No Way To Run A Business
And more from this week in America...
One of my favorite facts about business strategy is that, per the Harvard Business Review, “M&A is a mug’s game, in which some 70% to 90% of acquisitions are abysmal failures.” Yet every empire-building CEO is eager to pursue them, boards of directors reliably sign off, and waves of investment bankers and consultants, who happen to be good friends with the CEOs and directors, happily collect their fees at every step along the way. The bankers and consultants go on to be CEOs, the CEOs to be directors, and so on. Mergers pay for summer houses; failed ones do not lead to foreclosures.
The pattern repeats through all manner of faddish business trends. There’s the trillions of dollars invested in private equity and hedge funds, which perform no better than passive index investing. (“Pensions piled into private equity. Now they can’t get out.”) Who can forget the SPAC craze? (“Company insiders made billions before SPAC bust.”) For twenty years, companies moved to China, juicing short-term profits and executive payouts with no concern for the long-term future let alone the workers and communities left behind. I recently told the story of how Elon Musk became the richest man in the world by handing Tesla, and leadership in electric vehicles, to China.
ONE THING TO READ
So this week, I highly recommend reading the Wall Street Journal’s report, “Boeing Calls Time on the Great American Outsourcing.”
You see, back in 2005, Boeing sold its Wichita and Tulsa operations to a Canadian private equity firm for about $1 billion, creating Spirit AeroSystems, to which Boeing could then outsource the manufacture of fuselages. As the Journal explains, “The IT revolution, together with the rise of consultants and business schools, had made outsourcing fashionable. … At the core of the outsourcing trend, however, was the idea that an ‘asset-light’ firm focused on intellectual property and its ‘core’ expertise would be better run. With this mindset, jettisoning aerostructures operations seemed like a no-brainer.”
Aggressive outsourcing—”Boeing outsourced more than 70% of the 787 Dreamliner program,” notes the Journal—has been a disaster for the company, and for American industry broadly. Now Boeing is paying about $5 billion to reacquire Spirit. “Spirit’s round trip back to Boeing was borne of desperation,” the story concludes, “yet it captures the zeitgeist.”
Market fundamentalists are well practiced at reciting every instance of bad public policy as evidence that government must not “interfere” in the market or “pick winners and losers.” Policymakers supposedly lack both the knowledge and incentives to get anything right. Yet purportedly profit-maximizing corporate executives seem every bit as bad at their jobs, often know even less, and often have worse incentives. None of this argues for the government to take over the market, but it does underscore the absurdity of the blind faith in market forces that conservatives have long been ordered to espouse. Real life is rather more complicated.
Bonus Link: Of course, with Boeing in particular, it does seem rather relevant that the company lapping it in the commercial aerospace market is Airbus, born of a consortium of European governments. American Compass published a thorough case study of that development.
Bonus Bonus Link: This week on the Odd Lots podcast, a deep dive into the success of Embraer, the Brazilian national champion created in 1970 and privatized in the 1990s, which likewise appears rather better run than Boeing.
THIS WEEK AT AMERICAN COMPASS
The Compass Point is from Sergei Korol, a Belarusian activist who received political asylum in the United States in the 1990s, on his experience watching neoliberalism undermine America’s greatest strengths: Stranger in a Strained Land.
The economic philosophy that I so admired, combining healthy individualism with respect for the commons, gave way to the sort of oligarchic enrichment that would have been more familiar in the former Soviet republics. In both the corporate world and popular culture, artificially fueled stock-market booms promoted a view of capitalism as a form of legitimate gambling. After I was transferred to a work assignment in Asia, removed from the daily surroundings of the nation in decay, seeing it during visits home was all the more shocking—in the ever-widening girths of the people, aging infrastructure, personal acquaintances falling victim to opioid abuse.
ALSO ON THE COMMONS
Micah Meadowcroft writes on immigration, asking, “If taxation without representation merited a war for independence, what is a citizenry to do when they have no voice in who will be their neighbors?”
Michael Cuenco considers the place of car dealers in the modern American political economy after a devastating cyber-attack on the private-equity-owned company that provides their software.
And, on the American Compass Podcast this week, Dean Ball joined me for a discussion of his recent Compass Point, Move Fast and Make Things, on the role of AI-driven innovation in an American manufacturing renaissance.
WHAT ELSE SHOULD YOU BE READING?
In The Atlantic, Alec MacGillis has a fascinating piece about resistance to school choice among rural Republicans. Public schools tend to be the anchors of their communities and few good private options exist. When Koch-funded canvassers show up to push vouchers, it… doesn’t go well. It’s a good illustration of the gap between the donor-class libertarianism that has dominated the American right-of-center and the more prudential and genuine conservatism in the real world.
I’m highlighting this next piece on child-free weddings partly because they’re a pet peeve of mine and I wish to endorse and foist upon all of you the author’s perspective. But I’ll add a broader point, which is that while conservatives are very good at shrugging things off as “a culture problem,” that is usually code for “something my tax cut proposal probably won’t solve, so let’s ignore it.” The decline of family formation and child-rearing in the United States is obviously both an economic and a culture problem, but that’s not a reason to shrug, it’s a reason to offer concrete solutions along both dimensions. Those don’t always have to be policy proposals. But they should highlight specific problems and offer real responses: Have kids at your wedding. Let others know you’re disappointed if they don’t. Ew, no, how gauche… How else does culture change?
The New York Times profiled one of my favorite Democrats, Rep. Marie Gluesenkamp Perez, from Washington’s third district. There’s a small set of Democrats hoping to get their own party focused back on the priorities of common citizens before Republicans like Marco Rubio and J.D. Vance solidify that position for conservatives. Another good example is Rep. Jared Golden, from Maine’s second district, who surged into the news this week with his op-ed, “Donald Trump is going to win the election and democracy will be just fine.” For all sorts of reasons, I think they face a harder uphill climb than the Republican reformers; probably an insurmountable one. But that’s a discussion for another day. For now, they’re worth paying attention to.
Finally, a couple of helpful snapshots of American politics in this fragile moment:
From the Left, the director of the Aspen Institute’s Philosophy & Society Initiative recounts the scene at the Aspen Ideas Festival as progressives tried and failed to process President Biden’s debate disaster in real time.
From the Right, David Brooks interviews Steve Bannon about populist trends here and abroad and possible directions for a second Trump administration.
Enjoy the weekend!
If you’re new to Understanding America and would like to learn more, please start with my introductory post: Welcome to Understanding America.
If you think David Brooks represents the right, you don’t have a clue about what the true right stands for. Brooks is a NYT republican, so in other words a liberal approved, watered down republican, not even close to a true representation.
Maybe, just maybe if Democrats would for once listen to the concerns of the working class they wouldn’t be on the brink of an historic loss. It's clear that both the crazy right and the crazy left have given up on analyzing issues individually based on facts and are in herd mentality mode. As a lifelong Democrat who always thought he was mildly liberal I am most disappointed in the wokeness epitomized by my own party. Men can actually become women and belong in women’s sports, rest rooms, locker rooms and prisons. Our borders should be open to billions. We discriminate against whites, Asians and men to counter past discrimination against others.
Children should be mutilated in pursuit of the impossible.
Crime and homelessness destroy liberal cities because politicians won't say no to destructive behavior. The list goes on and on. Enough.