National Interest and the Bottom Line

The Captains of U.S. Industry have been busy boys, lately. They've been busily going after the short-term big profit.

United States Steel Corporation changed its name to USX Corporation. USX Corp. has two subdivisions, US Diversified—Marathon Oil, Texas Oil and Gas, chemicals, manufacturing and domestic transportation; and USS, its iron and steel business, still the nation's largest. In announcing the change the top management of USX Corp. made it clear steel making was on its own and would not be supported by earnings from other divisions of USX, Corp.

Columbia Broadcasting System announced a reduction-in-force of its news divisions by two hundred people. CBS explained this with the usual talk about increasing efficiency etc, etc. The real reason was that Columbia Broadcasting System's 1986 earnings were about $340 million, down from about $500 million for the previous year. CBS lost no money, it just didn't make as much money as its top management thought it should, hence the RIF.

The "bottom line" controls the decisions of top level management, the bottom line being the most profit in the shortest time. But bottom line management philosophy misses a lot.

Case in point: the United States led the world in phonograph technology, developed hi-fi, produced the LP, developed stereo and was the leading manufacturer of records of all classes—Ethnic, Popular, Rock-&-Roll and Classical. As a nation we promoted the musical arts as never before and made available the best quality of performance at quite modest prices. Recently MCA—the entertainment conglomerate—tried very hard to develop and market a compact laser disc (CD) system for playing movies in the home. The laser disc uses a compressed binary code that can store enormous amounts of information. It produces fidelity which is unsurpassed. But U.S. recording companies and recording manufacturing companies have decided they can sell more records—short term sales—by recording and selling popular music, and have essentially abandoned classical music. MCA quit producing compact disk, and RCA—which was marketing a similar system—did likewise. Both systems were on the market briefly and then were eclipsed by the Japanese VCR's. In the meantime Sony, the Japanese electronics giant and Philips, its Netherlands counterpart, took up the matter of the audio CD. They now have a virtual monopoly on the medium. While the U.S. recording companies are busy promoting pop music, American classical artists must travel to Europe, meet European contract standards and spend money which we endowed them outside of the United States. It's not that Classical disks are money losers, it's just that they make their money in the long haul. Brahms doesn't produce the consumer "feeding frenzy" that Bruce Springsteen produces.

It's even worse: the 12 inch disk MCA was developing would hold a two hour black and white movie or a 1 hour color movie. In the black and white mode the 12 inch disk could hold 54,000 frames, which, if they were used as "microfilm", would amount to 54,000 pages of printed material. Needless to say, the CD (which the CIA and the Library of Congress should have adopted as their own) is the center of a vast effort to develop into the true multi-media information storage system. The system is so efficient that only a small fraction of the surface of one side of the CD holds the music codes, typically only 1/2 inch. A forecaster of the CD boom has projected that with attainable compression all the books of the world could be encoded onto 34 square feet of CD—that's fifty-eight 12 inch disks. And who are the leaders in this technology? The Japanese and the Europeans. Why are they the leaders? Foresight.

The Japanese blitzed us with consumer electronics. We were happily making TV and stereos etc. when the Japanese marketing storm hit and we were left with very few manufacturers of consumer electronics. This erosion of our position in electronics has gone so far even our own defense contractors are wondering if we should be buying so much of our "silicon" from Japan.

The same story can be told in manufacturing field after manufacturing field—autos, machine tools, optics, heavy industry. . . Our position in agriculture is being challenged by the very Third World countries we assist. They are not only solving their domestic food problems, they are exporting their surpluses to the world market—much to the chagrin of our farmers, who thought the world would never get enough of our food, feed and fiber.

The Japanese expected American manufacturers would overtake and perhaps surpass them in five years. That was about eight years ago, just before the present administration took office. Instead of competition we have had quotas and deals on market shares. We have ex-employees of the Office of the Trade Negotiator working for the Japanese conglomerates, using their insider's knowledge of the Federal government and U.S. industry to give the Japanese a decided advantage. This is deplorable.

The recent decline of the dollar is supposed to help us in the balance of trade. With respect to consumer electronics (VCR's and so forth) since we don't make them and because the Japanese yen has advanced, these items are now more expensive to the U.S. consumer than if the dollar were still strong. The weak dollar, in other words, makes sense only if we domestically produce the items affected by the exchange rate. Since we are no longer large producers of consumer electronics, our trade balance will increase with the strong yen and the weak dollar. Just the opposite of what was hoped for.

What can be done about this? It is a waste of our time to insist on competing with Japan in her home markets. She's not going to let us because her home markets are vital to her world marketing strategy. Take them away and Japan's world market strategy collapses. Suppose we took the unrealistic position that Japan might throw open her markets to all our products without restraint, and would absorb as much as she could of our wares. This would not redress the balance of trade with Japan. She already has more of our market than we can get of her's. If we want to out-compete the Japanese we have to start at home. In an intensely insightful analysis of this situation, (Economics and the Wealth of Nations), Jane Jacobs says we must first engage in "import replacement." To be competitive the United States must first replace Japanese imports with goods of domestic manufacture. Trying to compete in Japan simply gives the Japanese more time to establish further inroads into our domestic market, which is far richer than her own.

No single corporation, not even IBM, or AT&T (and its spawn), will successfully compete with Japan Incorporated. Japan Inc. is organized to distribute profits and losses within and among large capital conglomerates in ways not permitted by U.S. law. And its purpose is to serve the national interest of Japan in securing its position of world economic hegemony. The United States is its best and easiest market. Japan will never open its domestic markets to the U.S. since it would destroy the foundation structure of their economy. Japanese citizens and businessmen seem to know this, since they do not seem to buy foreign goods in Japan unless there are no domestic alternatives. (The recent microchip settlement notwithstanding, it is still to be determined how U.S. microchips will do in Japan, even if the Japanese government agrees to allow the U.S. chip makers to have 20% of the Japanese market. Will the Japanese buy the chips? That remains to be seen.)

If U.S. corporations are going to compete with Japan Inc.—or Hong Kong or Taiwan or other Pacific Rim countries—they will require the assistance of the Federal Government. (They cannot go it alone. The integrated competition of Japan will eat the disintegrated competition of the U.S. alive.) The assistance may be in the form of tax laws, laws governing price structuring, and cooperative arrangements for research and development. The assistance may take the form of information gathering and dissemination—advice on how to deal with foreign governments, foreign corporations and overseas target markets. It might be wise to look to the reestablishment of engineering experiment stations (provided for in the Morrill act of 1862 as companions to the agricultural experiment stations).

The ecological situation described here is simple. If the "bottom line" is the principle ecological factor for the decision to enter the marketplace, and the bottom line is defined as the maximum short-term return on the investment, it is obvious the driving factors will not be service to the community, support of the national interest, promotion of the national defense, promotion of the national culture or a whole host of very worthwhile reasons to be in business. If CBS is blind to its need to provide the best, most honest coverage of the news (in return for the privilege the people of the United States grant to it in the form of its license to broadcast) seeing only the bottom line max as its goal, what can be said of its obligations to serve the larger community interest? The national interest will not be served if the ecological guiding principle of industry is merely the bottom line. Corporations must be profitable, make no mistake. But to serve the National Interest, profit can not be the only motive. To serve the National Interest business has to be able to walk and chew gum... .

We are bottoming out of one set of technologies and have yet to implement the new ones. The old technology was mass production manufacturing with its huge inventories and "finished product" quality control, the new technology is "just in time" manufacturing robotically produced with little or no inventory and fanatic attention to quality control at every step in the manufacturing process. Our competitors have the latter and we are still stuck with the former and with a set of high level corporate managers who are more interested in "golden parachutes" than reality and have yet to smell the coffee. Combining prolix defense expenditures (without the taxes to support them) with "Scroogian" domestic policies—in a time when our ability to compete is hampered by our obsolete technology—has produced unprecedented public debt and trade deficits. We have voluntarily shot ourselves in the foot with our defense budget and our industrial competitors are having a field day. If they decide to pull their money out of our economy it will collapse. It is unlikely, however, that they will kill the goose that lays the golden eggs.

A Department of Commerce and Trade with a National Interest Industry policy would end all of that. The federal government is admirably suited to perform these functions for national interest industries in the same way the Federal government established such an information network for the agricultural industry, and the DOD has developed an intelligence/information management infrastructure for the defense industries. The CIA should be pressed into this business. Our economic hegemony is as important, if not more important, than our political hegemony. The CIA is well positioned to perform the assessment of domestic economic vulnerability to foreign competition needed to make such a national strategy work.

For one thing we might look at a person who left a sensitive post with the Trade Negotiator to go to work for a competitor of our economic hegemony in exactly the same way that we'd look at a high ranking CIA official who set up a consulting business with Moscow. A national policy that recognized the relationship of the peaceful arts and sciences to our economic hegemony in the same way the military arts and sciences relate to our political hegemony would put the problem into the proper perspective. An assessment of economic vulnerability would produce a list of National Interest Industries and would lead to whatever new legislation was required to protect them. Everybody knows the United States is the principal purchaser of the products of the defense industries. Those same people should know these industries account for a very large share of our foreign trade. While the government is not a principal buyer of the products of the peaceful industries, it is a large buyer of such products the largest single buyer in fact. The laws that allow the Federal government to deal with the defense industries—while not the answer—will certainly point the way.

We must first decide what areas of our industrial economy are contributing the most to our problem, in this case our international balance of payments. We spend a lot of dollars for oil, we have a major drain in consumer electronics, with imminent threats in computers and related semiconductor technologies. We have to make a major effort in robotics and related automated manufacturing or we will never catch up. We have to reassert our lead in machine tools without these we can not be competitive in manufacturing. We are hurting bad in steel and steel products, and of course automobiles and related automotive equipment. (There is no reason we should make only one motorcycle, the Harley Davidson, which the Japanese have graciously agreed not to put out of business.)

In the past we have seen it to be in the national interest to promote aviation, so we gave airlines mail contracts and other forms of subsidies, including NASA research. We subsidized the railroads with huge grants of land, which still form the basis of the wealth of some of these companies. We subsidize the transportation industry by building roads, dredging channels, building bridges and tunnels. We support an armaments industry second to none in the world. So how should we support national interest industries? We should first define them.

National Interest Industries are those necessary to maintain our integrity as a nation. The specific industries constituting the group may change from time to time as technology and the world situation change; for the most part National Interest Industries will fall into two categories—those that support the economic hegemony and those that support the political hegemony. The principal industries supporting the political hegemony are the defense industries. Nobody needs to be told how the defense industries operate—they are too efficient in establishing what our national priorities are and how they should be met. If anything we should cool their ardor a bit. For the industries and businesses supporting our economic hegemony, it is difficult to see the national interest and consequently shape our national behavior to support it. During this time of mismanaged Federal budgets, however, we have an excellent opportunity to see how the peaceful National Interest Industries that support our economic hegemony are affected by Federal policy.

A group of electronic firms might be organized the way the National Football League is organized: fiercely competing with each other (and their foreign competitors) but never in a way that eliminates any of the teams from the league. Laggards in the efficiency race would be assisted by "drafts" and other considerations to make them more competitive inter nationally. We should go about this with the same degree of earnestness as our pursuit of professional basketball. We should compile statistics and profiles on these industries; we should rate, rank and score them; applauding the successes and booing the failures. We ought to read the business page and get the feeling something as exciting as professional baseball is happening. And there should be that night on TV when a proud nation gathers before the tube to see the heroes of American industry rewarded, not with $7 million salaries, but with loving cups for the production of the most perfect automobile in the shortest amount of time for the least cost, for the most innovative product of the year, for the fewest defects per unit manufactured...

If we as a nation agree that the information industries and all related and ancillary activities are in our national interest and we are going to defend them the same way we defend our interest in the latest military technology, we will have taken a giant stride in the right direction. What is called for is increasing the competitiveness of American industry, not erecting trade barriers. Once an industry is designated as a National Interest Industry, it should be treated the way we treat defense industries. The Federal government can arrange financing for plants, equipment, research and any other aspect necessary to make and keep the industry competitive. We should expect such industries to be profitable, to have stockholders or be employee owned, to act in the market place in every way as any other business, except—since they would be considered vital to our economic hegemony—they would be the beneficiaries of laws written for their husbanding.

It is obvious we can not rely on the business acumen foresight knowledge or wisdom of our current crop of Captains of Industry to remedy the situation. There are no easy plums to pick, no risk-free capital ventures, as there have been for most of our commercial history. As a matter of fact, the business community cannot solve this problem. There is nothing in the past history of the U.S. industrial community that indicates they will look to any but their own narrow interests. Nor should they, since the U.S. antitrust laws will penalize them severely if they act in any concerted way. In the present situation Japan, Korea, Hong Kong, Singapore, the Common Market and the other more competitive international trading nations will pick and choose the parts of the of the U.S. economy they wish to dominate. Now its a matter of dog-eat-dog competition—and USX positions it's steel producing unit so it can be jettisoned without risking the remainder of the corporation...

The question does not have an easy answer. We must recognize that in a free society, which espouses the tenets and principles of free enterprise, investors have to be perfectly free to invest or not invest as their best interests are served. If USX wants to divest itself of steel and stay with oil and chemicals, who's to say they shouldn't? If the record companies want to pump out Rock-&-Roll, not Beethoven and Brahms, who is to say what private investors do with their money? These principles are well recognized and business and economics dictate the maximum freedom here. But in such an environment, how is the national interest served?

The United States has a superb University system. We have an intelligent citizenry. We have the necessary capital—we would have more if we got off the hard liquor of defense spending—and as a nation we have the will. What we now lack is leadership; men and women with vision and commitment. We are carrying an awful burden of incompetence at the highest corporate and governmental levels, and in time some sort of corporate reform will be necessary for the survival of the national economy. In current practice corporate leadership is power without responsibility—to the public or even to stockholders. But not much is needed to correct this—a few corporate leaders, a responsive Federal government and educated consumers who can demand and get high quality products at reasonable prices. We are talking about free enterprise capable of competing in the world markets, the basic health and strength of the nation. A nation too sick to plow will soon be the vassal of its economic owners, even if it has a million nuclear swords.

. . . Ted Sudia . . .

© Copyright 1987
Institute for domestic Tranquility