July 16, 2007

This past weekend I was asked to give the Keynote Address at the commencement ceremonies for our Texas MBA at Dallas/Ft. Worth and Texas MBA at Houston programs.  Naturally, I had to touch on some macroeconomic concepts.  Below is a transcript of the speech.  Hope you enjoy it.

Regards,

M. Brandl

A Manager’s Role in Shaping the Economic Future.

My esteemed colleagues, friends, relatives, guests, and graduates it is indeed an honor to deliver this commencement address.

University commencement addresses of today are usually dull, uninteresting speeches, filled with useless folksy wisdom and irrelevant stories of the past. 

But it was not always this way.  For a previous generation university commencement speeches offer insight into the problems and issues society faced and these speeches offer solid solutions that ultimately had a significant impact on society.

For example, the Harvard commencement speech given by Secretary of State General George Marshall in 1947, laid out the intellectual framework for what became known as the “Marshall Plan.”  The Marshall Plan, in turn, altered the history of Western society as it rebuilt Europe and the Pacific after World War II.  Marshall was ultimately awarded the Nobel Peace Price for the Marshall Plan in 1953.

Or who could forget President Kennedy’s commencement address at American University in 1963?  In his speech Kennedy laid out the ground work for what would become the nuclear test ban treaty.  This treaty is credited, in great part, for our ability to avoid Armageddon during the cold war years with the Soviet Union.

Those commencement speeches had real meaning.  They encouraged the audience to think about the world in which they lived, and what the future might hold.  My hope is that this address will more closely resemble those commencement addresses of old and resemble less the rambling, incoherent, dull commencement speeches we so often are subjected to today.

The summer of 2007 finds our nation at a unique crossroads.  Our country is at war on multiple fronts across the globe.   Many of our country’s citizens are concerned about the impact globalization will have on their family and their family’s future.  And in a few years a new generation of leaders will takeover the reigns of power in the United States.  As the Baby-boom generation reaches retirement age it will be time for a new generation to chart the future of this country and this world.  You are the leaders of this new generation.

You can no longer say “our leaders” must solve the problems our society and our world face.  You are now those leaders.  Consider the facts.  In 2006 the Census Bureau reported that the percentage of Americans over the age of 25 that held a four-year college degree was only about 28%.  The percentage of Americans with a Master’s Degree was only 8%.  Only a small portion of this 8% of the American population with a Master’s Degree earned their degree at an elite institution such as The University of Texas at Austin.  Thus, the data is clear:  you are the intellectual tip of the iceberg.  You are the leaders.  It is your responsibility to come up with the answers to the questions our nation and our world faces.

So what are these questions?  As a Presidential election looms next year, I want to focus on the economic policy issues the new Administration and the new Congress will face.  In doing so, think about how you can use your new found responsibilities to help answer some of these questions.  I want to focus primarily on two issues:  Fiscal Policy and our Global Financial Architecture.

First, fiscal policy.

The facts about the status of U.S. Fiscal Policy are well known:  the U.S. Federal Government on-budget deficit for 2006 was 434billion dollars or 3.3% of Gross Domestic Product.  While the pundits either bemoan or poo-poo the size of the government budget deficit, an even more important question goes unaddressed.  That question, simply put is:

What do we want fiscal policy to do?  Should changes in the federal government’s spending and taxing policies be used to smooth out business cycles; or should fiscal policy be used to spur long run economic growth?

One of the main challenges with using fiscal policy to smooth out business cycles is the well know legislation lag.  It takes Congress and the Administration too long to change government tax or spending policies to react to downturn in the economy. 

Princeton economist Alan Blinder has suggested creating an entity within the Federal Government that would advise Congress, and the Administration, on the proper role of fiscal policy in reaction to business cycles.  Blinder suggests moving some of the power to change fiscal policy out of the hands of the politicians and into the hands of “technocrats” or politically independent economic specialists. 

Others have suggested a more fundamental reform of fiscal policy, in that a completely politically independent body, ala the Federal Reserve, should be established to oversee and manage the conduct of fiscal policy.  Under this framework the ‘technocrats” would give to Congress and the Administration, a certain amount of money each year that they could spend and a limited choice of a  changes in tax policy.  Under this setting fiscal policy would be “managed” much as monetary policy is managed today.  This, in turn, would allow fiscal policy to be flexible enough to react to changes in the business cycle.

On the other hand, if one wishes to use fiscal policy to spur long run economic growth we must consider the best way to accomplish this goal.  One of the major stumbling blocks in pursing such a goal is that the institutional framework of fiscal policy is not designed to this.  For example, policies designed to make labor markets more flexible come out of the Department of Labor and perhaps the Department of Education.  Policy suggestions designed to make firms more productive come out of the Department of Commerce and perhaps the Department of Treasury.  Economic statistics are collected by a wide variety of government agencies.

Perhaps what needs to be done is to streamline (and reduce) all of these government agencies that deal with long run economic policies.  It makes little sense to continue to have a Department of Labor, a Department of Commerce, a Council of Economic Advisors, Office of U.S. Trade Representative, AND the National Economic Council all attempting to make long run economic policy. 

Perhaps a better approach is to merge (and reduce the size of) these various federal government departments and agencies into one single (and smaller) Department of Economy.  This new department would be responsible for preparing the United States economy to compete in the global marketplace, by suggesting economic policies that will stimulate long run economic growth.

Speaking of the global marketplace another issue that must be addressed is our global financial architecture. 

Much of this architecture was designed for a world that no longer exists.  Think about the International Monetary Fund, the World Bank, NATO and the G7 as examples.  Each of these multi-lateral institutions were created either at the end of World War II, or during the Cold War with the Soviet Union.  While these entities were well suited for the issues the world faced half a century ago they may be poor suited to deal with the issues we face in the 21^st century.

The Meltzer Commission Report of 2000 offered a template for reform of the IMF and World Bank.  Unfortunately few, if any, of the Meltzer Commission suggestions have been implemented.  Similar reforms need to be considered for NATO and the G7.

We must ask ourselves how could these institutions be used to ensure nations do not follow destructive economic policies such as mercantilism and monetization of the public debt?  For example, could these institutions have played a more effective role in helping Japan avoid its lost decade of the 1990s? 

Could these institutions play a more effective role in ensuring developing nations protect property rights and the human rights of their citizens?  Can these institutions be restructured to help us to better understand the value of natural resources and other entities and actions that do not have effective market prices? 

But a warning must be sounded.

In the creation of any new entity, whether it is to guide fiscal policy or reshape our global economic institutions, we must be ever vigilant against creating new excessive bureaucracies that will inhibit the proper functioning of markets.  Far too often we see the creation of massive bureaucracies initially designed to solve problems, but eventually these bureaucracies become focused solely on their own survival.

We see this long reach of entrenched bureaucracies in business as well as in government.  How often do we see management “buzz phrases” being used instead of sound management decision making?  How often do we see anecdotal story telling taking the place of serious quantitative analysis?  This simplistic thinking which is the outcome of a bureaucratic mindset must be resisted and fought against. 

In addition, we must think not just of the here and now, but we must also consider the long lasting impact of our decisions and how those decisions will impact people and markets well beyond our own firms.

President Woodrow Wilson once said that every man and woman sent out from a university should be a person of his nation as well as a human being of their time. 

I think Wilson’s words are never truer than they are today. 

Each of you as graduates from the MBA program at the McCombs School of Business are not only the leaders of your companies …and our nation… you are the leaders of our time. 

Take that responsibility seriously so that future generations will look back on you proudly, as we today look back with pride on the Generation that lived through the Great Depression, fought World War II and left the world a better place than they found it.

I look forward to hearing of your progress and the impact you have on shaping fiscal policy, remaking our Global Financial Architecture, and controlling simplistic, bureaucratic inspired thinking.  The work ahead will not be easy, but it is necessary. You are well equipped to undertake these challenges.

Good luck to you and best wishes.  May God bless the entire world, no exceptions.  Thank you very much.

The author wishes to thank Sona Hardikar and Admiral Bob Inman USN (Ret) the Lyndon B. Johnson Centennial Chair at the Lyndon B. Johnson School of Public Affairs for their helpful suggestions on earlier versions of this speech.