OUT OF FAVOR
There's a disturbance in the force that powers the U.S. economy, and it’s focused on the White House. After billions of dollars in bailouts this year for major banks and a few other politically favored corporations, an anxious consensus is emerging in political discourse.
“There is little indication that the [Obama] administration understands what makes business tick,” says Jade West, senior vice president, government relations, for the National Association of Wholesaler-Distributors (NAW). “You don’t want to pick a fight with your president, but most of us would argue that we see ourselves as being viewed by him more as the bad guys and as a revenue source.”
West’s viewpoint, on behalf of one of the few business lobby groups in Washington that opposed the Obama stimulus package, is not surprising. But the echo of her remarks is. Ed Schultz, the feisty left-wing Air America radio commentator and MSNBC-TV talk show host, told his viewers in October:
“The bottom line is Wall Street got damn near anything it wanted, and you guys out there who are creating jobs, who are trying to stay afloat, it’s like you’re in a different world, operating under a totally different set of rules and you want the Obama administration to redo this thing. … Nobody on this [White House] economic team has ever had to meet a [payroll].”
In monetary terms, massive federal deficits threatened to crowd out private borrowing for economic growth. But the problem is bigger than capital markets swamped by Treasury securities. On an emotional scale, entrepreneurs’ spirits are being crowded out by debates in the news media that focus almost entirely on government proposals, not on their ingenuity and creativity.
The relationship of business and government has always been an uneasy one in the United States. Some administrations and Congresses have seemed decidedly pro-business because there’s nothing like a healthy business community when it comes to job creation, community service, thriving families and a growing tax base. Others have regarded business with deep suspicion, viewing business people as greedy, pollution-prone oppressors of pristine communities and honest, hard-working “ordinary” Americans.
Such stereotypes notwithstanding, incomes of most people come from private sector wages and salaries. That’s why business is used to having a seat at the negotiating table, no matter what the issue. But so far the Obama administration has missed a chance to tap operating executives from non-financial companies for senior appointments. This oversight is hardly unprecedented; it has been the same in past Democratic and Republican administrations. But the absence of visible, non-financial executives in policy-making roles is especially apparent and unfortunate now, amid political promises of change and commitments to long-term economic growth. Instead, companies that make things are on the outside looking in and—no surprise here—not always liking what they see.
That’s a widespread perception, at least. Dan DiMicco, the outspoken chairman, president and CEO of Charlotte, North Carolina-based steel maker Nucor Corp., says the reality is not so bleak: “For over 10 years we have been pushing on a string and while we have made some headway, it has been very limited,” he said. “Now, we may be in the position of pulling on a rope and that will make all the difference.”
DiMicco is optimistic about President Obama’s appointment in September of Ron Bloom, a former United Steelworkers Union official, as the White House manufacturing adviser. “I can say that I am more encouraged than at any time over the last 15 years that we may finally be getting traction on our issues. It has taken the mother of all crises to start to wake people in Washington up to the critical importance of U.S.-based manufacturing to real wealth creation in this country. This is as opposed to the funny money wealth of Wall Street, the banks, and other financial institutions that caused our financial and economic crisis.”
“I don’t think we can spend our way out of a recession. It doesn’t work in business and it doesn’t work for the government,” says Sandra Westlund-Deenihan, president and design engineer of third generation family-owned and operated Quality Float Works, Inc., in Schaumburg, Illinois. The company, organized in 1915 by her grandfather, makes metal floats and assemblies used to level liquid controls in plumbing, water purification systems and dozens of other industrial applications.
“The best way to stimulate the economy is by cutting taxes—both individual and corporate—and easing regulations that really impact small business. I can tell you from personal experience the time and energy it takes to comply with the paperwork is time I’m not engineering a product for a customer or creating jobs,” says Westlund-Deenihan, a member of the NAM board of directors.
Despite such clarity in the business message, current government attitudes toward business may seem dismissive, as West suggests. Complaints about exported jobs, executive pay, perquisites, business conferences and tax loopholes proliferated for much of the year in an environment characterized by low business confidence and wobbly stock prices.
Condescension toward business by government officials is evident in the media. In a July interview with BusinessWeek, for example, President Obama said, “A number of those who think we’re anti-business seem to forget that it was just three or four months ago when, at great political expense, we yanked them out of the fire.” U.S. Commerce Secretary Gary Locke characterized the government’s attitude toward business this way in comments to the Los Angeles Times: “It’s not different than a parent who says to a child, ‘I’m very disappointed in your behavior here, and we think what you did is wrong and unwise, but we still want you to succeed.’”
The voice from the Obama opposition is similarly dissonant. This summer’s sometimes raucous congressional town hall meetings about health insurance legislation revealed deep distrust toward the federal government.
Such skepticism resides in the DNA of Americans, and not just among those whose political party has resoundingly lost the most recent national election. Year after year, a majority of Americans say they believe “government is trying to do too much that should be left to individuals and businesses” compared with those who say “government should do more to solve the country’s problems,” according to a March 2009 Gallup Poll.
In the last two decades, Americans’ regard for profit-making enterprises has remained consistently high. Stock market losses, Wall Street shenanigans, corporate ethics scandals, the burst of the housing bubble, higher unemployment—none of these calamities has altered Americans’ core belief, posited repeatedly in Pew Research Center surveys that measure agreement with the statement: “The strength of this country today is mostly based on the success of American business.”
Three-fourths of Americans mostly or completely agreed with that statement in the 2009 survey, with an increase in those who agree completely compared with the 1987 survey. “I fully expected that there would be much more negative attitudes about business,” says Scott Keeter, Pew’s director of survey research. More than half of Americans believe labor unions are a necessary protection for workers, but the level of support has declined to 61% in 2009 from 74% in 2003.
“There hasn’t been a grand rise in anti-business sentiment,” Keeter said. “Nor is there—in a couple of new questions that we ask—any sign that people want to kill everybody on Wall Street. There is an acknowledgement that there is a lot of greed on Wall Street, but at the same time there is a view that it has some important social utility for the country.”
Maybe so, but Keeter’s data reveal an impediment to the current business voice. When a Pew survey this summer looked at public approval of various job classifications, “we asked people how much each of these professions contributes to the well-being of society,” said Keeter. “Scientists, teachers, members of the military, medical doctors—all got high ratings—69% to 84%. Business executives were at the bottom. Twentyone percent of the public said they contributed a lot to society’s well-being.”
In this worst case, business owners and operators are caught in a rhetorical pincer—dismissed by activist elites in government and disliked by anxious voters rebelling against forces beyond their direct control.
Of course, a simple “just-say-no” reaction by many business people toward government initiatives ends discourse, even when their negative instinct is well grounded. Understanding the other factors muting the business voice, despite overall public approval of business’s place in American society, requires business leaders to take a look back and to look in the mirror.
LEGACY COSTS
The U.S. Constitution was enacted in large measure to boost commerce among the states. One of the most powerful laws of the 19th Century, the Sherman Antitrust Act, codified the Constitution’s intention to spur business competition.
But despite brief ascendancies in the administrations of Presidents Calvin Coolidge and Ronald Reagan, the mantra uttered by Coolidge in 1925 that “the chief business of the American people is business” has been sotto voce in American political discourse. Republicans and Democrats have honored free enterprise as a concept to salute, but not as a strategy to implement.
This year, the recession prompted a look back to the Great Depression, which liberal and conservative scholars agree was deepened by the overly conservative policies of the Federal Reserve, the nation’s central bank. The Fed failed to stimulate credit, despite large infusions of gold reserves into U.S. banks from overseas.
The role of the Depression-era presidents, Herbert Hoover and Franklin Roosevelt, draws less agreement. But there is no disagreement that import tariffs championed by Hoover throttled America’s blossoming international trade. His Reconstruction Finance Corp., which made emergency loans to banks, farm lending agencies, railroads and local governments, often made things worse when it publicized the names of loan applicants, hurting their public image and pushing customers to competitors.
Hoover’s market interventions in the name of problem solving became the cue for his successor, Roosevelt, to instigate even more aggressive and invasive experiments that thwarted free enterprise, notably the National Recovery Administration, which introduced a series of economic mandates and bureaucracies that squelched possible private sector solutions to the downturn.
After World War II, business joined government in worrying that the U.S. economy would lapse back into depression, leading to political unrest. Even as evidence of a substantial post-war boom emerged, the loudest voices of business expressed fear that America was sliding into socialism. The outcries at this summer’s town hall meetings pale in comparison to the capitalism vs. socialism pyrotechnics of the late 1940s and 1950s.
In 1952, liberal economist John Kenneth Galbraith, noting that the U.S. Chamber of Commerce and the National Association of Manufacturers railed against socialism even as post-war business profits blossomed, put his finger on an essential weakness in the business voice: “The businessman shares with many others [a] fear which, unlike his political doubts, he leaves largely unexpressed. It is that private capitalism is inherently unstable.”
Galbraith’s insight rings true to many today. But so do the words of his contemporary and rhetorical counterpart, economist Milton Freidman. Freidman answered head-on the anxieties of capitalists as well as the warnings of economic liberals by becoming the energetic public voice of free enterprise.
Milton Friedman’s book, Capitalism and Freedom, first published in 1962, and its more popular companion book co-authored with his wife Rose Friedman, Free to Choose, published in 1980, sought to replace fear with pride in the hearts and minds of America’s entrepreneurs.
The Friedmans’ idea was pure and simple—limited government, leaving most decisions and resources to private individuals and businesses. They opposed nearly all taxation and regulation of business, but they also opposed tariffs and other trade barriers as well as direct government subsidies to business.
The Friedmans exposed the fork in America’s business voice—invocations of capitalist freedom clash with cravings for government largess. Milton Friedman famously labeled the American Medical Association a trade union, whose purpose was to restrict competition. He approvingly quoted classical economist Adam Smith, who wrote, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”
The historic dualism in America’s business voice permits the U.S. Chamber of Commerce to promote free enterprise while applauding government handouts. But it’s a costly legacy. Veterans of Capitol Hill and the federal bureaucracy, on both sides of the political aisle, have long since abandoned expectations that business lobbyists would advocate any useful doctrine that might counter the latest bid for government expansion.
Instead, business lobbying is transactional, designed to obtain from government an advantage for a private company or industry, often at the expense of another private company or industry. At worst, the process is known as pay-to-play, wherein campaign contributions are exchanged for spending earmarks or particular regulatory relief.
“There is a whole bunch of transactional lobbying,” says Donald Marron, who has held senior positions in Congress’s Joint Economic Committee, the Congressional Budget Office and the President’s Council of Economic Advisers. “I always found talking to the lobbyists and trade association types to be most useful when they had domain knowledge that we didn’t have. It’s not their job to generalize or think more broadly.”
Sometimes, the business message is seen as a lament, rather than a contribution to positive discourse. The U.S. Federal Reserve Board under Chairman Ben Bernanke illustrates the point. Bernanke, who succeeded Alan Greenspan, “the maestro,” in early 2006, declared his interest in collegiality and opened the door wider to public input. But what the members heard wasn’t always helpful.
“I arrived a month after Ben got there. I think all of us on the Board were most interested in hearing systematic evidence rather than anecdote,” says Randall Kroszner, who was a member of the Federal Reserve Board in the initial Bernanke years, 2006 to 2009, and is currently a professor of economics at the University of Chicago Booth School of Business.
“The people who have the most impact are the ones who were able to tell us something that maybe we didn’t know before, and not just through a particular story, but through something that was broadly representative and more systematic,” Kroszner said. “Sometimes the meetings would be very informative, and other times the meetings would be quite boring. The most effective discussions were interactive, with lots of opportunity for us to pose questions and have a lively back-and-forth, not just lengthy PowerPoint presentations that simply rehearsed talking points.”
WHERE IS WENDELL WILLKIE?
Near the end of the Depression, a lawyer and utility company executive and former Democrat named Wendell Willkie, a man of great character and understanding, spoke for American business against the New Deal social experimenters, whom he knew all too well. He switched parties in 1940 and ran unsuccessfully against Roosevelt that year.
Amity Shlaes, a Bloomberg columnist and author of a new book on the Depression, The Forgotten Man, (see Shelf Life, Page 8) called Willkie “Roosevelt’s gadfly.” He told America that the New Deal was based on a “bedtime story, telling us that the men who hold office in Washington are, by their very positions, endowed with a special virtue.” He was known as “the man who talked back.”
One of Willkie’s important insights was that government’s on-again, off-again embrace of private business created destructive uncertainty in the economy, regardless of the short-term effects of a particular government program. Willkie had participated in the dilemma as he attempted unsuccessfully to align his company, Commonwealth & Southern Corp., with the desires of FDR’s campaign for public control of electricity.
“Business doesn’t know what to make of larger government,” Shlaes said in an interview. “There’s a lot to like in a government that’s active in a crisis. It might cut special deals with your industry. It might help you if you’re a car dealer to collect clunkers and sell new cars. It might change your life for the better in a significant way. But it might not. The initial response of business to the New Deal was ‘What’s in it for me?’ The businessman or woman is not an ideologue. Business is pragmatic. That’s what’s great about it. Then, however, comes another reaction—the reaction that asks, ‘What if I don’t happen to be in the special group? Then I will be shut out—the forgotten man—in an economy that is less good overall.’”
“But after the debut of an activist government, business discovers that activism and predictability don’t go together and that a larger government can be highly unpredictable,” Shlaes said. For example, there were periods in FDR’s first term when the administration looked favorably on big business as a likely source of economic stimulus. At other points, some of them in his second term, the tables turned. Roosevelt mounted repeated antitrust attacks on business, notably on Aluminum Company of America (Alcoa).
Shlaes said wariness is the second stage of business’s response to government expansion. Uncertainty cripples recovery and growth, she said. The business executive says, “‘I don’t like that erratic aspect. I wish the interveners would just go away.’ That’s the second stage of it. Business realizes that the government is like an elephant in its room. The businessperson says, ‘I’m not moving much. It’s just too scary.’ The erratic behavior overwhelmed the interest in what might be there to like. After a while it became obvious that erratic behavior by government costs a lot.”
As the mid-term election approaches in 2010, business organizations that embraced economic stimulus have entered the second stage of their reaction to the current political climate. But who will speak for business amid the current uncertainty?
In a Forbes article about Willkie, Shlaes cited Jamie Dimon, CEO of JPMorgan Chase, as an alternative voice. Dimon aptly called the government bailout money his bank received “a scarlet letter.” Others have labeled former General Electric CEO Jack Welch as an effective business spokesman. But the current climate of skepticism taints anyone associated with the 2008 financial train wreck, including Welch.
“What Welch did was to turn GE from a wealth creation entity into a house of cards,” wrote manufacturing consultant Bill Waddell, co-author of Rebirth of American Industry. “The dizzying earnings of the 1990s are gone and we the people are stuck with the bill to clean up the mess he made.”
“I think that there is still a gripe that Wall Street has on all sorts of policies made in Washington, and I don’t think that’s healthy for business. Too much of our recovery effort was focused on the financial services industry and not on Main Street,” says Scott Paul, executive director of the Alliance for American Manufacturing, a management/labor lobbying coalition.
“One of the silver linings of the economic mess that we’re in is that there is a renewed appreciation for the role that manufacturing business can play in a recovery, and we need to have a growing manufacturing base,” Paul says. Yet, so far, no American manufacturer has been identified as a leader of the effort.
CATCH 22
A pair of obscure revenue initiatives in President Obama’s fiscal 2010 budget illustrates the absence of the non-financial business voice.
Earlier this year, the White House proposed raising $23.5 billion over the next ten years by taxing so-called carried interest received by investment partnerships as ordinary income, rather than capital gains. The administration, reviving a Republican idea from 2006, also wants to raise a much larger amount, $61 billion over the next 10 years, by repealing the last-in, first-out (LIFO) method of inventory accounting used by non-financial businesses.
The arcane carried interest proposal affects a relatively small number of partnerships, mostly Wall Street-affiliated entities. By contrast, the simpler LIFO change would cut a broad swath through the heart of American business. Yet Obama’s endorsement of the carried interest tax increase had far more recent mentions in BusinessWeek, The New York Times and the Washington Post, than Obama’s proposal regarding LIFO, a search of the publications’ databases shows.
Setting aside the likelihood that journalists find Wall Street a more engaging beat than non-financial business, the explanation for the divergent coverage is simple: mathematics.
In the past 20 years, the number of jobs in financial services has risen by 20%, while the number of jobs in manufacturing has declined by more than 25%, Bureau of Labor Statistics data show. There are more than three manufacturing jobs for every two financial service jobs, but the robust increase in labor productivity in manufacturing compared with the economy as a whole has helped reduce manufacturing payrolls.
By focusing on efficiency and profitability, rather than mere output, American manufacturing trimmed jobs and thereby lost political clout.
“I don’t play from a political perspective very frequently, by choice,” says Irene Petrick, a professor at the College of Information Sciences and Technology at The Pennsylvania State University and an analyst of industrial supply chain management systems. “I think the political dialog around jobs, jobs, jobs, while I understand it, does a lot of harm, because when we talk about the really high-end advanced manufacturing activities that have high dollar per worker output, they are not about people jobs, they are often about robot jobs.”
Petrick says much of the future of non-financial American business lies in small- and medium-size companies that, with the aid of the Internet, develop niche businesses. They could then participate internationally in supply chains (she calls them “value chains”), facilitate the trial and error of innovation and offer the latest materials and operational technologies to customers around the globe. “They can become a key source for new innovations,” Petrick said.
“Our next generation of leaders will be in advanced manufacturing,” said Westlund-Deenihan, president of Quality Float Works. “That’s where our training and workforce have to get a leg up. The environment will get these kids interested, talking about solar, talking about green, sustainable designs.” These entrepreneurs don’t look or act like the Titans of Industry, in Petrick’s words, that historically defined the political voice of American business.
“Where government could have some benefit is not in manufacturing directly, but in the encouragement of talented young people to go into those kind of careers,” Petrick says. “The challenge that we see is that some of the best and brightest most talented people are not going into manufacturing.”
If the business voice is to be heard, a few of those people, who like Petrick see excitement and reward in manufacturing, need to speak up. And, just as important, Washington needs to listen.