On Her 235th Birthday, America Desperately Needs Lean, Open, and Secure Governance

Baby boomers like myself clearly recall the tumultuous years leading up to the Bicentennial of the United States.  The world we grew up in was near the peak of the industrial revolution, dominated by the aftermath of the Great Depression, WW2, and the Cold War.  We were raised in a culture that had witnessed first-hand the power of a unified government, which led to the victory of fascism in our parent’s generation, followed by a round trip to the moon in our own. In the childhood of my generation, nothing was impossible with sufficient government power.

By 1976, however,  America had endured the 1960s cultural revolution, the Vietnam War,  a serious energy crisis, stagflation, and Watergate.  We were experiencing the shocking end to the post war boom, with new revelations that success had a price, military power had limits, government was not always trustworthy, and our industrial economy had a soft underbelly leaking oil.

By the late 1970s, interest rates were skyrocketing, inflation seemed out of control, the Cold War was threatening to become white hot, and U.S. public debt had risen to the shocking level of $900 billion, representing one third of U.S. GDP.  During the next decade of economic expansion led largely by financial engineering and services, the U.S. debt more than tripled in dollar terms, rising to nearly 60% of GDP.

During the 1990s, with the commercialization of the Internet and exponential adoption of computer networking worldwide, the global economy began to shift, but the information revolution did not result in taming the industrial revolution—at least in the short-term, but rather acted as a catalyst in shifting heavy industry from West to East in our never ending quest for growth and scale. The dot-com bubble provided a very brief respite from accumulating debt in the form of capital gains, but it was a one-time gain.

By the late 1990s it became apparent that the unfettered Internet, in ironic contrast to the core message in The Wealth of Nations, offered such disruptive efficiency that many industries would be radically transformed, including the service economy that had become dominant in the U.S.

Meanwhile, global companies became too big to fail, increasingly divorcing themselves from U.S.interests in what became the primary global strategy for risk reduction and growth, which only compounded the challenges facing the U.S. economy.  By extension, regional and national economies dependent on the industrial revolution or services would also need to adopt the efficiencies offered by the new medium in order to avoid eventual bankruptcy.  In modern parlance, the trajectory of our national budget was increasingly in misalignment with the needs of our economy, the super majority of our citizens, and our collective future.

Rather than downsize to meet the new reality and future obligations, the post 9/11 economy witnessed increased liquidity that  “saved the economy” (Alan Greenspan), combined with post war guarantees in banking, systemic corruption, and ideological activism to enable the mega housing bubble, followed by the inevitable correction and almost certain economic depression if not for historic levels of Keynesian intervention. Rather than invest massive stimulus in converting to a sustainable trajectory, however, most of the spending was targeted at populist programs that continued to expand government overhead, thus increasing long-term liabilities, primarily in very temporary form that now leaves regional economies facing an even more challenging future, and citizens faced with much greater national debt; short, mid, and long-term.  The promises made by government during and after the Great Depression were obviously not only unfunded, but increasingly unfundable.

The most recent example of kicking the can down the road has been unprecedented life support from the FRB in financing 70% of the U.S. debt in QE2, while once again warning Congress and the White House to get its long-term fiscal house in order.  The result, once again, was to witness excess liquidity flow to the most speculative markets, not the fundamental investments required to transition to a sustainable economy, confirming that we have yet to address the underlying structural problems.  The cost of avoiding another Great Depression by stimulus and liquidity has been to advance U.S. insolvency by more than a decade; and quite probably more than two.

Port of Call in the Voyage of Fiscal Denial

Regardless of how one interprets the voyage, the destination that our culture is finally beginning to awaken to is tragic. Under what most believe to be an optimistic forecast, the Congressional Budget Office (CBO) warns us that public debt will rise from around 70% of GDP currently to 84% by 2035, with interest payments rising to 4% of GDP from 1% at current levels. This “extended-baseline” scenario is dependent upon a great many things that have not occurred in the past, however, nor are expected by most, including low inflation and a relatively disciplined Congress. The more consensus forecast, or “alternative fiscal scenario”, projects public debt to rise to 100% of GDP by 2021 and 190% by 2035. However, anyone observing financial crises can attest that these events do not occur on an even gradual basis, but rather reach a tipping point.

The warning I offer today is that economists have based their forecasting on comparable situations in very small economies relative to the U.S., not the world’s largest that also manages the global currency, not to mention the only global military power.  Every forecast, scenario, and metric I have observed in economics is based on a very different history than the situation we face today, all of which assumes the post war experience of a stable U.S. economy.

To capture the situation, consider that while each have proposed different remedies, the best economic forecasters of our time, to include investors, Nobel Laureates, current and past FRB chairs, and regardless of party or ideology, all essentially agree that this unsustainable trajectory has nearly reached its pinnacle.  All are raising red flags, and none can (or have to my knowledge) deny that when the herd finally changes course in bond markets, as we’ve seen most recently in Greece, the stampede is swift and brutal.

Lean, Open, and Secure Governance = The Semantic Enterprise

The Levin–Coburn Report found that the financial crisis was the “result of high risk, complex financial products; undisclosed conflicts of interest; and the failure of regulators, the credit rating agencies, and the market itself to rein in the excesses of Wall Street.”

The U.S. Financial Crisis Inquiry concluded that the crisis was caused by:

  • “Widespread failures in financial regulation, including the FRB’s failure to stem the tide of toxic mortgages”

  • “Dramatic breakdowns in corporate governance”

  • Key policy makers “ill prepared for the crisis, lacking a full understanding of the financial system they oversaw”

  • “Systemic breaches in accountability and ethics at all levels”

In early January of 2008, former GAO Director David Walker suggested that four types of deficits caused the underlying fiscal problem: budget, trade, savings, and leadership. While these four causal factors are without question, I suggest that all of our deficits depend upon the integrity of governance structure, including our increasing deficits in knowledge, competitiveness, security, and happiness.

The only reliable method to achieve a sustainable governance infrastructure in the network economy is with semantic enterprise architecture, which is based on many years of research and testing. For a brief video description of the semantic enterprise, see my elevator pitch, and for a more in-depth discussion, view this keynote at the recent SemTech conference by Dennis Wisnosky on the transformation of the DoD.


HBR continued.. Capitalism or Wall Street

Andy Rappaport posted an article to the HBR debate on U.S. competitiveness: Outsourcing, the Culprit is Capitalism, not Wall Street

My comment:

Valuable comments. One of my primary criticisms of Wall Street in the past decade, and some of their largest clients, has been an enormous unproductive use of capital.

While Alan Greenspan has earned his criticism, at least his ideology was based on a belief that large investors would choose self-preservation over systemic suicide, rather than the more cynical view that has so often been rewarded in recent years. I long ago tested self-regulation in micro markets, so was not surprised, however sickening. But the FRB did not direct the fire hose of gasoline even if they provided much of the fuel, and refused to manage the blaze, much less prevent it.

At precisely the time when the U.S. badly needed to redirect investment — both public and private — to improve upon future competitive pressures already well under way, instead Wall Street elephants brokered trillions in unproductive, counter productive, and self-destructive assets.

At the early stages in technology venturing, deployment of capital wasn’t much better as a similar misguided philosophy of activism and emotional dysfunction ruled.

I personally find the excess in outsourcing to be sourced in a similar failed ideology — that somehow the end justifies the means — that to kill the golden goose is somehow justified. The convenient emotional delusion aligning with short-term greed and peer pressure within careerism simply doesn’t mesh with the math — my 8th grade math teacher hobbling on two crutches from his WW2 contributions knew better.

Jeffrey Liker raises a very interesting point — we developed a state of the art holistic system with a global leader in mind, and when I presented it to the chairman of the board — he said that their internal scientists had looked at the issue (for the sake of this point let’s call it knowledge systems), and deemed it impossible. Of course the same was said of his founder decades earlier, and neither were accurate fortunately, but I agree Jeffrey — the only reason I have been able to find at all for those in government and global companies in refusing to adopt holistic systems makes me very uncomfortable indeed — which is that they don’t want to prevent crises, improve performance, and increase both meritocracy and accountability.

One final comment that I haven’t seen raised here, and it should be raised. I firmly believe that one of the key drivers of excessive outsourcing has been what is largely invisible protectionism; that is the implication by governments in a few of the highest growth markets that goes something like this: if global companies want access to these markets — representing the vast majority of growth worldwide — and don’t want to face a government backed if-not-owned competitor, then we best see not only factories dotting the skyline, but research centers as well.

While the U.S. is certainly far from pure in trade, I do believe that the comparison to the NZ experiment in free trade is valid. We all know that trade is rarely free, but to ask (demand) that U.S. tax payers subsidize the exportation of future competitors whether through R&D deals with global corps, universities for decades, and/or tax incentives — is well beyond acceptable for this son of a lifer in the military who sacrificed in two wars, bringing his grief home to his family.

The problem isn’t capitalism — the problem was the scum that too often rose to the top of firms feeding off of capitalism, creating a culture that would not allow cream to rise to decision levels across their sphere of influence. I was so ashamed that I almost relocated permanently in protest. It has been a disgrace.