Chrystia Freeland

Surf the web or watch TV and you will probably conclude that American politicians and American pundits don’t agree on much at the moment. But that polarized public discourse obscures the equally important fact that Americans are remarkably united when it comes to determining what the big issues facing the country are.

This isn’t a moment when the nation is divided between isolationists, who want to focus on domestic issues, and expansionists, who want to focus on the rest of the world; nor is this an era when the political debate is about whether social policy—those old standbys like abortion, gay rights and family values—or economic concerns—be they poverty reduction or business growth—should be pre-eminent.

Instead, everyone is pretty much agreed on the big challenges facing America: stimulating economic growth, balancing the budget and finding a place for the United States in the world economy. There is even consensus, at the broadest level, on what the country needs to do to achieve all three: save more and spend less; invest more in social and physical infrastructure and less in personal consumption.

Here’s how Nobel-prize winning economist Michael Spence framed the problem—and the basic solution—when I interviewed him at a recent conference. “Let me describe China thirty years ago,” said Spence, who is advising the Chinese government on the twelfth, and latest, five-year plan. “Thirty years ago China had a per capita income of $400, changed direction, and started saving at 35% and investing at 35%. OK? Now when you have a $400 income and you’re saving at 35%, that means you’re consuming 65% of $400. That is a huge commitment to the future as opposed to the present, right? Now you either make the commitment, as the Chinese did and all the other high-growth developing countries, or you don’t.”

That’s a tough message, but it’s not actually a particularly controversial one. The hard part has been finding a consensus on how to pay for that investment in the future.

No surprise there. ‘Who pays?’, or, as Lenin more forcefully liked to put it, ‘kto kogo’ (‘who whom’) — is a, maybe the, central question politics exists to resolve. What is proving harder for the U.S. to come to terms with is that the battle today is largely a class divide.

Americans are accustomed to framing their political battles around race, region, religion, gender and even sexual orientation. But when it comes to money, the classic dividing line in the politics of so many other nations, Americans get decidedly squeamish. That’s probably because the classless society, or at least one in which wealth depends on achievement rather than birth, is so central to the American idea.

The problem today is that, even if you believe that America is a perfect meritocracy—something the most ardent libertarian is unlikely to assert—you can’t deny that globalization and the technology revolution are enriching the super-elite and hammering everyone else. Unemployment is still hovering close to 10 percent, but CEO compensation, according to a calculation by the Wall Street Journal this week, rose by 3 percent in the latest fiscal year. That continues a thirty year trend, which has seen the top 1 percent rise from taking home 9 percent of the national income in 1976, to 24 percent today.

This yawning class divide—and that is what it is, even if Americans are loathe to call it that—makes investing in the future particularly hard for the country to agree on. Nancy Pelosi’s constituency is too enraged by the gains of the super-elite to consent to cuts to social security or social services.

The super-elite, who regret America’s national economic malaise as a matter of theory, but who are personally doing better than ever, are finding it much easier to back flashy personal philanthropies than to go along with swinging increases in their own tax bills.

Authoritarian regimes, like Communist China, can coerce their people into investing in the future. Democracies need to persuade them. One essential part of that pitch is convincing voters—and taxpayers—that their sacrifice will be shared. In today’s two-speed America, that’s not an argument anyone is yet making.

A favorite theme of American business and political elites at the moment is that authoritarian regimes—i.e., China—may be better at making hard, long-term economic decisions than are querulous democracies—i.e., the United States. There is plenty of academic research to suggest that, over the long term, this view is wrong. But in the shorter term—this week in fact—America itself offered a case study of this scary theory.

Consider: On Tuesday, Americans swung sharply to the right, giving their Democratic President a shellacking and handing control of the House of Representatives to the Republicans. The country’s most powerful elected Republican, John Boehner, who will be the new speaker, immediately declared it was a vote for “cutting spending” and “smaller, less costly government.” Most analysts, including happy ones on Wall Street, who are often most cheerful when the country’s elected officials are least active, decided it was a vote for gridlock, thanks to the Democrats’ continued control of both the Senate and the White House.

Then, on Wednesday, America’s most powerful unelected Republican, Ben Bernanke, the chairman of the Federal Reserve, swooped in with massive government action, announcing a plan to pump $600 billion dollars into the U.S. economy over the next two years. That is not much smaller than two of the big government interventions that earned the Democrats their shellacking—the $700 billion TARP program (never mind the pesky fact that it was actually a Republican Secretary of the Treasury who invented it) and the $787 billion stimulus.

The timing of the Fed’s move underlined one of the most important take-aways from the mid-term election campaign. Watch cable news or surf the web and you are likely to conclude that America is a deeply divided nation, split between fiercely partisan hardliners on the left and on the right. That’s one version of the political battle. But another one is that America is indeed divided, only, in this narrative, the division isn’t between liberals and conservatives, it is between the hoi polloi and the elite.

That split between the mandarins and the public is how you get a popular vote for government inaction the day before the bi-partisan, Republican-led technocrats at the Federal Reserve, with only one dissenting vote, endorse massive government intervention. The economic battle in America today isn’t just between the Republicans and the Democrats, it is between the technocrats and the populists, and in the later contest, the Bush-nominee who runs the Federal Reserve probably has more in common with the beaten up Democratic President than he does with the victorious leaders of his own party.

Of course, this sort of national divide is the main reason central banks are independent: rich western democracies decided some time ago that long-term objectives of monetary policy are best judged by a technocratic elite, not by elected politicians and the sometimes angry constituencies who choose them.

But turning over responsibility for pulling America out of its recession to the unelected chiefs of the Federal Reserve—which is likely to be the big practical result of this week’s vote—is not without some tricky consequences. For one thing, it is clear that America’s central bank would prefer that its monetary stimulus be accompanied by a fiscal one—a measure that seems almost impossible after this week’s vote. That means that the money Washington is pouring into the economy will go first to those who need it least—banks, businesses and families with strong-balance sheets are in the best position to take advantage of the cheap money flooding into America. The unemployed—who figured prominently in the Fed statement and were one of the direct targets of last year’s fiscal stimulus—far much further down the food-chain, as will the Americans grappling with foreclosure.

A second result is that punting the task of economic revival to the Fed may ultimately mean sending the bill to the rest of the world. Printing dollars is one way to make it easier for the American government to solve one of its looming, long-term problems—paying off its massive foreign debt. No one wants to admit to inflation as a policy solution, but that’s what political gridlock and an interventionist Fed could amount to—and that sleepwalking policy is Washington’s real ‘don’t ask, don’t tell’ secret.

Don Graham, Chairman and CEO of the Washington Post Company, visited the Reuters studio this morning to chat with Chrystia about the future of the company’s Kaplan subsidiary as well as its flagship newspaper. In addition to its popular test preparation courses, Kaplan operates 75 colleges and graduate schools, both online and through brick-and-mortar campuses, that serve 112,000 students. Earlier this year the Department of Education lashed out at for-profit colleges like Kaplan for misleading prospective students about tuition costs and salaries after graduation. The Department proposed new regulations on these institutions that would tie federal aid to the number of students who are repaying their loans.

Graham said that while the Department’s efforts to crack down on bad actors are right-minded, the current proposals will end up having an unintentional yet harmful effect on low-income students:

There is a 99% correlation between the number of Pell Grant students—the number of poor students a campus serves—and the repayment rate under the proposed Department rules… The Department has scored a direct hit on schools that serve poor students. They didn’t want to. They didn’t mean to. But that is what they did. And I hope they’ll reconsider that rule and propose something that in fact cracks down on bad actors but does not punish schools that serve poor students.

Graham offered an alternative proposal, the “Kaplan Commitment,” that would preserve the Department’s intentions to ensure students are not misled but that would not discriminate against poor students. The Kaplan Commitment will allow any student to enroll in any campus or online course that Kaplan operates for five weeks, free-of-charge. If the student decides the program is not for them, they can withdraw without paying a dime in tuition. Graham did note that enacting this change would have a material adverse impact on the company’s earnings, but he said it was worth it to show everyone that at Kaplan students come first.

When asked whether the entire model of for-profit education is a mistake, Graham said that at a time when state universities are seeing their budgets’ slashed, only for-profit colleges like Kaplan are poised to meet students’ needs:

Somewhere between 7 and 10% of all students today are signed up at for-profit institutions… Let’s talk about traditional education and for-profit education. There are of course the most famous elite private universities in the United States—the Ivy League and so on—but nobody is founding such institutions in great numbers or expanding them widely today. President Obama has announced what seems like a pretty sensible goal: that the United States should again be #1 in the world in the percentage of adults who have graduated from college. And this is not a minor goal of his; this is put forward as one of the principal goals of his administration. The bulk of Americans who go to university go to a State U—go to a community college or go to one of the great state universities. The state universities are a fantastic achievement of the United States of America, but given the financial conditions of the states, and especially of the largest states, it is as plain as day that these state universities are struggling to maintain the number of students they have today. A year ago Cal State said they were reducing their total student count by 44,000 students. That’s a lot of students. And the state of California, the financial condition of the state of California is pretty famous. It’s very, very bad. Illinois, New Jersey, New York—these are states with big financial challenges. So are they going to be able to offer places to more students? It doesn’t seem realistic that they are.

Finally, Chrystia asked Graham how the Washington Post intends to compete with relative newcomers like Politico and Bloomberg News that have grown significantly in the nation’s capital in just a short time. Here’s what he had to say:

I really admire what the Allbritton Company has done with Politico. It’s a very good job. As far as the economic future of the Post is concerned, every newspaper in the United States is under the same kinds of challenges. Down in Baltimore or up in Philadelphia they’re not thinking about Politico but they’ve got the same kinds of challenges to their political future, so it’s a challenge for our journalists to compete with the very good journalists they have as we compete with the journalists at the New York Times and the Wall Street Journal and Reuters. That is one of many journalistic challenges. It isn’t really fundamentally an economic challenge… Bloomberg—as I understand it—Bloomberg is going to hire a lot of reporters and offer a lot of specialized products to readers who have strong interests in tax or energy policy. That highly specialized information industry is an important part of the Washington news industry but it’s mostly covered by newsletter providers… I think Bloomberg News is a great organization—I’m sure they’ll do a good job, but what they’re meeting is the demand from their financial customers for highly specialized information about the actions of particular federal government agencies, which isn’t the primary focus of most newspaper readers.

Graham added he “welcome[d] the competition” and that he is “thrilled with the way the Post newsroom is doing its job today,” especially with coverage of the midterm elections. He also does not foresee a day in his lifetime when the Washington Post does not have a print edition, noting “there’s a strong preference among readers for a print publication.”

Posted by Peter Rudegeair.

Tony Hsieh and Sanjay Madan wrote the program to create LinkExchange over a weekend. Before the following weekend, they had more than a dozen websites participating in their ad-sharing network. Over the next several weeks they worked frantically on the project. They refined their business in real time, learning—quickly!—from their mistakes. Less than a year later, the Harvard grads were offered $1 million (U.S.) for the company. Less than a year after that, they sold it for $265 million.

That was 1996. Since then, this story of development on the run has become commonplace. Hacker culture is now part of the broader culture: “beta test” is in the dictionary, and we accept innovative, albeit imperfect, beta releases even from multibillion-dollar global behemoths such as Google. We’re prepared to accept flaws because the tech revolution is progressing so quickly that it is usually better to be fast, and possibly wrong, than to try to be perfect and end up being slow. By the time your flawless product is released, it will likely be obsolete.

Technologists aren’t the only people operating in a rapidly changing, uncertain environment. Thanks both to the tech revolution and to globalization, that is true of all of us, including our governments. But, as Nobel-Prize winning economist Michael Spence argued at a private equity conference in Quebec City this week, emerging-market governments seem to be better at dealing with an unpredictable, volatile world than Western ones. They are like Silicon Valley entrepreneurs—willing to act swiftly, even if it means making mistakes. Leaders in the West are more like Detroit, reluctant to make bold moves until it is too late.

Part of the problem is the way we judge various types of mistakes. Spence argues that we make two types of mistakes—implementing a bad idea, and failing to act on a good one. If you are religiously minded, you could think of these as sins of commission and sins of omission. In stable times, sins of commission are probably worse. If your industry isn’t changing very much or if your country’s economy and the world economy are on an even keel, launching an expensive new product or government program that fails is probably more damaging than missing out on a great opportunity.

But in times of radical change, making a mistake is less risky than doing nothing at all. Spence thinks that emerging-market leaders understand this better than Western ones do, and he cited the examples of China’s fast and big stimulus program after the financial crisis and the Indian government’s willingness to act to burst asset bubbles.

The effectiveness of China’s government—especially in contrast with the paralysis of some Western nations—is often understood as evidence of the greater agility and decisiveness of authoritarian states. Spence’s analysis suggests another phenomenon could be at work. Emerging-market leaders—both the democrats and the dictators—are more accustomed than their Western counterparts to fast and disruptive change: They’ve experienced revolution, hyperinflation and devaluation. That may give them an edge in today’s volatile global economy.

Speaking at the same conference, Glenn Hutchins, co-founder and co-CEO of private equity firm Silver Lake in New York, said that in the corporate world the heat is shifting from Western companies to ones in the emerging markets. In the past, he said, developed Western economies were “the best crucible” for coming up with the most appealing inventions and the most effective business practices that were then exported to the rest of the world. But Hutchins, argued that emerging markets, with their rapid growth and demanding, low-income consumers, were turning out to be a tougher—and therefore better—hothouse for pace-setting companies than the West.

“It used to be that to be a global company you had to forge your business model in the crucible of competition in North America,” Hutchins said. “Today what you are seeing is companies that are growing up … whose business models are being forged in the crucible of competition in the emerging markets.”

American financiers haven’t been getting a lot of praise lately for their skill at capital allocation. But the speed with which the smartest investors, such as Hutchins, have grasped the shift of ideas to the emerging markets is impressive. Western politicians could do worse than to follow their example.

The theme of this year’s Quebec City Conference, a gathering of some of the world’s pre-eminent private-equity investors and venture capitalists, is innovation and globalization. Chrystia was in attendance earlier this morning and interviewed one of the event’s keynote speakers: Glenn Hutchins, co-founder of Silver Lake Partners, a $14 billion private-equity firm that focuses on the technology sector.

Hutchins’ remarks focused on the shift of economic power from the U.S. to China. He noted that as long as China grows much faster than the United States, multinational corporations will shift more of their business there. But his other insight was that for the first time businesses are tailoring products to the Chinese consumer rather than just selling the Chinese products developed for American consumers:

It used to be that to be a global company you had to forge your business model in the crucible of competition in North America–potentially Europe, but usually North America–where you define your business model, define your product set, define your customers, and then once you were successful there took it outside the world and essentially sold the same products and services to a strata of groups and people around the world who can consume it.  Today what you’re seeing is companies that are growing up–we talked a little earlier about Huawei being a very good example, but there are many, many others–whose business models are being forged in the crucible of competition in the emerging markets.

Hutchins gave an example from the mobile phone industry to illustrate his point. Americans are willing to pay upwards of $400 for Blackberries, iPhones, and other all-functional smartphones, but emerging-market consumers tend to spend only $20 on mobile phones. Instead of following the integrated business model of RIM or Apple, mobile-phone makers are forced to develop a new model that uses many small workshops across the developing world to keep phones both cheap and customizable.

Staying on the topic of mobile phones, Hutchins called the rapid development of mobile wireless broadband the “biggest technology trend of our lifetimes.” The technology revolution that took off with the PC and Microsoft, continued with the network and Cisco, and grew to include the internet and Google, has reached a new phase with today’s mobile phones. He gave some numbers to make his point:

Twenty-five or thirty years into the PC trend there are about a billion PCs in use in the world today. There are about 1.5 billion television sets, about 1.2 billion telephones. I think there are only 2 billion bank accounts.  There are already 5 billion subscrpitions to wireless handsets just in the nascent days of this.  So it’s three to five times the size of the addressable market of these technology trends that are twenty-five to thirty years in penetration.  It’s enormous potential.

Posted by Peter Rudegeair