Great Expectations
If The Economy Is Doing So Well, Why Don't I Feel Better?

Charles M. Denny, Jr.
Retired Chairman and CEO of ADC Telecommunications

This has truly been "our winter of discontent." The headlines scream of massive layoffs and their disastrous impact on the lives of our fellow citizens. Article after article analyses and protests soaring executive compensation and the increasing mal-distribution of national income and wealth. Television specials highlight the struggle of working parents to make ends meet, while juggling the demands of job and family. Exacerbating our sense of insecurity, our trade deficits continue to mount as newly developed countries aggressively compete for our markets here and abroad.

Has Something Happened To Our Economic System, A System That Has Made Us The Most Powerful Nation In The World?

The Statistics:

• In the period 1973 to 1993: While real GDP rose 29 percent, average median earnings for males working year-round fell 11 percent.

• In the 1980's: The lowest quintile of 22-58 year old men saw their incomes drop 34 percent. The lowest quintile of families saw their income drop by 4 percent. Only the top two quintiles realized gains in family income.

• Thirty-two percent of all men 25-34 years of age earn less than the amount necessary to keep a family of four above the poverty line.

• While there have been net job gains, more than 43 million jobs have been eliminated since 1979. Sixty-five percent of those laid off either accept jobs at less pay or are removed from full time labor market.

• When compared with European nations, the U.S. rate of movement out of poverty is the lowest by a considerable margin.

• In the 1980's, the pay of the average Fortune 500 CEO increased from 35 to 157 times the wage of the average production worker.

• In the 1980's, all of the gains in male earnings went to the top 20 percent of the workforce and an amazing 64 percent accrued to the top 1 percent.

• Sixty-two percent of all U.S. wealth is held by ten percent of the population.

The statistics go on and on. There is no lack of somber news should one seek it. While some of the news is anecdotal, and some reports deal selectively with the data or the time frame to prove a point, large numbers of Americans are now questioning the effectiveness and fairness of our capitalistic system. That alone constitutes a serious problem for our policy makers.

So How Did We Get Here? What Went Wrong?

Lester Thorow, the distinguished MIT economist, addressed these questions in his new book The Future of Capitalism, which I highly recommend to anyone interested in the socio-economic debate that is likely to be the dominant issue on the 1996 presidential campaigns.

Thurow identifies five causes for the difficulties we are experiencing today:

• The End of Communism

The impact of one-third of humanity and one-quarter of the world's land mass joining the capitalist world.

• A Technological Shift to an Era Dominated by Man-made Brainpower Industries

The area of industries being co-located with natural resources and capital is at an end. Industries of the future will be based on brainpower that can be found anywhere in the world.

• A Demography Never Before Seen

The effects of a growing world population - largely in the underdeveloped nations - which will lead to mass migrations, and the impact of the aging populations that will consume inordinate portions of national income.

• A Global Economy

The effects of advances in technology, communications, and transportation which make it possible to make anything anywhere in the world. And the effect of transnational corporations which operate independently of national governments.

• An Era When There Is No Dominant Economic, Political, or Military Power

The world trading system has always been policed by the dominant power of the time - first Britain and now the United States. But the unipolar world of last two centuries is past, to be replaced by a multipolar world, whose rules have yet to be written.

To summarize: We are living in a time of world-wide economic and political change. Change often creates an acute sense of insecurity, which can lead to instability and turmoil. But, while change is painful, it is not necessarily a terminal condition.

Should We Look Before We Leap?

But before ordering major surgery for what ails us, let's check the health of the patient one more time:

Sick by whose standards? What standards of measurement do we apply in defining our condition?

• Our economy is performing:

In the period 1973 to 1995, real U.S. GDP rose 36 percent.

 

Today, 63 percent of the U.S. population is employed.

 

From 1973 to 1994, 38 million new jobs were created in the United States while Europe, one third larger than the U.S., had no growth at all.

 

The U.S. enjoys one of the lowest unemployment rates of all major industrial nations.

 

Our economy is the largest in the world, and our per capita income is amongst the highest.

• Our Quality of life has improved:

In 1940: Twenty percent of Americans lived on farms, of which less than a third had electricity. Thirty percent of all U.S. households did not have running water. More than half of American households lacked a refrigerator, and 58 percent lacked central heating.

 

In 1940, there was no air conditioning. Today more than 70 percent of U.S. households are so equipped.

 

In 1940, there was no television. Today 97 percent of all homes are equipped with color television.

• As a nation, we have demonstrated social concern:

In 1945, only 500,000 Americans received Social Security. In 1992, 42 million Americans received Social Security, 35 million received Medicare and 25 million received food stamps.

 

In summary, we have made remarkable progress in important facets of our collective lives. We are healthier and live longer. We are educating more of our children, living in larger homes (the average house grew in size 40 percent between 1970 and 1990). We are employing a greater percentage of our population than ever before. We have created a significant safety net and we are making progress in reducing racial inequalities.

 

Yet, we continue to believe that our national condition is unsatisfactory and our prospects are poor.

A Failed Economic System Or a Faulty Perspective?

I posit that our economic system is working - albeit imperfectly, but we have overloaded it with expectations that it cannot meet.

How did we develop these expectations?

• The artificiality of the boom years 1945 to 1975:

In the aftermath of World War II, the share of the world GDP rose from its pre-war level of 23% to 45%. The industrial infrastructures of the major nations of Europe and Asia were in rubble, the populations tired and dispirited, and the national treasuries empty. Into this vacuum poured the goods produced by the U.S., a nation made stronger by its war efforts. Certain of our destiny, possessed of superior technology and financial resources, the U.S. dominated world trade. In this supercharged environment, the U.S. invested heavily in education, public infrastructure, and productive manufacturing capacity. Not surprisingly, national productivity soared, enabling a general increase in prosperity for the majority of the U.S. population.

 

But by the mid-seventies, competition from Europe and Japan began to take its toll. Equipped with the latest in modern manufacturing machinery, employing technologies licensed or acquired in the U.S., and, most importantly, driven by a sense of national need and purpose, the Asians and to a lesser extent the Europeans, began to take their share of the world markets. Not surprisingly, the U.S. share of the world GDP has dropped back to its pre-WWII level.

 

We had a long and exciting run, the exhilaration of which was felt by most Americans. The present realities of slower, and more normal growth in national productivity and GDP has left us with an acute sense of disappointment and frustration. The end of the American era is hard for most of us to swallow.

• A new sense of entitlement

With the advent of the Great Society in the 1960's, a new concept became the philosophical underpinning of American political thought: equality of result would replace the concept of equality of opportunity. With this shift away from personal responsibility came a sense of entitlement to achievement. In this sense, of one's lot in life was not what one wished, then the economic and political system had failed.

What Can Be Done? What Should Be Done?

Many economists believe that the current restructuring of American business is necessary, theoretically ordained, and, although painful, beneficial in the long run.

I regretfully concur, but believe that there are significant actions that government and business undertake that will relieve the stress on society today and ensure a more beneficent and productive economy tomorrow.

Professor Thurow speaks in harsh terms to the tension between democracy and capitalism:

"One believes in a complete equal distribution of political power ... while the other believes that it is the duty of the economically fit to drive the unfit out of business and into economic extinction."

 

"Historically, since market economies haven't produced enough economic equality to be compatible with democracy, all democracies have found it necessary to 'interfere' in the market with a wide variety of programs that are designed to promote equality and stop inequality from rising."

We may be reaching that point today. Politicians are focusing on income inequality and corporate downsizing as issues that will arouse the public - and hopefully bring them support in the fall elections. The clamor will increase and calls for government action will ring out in both parties. But governmental action is not inevitable; choices still are available to the business community.

The Role of Business

I am attracted to a definition of the role of business in our modern society developed by members of the Minnesota Center for Corporate Responsibility and the Caux Round Table.

The role of business in a free society is:

• The creation of wealth, a function which business does better than any other known form of economic organization.

• The just distribution of the fruits of the enterprise between the various stakeholders.

• The building of community; that is participation in building the social organizations that inform our opinions, moderate our passions, and create the bonds that bring us together.

In short: prosperity, justice, and community

What does that mean in the context of our employment problems today?

• Compensation

When all issues are considered, is not a small increase in the minimum wage in the interest of the nation? Will not the social benefits compensate for the economic risks?

 

When a significant segment of our population is living in poverty, and when large numbers of middle managers and professionals are cast out from the corporations to which they had to devote their energies and loyalties, is it appropriate for senior management to take compensation that rivals the rajas of India and the sheiks of the oil kingdoms?

• Health and Pension Benefits

In conjunction with the government, can we not provide portable health and pension benefits that can lessen the hardships of loss of employment?

• Skill Development

In conjunction with the government, would not life time skills development be a low cost investment in improving our national productivity and affording the individual transportable skills so necessary in today's fluid employment markets?

• Work and the Family

In the past, our business establishment successfully has accommodated societies changing social priorities - abolition of child labor, reduction of the working day to eight hours, paid holidays and vacation, and protection of health and safety in the working place. Can we not today adjust our business schedules and processes to recognize the societal issues attendant to working mothers and single parents who must juggle the demands of the competitive labor markets with their primary responsibility as parents.

The Role of Government

What actions can and should a government undertake? I see the government acting most effectively in four roles:

• The Safety Net

The government acts on our behalf to ensure that all Americans have access to the minimum essentials of life: food, housing, medical care, and subsistence cash for clothing, transportation, and other basic needs. We may rightfully criticize the design and administration of the delivery systems, but few of us would remove all support from the neediest of our fellow citizens. If the first responsibility of government is to ensure the public tranquility, then a safety net is a mandatory condition of that tranquility.

• Education

Perhaps no other program touches so many Americans as our public education system. It has been the primary vehicle for socializing our multi-cultural citizenry - a critical function in a nation of immigrants - and has equipped Americans with the knowledge and skills to establish our nation as a world economic, cultural, and political leader. Once again, we may criticize existing programs, bureaucratic institutions, and controversial education theory, and we may demand higher levels of performance from students and teachers alike, but I believe most of us accept the government's role in education as an essential condition of democracy. In this age of knowledge, the best investment a government can make is in the education of its present and future workers.

• Technology

If basic research is fundamental to a competitive national technology base, then our government must be involved. There are a few corporations today who have the financial resources and management will to pursue basic research. Only the federal government has the financial capacity to fund research that may take decades before the first signs of success appear.

In the U.S., basic research is performed largely at the great research universities scattered throughout the country, funded by a variety of government agencies pursuing their own agendas. This alliance of state and federal entities has worked exceptionally well, as measured by a scientific achievement and contributions to our economic well being. This successful formula warrants continuation until circumstances diminish its effectiveness.

• Infrastructure

Modern economies are built upon infrastructures that link the commercial energies of a nation - within its borders and externally to world markets. Highways, airports, shipping ports, energy and communication networks, all fortify a nation's competitive economic strength. The extra-territorial nature of these investments requires a common entity that rises above local interests. This is truly a legitimate endeavor of national governments.

The business community rails against government action - unless it results in a special benefit for a given company or industry. But we would do well to recall that there have been many successful government programs that have had great beneficial impact on our society:

• The GI bill

• The Marshall Plan

• The Federal Highway Program

• The National Defense Act

• Graduate education in science and engineering

• Sponsorship of basic research in computer, material and biological sciences

A large part of the economic success of the decades of the late 40's, the 50's, 60's and 70's can be attributed to these strategic investments by our government. These were high layout investments as measured by any standard.

Conclusion

In determining our response to the current social pain, we should, I believe, apply four criteria:

• First, make certain that we know the problem. Is our economic machine truly broken and in need of replacement? Or, is it working but not performing at the level of our heightened expectations? Have we unrealistically raised the bar?

• Second, before tinkering with the machine, we must check on results obtained elsewhere from similar corrective actions. If we proceed, we must insist on qualified mechanics.

• Third, we must carefully define which actions are performed most appropriately by government and which are best left to the private sector.

• Fourth, before we begin to alter our economic equation we must understand the cultural and political consequences of our actions.

In summary, a more thorough examination of the issues may lead to corrective actions that alleviate much of the social pain while preserving the beneficial aspects of an economic system that is still the envy of the world.

Addendum

In respect to the last suggestion, I would like to briefly note an interesting analysis of our spiritual malaise as offered by Harvard Professor Michael J. Sandel in the article "America's Search for a New Public Philosophy" published in the March 1996 Atlantic Monthly.

Professor Sandel state: "For the past half century Democrats and Republicans have debated the role of government in the market economy and the proper scope of rights and entitlements. But this debate does not speak to the two concerns at the heart of our discontent. One is the fear that, individually and collectively, we are losing control of the forces that govern our lives. The other is the sense that, from family to neighborhood to nation, the moral fabric of the community is unraveling around us. These two fears define the anxiety of the age."

He attributes the cause for such fears to a shift in our public philosophy from a republican (with a small r) political theory to a liberal (with a small l) theory that became the dominant theory beginning with the New Deal.

He describes a liberal view as one that defines liberty as freedom for individuals to choose their ends for themselves. A republican view, on the other hand, is based on the concept that liberty depends on sharing in self-government.

The practice of the republican theory "requires a knowledge of public affairs and also a sense of belonging, a concern for the whole, a moral bond with the community whose fate is at stake. To share in self-rule therefore requires that citizens possess, or come to acquire, certain civic virtues." He notes: "Americans of the postwar decades found their way to a new understanding, our liberty depends not on our capacity as citizens to share in shaping the forces that govern our collective destiny but rather on our capacity as persons to choose our values and ends for ourselves."

He concludes: That "despite its appeal, the liberal vision of freedom lack civic resources to sustain self-government. The public philosophy by which we live cannot secure the liberty it promises, because it cannot inspire the sense of community and civic engagement that liberty requires."

Something to think about as we shape public policies!

Charles M. Denny, Jr., retired Chairman and CEO of ADC Telecommunications, is currently involved with the following organizations: Director, Minnesota Center for Corporate Responsibility; Executive Fellow, University of St. Thomas; Advisory Board Member, Humphrey Institute of the University of Minnesota; and Director Citizens League; and Trustee of the Minneapolis Foundation.

April 1996

Center for Ethical Business Cultures

1000 LaSalle Avenue, TMH 331 ▪ Minneapolis, MN 55403-2005 ▪ USA

Phone: 651 962 4120 or 800 328 6819 Ext. 2-4120 ▪ Facsimile: 651 962 4042

Email: mail@cebcglobal.org

© 1978-2008 Center for Ethical Business Cultures. All Rights Reserved.

Business Partnering with the University of St. Thomas - Minnesota