Churn Baby Churn

Tom Peters

“Over the past several years, politicians and pundits have called for renewal of ‘American competitiveness,’ ” University of California Professor Richard B. McKenzie wrote in the May 14 Wall Street Journal. “They don’t seem to get the underlying message in the country’s failures in domestic and international markets: America has been destroying too few jobs.” Talk about a contrarian point of view!

“We must view … the loss of hundreds of thousands of jobs in the textile industry over the past two decades as a measure of the success of the industry in dramatically improving productivity and maintaining its world-class status.” McKenzie continues. “Similarly, the current wave of job destruction in the service industry must be seen as mirroring the long-awaited productivity gains from computerization.”

MIT economist David Birch is another prophet of turmoil. “No one has looked carefully into how jobs are created and destroyed,” Birch writes in his book, Job Creation in America: How Our Smallest Companies Put the Most People to Work. He chides fellow economists for treating the economy as “huge blocks—consumption, investment, government spending, exports, and so forth that can be moved around by a relatively few ‘economic crowbars.'” Instead, he claims the real story involves a volatile population of 7 to 8 million companies. “What happens when you … put this amorphous abstraction (called the economy) under the microscope?” Birch asks. “You will see a mass of confusion, a chaotic, turbulent collection of individual companies, all of which are constantly undergoing change.”

Consider firms that employed 20 to 99 people in the early ’80s. In 1981, according to Birch, they employed 12.1 million of us. During the next four years, however, a cataclysmic job-churning process affected millions.

The gory details: New companies (born in or after 1981) that employed 20 to 99 people in 1985 created 3.0 million jobs. Wow! But: 2.8 million jobs were lost by 1981’s companies of 20 to 99 that had closed their doors by 1985. Moreover, bigger companies (100 or more employees) lost jobs and had shrunk “into” the 20- to 99-person category, while many of 1981’s 20- to 99-person firms grew to more than 100 workers; altogether, these and other somersaults resulted in the creation and destruction of another 3 or 4 million jobs—just in the one category of firm.

But such commotion is far from the whole tale of relentless expansion and contraction. Economist Paul Craig Roberts cautions those who make policies based solely on movements within income quintiles (top fifth in family income, second fifth, etc.) Instead, he claims, policy-makers should follow individuals. In a July 13 BusinessWeek column, Roberts reviews a recent study by Isabel V. Sawhill and Mark Condon, from the liberal Urban Institute. “Using well-established income survey data, (they) examined income growth and mobility during 1967–1976 and 1977–1986,” he writes. “During the earlier period, the average family income of the poor (those beginning the decade in the bottom income quintile) grew 12 times faster than the income of the rich (those in the top quintile). During the latter period, the income of the poor grew 15.4 times faster than the income of the rich.

“Tracking individuals is crucial to understanding income distribution in the U.S., because there is so much income mobility: The rich and poor will always be with us, but they won’t be the same people over time. Sawhill and Condon find that about half of those who began in the bottom quintile moved into higher quintiles … and about half of those who started at the top moved down. … More than two-thirds who started out in the middle moved up or down.”

This pattern, Sawhill and Condon note, “may be surprising to the general public, which has been led to believe that the poor were literally getting poorer over the last decade or two, and that the incomes of the rich were skyrocketing. This is simply not true.”

None of this is very comforting, especially when you realize that the cacophony is increasing. This is the age of new technologies, of headwork rather than handwork, where business is done in groups of 10 and in ever-shifting networks—not in stable factories that mass thousands under one roof.

The upshot: Individuals will move up and down the income ladder at even faster rates. “Careers” will increasingly become portfolios of jobs, on and off numerous firms’ payrolls at various times. And companies—including members of the Fortune 500—will appear and disappear, leap forward, and tumble backward, at a furious pace.

The price for misconstruing the nature of economic progress is enormous. Economist McKenzie attacks both political parties’ attraction to what he calls “jobilism”—trying to “create” jobs mostly by protecting current jobs, thence reducing churn. (This will be the nub of Congress’ attack on the North American Free Trade Agreement.) The pathetic Eastern European and former Soviet economies were built on a bedrock of jobs for all, with virtually no churn, McKenzie says. The result: “They destroyed not only economic progress, but the morale of the
people.” The seeming madness of churn per se—among workers, companies, and communities—turns out to be the cornerstone of success, from Shenzhen, China, to San Jose, California.