Downgrading America?

8/9/11

I don’t know how most Americans feel these days, but I haven’t felt like this since just before Richard Nixon left office in 1974. Our political leaders (think “jumbo shrimp” or “military intelligence”) have just completed a grand game of chicken. They ended up in just the same position Neville Chamberlain was when he negotiated with Adolf Hitler.

I won’t dwell on the inanity of the negotiations or final resolution about spending, revenues and debt limits. Suffice it to say that cutting a little over $2 trillion from the projected 10—year deficit is akin to losing 7 pounds off a starting weight of 350. We will still have accumulated deficits over that time frame of $7 trillion, and we still confront total debt and vested liabilities of perhaps $90 trillion.

One side argues that we can’t raise revenues and the other argues that we can’t cut entitlements. I have no horse in the race, so to speak, so let me be clear: both sides are wrong, dumber than a pile of rocks, but much more dangerous. Entitlement costs, especially healthcare, will eat us alive: without real reform of affordable health delivery, not just reform of access to health insurance, the U.S. economy is doomed. More generally, at all levels, government has given away the future in order to buy votes in the present. It has been a truly bipartisan effort over decades. On the revenue side, we will need to increase taxes, broaden the tax base, and reform the tax code, or we are also doomed.

Because the negotiated settlement of the debt crisis was so lame, a ratings agency has downgraded the country. Instead of asking whether we are indeed in greater danger of long-term financial difficulties, everyone is blaming the bearer of bad news, pointing out that they weren’t exactly prescient in the recent financial crisis. Of course that is true but irrelevant. You don’t need a crystal ball to see that we have an unsustainable business model and no political process for change.

Reading the papers these days is remarkably uninformative. Increasingly, the media mixes editorial and news content. Each outlet picks a side and then puts all its weight behind a particular narrative. Silver-tongued/penned commentators rail against the lunacy of the other side without the slightest sense of humility or responsibility. Meanwhile, the American public divides into equally ill-informed and unthinking partisan camps.

Whenever I see this recurrent set of facts play out, I am reminded of one of the Dr. Seuss books (The Sneetches) in which one group has a star on their bellies and purports to be superior to the non-starred crowd. The latter gets an enterprising entrepreneur to put stars on, which causes the previously starred group to hire the same entrepreneur to remove their stars. In the end, of course, the entrepreneur has all the money and nothing has been resolved. Sadly, the metaphorical entrepreneur in this case is probably the devil: no one really benefits from the ludicrous behavior of our modern day Sneetches.

So, other than throwing all of our ersatz political leaders out of office, what can be done? Where is there hope? The shocking but self-evident truth is that we need to focus on creating new opportunity in the U.S., not on arguing about who is to blame or whose polar solution is the one true answer. Even if either side got its wish—the Democrats raise taxes on the wealthy to support unreformed entitlements and an expanded safety net, or the Republicans cut taxes and entitlement spending to the bone-‐-the country would not be better off.

What we need is simple—growth. We need the economy to expand. We need people to feel that they can get a job, that their children will be better off than they will be, that tomorrow will be a better day. Where does growth come from? The answer is equally simple—business, especially new business, creates jobs and prosperity.

We need to stop arguing about how to slice a shrinking pie and start working to grow the pie. We need lots of investment in research and development. We need a better-educated and trained workforce. We need hungry, talented immigrants to work their magic in the economy. We need cleverness in using existing government and private dollars to fix infrastructure and create opportunities. We need more venture capital, more entrepreneurs. We need more competent CEOs of major companies who will invest wisely to create new valued products and services.

I was always dismayed at some of the decisions that accompanied the famous stimulus bill that was intended to get us out of recession. My (least) favorite example was the plan to build sound barriers along two road systems in Massachusetts. Think about it, this kind of project does indeed employ people, but it does nothing to decrease the ultimate cost of the road system, nothing to improve economic productivity, nothing to create future opportunities. In short, it’s pork.

Imagine instead that the government had figured out a way to encourage energy-saving retrofits of existing buildings in the U.S. By most estimates the return on such investments is 10-15 percent per year. The investments yield direct savings in operating costs. They also lower oil imports, provide domestic jobs, decrease greenhouse gas emissions, and entail training for new skills.

Or consider investments in new nuclear power generating equipment. One company, TerraPower, has technology that uses spent fuel rods to create safe, reliable energy. That solves several problems, including what to do with nuclear waste, how to diminish the supply of materials for terrorist bombs, and how to decrease reliance on foreign oil. For the past four decades, we have systematically underinvested in nuclear technology, which is tragic.

I could give scores of examples of new ventures in the economy that have the potential to create a boom here and abroad. There are potential cures for diseases like diabetes. There are fabulous companies focused on delivering high quality affordable health to millions. There are thousands of social entrepreneurs trying to improve education and social services. We just need to create a context in which they can thrive.

Instead, what we have done in the U.S. is to impose the greatest imaginable tax on hope and opportunity. We have created a corrosive, divisive context of uncertainty, blame and retribution. Consider, for example, young people pursuing a career in science. Already, such careers are fraught with risk as access to funding for research grows tighter. Now, in the grand compromise over the debt ceiling, we have offered up the prospect that funding at organizations like NIH and NSF will get arbitrarily cut by almost 10 percent. Help me out—does that increase or decrease the supply of great people to careers in research? Does it create opportunity for all? I don’t think so.

The other day in a conversation with my officemate, I called current politicians twits. He objected. I now agree, my assessment was an insult to twits everywhere. Though our politicians are inept, private action can overcome partisan haggling and incompetence. America is a great country because it has citizens who constantly search for new ways to improve the world. We have willing investors. We view crises as opportunities. We, the non-politicians, need to accept responsibility for fixing the country and get to it.

In 1974, the Dow Jones Industrial Average was approximately 600. Today, even as the market plunges, an investment of $1 in 1974 would be worth approximately $50. The real rate of return over the period would have been 7 percent per year, not too shabby considering how depressing the start of the period was. I suspect that 10 or 20 years from now, we will look back in like fashion, marveling at how hopeless August of 2011 seemed, and how resilient and resourceful Americans were in helping her get her mojo back.

William Sahlman is the Dimitri V. D'Arbeloff – Class of 1955 Professor of Business Administration at Harvard Business School. The d'Arbeloff Chair was established in 1986 to support teaching and research on the entrepreneurial process. Follow @

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  • http://ducknetweb.blogspot.com/ Barbara Duck

    It is time for digital laws and digital literacy in Congress and use technology like IBM Watson to query and all start with the same numbers and the old paradigm of its for those guys over there needs to die:)

    http://ducknetweb.blogspot.com/2011/04/ibm-makes-servers-even-smarter-with.html

    Congress has a demonstration and opportunity but apparently digital illiteracy goes so far as to not have any of them recognize a technology tool to help them do their jobs sadly.

  • June

    Leadership, innovation and less regulation would go a long way to helping us climb out of this mess. Why would any entrepreneur or investor take such a risk when they are penalized for their success at every step, through over regulation, taxation or a high cost of doing business, particularly in California?

    Without either party implementing vision through real leadership, we will continue to be mired in the same muck we’re lumbering through today.

    Leadership comes from individuals, not parties and unfortunately there are no individuals willing and bold enough to stick out their political necks to get the job done – not yet, anyway.

  • Drewski

    Yes, grow our way out of it- the only real solution.

    However, you made, then ignored, a key point:
    “More generally, at all levels, government has given away the future in order to buy votes in the present.”

    Next year and decade are already sold- we need to live within our means today, since we don’t have future left to borrow against.

    Yet you propose raising taxes- which stifles growth and presupposes a future unencumbered by yesterday’s debt. Its too late for that- time for a small government and vibrant entrepreneurial ventures to solve this crisis.

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  • http://www.gilberttweed.com Neil Greco

    Interesting perspectives. Agreed on many fronts – I can’t help but get irate when I drive along Route 128 and the sheer waste of tax payer dollars to put up noise barriers – let alone the continued congestion the construction causes on an already crowded roadway. To what avail?

    Without a doubt, energy efficiency is one of the more viable efforts with definable payback periods that we can undertake. One that creates jobs and preserves our fragile environment – a win win. Look at NYC and the NJ Energy Master Plan for example. PlaNYC targets 4,000 city owned buildings and drives efficiency. The Jersey Master Plan offers incentives for continued use of renewable sources of energy. Great examples that – by the way – are the beneficiary of ARRA (a.k.a stimulus) dollars.

    Unfortunately, in our broken political system, we seem to have lost sight of the common good and common sense. Was the recent political wrangling more about the debt ceiling or posturing for the coming elections? Were the noise barriers in the same vein?

    Thanks for sharing your viewpoint.

  • Richard Griessel

    Was it not Harvard that created a lot of the bad ideas which got us in this mess. Like outsourcing….and selling this as a great new MBA tool. Is it not Harvard like most Universities that have become morally so destitute that the indebt their students with loans that they can never repay and made sure the system is tweeked in a fashion that even if you are broke that is the only thing you have to repay. If you raise taxes then only if education is as free as in Europe. Because if you do the math the US taxes are actually higher if you add in the services that the European taxes buy you. Higher US education is not considered tops by most people in this world anyway. So I would strongly recommend Harvard to be more humble as they may be part of the problem and not the solution.

  • http://www.landofsheep.com Andrew Best

    A well-written and interesting piece from Xconomy It’s a shame that most of the public probably can’t understand what is being said here. The system isn’t designed to solve the problems the country is facing. I’m assuming anyone who read all the way to hear felt that this was a classic case of preaching to the choir. I am interested and hopeful as to how this country will turn out, but I’m also a pragmatist, thinking of the opportunities that are out there for investors and small fraction of Americans who aren’t complete fools. Check out http://www.landofsheep.com for more interesting reads on international investing and investing in general.

  • http://babyboomerswriting.blogspot.com Lynn

    A fine summation of the economic damage that has occurred, while mistakes continue to be made. It is a shame we see inconsistent leadership and so little honest discussion. This is what happens when extreme political views try to run the country. Major issues have been clouded by partisan politics while the people hold their collective breath and wait for sensible solutions and clarity.

  • http://Jimbland.com Jim Bland

    Great summary and echoes my article as well http://wp.me/p1PSiJ-q.

    We have weak kneed leadership and too few workers prepared to excecise innovation and creativity.

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