By Loyd Eskildson

David Rhodes and Daniel Stelter are Europe-based senior partners in the Boston Consulting Group. In Accelerating Out of the Great Recession they purport to offer solid advice on how American business can survive and thrive in these trying times. They begin by observing that it would take a 32% increase in China's private consumption to offset a 5% reduction in U.S. consumer spending - something they believe is not going to happen. Thus, when combined with various spending inhibitors, they conclude business leaders should instead look for growth in the U.S., albeit slower than in the past. Accompanying that slower growth will be unwanted increased efforts at government regulation, anti-immigration action, and trade protectionism.  Other economic drags include downward price pressure due to deleveraging, and bank reluctance to lend due to their failure to recognize the extent of their potential losses and recapitalize.
 
Continuing, the authors point out that U.S. household wealth shrank an estimated $13.9 trillion (22%) in the last few years, while the savings rate rose from -2.7% in 2005 to +5.9% in 2009. Both factors reduce demand. Meanwhile, the GDP-boosting U.S. trade deficit (4.6% of GDP) cannot continue, unemployment and underemployment remain high, and most surveyed business leaders are not optimistic about soon returning to record 'pre-recession' profits. 
 
Soaring U.S. health care costs (17.3% in 2009, expected to hit 25% in 2025 and 37% in 2050 without fundamental change - Congressional Budget Office) receive almost no attention in Accelerating, despite the obvious fact it cannot continue. (Suffice it to say, health care reform will not occur on its own, and will have major impact.) Rhodes and Stelter continue, finally concluding that consumers will become more "value-conscious," obvious old news to most. Eg. Guess what has driven Wal-Mart from nothing to become the world's largest public corporation in 40 years and the U.S. largest grocery retailer in 21 years, while department-store market share fell from 38% in 1995 to 19% in 2002? Home equity financing reached almost $1 trillion in 2006 (7% of GDP), before home values began tanking - guess what that does to demand, especially for big-ticket items? Up to 70% of homeowners are underwater on their mortgages in some areas - those homeowners will not lead any economic recovery, period. Just two years ago the U.S. finance industry generated 41% of corporate profits - that won't be repeated soon either.
 
Worse yet, Rhodes and Stelter are oblivious to the reduced impact and opportunity from today's consumer sales. Decades ago when Americans bought a car, toaster, toy, shirt, tank of gasoline, or a shrimp dinner they not only boosted retail sales, but generated added activity for the U.S. auto, appliance, textile, toy, oil, and fishing industries and their U.S. employees as well. Today, that second level of activity is largely gone, both in the preceding areas and many, many more - mostly off-shored to China. Thus, adding a dollar of U.S. consumer sales not only requires more credit than before ($1 in the 1950s, $3 in the 1990s, and $5 in the last decade - per the authors), but also far less impact on total GDP. Regaining that stronger impact requires protectionism, despite Rhodes and Stelter's unconvincing counter-arguments, unless one proposes ballooning the trade deficit - which they also oppose. What does this mean for business leaders - that major economic improvement requires government to reverse course on 'Free Trade.'
 
The second section of Accelerating covers suggested business strategies. Those looking for new, sophisticated strategies and insights, however, will not find any. The material is simply a superficial rehash of Finance 101 - protect your cash position, negotiate with suppliers, focus on inventory management and reduce debt levels, divest non-core businesses, focus on bloated R&D, focus on innovation, . . .. Easy to say, not so easy to do when surrounded by excess world production capacity (U.S. - 20%, Japan - 15%, European Union - 18%, India - 30%, China - 40%, Brazil - 30%), with Asian producers especially advantaged by much, much lower operating and capital costs. Clearly, America's economic future will not be found through just working harder at more of the same.
 
Bottom-Line: The U.S. cannot accelerate out of the great recession without creating a new, significant, sustainable, strategic advantage, or at least a similar defense - especially in the industries of tomorrow. The New York Times (1/30/2010) reports that China is already the world leader in green energy wind and solar power, and pushing hard to build nuclear reactors and more efficient coal-fired plants. It also is leading in electric bicycles, and the "smart money" (Buffett's Berkshire) is betting on a Chinese state-owned company developing electric cars and their batteries. Meanwhile, China is also significantly boosting R&D efforts in nanotechnology and bio-sciences.  All this while erecting trade barriers to outside competition in new areas, and refusing to revalue its currency - thus protecting old areas as well. Little, if any of these current (or former) initiatives occurred through purely private initiative, or simply across-the-board Chinese business tax-cuts. Nonetheless, Accelerating Out of the Great Recession ignores or takes a negative posture on the potential role of U.S. government, probably because many Americans believe it should have no role in private enterprise.
 
China became a modern power by facing down its anti-capitalist roots en route to a heavy government role in lifting private businesses; further, its on-going economic vibrancy is assisted by much, much lower health care costs (admittedly the government is working to expand this area) and an undervalued currency. The U.S. similarly needs to face down its anti-government roots to help maintain our modern status through government-led  health care reform, severely limiting illegal immigration, imposing tariffs to counter China's under-valued currency, and guiding/helping the development and protection of nascent industries.


David Rhodes is a senior partner and managing director of the London office of The Boston Consulting Group and the global leader of the Financial Institutions practice.

Daniel Stelter is a senior partner and managing director of the firm’s Berlin office and the global leader of the Corporate Development practice.

Loyd Eskildson is retired from a life of computer programming, teaching economics and finance, education and health care administration, and cross-country truck driving.  He's now a reviewer for Basil & Spice.

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