You're Awesome, America!
Why the U.S. recovery will be bigger, faster, and stronger than economists and politicians expect.
The recovery came quickly because the public and private sectors reacted with great speed. In the 1990s, Japanese policymakers deliberated and delayed before embarking on a program that included interest-rate cuts, a huge stimulus program, expanded bank insurance, and the nationalization of failed institutions. In 2008 and 2009 it took the United States just 18 months to conduct the aggressive fiscal and monetary actions that Japan waited for 12 years to carry out. And the patient responded to the shock therapy, as the credit markets and financial sector bounced back. Since the announcements of the Treasury-imposed stress tests in May 2009, banks have raised more than $140 billion in new equity capital. In August 2009, not even the most cockeyed optimists could have projected that within four months, Bank of America, Citi, and Wells Fargo would return $100 billion in borrowed funds to the taxpayers. But they did.
CIT Group, the small-business lender that lost its way in an ill-timed foray into subprime, is a perfect example of those quick reflexes. It filed for Chapter 11 on Nov. 1, 2009. In five weeks it wiped out $10.4 billion in debt (including $2.3 billion of TARP funds) and emerged from bankruptcy. It has brought in a new CEO—John Thain, who had run the New York Stock Exchange and Merrill Lynch—and is now focusing on its core business of lending to small and midsize firms. "Restructuring, whether it is done out of court or bankruptcy, is an accepted genre in the U.S., whereas overseas it still carries much more of an onus," says Stephen Cooper, a founder of Zolfo Cooper, which pioneered the business of administering triage to seriously wounded companies.
Fixing broken financial structures is only the beginning. In periods of slack demand, the single most important factor that drives profitability is the ability to do more with less. Here again, Americans seem to have an innate competitive advantage. Whether it was Frederick Taylor, the inventor of scientific management, walking around Victorian-era factories with stopwatches, timing workers' motions; or Henry Ford perfecting the assembly line; or W. Edwards Deming developing total quality management; or Wal-Mart's insanely effective supply chains—the pursuit of efficiency is as American as apple pie. In this crisis, companies embraced cost-cutting and efficiency. From the fourth quarter of 2008 to the fourth quarter of 2009, productivity rose 5.8 percent. In 2007 and 2008, productivity growth was 1.7 percent and 2.1 percent, respectively.
In the short term, the ruthless pursuit of efficiency translates into the uncomfortable—and unsustainable—dichotomy of rising profits and falling employment. But the focus on efficiency is creating new business opportunities for smart companies. At BigBelly Solar, a Needham, Mass.-based firm whose solar-powered trash compactors reduce the need for both labor and energy, sales doubled in both 2008 and 2009. "Cities and institutions like universities and park systems are eager to do more with less," says CEO Jim Poss. Leasing 500 compacting units has allowed Philadelphia to cut weekly pickups from 17 to five and will save it $13 million over 10 years. BigBelly employs fewer than 50 people, but like many businesses in fast-growing markets it indirectly supports a much larger number of jobs. At Mack Molding, an Arlington, Vt., contract manufacturer, 35 workers are kept busy on two shifts producing compactors. "When you add the employees at the more than 50 component suppliers, this work is supporting another 180 jobs," says Joan Magrath, vice president of sales and engineering at Mack Molding. BigBelly compactors, which are entirely made in the United States, have been exported to 25 countries. It's a drop in the bucket. But thousands of start-ups and small businesses are trying to crack the markets developing at home and abroad.
In fact, since bottoming in April 2009, exports have risen smartly, from $121.7 billion in April 2009 to $142.7 billion in January 2010—an increase of 17.3 percent. Boeing will deliver about 460 commercial planes in 2010, up from 375 in 2008, with the vast majority going to non-U.S. buyers.
All well and good, the skeptics note, but we've got a long way to go. To recoup the 8.2 million jobs lost since December 2007, it'll take four years of growth at 170,000 jobs per month. And by definition, it's hard to identify the next transformative economic force—the next steam engine or interstate-highway system. White House economic adviser Larry Summers tells a story about the economic summit in Little Rock, Ark., after the 1992 election. In the thousands of pages of briefing papers and policy briefs, one word that didn't appear was Internet.
Beyond creating jobs for those who built and maintain it, the Internet functions as a powerful platform on which all sorts of new businesses—and ways of doing business—can be rolled out. And constructing entirely new ecosystems is another discipline at which the United States excels. "In a reset, we get great individual innovation," notes Richard Florida. But more important is the rise of systems innovation, as when Thomas Edison and George Westinghouse were building electrical systems: "That leads to new models of infrastructure and new kinds of consumption."
Apple launched the iTunes Music Store in April 2003 with a single product: songs selling for 99 cents. Seven years later, iTunes is a much larger business: Supporting hardware like the iPhone, iPod Touch, and iPad, the store now offers audiobooks, movies, ringtones, apps, and e-books. It's a boon for retailers, movie studios, independent coders, analytics firms, and accessories makers—the market for cases, sleeves, and headphones for i-devices is north of $1.5 billion annually. In late March, the venture-capital firm Kleiner Perkins Caufield & Byers doubled the size of its two-year-old iFund, which backs app makers, to $200 million.
Now consider two interrelated systems: energy and auto manufacturing. In the past two years, the old policy of subsidizing housing and Wall Street has been replaced by a new one that seeks to boost national operating income through efficiency. Skepticism about the potential for millions of "green jobs" to materialize overnight is warranted. But in some areas, a process similar to the iTunes experience is developing. The Danish wind-turbine maker Vestas in recent years has announced investments of nearly $1 billion in wind-turbine-manufacturing plants in Colorado, which, when completed, will directly employ about 2,500 people. But Vestas has also attracted a dozen-odd suppliers, including components producers like Aluwind, PMC Technology, Bach Composite, and Hexcel. And it's not just about the hardware. Renewable Energy Systems Americas, the largest manager of wind farms, moved its corporate headquarters to Broomfield, Colo., in 2008. Last month Colorado mandated that 30 percent of the state's energy be produced from renewable sources by 2020.
Daniel Gross is the Moneybox columnist for Slate and the business columnist for Newsweek. You can e-mail him at firstname.lastname@example.org and follow him on Twitter. His latest book, Dumb Money: How Our Greatest Financial Minds Bankrupted the Nation, has just been published in paperback.
Illustration by Rob Donnelly.