Belt to the South and Southwest.
Second, it is important to remember that the U.S. can be the most productive country in the world: We PROVE THAT every day in thousands of plants from coast to coast. This is not rocket science. Successful companies today are using pretty much the same techniques that Edward Deming, the great business leader, brought to post-war Japan in the 1950s.
Third, it is important to remember that as we face increased global competition, unions and management will need to work hand in hand—or they may not work at all. The U.S. can probably afford to have a thriving automotive industry led by companies from Japan and South Korea (and in the not-too-distant future, China and India and elsewhere). But the employees of the Big Three can't afford to lose their jobs. General Motors alone, for example, still has approximately 139,000 employees in North America, making it the fourth-largest employer in the country. GM also supplies health-care benefits to more than 1 million Americans, including active workers, retirees, and dependents. If one of the Big Three is forced to file for Chapter 11 bankruptcy, or even Chapter 7, many of these benefits could be lost. Can the President bring the UAW and management together and end this long-standing stalemate?
The Royal Swedish Academy of Sciences recently awarded the Nobel Prize in economics to Princeton University professor and columnist Paul Krugman in recognition of the pioneering research expanding on the observations of an earlier economic thinker, David Ricardo.
It is Ricardo who, in his 1817 book On the Principles of Political Economy and Taxation, helped the world understand the principle of "comparative advantage." As economist David Henderson, a research fellow at the Hoover Institution, noted upon Krugman's selection, "Ricardo grasped that people will specialize in producing the goods and services in which they have a comparative advantage." For example, Henderson wrote, though you may be able to rake leaves faster than the teenager next door, "it still makes sense to hire him because you have a comparative advantage in writing software programs."
As we move forward, U.S. manufacturing must always be based on comparative advantage. And America's comparative advantage is the productivity and inventiveness of our workforce.
Indeed, these have been America's most effective economic weapons. And, in fact, we have been extraordinarily successful. Even today, as we compete with companies from everywhere for everything, America remains the world's largest manufacturer, with more than 20% of the world's total manufacturing output in 2007, the most recent year for which reliable data are available.
But some of our companies and industries are struggling. And the competition is increasing year after year. This trend will not only continue but intensify as companies from such rapidly developing countries as Brazil, China, India, Turkey, and many others go through their growing pains and become world-class innovators and manufacturers.
We have studied hundreds of such companies; we have visited many of their factories and R&D facilities; we have talked with their CEOs and other top company officials; and we can attest to their abilities and their hunger to grow and compete on a global scale.
Detroit and Unions on Collision Course
While a President cannot stop or even slow down such trends—and would be foolish to even try—he can help prepare the public for the competitive tsunami that lies ahead and help U.S. companies and workers prepare for the tough challenges they will face. A heavy dose of realism—and perhaps some "tough love"—will be needed here.
For example, most people believe the U.S. auto industry is dying. Almost daily we read about losses, layoffs, plant closings, possible mergers, restructuring, and shifting production from gas guzzlers to economy models to hybrids to alternative-fuel vehicles, as the industry reels from economic crosswinds beyond its control.
Yet, prior to the recent economic meltdown, the U.S. automobile industry writ large was doing quite well. New plants were being built, and hundreds of new jobs were being created. Among all manufacturing industries—medical equipment and supplies, fabricated metal products, plastics, cement and concrete products, and so forth—U.S. motor vehicle manufacturers led all others in "multifactor" productivity gains from 2005 to 2006 (output per combined units of labor and capital). The automakers registered a 4.6% increase, according to an August 2008 Bureau of Labor Statistics report. These gains are not the sign of a dying industry.
So why is Detroit in such a funk? And why did the Big Three automakers request and receive a $25 billion loan recently from Washington? The answer is that there are two auto industries in America: the old and the new.
The old auto industry is located in Michigan, Indiana, Wisconsin, and elsewhere in the Rust Belt. While the motor vehicle industry as a whole has chalked up impressive productivity gains of 4.6% in the past two years (vs. the 0.61% that 86 manufacturing industries saw for the same period, according to the BLS), Detroit has not fully benefited from these gains. Partly as a result, Michigan alone has lost 47% of its vehicle manufacturing jobs over the past eight years, pushing the state's unemployment rate to 9% in mid-October of this year.
While the old auto industry has many problems, one of the biggest is the fact that it is locked in a mutually assured destructive (MAD) relationship with the United Automobile Workers union (UAW), doing a death dance that can only end in tragedy.
Right to Work
If the relationship continues along its present course—from which no winner can possibly emerge—there will eventually be no Big Three in the U.S. and no UAW (though the Big Three may continue to manufacture overseas for the Asian, European, and Latin American markets). Michigan will become primarily a farming state again. And the children of UAW workers and auto company professionals and executives will have to seek work elsewhere when they finish school.
The new U.S. auto industry—spearheaded by Japan's Honda, Toyota, and Subaru, South Korea's Hyundai, and Germany's Volkswagen, to name several key players—is located in Alabama, the Carolinas, Mississippi, Tennessee, and Texas, all right-to-work states, where belonging to a union cannot be made a condition for employment. This is where most of the productivity gains can be found. This is where the industry is building modern new plants and creating new jobs.
This is what the future could look like if the right policies were in place and the Big Three and the UAW had the will to work together, rather than continue their MAD combat. Can a President bring labor and management to their senses? You will at least have to try.
Most people naturally think of labor when they think of productivity: How many widgets are produced per worker-hour of labor? And labor is certainly an important component. But many other factors can influence productivity as well: ingenuity, innovation, fluid management, having the right people in the right places at the right times. The topics I discussed in my earlier letters—education (BusinessWeek.com, 10/28/08), (BusinessWeek.com, 9/28/07) and (BusinessWeek.com, 10/21/08)—all bear this out. Innovation and productivity require educated, well-trained workers. Manufacturing and mobility require energy. Living well and getting goods to market require infrastructure.
So what is it that a President can do to affect this?
He can make America's productivity—in government as well as the private sector—a White House priority. He can tell union officials that the days of featherbedding and counterproductive work rules and job classifications are over. In a world in which we are competing with everybody from everywhere for everything, we can't afford this anymore.
The President also can propose tax incentives for worker training and R&D programs, to make sure American companies remain not only cutting-edge manufacturers, but highly efficient, highly productive manufacturers: producing more and better products with the same labor. This is how economies grow. This is how you increase the overall number of jobs.
Most of all, the President can provide leadership. In the coming era of globality, Americans need to work together as never before. If we don't do that, our economy will wither over time. In 20 years there may be no jobs for our children.
In a poster for Earth Day 1970, cartoonist Walt Kelly, creator of the Pogo comic strip, coined the famous saying: "We have met the enemy and he is us." That, Senators Obama and McCain, describes our economic situation as well.
Sure we will continue to face increased competition from low-cost manufacturers from China and other developing countries for many decades to come. But we don't have to lose this competition. If we do lose, it will not be because of anything they have done—but because of the many things we haven't done.
The U.S. has had things good for a very long time. Since the end of World War II, we've been the country of choice, where millions of people fleeing poverty, ignorance, bureaucracy, and repression have come to study, work, succeed, and build better futures for themselves and their descendants. But recently, we've taken our success for granted, assuming it's a birthright. While others have been investing in their future, we've been consuming ours.
We can continue along this course and leave our children a country that is less than it was when our parents handed it to us. Or we can invest our resources in ways that will ensure that we are always—always—No.1.
If we make ourselves energy independent, expand our talent, and build an infrastructure that keeps America mobile and moving, and enhance our productivity, we can ensure that the U.S. will remain the greatest nation on earth.
It makes little difference to me whether the next President is a Democrat or Republican, a younger man or an older man, a great orator or a great war hero. What I care about is that the country set itself on a long-term course of action that will ensure its economic strength, which is necessary for everything else we may hope to accomplish.
We need a President with a long view, the patience to see the challenge through, the courage to say no as easily as he might say yes, and the knowledge that the world as we knew it in our youth no longer exists. It has been displaced by the far more complicated and rapidly changing world of globality—a world in which American companies and workers will have to compete with everyone else or fail.
I realize the economy is in serious trouble today. Still, the next President needs to focus on tomorrow. If our children are to prosper, we need to think beyond mere survival.
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