Why We Are In Political Gridlock: The Private Sector Is Dying

The fact that the so-called Super-Committee of Congress has failed to reach agreement on a budget deal will surprise no one. The underlying reason why no deal was reached surprises almost everyone: the private sector is dying.

The pretexts for the gridlock

Barring something unexpected before today�s deadline, the Congressional deficit committee�s failure will be the third in the last 12 months. By law, the Committee�s inability to reach an agreement will trigger $1.2 trillion in automatic spending cuts over 10 years starting in 2013.

The positions of the two political parties for the failure are well-known:

• Democrats blame Republicans for their unwillingness to yield on a no-new-taxes pact they signed.
• Republicans blame Democrats for being unwilling to deal with the problems facing social programs like Medicare and Social Security.

These are merely pretexts.

The failure of the economy to grow

The reality is, as I explained in my last article, �Peggy Noonan On Steve Jobs And Why Big Companies Die�, that the salesmen and the accountants have taken over America�s big companies and they are dying. They are no longer able to innovate and create organic growth.

If only one or two big firms had fallen into this mode, we would be dealing with a few rotten apples. When it�s most big firms, we are dealing with almost the whole barrel. When almost all the big companies are dying, we don�t just have a serious management problem. We have an economic catastrophe.

Thus the issues that I depicted in individual companies are also reflected in the national statistics. When economists add up all the things that the economy produces, they find that the economic pie simply isn�t growing fast enough to meet our collective needs. When push comes to shove, the economy isn�t providing a good living for all its citizens. The economic dysfunction that people see in their personal lives flows from this fundamental fact.

Similarly at the national level, the political parties might blame each other, but in the end there is no way for politicians to slice the current economic pie in a way to make things better for everyone. Hence, gridlock. When the economy is barely growing, politicians find themselves fighting a bitter zero-sum game. The problem has been aggravated by growing income inequality and a declining interest in doing things for the common good, but beneath it all, there is a simple problem: the economic pie isn�t growing fast enough.

Don�t blame the public sector

The idea that the overall economic decline is due to the growth of the public sector is widespread but incorrect. Shrinking the government will do nothing to solve the underlying problem of low economic growth. In the short term, it will aggravate it.

The reality is that the private sector itself�the engine of economic growth�is producing only a quarter of the rate of return on assets (ROA) or the rate of return on invested capital (ROIC) that it was in 1965. This mirrors the decline in GDP. The Shift Index�Deloitte�s magisterial study of 20,000�covers US firms from 1965 to 2010.

When we learn that the private sector is doing so poorly, it�s tempting to question the messenger and claim that the wrong indices have been chosen. This argument goes nowhere, because alternative indices show that the situation is actually worse.

When questioning the statistics doesn�t work, then it is tempting to try to find someone to blame.

One might try blaming the president for failing to restart the economy after the 2008 meltdown. But he is just the current incumbent of a system that has been in decline for several decades.

One might try blaming the public sector for �crowding out� or �over-regulating� the private sector, but again, this doesn�t get to the heart of the matter. When private sector firms have currently over a trillion dollars in excess working capital on their balance sheets, it is hard to see how the private sector is being crowded out. The private sector has continued its magisterial decline in both Republican and Democratic administrations, both when government was cut back and regulation was strengthened and when the opposite occurred.

If we think carefully, we can see that merely blaming some person or group isn�t going to deal with problems of the longevity and depth that we currently face. If a factory or an organization or even a government is torn down but the rationality which produced it is left standing, then the same rationality will simply produce another factory or organization or government. The real task at hand is to understand the rationality that led to this debacle and change it.

The world changed but management didn�t

Why is the private sector�once the pride of America and the engine of economic growth�getting much lower returns on assets and capital than it used to get?

The reason for that is not that the managers have forgotten how to manage. The primary reason is that world has changed and management hasn�t.

Half a century ago, big firms were in charge of the marketplace. They could dictate terms to customers. Customers had few choices and imperfect information. Large hierarchical bureaucracies pursuing economies of scale and pushing products and services at customers were fairly effective in dealing with such a world.

Then the world changed. At first slowly and then, in the last decade, rapidly. Customers now have many choices and instant access to reliable information about those choices and can share views with other customers. As a result, there has been an epochal shift in power from seller to buyer. Now large hierarchical bureaucracies are no longer nimble enough to cope with a world in which the customer is effectively in charge. If customers are not delighted, they can and do go elsewhere. In order to delight the customer, a firm needs continuous innovation.

What is �management�?

When I use the word �management�, you probably think of bosses who tell people what to do, in boring meetings with plans and reports and processes, where efficiency is the name of the game, where somehow the real issues never seem to get addressed and where most people are disgruntled. You may well think of Dilbert-style management where even intelligent, highly educated people persistently act stupidly.

We have come to have in our minds a very specific notion of what the word �management� means, based on the practices of large organizations throughout the 20th Century. This way of thinking about management is so ingrained in us that it is sometimes hard to imagine that there could be anything different�a world where the people for whom the work is done are thrilled and where the people doing the work are having a ball and where the company is also making a ton of money.

There is another way

But there is another way to manage. Fortunately Steve Jobs lived long enough to show us at Apple [AAPL]: what would happen if a firm opted to focus totally on adding value for customers?  The result? The firm makes tons and tons of money. In fact, much more money than the companies that are milking their cash cows with the goal of making money.

When a firm delights its customers, it starts growing, independently of any business cycle, because it creates its own demand.

And it�s not just Apple  [AAPL]. Other companies like Amazon [AMZN], Salesforce [CRM] and Intuit [INTU], have demonstrated the same phenomenon and shown us that this is something that any firm can learn. These firms have found ways to continuously add value to customers and deliver that value sooner. It�s not rocket science. It�s called radical management.

See also: The Dumbest Idea In The World: Maximizing Shareholder Value

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Steve Denning�s most recent book is: The Leader�s Guide to Radical Management(Jossey-Bass, 2010).

Follow Steve Denning on Twitter @stevedenning