Surviving the slump A special report on business in America l May 30th 2009

AAMBUSINESS.inddMBUSINESS.indd 1 119/5/099/5/09 12:43:3412:43:34 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. ŒFor 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 ŒHuggy 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 underemployed‹roughly 25m workers. dustry is Œputting 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 brie†ng 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 Œcarpo• 0.5 ailing health•care system will pan out. If he calypse has hit Detroit. Last year the + succeeds in curbing costs‹a big if‹it 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 bene†t but the vast barely half of that. The Big Three American 1.0 bulk of the savings will be captured by carmakers‹General Motors, Ford and workers, not their employers. 1.5 Chrysler‹accumulated 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 cash‡ow 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 Œa 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, Œthe 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 Œin 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 Œcomparatively 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 eˆcient 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. Household FNeil Fiske wrote a book, ŒTrading Up: Secret. A couple making $125,000 ordered net worth fell by a staggering $11.2 trillion The New American Luxury. They argued a $4,000 brand•name cooking range, even last year. The rich are cancelling orders for that Americans, even those of modest though their kitchen came with a free ge• yachts. Working Americans are forgoing means, were abandoning merely ade• neric one. even small luxuries. Lindt & Sprüngli, a quate products for luxurious ones. Jake the If you read the book backwards, it de• maker of exquisite chocolate tru‰es, is construction worker, for example, splur• scribes what is going on today. closing 50 of its 80 stores in America. Her• ged $3,000 on Callaway golf clubs, though Americans are trading down. If they shey’s, a maker of less chocolatey choco• he could have bought a set nearly as good still have jobs (as 91% of the workforce do), late, is doing rather well. Limited Brands, for a third as much. (ŒThey make me feel they are worried about losing them. Their which owns Victoria’s Secret, is not. rich, he said.) A shipping clerk on $25,000 homes are no longer cash machines and Americans are rediscovering thrift. Re•1 The Economist May 30th 2009 A special report on business in America 3

is so good at squeezing costs that it has a of time at home, you need to be able to de• Cheap sells 2 measurable e ect on the national in‡ation fend it. Gun sales are unusually brisk: FBI Sales, Q1 2007=100 rate. McDonald’s is enticing cash•strapped background checks in the three months Amazon Wal-Mart Neiman diners with meals for as little as $1. from November 2008 were up by 31% on US US Marcus Americans who still eat out are doing the previous year. Some Americans are 250 so at cheaper restaurants. Russ Klein, a se• stocking up in anticipation of tighter gun nior executive at Burger King, another fast• laws under Mr Obama. Others fear that 200 food chain, reckons that on balance the re• the newly jobless will turn criminal. Nei• 150 cession has helped his †rm. High unem• ther fear is likely to prove founded, but gun ployment hurts breakfast sales, because stores are still running out of ammunition. * 100 * jobless people have less cause to get out of bed. But overall, cash•strapped consumers The big squeeze 50 are buying more burgers in paper bags and As consumers cut back, so do companies. 0 fewer steaks served on white linen. Everyone is hoarding cash, trimming costs Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 The competition among the fast•food and painfully burning o fat. Inventories 2007 08 09 chains is exuberantly vicious. Burger King fell by 7% from August 2008 to March this Source: Company reports *Quarter end Jan 09 produces edgy advertisements in the hope year. Some industries will have to shrink that people will pass them around online. dramatically to survive. Car•parts suppli• 2 tail sales fell by 11% from their peak in late Earlier this year it o ered users of Face• ers, for example, are in dire straits, despite a 2007 to April 2009. Personal consumption book, a social•networking website, a free promise of $5 billion in emergency loans has fallen 2.5% since last summer. The Bos• Whopper burger if they would dump ten from the government. TI Automotive, ton Consulting Group (BCG), a consultan• of their online friends. Facebook soon shut which makes fuel tanks, has laid o a quar• cy, †nds that nearly three•quarters of down the promotion, but not before Bur• ter of its white•collar sta in North Ameri• Americans plan to curb their spending ger King was able to claim that the public’s ca in the past year. Managers’ salaries have over the next year. love of its ‡ame•grilled product was been slashed. Blue•collar workers’ hourly Trading down is not diˆcult. Instead of, Œstronger than 233,906 friendships. pay has been frozen and their hours cut by say, blowing $4.50 on a Strawberries and Another way Americans are saving half. The †rm is delaying paying its own Crème Venti Frappuccino from Starbucks, money is by staying at home, so †rms that suppliers unless they can deliver exactly Americans are popping into Dunkin’ Do• o er a distraction from the horrors of fam• what it wants, when it wants it. nuts for a basic cuppa Joe at a buck or so. ily life are doing well. Net‡ix, which lets Yet all this belt•tightening will not be Instead of shopping at Neiman Marcus (a couch potatoes order †lms from a huge li• enough. Car•parts suppliers must consoli• posh department store known colloquial• brary for as little as $4.99 a month, said in date, says William Kozyra, TI’s president. ly as ŒNeedless Mark•up), they are driving April that it had shipped its 2 billionth There are typically six to eight of them for to the out•of•town Wal•Mart superstore or DVD. Amazon, an online bookseller that each part. To achieve the necessary econo• shopping online for bargains at Amazon has expanded into music, video games, mies of scale, that must shrink to two or (see chart 2). A recent Pew poll found that hiking equipment and even sex toys, three, he reckons. Unfortunately, suppliers 21% of Americans planned to grow their boosted pro†ts by 24% in the †rst quarter. would need to borrow money to †nance own vegetables, 16% had held a garage sale Of course, if you are going to spend a lot mergers or acquisitions, and no one will or sold things online and 10% had either lend right now to an industry whose future taken in a friend or relative or moved in is in such doubt. with one. Pundits are coining phrases such Other industries are doing better. Few as Œausterity chic and Œluxury shame. †rms have the crushing legacy costs of GM Four•†fths of Americans told the BCG or Chrysler, and few carry such unbear• they would defer big purchases that can able debts. Most of America’s non•†nan• wait. The most obvious example is a car. cial †rms did not go mad in the credit After a home, this is the most expensive boom. In fact, since the dotcom and tele• object a typical family buys. New cars are coms busts earlier this decade, many have nice, but old ones can last a long time, as put their balance•sheets in order. While any third•world taxi•driver knows. So households and †nancial †rms went on a Americans are keeping their old wheels on borrowing binge, non•†nancial †rms the road. Repair shops are bustling. Des• stayed fairly sober. Household debt leapt perate dealers are o ering interest•free †• from 71% of GDP at the beginning of 2001to nance. Hyundai, a maker of un‡ashy cars, 97% in late 2008. Financial•sector debt has lifted its share of the American market vaulted from 85% to 121%. But non•†nancial by saying: buy a car from us, and if you lose †rms’ debt rose only from 66% to 78%. your job we’ll buy it back. Despite massive injections of taxpay• The bene†ciaries of the new parsimo• ers’ cash to restore lenders’ balance•sheets, ny are, unsurprisingly, †rms that o er low it will be a while before the credit crunch prices. The only two stocks on the Dow ends. Between 2000 and 2007 the average Jones Industrial Average that rose in 2008 American increased his personal con• were Wal•Mart and McDonald’s. Wal• sumption by 44%. This accounted for 77% Mart, with its hypereˆcient supply chain, Cheap and cheerful of America’s economic growth during that1 4 A special report on business in America The Economist May 30th 2009

2 period. Much of it was †nanced by debt. In tens of thousands of pages of leases and a †ve years, American households extracted labyrinth of obligations to landlords, jani• $2.3 trillion of equity from their homes. tors and the taxman. They blew 20% of this on consumption, In good times property management is 19% on sprucing up their homes and 44% seen as a †xed cost, says Mark Friedman, on assets such as stocks. Accruent’s chief executive. But now †rms The hangover from this party will be are looking for ways to trim their bills. Ac• long and painful. Households’ total out• cruent helps them build more rationally, standing borrowing fell in the fourth quar• †nd cheaper leases and fend o landlords ter of 2008, for the †rst time since the sec• who try to overcharge for extras. The reces• ond world war. The personal•saving rate sion creates new problems: leases don’t ex• rose to 4.2% in the †rst quarter of 2009, pire just because you lay people o . Ac• from a nadir of minus 0.7% in 2005. ŒIt is cruent helps †rms shu‰e employees easy to see how consumer deleveraging around to create an empty building that could result in hundreds of billions of dol• can then be sold or sublet. lars•worth of forgone consumption in So its services are in demand. But the coming years, say Martin Baily, Susan Cleaning up in tough times sheer unpredictability of the economy still Lund and Charles Atkins of the McKinsey makes Mr Friedman nervous. Quite often, Global Institute. So while owners are struggling, Marri• he opens the Wall Street Journal and †nds For most non•†nancial †rms, however, ott is scouting for bargains. Mr Sorenson, that something bad has happened to a †rm there are a couple of bright spots in the the company’s president, predicts that dis• he thought he was about to do business gloom. Their balance•sheets are mostly tressed hotels could soon be on sale for with. ŒIt feels like we’re driving at 100mph healthier than the banks’. And for the half•price. He will buy some, perhaps, and in a fog, he says. strongest †rms the downturn o ers oppor• sell them when times improve. Like the On the plus side, many of the eˆcien• tunities to snap up prime assets cheaply. Rothschilds of old, Marriott likes to buy to cies discovered through necessity during Consider Marriott. Although the hotel the sound of cannons and sell to the sound the downturn will outlast it. For example, business tends to rise and fall in lockstep of violins. †rms are cutting business travel by video• with the wider economy, not every hotel• conferencing. Mr Sorenson of Marriott ier is equally exposed. The Marriott name Making money by saving money plays down the threat, arguing that there is (or one of its sister brands) graces more Firms that help other †rms save money are no substitute for meeting people face•to• than 3,000 hotels worldwide, but the com• also in a strong position. For example, Ac• face. Others are not so sure. Videoconfe• pany owns only half a dozen. The rest are cruent, a Californian information•technol• rencing technology keeps improving. franchised out or managed by Marriott for ogy †rm, helps big organisations make Some meetings are necessary, but others a fee. Since Marriott owns so few proper• more eˆcient use of their land and build• are a waste of time. Mr Kozyra of TI Auto• ties, it pro†ts less during a boom. But it suf• ings. Its clients include Target (a retailer), motive predicts that, when the good times fers less during a slump. It still collects fran• Lockheed Martin (an aerospace †rm) and return, Œwe’ll go halfway back to travel• chise and management fees. Only its Yale University. Organisations such as ling, and maybe send two executives to performance•related payments shrink. these may have hundreds of properties, meet customers instead of six. 7 Creative destruction

The struggle is ugly, but the survivors will be stronger

N A quiet street in Romulus, a suburb that would be a good deal, he suggests. $32,000, to a local entrepreneur who plans Oof Detroit, is an empty house. Even if The house was sold that same day by to turn it into a home for the mentally ill. there were not a foreclosure sign outside, an auction †rm, Real Estate Disposition Perhaps not what the neighbours most the rotting newspapers and broken toys on Corporation (REDC). The bidding started wanted, but at least it will be occupied. the lawn make it obvious that no one lives at a mere $500, but soon grew heated. Such auctions are now common in here. The owner lost his job and left last ŒWe’re approaching the bottom of the America. They are a conspicuous sign of year, according to neighbours. market! This is a great time to buy! buzzed misery but they serve a purpose. If banks But the house itself is solid and spa• the auctioneer. As his sales patter rattled could not seize and sell homes with mort• cious, with four bedrooms and an ample through the ampli†ers, tuxedo•clad Œspot• gages in default they would not lend in the yard. Someone should buy it and †x it up, ters dashed back and forth among the †rst place. And though it may be heart• reckon the neighbours. So long as it is emp• crowd spotting bidders and shouting out breaking for former owners to see their ty, it drags down the value of the surround• their bids. homes o‰oaded cheaply, low prices are ing properties, grumbles one, a retired car The house in Romulus was one of doz• good for †rst•time buyers. worker. ŒHomes round here used to sell for ens REDC auctioned on March 30th at a The auction in Dearborn was packed $120,000, but if you can get it for $25,000, hotel in nearby Dearborn. It went for with young couples who until recently 1 The Economist May 30th 2009 A special report on business in America 5

2 could not a ord to own a house. There In January Circuit City, an electronics new hands. A ruthless labour market and a were throngs of landlords, too, looking for retailer, went into liquidation, shutting miserly welfare state have historically bargains to buy, clean up and rent out. more than 500 stores and selling its entire meant that Americans are more likely to Someone has to do this. A mobile popula• inventory. Shoppers snapped up bargains have jobs (albeit often low•paid ones) than tion needs rentable homes. at its closing•down sales. Other retailers Europeans, and far less likely to be unem• Some think the housing market is about pounced on some of its properties. And its ployed for a long time. In 2007 America’s to recover. Optimists took heart when rivals in the iPod•and•toaster•hawking jobless rate was 4.6%, compared with an sales of single•family homes rose in Febru• trade are †ghting to woo its former custom• average of 7.9% for the OECD’s European ary but March’s weak †gures undermined ers. ŒWe think there’s six to eight billion member countries. And whereas the aver• their hopes. Pessimists note that one home dollars of business up for grabs, says Brad age jobless American was out of work for in nine is still empty. Between 2002 and Anderson, the outgoing boss of Best Buy, less than four months, the average jobless 2007, at least 1m more homes were built Circuit City’s closest competitor. European spent nearly 15 months involun• than new households were formed. It will An ideal bankruptcy system would tarily idle. take a while for this surplus to be cleared. transfer resources eˆciently from less pro• During previous downturns, unem• In much of the Midwest and north•east de• ductive to more productive uses. How ployment in America has risen more mand is unlikely to catch up with supply close does America come to this ideal? It is sharply than elsewhere but then fallen until 2012, by some estimates. less ruthless than Britain, which is quick to more quickly, too. This time round, it has Bankruptcies are soaring. In the †rst force †rms into liquidation, but less indul• certainly followed the painful †rst part of quarter of this year, 20,251 companies †led gent than France, which has a Œhuge bias that script. Joblessness is already almost for bankruptcy, a 52% jump from the same towards propping up zombie †rms on the 9%, and the OECD predicts that it will hit period last year, according to AACER, a assumption that this will save jobs, says 10.3% next year. The question is: will the la• †rm that monitors such things. Including Michelle White, a bankruptcy expert at the bour market rebound as robustly as it has individuals as well as †rms, AACER ex• University of California, San Diego. Over• in the past? No one knows the answer. This pects to see 1.5m bankruptcies this year, all, she thinks the American bankruptcy recession has been particularly severe. twice as many as in 2007. system does a Œvery valuable job. More than 2% of American workers have Bankruptcy lawyers are busy. Douglas But Jack Williams of the American been out of work for six months or more, Bernstein of Plunkett Cooney, a Michigan Bankruptcy Institute, a think•tank, adds a which is close to a post•war record. And law †rm, says he could work 14 hours a day, caveat. Firms are now †nding it hard to use †rms are cutting back on hours, too. The 7 days a week and not keep up with the de• bankruptcy as a temporary shield to allow average working week fell by half an hour mand for his services. ŒUnfortunately, them to reorganise, because that usually in 2008 to 33.2 hours, the shortest since re• when the economy is bad, they don’t add requires a bridging loan of some kind, and cords began in 1964. hours to the day, he grumbles in an e•mail at the moment no one is lending. That has from his oˆce at 6am. given the system an unfortunate bias to• Now for the creative part Companies that recycle the valuable wards liquidation, he fears. Despite the gloom, there are several rea• parts of bankrupt companies are doing When times are hard, American †rms sons for believing that American business well, too. Distressed †rms typically shed †nd it easy to lay o workers. When times retains its underlying dynamism. First, one assets to raise cash so they can restructure are good, however, they are quick to hire can listen to what businesspeople say. and continue operating. If that does not They may be feeling wretched this year, work, they may go into liquidation. Every• but few doubt that things will get better. thing must then be sold‹the goods on the Bill Green, the boss of Accenture, a consul• shelves, the shelves themselves, the leases tancy, predicts that America will come out on the shops, the websites, the trademarks, of the recession Œmuch earlier than other you name it. Firms such as Hilco, a private• parts of the world. He talks constantly to ly held Illinois †rm, can help, either by other chief executives around the world, broking the sales or by buying assets them• he says, and their consensus is that Ameri• selves and selling them later. Richard Kaye, ca will begin to recover later this year or in a vice•president of Hilco, says there has early 2010. They give three reasons. The re• been a Œsigni†cant uptick in its bankrupt• cession started earlier in America than cy business. In April, for example, the †rm elsewhere. The government’s stimulus agreed to buy the remnants of Polaroid, a package is likely to work. And Œthey be• once•iconic instant•photo †rm whose only lieve that we have a natural competitive signi†cant asset now is its name. streak‹that people are going to want to get Firms that prey on dead or dying †rms back in the game. are not popular. When someone calls you Second, one can look at America’s ad• a Œvulture, it is not a compliment. But vul• mirable record of dealing with turmoil. A tures have their place. The easier it is for study by the Ewing Marion Kau man lenders to collect what they are owed, the Foundation, a think•tank that studies en• easier †rms will †nd it to borrow. An eˆ• trepreneurialism, found that America’s cient bankruptcy process is an essential high rate of economic Œchurning boosts part of capitalism red in tooth and claw. productivity and hence material well•be• The weak die. The strong feast on their car• ing. Between 1977 and 2005 some 15% of all casses. Little is wasted. Recessionary recipe American jobs were destroyed each year 1 6 A special report on business in America The Economist May 30th 2009

2 as †rms closed or cut back. Thanks to the Kau man sample was $78,000. Some typically start up in fat years, Paul Ke• expansion of successful †rms and the en• need far less. Saudia Davis, for example, drosky of the Kau man Foundation found try of new ones, however, many more jobs founded Greenhouse Eco•Cleaning, a that each bad year in America since the were created than destroyed. Start•ups (ie, green apartment•cleaning †rm in New second world war produced just as many †rms less than †ve years old) provided a York, with $800 she earned from mopping †rms that have subsequently grown large third of the new jobs during this period. ‡oors herself. She now has between seven enough to list their shares. He concludes Start•ups that went bust were on aver• and ten cleaners working for her and that †rms that begin in bad times are more age 32% less productive than mature in• would like to expand, but banks are not likely to turn out to become economically cumbents. Mature †rms that went out of lending, she says. She is looking for an Œan• important: think of Microsoft, Apple and business were 27% less productive than gel investor but this is tough when you Krispy Kreme doughnuts. mature survivors. Start•ups that survived, have no intellectual property, so she may During good times, any idiot can get his however, were 3% more productive than have to grow organically. ideas funded, says William Barnett, a pro• mature incumbents; †ve years later they The recession itself sometimes gener• fessor at Stanford University’s business were 5% more productive. This was true of ates start•up capital, in the form of sever• school. During bad times, only the most all industries but especially retailing, in ance payments. Adrienne and Kelly Lump• impressive and persistent entrepreneurs which stores the size of football †elds have kin got their start with the help of a can. Mr Barnett has discovered that †rms given way to even larger ones. redundancy package Mr Lumpkin re• which are set up shortly after a successful The credit crunch is making it harder for ceived from IBM in the early 1990s when IPO (initial public o ering of shares) by an• new †rms to †nd capital. That matters: not Big Blue was in trouble. Alternate Access, other †rm that does roughly the same all entrepreneurs start up in their garages their Raleigh, North Carolina•based †rm, thing tend to do very badly. By contrast, with money from Œfamily, friends and helps ‡orists, doctors and other small en• †rms founded shortly after news of the fools. In a survey for the Kau man Foun• terprises do clever things with internet te• bankruptcies of †rms doing roughly the dation of 4,163 companies started in 2004, lephony. It o ers call•centre services, for same thing tend to do well. Google, for ex• Alicia Robb and David Robinson conclud• example, and sells software that helps em• ample, got started just after a clutch of oth• ed that 80•90% of start•up capital for a typ• ployees see, on their computer screens, er search•engine †rms crashed. ical †rm came from two sources. One was whether the person calling them is an im• During a crisis, says Mr Barnett, the the entrepreneur’s savings. The other was portant customer or a deadbeat. market’s signals are clearer. During a external debt: either a bank loan or a cred• Despite the recession, Americans start• boom, people buy stu without much it•card balance. ed 530,000 businesses a month last year. thought. During bad times, they are much Most start•ups do not require huge And †rms founded during tough times choosier. So only †rms with genuinely su• amounts of capital. The average in the have to be tough. Although more †rms perior products or services will thrive. 7 Red tape and scissors

Despite crazy rules, convoluted taxes and rampant lawyers, America is still a great place to do business

MERICA is supposed to be the land of rators. Marylanders are barred from mas• Alaissez•faire, but it doesn’t seem that saging animals without a vet’s licence. way to Erroll Tyler. He wants to run tours of Wisconsin until recently banned the sale Cambridge and Boston, cities that nestle of excessively cheap petrol (gasoline). on opposite banks of the Charles river. He Not all rules are pointless. Under would pick up punters in an amphibious George Bush, the White House Oˆce of vehicle, show them the sights and give Management and Budget reckoned the to• them a pleasant cruise. But Boston will not tal yearly cost of federal regulations be• let him. Oˆcials say he needs a sightseeing tween 1997 and 2007 was $46 billion to $54 licence. Alas, there is a moratorium on billion. The bene†ts, in terms of pollution such licences. It was imposed for fear that averted, lives saved and so on, were far Boston would get congested during the Big higher: $122 billion to $656 billion a year. Dig, a construction project. But the Big Dig But businessfolk still have plenty of gripes. ended three years ago. Mr Tyler thinks the First there is the tax code. Overall, real reason he cannot get a licence is that American taxes are light and the tax code is someone is protecting a cartel of local tour highly progressive. But corporate taxes are operators. He is suing the city authorities. steep. Federal and state taxes on pro†ts to• Mr Tyler is not the only American who gether average 39.3%, the second•highest feels that red tape is garrotting his business. rate in the rich world. And the system is re• Senseless rules that bene†t cartels are pulsively complex. Federal, state and local common. Oklahoma protects consumers rules accumulate each year in a vast and from the perils of unlicensed interior deco• impenetrable heap. No one understands it. Incomprehensible tax returns 1 The Economist May 30th 2009 A special report on business in America 7

about how the new administration might rewrite the rules. For the most part they are not re‡exively hostile to Barack Obama. But since he has such a short record in of• †ce, they don’t know much about him; and they don’t like uncertainty. The govern• ment has taken control of large chunks of the †nancial and carmaking industries. Is this a temporary response to the crisis, as the White House insists? Or will the Demo• cratic Congress, some of whose members would love to harness private †rms to pur• sue policy goals, †nd ways to prolong it? No one knows. A more immediate worry is a bill that would in e ect abolish workers’ rights to a Free to be arm•twisted secret ballot before being unionised. The measure, misleadingly named the Employ• 2 Some 82% of individual †lers pay for pro• an artery. She sued the hospital. Fair ee Free Choice Act, would let a union win fessional help or tax software. enough. But she also sued the drugmaker, automatic recognition simply by cajoling a Big business can cope‹clever accoun• Wyeth, although the drug was approved majority of employees to sign cards. The tants †nd all manner of lucrative loop• by the Food and Drug Administration and †rm would then have to reach a deal with holes. But small businesses Œface a particu• came with six warnings not to inject it into the union or accept one brokered by a gov• larly bewildering array of laws, including a arteries. She won $7m in damages. ŒThe ernment•appointed arbitrator. patchwork set of rules that governs the de• simple lesson businesspeople took was If the bill passes‹and it faces a struggle preciation of equipment, numerous and that the drugmaker could not have done and possible revision in the Senate‹un• overlapping †ling requirements for em• anything to avoid being sued, observed ions hope it will revive their shrivelling ployment taxes, and a vague set of factors Gordon Crovitz, a columnist. membership. Businesses fear it will let un• that govern the classi†cation of workers as ŒPatent trolls pose another problem. ions do to them what they have already either employees or independent contrac• These are †rms that buy up patents, not to done to Detroit. Arne Sorenson of Marriott tors and that can keep businesses and the turn them into products but solely to sue predicts that his typical employee, a dimin• IRS battling each other for years with no other †rms that may have infringed them. utive Hispanic housekeeper with shaky obvious ‘correct’ answer. Those are not Since the United States Patent Oˆce grants English, will †nd it hard to say no to the tall, the words of an anti•tax zealot but of the patents freely and courts enforce them articulate union man who turns up and Internal Revenue Service itself, in its annu• zealously, every inventive company lives asks her to sign a card. Some Marriott ho• al plea to Congress to simplify the tax code. in fear of trolls. If one can convince a court tels are already unionised‹typically in cit• A second gripe is America’s lottery of a that a billion•dollar product incorporating ies that insist on it. Its non•union ones are legal system. Litigation cost the country hundreds of patents infringes only one of 10% more pro†table, says Mr Sorenson, $252 billion in 2007, according to Towers his, he can get an injunction to stop it being mostly because of more ‡exible work Perrin, a consultancy. At nearly 2% of GDP, sold. The victim typically settles. Michael rules. At one unionised hotel, he recalls, that is about twice the burden that law• Heller, author of ŒThe Gridlock Economy, the pool attendant was not allowed to take suits impose on other rich countries. Yet argues that such vaguely de†ned and ag• the deck chairs out of the pool when the the Paci†c Research Institute (PRI), a con• gressively asserted property rights sti‡e in• wind blew them in. It was not his job. servative think•tank, thinks it a gross un• novation and cost lives. derestimate. By including indirect costs, Another common complaint, especial• Bigger is better such as products never launched for fear of ly among medium•sized †rms, is that it Despite such grumbles, nearly every entre• litigation, PRI arrives at a total of $865 bil• costs so much to list on an American stock preneur and executive interviewed for this lion a year. Of this, it reckons two•thirds is exchange. After the Enron scandal of 2001, report judged the United States the best wasted; that is, it neither compensates the in which auditors failed to notice a vast place in the world to make money‹or at injured nor deters the reckless. fraud at a publicly traded energy †rm, dis• least, one of the best. Impartial observers Whatever the size of the Œtort tax‹and closure requirements were tightened dras• tend to agree. ŒDoing Business in 2009, a this is hotly disputed‹nearly every busi• tically. A hastily passed law known as Sar• World Bank report on regulation, †nds that ness grumbles about the system’s unpre• banes•Oxley includes provisions for America is the third easiest place to do dictability. Most juries are reasonable, but †nancial reporting that can cost millions of business, beaten only by Singapore and many misunderstand complex disputes dollars to obey. Mark Friedman of Ac• New Zealand. Its labour market is the and some impose penalties that bear no re• cruent says he cannot take his †rm public world’s most ‡exible. Starting a business lation to any harm su ered. Trial lawyers because compliance costs might erase his involves few bureaucratic hassles: Ameri• are adept at crafting suits aimed at whoev• pro†ts. Founders of high•tech †rms, who ca ranks sixth out of 181 countries on this er has deep pockets. Judges sometimes fail once hoped to make their fortunes with an score. Enforcing contracts is straightfor• to apply common sense. IPO, now pray that a big †rm such as Goo• ward (also sixth), as are registering proper• In a recent case, a patient lost an arm be• gle will buy them. ty (12th) and trading across borders (15th). cause a health assistant injected a drug into Finally, businesspeople are worried Using a broader range of more subjec•1 8 A special report on business in America The Economist May 30th 2009

2 tive measures, the World Economic Forum al Institute, a think•tank, predicts that R&D puts America †rst out of 134 countries in its A close match 3 spending from all sources (government, annual Œcompetitiveness rankings. It US, 1970=100, real terms business and universities) will rise by 3% in scores only adequately for macroeconom• 2009 but contract slightly in 2010. As 350 ic stability (66th) and health and primary R&D spending American †rms outsource more technical 300 education (34th). But it ranks near the top GDP work to cheaper countries such as India, for infrastructure and the eˆciency of its 250 however, they will †nd that each research market for goods. And it comes top for la• dollar goes further. bour•market eˆciency, absolute market 200 Some observers worry that America is size and innovation. 150 growing complacent about its technologi• Amar Bhidé, a business professor at Co• 100 cal prowess. In a report for the Information lumbia University, thinks these last two Technology & Innovation Foundation, 50 points are connected. Because America’s Robert Atkinson and Scott Andes rank market is so huge, it is the best place to test 0 America 6th out of 40 countries for inno• new products. American consumers not 1970 75 80 85 90 95 2000 07 vation and competitiveness, but contend Sources: Bureau of Economic Analysis; National Science Foundation only spend more than those of other na• that it has improved the least in the past de• tions; they are also more Œventuresome, cade. They liken America to Œan ageing says Mr Bhidé. That is, unusually willing to the actress in the soap they are watching. sports dynasty that has won the Super try new things. Their purchases reward in• Despite the downturn, American †rms Bowl for many years but blithely ignores novators. And their feedback helps those continue to spend copiously on research the rising performance of younger teams. innovators †ne•tune their products. and development (R&D). Software †rms, But these rankings include measures Innovation tends to come incremental• which used to keep o ering more and fan• that have little to do with innovation, such ly, says Mr Bhidé. ŒEureka! moments are cier features, are now concentrating on do• as the size of a country’s trade de†cit. Also, rare. More often, inventors incorporate at ing things more quickly and cheaply. In they fail to give corporate America due every stage what their customers teach February Intel said it would plough $7 bil• credit for its knack of turning raw science them about what works, what doesn’t and lion into factories in New Mexico, Arizona into marketable products. Nearly all the why. Apple’s iPod, for example, was not and Oregon to make chips with transistors best universities are American‹17 of the based on truly original technology. Rather, so small that 60m could †t on the head of a top 20 by one recent ranking‹and they all it skilfully integrated technology from pin. If something is technologically possi• work arm in arm with industry. Firms that multiple sources and countries. Millions ble and you don’t do it, someone else will, exploit advances in cloud computing or ge• of Americans bought the clunky, expen• says Paul Otellini, Intel’s boss. nomics tend to cluster around the top col• sive †rst version; it was much more popu• Since 1970 industrial spending on R&D leges. Start•ups are fed and nurtured by lar in the United States than in other rich in America has never fallen signi†cantly venture capitalists. Big †rms snap up small countries. Apple used the cash and feed• from one year to the next, though it dipped ones with marketable ideas. That said, back from the †rst iPod to develop smarter a bit after the dotcom crash of 2000•02 (see many of the best students and academics and more user•friendly versions. The pro• chart 3). This recession may be di erent, of at America’s universities, and indeed duct is now a global hit. A similar tale course. Jules Duga of the Battelle Memori• many of the entrepreneurs they turn out, could be told of Amazon’s electronic book• are foreign‹which means that the coun• reader, the Kindle. try’s success in turning ideas into dollars American customers know what they would be imperilled if the recession want, and they want it now. They are not prompted Congress to tighten immigra• always reasonable, but as far as businesses tion laws still further. are concerned, they are always right. Sau• American †rms such as Google, Micro• dia Davis of Greenhouse Eco•Cleaning re• soft and Cisco have changed the way al• calls a client who demanded that she re• most everybody handles information. As place a cleaner who was ruining her yet unheard•of American biotech †rms are apartment’s feng shui by being too thin. Ms working on drugs tailored to individual pa• Davis says she Œyessed her to death and tients’ genomes. But one of the glories of sent someone else. American capitalism is the way †rms ap• The only time customers do not know ply complex technology to the most basic what they want is when they do not realise businesses. Hollywood uses awesome what is technically feasible. For that rea• computer power to tell fairy stories. Burger son, Intel, a microchip•maker, hires eth• King has invested oodles of money to de• nographers to watch people in their homes velop restaurant layouts that let workers and search for unmet desires that might be put sandwiches swiftly in customers’ ful†lled. They discovered that Americans hands. A study by Diana Farrell and other still love television but would like to com• McKinsey researchers found that of the bine it with the internet in an undemand• †ve sectors that contributed most to Amer• ing way. With Yahoo!, an internet †rm, In• ican productivity growth between 2000 tel took a step towards this last year by and 2003, three were refreshingly unglam• unveiling the Widget Channel, which lets orous: retailing, wholesaling and adminis• viewers look up such things as the name of Feedback made the iPod better trative and support services. 7 The Economist May 30th 2009 A special report on business in America 9

Life is expensive

Treating the sickest part of America’s economy

MIDDLE•AGED man felt chest pains. through their employers. This dates back Jonathan Gruber, an economist at the Mas• AAs an executive at IBM, an informa• to the era of post•war wage controls, when sachusetts Institute of Technology. Last tion•technology †rm, he had excellent †rms o ered bene†ts instead of pay rises. year, employer•provided health insurance health insurance, so he went straight to a Today’s tax code sets it in stone. Employers reduced wages by 7.9%, according to the Bu• specialist. His cardiologist put him through can buy health insurance with pre•tax dol• reau of Labour Statistics. The stagnation of a bunch of tests, including a computerised lars. Individuals cannot. middle•class incomes in recent years is in tomography scan. A radiologist noticed This creates an agency problem. When large measure caused by health•care in‡a• something odd in his neck, so he went to a a typical patient goes to the doctor, he has tion. Tying people’s health insurance to neck surgeon, who checked him out and no idea what anything costs. He pays only their jobs also makes it harder for them to found nothing. He went back to the cardi• about 15% of the bill, so if the doctor recom• switch jobs or set up their own †rms. ologist, who gave him an angiogram, mends something he will probably say Reforming health care is Barack which caused dangerous complications yes. The doctor gets paid for everything he Obama’s domestic priority. He is deter• and landed him in hospital for a while. In does, so he has a powerful incentive to per• mined to increase coverage and curb costs. all, he ran up more than $150,000 in medi• form costly, unnecessary procedures. Be• To increase coverage, he would subsidise cal expenses before the chest pains disap• sides, he may be socked for damages if he individuals and small †rms to buy insur• peared on their own. omits a test that a lawyer subsequently ance and bar insurers from excluding sick When they reappeared several months convinces a jury might have been useful. people. To promote competition, he would later, he spoke to Paul Grundy, the head of The costs are passed on to insurers, who create a national insurance exchange health•care technology at IBM. Dr Grundy, where people could shop for di erent a doctor of preventive medicine by train• plans. As well as private insurance, he ing, asked him if his lifestyle had changed Unhealthy 4 would o er people the option of buying recently. The executive mentioned that he Total health spending (public into a public plan like the one that covers had taken up gardening again. Dr Grundy & private) as % of GDP, 2006 Average life federal workers. To curb costs, he would expectancy, years† quickly established that his chest pains promote the use of information technol• sprang from a muscle he had strained 048 12 16 ogy and Œevidence•based medicine, the through overzealous weed•whacking. United States* 79.2 notion that you measure what works and Such stories are all too common. Amer• France 81.2 only do it if it does. He would also allow icans will spend a staggering $2.5 trillion Germany 79.9 imports of drugs from countries where on health care in 2009, says the Congres• they are cheaper (for example, because Britain 79.4 sional Budget Oˆce. As a share of national prices are set by a state monopsony). income that is far more than other rich Japan 82.7 Getting all this through Congress will † countries spend (see chart 4), despite Sources: OECD; UN *Differences in methodology Latest be an ordeal, as Hillary Clinton discovered America’s slightly younger population. To in the 1990s. But some kind of reform is say that Americans do not get value for pass them on to employers in the form of likely, perhaps this year. The consequences money is putting it mildly. They live no lon• higher premiums, who then pass them on could be far•reaching. Mr Obama seems ger than Europeans and die younger than to workers in the form of lower pay. determined to o er every American the the Japanese. Meanwhile, 46m of them This last point is not widely under• option of buying government health insur• lack health insurance. stood. Many Americans think of soaring ance and if Congress agrees, private insur• There are many reasons why American health•care costs as a burden on compa• ers will be walloped‹some say wiped out. health care costs so much. Americans love nies. And it is true that some high•pro†le A government scheme could o er fancy new medical technology. New ones, such as carmakers, have come un• much lower prices. Unlike a private insur• drugs, for example, are prescribed a year or stuck by promising health bene†ts that er, it would not have to make provision for two earlier in America than in Europe, and subsequently became too expensive. GM future liabilities; it could simply stick the do not come cheap. American doctors pay spends more on health insurance than on bill to future taxpayers. Medicare, the gov• a fortune to insure themselves against friv• steel. It is also true that small †rms †nd the ernment scheme for old people, has un• olous lawsuits. A study in the New England bureaucracy of health insurance hassle• funded liabilities of $36 trillion‹two•and• Journal of Medicine found that even in some. However, in general the real victims a•half times America’s GDP. If opened to cases where no medical error was found, of health•care in‡ation are not businesses all, it could undercut private insurers by plainti s received payments a quarter of but ordinary Americans. As the cost of cov• Œscrewing our children and grandchil• the time. And half of medical malpractice erage rises, their wages are squeezed, or dren, says Regina Herzlinger, a health•care payments were gobbled up by lawyers coverage is dropped altogether. expert at Harvard Business School. and overheads. The proportion of the cost of employer• The insurers that survive will be those But the central problem is that most provided health insurance shouldered by that keep costs under control. Fee•for•ser• Americans get their health insurance employees is Œat or close to 100%, says vice insurance must adapt or wither. Man•1 10 A special report on business in America The Economist May 30th 2009

2 aged care will return. This is the model will not interact harmfully. whereby doctors work for the insurer, Mr Obama plans to spend $19 billion to which pays them to keep people well. In• promote health IT. The system is sorely in stead of letting patients go straight to a spe• need of the eˆciencies that digitisation cialist, managed•care †rms like Kaiser Per• might make possible. Only 4% of Ameri• manente make them see a primary•care can doctors have a fully functional elec• doctor †rst, who will †gure out whether tronic medical•records system and anoth• the problem is serious. This is crucial. Spe• er 13% have only a basic one, according to cialists tend to recommend their own spe• the New England Journal of Medicine. cialism‹surgeons advocate surgery, and so Simply putting computers on doctors’ on. The lack of a gatekeeper in traditional desks is not enough, however. They must fee•for•service insurance leads to over• have incentives to use them. For managed• doctoring that is often harmful as well as care †rms, the incentives are already there. costly, as that IBM executive discovered. If their doctors can call up a patient’s medi• Managed care, provided by †rms also cal records on a screen, along with infor• called health•maintenance organisations, mation about suitable treatments, they can (HMOs), grew rapidly in the 1990s but then I’m afraid we’ll have to remove your wallet get better results for less money. Fee•for• retreated. One reason, according to Alain service doctors, who gain nothing by pro• Enthoven, a health•care specialist at Stan• typically costs them a billion dollars to de• viding more cost•e ective care, have been ford University, is that †rms pushed their velop a new drug. They can only recoup slower to digitise. Mr Obama says he will sta into HMOs without a choice, which their vast R&D outlays thanks to high mar• o er them incentives to do so. Meanwhile, angered many. Another is that they failed gins in America. The rest of the world en• private †rms are trying to show them that explicitly to pass on the savings to employ• joys a free ride. But that could change. IT can make their lives easier. ees. This might change. For example, Stan• Billy Tauzin, the drug industry’s chief By chance, one of these †rms, Athena ford gives employees a choice of †ve lobbyist, protests that European•style ra• Health of Massachusetts, is run by a cousin health plans. If they pick the cheapest, tioning would cost American lives. But of George Bush. Rather than trying to sell (Kaiser, which is also arguably the best, drug †rms are already bracing themselves doctors software which they might never says Mr Enthoven), the university pays the for leaner times. Several are merging to cut use, Jonathan Bush says he uses software full cost. If they pick a more expensive one, overheads and pool their research skills: to provide a service, just as Amazon uses they must pay the di erence. Four•†fths Merck with Schering•Plough, P†zer with software to deliver books. His †rm helps choose an HMO. Wyeth, Roche with Genentech. And many 13,000 doctors to digitise their patients’ re• are †nding that they can cut costs by out• cords and handle the maddening process The high price of pills sourcing drug•testing. Quintiles, the larg• of billing insurers. Mr Bush says his clients Health•care reform worries drug †rms. Un• est †rm that undertakes such work, saw its get paid 11% more than before (because in• der the current system, Americans not revenues grow by 19% last year. Pharma• surance †rms’ bureaucracy sometimes only adopt new drugs more quickly than ceutical research is getting more expensive used to defeat them) and 34% faster. He people in other rich countries; they pay because it is getting more complex, says saves the patients money, too. Doctors 50% more for the same drugs, according to Dennis Gillings, Quintiles’s chief execu• without electronic records often †nd it eas• McKinsey. In a more government•domin• tive. Many new drugs are aimed at old peo• ier to do another $500 chest X•ray today ated system, drug †rms’ pro†ts would suf• ple who may already be taking several oth• than to dig up the results of the one they fer. So would their incentive to innovate. It er pills. Testers have to be sure that they did yesterday, marvels Mr Bush. 7 A green revolution

Saving the world will not be cheap

HE best way to curb global warming rack Obama and John McCain proposed a Neither dwelt on the fact that cap•and• Twould be a carbon tax. The money cap•and•trade system for curbing CO2 trade will raise energy prices, that subsi• raised could be divided up among citizens emissions, not because it would work bet• dies for renewable energy will have to be or used to repay the national debt. A tax on ter than a carbon tax but because it did not paid for, or that both policies will destroy carbon dioxide (CO2) would give everyone have the word Œtax in its name. Both can• jobs as well as creating them, while proba• an incentive to emit less of it. It would be didates also gave the impression that their bly cutting growth. The Congressional simple, direct and transparent. For these green policies would yield huge bene†ts Budget Oˆce estimates that a 15% cut in reasons, it will never happen in America. while imposing no costs. A shift to alterna• CO2 emissions will cost the average Ameri• Frank talk about energy policy is rare. tive energy, they agreed, would not only can household $1,600 a year. If politicians Politicians hate to admit that anything check global warming but also create mil• pretend they can save the planet at no cost, they plan to do will cause pain to any vot• lions of green jobs and help break Ameri• they risk a backlash when people realise er. During the election campaign, both Ba• ca’s dependence on foreign oil. they were †bbing. 1 The Economist May 30th 2009 A special report on business in America 11

2 Greenery is both fashionable and in targets and give away 85% of the permits to Œeasily rise to 30%, says Ditlev Engel, the ‡ux. Every business wants to boast about pollute, while auctioning the rest. boss of Vestas, a Danish †rm which is the its e orts to avert climate change, even if House Democrats say this is the best world’s largest maker of wind turbines. those e orts, on closer inspection, amount possible compromise. Greens say the bill America has ample wind, blowing across to little. At the same time, many big invest• does far too little to cut emissions. Fiscal the plains from North Dakota to Texas. Not ments in planet•cooling activities are on hawks fret that it would mess up Mr harvesting it would be like Saudi Arabia hold because no one knows what incen• Obama’s budget. Its micromeddling guar• not drilling for oil, he says. Vestas is invest• tives the government will put in place, and antees unforeseen consequences, just as ing $1billion in factories in Colorado. when. This year’s economic•stimulus biofuel subsidies seem to have encouraged Solar energy is more expensive than package allocated $65 billion in subsidies the use of nitrous oxide•spewing fertiliser. wind. It depends on fat subsidies, which and tax breaks to the energy industry, most No one knows how the bill will fare in the means the biggest market is Europe and of which had at least a green veneer. But Senate. Meanwhile, many businesses say cloudy Germany is covered with solar the big reforms are still to come. First and they prefer it to a mooted alternative‹reg• panels whereas sunny New Mexico is not. most important is cap•and•trade. The bud• ulation of greenhouse gases by the Envi• But several †rms hope to make solar tech• get Mr Obama submitted to Congress in ronmental Protection Agency. nology cheaper. For example, First Solar, February assumes that such a system will Mr Obama’s other big plan is to insist an Arizona•based †rm, makes thin•†lm so• be up and running by 2012. Tradable per• that 10% of electricity be generated from re• lar panels that are more cost•e ective than mits to emit an amount of CO2 will eventu• newable sources by 2012 and 25% by 2025. most existing ones. It plans to double its ally be auctioned to the highest bidders. That implies a surge in wind, solar, hydro• production this year, to 1,000 megawatts, Mr Obama’s budget assumed he would electric and geothermal power, and so on. says its boss, Mike Ahearn. raise $80 billion a year from cap•and•trade, If that target were rigidly enforced (for ex• of which $15 billion would go to subsidise ample, if †rms get no credit for energy eˆ• The nuclear option, again renewable energy, and the rest would pay ciency), the Boston Consulting Group reck• In his election campaign Mr Obama for a tax credit for all but the richest 5% of ons that 50•60 gigawatts of renewable dodged the subject of nuclear power. Americans. For many, that would make up capacity would be needed, over and ŒNew Energy for America, his eight•page for higher energy bills. For those who live above current projections, by 2012. energy manifesto, mentioned it brie‡y, in states that mine or burn a lot of coal, Clean•energy †rms are salivating. Most without enthusiasm. But it is hard to imag• however, it probably would not. have been hit badly by the plunge in the ine halting climate change without it. This is where the problems start. Mr price of oil. And the †nancial crisis has cur• Windmills and solar panels provide pow• Obama’s plan must pass through Con• tailed, at least temporarily, new lending for er only intermittently. To avoid blackouts gress, which is doing its best to make it investment in green technology. But many an energy source that keeps ‡owing in any murkier, more complex and less e ective. predict that, once the recession is over, oil weather is needed. Nuclear power, whose Every state, industry and special interest is prices will rise again, making alternative CO2 emissions are tiny, †ts the bill. But no clamouring for loopholes or handouts. On fuels seem less expensive. Combined with new nuclear plant has been built in Ameri• May 15th Henry Waxman, a Democrat the incentives being proposed, this could ca for 35 years. Mr Obama is now mulling who heads the House energy committee, lead to a green•energy boom. loans to restart the industry. Given the disgorged a 932•page cap•and•trade bill Wind power accounts for only 1% of huge upfront costs and the certainty of re• that would loosen Mr Obama’s emissions electricity generation in America. It could sistance from environmentalists, †rms will have to know the government is serious about curbing CO2 before they commit themselves to building nuclear plants. Oil and natural•gas †rms are in no im• mediate danger. ExxonMobil earned $45 billion in pro†ts last year, making it the most pro†table †rm in America. With oil prices barely a third of their peak, that will not happen again this year. But oil is too useful to become obsolete any time soon, and gas is relatively clean. Coal faces a greater threat, and not only because Al Gore is calling for protests against coal• †red power plants. Since coal is the dirtiest of the main fuels used to generate electric• ity, cap•and•trade could lead such plants to shut or switch to gas. E orts to make coal cleaner by injecting its CO2 emissions into the ground show little sign of becoming cost•e ective, despite subsidies. Only the fact that coal is plentiful in swing states gives the industry hope. If a price is imposed on CO2 the next big Room for plenty more obstacle to renewable energy will be the 1 12 A special report on business in America The Economist May 30th 2009

2 electricity grid, which is antiquated and growing parts of IBM’s business. Manufac• overall, there are plenty of ideas that pay sclerotic. Regulations vary from state to turers such as GE and ABB build the physi• for themselves. Making buildings more en• state, making it hard to transmit energy cal infrastructure, while IBM vies with ergy•eˆcient is an example. Companies across state borders. There are not enough such †rms as Accenture to supply the infor• such as Ameresco o er to do this in return lines to send power from, for example, mation technology and integrate it all. for a share of the savings. Firms such as Se• windy states to populous ones. New con• If the government introduces carbon• rious Materials of California provide ener• struction is stymied by an attitude among curbing incentives, there will be rich pick• gy•saving windows and environmentally regulators and environmentalists colloqui• ings for †rms that uncork the remaining friendly plasterboard. Wal•Mart plans to ally known as BANANA (Build Absolutely technological bottlenecks. For example, reduce its packaging, thereby cutting hun• Nothing Anywhere Near Anyone). whoever makes a cheap, powerful and ef• dreds of thousands of truck trips and sav• And the commonsense notion that †cient battery for an electric car will be ing both emissions and cash. consumers should be able to sell energy well rewarded. Firms like A123Systems of In Europe, whose cap•and•trade system back to the grid as well as buy it has barely Massachusetts are working on it, but elec• is already in force, CO2 prices are routinely taken root, except in California. Lynn Orr, a tric cars are still too costly for most people. factored in to business decisions. In Ameri• professor at Stanford University, has solar ca, they are not‹yet. Forest Reinhardt, an panels on his home. During the day he Saving the planet with old tyres environmental specialist at Harvard Busi• sells power to the local utility at 29 cents a Since nearly every activity requires energy, ness School, argues that consumers of fos• kilowatt•hour. At night he buys it back for 9 there are limitless angles from which to ad• sil fuels should pay for all the externalities: cents. The system is not perfectly ‡exible. dress the problem. Lehigh Technologies of not only emissions, but also the cost of pol• He can reduce his bill to zero but no further. Tucker, Georgia, uses cryogenic technol• icing the Middle East. ŒSo I need an electric car, he muses. ogy to create a recyclable powder from old But he concedes that the shift will be ex• Mr Obama included incentives for tyres. Because the process saves oil, cus• tremely hard. The location of everything in building a smart grid in his stimulus pack• tomers will one day claim it as a CO2 o set. America assumes that petrol will cost age. Businesses are queuing to build one. Modestly, Lehigh calls its product ŒThe about $1 a gallon, he says. Commutes are ŒThis is the most sexy industry to work in, Powder to Save The World. too long. Cars and lorries are too big. Cities says Guido Bartels, who leads the energy Many Americans fret that if cap•and• are much greener than rural areas: apart• team at IBM. A smart grid would involve trade raises domestic energy prices, indus• ments and public transport are more ener• sensors to monitor power ‡ow in both di• tries will migrate to China. Stefan Heck of gy•eˆcient than big houses and pickup rections, and software to help crunch all McKinsey thinks that unlikely. Firms out• trucks. But not everyone can move to a city the data thus generated. If you plug in your source labour•intensive jobs to China be• centre. People in Montana need a car to get electric car at a friend’s house, you will cause there is a huge di erence in labour around. They are not rich, they spend a big want an easy way to be billed, says Mr Bar• costs even after accounting for productivi• chunk of their disposable income on pet• tels. And information can be used in myri• ty di erences. Cap•and•trade might add rol, and they do not want to move to Mas• ad ways to make the system more eˆcient, 20•30% to energy costs. That is a lot, but not sachusetts. The government has to get the for example by imposing variable prices to enough to spark a mass exodus. incentives right, says Mr Reinhardt, but it is discourage power use during periods of Although the shift to a low•carbon hard for it to make commitments that will peak demand. Energy is one of the fastest• economy will reduce economic growth bind its successors in, say, 2017. 7 The fragile web of foreign trade

The recession makes globalisation more necessary, but more precarious

FEW years ago, Niall Ferguson and Mo• the asset bubble that has now burst so big chunk of China’s foreign•currency re• Aritz Schularick, two economic histori• painfully. Although no one forced Ameri• serves, so both sides have an interest in ans, coined the term ŒChimerica to de• cans to borrow so much, nor to gamble the preventing it from happening. This mutual scribe the symbiosis between the world’s money on property, the crisis has fuelled dependence applies to businesses, too. two great powers. Chinese people save, nativist anger. Lawmakers added ŒBuy Chinese manufacturers need America’s they observed, allowing Americans to bor• American clauses to this year’s stimulus huge market. American †rms, to stay com• row and spend more than they earn. package, and there are still absurdly tight petitive, need to buy things from China. American consumers buy gizmos made in limits on the number of skilled foreigners It is increasingly hard to tell if some China, keeping Chinese workers in jobs. who can work in America. companies are American or Chinese, says Both countries bene†t. The American and Chinese economies Jonathan Woetzel, a China specialist at But the †nancial crisis has caused many are so entwined, however, that any at• McKinsey. Consider Cheung Yan, who was people to rethink this comfortable arrange• tempt to separate them will end in calami• until recently China’s richest person. With ment. Protectionists have long blamed ty. If China were suddenly to stop buying her husband, she set up a †rm in California Chinese imports for destroying American US Treasury bills, it would plunge America to gather American waste paper and ship it jobs. A new gripe is that, by lending Ameri• into a †scal crisis. It could also spark a col• to China to be recycled. Later, she set up pa• ca so much money, China helped in‡ate lapse in the dollar and thereby wipe out a per factories in China to do the recycling. 1 The Economist May 30th 2009 A special report on business in America 13

2 Some of the waste paper is turned into †rms in China by the American Chamber boxes to hold Chinese•made electronic Trading down 5 of Commerce there, 63% said they were goods that are then shipped to America. Is US, total, $bn there to sell to locals, whereas only 9% said their business Chinese or American? And they were there to sell things back to Amer• does it matter? 250 ica. Procter & Gamble is so well established The recession has severely disrupted Imports that many Chinese think its products (such trade between America and more or less 200 as green•tea•‡avoured Crest toothpaste) everywhere else (see chart 5). China’s ex• are local brands. GM is doing well in Chi• ports to the United States, which had more na, unlike at home. American †rms are than trebled between 2002 and 2008, col• 150 jostling to help China build smart infra• lapsed by more than half between Sep• structure and tackle pollution. Exports tember 2008 and February 2009. The American business is as deeply entan• slump in American consumer spending 100 gled with other parts of the world, too. may be causing as much pain for some Supply chains criss•cross oceans, letting Chinese exporters as it is for American 2006 07 08 09 †rms buy whatever they want from who• Source: US Census Bureau businesses. But hard times are forcing ever makes it most eˆciently. Despite Ba• American †rms to look harder for savings, rack Obama’s claim that green jobs cannot and many are †nding these in China. grow more sophisticated, they are selling be outsourced, a study by Brown•Wilson Ever more industries are †nding that fancier stu . China’s exports to America of Group, a research †rm, †nds that they can. their supply chains can run through China, machinery and electrical goods, for exam• Granted, the man who †xes a solar panel says Jimmy Hexter, another McKinseyite ple, grew at twice the pace of its textiles ex• to a roof in Ohio has to be in Ohio. But the and co•author, with Mr Woetzel, of ŒOper• ports between 1993 and 2008. panel itself can be made in China, and the ation China. Wal•Mart’s chief procure• For American †rms setting up in China, software for the smart grid that will one ment oˆcer lives in Shenzhen. For cheap the chief attraction these days is not its day make the solar panel economic can be retailers, not buying goods from China cheap labour but its increasingly a‰uent written in India. Without free trade, saving would be suicidal. But as Chinese †rms consumers. In a recent survey of American the planet will cost a lot more. 7 The coming recovery

It could take a while, but Main Street will bounce back

OHN RICH, a country•music star, sings of their savings crumble. The †nancial col• 79% think them critically important to job Jan angry song about the recession. lapse has exposed newsworthy frauds, like creation. And although a slim majority ap• ŒWhile they’re living it up on Wall Street the colossal Ponzi scheme run by Bernard prove of Barack Obama’s expansion of in that New York City town/Here in the Mado . Such swindles were not typical. government to tackle the immediate crisis, real world they’re shuttin’ Detroit down, The crisis owes far more to incompetence only 13% want that expansion to be made complains Mr Rich. He adds that ŒThe boss than criminality. But neither explanation permanent. In short, Americans favour in• man takes his bonus pay and jets on out of re‡ects well on the captains of capitalism. cremental rather than radical change. They town/And DC’s bailing out them bankers A Rasmussen poll in April found that want to see Wall Street tamed, but they are as the farmers auction ground. The ac• only 53% of Americans think capitalism is not clamouring to reinvent the relation• companying video shows a car worker los• better than socialism, with 20% preferring ship between government and business. ing his job and home. socialism and 27% unsure. Those are They will probably get their wish. The Mr Rich is not just another bleeding• alarming numbers for believers in free †nancial industry grew far too big. Its share heart celebrity. He wrote John McCain’s markets. They may be misleading, how• of corporate pro†ts in America peaked at campaign song last year and performed at ever. Some Americans are hazy about an incredible 41% in 2007. Its employees, the Republican convention. But he is furi• what Œcapitalism and Œsocialism mean. who were paid about the same as those in ous about fat•cats. And whereas one can A later poll found that 77% of Americans other industries until the early 1980s, pock• quibble that the folks on Wall Street are not preferred a free•market economy to one eted 1.8 times as much in 2007 (see chart 6, really having much fun this year, or that managed by the government. And hardly next page). Judged by the fruits of their la• carmakers and farmers have also received anyone thinks the government would do a bours, they did not deserve it. Thomas hefty subsidies, it is worth pondering his better job than the private sector of run• Philippon of New York University and Ari• rage, for it is shared by Americans of every ning banks or car factories. ell Reshef of the University of Virginia esti• ideological hue. Americans are angry †rst and foremost mate that 30•50% of the wage gap between Few understand what a credit•default with †nanciers. They also take a dim view †nancial and non•†nancial workers be• swap is, but everyone knows that Wall of overpaid and underachieving bosses, tween the mid•1990s and 2006 was the Street messed up, and nearly everyone particularly if they ‡y to Washington by fruit of what they judged to be rent•seek• feels it, too. Those who have not lost a job private jet to beg for a handout from tax• ing rather than genuine wealth•creation. have seen their wages frozen or the value payers. But they admire entrepreneurs: That will now change. A smaller, humbler, 1 14 A special report on business in America The Economist May 30th 2009

Overpaid? You bet 6 Wages in the US finance industry relative to the private sector

1.75 1.50 1.25 1.00 0.75 0.50 0.25 0 1933 60 80 2005 Source: Philippon and Reshef, “Wages and Human Capital in the US Financial Industry: 1909-2006”

2 more regulated †nancial sector will labour unions, that he will raise taxes to during the Depression of the 1930s (which emerge. Many of the brainy youngsters enterprise•throttling heights, or that his saw the invention of nylon, canned beer, who used to ‡ock to investment banks or propping•up of badly run †rms is unfair to the photocopier and the drive•in cinema) hedge funds will put their talents to other, their better•run competitors. None of and the stag‡ation of the 1970s (Post•it perhaps more productive, uses. these worries is baseless. But the evidence notes, bar codes, the microprocessor). Not Mr Bush of Athena Health thinks this is so far suggests that the new president un• only is America’s market the largest, but terri†c. The clever people he could not re• derstands America’s economic problems that market is homogeneous: a †rm that cruit because Goldman Sachs was paying and is pragmatic about seeking solutions. works in one state can probably work in them $65,000 a month are suddenly avail• There is no reason‹yet‹to doubt his pro• any other. ŒI laugh when people talk about able, he says. Robert Kaplan of Harvard mise to tackle the budget de†cit once the diversity here, says Mr Ferguson. And Business School, a former vice•chairman crisis subsides. And America is fortunate America has economic policy levers com• of Goldman Sachs, applauds the prospect to have had a change at the top just as the mensurate with its size: the European Un• of pay in †nancial services reverting to less crisis exploded. A crisis requires a bold re• ion has no central treasury to compare giddy levels. Only people genuinely inter• sponse. Mr Obama’s fresh mandate and with America’s, and America’s central ested in †nance will seek careers in it, he personal popularity make it easier for him bank has acted more aggressively to tackle says. Fewer will do jobs they hate just for to provide one. the crisis because it can. the money. More will start their own com• Finally, there is that gung•ho spirit of en• panies. Mr Bhidé of Columbia University The spirit of enterprise terprise. ŒI think people will be surprised calls for a return to Œmore primitive †• When the crisis ends, America will still be how quickly [business] will pick up when nance, with deposit•taking banks strictly the best place in the world to do business, it does, says Mr Sorenson of Marriott ho• regulated and strictly separated from the says Niall Ferguson of Harvard University. tels. One can discount his words, of course. more innovative, risky †nancial †rms, to Unlike in parts of the developing world, its Business people are by nature optimistic, avoid a repeat of the recent contagion. political stability is not in doubt. American especially in America. But their optimism Main Street will recover only when innovation continues apace, just as it did can be self•ful†lling. 7 America’s †nances are on a sounder foot• ing. That will take time. Total private•sector O er to readers debt (households, †nancial and non•†• Future special reports Reprints of this special report are available at a Countries and regions nancial †rms combined) reached nearly price of £3.50 plus postage and packing. Texas July 11th three times GDP last year. Reducing that A minimum order of †ve copies is required. The Arab world July 25th load will hurt. Money spent repaying debt September 12th Corporate o er Indonesia cannot be spent on the products that Customisation options on corporate orders of 100 American †rms are so desperate to sell. or more are available. Please contact us to discuss Business, †nance, economics and ideas Corporate pro†ts collapsed by 10% last your requirements. The euro area June 13th year, and continue to slide. But they will Global greying June 27th Send all orders to: eventually rebound. Chris Varvares, the Telecoms September 26th The world economy October 3rd president of Macroeconomic Advisers, a The Rights and Syndication Department consultancy, predicts that they will †nd a 26 Red Lion Square WC1R 4HQ sustainable level of about 9% of GDP by London Tel +44 (0)20 7576 8148 2011. That is well short of their 13% share in Fax +44 (0)20 7576 8492 2006. But it is high enough, for example, to e•mail: [email protected] help pension funds to start recovering from their recent pummelling. For more information and to order special reports Previous special reports and a list of There are reasons for guarded opti• and reprints online, please visit our website forthcoming ones can be found online mism. One is Mr Obama. Businessfolk Economist.com/rights Economist.com/specialreports worry that he is too cosy with lawyers and