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David A. Moss

An interview with David A. Moss, McLean professor of business administration and founder of the Tobin Project. Read the complete article, “Can America Compete?” (September-October 2012)

 

Harvard Magazine: The competitiveness project’s survey research shows that managers and business leaders are concerned about the political system—it looks messy and dysfunctional.

David Moss: Yes, this seems like a new twist on the competitiveness debate. Of course, worries about the economic health of the country are nothing new. In the 1950s, there was great fear that the Soviet Union would eventually outproduce the U.S. Then there was a good deal of worry about Japan in the 1980s—that Japan was an economic juggernaut, and the U.S. couldn’t possibly keep up. Both fears turned out to be overblown.

Perhaps my favorite example relates to late eighteenth-century Britain, when skeptics were saying the country was in decline—that its public debt was too big and its products were no longer of high quality. But Adam Smith said the pessimists were wrong, and we now know he was absolutely correct—Britain was on the verge of an economic takeoff. The rationale Smith offered in 1776 is especially interesting. He suggested that in a dynamic economy, the biggest (and thus most visible) industries are frequently in decline, and the newest, most vibrant ones aren’t yet visible. This is why a country could have a very promising economic future yet still appear to be in decline.

The lesson here is that we need to be cautious about our economic pessimism. It’s easy to get carried away. So as we think about some of the political challenges America faces today, we need to be equally cautious.

Library of Congress

Adam Smith, author of The Wealth of Nations, was prescient about dynamic economies in preindustrial Britain. Might he caution against excessive economic and political pessimism in the United States today?

That said, in past discussions of America’s economic health, the focus was predominantly on economic and business factors: interest rates, tax rates, labor costs, supply chains. Now it seems we also need to pay close attention to the political system. One has a sense that it’s increasingly dysfunctional. In fact, when our HBS alumni were surveyed about strengths and weaknesses in the American economy, they identified the political system as the biggest weakness going forward. It appears Standard & Poor’s came to a similar conclusion during the debate over the debt ceiling last year. When S&P downgraded the nation’s credit rating, there wasn’t any serious question about the country’s capacity to repay its federal debt. The U.S. had (and has) plenty of GDP. The real question the rating agency raised—the basis for its downgrade—was whether the nation’s political system is reliable enough to ensure continued repayment. The extreme political brinksmanship that characterized the debt-ceiling fight was profoundly unsettling for S&P’s analysts—and perhaps rightly so.

Putting these pieces together, I think there’s reason to worry about the long-term economic health of the country. I remain optimistic—but nervously optimistic. Although we’ve seen GDP growth over the past few decades, it’s been highly concentrated among top earners—most Americans haven’t seen nearly as much income growth as past generations have. Will broad-based growth return in the future? I sure hope so. But we need to think hard about what’s causing the problem.

I’m not sure the traditional explanations work so well. For example, I don’t think the fundamental problem relates to the way our firms are managed or the nature of our trade infrastructure (though we still have to work on both). In my view, political dysfunction is likely a more serious impediment to a healthy economy. Are we doing what we need to do in terms of developing our human capital? Clearly not. Whether from the right or the left, do we have an energy policy that makes sense? Not really. People can debate the individual healthcare mandate, but the ultimate question is, can we continue to afford spending over 17 percent of GDP on a healthcare system that appears less productive—less effective, in many cases—than those of other rich, industrial countries? In terms of our fiscal position, the federal government is spending about 24 percent of GDP while taking in about 16 percent of GDP in revenues. It’s obvious that we need to cut spending and raise taxes over the long term—yet the political system can’t deliver that. In fact, it’s having trouble addressing any of these major challenges in a coherent way. So political dysfunction may well be an important part of the problem.

 

HM: You have found periods when Americans, though skeptical about government, have agreed on steps to reduce debt and pay for public services. Does that context inform the present?

DM: Yes, absolutely. But first we have to ask: is there something different about the problems facing the political system today? After all, in nearly every generation, Americans have complained about how their political system “doesn’t work as well as it used to.” Although the same may be true today, I think we do face some distinctive political challenges. Consider the research that Nolan McCarty, Keith T. Poole, and Howard Rosenthal—three superb scholars—have put together on political polarization in Congress. Their data show it is at or near an all-time high. We’re seeing more distance between the parties and less ability to compromise than we have in a long, long time.

In fact, the issue of compromise is itself interesting, and starts to get us back to your question. Many people think of compromise as meeting in the middle: I give a little, you give a little, and in this way we reach a solution. But there’s another form of compromise that we sometimes forget about: instead of meeting in the middle, each party gets what it most wants. If one person wants to visit Miami and the other New York, they could settle for Washington, D.C.—or they could agree to go to Miami this year and New York the next. Some of the most important political accommodations in American history have involved the latter sort of compromise—choosing the best from column A and the best from column B.

Since the days of Jefferson and Hamilton, Americans have harbored profound disagreements about the proper role of government. One side sees government as the problem and seeks to limit it and get it out of our lives; the other believes government can be harnessed to solve important problems, particularly those that individuals have trouble solving on their own. Both views have been enormously productive over the course of the nation’s history: in fact, one key to American economic success is that the nation’s governance has long been rooted in two great philosophies of government, not just one. And reconciling the two has not always involved meeting in the middle.

Consider the extraordinary thing that happened in the mid nineteenth century, when many states introduced strong budget rules that sharply limited public borrowing—something the Europeans should look at very closely today. Back then, the push for fiscal responsibility, often rooted in state constitutional provisions, came mainly from small-government conservatives. In New York, for example, the group that secured a constitutional amendment to limit borrowing, the Barnburners, in some ways was very similar to the Tea Party today. One important difference is that the Barnburners were more allergic to debt than to taxes—and even willing to raise taxes to bring down debt, where necessary. But they were deeply upset about fiscal excess, and went to great lengths to bring the state budget under control.

Now, at virtually the same moment, there was another strong push—from the other end of the political spectrum—for free public education at the state level (financed by taxes, rather than private tuition charges). This represented a radical development at the time, the virtual socialization of an industry. It was enormously controversial. Ultimately, though, the rise of public education constituted a powerful competitive advantage because it moved the United States far ahead of most other countries in terms of education and human capital development.

What’s especially remarkable is that many states put both in place nearly simultaneously: strong legal provisions for limiting deficit spending and public education financed by new taxes. Two powerful ideas from two very different parts of the political spectrum. In this case, as in so many others, progress was achieved not by meeting in the middle, but rather by adopting the best of both sides.

I think this is an important example for us in 2012. We need to think about how to get our federal budget into long-term balance—perhaps through some sort of balanced-budget provisions with appropriate escape hatches—and, simultaneously, how to invest more effectively in human-capital development. That is the type of compromise we should be aiming for: the best of both.

Which brings us back to the question of ideology. Some observers look at the paralysis in our political system and assume that ideological divisions are the cause. I don’t see it that way. As I’ve said, these sorts of divisions have been around for a very long time in America. Instead, I believe that the central source of weakness in our political system today is an absolutist view of politics (and political tactics)—where any success for the other side is seen as a devastating loss for your side. A good friend at MIT, Stephen Van Evera, refers to this as a Leninist orientation—thinking of politics as war, where winning is everything and compromise is a dirty word. I would say this Leninist approach is profoundly inconsistent with sustaining a healthy democracy. This is the piece of American politics that’s dysfunctional. We can have different views of government—that’s as American as apple pie—but we need to get back to a place where it’s possible to govern on the basis of both perspectives—and get the best of both, rather than fall into a cycle of unending political warfare and paralysis. The problem isn’t ideology. It’s politics as war, and that’s what Americans need to reject when they go to the voting booth.

HM: Do politicians who approach governing as a fight to the finish fundamentally differ from business leaders, who make pragmatic decisions as they adjust and adapt operations?

DM: That’s a great question. The business sensibility tends to be highly pragmatic: problems come at you, and you need to try to solve them. That said, if you develop a better product, it might put your competitors out of business. It’s hard to be too upset about this, because we all benefit as consumers from the introduction of better products. That’s business.

I’m not sure the same logic entirely applies in politics. If one political party could destroy the other, the country would be poorer, not richer, as result. That’s because there’s an important shared element to our political system. Whatever side you’re on, you need the other side to be healthy or the democracy will break down. In politics, in other words, we have to be especially careful in thinking about the integrity of the system as a whole. Individual politicians often have a greater responsibility in this regard than they realize.

HM: Do today’s CEOs differ from their predecessors? They’re measured and compensated in a shorter-term way. If they run global enterprises, they are less locally rooted. They have strong incentives to lobby for short-term benefits, like tax loopholes. Have their ties to a functioning democracy weakened?

DM: One theme my colleagues on the competitiveness project have emphasized relates to the broader business environment—the “commons”—and whether business support for the commons at local and national levels has diminished as the economy has globalized. If we are underinvesting in human capital, physical infrastructure, and other elements of the business environment as a result of such neglect, this certainly requires attention.

I wonder if much the same thing may be going on with respect to the political system—that is, whether the political “commons” has been increasingly neglected. The integrity and health of the nation’s democracy are of incalculable benefit to everyone who lives and does business in the United States. This is true even strictly in economic terms. Think about all the elements of the business environment that are products of political decisionmaking—from rule of law and property rights to a stable monetary system and even protection from foreign foes. Just as good governance is essential for high-performing firms, good governance is essential for high-performing countries. So I think this idea about the commons is certainly applicable in the political sphere. If we allow our political institutions to atrophy, the economic health of the country will falter in time. So we need to be vigilant about this.

Now, returning to CEOs, if it’s true that they are less focused on the business commons than they used to be (given the forces of globalization, for example), then perhaps they are also somewhat less attentive to the state of the political commons than they used to be. Is this the case? I don’t know. But it’s an intriguing question.

Certainly, we all need to think about our own responsibilities as members of a democracy. We all need to vote, to think carefully about the issues, to formulate our own opinions and be respectful of others’. In the same way, CEOs have a responsibility to think about their role in sustaining and strengthening the democracy, and sometimes this could involve forgoing opportunities for short-term political victories. It may seem idealistic—even naive—to speak in these terms, but I believe this sense of responsibility is absolutely essential if we want to ensure the long-term health of our political system.

HM: What can business leaders do?

DM: Let me talk about what all of us can do. We need to work as hard as we can to preserve and strengthen our culture of democracy. That means, in part, rejecting “politics as war,” which is so inconsistent with healthy democratic governance. But it also means making certain investments—in education, for example. There has been discussion recently about civics in the classroom. To a large extent, it has disappeared; and even in states that still have civics programs, the curricula are often out of date and not especially exciting. If we could revive civics—or, more broadly, the study of democracy—in high school and college in a truly effective and engaging way, that by itself could have a very positive effect over time. In fact, we should be thinking about how best to do this here at Harvard and at other colleges and universities. (Full disclosure: I’m currently developing a case-based course on the history of American democracy, which I hope will help serve this role.)

Business leaders could certainly help push this agenda along as well. A number are already speaking out about the critical importance of improving reading, writing, math, and science skills in primary and secondary education. The fact that we’re at or below the median on international tests is almost unforgivable in a country that helped invent public education. But I want to emphasize that while skill-building is enormously important, it shouldn’t be the only objective as we think about educational reform. One principal reason for creating public schools in America in the nineteenth century was to help ensure and develop a capable electorate. So as we imagine new ways to strengthen our educational system, we shouldn’t lose sight of how important it is to foster good citizenship and to deepen understanding of the democracy and its history. Thoughtful business leaders could certainly play a valuable role in reminding us of this.

Too often, I’m afraid, the health of the political system is seen as someone else’s problem—not appropriate for the CEO to be worrying about. But when Harvard Business School alumni tell us that the biggest problem with the American business environment is the political system, that should make things abundantly clear. It is absolutely in the interest of American business to help ensure a strong and healthy culture of democracy in the United States. CEOs and other business leaders could make a difference—they could help strengthen the political commons—by making clear to their stakeholders and to the broader public that a healthy political environment is vital to a healthy business environment and a healthy economy, and that treating politics as war (however attractive in the short run) is a sure-fire way to weaken the political system (and the economy) in the long run. If we are going to strengthen and revitalize our democracy, all of us—including the nation’s business leaders—have an important role to play in making this happen.