The Future of the US Economy

Barely a decade ago, many if not most commentators portrayed the U.S. economy as reeling under the onslaught of foreign competition. In industry after industry, on virtually every measure of competitiveness from product quality to manufacturing efficiency to consumer acceptance, U.S. companies were being annihilated by foreign competitors using new quality-oriented, hyperefficient manufacturing systems. But by the mid-1990s much appeared to have changed. The pundits, the press, and even established academic economists began to write glowingly of the U.S. comeback, drawing a pointed contrast to Japan’s faltering economy, the Asian crisis, and persistent unemployment in Europe. What accounts for this dramatic turnabout?

The Productive Edge by Richard Lester takes a close hard look at this question. Lester, director of MIT’s Industrial Performance Center, is among the most insightful and clear-headed students of U.S. industrial competitiveness and is coauthor of the influential 1990 book Made in America that set out the challenges facing U.S. industry. The Productive Edge is important reading for anyone interested in the future of U.S. industry and the debate over economic growth and its consequences. Based on a reasoned analysis of key indicators of long-run economic performance and careful studies of five key industries-automobiles, semiconductors, steel, electric power, and cellular communications-he provides an even-handed, clearly written, and illuminating survey of what is right and wrong with the U.S. economy.

What are the problems?

For Lester, the bottom line is clear: Despite the current spate of overly optimistic prognostication, all is not rosy on the U.S. economic scene. Although there is certainly much to applaud in U.S. industry’s decade-long turnaround, myths and half-truths abound. According to Lester, the biggest long-run problem lies in the anemic rate of U.S. productivity growth. During the past 25 years, overall productivity growth has edged up at a rate of roughly 1 percent per year, as compared to 3 percent per year in the 1950s and 1960s and worse than the rates of many of its economic competitors. Although manufacturing industries have indeed done better (posting annual productivity growth in the range of 3 percent since 1990), this has not translated into significant economic gains for the economy as a whole, nor has it boosted real wages or helped to overcome widening wage disparities. Investment too has been anemic, whether measured as gross private investment, investment in R&D, or investment in our decaying infrastructure, says Lester. Gross private investment as a percentage of total economic output, for example, hovered at roughly 12 percent during the early 1990s, which is well below historic levels and less than half of Japan’s 25 percent.

Second, Lester argues that far too much emphasis has been placed on management fads, from total quality management to business process reengineering, which are partial solutions at best and which generally speaking have failed to deliver the goods. And the powerful allure of these quick fixes has complicated matters, diverting attention and effort from doing what’s necessary to really turn things around. “There is no sign that total quality management, reengineering, and many other strategies . . . have produced a significant productivity benefit for the U.S. economy,” Lester writes. Much the same can be said of the waves of corporate restructuring and downsizing of the early 1990s, which increased efficiency by eliminating jobs but have not translated into sustained economic growth. And such strategies have frequently failed to live up to expectations in the companies that have made significant investments in them. Citing pioneering research by MIT and Carnegie Mellon University teams studying the automotive and steel industries, Lester suggests that the most successful firms look past the management fads of the moment and work hard to implement reinforcing systems of best practices on the shop floor, in the R&D lab, in the management suite, and with their key suppliers. The basic values underpinning these best practices revolve around encouraging loyalty, innovation, a strategic focus, and the willingness to take risk. Lester further argues that strategies to improve operational effectiveness are a necessary but insufficient condition for sustaining productivity improvement. To be truly successful, firms and nations must constantly identify and penetrate new markets and develop new services and products.

The jury is still out on the U.S. economy, according to The Productive Edge. Our nation and the world are caught in a wrenching period of economic transformation, in which change and uncertainty are the only constants. Rapid technological change, rampant and far-flung globalization, and the recasting of government’s role in the economy through deregulation and privatization continue to destabilize traditional economic patterns and create new uncertainties. Mounting economic anxiety is the result, as the bonds of loyalty that once held our society, its institutions, and its people together weaken under the strain of these powerful economic forces. This, Lester cautions, has enabled simplistic, backward-looking, and dangerous solutions such as “economic nationalism” to gain a toehold in the debate over the country’s economic future.

Taking action

What then can we do? Outlining a strategy for the future, Lester draws on the factors that account for success in leading-edge organizations. The key to economic renewal, according to The Productive Edge, is to look beyond short-term piecemeal approaches, focusing instead on the long hard work of enhancing “organizational capabilities”-the broad retinue of practices and supportive culture that allows everyone from R&D lab to the factory floor to contribute their full potential. Such organizational capabilities are more than a simple aggregation of management fads and practices; they reflect long-term corporate commitments to people, embodied in secure jobs that reinforce loyalty and a focus on innovation. True high-performance organizations invest in the knowledge, skills, and organizational assets required to launch new products, reconfigure themselves to adapt nimbly to change, and create whole new markets.

The United States, Lester suggests, should do the same. The vehicle he advances for doing so is a “new economic citizenship.” By this, he means instituting a new vision of work enhanced by technology and recasting the role of government to encompass a complementary set of economic and social supports that is in tune with the new economy. This would entail, among other things, establishing a new, more decentralized, and individually oriented “safety net” that explicitly recognizes the realities of varied career paths and multiple jobs, providing Americans with the portable pensions, individual learning accounts, and the like that will be necessary to effectively navigate the new economy.

Fashioning such a far-sighted and much-needed agenda will not be easy. The only real weakness of The Productive Edge is that it provides far too little detail here. As with all matters of policy, the devil is in the details, and Lester gives us only the scantiest outlines of what the new economic citizenship might look like. And there remain the vexing questions of what kinds of forces and factors can bring this change about and what political shifts will be required. The Productive Edge fails to address these questions. Political institutions and public policy change much more slowly than technology or the economy, as shown in the classic work of the late Mancur Olsen, The Rise and Decline of Nations. The lag time between the rise of a new economic system and a new policy agenda of the sort Lester’s economic citizenship would entail is very long indeed.

Furthermore, the U.S. political system suffers from a collective hardening of the arteries-what Jonathan Rauch has dubbed “demosclerosis.” The creation of a new policy agenda for the new economy faces the daunting challenge of overcoming the persistent legacy of our handed-down system of policies that grew up over the past century to support the mass-production economy. The old rigidities range from an adversarial system of labor-management relations to almost every facet of government intervention, from housing and transportation policies that seek to create new markets for the products of mass-production capitalism, to welfare and poverty policies that fail to connect people to meaningful employment or allow them to actively engage in the economy, to science and technology policies that continue to embrace the linear model of innovation, as opposed to continuous knowledge mobilization and constant change. This policy system will likely prove far more difficult to deconstruct and transform than will U.S. industry.

One of the biggest contributions of The Productive Edge is in laying this fundamental challenge before us. U.S. industry has begun to revitalize itself. But the agenda for long-run economic transformation is far from complete. The next and much more critical step is to develop and institutionalize a broad and integrated policy agenda that can enable all Americans to participate and prosper in the new economy.