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I recently overheard two business leaders saying the slow pace of economic recovery would impede their quarterly results.
I concur with their assessment, but focusing on the rate of economic recovery is similar to looking at an iceberg; only 10 percent is visible. The other 90 percent is hidden below the surface.
Likewise, focusing on the highly visible recovery rate exposes only a small portion of economic strength.
Long-term strength is not found in the rate of a recovery. How the United States stacks up globally in the underlying economic drivers of productivity, competiveness, creativity and innovation are better indicators of the long term.
In the past, the U.S. ranked at the top of these measures and would power out of recessions. Today, the U.S. is in the top five of only one global measure. In fact, in most categories, the U.S. is not even in the top 10.
As a result, recoveries are less robust.
Somewhere, business leaders lost their economic compass. Today, shorter-term, profit-driven shareholder capitalism takes priority over enduring long-term economic growth.
My first college economics course covered economic strength. The professor stressed that long-term economic strength required two components: wage growth and the ability for business to make robust profits. When one component cannibalizes the other, an economy weakens.
That basic principle established the microscope that I have since used to examine business strategy and actions. It’s a simple methodology. Anytime profits increase and wages decline or vice versa, actions have a weakening effect. While the simplicity of this approach can be debated, observing business in this manner has worked well to indicate an increasingly weaker economy.
The obsession to lower wages to increased profit is a direct contradiction to this fundamental principle. Focused wage reduction has taken an enormous toll on economic strength. It is not a coincidence that the amount added to company profits corresponds with a similar amount of wage decline.
The country’s collective purchasing power still tops all other countries, but our ability to consume has been on the decline since the 1970s. The Pew Research Center reports that, since 1971, the middle class, an economy’s consumption engine, has shrunk from 61 percent to 51 percent of the population, and the median middle-class income peaked in 1999 and remains in steady decline.
Initially, the decline went virtually unnoticed because credit propped up consumption.
I remember the exact time the economic alarm sounded for me. In the mid-’90s, I heard a CFO of a highly profitable company comment that his company should bargain for wage concessions not for a compelling business reason, but because “everyone was doing it.” That comment triggered my subsequent thought: “If everyone is doing it, our ability to consume will be damaged and our economy will be in trouble in 10 to 15 years.”
Countries ahead of us in the global competitive indexes as a rule are not low-wage nations. Most have a higher average wage than the United States. They have figured how to be highly competitive with higher wages.
What is keeping the U.S. from doing the same? It is simple. Share the profit. But companies and shareholders covet escalating profit.
We are the United States. We have a history of courage and strength to overcome daunting challenges. We entered military conflicts to defend our freedom.
Surely we can find the courage to divert a portion of profit back into wages to protect our economic freedom.•
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Kanning is a business adviser, senior lecturer in the Indiana University Kelley School of Business, and former Hillenbrand executive. Send comments on this column to ibjedit@ibj.com.
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