Why American Capitalism is in a funk

Phil Gramm, not withstanding, it is not only our economy that is in the toilet, American Capitalism is also in a funk. And, I contend it is largely due to a failure of leadership at the corporate level, and the policies of the current administration.

The problem at the corporate level has for years been the result of very short term planning on the part of company executives fighting for “instant gratification” on the bottom line, along with a large dose of greed. This has resulted in short-sighted planning among American top executives – quite unlike business leaders in a number of other countries. No where is this better seen than automobiles and the airlines.

The gas “crisis” first reared its ugly head in the 70’s. Japanese automakers understanding where this was headed were gearing up to build quality fuel-efficient automobiles with emphasis on reliability, desired features, and style. American manufacturers, taking the short term view, saw a relaxation of fuel prices, and fat profits in SUV’s trucks and large cars. But that was not to be the future; and now the chickens have come home to roost.

While companies like Honda and Toyota were developing hybrids, and churning out their incredibly desirable Camrys, Civics and Accords, the American corporate leaders only started getting the message a few years ago. So, to hedge their bets, they tossed pieces of fuel efficient crap into the market, like GM’s ugly and poorly rated Aveo. Now, of course, American manufacturers are in the tank, and hustling to catch up; and General Motors currently has a market capitalization slightly less than Hershey. Meanwhile, Honda in recent months was able to show a sales increase and good profits.

Conversely, in the airlines industry, the America corporate leaders are in a tizzy trying to deal with rising fuel costs. Their solution: cut everything to the bone including passenger comfort, convenience and cost. The result, a spiral down that will likely continue. One of the interesting side stories about this activity is the recent call by airline executives to request government regulation of fuel prices! These were exactly the same folks who cry out for less government regulation, and in fact wanted the industry de-regulated.

As juxtaposition to the American business leaders in the airline industry, we can again turn to Japan, where Japan Airlines took a much more creative approach. Knowing prices would have to rise due to fuel costs, JAL decided to improve service! They improved seating; added upgraded classes; serve delicious food from well known Japanese restaurants, and most of all have friendly well trained personnel. They put special emphasis on their flights to and from the United States. Guess whose planes are flying full, and which airlines are cutting back as fast as their little jets will let them?

As a prime example of the above dynamics, take a look at Northwest Airlines (NWA) derisively referred to as “Northworst” Airline in my home town of Minneapolis. NWA has had a history of mismanagement, poor customer service and low employee morale for years. About three years ago, they finally gave up, and entered bankruptcy. After beating down their employees for severe compensation concessions, they emerged from bankruptcy – and gave their top executives tens of millions in bonuses for the engineering the emergence! Remember, these were the same executives who got them into bankruptcy. Now, about a year after that fiasco, NWA stock has again declined 60% from its post-emergence high...the airline is cutting back on everything possibly short of removing the seats...and seeking a merger with Delta who also filed for bankruptcy. This is a strategy for success? Meanwhile, the top executives in the company have suffered little from their mismanagement; indeed, they seem to have been rewarded. This is modern American capitalism at work...and at its worst!

Again, on the transportation front, a French company (Alstom) now has in production a 300+ MPH super train. What a great way to travel; plus it is energy efficient and a fine alternative to travel by air. American companies have ignored this solution, and along with it, a great long term Capitalist opportunity for jobs and profit.

As noted above, there is a strong emphasis on trained and friendly personnel at Japan Air. American airlines – indeed American businesses – have been an expert in providing lousy service at virtually every level. Part of it is lack of training. Part is again the desire to generate short term profits, by cutting costs at precisely the wrong places. And part is the terrible discrepancy in executive wages vis-a-vis those of the average worker. That not only is unfair and a negative for sound capitalism, it is also a component for poor worker morale. In 1965 (According to the House Committee on Financial Services) U.S. CEOs at major companies earned 24 times the average worker’s pay; by 2004 it was 431 times the pay of the average worker! In fact, according to this same study, the real wages for the 92% of Americans who earn under $92,000 per year have actually fallen since 2001.

Which brings us to the failure of political leadership at the national level. The Bush administration has been one of the worst enemies of strengthening American capitalism. They have harmed our economic system in a variety of ways – but the two largest are: running massive deficits (and the related decline of the dollar); and Bush’s stubborn adherence to the Chicago School’s trickle-down economics which, while clearly benefiting those at the top of the economic ladder, has proven to be a flawed policy and antithetical to robust Capitalism. Further, he has regularly eschewed valuable and cooperative pubic/private partnerships through his lingering dislike of anything resembling government participation or regulation, thus discarding a valuable economic tool.

The deficit, and subsequent dollar decline, has poured incredible amounts of money into less than friendly nations and/or positioned foreign companies to literally “buy” American business at will. That translated into $276 Billion of foreign purchases of American business in 2007. Abu Dhabi buying the Chrysler building was a bit embarrassing; but even though I am fond of imported beer, the sale of an icon like Anheuser is kind of the last straw. Indeed, foreign companies now have a huge stake in our economy, with a contingent ability to buy virtually any company in sight.

Trickle-down has been a mantra of conservative philosophy for decades. Problem is, history shows it has never matched the “rising tide benefits all” way of thinking. This point could be argued about endlessly – but here are the facts as we know them today. For 6 years the Bush administration held all the levers of power in our country with an especially compliant Congress; and for two years, Bush has held the power in the Executive Branch and Judiciary. His trickle-down tax policies (heavily skewed to less taxation on the wealthy) have prevailed during virtually this entire period...and I ask you: has this been a road to a successful economy and growth of Capitalism?

America is such a great country, with a history of leading the world economically. We still have great imagination, creativity, production capacity, and strong (if not ebbing) financial strength. But corporate greed and mismanagement; lack of long term planning; poor stewardship of our resources; a horrendous deficit; and a specious tax policy have all contributed to the decline of a robust Capitalism and American leadership as it used to be. To paraphrase Winston Churchill’s remarks on Democracy: “Capitalism is the worst form of economics...except for all the others that have been tried.” We’ve been here before, and survived; but the world is different now, with wealth spread over many nations and continents. Only a radical change in American corporate governance and enlightened fiscal policies can get our Capitalism out of the tank this time.