U.S. Companies Versus the U.S. Economy

01 Mar. 2012 | Comments (0)

It's obvious to anyone paying attention that the United States needs well-educated, technically skilled workers if it's to remain competitive in the global marketplace. Just as obvious: We need a robust middle class with adequate disposable income and a sense that our economic system is working in a reasonably fair way. Yet business leaders and policy makers behave as if they don't believe either of those things:


    • they tolerate K-12 student performance that's falling fast relative to that of comparable countries;

    • companies invest far less than they used to in worker training;

    • many jobs go unfilled because companies say they can't find workers with the skills they need;

    • we have a large and growing population of people who have been unemployed for so long that they are no longer looking for work;

    • wages have been stagnant for three decades (except in the case of top earners),

    • the gap between high-income earners and lower- and middle-income workers is greater than at any time since the 1920s, and

    • unions are attacked as part of the problem, not (as they could be) part of the solution to these challenges.

 

It's a perfect recipe for decline and a terrible legacy to leave to our children and grandchildren.

As I argue in the March issue of HBR, this disconnect is the result of a market failure. Simply put, what's good for individual U.S. companies is no longer automatically good for business nationwide, for U.S. workers, or for the economy. It often makes economic sense for individual firms to close a U.S. plant, to send work to wherever it can be done effectively at the lowest cost, and to minimize labor expenses through other means. Indeed, business executives will say that they owe it to shareholders to do exactly that.

But the overall needs of the U.S. business community are much better aligned with those of the U.S. economy as a whole. U.S. multinationals continue to derive 60% of their sales from the U.S. market, according to Commerce Department data. These firms rely on U.S. customers' personal-income growth and their purchasing power; a well-educated workforce that has the right technical skills; and a regulatory environment that rewards companies for taking a longer-term view. All of these objectives lie beyond the reach of individual firms but within their power to achieve collectively.

As in a classic market failure, individual firms are not shouldering the true costs of their actions. They benefit from minimizing their own labor costs while society picks up the tab in the form of slow economic growth, unemployment, welfare, and so on. Then there's the tension between short- and long-term objectives: Activities that make sense for individual firms at one end of the value chain, right now (for instance, shipping jobs overseas and cutting costs wherever possible) can backfire at the other end. Down the road, the middle class may not be robust enough to create demand, and the workforce may not be trained well enough to drive innovation.

It's impossible to fix this market failure without first fixing how we talk to each other. Leaders from government, business, labor, and education seem to have lost the knack of tackling problems together when the stakes are high — as we've done in other moments of national emergency, such as the Great Depression or World War II. Instead, we seem to delight in ideological posturing and finger pointing. In a future post, I'll suggest ways to jump-start a process for fixing the market failure I've described.

For now — what do you think of the "tragedy of the commons" I've described? Do you agree that there's a disconnect between individual companies' interests and the interests of the society at large? Should business leaders start working with other stakeholder groups to respond to this national emergency?

 

This post is part of the HBR Insight Center on American Competitiveness.

This blog first appeared on Harvard Business Review on 2/17/2012.

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  • About the Author: Thomas Kochan

    Thomas Kochan Thomas A. Kochan is the George Maverick Bunker Professor of Management at MIT’s Sloan School of Management and a codirector of the Institute for Work and Employment Research. His article in the …

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