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America in the Reset World: Ch ti N CCharting a New Course

Professor Peter BrewsKenan-Flagler Business School,

University of North Carolina at Chapel Hill

Megatrends

The Westin Arlington Gateway

April 15, 2010

Presentation Outline

• What is Reset, why choose it as headline?What is Reset, why choose it as headline?

• Resets facing America: what is the Reset World?

• Theory of Reset?

• How far in are we?

Questions welcome any time

Reset

‘To set again or anew’

Merriam Webster Online DictionaryMerriam-Webster Online Dictionary

Re·set

– verb (used with object)

1 to set again: to reset an alarm clock1. to set again: to reset an alarm clock.

2. to set back the odometer on (an auto or other vehicle) to a lower reading: a used-car dealer charged with resetting his cars

Dictionary.com

Potential Resets facing America

Consumption Reset: conspicuous to careful; more to lessp p ;

or corollary

Savings/Investment Reset: Less to more

Fiscal Reset: less to more taxes/more to less govt. expenditure

Consumption, savings, fiscal resets necessary because America has lived beyond means for past generation…

Country out of balance, publically and privately

Major Conclusions

US Federal Gross Debt as % of GDP: 1940-2009

.

Source: zFacts comSource: zFacts.com

US Gross Federal Debt is now around 98% of US GDPUS Gross Federal Debt is now around 98% of US GDP

Source: http://www.usgovernmentspending.com/downchart_gs.php?year=1792_2010&view=1&expand=

US Macroeconomic data: Consumption and Mortgage Equity Withdrawals

Graph constructed by Professor Christian Lundblad, Kenan-Flagler Business School, University of North Carolina at Chapel Hill.

Consumption and GDP data from the Bureau of Economic Analysis (BEA). Mortgage equity withdrawals are measured as the year-over-year change in mortgage debt (from the Federal Reserve Flow of Funds) minus 70 percent of residential

(f ) (S )investment spending (from the BEA). (Source: L. Josh Bivens, Economic Policy Institute)

US Macroeconomic data: Home prices, building costs, interest rates, population p , g , , p p

Source: http://www.econ.yale.edu/~shiller

Oth t f i A iOther resets facing America

Political Economy Reset: From Last Super Power to First Among Equals

Energy Reset: From fossil to renewable fuelsEnergy Reset: From fossil to renewable fuels

Globalization Reset: From supply to market seeking

These three are less classical ‘resets’ than structural changes Americans mustThese three are less classical resets than structural changes Americans must face/adjust to

R t l i ll b t t i t ti f ll d b f i li t tReset classically about returning to practices followed before; implies return to previous status quo

But reset includes new behaviors as well as returning to sq; reset often also involves change managementinvolves change management

If reset involves change before constructing Theory of Reset consult Theory of Change ManagementChange Management….

Change Management Approaches/Models

Top down versus bottom up; directed versus participative

Shock therapy versus gradual change

Change as unfreeze change refreeze (LewinChange as unfreeze, change, refreeze (Lewin, 1951)

Change as D x M x I > Cost of Change (Beer 1989)Change as D x M x I > Cost of Change (Beer, 1989)

Theory E versus Theory O Change (Beer and Nohria, 2000))

Beer’s Model: Change as D x M x I > C

Successful Change = D x M x I > C

where:

D = Dissatisfaction with status quo

M = Model of future state aspired to, including structures, systems, behaviors, attitudes etc.

I = Implementation/processes/sequence of events required to learn new structures, systems, behaviors, attitudes such that

desired state is achieved and the change accomplisheddesired state is achieved and the change accomplished

and C = Cost of Change, i.e.and C Cost of Change, i.e.

Loss of power

Loss/obsolescence of skills/competences

L f l ti hi /j bLoss of relationships/jobs

Loss of rewards/benefits/titles

Loss of indentity

Costs if status quo maintained/change not implementedCosts if status quo maintained/change not implemented

There is no more delicate matter to take in hand, nor more dangerous to conduct, nor more doubtful in its success, than to be the leader in

the introduction of changes. For he who innovates will have for enemies all those who are well off under the old order of things andenemies all those who are well off under the old order of things, and only lukewarm supporters in those who might be better off under the

new.

Niccolo Machiavelli

Towards a Theory of Reset

1) Consider level of D; if population not ready to reset increase D

“Don’t let crisis go to waste…”g

2) If reset is back to previous status quo, go there after establishing urgent need to do so

3) If reset involves new model/solutions, follow accepted change management procedures, i.e. ensure D, build and test model, roll out etc., and

• Make sure all stakeholders with role to play in model’s construction/testing/rolling out are involved in construction

• Look for best overall model/solution not driven by stakeholders with narrow• Look for best overall model/solution, not driven by stakeholders with narrow interest that might confound/hijack model/solution

Towards a Theory of Reset

4) Model’s terms and leadership actions will also impact reset’s success:

• Shared sacrifice will enhance acceptability

• Leaders must be first to adopt reset ….

Towards a Theory of Reset

5) H d l/ l ti i f d/ ld l i t t5) How model/solution is framed/sold also important:

“Americans could reduce their consumption by 20 percent and they probably would not notice it…”

or

“What would happen to your quality of life if you had 20 percent less stuff?”What would happen to your quality of life if you had 20 percent less stuff?

or

“Do you live to work, or work to live?”

or

“And if you think we are in trouble, visit Haiti, Zimbabwe, Mexico, Iceland, Greece, etc…keep your scale/perspective, show some character, etc…”

For challenging resets managing expectations and framing reset positively key

Also best if leaders ‘tell the truth’ backed by credible balanced evidenceAlso best if leaders tell the truth backed by credible, balanced evidence

People not stupid…

H f i ?How far in are we?

Resets/adjustments needed:

• < 5 - 10 % in US Consumption as % of GDP

• > in US Savings to 5 - 10% of GDP

• > in US taxes 3 - 5 of GDP %

• < 20% in average US body weight

i.e. all must save more, consume less, adjust consumption expectations, de-lever

Note: 2009 QIII Personal Consumption Expenditure was estimated to be justNote: 2009 QIII Personal Consumption Expenditure was estimated to be just over 71% of GDP; GDP in 2009 < by more than 3 percent

Average Real GDP Growth

Year Growth Rate

2009 -3.2

2008 0.43

2007 2.13

2006 2.65

2005 3.08

2004 3.582004 3.58

2003 1.83

U.S. Bureau of Economic Analysis2009 estimate until Sept.

Gross Private Domestic Fixed Investment

YearUS$ billions

(2005 base year)2009 1,453.0

2008 1,989.4

2007 2,146.22007 2,146.2

2006 2,230.4

2005 2,172.2

2004 2,058.2

2003 1,871.6

U.S. Bureau of Economic Analysis2009 2nd Quarter estimate

Future Scenarios:

Party On, Dude

To

Tighten Belts

Party On, Dude

• Bailouts continue/budget deficits grow, pandering rather than pain: no pay as g g , p g p p yyou go imposed

• Government borrowing increases, private investment/GDFI crowded out, welfare grows corporate and consumerwelfare grows - corporate and consumer

• World eventually becomes nervous of US$/Economy, dumps US$, status of world reserve currency lost to Euro or Rmb

• US descends into second class status, paying off today’s debt through inflation, debasing currency into Mickey Mouse money

• This is worst case scenario, unlikely but possible

Tighten Belts: Take the Pain, Adjust, Emerge..

• After stabilization, tightening occurs: interest rates rise to encourage savings/counter inflation, budget deficit stabilizes, federal govt. > discipline

• Short to near term economic growth declines/moderates, jobs lost, Americans reduce consumption, increase savings to de-lever balance sheets, increase savings/cushions

• After initial adjustment US economy resumes growth based on ongoing productivity gains, clean tech/high tech/organic innovation, local and export led growth

• China, Brazil, India, others become locomotives of global growth, lasting well into the 21st Century, consumption model evolves

• US evolves from last Superpower to First Among Equals

Situational check

• Obama Administration/Congress still stemming bleeding, closer to party on, dude g g g, p y ,than to tightening belts; triage

• Deficit for 2009 federal budget forecast to exceed US$1 6 trillion 3x greater than• Deficit for 2009 federal budget forecast to exceed US$1.6 trillion, 3x greater than 2008; possibly >US$1 trillion next year too; easier to increase debt than to impose discipline/pay as you go

• Choice between stimulating investment vs. consumption vs. permitting correction; borrowing should be for investment, not for consumption

• Pres. Obama’s talk of fiscal responsibility encouraging…walking tight rope

• Serious belt tightening only likely after next Presidential election; most likely if O’bama re-elected …

Either way Americans must reduce consumption/living standards to match productivity/income, and prepare for the additional overhead of healthcare,

baby boomer retirement costs, and for clean energy development costsy gy

We probably cannot borrow grow vote our way out of the current messWe probably cannot borrow, grow, vote our way out of the current mess

More than likely, future entitlement expenditure will have to be curtailed(see O’Bama’s Deficit Reduction Panel, headed by Bowles and Simpson)

And we still have some way to go in a long term adjustment that will span decades, if not generations…

Economic recovery/growth in the short/medium term likely to be muted, below t dtrend

For the sake of our children/grand children we must deal with our economic imbalances (short term) as well as with Global

Warming/Climate Change (long term)Warming/Climate Change (long term)

We are currently mortgaging their futures, economically and environmentally…

BIG TIME

But don’t go from irrational exuberance to irrational depressionBut don t go from irrational exuberance to irrational depression

All a question of balance...

Whether US declines or revitalizes depends upon political choices/leadership and willingness of all to confront reality and adjustp g y j

End of world not nigh, it could be far worse…

US economy still envy of world, flexible, innovative, open for business, productive

While recovering from our party and hangover, all must work to keep it that way!!!!way!!!!

Defer gratification, invest/save, and most importantly live within means

And the longer we wait/leave the adjustment, the bigger it will be, the more it will cost…

And remember principles of Reset/Change Management

1) ) Consider the level of D; if population not ready to reset, increase D

2) If reset back to previous status quo go there after establishing urgent need ) eset bac to p e ous status quo go t e e a te estab s g u ge t eedto do so

3) If reset involves new model/solutions, follow accepted change management procedures i e ensure D build/test model roll out etcprocedures, i.e. ensure D, build/test model, roll out etc

4) Model’s terms and actions of leaders will impact reset’s success

5) How model/solution is framed/sold important, and manage expectations astutely

Two more:

6) Change always harder than you think it will be, takes longer, costs more…

7) Change is never as hard as you worry it will be…