Let’s Debate the Right Issues
Let's Debate the Right Issues
A colleague who used to work at the Federal Reserve Bank in
Atlanta devoted a year to studying premier firms in the
Southeast. He recalls a tongue-lashing from Federal Reserve
Chairman Paul Volcker, who blasted him for wasting time on
microeconomic issues (the strategies of individual firms).
Volcker told him to stick to major variables that influence the
economy's performance -- like manipulation of the money supply.
The brouhaha surrounding Volcker's withdrawal and Alan
Greenspan's ascension to the Federal Reserve throne once again
points out our bias for "big solutions." Economic debates are
dominated by the big macroeconomic levers, such as the deficit,
the price of money and the strength or weakness of the dollar.
The Fed, the Administration and Congress work principally on
macro levers. They are vitally important, to be sure. But I
believe that our loss of competitiveness stems from inattention
to microeconomic forces more than from inept macro policies.
For 40 years, the role of macroeconomic policy has been one of
fine tuning, even in the massive 1981-1983 recession. The fine
tuners worked under the assumption that our underlying production
machine was not only sound, but also the world's best. The only
issue was how to optimally unleash the power of that machine --
the Fortune 500.
Today, much of the Fortune 500, and even its service sector
counterpart, are losing their competitive foothold. Not because
of the long overvalued dollar (before two years ago). Not because
of the off and on nature of investment tax credits. Why, then?
Because of a failure of management, unions and policymakers to
attend to microeconomic issues such as quality, research and
In fact, the only bright spot in the U.S. economy is the thriving
small-business sector. It is not only creating jobs (over 10
million in the last decade, while the Fortune 500 lost over 3
million), but it also is spearheading risky invention from
biotechnology to semiconductors. To put it mildly, small business
has not been the darling of the Fed or the Administration. It
has succeeded in spite of their inattention.
I am not suggesting at all that we ignore the "big variables."
They must be managed to keep the ship afloat. I do implore
policymakers (1) to not suffer the illusion that manipulation of
the big variables will fix microeconomic problems (e.g. firm-
level noncompetitiveness vis-a-vis Japan and Germany) and (2) to
raise micro issues to an equally high pedestal as the macro
Two sorts of microeconomic issues need attention. The first type
can -- and must -- be promoted through government policies. Take,
for example, research and development. The U.S. has jumped into
the lead over Japan (and everyone else) in R&D spending. But we
can kiss that edge goodbye with the insane tax bill of 1986,
which gets rid of the major R&D tax credit.
Another crucial incentive, that especially cripples investment in
small business, was killed by the tax act, too -- the favorable
capital-gains treatment. This should be reinstituted, and fast. A
host of other inhibitors, including massive reporting
requirements developed for the GMs of our nation that also are
imposed on tiny companies, must be relaxed in order to spur even
further vitality from this sector.
Training and retraining also demand policy support. As I proposed
in an earlier column, we need a massive tax credit to induce
employers and employees alike to spend more on training and
retraining. Our expenditures are a sick joke compared, once more,
with Japan and Germany.
Policymakers can even aid internationalizing U.S. businesses.
Tools should include providing new funding sources for smaller
business exports and twisting the tax system in general to
encourage exports (e.g., a value-added tax that would not be
applied to goods sold for export).
A second category of microeconomic issues cannot be legislated.
It requires jawboning by the President and all senior
policymakers. At the top of the list are "soft" topics such as
product quality. Poor quality (and its handmaiden, poor service)
have gutted our ability to compete. Yet almost nobody talks about
it. In fact, the entire "Buy American" campaign and trade debate
is a thinly disguised anti-quality conspiracy aimed at papering
over the problem. The implicit message is, "Hush up. Don't talk
about our despicable quality. It will hurt our ability to get
tough with the Japanese."
The end-of-May automobile sales figures disclose just how much
inattention to the "soft" factors can hurt. The free world's
largest industrial company, GM, has lost an astounding 20 percent
of its market share in just one year! (And that occurred despite
a 20 percent drop in the value of the dollar vis-a-vis the yen
and despite dramatic car-sales incentives.)
Mr. Greenspan has accepted a tough job, and an important one. But
his solutions, at best, will be band-aids. At worst, "solutions"
by the Fed (and Treasury, etc.) prop up our tottering, underlying
rot. They hide badly eroded microeconomic deficiencies. Something
is rotten, and macroeconomic tinkering is not going to fix it.
(c) 1987 TPG Communications.
All rights reserved.