25
Nov
10

United States: The Weakening Giant

Chinamerica The Uneasy Partnership that Will Change the World

Think of the United States as a large and mature oak tree. It is tall and has many branches, representing the political, geographical, and economic diversity of the country.

The oak tree has deep roots, and for more than 200 years, it has weathered a variety of storms, insect invasions, droughts, and other natural calamities. Branches have bent and swayed during storms, but they have eventually returned to their former position. When an extremely strong wind or ice storm has broken a branch, a new one has quickly grown.

The tree has been resilient because in the past, the rains were plentiful and the leaves were numerous, green, and healthy. The tree was well maintained, with careful pruning and fertilizing.

Beginning in the 1990s, though, the tree’s environment began to change. The rains were not as frequent. Less fertilizer was applied to the ground. The tree didn’t get the same level of nutrition as in the past. As its support has diminished, insects have penetrated the tree, draining it of vital nutrients. In addition, caterpillars are eating the leaves. Struggling with less nutrition, some of the tree’s branches have become brittle.

Like the oak tree, the United States is being weakened from within as well as from outside. And as the decay accelerates, the country’s resistance to other threats declines even faster.

In this weakened state, adverse weather has more of an effect. Snow and ice and strong winds break more branches. As the tree weakens, new branches do not emerge as rapidly as before. The bare wounds from broken limbs provide easy access for insects and disease. Although the oak tree is strong, it is not impervious to all of these threats, and eventually it will die if not properly cared for.

Many storms have challenged the United States during the past 60 years: the rise of the Soviet Union as a military power and aggressor in Berlin and Cuba, the Japanese electronic and manufactured and automotive export storm, then the Mexico and Taiwanese ?oods of goods. The biggest storm of all is coming, though. The winds will be very strong. This storm is China.

To date, the China winds have been relatively weak, compared to what they will be as China continues building its strengths. How severely the China storm will harm the United States and other countries will be determined by many factors. How the United States weathers this storm will be determined by how it is nurtured. If it is not strengthened and continues to be abused, it will fare poorly.

By far the biggest internal threat facing the United States is its mounting personal and governmental debt. Let’s examine that in detail.

U.S. Drowning in Debt

The U.S. economy continues to be the largest in the world, but it has had low GDP growth over the past decade.1 In addition, the key driver

for GDP growth in the United States in the early years of the twentyfirst century has been the use of fiscal deficits to stimulate consumer consumption rather than increasing productivity. The United States has become addicted to deficits as a means to generate economic growth. In fact, the new deficits pay for the old deficits. What’s more, the deficits become larger at each re?nancing cycle.

While there is a lot of talk about reducing the fiscal deficits, no plans are in place to reduce them. President Obama and some economists have expressed optimism that the economic recovery from the 2008 to 2009 recession will help pay off the debts. However, the modest economic recovery predicted by most economists will not be large enough to diminish the debt tsunami.

Don’t forget that the U.S. economy was in a severe recession in 2008 primarily due to the excessive leverage assumed by the financial institutions, along with the excessive leverage of home buying by consumers. Not only did government officials indulge in indiscriminate borrowing but so did supposedly smart bankers and real estate developers, as well as consumers in all strata of society. The expectation was that house and office building prices would continue to increase at a faster rate than the debt load on the properties. This type of artificial growth was clearly not sustainable, though, and the result is that the government has had to absorb a big part of the losses.

Consumers in the United States thought they could buy houses with no money down, with very low monthly payments. Also, they assumed that as real estate prices increased, they would be able to refinance and get additional equity out of their houses. Others arranged for home equity loans and then didn’t use the cash to increase the value of their home. They took the short-term excess liquidity and spent it on material goods, typically made overseas.

The bankers created financial instruments out of the mortgages and then borrowed money to trade those esoteric collateralized mortgage obligations, credit default swaps, and other repackagings of debt. Essentially, the banks indulged in leverage on the leverage. The 2008 to 2009 recession was inevitable in its timing and in its severity. While a modest recovery began in late 2009, it was based primarily on the bailout and stimulus packages financed by debt taken on by the U.S. government.

Some of the financial institutions that succumbed to the leverage collapsed or were forced to borrow from the government. What is worse, the government continues to fund the consumption based on debt.

The $4,5002 that the government paid for automobile clunkers promoted the illusion that Americans can continue to consume. It’s an illusion because it is based on increasing government debt. As noted, the U.S. government borrowed more than $1 trillion to fund the stimulus programs.

The People Problem

Even with the understanding of the factors that caused the economic crisis, the United States continues to be living in an illusion that consumption can continue at a high rate, without regard for the origin of the products being consumed or even more fundamental issues, such as the need to create value and maintain the strength of the country. Too few citizens are paying attention to the nutrition needs of the U.S. oak tree.

In the 1950s, U.S. consumers scoffed at products stamped Made in Japan. While the products were inexpensive and in some cases (portable transistor radios) technologically impressive, the quality was poor. Nowadays the prevalence of Made in China, Made in Taiwan, Made in Vietnam, or other identification from an overseas country doesn’t faze Americans. Indeed, there are few concerns regarding who is making the products that are being consumed in the United States. All consumers care about is the fact that the products are inexpensive. However, the real cost of an item for the U.S. consumer is not just the number of dollars needed to buy the product. The real costs also include the hidden costs of the loss of employment within the United States. Furthermore, few seem to care about the long-term implications of the rising level of imports and the subsequent increases in the trade balance deficit. While it is important to have global competitiveness and allow consumers to buy the cheapest products, the full impact of that freedom needs to be understood.

Another lack of concern is even more troubling. There is a rapidly declining perception of the need to work and create value in the United States. The working contracts that are being negotiated by unions for government employees mean 60 years of pay for 20 years of work. A worker starts at 22 years of age and works 20 years until age 42 for the government, and he or she gets a pension at close to the average annual pay for the last 2 years of work. The worker will collect the pension and benefits for another 40 years based on living to age 82. There are also annual cost-of-living increases at 3 percent per year.

Even current tax policy has helped to perpetuate the illusion of easy money. In the United States, 47 percent3 of the households do not pay federal taxes, and another 30 percent pays relatively little in federal taxes. The bulk of federal taxes are paid by 20 percent of the population.

Politicians have manipulated tax and spending policies to such an extent that it has affected Americans’ relationship with their country. Gradually the culture has evolved from one in which everyone was expected to make a contribution to build the economy to one in which a large percentage of people are trying to extract as much as possible from the economy. In less than 50 years, we have reversed John F. Kennedy’s call in 1960 to “ask not what your country can do for you- ask what you can do for your country.” There are exceptions in the United States, of course. Some individuals and organizations make large contributions to the building of wealth. American inventors and entrepreneurs such as Steve Jobs and Apple’s iTunes have created huge lucrative industries. Also, corporations such as Boeing that generate large exports and have large employment in the United States are key contributors to national wealth building.

The overall perspective, however, is that of entitlement, which is based on the continuation of past patterns. The following is a summary of some of the key trends showing how Americans are more focused on themselves than on their country:

  • Politicians use the approach of reallocating taxes to gain votes. This means that the more money the politicians can appropriate out of the federal budget for their local projects, affectionately known as “pork-barrel politics,” the higher the probability of their being reelected. U.S. politicians are not the only ones to use this approach, but they have taken it to an extreme.
  • Poverty in the United States has become a way of life for 10 to 15 percent of the population.4 In many cases, children of welfare recipients also go on welfare when they grow up because they are not well educated and have not developed work skills.
  • Government employees receive high compensation and very generous retirement packages. The levels of compensation in many cases are not consistent with their contributions as employees.
  • Government regulators have failed to police the banks and other financial institutions that created the 2008 to 2009 recession. This error was compounded by many of the financial institution leaders, who were too greedy or too foolish, or both. Indeed, the 2008 global financial crisis was caused by greed and foolishness.
  • While new regulations are being added to reign in the financial services industry, a key ingredient that created the global financial crisis was a lack of enforcement of the existing regulations. The 2008 election was, in effect, a decision by the electorate to terminate the government officials who did not enforce the regulations. And while the Obama administration has promised tougher enforcement, it remains to be seen whether the historical pattern of inadequate regulatory oversight of the financial services industry will be reversed. No one is effectively monitoring the monitors.
  • Trade unions in a number of industries have taken short-term approaches to compensation. They have not taken a global perspective on cost competitiveness. Equitable compensation must be balanced against cost competitiveness. While the primary responsibilities of the trade unions are to protect the jobs and welfare of their members, they must also ensure that costs and contributions are competitive on a global basis.
  • CEOs and top management of many corporations have been focused on very high, short-term compensation. Instead, they should have been taking a longer view and using today’s profits to build tomorrow’s world-class corporations.

The entitlement mentality and greed have resulted in a major cultural change in the United States over the past 20 to 30 years. Employees’ expectations of a long and lucrative career at one company in exchange for devoted service and occasional sacri?ce have been torn apart by vicious rounds of layoffs, often conducted in a brutal fashion. The new cultural norm is for employees to focus on “What’s in it for me, now?” When rankand-file employees see the CEOs of major Wall Street corporations stripped of their jobs but retaining their stock options, pensions, and other financial benefits, it isn’t a surprise that everyone has an attitude of emphasizing short-term consumption at the expense of long-term wealth.

Greedy behavior stems from the cultural decay of the United States. This started with the weakening of the image of government and government leaders as honest. The Watergate scandal of the Nixon administration and subsequent misbehaviors by other presidents diminished the respect accorded the presidency of the United States and other national leaders. Furthermore, the failure to incarcerate those responsible for the subprime mortgage scandal of 2008 convinced many people that there are no major penalties or punishment for lying and cheating.

While greed was the primary motivation for many Americans during the boom times beginning in 1995 or so, higher taxes to pay for the deficits and new health care programs may “demotivate” the entrepreneurs and wealthy investors who have provided the capital and inspiration for growth in the past.

Demotivated Investors

The increase in taxes on the wealthy will redistribute wealth and reward the low achievers at the expense of the high achievers. And higher taxes will inevitably discourage risk taking by investors.

Another form of demotivation may occur as well, due to government actions in 2009. In the past, investors were a powerful force in finance and in regulatory offices, but this is changing rapidly. The Bush and Obama government-led bailouts of GM and Chrysler automakers essentially deprived stock and bond holders of most of their investments.5 The change in the power base from the investors to the govern ment and the unions is evident in the change of ownership of Chrysler. Now the United Auto Workers (UAW) union owns 67.69 percent of Chrysler.6 A similar situation exists with General Motors: the government owns 60 percent,7 and the UAW owns 20 percent.8 This change in the power structure will clearly demotivate investors. When the government wiped out the equity and debt holders of GM and Chrysler, it cast a pall over future investments in these companies.9

These major changes in cultural and ethical values are at the core of the decline in U.S. competitiveness.

In the past, it took decades or even centuries for societies to weaken to the point of collapse, but today, the competitive environment can change rapidly-in as little as 5 to 10 years.

The oak tree is weakening, and as the weakening progresses, there is less ability to counter the external threats. It is, consequently, important to react rapidly and make sure that the storms of the coming winter do not cause permanent damage. It is up to the citizens of the United States to protect and restore the oak tree to its prior health. We have to halt the damage from the inside and strengthen it to absorb the impact of future storms.

To do this, we must first burrow deeply into the cornerstones of American industrial might, to understand its real strengths, weaknesses, opportunities, and external threats.

A Perspective on U.S. Industries

A key characteristic of U.S. corporations in the 1960s and 1970s was their focus on the local market, and it was safe for them to keep that focus because the U.S. market was large. Indeed, for many products, the U.S. market was the largest in the world.

The consumers and businesses in the United States were wealthy, and they had predictable buying patterns. By having a large share of a huge market in the United States, domestic corporations were leaders in the global market as well. Their advertising activities were geared at not only increasing the market share of specific brands but also at increasing the size of the total markets, creating new markets, and taking advantage of the large and growing buying power of the U.S. consumers. American high-tech companies proved especially adept at introducing new products that would create large and vibrant domestic markets.

However, corporations that limited their horizons to domestic markets were blind to the capabilities of successful competitors in other geographic areas. For far too long, General Motors, Ford, and Chrysler remained ignorant of or oblivious to the high levels of quality control and efficiency being achieved in Japanese auto factories, as well as their success in making more fuel-efficient vehicles. In addition to ignoring their tactical advantages in entering overseas markets, U.S. companies lost a strategic opportunity. While it is important to protect the local market against competition (by maintaining a strong internal base and having defensive strategies), it is also critical to take a global perspective on market opportunities. This is a crucial offensive strategy for corporations. Indeed, having high global market share is one of the key metrics for financial success, as demonstrated by GE during and after the Jack Welch era.

The thinking behind this type of offensive strategy is simple. In many cases, it is important to attack the enemy (competing corporations) within their home base to ensure that they do not have the strengths to compete in global markets. If it is not economically viable to take market share away from competitors in their local markets, it is critical to try to contain the enemy and not allow them to generate high market share in other geographic regions. In business as well as in war, there must be strategies to defeat and dominate competition within selected geographic areas.

A key tactic in becoming a global market share leader is for the offensive thrust to be based on feature or technology uniqueness. Using price as the primary tool to invade foreign markets generally results in low profits. The innovative technologies introduced by Apple-the iPod, the iPhone, and the Mac-are great examples of premium-priced products that successfully conquered global markets. Toyota’s Prius hybrid car is another example of an innovative product that achieved profitable success outside of its home market.

Many U.S. corporations have consistently underestimated the global competitive threats. As a result, there has been a weakening of U.S. corporations in a number of market segments. This has enabled their competitors in some geographic regions to increase market share within their local markets. A key example is that of the Japanese automobile companies that built strong positions in Japan and then launched major export drives in the United States, South America, and elsewhere.

Even though the population in Japan is 127 million,10 versus 307 million 11 in the United States, companies such as Toyota have become global market leaders because they were able to build strong domestic businesses with enough profits to launch overseas ventures. Once they had established a strong domestic market, the products they had developed for their Japanese market could be sold in high volumes in other geographic regions.

Japanese auto companies were not the only ones to follow the model of building strong positions in local markets as stepping stones to overseas conquests. Companies such as Samsung and Nokia had even smaller local markets than did Toyota and Honda in Japan. Out of necessity, they developed the skill base required to compete in global markets. Nokia became the global leader in the wireless handset market. And, according to IBS, Samsung became the global market share leader in LCD televisions and memory chips for computers and other electronic devices, as well as the world’s second-largest wireless handset vendor.

Let’s drill down to understand the competitiveness of U.S. corporations in a number of markets, including automobiles, steel, computers, consumer electronics, cell phones, memory, microprocessors and other integrated circuits, aircraft manufacturing, military equipment, agriculture, and pharmaceuticals.

Notes:

  1. http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=1&ViewSeries=NO&Java=no&Request3Place=N&Place=N&FromView=YES&Freq=Year&FirstYear=1998&LastYear=2008&3Place=N&Update=Update&JavaBox=no#PtrFriend
  2. http://www.cars.gov/faq
  3. http://taxvox.taxpolicycenter.org/blog/_archives/2009/7/8/4243062.html
  4. http://www.census.gov/Press-Release/www/releases/archives/income_wealth/014227.html
  5. http://money.cnn.com/2009/10/21/autos/auto_bailout_rattner.fortune/index.htm
  6. http://www.freep.com/article/20091207/BUSINESS01/91207051/1320/Marchionne-says-he-will-have-to-split-his-jobs
  7. http://online.wsj.com/article/SB124385428627671889.html
  8. http://www.uaw.org/gm/gm01.cfm
  9. http://money.cnn.com/2009/10/21/autos/auto_bailout_rattner.fortune/index.htm
  10. https://www.cia.gov/library/publications/the-world-factbook/geos/countrytemplate_ja.html
  11. https://www.cia.gov/library/publications/the-world-factbook/geos/countrytemplate_us.html

Source: Handel Jones, “ChinAmerica: The Uneasy Partnership that Will Change the World,” McGraw-Hill, 2010

Republished by Kajian Internasional Strategis


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