“Creative Destruction is Part of Free Enterprise” “Let ‘em Fail”
Hold on just a minute. Maybe; maybe not. What about extenuatin’ circumstances?
Since I’ve already upset most of you, let me begin by establishing my bone fides on creative destruction. I’ve read Joseph Schumpeter. I appreciate his insight and agree with it under most circumstances.
Shortly after becoming President of the Dallas Fed, we devoted the essay in our 1992 Annual Report to creative destruction, which turned out to be extremely popular. Larry Kudlow even started calling the Dallas Fed the Schumpeterian Fed.
The essay in question was written by Mike Cox, AVP and Economist at the time, (later Chief Economist). Tellingly, we titled the essay, “The Churn: The Paradox of Progress.” Our coinage of The Churn for Creative Destruction caught on. In establishing what came to be a precedent for me in my President’s letters, I applied the points in our essay to my personal life experiences. I was straining for the concept of a human central banker.
The cover of that annual report featured an old-fashioned picture of an old-fashioned blacksmith. I said that wasn’t my grandfather but it might have been. Like his father before him, my grandfather was a blacksmith– an occupation already obsolete by the time I came along. My memory is of him rocking in his rocking chair on his front porch, clicking his fingernails on its armrests, occasionally playing the harmonica, which he called a French Harp. I think having no teeth was an advantage in that endeavor.
My Grandfather (Pappa) was the victim of creative destruction. My Dad went into the filling station business, selling gasoline and servicing the cars and trucks that had put his Dad out of business. Once I was old enough to clean windshields and check the oil, his filling station became a service station. After a couple of years of scrimping and saving, he built a larger service station attached to a greasy-spoon type café and called it a truck stop. Doyal’s Truck Stop was about a quarter mile up the road (U.S. Hwy 411 in North Georgia) at the top of a long incline in both directions.
My Dad figured the incline would slow the trucks as they approached the truck stop and would give them a good running start as they departed. He reeled them in with “free coffee to truckers” and a 3-cents-a gallon “discount to truckers” on gasoline and diesel fuel. Truck traffic was heavy because 411 was the main route between Atlanta and Knoxville. We were going to be rich.
Then Interstate 75, which roughly paralleled U.S. 411, went in about 18 miles to the west of Doyal’s Truck Stop. Another version of creative destruction had struck. Back then change was a little more drawn out. Doyal struggled on a few years, put my little sister in charge when he faded, but it was a lost cause. As Billy Joe Shaver later sang, “Ride me down easy Lord; leave a mark in the dust where I lay.” Doyal’s Truck Stop has stood empty in the dust for several years now, our monument to creative destruction, or the Churn.
My sister lives well now in a larger town close to I-75, and I live almost as well in a Texas town chosen in part because of a good access to the Dallas Fort Worth airport. Dad wanted both me and my sister, in turn, to run his beloved Truck Stop. I got the hell out of Dodge instead, but she gave it her best shot for several years. She was Daddy’s little girl. But I digress . . .
What I do in the evolution of creative destruction in the McTeer family is hard to say. I had 36 total years with the Federal Reserve, which I never was able to explain to my Dad. Now, I work for a free-market think tank (Say what?) in Dallas and spend much of my time writing a blog (Say what?) for them. I’m a CNBC “contributor” (Say what?), and I make some speeches on the economy for a fee. (Hint, hint.) I’m only half as good at that as my former boss, Alan Greenspan, but I can be had for no more than a tenth of his cost. Think about it. (email@example.com).
In addition to that shameless commercial, recall that I was establishing my bone fides on creative destruction. I am familiar with the concept. Of course, it’s not all about me.
The economic significance, and the positive side, of creative destruction is that the old and the obsolete give way to the new. The sons of retiring farmers populated the factories and the mills of the industrial revolution. The sons and daughters of retiring and laid off mill and factor workers moved into the service economy. Their sons and daughters move up the food chain as the service economy increasingly becomes an information economy.
The old have to move on and become new resources for the new. Farming used to occupy about 90 percent of the population. Now about 2 percent produces more and better food. That’s called productivity growth (more output per worker due to technology and innovation), and the nation is better off for it despite the sympathy we all have for Willie’s stressed family farmer.
In recent years, this transition has taken place as goods employment give way to services employment. We still have a viable manufacturing sector in terms of output and quality, but it has been shrinking for a long time in terms of employment. That’s progress due to productivity even though we feel sorry for the laid off factory workers who were counting on lifetime employment like their father’s had.
Given all our phone calls, e-mail, and text messages, think of all the telephone operators that would be needed without modern communications technology. Some lost jobs, unfortunately, but most were jobs that were never filled-never filled by people that were employed in the expanding areas, perhaps even in communications technology. This is creative destruction.
Think elevator operators.
Of course, this creative destruction is absolutely necessary for a thriving economy and growing prosperity. Attempts to “save jobs” or “keep the jobs at home” are understandable, but should be resisted.
If serious hardship results, deal with the hardship. Allow the economy to be an economy of the future, not the past.
Okay. So I believe in creative destruction. Creative destruction is good for our economy.
But-you knew this was coming didn’t you-not all destruction is creative destruction.
Some shops on the beach make it and some don’t. But what if a tsunami hits the beach? Do you say, “Well, their risk management was obviously flawed”? They made bad business decisions and they deserved to be wiped out. Smarter people will replace them. Creative destruction, you know.
I could give more examples like this, but you get my point. Destruction resulting from a Tsunami, or its financial or economic equivalent, isn’t necessarily creative, and its victims aren’t necessarily dumb.
Bank failures in reasonably normal times might reasonably be blamed on management. But massive bank failures resulting from a financial tsunami are another matter.
My Dad used to say it rained on the just and the unjust alike. I’m still not sure what he meant by that, but I’ll borrow a version of it here. Under these extraordinary circumstances, some rules shouldn’t apply. Some rules probably should be relaxed to give victims a chance to claw back. But, ironically, as bank conditions deteriorate, the rules are usually tightened. The bar is raised, not lowered.
Some bailouts may be necessary-even to someone who works at a free-market think tank.