June 28, 2018 / 3:50 PM / 9 months ago

Breakingviews - Cox: If GE can break up, so can the United States

NEW YORK (Reuters Breakingviews) - In the 126 years after Thomas Edison established General Electric, it became too unwieldy to manage effectively, insufficiently accountable to stakeholders and financially undisciplined. New boss John Flannery’s solution is to break GE up, creating “simpler, stronger and more focused” companies from the once-sprawling industrial and financial conglomerate. If GE can do that, why not the United States of America?

The logo of Down Jones Industrial Average stock market index listed company General Electric is shown at their subsidiary company GE Aviation in Santa Ana, California April 13, 2016. REUTERS/Mike Blake

It may sound far-fetched, even unpatriotic, to suggest splintering the nation. It certainly would be more complicated than dismantling a $120 billion corporate entity. But what works in business could be applied to a bloated federal government, and a nation divided on economic and social issues exhibiting many of the same symptoms of distress that GE did. That was, after all, the reason voters elected a businessman, Donald Trump, as president.

Most recent discussion of deconstructing America has occurred along the culture-war fringes. After the 2008 financial crisis, Russian academic and former KGB analyst Igor Panarin garnered headlines for his earlier prediction that the United States would dissolve into six bits, sparked by immigration and general economic and moral decline. It’s still a popular cry among white supremacists decrying cultural degradation. There’s also a live attempt to put secession on a future ballot in California.

Though it may offend the sensibilities of Americans who consider the Civil War the last word on the matter, modern history suggests there will be more stand-alone states in the world, not fewer. The number of sovereign countries more than doubled to around 195 today since the end of the 19th century. The global population is projected to hit 9.7 billion by 2050, the United Nations says, up from 1.6 billion in 1900. As humanity grows, so too will the desire for more accountable, competent governance.

With just over $120 billion of sales last year, GE’s economy ranks somewhere just above Morocco and Kuwait. That will change as Flannery effectively creates three free-standing corporate states. One of them will be Precision Health, which sells about $19 billion a year of products like magnetic resonance imaging and ultra-sound machines.

In its new guise GE argues Precision Health can better focus on its mission: “better outcomes delivered more efficiently.” It will have its own stock, which it can use as a “currency” for acquisitions and to compensate managers. Their success, or failure, will no longer be diluted by whether Pakistan orders another gas turbine or Japan Airlines buys more jet engines. It’s a form of sovereignty.

That’ll be good for the rest of GE. It can use proceeds from a sale of 20 percent of the health business to shore up its finances and it will send the division off with around $18 billion of liabilities. Selling control of oil-field services firm Baker Hughes similarly brings in cash that can be used to pay off creditors and strengthen core GE, while relieving Baker Hughes from the yoke of Boston’s stewardship.

Over time, these two enterprises may become larger than their parent, as Brazil did with its former master Portugal. Though they will eventually be three independent companies, they may also do business with each other, as trading partners, forging partnerships and striking arm’s-length commercial agreements that benefit both sides, just as nations do. They might even pool resources the way JPMorgan, Amazon and Berkshire Hathaway are doing in healthcare.

Each should be more accountable to suppliers, employees, regulators and, particularly, shareholders, who vote every year on the direction of the company, pay and the board’s composition. As smaller entities, it will also be easier for activists to make their views known. That heightened democracy should make their managers more disciplined in their decisions.

Who wouldn’t like to see such virtues applied to the U.S. government and its $4 trillion budget? Despite the change from Democrat to Republican control of the presidency two years ago, and before that the legislature, spending continues to rise and outstrip revenue. America’s economy is chugging along, in part thanks to tax cuts fueled by deficit spending. Yet outcomes, from education to health to infrastructure, remain below rich-country standards.

Meantime, the social and political divisions among Americans, at their worst in a generation or more, have become geographic in their contours. The coming battle over the next Supreme Court justice will take this to a new extreme, as Breakingviews has pointed out. If the Senate approves Trump’s nominee on a simple majority, it will hand extraordinary power to sparsely populated states over California, New York, Washington and New England. The election of a conservative jurist is likely to put an end to legal abortion in dozens of states.

As inequity in representation becomes more pronounced, secession movements like California’s will become stronger. Why should the Golden State, where 12 percent of the population produces 13 percent of the economic output, be outvoted five to one by Wyoming, the Dakotas, Idaho and Montana, with 1.6 percent of the country and 1.3 percent of the GDP? It’s unfair.

Similar disparity exists in the taxes paid compared to the benefits received by America’s most productive states. According to a March study by WalletHub, a personal-finance website, the most federally dependent states are predominantly controlled by Republicans in the south and west. In a separate study of fiscal transfers from 1990 to 2009, the Economist found coastal states, which tend to elect Democrats to office, paid far more to the federal government in taxes than they received.

As the political and economic fault lines widen, it becomes easier to imagine breaking into new regional nations. Think Pacifica, an amalgam of the three West Coast states; or Atlantica, stretching from the borders of Canada and Ohio down to Washington. Those states paid some $2 trillion more in the years tallied by the Economist than they got back. Like the future earnings of a Precision Health untethered from GE, those funds could be invested in education, healthcare - or returned to voters.

Breaking up wouldn’t be easy. Legislative, judicial and executive institutions would need to be recreated. New countries would have to decide whether to provide for their own self-defense or contribute to a shared military, which could then become more accountable to stakeholders, too.

Like GE’s new entities, America’s successors would also need to contemplate their own finances. The Atlantica or Pacifica dollars might no longer function as global reserve currencies. Consequently, the market would discipline them from ballooning deficits, printing unlimited paper and starting trade wars. And that’s the whole point. GE may be a bad model for a modern U.S. company today, but it just may be the blueprint Americans need.


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