Creative Destruction – Ingredient for Change

There exists within Western economies a relic of the Cold War. This is not a reference to defense policy, they’ve moved on, adapting to new realities. A parallel to trade policy may seem appropriate, but yet trade with former enemies flows and grows as barriers drop by the hour. One might even look to sport for a legacy, but we see our former rivals now as heroes to our children in hockey, basketball and soccer. Within our market democracy, there exists a centrally planned economy that follows a model that has been exhaustively proven to be a failure. Disability is a centrally planned economy, where its constituents face the same circumstances as those behind the Iron Curtain.

When the USSR fell, western economists were flabbergasted at the state of affairs in the Warsaw Pact countries. In his book, The Age of Turbulence, Alan Greenspan talks about the shock in the realization that East Germans had living standards equal to 35% of their West German countrymen when the wall fell. Economists’ best estimate prior to the opening of books was 75%-80%. Remembering that economists and weathermen can be estimation peers, what caused this gulf in estimates? Greenspan makes the point that while each nation produced millions of cars a year, the economists made no account of quality difference over time. Economists did not account for the difference between the 1950 Mercedes and 1991 Mercedes built in the West, while the East German Trabant is the same car built in 1991 as 1950. Central planning has no account for customer desire, productivity gain or non-scientific innovation, therefore no need to update design or alter production for efficiency. The East Germans maintained the status quo, because there was no perceived need to change. This is a microcosm of what happens when central planning occurs.

In 1942, Joseph Schumpeter brought the term ‘creative destruction’ into the arena of economics. "The opening up of new markets and the organizational development from the craft shop and factory to such concerns as US Steel illustrate the process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one ... [The process] must be seen in its role in the perennial gale of creative destruction; it cannot be understood on the hypothesis that there is a perennial lull." (Quote from "The Process of Creative Destruction" by Joseph A. Schumpeter, 1942) Paraphrasing Schumpeter, for progress to be made, old systems must be replaced by new ones as thought and technology evolves.

In the former Soviet Union, after its fall, it was common to see tractors in fields that where built in 1910. Greenspan himself asked why they were in use, getting the reply that “It still works.” Cuba is famous for this. In the late 1970s, Castro purchased a number of buses from the city of Montreal, whose passengers and taxpayers demanded new and more efficient rides. They are still in service today on the island of Cuba. Not to bias the result, but you can guess what the results of a straw poll with Iowa farmers or Manhattan bus riders would be regarding this approach?

So why are we stuck in the same quagmire with disability in the developed nations of the world? Government programs dominate the field. In a previous blog, it was stated that government makes up 99.9% of the funding in disability. In politics, disability is bi-partisan, which is a euphemism for zero accountability. Let’s be honest, what pol in their right mind is going to give his/her opponent the sound bite of being against disability. With $480B of US tax expenditures on the line annually, and zero accountability, that gets us waltzing through Red Square fairly quickly.

As the experience in Poland, Hungary and Turkey has proven, disability must be privatized. The current systems for medical care, employment services and inclusion under the government umbrella are not performing to expectations. One way to fix this is to inject choice and competition into the mix. Through its elected officials, society deems it appropriate to fund these programs. A mechanism can be devised to pass through tax dollars to users via a simple voucher system. The key here is to drive quality with incentive. Government can regulate, as it does with the FDA and SEC to ensure quality and standard service, but government needs to get out of the disability business simply because its bureaucracy cannot execute creative destruction on a bi-partisan issue.

Experience tells us that this process is painful. Entire populations in Eastern Europe went through great upheaval in the years following the Berlin Wall’s collapse. Inflation, shortages and corruption all came with choice, innovation and freedom in these economies. The same is true for disability. As with the collapse of the Soviet Union, there is no choice. The lack of results for constituents means the system will collapse unto itself. Managed change trumps chaos any day.

Private industry has an advantage in disability. Most entities do not carry lagging legacies, simply because they have not gotten into the space before. Those firms that have mostly volunteer teams working on disability must embrace creative destruction to plan to have material impact on their firm’s profitability requisite with the demographic potential. The best firms accomplish this in everything they do.

Many say that Social Security is the third rail in American politics, causing pols to avoid changing the system like polar bears avoid Miami. The result is a dead program that nobody under the age of 40 expects to draw from. Disability is similar, as in their rush to one side, leaders overlook results. With the incentive to change, creative destruction occurs and innovation happens. These ingredients are what make results percolate.