Schumpeter's notebook

CRITICS of management consultants in general, and McKinsey in particular, can find a nice nugget in the New York Times's profile of General Electric:

IN the buoyant years before the credit crisis, the company’s finance arm contributed nearly half of G.E.’s overall profits. When Mr. Immelt had qualms about the unit’s risks, he sought outside opinions, including ordering up a study by the consulting firm McKinsey & Company in 2007.

Sixty days later, the consulting team, he says, told G.E. that money from nations with a trade surplus, like China, and sovereign wealth funds, among other investors, would provide enough liquidity in the financial system to fuel lending and leverage for the foreseeable future. (McKinsey declined to comment on the study.)

A COUPLE of years ago I attended at a dinner at the American Enterprise Institute at which everybody, with the notable exception of Michael Barone, banged the anti-immigrant drum. So I'm delighted to note that at least a few people on the right are trying to change the conversation a little, and are realising, however belatedly, that America needs to compete for the world's intellectual talent.

Here is Nick Schultz at the American Enterprise blog:

It is well-known that, for generations, America attracted Europeans, Asians, South Asians, and others to come here, learn, and in many cases start and build businesses. Modern Silicon Valley wouldn’t have been possible without this dynamic. Less well-known today is that increasing numbers of Indians, Chinese, and other talented students studying in the United States don’t plan to grow roots here. They sense more opportunity outside the United States. And they don’t want to put up with the hassles of current US immigration law.

And here, amazingly, is Katrina Trinko talking sense from deep inside the belly of the beast, the National Review online:

With unemployment so high, it’s time to look outside the box for new ways to create jobs. My suggestion is that we pass legislation letting more foreign entrepreneurs enter the country via start-up visas, which would give two-year visas to any entrepreneur backed by investors who was committed to hiring five or more Americans.

DAVID BROOKS has a dispiriting, and undoubtedly correct, opening to his latest column:

This has been a great month for conversation. The Bipartisan Policy Center and the chairmen of the fiscal commission released big plans for reducing debt and reforming government. This has set off a deluge of interesting commentary about how we should govern ourselves in the coming century.

But is any of this going anywhere? Are any elected officials actually going to follow through on these plans? Has anybody discovered a political formula to get spending cuts, tax increases and other reforms through the Congress?

I’ve spent the past few days calling Congressional leaders and other budget mavens to get an answer to that question. The answer is No.

Mr Brooks explains this refusal to deal with fiscal incontinence in terms of the psychology of American elites. I would prefer to explain it in terms of the working of the political system. Throughout the 20th century American parties were defined as much regionally as ideologically: there were southern conservatives in the Democratic party, northern liberals in the Republican Party, and party bosses, using the tools of patronage and persuasion, could smooth over ideological differences. But the parties are now almost entirely defined by ideology, with the Republicans committed to cutting taxes and the Democrats committed to defending welfare programmes. Combine ideological polarisation with a political system based on checks and balances and you have the perfect recipe for gridlock.

The result will almost certainly be a disaster. I would put the chances of American dealing with its budget problems before the market forces them to do so, with a shock that will resound around the world, as at about zero.

DO GOOD looks help you get good jobs? I came across an interesting study (yes, there are such things) in the New York Times that demonstrated that men enjoy a much higher "beauty premium" than women. Attractive men (who included their photos with their CVs) got almost twice as high a "call-back" rate as plain-looking men. Attractive women enjoyed no such premium.

The researchers suggested that the best explanation for the lack of a female beauty premium was female jealousy. So much for the sisterhood.

FAST COMPANY has a fascinating, and mercifully unsnobby, article on McDonald's, a company that has been booming for the past few years, but is determined to do even better. It is fascinating to learn how much emphasis McDonald's puts on innovation and design; it is also fascinating to learn how much effort it devotes to learning from its franchisees (and how difficult it is for this supposedly homogenous organisation to get franchisees to sign onto new ideas).

A taste from a rich menu (the Weil in question is Denis Weil, VP of Concept and Design:

Weil has created what he calls a "living network" where ideas bubble up from McDonald's global partners -- owner-operators, suppliers, outside design firms -- and are relentlessly filtered and tested by Weil and his team. "One of the strengths of my job is to conceptualize what happens in the marketplace and distill the principle out of it," Weil explains. This year, he will host representatives from 25,000 restaurants at his Innovation Center, in Romeoville, Illinois, to propagate the best ideas systemwide. "This is not snazzy stuff," Ideo's Brown says, "but McDonald's has become one of the few companies that does design management well." Thompson says of Weil, McDonald's most senior design exec ever: "He's become our centerpoint. We never really had that."

ANNE APPLEBAUM has written an interesting column on meritocracy, in which, among other things, she chastises the conservative movement for its repeated assaults on educational elites, not least people who went to Yale.

Ms Applebaum arguably understates her case. She could have pointed out that American conservatism is currently being disfigured not just by populism, but also by nepotism. The neo-conservative movement is dominated by the children of the founders, the so-called mini-cons. Commentary is now edited by the son of its longest-serving editor, John Podhoretz. Adam Bellow, Saul's son and one of the stars of conservative publishing, has even written a (rather good) book justifying nepotism.

And conservatives have generally made fools of themselves in replying to Ms Applebaum. They have criticised her for committing such unforgivable sins as attending Yale and living in Poland. They are not against real meritocracy, they argue, just the sham meritocracy that America now embraces, which is why they rail against anybody who happens to have a PhD but make endless excuses for numbskulls such as Christine O'Donnell, that great constitutional scholar, and Sarah Palin, that great historian of the Founding Fathers.

Still, I think that the debate about the state of America's meritocracy is actually much more interesting than Ms Applebaum allows, and actually cuts more in favour of the tea-partiers than their critics.

The American meritocracy has recently entered its triumphalist phase. It elected its first pure blood member as president (Bill Clinton, though probably cleverer than Mr Obama, had other personas, including that of the good ol boy). It enacted some of its most cherished programs, not least health-care reform. It has happily thumbed its nose at popular prejudices about gay marriage, the ground-zero mosque, deficit spending, etc.

That would be fine if Ms Applebaum's portrait of the meritocracy, with universities welcoming high IQ types and allocating them to productive jobs in a thriving society, were accurate. But in fact this triumphalism is oddly timed, to put it mildly. The past few years have seen the best and brightest, obsessed by clever academic models, wreaking havoc in one area after another. The products of America's elite business schools were responsible for introducing complicated financial tools that almost wrecked the economy, for example: at the height of the financial boom more than 40% of the graduates of Harvard Business School and the like went into the financial-services sector.

America's meritocracy is also in danger of calcifying into a caste, decorated with a few members from favoured minorities, but cut off from the great mass of the population. The social hierarchy is getting both steeper and harder to climb. Poor children are finding it harder to find a good education, thanks in part to the innovation-destroying power of the teacher's unions. Ms Applebaum celebrates America's universities for opening themselves up to people from all backgrounds. In fact, there is mounting evidence, brilliantly marshalled in Daniel Golden's "The Price of Admission: How America's Ruling Class Buys its Way into Elite Colleges—and Who Gets Left Outside the Gates", that, after a period of outreach, America's universities are pulling up the drawbridge once again. They are stuffed full of the children of the elite, going out of their way to recruit the offspring of alumni, celebrities, potential donors and the well-connected, and are increasingly out of reach of the white working class.

I have tried to substantiate these arguments in several articles in The Economist, particularly "Ever higher society, ever harder to ascend" and "Poison ivy". I have also written at length about the history of the idea of merit in "Measuring the Mind" (Cambridge University Press), in case anybody is interested.

NATIONAL AFFAIRS is shaping up to be a worthy successor to "The Public Interest", one of the great periodicals of the post-war era.

The current issue contains a superb essay, by Daniel Disalvo, on America's public-sector unions, which have an extraordinary power to force the state to dance to their tune, squashing innovation, reducing productivity and undermining competitiveness. Given that America needs to reinvent much of its antiquated state apparatus, particularly its schools, if it is to remain competitive with the emerging world, I suspect that the country's future depends on its ability to master, or sideline, these ever-mightier institutions. Some choice extracts:

The rise of government-worker unionism has also combined with the broader transformation of the American economy to produce a sharp divergence between public- and private-sector employment. In today's public sector, good pay, generous benefits, and job security make possible a stable middle-class existence for nearly everyone from janitors to jailors. In the private economy, meanwhile, cut-throat competition, increased income inequality, and layoffs squeeze the middle class. This discrepancy indicates how poorly the middle class has fared in recent decades in the private economy, which is home to 80% of American jobs. But it also highlights the increased benefits of government work, and shines a spotlight on the gains public-sector unions have secured for their members. Perhaps this success helps explain why, on average, 39% of state- and local-government employees belong to unions. (Differences in state and local laws of course mean that the percentage varies from state to state; New York tops the chart with roughly 70% of state employees in unions, while many Southern right-to-work states hover in the single digits.)

For a case study in how public-sector unions manipulate both supply and demand, consider the example of the California Correctional Peace Officers Association. Throughout the 1980s and '90s, the CCPOA lobbied the state government to increase California's prison facilities—since more prisons would obviously mean more jobs for corrections officers. And between 1980 and 2000, the Golden State constructed 22 new prisons for adults (before 1980, California had only 12 such facilities). The CCPOA also pushed for the 1994 "three strikes" sentencing law, which imposed stiff penalties on repeat offenders. The prison population exploded—and, as intended, the new prisoners required more guards. The CCPOA has been no less successful in increasing members' compensation: In 2006, the average union member made $70,000 a year, and more than $100,000 with overtime. Corrections officers can also retire with 90% of their salaries as early as age 50. Today, an amazing 11% of the state budget—more than what is spent to educate California's nearly 6.3 million public-school students—goes to the penal system. Governor Arnold Schwarzenegger now proposes privatizing portions of the prison system to escape the unions' grip—though his proposal has so far met with predictable (union supported) political opposition.

Yet as skilled as unions may be in drawing on taxpayer dollars, many observers argue that their greater influence is felt in the quality of the government services taxpayers receive in return. In his book "The Warping of Government Work", Harvard public-policy scholar John Donahue explains how public-employee unions have reduced government efficiency and responsiveness. With poor prospects in the ultra-competitive private sector, government work is increasingly desirable for those with limited skills; at the opposite end of the spectrum, the wage compression imposed by unions and civil-service rules makes government employment less attractive to those whose abilities are in high demand. Consequently, there is a "brain drain" at the top end of the government work force, as many of the country's most talented people opt for jobs in the private sector where they can be richly rewarded for their skills (and avoid the intricate work rules, and glacial advancement through big bureaucracies, that are part and parcel of government work)....

Thus, as New York University professor Paul Light argues, government employment "caters more to the security-craver than the risk-taker." And because government employs more of the former and fewer of the latter, it is less flexible, less responsive, and less innovative. It is also more expensive: Northeastern University economist Barry Bluestone has shown that, between 2000 and 2008, the price of state and local public services has increased by 41% nationally, compared with 27% for private services....

HOWARD KURTZ is an infuriating figure. I dislike what he does (gazing at other journalists' navels) while at the same time finding it irresistible.

His profile of Paul Krugman, in the Washington Post, is more irresistible than usual, because Krugman is such a compelling figure, an irritant who has got some very big things right. The profile includes a nice quote from George Will: "If certainty were oil, he'd be Saudi Arabia". It also includes a fact worth savouring: Krugman was once asked to take over the writing of a presidential report from Larry Summers because Larry "was not very good at being tactful".

The most damning fact in the piece is that Mr Krugman was once a backer of John Edwards, an error of judgment that might have persuaded a lesser man to abandon political prognostication.

ANN BERNSTEIN'S new book, "The Case For Business in Developing Economies" (Penguin) is one of the best books on business and development in recent years. Ms Bernstein demonstrates, beyond doubt, that companies, rather than governments or aid agencies, hold the key to prosperity in the developing world; she also lays numerous body blows on anti-business NGOs, aid tsars, soft-headed academics and whingeing do-gooders (I should say that I was one of several people who blurbed the book).

Clive Crook, formerly of this parish, has some comments on the book and a link to a Cato Institute podcast:

Ann Bernstein of South Africa's Centre for Development and Enterprise gave a talk about her new book—The Case for Business in Developing Countries—at the Cato Institute yesterday, and I was her discussant. I like the book a lot. It gives a view from the developing world of the centrality of private enterprise in economic growth and social progress. It makes some well-targeted and intelligently nuanced criticisms of rich-country anti-business NGOs and the corporate social responsibility movement. Multinational corporations, she says, should stop apologising for capitalism and be more forthright about the benefits.

FLYING cars don't come any cooler than this: click here to see the spectacular image. Some of the business thinking behind the Transformer, as the car is known, is as follows:

AAI Corporation, a Maryland-based aerospace and defense company, won a $3.05 million contract with Darpa to see if it the technology behind the Transformer can, well, get off the ground, Aviation Week reports. Based on so-called “compound helicopter” technology that the company is developing with Carter Aviation Technologies, the gist is that AAI’s design for the Transformer envisions it to carry four soldiers on the road as a car, but the rotor blades on top allow it to take off vertically into the air. The car’s takeoff functions are supposed to be automated, so soldiers or marines don’t have to be aviators to get it off the ground.

The military has been the incubator of many world-changing innovations, including the internet; can the commercial flying car be far behind?

I HAVE to psyche myself up before reading articles by either Malcolm Gladwell or Michael Lewis: Mr Gladwell because I cannot escape the feeling that he is pulling the wool over my eyes; Mr Lewis because he is just so damn good at what he does.

Mr Lewis tells the story of how a group of bearded monks at the Vatopaidi monastery managed to accumulate billions of dollars with his characteristic skill. But he also exudes a wonderful sense of moral outrage at the state of modern Greece,

Here is a taste:

Thousands upon thousands of government employees take to the streets to protest the bill. Here is Greece’s version of the Tea Party: tax collectors on the take, public-school teachers who don’t really teach, well-paid employees of bankrupt state railroads whose trains never run on time, state hospital workers bribed to buy overpriced supplies. Here they are, and here we are: a nation of people looking for anyone to blame but themselves. The Greek public-sector employees assemble themselves into units that resemble army platoons. In the middle of each unit are two or three rows of young men wielding truncheons disguised as flagpoles. Ski masks and gas masks dangle from their belts so that they can still fight after the inevitable tear gas. “The deputy prime minister has told us that they are looking to have at least one death,” a prominent former Greek minister had told me. “They want some blood.” Two months earlier, on May 5, during the first of these protest marches, the mob offered a glimpse of what it was capable of. Seeing people working at a branch of the Marfin Bank, young men hurled Molotov cocktails inside and tossed gasoline on top of the flames, barring the exit. Most of the Marfin Bank’s employees escaped from the roof, but the fire killed three workers, including a young woman four months pregnant. As they died, Greeks in the streets screamed at them that it served them right, for having the audacity to work. The events took place in full view of the Greek police, and yet the police made no arrests.