Monday, 21 May 2012

The Truth About CEO Presidents

In this presidential contest, the American public is once again being told that the Republican candidate knows how to create jobs because he is a former CEO. Taken at face value, this is an absurd claim. For no sane business leader wakes up every morning asking, ‘how many jobs can I create today?’ The single most important priority of business leaders is to make money for their shareholders. And the number of persons a company employs is determined through strategic workforce planning, which is based on business plans, competitive positioning, and general consumer demand. The truth is that no company has job creation as its central purpose, and anyone who knows anything about the inner-workings of business organizations understands this.

Governor Romney’s claim that he can solve the nation’s unemployment crisis because he was a successful business leader is meant to take advantage of the misconception many Americans have about the CEO President: that mythological creature that was thought up years ago by right-wing pollsters and pundits, and that is meant to play on the romance America has had over the last couple of decades with certain of its business leaders.

Executives such as Jack Welch, Warren Buffet, Bill Gates, and Steve Jobs have been celebrated for their vision, intelligence, and judgment. And it is now widely assumed that former CEOs who run for public office will be able to translate their business know-how into a formula that will bring the nation high economic growth, low unemployment, and a general rise in living standards. But what reason do we have to believe this? We ought to expect a business leader to have considerable knowledge of his market, products, and services as well as his industry, investments, and people; but the intricacies and interrelations of GDP, inflation, unemployment, price indices, trade policy, and international finance are of an entirely different order of knowledge, and there is no reason to think that knowledge of business entails knowledge of macroeconomic theory and policy-making.

We can also demonstrate the falsity of this meme by examining the history of American presidential leadership. The last two presidents with experience as private sector CEOs were George W. Bush and Herbert Hoover. If we look at the respective records of these two men, we see nothing exceptionally good about their stewardship of the economy.

Under President George W. Bush, unemployment rose from 4.3% in Jan. 2001 to 6.3% in June 2003. It was down to 4.4% by March 2007, but was up again to 7.2% by December 2008. The poverty rate increased from 11.3% in 2000 to 12.7% in 2004, and was up to 13.2% when Mr. Bush left office. During the Hoover administration the unemployment rate rose from 3.2% in 1929 to 24.1 percent in 1932; and the average income of most Americans dropped 38%. Now one may say that these figures are distorted by the fact that a financial crisis occured while each of them was in office. But the 1929 Wall Street crash and the 2008 subprime mortgage meltdown were not in themselves to blame for mass unemployment and increased poverty; it was rather the failure of Messrs. Hoover and Bush to act decisively which led to economic calamity in each case.

President Hoover refused to provide federal funds for public works projects and cut government spending as tax revenues fell, thereby increasing the deflationary pressures on the economy. He would not provide money for the direct relief of the unemployed and depended upon business and community volunteerism to help ease poverty. President Bush’s response to the financial crisis of 2008 was better but not by much. He pushed emergency loan legislation through Congress to help prop up the banks, but he did almost nothing to deal with rising unemployment; indeed, Mr. Bush declined to increase government spending as unemployment rose and refused to extend unemployment insurance benefits as the job crisis set in.

There is nothing in logic or history which suggests that experience as a CEO gives a president the qualities necessary to competently manage economic affairs. And the claim which states that a CEO President will know what it takes to ‘make the country competitive’ is equally nonsensical. When pundits and politicians talk about national competitiveness, they usually mean one country’s competitive standing vis-à-vis that of others. But it is hard to see what evaluative standard we are supposed to use to determine this status. Should we use GDP, current account, unemployment rate, currency exchange rates, new housing start-ups, new business start-ups, monthly economic growth, annual economic growth, foreign direct investment, or position on the human development index? Or, perhaps it is the aggregate of all these facts that is supposed to tell us the relative competitive strength between nations.

The World Economic Forum’s Global Competitiveness report is the closest thing I’ve seen to this kind of index. It provides a highly detailed and intelligently analyzed overview of the conditions that are favorable and unfavorable to productivity in the various industries in each of the world’s economies. There is no loose talk in this report about countries being in competition with each other; that is because the Forum’s report is based on the Porter framework for national competitiveness.

The Harvard economist Michael E. Porter first brought the idea of competitiveness into the public sphere with his two books, Competitive Strategy and Competitive Advantage. These works became quite popular among business school academics and management consultants in the 1980s, and his ideas made their way into the business world of the 1990s, changing the way management teams evaluated their ability to produce, develop, market, and distribute goods and services.

In 1990, Professor Porter published The Competitive Advantage of Nations, which is perhaps the best work in the field of political economy since David Ricardo’s On the Principles of Political Economy and Taxation. In this book, Porter argues that productivity is the only meaningful criterion for measuring competitiveness; and the only way to understand national productivity is to examine the activity of regional clusters of specialized firms in relation to the social and material conditions of the country as a whole. Porter presents four case studies—Germany printing machines, American patient monitoring equipment, Italian ceramics, and Japanese robotics—and explores the productivity of particular industries within those nations.  

Porter’s vision of national competitiveness is not a zero-sum game in which America is in direct competition with China or India or the United Kingdom for jobs and wealth; he instead offers an empirically-sound theory explaining how nations can grow and thrive simultaneously.  

‘Every industry is unique, with its own sources of competitive advantage and its own evolutionary path’, Porter says. There are no generic set of public policies that guarantee competitiveness. Government’s role is to support the development of regional clusters by educating the workforce, building infrastructure, and creating a regulatory environment that encourages competition among rival firms: specific remedies for each of these policy areas must correspond to concrete social and economic realities, or else they will be of no effect.

Michael Porter is still considered the leading expert on national competitiveness, but few conservative politicians seem to have read him, for they propose policies which have nothing to do with his recommendations. For example, Mr. Romney says he will sign the so-called American Competitiveness Act during his first week in office, the only effect of which will be to lower the overall corporate tax rate. But the only thing that Porter says about corporate taxes is that specific tax incentives can be used to encourage business investment: a single sentence in an 800-page book. ‘The goal of government policy toward the economy’, Porter says, ‘is to deploy a nation’s resources (labor and capital) with high and rising levels of productivity’; there is nothing in The Competitive Advantage of Nations urging tax cuts as a means of achieving this aim.  

The right-wing's abuse of the word competitiveness is part of a larger effort to get us think that whatever is good for profit is good for people. They would have us believe that a former CEO knows how to decrease unemployment and increase prosperity because he has made a lot of money for himself and his shareholders; and they would have us conclude that with Mitt Romney as president everyone will see their wages and their employment prospects improve because he knows how to make wealthy people even wealthier. Mr. Romney wants people to think he will be a job-creating CEO President. But the public must be reminded that the last two CEO Presidents were poor stewards of the national economy and that expertise in business is no guarantee of proficiency in public policy making.

1 comment:

  1. Perhaps Mitt could take California through a managed bankruptcy and sell of the components to other states? Oregon and Idaho might bid for the portion of the state north of Sacramento? Better yet, he could use the bankruptcy to 'pilot' privatization of key Government functions that would both reduce debt and increase employment. The Golden Gate bridge, sponsored by Goodyear; the California postal service; The ADT Highway Patrol? Yosemite, by AT&T.