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After the Election: The Hidden Flaw Holding Back Full Recovery

Nov 30, 2012 | Updated Jan 30, 2013

Post-election America: The campaign was hard-fought on both sides, but President Barack Obama won with his message of "let's finish what we started."

Moving ahead, some new policies will be announced, and some cabinet changes made. Obama's January inauguration will precede a measured economic recovery in 2013.

That's the good news.

The bad news: The upcoming recovery won't sustain itself. It won't significantly boost for middle- and working-class households over the long term.

This won't necessarily be the Obama administration's fault. Since this country's 2008 fiscal meltdown, policy experts of all stripes have trotted out a variety of plans to boost the economy.

Little has worked. The lack of significant job creation, high unemployment, stagnant wages, stagnant productivity, decreased consumer spending, and increased household debt are side effects of a far larger problem.

While policymakers focus on these symptoms, the real problem is more fundamental and systemic. And this fundamental problem is invisible to nearly everyone.

This unseen (and therefore, unaddressed) problem means an even bigger, longer-lasting crisis -- a true economic tsunami -- lies ahead for the world, not just the U.S.

Industries around the globe will continue to shed valued (and valuable) jobs, in turn creating a self-sustaining downturn. This downturn will continue until the world economy either "breaks" permanently -- or the fundamental problem is addressed.

At its heart, the flaw is our mistaking efficient markets as being effective markets -- and failing to recognize the profound difference.

The solution starts with acknowledging domestic manufacturing needs to be the backbone of any sustainable recovery. Experts will say the U.S. doesn't "do" manufacturing anymore. Our economy is all about service, finance, software, and entertainment.

That's not strictly true, of course: The auto industry is still a major player (just ask Ohio and Michigan).

But the fact manufacturing isn't considered a primary element of our economy is a big reveal of our fundamental problem. We can encourage entrepreneurs and innovators in any number of ways, but if the basic conversation assumes new manufacturing will eventually shift overseas -- we're completely misdirected.

Moreover, we should also admit job creation isn't the primary direct benefit of American innovation and entrepreneurship.

It isn't, of course. Over the last 20 to 30 years of the Information Age, we have shifted our "real market" process (basically, the physical supply chain) to a more efficiency-oriented supply-side environment.

This shift essentially created numerous domestic "job-killing machines," as large firms focused on profitability through efficiency.

But isn't efficiency good for the economy? In a balance-sheet recession, no.

Here's why:

Think of the supply chain network -- from manufacturer to distributor to retailer -- as a highway leading from the countryside through mountains via tunnel, over a bridge and into a city.

The highway passes a variety of buildings along the way and ultimately leads to a retail store. Every element of this highway is the supply chain "network."

Now imagine the highway, tunnel, bridge, and buildings are privately owned by the same company. Moreover, the owners won't open this system -- not even to collect tolls. They simply want a closed highway for their private use.

That's unlikely to happen in any rationally run country, right?

Wrong. The same thing happens throughout our economy in less obvious ways.

One example: Zara, the world's largest clothing retailer, has developed a private IT-centered supply chain network that vertically integrates its logistics and collaborative functions.

The Arteixo, Spain-based firm's network is so efficient it needs just two weeks to develop a new product and get it onto store shelves -- compared to a six-month industry average.

This advantage lets Zara launch around 10,000 new designs each year, swamping the competition.

As the retailer has grown, a few lucky groups (suppliers, designers and distributors) were brought into this system. Because these resources were pulled into Zara's closed network, the larger industry's supply chain became seriously unstable. Less efficient companies lost their businesses.

Sound familiar (Walmart, anyone)? Small and medium-size companies worldwide have seen their businesses weakened and often destroyed due to the superior position of large companies with private, highly efficient supply chain networks.

The real result is middle- and lower-income jobs for workers in many industries have relentlessly decreased. These jobs aren't replaced in anything resembling equal numbers by the larger firms.

These private IT-based supply chain networks have been the major job-killing for three primary reasons:

  1. broad adoption of IT systems that identify redundancies;
  2. off-shoring and outsourcing manufacturing to low labor-cost countries;
  3. broad adoption of robotic and automation processes, eliminating jobs from entire industries.

These closed, winner-take-all efficient systems harm larger economic goals because they eliminate jobs as part of their natural process. And with fewer jobs, there are fewer consumers in the marketplace.

That means while such private networks are efficient, they aren't -- in terms of larger economic priorities -- at all effective.

An effective supply chain network would allow members to shift the emphasis from strictly cost-per-unit to competition by price, quality, and service, while emphasizing job creation as a larger customer-creation benefit.

In our example of the private highway system, the owners keep their closed network. But we'll build a toll-based system open to whoever can pay a small fee.

This open system means a broad range of businesses -- low-tech to high-tech and everything in between -- can benefit from shared intelligent manufacturing and distribution networks, lowering the cost of entry into any number of domestic markets.

As the business environment for middle- and small-sized companies eases, local employment conditions will improve considerably.

The improvement of the self-generation/job-creation capability of the market could be transformed into a permanent structural force that ultimately boosts consumer spending.

But it's only when we're ready to discuss the importance of manufacturing's role in our economy -- and the advantages of an open supply chain system to foster innovation, production and distribution -- that we can discuss the realities of a sustainable economic recovery.