Why Carly Fiorina's business experience doesn't matter

Running a company is not like running a national economy

Fiorina was formerly Chairman and CEO of Hewlett-Packard.
(Image credit: Chris Farina/Corbis)

Now that Carly Fiorina has emerged as the GOP presidential field's resident Anti-Trump, we're once again debating just about the only item on her resume that anyone knows anything about: her time as Hewlett-Packard's CEO. The Washington Post did a long dive last week, and President Obama's former car czar Steve Rattner took a whack at her in The New York Times.

But I have bad news for everyone: The one thing we all know about Carly Fiorina tells us virtually nothing about how she'd do as president.

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Unfortunately, this is hogwash.

Paul Krugman actually wrote an excellent essay on this very question for the Harvard Business Review back in 1996 — helpfully titled "A Country Is Not A Company." The main point is that a national economy and an individual company are two fundamentally different entities. A national economy is mainly a closed system, and a company is largely an open system.

Consider that any given company is going to sell the vast majority of its goods or services to people who don't work for it. This means that if the company hits a rough patch, belt-tightening will work. Cutting its costs and expenditures will get it back in line with revenues, precisely because the revenues themselves will keep streaming in. As Krugman puts it, there is no feedback mechanism between the company's costs and revenues.

But now imagine a company whose employees also accounted for over two-thirds of its customer base. It's much more of a closed system, and there would be a strong feedback mechanism between cost-cutting and revenues. If this company tried to cut labor costs (i.e. wages) it would wreck the ability of much of its customer base to buy its product. That would cut its revenues, and destroy its finances.

Now, no company in the world finds itself in the latter position. But just about all countries do. Even for a globalized superpower like the U.S., the lion's share of the buying and selling that goes on in our economy is done with Americans at both ends. Which is precisely why government budget-cutting during recessions makes things worse, not better.

Another aspect of closed systems is that they don't really compete with each other. Only the smaller open systems (companies) within the closed systems (national economies) battle each other for market share and the like. Closed systems just reshuffle money and resource flows. They're governed by trade-offs like the balance of payments and national income accounting, which, while they involve lots of moving parts, must by mathematical necessity balance out to zero.

So, for instance, China runs a large trade surplus because it's poorer and less developed than the U.S. and other Western nations. Its workers make less, so it's cheaper for the U.S. and the developed world to buy manufactured goods from China rather than manufacture them themselves. But this also means there are less opportunities for investment in China than in America: We run a trade deficit in goods, but we have a surplus in capital. The balance of payments requires that a deficit in trade occur alongside more domestic investment.

This is changing rapidly as China modernizes. As its workers become richer, and the country shifts from a manufacturing economy to a service-based one, its exports will have to go down and its capital investments will need to rise. (They already have risen enormously.)

The takeaway from all this, as Krugman points out, is that the standard methods a company uses to grow — cutting its costs, boosting its revenues, increasing its "competitiveness" — don't apply at all to boosting employment in a national economy. Rather, full employment requires good stewardship of aggregate demand — the feedback loop between the purchasing power of everyday Americans and the investment in businesses that supply what they're buying. And the two tools the government uses to reach full employment are fiscal policy and monetary policy.

One last question Krugman doesn't really get into, though, is why the "business approach" to U.S. economic policy has maintained its grip on our political imaginations despite being such a bad idea.

Return briefly to the question of trade. A trade deficit not only must be offset by investment in the balance of payments; it also must be counterbalanced by what the other components in the national account are doing. One way this happens is with more debt, either of the private or the public variety. So a trade deficit isn't necessarily bad on its own, but it becomes a drag on aggregate demand if a country's citizens can't afford to borrow, or if the government refuses to borrow. In that case, high unemployment will persist. If policymakers refuse to increase the money supply enough to devalue the national currency — thus making the country's exports more attractive, and closing the trade deficit — high unemployment will persist.

And when you have high unemployment, you make workers desperate and wreck their bargaining power. Which in turn means they have less power to claim their share of the revenue flowing through business, and it gets spit out as big payouts to shareholders and management instead. The post-2008 economy has been unpleasant for American workers, but it's been great for corporate profits.

Treating the American economy like a business may not be good for employment. But by some perverse cosmic coincidence, it's great for depressing wages for normal Americans, and thus increasing the share of national income going to elites. So if you're a member of the elite — like Carly Fiorina and just about everyone else controlling U.S. policymaking these days — then the fruits of the "treat the economy like a business" approach will sure look good to you.

Even if they look terrible for everyday Americans.

Jeff Spross

Jeff Spross was the economics and business correspondent at TheWeek.com. He was previously a reporter at ThinkProgress.