Pawlenty warns of U.S. becoming the next GM

On Oct. 13, Gov. Tim Pawlenty gave a much-discussed speech at the annual dinner of the Minnesota Business Partnership, an organization of business executives. Pawlenty warned against the kind of complacency in public policy that, he said, proved the undoing of General Motors:

Minnesota leads the country — it is at or near the top — in just about everything that matters to most peoples' quality of life definition. … But I would suggest to you tonight that one of the biggest challenges and the biggest threats that Minnesota faces … is a sense of complacency or nostalgia as a strategic plan.

There is a great tendency in our great state to look back in terms of the way forward … Let me just digress for just a minute and tell you a little story about a company that you will recognize. And that is, General Motors … By the 1920s, General Motors had far surpassed Ford as the nation's largest automaker. The leader of the company at that time was Alfred Sloan. He was a dynamic, change-oriented leader by all accounts. The company not only survived the Depression, but was profitable through most years throughout the Depression, in large part, because during the Roaring '20s that preceded it, they had sensible business policies that were based on common sense and solid foundations. They did not get carried away into the hysteria of the Roaring '20s. <more>

After Sloan's retirement, the company began to have some problems and those problems lingered and accelerated over the ensuing years and decades. There was a great deal of commentary around a sense of smugness, around a sense of overconfidence, almost a sense of arrogance within General Motors. …

You then had a pattern over many decades of management and unions building up cost structures that were unsustainable, irresponsible and reckless and related to unbelievable pensions, lifetime health care entitlement programs without any utilization concerns within the health care programs. Pay and work rules that defied any sense of market sensibility or flexibility and unsustainable cost structure. The management attitude was smug and arrogant, feeling insulated from outside forces, reflecting no appetite for change.

In a bit of interesting irony that also foreshadowed what was coming, in 1996, General Motors actually designed and produced the first prototype electric car. … They not only shelved the project, they scrapped the car and destroyed all the models. They moved back to their traditional approach.

Rather than worrying about improving product, they then moved into financing schemes that would make things even worse exponentially. You saw them getting into the car equivalent of sub-prime mortgage financing. Putting financing out on cars that was greater than the value of the cars. And as the cherry on the top, then they went out and bought DiTech and got directly into the home mortgage subprime business.

The factors that took down General Motors included eroding competitiveness compared to national and global standards, uncompetitive and non-modern work rules and labor costs, future unfunded liabilities that surpassed any reasonable ability to ever pay them back and sustain them under rational market conditions. So I ask you tonight, does any of that sound familiar? As it relates to public policy in the United States of America in the year 2009? Are there any parallels to be drawn from the decisionmaking that you have seen in Washington, D.C. Not just now, but over the last several decades, regardless of which party has been in power in the White House or the Congress? …

And to the point, does any of that sound like Minnesota? And if it does, I hope that concerns you. It concerns me. A sense of urgency and an appetite for change. Our federal government in the United States of America would make General Motors look like Google in terms of innovation and moving forward. They don't even try to balance the budget anymore. The current situation has made it exponentially worse but let's face it, it wasn't much better in general trend lines for years or decades before that. We have a situation now where over 50 percent of all the debt in this country is bought by foreigners. You say, what difference does that make? Well here is one example of the difference it makes. If you want to go to China and ask them to help us pressure and put sanctions on Iran about nuclear weapons, if they own all our debt, how much leverage do you think we have in China? Not much. Not much. Our Secretary of State, Hillary Clinton, was recently in communist China, rhetorically and literally pleading with the Chinese to continue to buy our debt because if they don't and other sovereign wealth funds of the world do not, we cannot pay our bills.

Is that the United States of America that you want to live in? Do we want to be so in debt as a nation that if we do not have the good graces of the Communist Chinese and sovereign wealth funds in the Middle East that we can't pay our bills? And the answer in the meantime now is to keep interest rates at zero, devalue, deleverage the dollar by printing more money. You print more of something it is worth less. And you know what is coming when you do that. So in the intermediate and the long term we should all be very concerned about that. ...

But in Minnesota there is an entitlement mentality of our own here. From 1960 ... to just before I became governor, the average two-year increase in the state's budget was 19 percent per budget cycle. ...We can find no two-year budget cycle where from budget cycle to budget cycle state spending ever went down. Ever. All it does is go up. Until I became governor. Now for the first time in 150 years we actually reduced spending in real terms. I think that is reasonable in these economic times.

The point of the story is this. Even if we can get back to the good ole days of 2 or 3 percent GDP — let's say we can and I hope we do. You cannot have a private economy growing or 2 or 3 percent a year and having government programs, government institutions needing to have two or three or four times that just to stay even because of the cost structures they have built up. This math doesn't work. …

In what other walk of life does that kind of dynamic work? The answer is, it doesn't.

So we need to get good measures around price and quality. We need to give people incentives to use the system wisely. When you do it like we've done with our state employee group, we said you can go anywhere you want to, to our state employees but if you choose to go somewhere that is really expensive with bad results, you are going to pay more. And if you go somewhere that is efficient with good results, you are going to pay less. Guess where they go? Ninety percent of the people in the program of the state employees migrated to higher quality, lower cost places and the premium increases in that program for three of the last five years have been zero percent. Zero percent. ...

The reason that there is this never-ending demand for more government, more government housing, more government transportation, more government health care, is because in many cases the individuals can't afford it themselves. The reason they can't afford it themselves is they lack the education or the skill to access the economy of today and tomorrow. So it becomes a viscous cycle that feeds itself. We need to be much more bold and much more dramatic about education reform in this country. ...

Besides parents, the second most important factor in determining how a child is going to do in school is the quality and effectiveness and preparedness of their teachers. If you think of General Motors and think of the structure in our public education system, you will find a lot of parallel. As you saw earlier on this stage tonight, our schools are filled with really good people who are hard-working, good people. They don't make too much money. But they are working in a system that is a relic of the 1940s. All the money or most of it is aligned not to results but to things that are not even closely correlated to student learning. There is very little accountability for results. We have to have a system where the money is aligned to the results and there is accountability for the results that we expect. That relates to over-hauling the teacher profession. It relates to standards. And frankly, it relates to tenure reform.

We can't have a profession where you can come in to it and after three years, you are guaranteed a job for life unless you commit a crime. I would say that you should re-earn tenure. After three years, every three years after that or every five years after that and the way that you re-earn it is that you make sure that you make reasonable progress with the students that you teach. Unlike 20 years ago, we can measure that now. Not compared to some super district but compared to your students as you find them in the fall. How many of you have a job for life if you are not in government? ...

I would suggest to you that most of the structures in our government, particularly the entitlement programs, both in Washington and here, are just fundamentally broken. They are on a rotting foundation. They cannot be sustained. They are irresponsible. They are reckless. They are going to come crumbling down. They are going to do that within the next 20 years and maybe sooner. ...

We gotta find a different way to do business. ... It isn't easy. It isn't popular. I don't go over to St. Paul and say we're not going to raise taxes just because I like to get my shins kicked. I do it because we can't afford as a state or as a nation the trajectory of spending or the cost structures. And I don't mean afford just in terms of money out of our pocket. I mean what it means about growth and vitality for our economy moving forward.