Searching for Economic Prosperity

by Jean B. Eggemeyer
March 16, 2010

In recent years policymakers in Michigan and in Washington, D.C. have been looking for ways to foster the growth and development of high-tech, new economy businesses in order to provide stable economic growth, reduce unemployment and improve quality of life.

In a new book published by the Kalamazoo-based W.E. Upjohn Institute for Employment Research, William Lazonick cautions, however, that we should fully understand what new economy corporations will and will not deliver in the way of economic prosperity before we wholeheartedly endorse the reorientation of our economy toward them.

Lazonick, a Harvard-trained economist and University of Massachusetts-Lowell professor and director of the Center for Industrial Competitiveness, spent five years studying how large firms in the information and communications technology sector are creating growth. He also dug into the economic, policy and societal impacts of that growth.

He explains that, in a sense, he looked at the U.S. economy in its best light — at companies in an expanding, highly competitive and globally interconnected industry that provide high-paying jobs — and studied whether or not the major players are delivering stable growth with equitable distribution of income.

He focused on the major actors in the sector — Motorola, Microsoft, Dell, Hewlett Packard, Google and several others — because the firms control such a large allocation of resources in the U.S. economy.

What he found is not altogether encouraging.

In Sustainable Prosperity in the New Economy? Business Organization and High-Tech Employment in the United States, Lazonick “catches us up with history,” explaining how the economy’s transformation over the past four decades has impacted employment and what we can expect in the future.

Over the last 30-40 years, the U.S. economy has seen the death of the “organization man” — stereotypically described as a highly educated, white man enjoying secure, career-long employment with one firm that offers generous pension and other benefit programs — and the rise of the new economy business model that, instead, values innovation, globalization, employment mobility and stock price growth.

While the new economy business model has its pros, including dispersing intellectual talent and innovation through a greater number of companies, creating new avenues to create wealth and improving the standard of living in many countries, it has its drawbacks as well. One major one being the jobless economic recovery created by the increased globalization of the workforce; i.e. outsourcing labor — even high-skill labor — to lower-cost countries.

Lazonick argues that another serious and substantial roadblock to sustainable prosperity in the U.S. is the relatively recent focus on stock price, brought about by the advent of stock options as a common compensation component. Stock options have led corporate leaders to employ stock repurchasing strategies, which, Lazonick contends, benefit executives but drain funding from investments in innovation and human resources, which could lead to true economic growth. Lazonick places a lot of the blame for the current state of the U.S. economy at the feet of corporate executives.

He further contends that the overarching public corporation goal to “maximize shareholder value,” is steering the economy downward rather than producing growth.

William Lazonick

To help correct the course of the U.S. economy, Lazonick calls on policymakers to selectively ban the practice of stock repurchasing to stem the economic damage he believes it creates.

The free market orientation in the U.S. — the notion that whatever corporations decide, they should be able to do — is very destructive to the U.S. economy, Lazonick further argues. He believes the political process has been captured by leaders of corporations who are motivated in large degree by personal gain, and that the implications are widespread since large firms control so much of the allocation of financial and human resources in the U.S. economy.

For a state like Michigan, which is suffering from a century-long reliance on the old economy business model and whose largest firms are being remade in the new economy mold, the research the book uncovers will be critical.

Bookworm Jean B. Eggemeyer owns the Williamston-based communications and marketing firm Carillon Communications LLC, serving the business and association communities.