AMERICANS SEEM so willing to suspend judgment about Ronald Reagan these days that few have even asked a central question about his economic plan. The simple question is this: What reason is there to think that an "unleashed" business community can cure our economic ills?
The simple answer: Very little. Indeed, there is growing recognition in the business world itself, as well as among its allies, that big businessmen in particular are one of the major sources of the unproductive mess we are in. Why, then, should we expect the same people to lead us to economic, social and political salvation?
"The top 1,000 corporations . . . have produced almost no net new jobs annually." Those are not the words of a business critic but of George Gilder, a new high priest of Reaganomics. In an interview in Public Opinion magazine, Gilder correctly notes, for example, that "large corporations don't introduce many truly pioneering products in our economy."
Yet the Reagan program is based on the indiscriminate notion that if only we cut businessmen loose from government regulation, slash their taxes and free lots more money for them to borrow, they will suddenly produce an abundance of wealth and jobs. The rationale for cuts in health and safety regulations, business taxes and government aid to the poor, the hungry and the aged is to transfer these extra billions to business, which chiefly means the large corporations that dominate the business world. This is supposed to create "the rising tide that lifts all boats."
But judging by the growing criticism of business by business and its boosters, don't count on too large a trickle down, much less a rising tide, from such blanket corporate aid (or, for that matter, from Democratic alternatives with their own indiscriminate business breaks).
In a widely discussed article in the Harvard Business Review, for example, Profs. Robert Hayes and William Abernathy conclude that we are "managing our way to economic decline." Reginald Jones, until recently the head of General Electric, blames the low quality of American goods on "management malaise." Businessman and former Commerce Department undersecretary Howard Samuels believes that "inefficient management may be the factor economists have underestimated in attempting to analyze our productivity failure."
The chorus goes on. Sen. Lloyd Bentsen (D-Tex.) last year told a business seminar that "part of our problem with competitiveness and productivity resides not in public policy, but right here at this seminar -- in the corporate boardroom." According to a Wall Street Journal report, 80 percent of the top managers at 221 companies cite "poor management" as a major reason for lackluster productivity. And Lewis Young, editor-in-chief of Business Week, charges that executives "are building corporate hierarchies and bureaucracies that are every bit as lethargic, obstructive and nonproductive as those in government about which business people complain so bitterly."
Those familiar with today's business world will recognize the validity of complaints about many of the managers in whose hands we are to place our fates. Top American executives are no longer so much risk-taking entrepreneurs, as much of the Reagan mythology assumes, as they are money managers who juggle accounting statements and acquisitions to show short-run paper profits.
This trend began in the 1950s with the arrival of the 'whiz kids' at the Ford Motor Company -- Robert McNamara, Arjay Miller and other corporate Red Adairs who could put out any fire with their brilliance and MBAs. During the go-go years of the late 1960s, the business press and business schools lavished attention on such financial conglomerateurs as James Ling (LTV) and Harold Geneen (ITT). The prevailing ethic was that if you were a professional manager, you could manage anything.
Indeed, at one hearing before the House Ways and Means Committee, Ling went so far as to have a flip chart with a page asking, "How many people in LTV know the steel business?" The answer on the next page was a big red zero. Ultimately, the joke was on Ling, who failed to make Jones & Laughlin Steel profitable and lost his entire empire.
Yet the image of the dynamic professional manager endured even as the image of the founding entrepreneurs -- Thomas Watson, Robert Sarnoff, Henry Ford, Walt Disney, Edwin Land -- faded into the romanticized past. By 1980, the consulting firm of Golightly & Co. reported that the number of company chairmen and presidents with financial and legal backgrounds -- not exactly the chief source of creative entrepreneurs -- had increased 50 percent over the past 25 years.
The costs of these interchangeable managers, often untutored in their industries, is becoming glaring.
Too many U.S. executives, for example; are more interested in short-run profits than in long-term growth, according to J. Peter Grace of W.R. Grace Co., former SEC chairman Harold Williams and former Commerce Department assistant secretary Frank Weil. With a top manager aware that he'll only be running things for four or five years on the average, "he'll entertain no research, no development program that won't pay off for eight or 10 years," according to Grace. And SEC reports pressure executives to show continually growing profits, quarter to quarter, even at the cost of cheating the future.
Also, many executive compensation plans tie bonuses to year-to-year returns, which encourage managers to overstate profits during their few years at the helm. Says Michael Maccoby, author of "The Gamesman," the best-seller about who gets ahead in the corporate suite, "It's like the George Allen-type football coach who trades young draft choices for 35-year-old stars who have one or two good years left. He wins immediately, but in five years he has no draft choices."
Contrast this with Japanese firms. High officials there rise through their particular business and stay at the top longer; their bonuses depend on returns over a period of years; and, compared with the United States, far more of their financing is debt than equity, so they don't have to pay dividends every year.
For these and other reasons, Japanese managers pursue long-gestating technologies and strategies despite short-run costs. Executives in America, says Julian Scheer, a senior vice president at LTV, "try to deal with long-range problems in the short run. They want to demonstrate . . . that they'll meet this year's targets this year. What gets lost is the strategy that will take the company over 25 to 30 years."
Another problem is what has been called "the rise of the paper entrepreneurs." As Robert Reich, director of Federal Trade Commission policy planning, puts it: "An ever larger portion of our economic activity is forcused on rearranging industrial assets rather than increasing their size. Instead of enlarging the economic pie, we are busy reassigning the slices."
One European manager told Profs. Hayes and Abernathy, "The U.S. companies in my industry act like banks. All they are interested in is return on investment and getting their money back. Sometimes they act like they are more interested in buying other companies than they are in selling products to customers.
In fact, the value of all mergers rose from $12 billion in 1975 to $20 billion in 1976, $22 billion in 1977, $34 billion in 1978 and $40 billion in 1979. W.T. Grimm & Co., which tracks acquistion trends, reports that merger announcements were up 46 percent in the first quarter of this year, and it puts the value of the planned corporate marriages at a quarterly record of $17.5 billion.
In the 1970s many consumer activitists and Senate liberals attacked large conglomerate mergers on efficiency and polictical-power grounds; the business press defended them by contending that the resulting combination would be more efficient than the sum of its parts. Now many business spokesmen are doing an about-face by turning against such mergers -- on efficiency grounds.
Harold Williams lectures business audiences against acquiring companies they "don't have the time to understand." According to Robert W. Johnson, former chairman of Johnson & Johnson, "never acquire any business you don't know how to run." A major study of why firms succeed by the management company of McKinsey & Co. concluded that the most successful ones were more single-industry than conglomerate enterprises -- companies such as 3M, Procter & Gamble, Johnson & Johnson.
This urge to merge contributes to a growing and measurable decline in American innovation. U.S. companies in 1979, for example, spent more for acquistions than for resereach and development. In fact R&D expenditures in this country in noninflated dollars peaked in the mid-1960s, both in absolute terms and as a percentage of GNP.
We also have something of a "balance of patents" problems today, as more patents are granted here to Japanese and West German companies than to U.S. firms in those countries. While small American firms pioneered in xerography and instant photography a couple of decades ago, today our corporate research factories come up too often with feminine hygiene sprays and pet rocks.
Recent studies corroborate the assumption that expenditures for innovation -- rather than for me-too products -- are what lead to productivity, profits and jobs. J. Hugh Davidson in 1976 looked at the reasons 100 new consumer products succeeded or failed in the United Kingdom between 1960 and 1970. Of new products, 74 percent succeeded; of imitative products, only 20 percent did so.
Still, U.S. managers seem to shy from the risks and rewards of innovation. C. Jackson Grayson, former Nixon wage-price controller and now president of the American Productivity Center, complains that management for 20 years "has coasted off the great R&D gains made during World War II, and consistently rewarded executives from the marketing, financial and legal sides of the business while it ignored the production man."
For these "paper entrepreneurs," acquistions are more familiar than innovations. And safer. As Joseph Schumpeter wrote four decades ago in "Capitalism, Socialism and Democracy," new technology can make existing investiment obsolute. If a corporation or corporations already dominate an industry, where is the incentive to take a chance on a new and costly product?
Several examples come to mind. American tire companies wouldn't market obviously superior radial tires and thereby allowed foreign penteration here. American auto firms have not had a major innovation since the development of automatic transmission in the 1930s and wouldn't significantly reduce the size of their fleets after the 1973 oil embargo, which opened up our domestic market to a flood of fuel-efficient imports. Similarly, it took a small Austrian company, one-third the size of the average U.S. Steel plant, to introduce the path-breaking oxygen steel-making process in this country.
No government bureaucrat told American industry not to market radials, small cars, small motorcycles, small computers, small reproduction machines and small TV sets. the fault, here as elsewhere, has been more with self-immolating managers than with federal regulators.
Many small and medium-sized companies, after all, have been innovative and profitable regardless of government rules. Moreover, as management consultant Jewell Westerman reports in the current Fortune magazine, a study he did of hundreds of firms shows that costs of "the bureaucracy of business management itself" are "far larger" than costs stemming from goverment bureaucracy.
Westerman raises the neglected issue of waste, which the Reagan administration somehow sees everywhere in big government but nowhere in big business. The bigger the firm, the bigger the costs of bureaucracy: excessive paperwork; committees reviewing committees; undetected sloth; institutional caution and delay; and the Parkinson's Law effect of superiors creating more subordinates.
The McKinsey study of corporate successes and failures found that one firm required 223 different committees to approve a new idea before it would be put into production -- and few were. John DeLeorean, author of "On a Clear Day You Can See General Motors," quit the auto giant as a; vice president at age 48 because on the 14th floor of GM building in Detroit "You were too harassed and oppressed by committee meetings and paperwork. It [GM] has gotten to be a total insulation from the realities of the world."
After 86 interviews with business managers, economist F.M. Scherer concluded that "the unit costs of management that "the unit costs of management, including the hidden losses due to delayed or faulty decisions and weakended or distorted incentives . . . do tend to rise with the organizatinal size. How typical it is for firms insulated from competition to operate with copious layers of fat can only be guessed. My own belief is that padding as high as 10 percent of costs is not all uncommon."
There is waste not only in board-rooms but in the workplace as well. "I rarely find an analysis of a manufacturing or service industry," says J. Peter Grace, "where the potential costs reductions are not equal to 30-40 perecent of the labor cost." But is labor or management really at fault here? Sony has plants in San Diego and Alabama that are about as productive as its facilities in Japan. Similarly, a General Accounting Office study showed that after a Japanese firm took over a Motorola color TV plant, defects fell from 150 per 100 sets to just 3-4 defects per 100.
It appears that U.S. labor could be competitively productive with the proper tools and motivation. Instead, our capital stock in autos and steel, for example, is aging and the equipment not the most advanced. As Fortune reports, "Japanese auto makers have achieved much higher productivity than their American rivals largely because they have invested more heavily in advanced production technology."
Moreover, management-labor tensions in the United States do not inspire the kind of loyalty and effort that seem to characterize the Japanese and West German labor markets. A recent Wall Street Journal story -- "Poor Labor Relations at U.S. Steelmakers Cut Ability to Compete" -- discussed the now familiar tale of how Japanese managers get more out of their workers by demonstrating greater concern for their welfare. American managers, by contrast, often treat employes with autocratic disdain.
All this is to say little of the matter of fraud in the boardroom, which has been documented in an avalanche of hearings, books, articles, criminal convictions and admissions of management-directed illegality over the past half decade. This, too, makes one wonder whether aid for business will be promoting something other than productivity.
While the Reagan administration stresses "psychology" and "faith" to support its fundamental economic assumptions, a large body of evidence about managerial inefficiency contradicts its economic Peter Panism. Given companies' acquisition-mindedness and the "waste, fraud and abuse" in business bureaucracy itself, Reagan's program seems more likely to simply shift wealth than create it. As designed, most of its benefits would likely end up not with the "truly needy" but with the truly greedy.
With Congress agreeing to Part I of Reagan's economic package -- huge spending cuts -- it would do well not to step back and consider some longer-run alternatives for economic growth that are more realistic than merely throwing money at corporations in the form of untargeted tax breaks.
For example, stricker anti-conglomerate standards would frustrate merging and encourage investing. More worker democracy would motivate employes to produce more because they get more, as studies of workplace participation efforts demonstrate. If there is inadequate savings in America, let's stop subsidizing consumption through a tax code that allows deductions for interest payments on consumer credit, life insurance policies and second and third homes.
Since there's a consistent negative correlation in advanced economies between high military sending and high economic productivity, a less extravagant defense budget would be a boon to the economy. And if managers lack the nerve to invest in risky but potentially groundbreaking technologies, perhaps we need a version of a national development bank to encourage such innovation. After all, it was more government spending than private initiative that led to such products as microprocessing, computer chips and wide-bodied airplanes.
It would be disastrous if slashes in social spending and all the consequent personal suffering ultimately fail to create the promised economic plenty. This could not only destroy this administration's political health but deeply wound the public's long-term confidence in the business community itself.