America’s Fear of Competition
How cronyism and rent-seeking replaced “creative destruction.”
By Eliot Spitzer
Slate.com, 2009-01-22

[I basically agree with Spitzer’s criticism of the SEC, but not of GM.
(To be honest, I have no special expertise on either one:
my opinions are merely based on a layperson’s insight.)]

Although everybody claims to love the market,
nobody really likes the rough-and-tumble of competition
that produces the essential “creative destruction” of capitalism.
At bottom, this abhorrence of competition and change
are [is?] the common theme that binds together
the near death of the American car industry,
the collapse of the credit market,
the implosion of the housing market,
the SEC’s disastrous negligence,
the Madoff Ponzi scheme, and
the other economic catastrophes of recent months.

Consider the examples of the SEC and GM,
which would appear to have nothing to do with each other.
The traditional critiques of the SEC have been that
it was underfunded
and didn’t have up-to-date laws needed to regulate
sophisticated financial transactions in evolving markets.
That’s not accurate.
The SEC is a gargantuan bureaucracy of
3,500 employees and a budget of $900 million—
vast compared with the offices that actually did
ferret out fraud in the marketplace.
And the general investigative powers of the SEC are so broad that
it needs no additional statutory power to delve into
virtually any market activity that it suspects is
improper, fraudulent, or deceptive.
After each business scandal (Enron, Wall Street analysts, Madoff …),
the SEC claims a need for more money and statutory power,
yet those don’t help.
The SEC has all the money and people and laws it needs.
For ideological reasons, it just didn’t want to do its job,
and on the rare occasions when it did, it didn’t know how.

GM’s excuses—
that its UAW contract and health care costs make it too top heavy to compete—
are partially true but ignore a simple reality:
These are the self-inflicted wounds of
a company that chose a path of least resistance
rather than confront the need for dynamism and innovation.
GM and its brethren forged a partnership with the UAW
that avoided difficult choices on legacy costs,
because the world seemed to permit it.
[Forged a partnership!
What Democratic BS.
The UAW was pressuring the auto industry every step of the way,
with brutal, lengthy, and revenue-shredding strikes
(I remember the 1950s, when
George Meany (AFL/CIO),
Walter Reuther (UAW),
David McDonald (USW) and
John L. Lewis (UMW)
were riding high,
featured on newsweekly covers as they (or their unions)
muscled industry to meet their demands.
Note that while the UAW, USW and UMW rode high when they could,
ultimately they effectively priced their members out of the market,
as their industries lost out to foreign competition.)
to force the auto industry to capitulate
to its insane (that is the right word) health care demands.
And if you are under the mistaken impression that
those health care demands were not insane,
why is the unionized American auto industry unable to survive
without rather large government subsidies,
while the non-unionized foreign-owned auto plants seem to be surviving on their own,
if probably not exactly thriving in this economic climate?]

Similarly, they opposed meaningful reform in health care.
While this approach may have been tolerable in the ‘50s and ‘60s,
it made no sense over the past 30 years.
The auto industry preferred protection to competition.
And when it had to compete, it wasn’t up to the task.

[Spitzer notably does not say
exactly how GM should have responded to the threat of a strike.
What alternative did GM have when the UAW said:
“Give us those health care benefits or face a debilitating strike.”]

Both the SEC and GM refused to adapt
from the world of the last century to the more dynamic new millennium.
Each reacted the same way to competition:
Instead of improving its product, it played defense.

Instead of genuinely asking
how it had missed structural flaws in the marketplace
that cried out for investigation,
the SEC repeatedly joined forces with major Wall Street banks
to handcuff those who had discovered the market failures.

No one at the SEC seemed to ask the most important question:
Given how the market is changing,
what should we change to insure the integrity of the capital markets?

Instead, the SEC spent its energy
preventing others from doing the work it should have done.
Using the rather arcane doctrine of pre-emption,
the SEC fought in the courts and on Capitol Hill
to keep other enforcers at bay:
worse than having fraud in the marketplace
was the possibility that an entity other than the SEC
would appear to be more effective than the SEC at finding it.

[Spitzer’s criticism of the SEC’s institutional imperatives
is rather similar to Michael Scheuer’s of the CIA.]

The auto sector was similar,
avoiding or opposing the innovations
that would generate consumer excitement.
For both the SEC and the auto industry,
Congress was a place to find protection from meaningful competition.
Each used its bureaucratic clout
to insulate itself from the pressures of capitalism.
Both the SEC and GM have lacked the nimbleness to realize that
the market was changing beneath their feet.
Each found it easier to continue doing the same thing over and over
and to reward those who made the same product,
or kept the competition from marketing a better product,
rather than themselves creating a better product.

The result has been unfortunate:
Over and over,
we supplied the protection from needed change
that these entities desired.
Then, when the going got tough, neither the SEC nor GM was up to the task.
By preventing the stern taskmaster of competition from forcing adaptation,
we became complicit in their becoming dinosaurs.

The contrast to the real marketplace,
where a company like Apple has to reinvent itself every product cycle,
is remarkable.
GM and the SEC need the Steve Jobs mentality.
It doesn’t matter that the SEC is a government agency.
Instead of focusing on cookie-cutter processing of minor claims,
it needs to value creativity.
It needs to move fast
so that tipsters will feel that their information will be acted upon,
not shuffled up in triplicate to a committee
that eons later may read and discard it.
Both GM and the SEC need to see
a change in market conditions as an opportunity—
not a challenge to market share.

We must rebuild these two institutions.
If we don’t infuse them with a culture of change and love of competition,
they will fail once again.
The SEC should go out and hire some of the young, recently laid-off traders
from hedge funds and investment banks.
[Even if they need work,
it is hard to see them make that change in compensation and workplace culture.]

They need work,
and better than any group of lawyers or agent-investigators,
they know what trading patterns and practices to examine
and where to drop subpoenas to find the skeletons.
The SEC should welcome the creative tension that results from having
state regulators or other federal agencies such as the CFTC on the beat.
And GM should use government funding for green technology
to truly transform itself:
It should build the infrastructure for plug-in technology
that will be the next iteration of “gas stations.”

This is a unique opportunity for President Obama and the Congress
to take two seemingly different entities
and force them to play by the real rules of capitalism:
compete and transform to produce better products.

Eliot Spitzer is the former governor of the state of New York.

Restoring American Competitiveness
by Gary P. Pisano and Willy C. Shih
Harvard Business Review, July/August 2009

[This is a really, really outstanding article.
My attention was drawn to it by the references to it in
Clyde Prestowitz’s The Betrayal of American Prosperity.]


A blueprint for keeping America competitive
By Jeffrey R. Immelt [chairman and CEO of GE]
Washington Post Op-Ed, 2011-01-21

[An excerpt:]

America cannot expand its manufacturing base without
greatly increasing the volume of goods it sells overseas.

[KH comment:
Bullshit, Mr. Immelt!
America would be in far better shape if it made
more of the things it needs for its own use.
In particular,
sane and competent people understand the concept of strategic industries,
industries which produce items essential for America to be
a success at maintaining its position in the world.
For example, modern warfare clearly is dependent on many electronic products.
How can America be capable of fighting a war with or deterring
those who make many of the products on which
fighting that war would depend?
Further, when many of our electronics are made overseas,
how can we be sure that subtle traps or Trojan Horses
are not embedded in the hardware itself?

In any case, simply building in America that which Americans buy
would put many Americans back to work and expand our manufacturing base.
Which puts the lie to the statement of Immelt quoted above.]

The Competition Myth
New York Times, 2011-01-24

[This column is full of impressive sounding assertions
which, while true, fail to support the thesis he is asserting.
Here is a sample:]

What sense does it make to view our current woes
as stemming from lack of competitiveness?

It’s true that we’d have more jobs
if we exported more and imported less.
But the same is true of Europe and Japan,
which also have depressed economies.
And we can’t all export more while importing less,
unless we can find another planet to sell to.
Yes, we could demand that China shrink its trade surplus —
but if confronting China is what Mr. Obama is proposing,
he should say that plainly.

[If you think about it
(which no doubt leaves out many of Krugman's readers),
the point he just made supports that
we are in competition with other nations for jobs derived from manufacturing.

The relevant point here is that
we all (i.e., all nations) can't simultaneously have trade surpluses,
with the domestic employment that comes with that.
Thus, if the goal is to have a trade surplus, then we are in competition.
I wonder how the Nobel laureate Krugman can title his column "The Competition Myth"
without denying that truism.]

The problem with competitiveness -- and with Canada
By Ezra Klein
Washington Post Opinion, 2011-01-25

[A small sample from the column that is either wrong or misleading.
Right now I don't have time to critique it minutely, just to claim
it is very, very misleading.
The most profound problem: Ezra Klein never even mentions the U.S. trade deficit
in this column.
How much longer can that trade deficit be maintained,
without disastrous results,
which will impact most severely future generations,
whom Klein claims to care about in his final paragraph?]

It’s not that Chinese companies have never taken an American worker’s job;
they have.
But the Chinese, by and large, are competing with
companies in India, Indonesia, Thailand and Malaysia,
because the things those workers make are not, in most cases,
the things we make or even the things we want to make.

“China competes on price,”
says Robert Shapiro, director of Sonecon, an economic consulting firm.
“There isn’t any doubt about that.
The United States competes on quality and innovation.
That’s how our companies outdo other companies.”

[I wonder how owners of Lexuses, Infinitiis, Mercedes, BMWs, Audis, or Porsches
think America is doing on quality?]

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