I have often wondered what it takes for a dominant economy to fail as Spain did in the late 17th Century, France did in the late 18th Century, or the Ottoman Empire did in the mid-19th Century. Niall Ferguson, a Professor of History at Harvard University, provided great insights on this phenomenon in a recent Newsweek article in which he questioned the future of the US (December 7).
The trends Professor Ferguson identified are frightening. He predicts that by 2039, federal debt held by the public will reach 91% of GDP, up from 41% in 2008 (he quotes an even more pessimistic forecast that puts debt at 215% of GDP by 2039). As Professor Ferguson notes, "This is how empires decline. It begins with a debt explosion. It ends with an inexorable reduction in resources available for the Army, Navy, and Air Force."
So how can such staggering levels of debt be reduced? If households incur exorbitant levels of debt, short of declaring bankruptcy, they can cut expenses or increase income. Countries can do the same. For a government to increase its income it needs to either increase marginal tax rates or increase the tax base -- that is, find ways to encourage economic growth so that people and organizations earn more and the tax on this additional income finds its way into government coffers.
Innovation is critical to long-term economic growth. CNNMoney.com ran an article called "Driving change: innovation is key to the future of the US auto industry" (December 1). The central thesis of the article was that the US auto industry was at a crossroads. Consumers around the world are demanding "greater fuel efficiency and cutting edge design" and the question is whether US automakers can respond or whether the balance of power will move to other economies with emerging auto industries, such as India and Tata Motors. Steve Jobs' advice to the US auto industry is to "think different."
The ability to "think different" is critical to the future success of many industries. To innovate as a way to generating growth within organizations can only help industries and the economy as a whole. Innovation requires inputs: money to support the development of ideas before the idea generates any revenue, a highly skilled labor force capable of working with cutting edge concepts and taking these ideas to market, an infrastructure to support the commercialization of ideas, and business conditions that encourage innovative organizations to stay in the US.
It is easy to see how a recession fuels a downward spiral: demand falls, expenditure is cut, income falls, demand falls (again), etc. When looking at where governments and organizations make expenditure cuts, "safe bets" include R&D because cutting R&D expenditure does not have an immediate effect on consumer demand nor is R&D expenditure tied to the immediate production of goods.
Similarly, education budgets are cut, and in some States such as the State of California, cut drastically. The impact of a deteriorating education system has an even longer-term impact on innovation because it may take years to feel the effects of deterioration in the quality of knowledge workers, people who have the capacity to drive an innovative society.
While I am not convinced we are completely out of the "recession woods" yet, I do believe the time has come to be more future-focused. In particular, it is time to focus on restoring expenditure in areas that will drive innovation and generate economic growth to such an extent that the income base expands and the level of debt does not eventually blow out to an unconscionable level.
Jenny Darroch is on the faculty at the Drucker School of Management. She is an expert on marketing strategies that generate growth. See www.MarketingThroughTurbulentTimes.com
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