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Countries Are Not Like Corporations

January 21, 2012, 2:02 PM
Shutterstock_76682167

Mitt Romney has experience that Barack Obama doesn’t. For all his obvious gifts, Obama has no real experience running private companies, while Romney is one of the most accomplished business people of his generation. As a management consultant at Bain, Romney was at the forefront of a revolution in the way we do business. Romney’s management experience is central to his pitch for why he should be president. As an expert in turning round companies, he contends he is particularly qualified to turn around a flagging economy.

But countries are really not very much like corporations. The job of corporate management is to create value for shareholders by increasing the value of the output of and lowering the cost of employing the people who work them. Whether jobs are created or lost is a secondary concern to consultancies like Bain. But you can't increase the national bottom line by firing workers or paying them less. A nation’s workers—its citizens—are also both its shareholders and its main customers. A country’s economic success is measured not by the profit its government makes, but by the wealth it returns to its citizens. It’s not the same thing.

Paul Krugman made this point again recently in an op-ed piece for the New York Times. I say “again” because it’s basically the same point he made years ago in a well-known article almost 20 years ago in Foreign Affairs, in which argued that countries are not in competition with one another the way corporations are. As he wrote in the New York Times, there are a number of key differences between countries and private companies:

For one thing, there’s no simple bottom line. For another, the economy is vastly more complex than even the largest private company.

Most relevant for our current situation, however, is the point that even giant corporations sell the great bulk of what they produce to other people, not to their own employees—whereas even small countries sell most of what they produce to themselves, and big countries like America are overwhelmingly their own main customers.

Yes, there’s a global economy. But six out of seven American workers are employed in service industries, which are largely insulated from international competition, and even our manufacturers sell much of their production to the domestic market.

What that means is that what works in a private company won’t work in a sovereign nation. As Krugman wrote,

Consider what happens when a business engages in ruthless cost-cutting. From the point of view of the firm’s owners (though not its workers), the more costs that are cut, the better. Any dollars taken off the cost side of the balance sheet are added to the bottom line.

But the story is very different when a government slashes spending in the face of a depressed economy. Look at Greece, Spain, and Ireland, all of which have adopted harsh austerity policies. In each case, unemployment soared, because cuts in government spending mainly hit domestic producers. And, in each case, the reduction in budget deficits was much less than expected, because tax receipts fell as output and employment collapsed.

This same confusion is at the heart of the simplistic idea of rich investors as “job creators.” Investment certainly can under many circumstances create jobs. But the interests of investors and the interests of workers are not at all the same. One of the key ways investors make money is by cutting labor costs—by firing workers or paying them less. That’s why the stock market generally rises on the news that wages are falling. If investors could reduce labor costs to zero by firing everyone and using machines that run themselves, they would. An economy entirely run by robots might be very productive in some sense. But the people who didn’t own the robots would be very poor, and they wouldn’t be able to buy anything the robots produced.

Mitt Romney is a very smart man. He may well be able to master the task of running an economy. Presidents never really have much experience running an economy before they take office anyway. As Krugman pointed out, “being a career politician isn’t necessarily a better preparation for managing economic policy than being a businessman.” But it's important to understand that microeconomics and macroeconomics are very different things. And running a country is really not like running a business.

U.S. flag on a pole image from Shutterstock

 

Countries Are Not Like Corp...

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