Surviving the slump A special report on business in America l May 30th 2009 AAMBUSINESS.inddMBUSINESS.indd 1 119/5/099/5/09 112:43:342:43:34 The Economist May 30th 2009 A special report on business in America 1 Surviving the slump Also in this section Trading down From decadence to discounts. Page 2 Creative destruction The struggle is ugly, but the survivors will be stronger. Page 4 Red tape and scissors Despite crazy rules, convoluted taxes and rampant lawyers, America is still a great place to do business. Page 6 Life is expensive Treating the sickest part of America’s economy. Page 9 A green revolution Saving the world will not be cheap. Page 10 America’s non•nancial businesses are su ering. But they will emerge from the recession leaner and stronger than ever, says Robert Guest The fragile web of foreign trade HE crisis began on Wall Street. Finan• since the second world war. Mark Zandi, The recession makes globalisation more cial conjurors suddenly discovered that an economist at Moody’s Economy.com, necessary, but more precarious. Page 12 T their tricks for making risk vanish had only predicts that the recession will shrink disguised it. Their leveraged bets went America’s economy by 3.5% in total. For The coming recovery sour, and the derivatives they thought in• most executives, this is the worst business It could take a while, but Main Street will sured them against any shock turned out environment they’ve ever seen, says bounce back. Page 13 to be worse than worthless. Trillions of Lenny Mendonca, chairman of the McKin• dollars disappeared. Credit markets froze, sey Global Institute, a research group. and the pain spread to Main Street. This Times are so tough that even bosses are special report looks at how American busi• taking pay cuts. Median pay for chief exec• ness will cope with that pain and with the utives of S&P 500 companies fell 6.8% in big policy issues that the country will face 2008, according to Equilar, a data provider. in the aftermath of the crash. The overthrown titans of Wall Street took America’s recession began quietly at the biggest knock, with average pay cuts of the end of 2007 (see chart 1, next page). 38% and median bonuses of zero. But there Since then it has mutated into a global cri• was some pain for everyone: median pay Acknowledgments sis. Reasonable people may disagree about for chief executives of non•nancial rms In addition to those mentioned in the text, the author whom to blame. Financiers who were not in the S&P 500 fell by 2.7%. would like to thank: Andrew Bartels, Saul Berman, Tim as clever as they thought they were? Regu• Nearly every business has a woeful tale Blair, Paul Bledsoe, Joseph Bower, Jeremy Bulow, Frank Buscemi, Helen Chang, Erich Clementi, Chris Colford, lators dozing Homer Simpson•like at the to tell. For example, Arne Sorenson, the Rafael Cosentino, William Dunkelberg, John Hallock, switch? Consumers who borrowed too president of Marriott hotels, likens the cri• Manouchehr Kambakhsh, Rosabeth Moss Kanter, Nancy much? Politicians who recklessly promot• sis to the downturn that hit his business Koehn, Tim Koller, Brian Krzanich, Naveen Lamba, Jay Light, Bob Litan, John Lutz, Paul Mango, Laura Marcero, ed home•ownership for those who could after September 11th 2001. When the twin Thomas Marder, Charles O’Reilly, Ellen Pao, George Parker, not a ord it? All are guilty; and what a towers fell, Americans stopped travelling. Michael Payne, James Phills, William Pulleyblank, mess they have created. Marriott had its worst quarter ever, with Hayagreeva Huggy Rao, Justin Rattner, Jan Rivkin, Daniel Sabbah, Sageworks Inc, Garth Saloner, Kevin Since 2007 America has shed 5m jobs. revenues per room falling by 25%. This Sellers, Bruce Sewell and Michael Spence. More than 15% of the workforce are jobless year, without a terrorist attack, the hotel in• or underemployedroughly 25m workers. dustry is putting the same numbers on A list of sources is at The only industries swelling their payrolls the board, laments Mr Sorenson. Economist.com/specialreports are health care, utilities and the federal The hotel bust, like most busts, was pre• government. The value of listed shares in ceded by a breathtaking boom. Although Videos and an audio interview with the author are at American rms collapsed by 57% from its many other big rms resisted the tempta• Economist.com/audiovideo peak in October 2007 to a trough in March tion to over•borrow, developers gorged on this year, though it has since rebounded cheap debt and built bigger and swankier A country brieng on America is at somewhat. Industrial production fell by hotels as if the whole world were planning Economist.com/unitedstates 12.8% in the year to March, the worst slide a holiday in Las Vegas. When the bubble 1 2 A special report on business in America The Economist May 30th 2009 2 burst, demand collapsed. Hoteliers found speeches on the subject might suggest. The themselves with a multitude of empty If all goes well... 1 shift to a low•carbon economy will help rooms even as a gaggle of unnecessary GDP, % change on previous quarter some rms, hurt others and require every new hotels was poised to open. organisation that uses much energy to re• 1.5 Other industries have su ered even FORECAST think how it operates. It is harder to predict more. Hordes of builders, property rms 1.0 how Mr Obama’s proposed reforms to the and retailers have gone bust. And a carpo• 0.5 ailing health•care system will pan out. If he calypse has hit Detroit. Last year the + succeeds in curbing costsa big ifit 0 American car industry had the capacity to – would be a colossal boon for America. make 17m vehicles. Sales in 2009 could be 0.5 Some businesses will benet but the vast barely half of that. The Big Three American 1.0 bulk of the savings will be captured by carmakersGeneral Motors, Ford and workers, not their employers. 1.5 Chrysleraccumulated ruinous costs over In the next couple of years the busi• the post•war years, such as gold•plated 2.0 nesses that thrive will be those that are mi• health plans and pensions for workers 2006 07 08 09 10 serly with costs, wary of debt, cautious Sources: Bureau of Economic Analysis; OECD who retired as young as 48. All three are with cashow and obsessively attentive to desperately restructuring. Only Ford may what customers want. They will include survive in its current form. This special report will make several ar• plenty of names no one has yet heard of. Hard times breed hard feelings. Few guments. The pain will eventually end. Times change, and corporations change Americans understand what caused the American business will regain its shine. with them. In 1955 Time’s man of the year recession. Some are seeking scapegoats. Many rms will die, but the survivors will was Harlow Curtice, the boss of GM. His Politicians are happy to pander. Bosses emerge leaner and stronger than before. rm was leading America towards a new have been summoned to Washington to The nancial sector’s share of the econ• economic order, the magazine gushed. be scolded on live television. The president omy will shrink, and stay shrunk for years Thanks to men like Curtice, the bonds of berates their greed. The House of Repre• to come. The importance of non•nancial scarcity had been broken and America sentatives passed a retroactive 90% tax on rms will accordingly rise, along with their was rolling in two•toned splendour to an bonuses at AIG, a bailed•out insurer. (The ability to attract the best talent. America all•time crest of prosperity. Soon, Ameri• bill died in the Senate.) The attorney•gen• will remain the best place on earth to do cans would need to spend comparatively eral of New York threatened to release the business, so long as Barack Obama and the little time earning a living. bonus recipients’ names unless they re• Democrats in Congress resist the tempta• Half a century later GM is a byword for turned the cash. tion to meddle too much, and so long as or• poor management. In March its chief exec• ganised labour does not overplay its hand. utive was red by Time’s current man of Extravagance is out The crisis will prove hugely disruptive, the year, Mr Obama. The government now Retroactive taxes and personal threats? however. Bad management techniques props up the domestic car industry, lend• Businessfolk pray such habits do not will be exposed. Necessity will force the ing it money, backing its warranties and spread. Meanwhile, they are bending over swift adoption of more ecient ones. At overseeing its turnaround plans. With backwards to avoid seeming extravagant. the same time, technological innovation luck, this will be short•lived. But there is a Meetings at resorts are suddenly taboo. will barely pause for breath, and two big danger that Washington will end up Goldman Sachs, an investment bank, can• political changes loom. micromanaging not only Detroit but also celled a conference in Las Vegas at the last Mr Obama’s plan to curb carbon diox• other parts of the economy. And clever minute and rebooked it in San Francisco, ide emissions, though necessary, will be though Mr Obama’s advisers are, history which cost more but sounded less fun. far from cost•free, whatever his sunny suggests they will be bad at this. 7 Trading down From decadence to discounts IVE years ago Michael Silverstein and a year bought silk pyjamas from Victoria’s their investments are in a ditch.