Bye bye American pie
Behind the crisis in corporate America is a combination of pernicious
Southern conservatism and unadulterated greed, argues Will Hutton.
Sunday June 30, 2002
The Observer
The US faces a grave economic crisis. The confidence in the balance sheets
and reported profitability of American companies has been shattered by an
orgy of unprecedented corporate fraud, plunder and malfeasance that has
demanded the connivance of its most reputable accounting firms, business
leaders and banks. Only last week news broke of the biggest ever accounting
fraud in history at WorldCom, to be followed days later of an epic
accounting swindle at Xerox.
Before them has been a string of others, with Enron the most famous collapse
of all. The integrity of the entire system for channelling savings into
investment is now in question as is that of corporate America, just as
America's debts to foreigners and its own consumers indebtedness have
reached unsustainable levels. The country has been living beyond its means
and inventing value when none existed. No one can predict with certainty how
this will unravel, although the faltering of American consumer confidence
and the sell-off of the dollar are already pointers. The dollar is
threatening to inherit the sobriquet of 'toilet currency' once borne by the
euro.
The US can and eventually will recover, but only when it comes to terms with
the harshest of realities. That it does not possess a uniquely enterprising
economic and financial model. That the scandals now hitting the headlines
are not a case of one or two bad apples, but reveal systemic weaknesses in
its financial system and methods of corporate governance which need
root-and- branch reform. That American business ethics are abysmally low and
require the toughest of policing . And that the US, like other economies
that have pursued unsustainable and foolhardy policies, must go through a
period of painful and difficult adjustment.
This is not just a case of companies fudging a billion here or there, as
President Bush said in his folksy statement on Friday, and hoping nobody
notices, a problem, as he characterises it, of individual ethics rather than
systemic deformation. Rather, this is where America's business culture has
led, legitimised by the conservative ideological barrage now a generation
old which has transformed American public discourse. Everything should and
must be pro-market, pro-business and pro-shareholder, a policy platform
lubricated by colossal infusions of corporate cash into America's
money-dominated political system.
Congresswoman Marcy Kaptur, for example, described the abysmally lax 1996
Telecoms Act, deregulating the telecoms industry and the precondition for
the current scandals in the industry, lobbied for ferociously by WorldCom in
order to unleash market forces, as 'living proof of what unlimited money can
do to buy influence in the Congress of the United States'. The truth is that
American business has bought the American executive and legislature alike.
It is this that makes crafting the right reaction to the crisis so hard. The
Bush administration has become so attached to the conservative revolution
and its attendant free-market fundamentalism that the change in thinking it
must now make threatens to be beyond them, even if its corporate paymasters
would allow it.
The need is to reregulate, to recognise business lobbying is primarily
self-interested and, above all, to insist that successful capitalism is much
more sophisticated and complex than simply letting fat cats get fatter and
diminishing all forms of worker protection. The US will find its way back,
as it has done before, but only when its conservative hegemony and its
compromised ideas have been broken.
This will be a Herculean task, for the rise in conservatism has deep roots.
It is no accident that WorldCom, whose accounting fraud cost $3.8 billion,
was based in Mississippi and was a generous contributor to its hard-line
conservative senator, Trent Lott, minority leader in the Senate, as Ed
Vulliamy reports today. Nor that Enron, whose profits were vastly overstated
by accounting fiddles, was based in Texas and whose relationship with George
Bush was so close.
The states of the Confederacy remain the heartland of the distinct brand of
American conservatism that combines Christian, market and America-first
fundamentalism to a unique degree, reinforced in the South by a legacy of
barely submerged racism.
The rise of American conservatism has closely followed the rise in the
economic fortunes of the Confederacy, together with its belief in a
take-no-prisoners form of capitalism. The new Right thinkers provided the
intellectual cover, providing populist slogans calling for 'freedom',
accusing all forms of government of being 'coercive' and deriding the social
contract as a cause of 'dependency'. It didn't take long before Wall Street
joined in, insisting that the companies should serve the interests of their
owners first and foremost - the doctrine of maximising 'shareholder value' -
and that regulation inhibited 'enterprise'. Bit by bit, the edifice of
Roosevelt's New Deal and Johnson's Great Society programme have been
dismantled to make 'America great' again.
For most of the last decade, the result has seemed impressive, spawning what
may only be transient US leadership of the hi-tech revolution. But now we
can see the underlying weaknesses. Company directors awarded themselves
fabulous share-option schemes and cut corners to manipulate their profits to
meet investors' avaricious expectations, so supporting the share price and
their own fortunes. The ruses were simple, ranging from booking next year's
income as this year's to the sheer fraud, as in the telecoms sector, of
falsifying sales altogether. The result was to propel an already fevered
stock market to yet more stratospheric and unjustified levels: Wall Street
is still valuing American companies more generously that at any time since
1929.
The majority of mergers and takeovers in this stock market-dominated economy
have proved destructive: few add any value and most lower it. Between 1993
and 2000, Wall Street had brought 3,500 small hi-tech companies to the stock
market; even before the dotcom bubble had burst, more than half were trading
below their initial offer price or had gone bust. While dividend
distributions have doubled as a proportion of profits, investment in the
core of American business was troublingly low; the US has less invested
capital per employee than France or Germany.
Productivity is higher in both (the old East Germany excepted) and growing
at least as rapidly. The consequence is America's intractable trade deficit.
Great wealth and opportunity have been the privilege of the few. As the
scandals unfold, ordinary Americans are left naturally concerned about the
integrity of their pensions and the viability of their insurance companies.
The structures that support ordinary peoples' lives - free health care,
quality education, guarantees of reasonable living standards in old age,
sickness or unemployment, housing for the disadvantaged - that Europeans
take for granted are conspicuous by their absence. Mainstream America has
been told that its threadbare and neglected social contract is the price it
must pay for opportunity, liberty and wealth creation. The political
reaction could be fierce if the Democrats have the nous, courage and
leadership to express citizens' concerns.
But the outfall could go further. Britain's political, financial and
business classes have been polluted by the same conservative virus. It is
not just Lady Thatcher, but Tony Blair and Gordon Brown who have
uncritically celebrated America's enterprise culture. Beyond them, many in
Europe have wilted before the propaganda offensive and begun to accept that
Europe's economic and social model is irredeemably weak and that it should
be Americanised.
In truth, the task, as I argue in The World We're In, is to develop a
distinctive European model of enterprise which takes a more rounded view of
what produces organisational success and protects our conception of the
social contract and public realm which are central to European civilisation,
and which all Europeans, despite their surface differences, hold in common
along with the best in the American liberal tradition.
As real fears grow that Britain could experience similar problems, our
establishment has been quick to point out that we are better regulated along
European lines. This notion was decried just a few months ago by many of
those same voices as inhibiting our ability to emulate American enterprise.
Our 'sclerotic' European-ness may be what saves us. We should be relieved
and proud - and build on it.
The World We're In by Will Hutton is published by LittleBrown, £17.99. Buy
it for £14.99 plus postage from The Observer Book Service 0870 0667989.
Capitalism in crisis?
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