October 2, 2012
Broader structural problems long in the making
Structural problems throughout the economy have contributed to job losses, and the HBS research highlighted many of them, including the growing prominence of the financial sector, political gridlock and failures in our educational system.
An article by Thomas Kochan, a professor at MIT, labeled the 1980s as “the decade when everything changed.” Maximizing shareholder value became the governing paradigm for US corporations, and innovation and deregulation took hold in the financial sector. The ’80s saw the rapid growth of leverage-buyout funds (and later private equity funds), which viewed corporations as tradable assets. That led to a focus on short-term results, according to Kochan. Top talent from business schools went into finance instead of the industrial sector, and the size of the financial sector as a percentage of US GDP has nearly doubled in the 30 years since.
“These trends built stronger pressure for short-term returns, which in turn prompted firms to cut jobs as a preemptive act, rather than a last resort,” Kochan wrote. “The net effect was to chip away at the more balanced view of the corporation as an entity with responsibilities to other stakeholder groups, not just shareholders.”
Porter and Rivkin cited a number of intractable political problems that have contributed to structural imbalances. These include the growing fiscal deficit, which has hampered the government’s ability to invest in much-needed infrastructure projects. Strong infrastructure is essential to US competitiveness and a key ingredient to domestic job growth, they argued. Rapid growth of health care costs, a “dysfunctional” tax code, and an aging population are among the major contributors to the rising deficit, according to Porter and Rivkin.
“There’s an almost universal view that our federal political system is one of the greatest threats to our economic future,” Porter wrote, “because of its inability to tackle some of these issues.”
Data in the HBS study also document the deterioration of the US educational system. The US ranks in the middle of the pack internationally in both reading and math scores; China is at the top on both lists. The researchers found a strong correlation between those test scores and GDP growth.
Repairing the structural damage
The broad picture painted by the HBS researchers is that many long-term factors have eroded US competitiveness, and that has in turn contributed to high unemployment. While cyclical factors are surely at work, stark structural problems are also evident. Productivity in the manufacturing sector has risen while median incomes have fallen, income inequality has grown, and the result is large-scale unemployment, particularly among less-educated workers.
The US needs to create as many as 20 million jobs over the next decade to get back to pre-recession employment levels, according to Kochan. “Left to current market forces, America faces a serious jobs deficit that will last for at least the rest of this decade,” he wrote.
The HBS project’s findings include a plan to address competitive weaknesses, including improving corporate governance, reforming our educational system and breaking the political gridlock that impedes long-term investment.
“The decline of US competitiveness is far from inevitable,” Porter wrote.
Indeed, there are signs that the trends underlying some of the key structural issues may soon reverse. The shift of jobs out of the manufacturing sector is likely to slow, as the transition to a service-oriented economy is largely complete. The fastest-growing sectors of the US economy over the next several decades are likely to include healthcare and education, where jobs will not be easily outsourced overseas.
Manufacturing in the US is likely to grow as well. Wages are rising in emerging markets, transportation and logistical costs are growing, product lifecycles are shortening, and companies are discovering “hidden costs” of outsourcing, such as hiring and retention, supervision, and intellectual-property protection, according to the HBS research.
Those trends will accelerate if they are supported by the proper policy measures. But the first step is recognizing that US unemployment reflects a number of long-term structural deficiencies, few of which can be remedied by such short-term measures as quantitative easing.
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