CEO Q Magazine Interview

An independent non-partisan economic policy white paper
by International Institute of Management

(First Published Jan 31, 2007)

Let's explore the possible causes of the economic crisis:

• A series of short-term-gain policies by incompetent or corrupt politicians?
  Although no one can judge the intentions behind any policy, the competency is easily judged by the results.

• Ideologically driven policies, rather than pragmatically driven policies?
  This can be judged by the politician's own statements, and again, by the results.

• Bought-and-paid-for analysts and lobbyists promoting foreign or private interests over national or public interests?
  Analysis of foreign and local media watchdog reports will always reveal the hidden agendas and the beneficiaries from each new policy.

• Misinformation promoted by media analysts and commentators have led the country in the wrong direction?
  Again, the best way to judge the competency of the media commentators is by the review of media archives and the final results.

• Ivory-tower economists not in touch with real business challenges?
  To be fair, that may not be the case here; the U.S. Federal Reserve has done a good job so far in controlling and pacing interest rates changes, but there is not much that they can do beyond that. A better policy is to educate the public and address the threats openly and directly. That does not mean that they cannot make bad decisions in the future.

• Tax policies?
  Not increasing taxes was a wise measure that helped businesses and investors, however, the Government has no other choice but to raise future taxes in order to balance the budget and pay for national debt.

• Uncontrollable external events?
  While 9/11 was a major negative event, it is the reaction to that event that counts. The U.S. Government cannot blame everything on 9/11, especially the failed U.S. foreign-relations and economic policies.

• The pitfalls of the powerful?
  If the American public does not stop the foreign wars for ethical and humanitarian reasons, there are few politicians who have the incentives to do so. Many U.S. politicians consider Iraq to be a military success. Their unstated logic is that they lost about 3000 Americans (2006 Data) since the start of the Iraq war in 2003. In their minds they are thinking, "So what! About 40,000 Americans die every year on the highways from auto accidents".  When politicians have such superior power, they are tempted to use it every time things don't go their way. Especially, if there is no other major constraining force. - The saying absolute power corrupts absolutely is not far fetched.

• Last but not least, could it be that the U.S. consumer culture has resulted in a huge consumer debt, thus weakening the economic engine?
  That seems to be the general consensus.

6) Economic Recovery Policy Options

A scientific economic fact: Any economy that is built on uncontrolled debt will eventually crash. An increasing debt is a vicious cycle that can only be broken through a strategy shift and operations restructuring. In IIM's opinion, the conditions for a crash were not met in 2006, however, attention must be paid early to avoid coming closer to the tipping point. The more the current Administration waits to make a change, the stronger the downward momentum and the more the inertia will be to reverse the direction. In other words, the  socioeconomic and political pains that will result from the necessary reforms will be much more painful.

So what policy options are available to the U.S. Government to help it overcome the above listed challenges?

To pay the bill for the annual economic expenses, Social Security deficit (care for baby boomers), debt financing, and economic growth, the U.S. Government will have to resort to a combination of the following options:

• Allow the dollar value to fall so that it can pay debts more cheaply. That may increase inflation and will lower the real purchasing power of U.S. citizens and businesses, but at the same time, this may improve price competitiveness with other countries. With the new currency exchange rate, salaries of the American worker become more competitive with their European counterpart. That will reduce the salary gap with China and India, thus slowing offshoring.

• Increase interest rates to attract enough money back to the United States. That is a poor choice, as it will make it tougher and more costly to raise capital. Also, increasing interest rates will result in savers investing less in the stock market, thus slowing economic growth. Increased interest rates will result in lower demand on the housing market and thereby a major loss in home values.

• Increase taxes. That is another difficult option, which will reduce business profits and U.S. ability to attract foreign investments.

• The U.S. has to sell more assets (telecom, utility infrastructure, and other assets) to overseas investors. Buyers look for a bargain and this will result in foreign control of major national assets -- A high price to pay.

• Reduce the U.S. Government budget across all major sectors, including defense, education, health and other social programs. That option will cause major layoffs in public and private sectors and will face major challenges from the strongest union lobbies and the public.

• Relax immigration policies, which will provide U.S. with more competitive labor (competing with China and India) and at the same time it will create a larger consumer base (helping in economic growth). Most likely that option will be opposed by the white majority, fearing cultural and political change. Not forgetting that the U.S. itself is a nation of immigrants and its economic prosperity is credited to the hard work of these emigrants. The U.S. Government can manage immigration policies in such a way as to attract productive immigrants and minimize negative impact on the culture. One such example is open immigration doors to doctors and nurses to reduce the cost of labor in the health care sector. The opening of the U.S. insurance and pharmaceutical markets to global competition should bring the cost of healthcare significantly down. Healthcare costs are a major burden on U.S. consumers and businesses.

• Recharge the U.S. innovation engine and generate new unique products and services to export, make more profits to pay off debt and attract foreign investments. That is the best possible solution and would offer the U.S. the most competitive advantage. The U.S. has given the world the most valuable modern innovations including atomic energy, computers and the Internet. Future bets are on nanotechnology, alternative energy, bioengineering and medical innovations to mention a few.

Before formulating a new strategy and launching reform initiatives, U.S. policy makers and the American public must acknowledge and accept that the solution must be long-term and cannot be pain-free. Leaders must make tough decisions rather than push them on to the next presidency. The Government must be honest in communicating with the public and the approach must be direct.

Problem 1: National Debt

• The U.S. Government must commit to reducing the federal deficit, i.e. the U.S. Government must tighten its belt to reduce expenditures and operational costs.

• The U.S. Government should not increase interest rates or taxes, however, this a highly debatable issue. Yes, that may lead to inflation, but the policy priority should be healthy economic growth over any other issue. Economic growth avoids many other social and economic crises.

• Institute new energy policies to promote better energy performance standards and to provide energy-saving tax incentives to reduce energy waste. Promote the development of alternative energy sources and technologies to help reduce the demand for oil.

• Both Government and business leaders need to exit and divest losing economic sectors (where U.S. cannot compete). Government bailouts of failing industries is counter productive and rewards bad management behavior. Let the free markets correct themselves and produce new industries. The only exception for government intervention is to invest in star industries through R&D subsidies and tax holidays for new startup businesses.  

• Encourage major reductions in pharmaceutical, healthcare and insurance costs. Reform liability laws and open the market for international competition to reduce prices and become more competitive.

• Encourage the development of the quality of education and lower its costs by reducing accreditation bureaucracy, ending state education monopolies through unnecessary regulations and removing competitive barriers for the entry of private education institutions.

• Reduce foreign and military aid to other countries and re-invest the money in the local economy. When necessary, invest in foreign joint-development projects sharing the risks and the rewards rather than just giving the money away.

• Re-prioritize expenditure from space exploration and defense to other economic development and small business creation.

• The U.S. Administration must consider the historical lessons of falling empires. One of the main reasons for the decline of early empires was the wasting of their national resources on wars and conflicts. The problem with conflicts is that they are made of vicious and expanding cycles. They are high-risk ventures that take a lot of time, effort and money to win. One need not go far to see the evidence. Just consider the U.S. cost of the Israeli-Palestinian conflict in terms of the financial aid, military aid, cost of combating terrorism, U.S. foreign relations and the Administration time and effort. What would have happened if the U.S. had spent half the amount of time, money and effort to reach a peace agreement?

Problem 2: National Competitiveness

The U.S. Government must formulate short-term and long-term policies and build institutions to strengthen the nation's competitive advantage through better education, innovation, technology and entrepreneurship development. The U.S. can compete with other economies using one or more of the following strategies:

• Invest in Innovation development and enterprise creation. A good example to learn from is the competitive model of European Innovation FP7 Initiatives

• Education and research budgets: Budgets should be redesigned to help investments in revenue-generating economic sectors and to provide incentives for new globally competitive products and services. Reform the U.S. education system to increase competitiveness and provide education and retraining resources for displaced U.S. workers

• Competitive tax policies: Tax policies should be redesigned to encourage innovation and industry. One simple, but highly effective measure, would be to shorten the depreciation schedules on capital investment and research spending, and increase short-term capital gains taxes to discourage short-term thinking. Dubai's industrial tax-free zones are good examples to examine.

• Make it simple: Simplify business management for entrepreneurs by simplifying the tax code and Government transactions. Simplify, automate and eliminate bureaucracy. A sales tax is more likely to increase savings and investments than income tax.

• Reduce insurance and legal costs by reviewing the legal system to minimize frivolous lawsuits.  Consider the model of the Japanese legal system

• Promote positive culture re-engineering: Promote transformation from consumerism to investment-oriented culture, from leisure society to education and entrepreneurship. This can be done through public education and media programs.

• Manage Globalization: The U.S. can slow globalization and offshoring through protection policies. However, The U.S. Government cannot stop globalization and will lose to competitors in the long-run. The only way is to manage the process by enforcing fair trade and joint investment agreements.

• Low cost Labor: If you can't beat them, join them. The U.S. can partner with neighbor countries, such as Canada and Latin American countries as low-cost labor sources.

• Immigration Policy: Bring more investors and competitive labor through more attractive immigration policies to attract foreign investors, intellectual capital and low cost labor.

• Hostile takeover (War):  That is an unethical option and has been proven to be a high risk, high cost and unprofitable foreign policy option.

• Friendly Merger: Acquire new labor, natural resources and markets. Learn from the European Union expansion model and consider the formation of new unions with other North American countries such as Canada and Mexico.

• Build stronger global socioeconomic networks: That will help favor American products and services. In order to build strong international relationships, the U.S. must refrain from acting as the world police and stop attacking other countries and cultures. Instead, the U.S. can promote American values by encouraging cultural exchange, open dialogues and economic partnerships. Transformation through education and positive exchange takes more time, yet is far more effective and lasting.

• Build stronger partnerships with other nations: That can be done through shared investments which will improve U.S. favoritism and trade relations over competitors (through shared interest in profit and loss).

• Build Peace: Shift the focus of foreign policy from combating threats with military force to building peace in Africa, Asia, Latin America and the Middle East. It does not help to take sides and create more enemies. Empower the United Nations and World Court to handle international conflicts, thus treating the root causes of terrorism and the U.S. hatred. That will eliminate most of the U.S. security threats and related socioeconomic liabilities. U.S. can gain much more through peace, and partnership activities than hostilities.

• When solving problems, U.S. Leadership needs to adopt the attitude of being smart vs. being right. Religious, ideological or egoistical policies create more problems than they solve. A pragmatic approach is far more productive domestically and internationally. The key challenge with this recommendation is the personal and subjective elements of the leadership.

8 ) Management Best Practices

Probably the best way the U.S. Government can implement the change effectively and efficiently is to adopt the private-sector management best practices. The simplest way to understand IIM's proposed solution is to compare the country to a company:

• The President as its CEO

• The Congress as its board of directors

• Multiparty subcommittees as the independent audit committee

• The Citizens as the shareholders

• Industry experts and the media as the company performance/investment analysts

USA Inc. is competing with other countries in a global economy. The CEO's mandate is the socioeconomic prosperity of the country. If the leadership team cannot meet their stated-objectives in their 4-years term, then they should be replaced. (Although non-democratic, Dubai is such an example of an economy that is being run as a global corporation). To help manage U.S. Government policies better, it is worth considering the following reforms or new policies:

• A group of nationally respected technocrats including academic researchers, socioeconomic experts, and representatives from all political parties could establish a comprehensive set of socioeconomic metrics as the main election agenda and set the performance goals for elected or appointed officials. This allows better informed-decisions by the public when electing the executive team. This set of socioeconomic metrics can be used as the criteria for democratic competition and election. One such basic example is IIM's Second Generation GNH metrics.

• Provide financial/political performance incentives and penalties tied to the complete set of socioeconomic performance measures. This will ensure tying of the interest of the elected officials to public interest as opposed to the interest of private lobbies.

• Establish better technical qualifications for the candidacy nominations.

• Establish better governing standards for the separation of duties to eliminate the conflict of interest.

• Institute a new format of an annual status report to the American public with far more details showing the performance of the Government using various socioeconomic measures.

Although it may be too much and too early for the implementation of some of the above mentioned reforms, they are worth stating for future intellectuals and leaders. In my opinion, such reforms would better inform and educate the public and would promote more responsibility and efficiency in addressing national challenges and opportunities.

9) Author's Notes
For proper correction of the US economy, before it is too late, we need a 360 degree view. I plan to update the paper on a bi-quarterly basis, hoping more media analysts, journalists, investors, lawmakers, decision makers get educated on the subject. I found that the ideal platform for this research and analysis is the CEO Q Magazine. The access to the paper will be provided online free of charge and will not be exclusive to the Magazine subscribers.

10) Paper Notes and Corrections:

A) This paper is not intended to be an academic research paper. To make the paper accessible to a wider audience, the format and the language of the paper were simplified to read like an article. For example: statistical numbers are rounded for simplicity, citations were minimized and key concepts are mostly stated in bullet-point format. Readers can verify the stated facts from the Internet and listed data sources in section ten.
B) When writing this paper, some of the quoted numbers were actual reported numbers and some were forecasted numbers for FY 2006.
C) The goal of this white paper is not to provide a complete solution; the goal is to draw attention to the true picture of the economic health and to shed  light on the emerging risks and available mitigation strategies.
D) Some of the above mentioned recommendations are drastic, socially expensive and cannot be implemented at this time. However, the purpose of a neutral study is to explore as many options as possible. From my knowledge of the human behavior, some of the best and most effective strategies will be discarded for ideological rather than pragmatic reasons. It’s a human and political tendency to reason what we love rather than love what we reason.

11) Statistical and economic data sources

U.S. Department of Commerce (DoC), European Commission (EC), United Nations (UN), Organization for Economic Cooperation and Development (OECD), International Monetary Fund (IMF), World Trade Organization WTO, Central Intelligence Agency (CIA) World Book, World Economic Forum (WEF), MSN Encarta, The Economist, Business Week, Financial Times, FederalBudget.Com , The White House, Congressional Budget Office. FDIC. PBS. US Dept of Treasury. US Census Bureau. US Department of Commerce. US Department of Economic Analysis. and International Institute of Management (IIM)

About the Author

Med Jones is the President of International Institute of Management (IIM) - A U.S. based strategy think tank. Jones is recognized as one of the few economic gurus who predicted the current U.S. economic crisis. He challenged the U.S. President, Federal Reserve Chairman and the popular opinions of the world economists in January of 2007. Jones is quoted in worldwide media on the topic. He is also known as the Economic Oracle for the accuracy of his predictions. For more information about the author, please visit Med Jones at www.iim-edu.org