16 Aug 2002 Will Our Economy Emerge Stronger from its Trials?
By the time you read this Brief, I will be in the ‘Mecca of Elvis,’ Memphis, Tennessee, along with 70 to 100,000 faithful pilgrims. In the unlikely event you haven’t heard, the twenty-fifth anniversary of the King’s death is today. It just happens to coincide with my taking my second daughter Emily, to school at Ole Miss. The University of Mississippi lies in the quaint town of Oxford, Mississippi, one hour south of Memphis. As it is difficult to fly to Oxford, Memphis is the gateway by air. But even Memphis may become a tougher destination for Elvis pilgrims and Ole Miss students if the current descent of commercial aviation continues.
What about the airlines? U.S. Airways’ bankruptcy filing reminds us of just how tough it has been for that industry since 9/11. In fact, for most of aviation’s history, airlines have been mediocre businesses at best. It seems apparent that significant innovative changes must occur in airlines, airports, airplanes, and the way we fly, if the industry is to thrive. In fact, our domestic and the global economies depend upon it!
Moreover, our economy requires the revitalization of several key components that have been weakened in the aftermath of the Internet/information bubble. They form the foundation of any economy, and are vital for growth. At the micro level, all business transactions depend upon mutual trust that the parties involved will meet their contractual obligations. Because of weaknesses in human nature, business systems provide additional layers of protection in the form of checks and balances (internal and external auditors). Finally, the rule of law governs businesses as a whole. Every one of these pillars has been tested during the past few months, shaking our confidence and the measure of that confidence – the stock market – to the very core. We have learned the obvious – that stormy seas are a poor time to question the ship’s integrity, but that’s when the leaks usually show up.
Economies also depend upon communications and the flow of information. At the height of the Internet boom the cable companies, the telephone companies, the satellite companies, and the wireless companies competed furiously to connect us to everyone else and to the vast store of human knowledge. Today, many are literally struggling for their very survival. As they struggle, they continue to offer the new and innovative services, but in this time of restraint, we find we just don’t need them as much as we thought we did during the bubble.
Long distance phone calls will soon be made over the Internet, eliminating much of the revenues now vital to AT&T and WorldCom. Antiquated FCC regulations make the regional Bells unable or unwilling to invest in upgrading their networks to compete with the cable companies who now seem to have the upper hand in delivering broadband Internet access to America’s households. What’s worse, the Bells are loosing thousands of phone lines per month as households drop their wired telephones to go exclusively with wireless phones. The cable companies, even with all their advantages still show few signs of business success (i.e. profits). Wireless companies suffer from competition and declining prices, as their industry becomes more commodities like. Our communications networks seem to be in a state of flux as the individual companies try to find business models that will lead to profitable operations.
The actions of governments can have huge impact on economies. Domestically, our government could be doing more than they are to motivate the creation of new businesses that create jobs, and to encourage existing businesses to invest more in their future growth and productivity. This political talk of the tax-cuts being fiscally irresponsible is completely off-base during a slow economy. Our economy exists because people take financial risks; to start businesses or to grow them. It is an economic fact that the willingness of entrepreneurs and managers to take risks diminishes as their potential returns are increasingly shared with the government.
The challenge for our elected officials is stop whipping the horses of our economy and to lighten the cart of government programs they pull. They MUST learn to spend less. Whether one likes Mr. Bush or not, as investors, we should applaud whenever he vetoes spending measures (on anything). More money is wasted in Washington D.C. than any bureaucracy on the planet; money that could be so much better allocated by the private sector (with the relatively few corporate scandals notwithstanding). Studies show that only 30 cents of the tax dollar makes it to the final recipients on the social side of the budget. A full 70% stays in the bureaucracy – much of that bureaucracy adds nothing to this country’s productivity. No doubt, our defense budget could be tightened considerably as well. Just a quick glance at the functions of governmental departments and agencies reveals how much overlap and territory protection exists. Washington Inc. would have gone bankrupt decades ago were it not for its ability to raise ‘prices’ (taxes) whenever its managers (Congress) fails to do their jobs on controlling spending.
On the global front it is vital that there be as few barriers to trade as possible. Yet we see barriers going up even in today’s slow world economies. For reasons I cannot understand (political I’m sure) Mr. Bush pressed for steel tariff measures amidst the kicking and screaming of our European and Asian trading partners. From a practical standpoint, the teeth have all but been removed from the tariffs, minimizing European retaliation thus far. But new threats now loom on the horizon. The European Union is putting pressure on the President to sign the Kyoto Agreement by threatening tariffs on American goods. Never mind that the Kyoto restrictions on developed nations are strict enough to threaten the very health of those economies. We will keep a close watch on these developments remembering that seventy years ago, global tariffs contributed mightily to the collapse of the U.S. and world economies.
The underpinnings of our economy have been rocked by events of the past several months, but they remain strong. Recent economic numbers, while lower than those a month or two ago, are still positive – some are improving again. Even more important is America’s spirit of innovation. Industry leaders are showing their confidence as they invest in their future. Microsoft Chairman Bill Gates announced on July 25th that the company would boost research and development spending by a whopping 21% to $5.2 billion (18.3% of revenues!) and hire an additional 5,000 workers to fuel growth. That level of R&D spending places the company at the top of the list and is particularly noteworthy at a time when most companies are heading for the shelters.
Small businesses have the greatest impact on new hiring in this country, therefore on the long-term health of our economy. Some tax incentives from the Congress would help, but barring huge government missteps, small business startups will resume in the near future. One could make a strong case that the technology/productivity boom of the 90’s was facilitated by the innovations of people who were forced into entrepreneurship after being laid off by the likes of IBM, Texas Instruments, Hewlett Packard and others during the tough economies in the 80’s.
Today, rest assured that the myriad of new ideas and innovations touted during the late 90’s did not evaporate with the excitement of the dot com or Internet boom; just the capital chasing these ideas disappeared. As stability returns to markets and the capital taps re-open, we will witness yet another wave of innovation as new business startups fire investors’ imaginations once again. However, investor expectations will likely be more realistic, and the information on which they base their projections, more accurate. It may just be that the events of the past two years have created a stronger foundation for powerful and sustainable economic growth, the likes of which would not have been possible otherwise. Long live the king!