Fix The Deficit? Grow The Economy, Stupid!

When I was working in the World Bank in the early 1990s, I would attend workshops in which we would receive briefings on the state of the US economy from the most knowledgeable experts. In briefing after briefing, we heard that the budget deficit problem of the US was insoluble. No matter how you analyzed it, we were looking at growing deficits ad infinitum.

Then a strange thing happened. The economy grew. The deficits disappeared. By 2000, the deficit had been reduced to zero. It didn't last long of course, but the lesson was important. In a declining economy, the problems of the deficit seem insoluble. In a growing economy, the impossible becomes possible.

The end of American optimism

Fast forward to today, and even conservatives are declaring in the Wall Street Journal "the end of American optimism".

Or listen to this summary of the budget discussion in Washington, where even the $61 billion cuts proposed by the Republican Congress will make scarcely a dent in the overall deficit.

"This surreal debate about how small cuts should have to be comes in the context of a story in Washington Post announcing that federal, state, and local debt now exceeds the total size of the economy. That’s happened before, after World War II, but some of that debt ended up being paid down by a young population during an age of economic growth. Now we’ve got the opposite problem — a lingering recession and an entitlement load from Baby Boomers from which there’s seemingly no escape. The ship is going down, yet even a sum as paltry as $60 billion in cuts is somehow so unimaginable that we need a two-week patch on the budget to give us extra time to weigh whether we should do it. We’re truly doomed."

No way out? Yet even in this piece, we see the solution staring us in the face: economic growth. The only way out of our current situation is economic growth. We've done it before. And we can do it again.

Growing the economy

Growing the economy will however take more than pseudo-fixes like reducing regulation or streamlining the tax code, however useful these improvements will be.

And this time, it will take more than finagling another financial bubble, like the Internet bubble of the 1990s or the housing bubble of the 2000s.

This time, we need to deal with root causes. Instead of chasing phantom scapegoats like the poor or the unions for the country's economic problems, we need to address the fact that our private sector institutions have become unproductive. Studies such as Deloitte’s Shift Index show that management in the US private sector is in sharp decline. The return on the assets of U.S. firms is only a quarter of what it was in 1965. The life expectancy of firms in the Fortune 500 is already startlingly brief—now less than fifteen years and heading towards five years, unless something changes. And during twenty-five years from 1980 to 2005, firms older than five years produced zero net new jobs in the U.S.

To grow the real economy, we have to undertake fundamental shifts in the way organizations are managed.

Reinventing Management

The key to growing the real economy today’s marketplace is a different kind of management that prospers by combining continuous innovation with disciplined execution. Instead of a single-minded focus on efficiency, it aims at generating more value for customers sooner.

We can learn what is involved from  books like: The New Capitalist Manifesto by Umair Haque, The Power of Pull by John Hagel, John Seely Brown and Lang Davison, Reorganize for Resilience by Ranjay Gulati, Leadership in a Wiki World by Rod Collins and The Responsible Business by Carol Sanford.

For an comprehensive account of the rise and fall of 20^th Century management as well as an account of the principles and practices underlying the reinvention of management, read my book, The Leader’s Guide to Radical Management (Jossey-Bass 2010).

 

Comments

[HayesThompson]

We don't just need fundamental shifts in the way organisations are managed.

We need fundamentally different types of organisation.

Ones that don't syphon off money and give it to a few shareholders or ultra-rich execs.

The US deficit was zero in 200? Really? Do you have a link? I'm looking at this:

http://en.wikipedia.org/wiki/United_States_public_debt

Thanks.

[Steve Denning]

Dear Hayes,
Thanks for your comment. I'm talking about the budget deficit being zero, not the debt. The debt was still enormous. As surpluses were imminent, they could have been used to start paying down the debt. Instead, more spending occurred, and more red ink. A sad story, particularly when you think about what the money was spent on.
Steve

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