Vicious Circles

Last September, President Bush asked Americans to keep shopping. It was our patriotic duty. Attractive pricing and financing helped sell thousands of automobiles and other big-ticket goods. By waving the flag in one hand and a Visa card in the other, we’d show those b***ards who would come out on top. And what good patriots we are: Consumer spending is responsible for two-thirds of our economic activity, and it kept the 2001 recession from becoming a full-blown disaster.

But while consumers took the President’s message to heart, many corporations didn’t. Scandals aside, the stock market is still a mess, and the typical corporate response has been the short-term fix: Slash the workforce, cut projects, scale back R&D investment, eliminate capital expenditures. Of course, this makes profit margins look healthier (even without suspicious accounting). Cutting excess fat makes sense, but there’s a difference between healthy weight loss and anorexia.

The U.S. Commerce Department reported that personal consumption spending rose by 0.3% in August, after a full 1% surge in July. The good news is that it’s still rising, albeit at only about 60% of the rate economists had forecasted for the month. Americans’ income growth picked up a little (0.4%) in August, but amid warnings of possible layoffs to come. That’s something to be wary of, because if consumers get worried about their jobs, they’re going to pare back spending, patriots or not.

Enter the vicious circle: If consumers pare back spending, and the economy slows, businesses will rein in even more. More people will worry about being laid off, so more people will cut back spending, which slows the economy even more, and so on.

The circle can be broken, but it will take a willingness to change our mindset. Americans born after World War II are wired for immediate gratification, not long-term reward. Baby Boomer narcissism says, “I want it all, I want it now, and I deserve it just because I’m me.” Generation X, which grew up with Watergate, the ’70s energy crisis, and AIDS, says, “I want it all now because who knows what will happen tomorrow?” Generation Y, the kids coming of age now and over the next 10 years, were practically born with mouse in hand, multitasking before kindergarten. They can’t even conceive of a world where things don’t happen instantly at the touch of a button.

Here’s a radical thought: What if America’s top corporate executives didn’t get bonuses until five years had elapsed and proven them worthy? The five-year plan would hold top executives accountable for fostering long-term growth, not just bumping up this year’s earnings-per-share. It would show who sees the big picture and who can’t see past the quarterly balance sheet. It would reward decision makers for innovation and leadership, not just cutting their way to prosperity.

Wall Street’s demands for consistently higher earnings-per-share breed executives who focus solely on driving those numbers any way they can, but when creativity, development, and loyalty take a back seat to stock price, the vicious circle widens. That’s when a small entrepreneur—who doesn’t have all those analysts sitting on his head—sees an opportunity for innovation. Customers who are bored or annoyed at paying the same price for a product that’s been scaled back give the entrepreneur’s product a try. Suddenly, the market leader has to spend money to protect his position, when it would have been easier and more cost effective not to lose it in the first place.

We’ve refused to let vicious terrorists defeat us. Let’s make sure we don’t let a vicious circle of our own making defeat us, either.

hschupak@reedbusiness.com