Business Forum: A Genius for Change

By Isaac Cheifetz
Published August 12, 2002

Has the "irrational exuberance" of the late 1990s mutated into "irrational distress?"

The Dow is hovering around 8,000. The past several months have seen the implosion of Enron, WorldCom, and Arthur Andersen.

Is the downturn nearly over? Or will the U.S. economy imitate Japan and follow a speculative bubble with a decade of economic paralysis?

The good news is that the foundation of the U.S. economy is sound, in several crucial ways that will benefit us in the future.

The bad news is that we have been avoiding certain difficult realities. The downturn will end only when we look reality in the eye and build on our strengths.

But confronting reality is rarely pleasant. Self-improvement is fun after the fact, when you can relish your growth. In the moment, change hurts.

Our Strengths

What are the strengths we can rely on?

• Capitalism rules. The U.S. economic system of free-market capitalism keeps succeeding, while every alternative has collapsed or is moribund. Our problems are real, but other countries share them -- or are struggling with worse.

The past 15 years have seen the collapse of totalitarian communism, the stagnation of Western European welfare states and the near-depression of the paternalistic capitalism of Japan -- previously thought to be more efficient economically, and less disruptive socially, than our free-market system.

This is not to say that capitalism always is attractive, fair or efficient, only that, to paraphrase Winston Churchill's comment about democracy, it is "the least awful of alternatives."

• We keep learning. Fifteen years ago, Japan's flexible, lean manufacturing seemed to be overwhelming our rigid, error-prone assembly-line manufacturing. U.S. companies swallowed their pride and threw themselves into total-quality management, Six Sigma and other process-optimization disciplines. U.S. workers made the difficult adjustment to the demise of the single-company corporate career.

The re-engineering of the Fortune 1000 resulted in a toughened, flexible workforce. And we lead in innovation -- no other country comes close.

• Corruption is the exception. Despite the recent high-profile financial scandals (and we probably haven't seen the last of them), the overwhelming majority of corporations have clean books.

Confronting Reality

So what are the missing pieces of the puzzle to regain a healthy economy?

Some, such as conflicts of interest related to the roles of corporate auditors and Wall Street equity analysts, already are being identified and addressed. But we need to go further. Here are several more realities to acknowledge (but not obsess about):

• Transparency. Both democracy and capitalism are built on trust, and trust is built on transparency -- the ability for citizens and shareholders to accurately see how the organization is performing. Anything that erodes transparency (aside from information legitimately confidential) hurts free markets.

• That '70s Show. The go-go stock market of the 1960s led to the flat stock market of the 1970s. In 2002, six years of irrational exuberance will likely also be followed by a lull in stock prices.

According to Robert Shiller, author of "Irrational Exuberance," the Standard & Poor's 500 is currently valued at 21 times its trailing 10-year average, compared to an average of 15 between 1871 and 1990 (Wall Street Journal, July 29).

• Stop speculating. There's no such thing as a speculative bubble that ends well. It is critical that investors -- professional and individual -- give up a get-rich-quick mentality, and not transfer their speculative ways to other sectors, such as real estate.

A Genius For Change

It is possible that the economy will continue its bumpy ride for several years.

What is extremely unlikely is the U.S. economy falling into a rut like Japan's. There is a fundamental difference between our societies.

We will grit our teeth, have layoffs and bankruptcies, and send some dishonest executives to jail. There will be false starts and overreaction, but ultimately lots of positive change.

Japan, by contrast, still lacks the political will to effect painful structural changes that stress the social fabric. These include deregulating the retail distribution chain, unraveling the tangled, incestuous relationship between banks and corporations, and encouraging companies to pursue layoffs and bankruptcies when appropriate.

Historically, we vaccinated ourselves against Marxism with the New Deal, ramped up military industrial production in 18 months to win World War II, defused racial strife through the civil-rights movement, and, in the past 30 years, moved women from the periphery to the center of the professional workforce.