There can be four kinds of business periods: true growth, challenges, synthetic and disastrous. As Northwestern University economist Robert Gordon has chronicled in his excellent book "The Rise and Fall of American Growth," our nation is not and never was preordained to enjoy unlimited prosperity. Our prosperity has been influenced by demography, innovation, productivity trends, and by patterns in corporate, governmental and individual behavior.
In the sobering last chapters of his book, Gordon makes us aware of some significant headwinds facing the United States today. It is a highly informative read.
The decades following World War II did deliver true growth. Houses were built, cars sold, computers were developed and became reasonable in cost. Farsighted public policies, such as the interstate highway system and other infrastructure projects, helped make our economy both productive and efficient.
The late 1970s and early 1980s were more challenging, with intensified global competition, the emergence of duplicitous financial engineering, high interest rates, and shakeouts in many industries. But many of these challenges were met, as some of our most important companies responded with better products and services delivered at reasonable costs. Companies such as Nucor Steel helped to improve our effectiveness in key industries.
The U.S. economy has experienced periods of challenge again, after 9/11 and during the mortgage meltdown of 2008 to 2010. We got through those challenges, too, but it was not easy.
Unfortunately, the U.S. also has endured some significant periods of synthetic economics. Several of these synthetic periods were particularly harmful.
Missteps during the 1990s permitted too many mergers, coupled with lax enforcement of tax and financial regulations. All this laid the groundwork for the very serious mortgage meltdown and Great Recession.
We have made some of the same mistakes in the last few years. As our economy gradually recovered from the Great Recession, we threw gasoline on the fire of an already improving economy by coupling huge federal budget deficits with interest rates artificially held at very low levels. Deficits essentially tripled from 2016 to 2019 to exceed $1 trillion in a single year. Things seemed good at the time, as unemployment was reduced and the stock market surged to record levels. But several unfortunate consequences developed.
Companies and governments did not always make good use of the prosperity of these years. Corporate repurchases of stock surged. These stock repurchases fueled unrealistic stock market valuations for many companies — well beyond what the companies were actually worth.
One example might be my old employer, IBM. IBM was a well-managed and frugal company when I started with it in the 1950s. But during the last decade or so, it repurchased nearly $170 billion of its own stock, often at prices 50% higher than where the stock is now.
IBM's balance sheet has correspondingly suffered. After its extensive share repurchases, and several costly acquisitions at premium prices, IBM now has a negative tangible net worth of around $52 billion — heading into a probable downturn.
IBM was by no means alone. Boeing, our nation's largest exporter, has repurchased $55 billion worth of its own stock, leaving that company with a negative tangible net worth of $20 billion. Meanwhile, it struggles with enormous financial and legal problems emanating the disastrous handling of its 737 Max program. And it looks as if Boeing will now be facing this exceedingly difficult situation during a severe downturn triggered by the coronavirus.
Boeing and IBM have plenty of company. CVS, AT&T, Verizon, General Electric, Kraft Heinz and many other U.S. corporations have negative tangible net worth as the economy weakens. In fairness, other companies — Ford, Intel and several utilities, for example — have avoided these unsavory practices and are better prepared for more challenging environments.
The problem with synthetic economies is that their prosperity is illusory, as ill-advised financial practices are employed to present a picture of economic progress when the long-term competitive position of major companies, and the entire nation, have been seriously eroded. Meanwhile, executive pay and retirement packages have fed on the same synthetic illusions and grew well beyond customary levels — thus endangering broad community support for companies at a time when it may be needed.
Absent any inclination to critique their own behavior, corporations, public officials and citizens often lobby for more federal action during a downturn — usually suggesting even greater fiscal deficits and even lower interest rates. But, will there be consequences? For example, in the viability of retirement savings, pension funds and banks?
According to the Center for Retirement Research at Boston College, many of the nation's pension funds are seriously underfunded and have been for many years. How are they going to fulfill their important obligations with near-zero interest rates?
And what about seniors who have saved for their retirement? When interest rates are arbitrarily reduced to below normal levels, is the action in any way similar to theft?
The British scholar John Argenti made an important finding in his landmark book "Corporate Collapse: The Causes and Symptoms." He noted that through several identifiable stages of mismanagement, a company can become so marginal that normal business hazards can mean the complete collapse of even major corporations. Will this happen to some of our important companies? I don't know, but the huge buildup of corporate debt is something that should worry us.
As problems associated with the coronavirus intensify, so has the clamor for safety nets and bailouts at a time when both corporate and governmental balance sheets are precarious. And where can the clamor for bailout end? Is anyone to be excluded from the generosity of a bankrupt and dysfunctional government? Are companies that might fail because they inappropriately bought back so much of their stock that they face insolvency entitled to the same largesse as companies that have behaved more prudently?
The economic slowdown that is apparently facing us is not a problem of the moment. It is the product of inappropriate policies, unwise business practices and compromised integrity dating back to the 1990s. These things produce predictable results. The solution to these problems will not fit neatly into the published propaganda of either our major political parties.
We need character, integrity, sound judgment and enough analysis to understand the deeper causes of our dilemma. It won't get better by each party mobilizing its storm troopers.
Fred Zimmerman (zimco55345@gmail.com) is a University of St. Thomas emeritus professor and has served as a director on several corporate boards.
