How to Save American Business

An open letter to President George W. Bush on the state of our entrepreneurial union.
Inc. Magazine, February 2005
By Jack Stack

Dear Mr. President,

At a time when our country is at war, when we're being challenged by new economic superpowers like China, when we face growing concerns about our ability to continue relying on foreign investment and loans to finance our debt, companies like mine -- which offer the hope of the future -- need your help.

After I wrote you in these pages a year ago, you and I talked about steps you and your administration had taken to stabilize our economy and position us to compete more effectively in the global marketplace. What was surprising, not to mention a great honor, was that you chose to talk about it in person, answering my letter by coming all the way to Springfield, Mo., to address the employee-owners of SRC.

Frankly, I think we were a good audience for you to talk to. We see our company as a business of businesspeople -- 1,200 businesspeople altogether. There's nothing particularly glamorous about what we do. We remanufacture engine and engine components for trucks, autos, and the heavy equipment used in agriculture and construction work. We make power units for irrigation. We put together engine repair kits. We're like the tens of thousands of other entrepreneurial companies that form the backbone of the American economy -- the ones who will generate the wealth required to handle the problems we face, keep the economy strong, and leave something better for our children.

That's why it's so important to bear in mind the needs of entrepreneurs whenever we pass new laws or make new rules, even if, on the surface, they appear to have little to do with business. Yes, people in growing companies care about tax policy, but that's just one way the federal government touches us. From environmental regulations to welfare reform to the call-up of National Guard units, virtually everything the government does has an impact on businesses like mine. It's all too easy for Congress and the administration to create problems inadvertently that will have ramifications throughout the entrepreneurial sector, with a potentially devastating effect on our nation's ability to meet the challenges ahead. Then again, it's also possible for you to help remove some of the biggest obstacles that stand in our way.

And that doesn't always involve passing a law. Sometimes we need leadership more than legislation. We need someone to explain how the economy works, what the real issues are, and how we ourselves can deal with them without getting the government involved. I believe explaining all that is the leader's role. Great leaders are great teachers, and you did a terrific job when you came here a year ago. The speech you gave was perfect for our community. You showed us how the tax cuts and your economic policy benefited company owners and employees alike. You got out there and sold it, and we understood it.

Encourage companies that are considering closing entire factories to keep some of the work here in the U.S.

Let's keep it going. Here are examples of issues I would encourage you to think about in your second term. They may not be the same as the economic priorities you've been hearing about from other people, but believe me, things look a lot different out here in the trenches than they do in the government buildings of Washington or the corporate suites of New York City.
The Health Care Crunch

I understand that there are a lot of health-care-related issues you have to think about as President, but the biggest one for businesses like ours is rising health care costs. Health insurance premiums jumped 11.2% between the spring of 2003 and the spring of 2004, according to a survey by the Kaiser Family Foundation and the Health Research and Educational Trust. Our company's health care costs -- we're self-insured -- will rise another 20% next year, from $2.5 million to $3 million. And yet, the consumer price index increased only 2.3% last year. We haven't seen that low a level of inflation in health care costs in a long, long time. Indeed, there have been double-digit percentage increases in premiums for four years running, forcing more and more small businesses to stop offering health insurance altogether. In 2004, only 63% of companies with fewer than 200 employees provided health benefits, down from 68% in 2001.

The fact is, every other health-care-related problem will grow worse unless we address the issue of rising costs. That means getting health care providers to think more like business owners. As you know from your own experience in business, most companies wouldn't last very long in a competitive market if we didn't keep our overhead in check and control our price increases. But because health care is a seller's market and the customers have nowhere else to go, the health care providers can pass their costs along -- and they do.

There are two steps you can take as President to hold down health care cost increases, and neither one of them involves new legislation or regulation. First, you can use your position to foster better understanding of why costs keep rising, to show the terrible impact that this is having, and to focus public attention on the need to make changes. Then you can ask health care providers to take the initiative by agreeing voluntarily to restrain their costs as other businesses do. Challenge them to keep their own price increases within the overall level of inflation. Start a national campaign around it. Single out for praise the providers that accept the challenge and hold the line. Let the industry know that, if they help you handle this problem, you'll be able to help them in other areas.

The second step is to encourage hospitals and clinics to put small-business owners on their boards. Very few hospitals do that now. Although their boards have really good people, the members often have no connection to the marketplace. It's an inbred system. That's why I agreed to sit on the board of the local hospital that provides health care for SRC employees. I wanted to make sure they were represented. The other board members pay attention if I present my case forcefully, and I can be enough of a pain that they make sure they have their ducks in a row before bringing up any new spending increase.

And they do listen. I was in a restaurant the other day, and one of the hospital's leading surgeons came over to my table. "I want you to know that we've heard what you're saying about keeping our costs in line with inflation, and we're working on it," he said. That's what I like to hear. Because of the hospital's efforts, it costs our company about $90 a month to provide a single employee with health care coverage, compared with a national average of $308 a month, according to the Kaiser Family Foundation. As President, you might be able to bring that average down if you can get other boards of health care providers to listen to the business owners who are footing the bill.

Please understand, I'm not saying you should drop your own ideas for addressing the health care situation. Most of them we support. Health savings accounts certainly have the potential to help small businesses like mine. Because employees would be using their own pretax dollars to pay for medical expenses, they would no doubt become smarter consumers of health care services, which is good for everyone.

Most of us in small business are also behind your effort to curb medical malpractice suits through tort reform. It's just not enough. The $24 billion that the health care industry doled out in malpractice awards in 2002 represented less than 2% of its total costs for the year, according to the Congressional Budget Office. Measures like capping attorneys' fees and limiting awards will help reduce health care costs in some areas, but we need to do more.

As for allowing small businesses to band together in associations that would let them qualify for discounted health benefits, it sounds like a good idea, but be careful. There's a danger that associations would favor companies with a young work force and reject those with older employees -- with the result that some people who have coverage now might lose it. And before you spend a lot of your political capital on getting a bill for association plans through Congress, you might want to check out how many additional people would actually be covered. I understand that's a matter of some debate.

Nevertheless, these are steps in the right direction. You can help us most, however, by using your considerable clout as President to get the health care industry to bring its cost increases under control.
Lawsuit Nightmare

Medical malpractice is not the only area in which we need tort reform, as I'm sure you're aware. Lawyers on contingency fees have turned all kinds of litigation into a nightmare for small businesses. In my company, it got to the point where we'd get a call from the same lawyer every time we let one of our employees go. We were becoming the guy's meal ticket, and we had to put a stop to it. So a year and a half ago, we began requiring our employee-owners to agree to arbitrate any disagreements that might arise. Now, rather than going to court with every problem, we hire arbitrators, who are paid by the hour, to work out compromises. With no 30% or 40% contingency fees to be had, the lawyers have stopped calling, and our annual spending on legal fees, lawsuits, and claims has plunged from $414,362 in 2003 to $97,169 in 2004.

With arbitration, moreover, everybody has to be reasonable. For instance, one of our employees recently filed a complaint about another employee who had allegedly made an inappropriate remark. We don't condone such behavior, and we put the offender on suspension. During the arbitration process, we got the sense that the employee who had complained wasn't happy being at the company anymore. We offered him a 90-day severance package. He asked for three years of severance pay. When we refused, he decided to come back to work.

I'm not saying that all lawsuits are frivolous. Of course, some employees have legitimate complaints, and some employers don't treat people as they should. But the vast majority of business owners try to do the right thing, and they shouldn't have to pay because of a few bad apples. We've cut down on employee lawsuits by switching to arbitration, and we urge other business owners to do the same. But we could all use some help from the government in terms of tort reform.
The Challenge of Foreign Competition

It's a fact of life that American business owners in general -- and manufacturers in particular -- face stiff competition from countries with dramatically lower costs than we have. In Mexico, for example, someone can remanufacture one popular type of engine in 20 hours for $2.15 an hour, including labor and all the invisible overhead costs, such as rent, electricity, accounting, and health benefits (if the company provides them). In Springfield, it costs us $40 an hour to make that engine, partly because the invisible costs are much higher. So we're spending $800 per engine, while a Mexican remanufacturer can do it for $43. That's a $757 difference. We think it's only our exceptional quality that saves us.

But with that kind of cost differential, I can't criticize any U.S. business owner for thinking about setting up shop overseas. We may eventually be forced to consider it too. If we're pushed to that point, we wouldn't shut down any of our Springfield factories, but we might start doing some business in Mexico to bring down our average cost. There are simply no cheap alternatives this side of the border. Although in theory we could reduce our invisible costs by not offering health insurance, I doubt that anybody would want to work here if we did. Besides, our goal is to improve the quality of life in our community, not to make it worse. We can continue to do that and remain competitive by manufacturing both here and abroad. It doesn't have to be all or nothing.

That's the message I think you can convey better than anyone else to company owners who are being hurt by competition from countries with much lower costs. Erecting trade barriers certainly isn't the answer. Look what happened in 2001 when you put tariffs on steel imports. It hurt a lot more people than it helped by driving up steel prices for American builders and manufacturers. Instead, you should be the teacher. Explain the issue to company owners. Encourage those who are thinking about shutting down entire factories to keep some work here and transfer a smaller portion abroad. That way, they'll reduce their costs without devastating their communities by eliminating thousands of jobs.

Tax issues are important, but it's the continued escalation in the invisible costs that's killing us these days.

The Toll of High Energy Costs

I'm sure that boosting U.S. oil production will be one of your priorities this term, as well it should be. High energy prices are a huge burden on companies like ours -- and everybody else, for that matter. In the past, however, I think we've gotten sidetracked by focusing too much attention on issues like drilling in Alaska, while we've all but ignored other major obstacles to increased oil production, such as the shortage of domestic oil refining capacity. That's a direct result of the regulations we've put on oil refineries. As you may be aware, no new refinery has been built in this country since 1976. Why? Because it would cost more than $2.5 billion to build one from scratch that meets our stringent emissions standards. As it is, even if you succeeded in getting more oil pumped in Alaska, we might not be able to refine it, meaning that we'd have to continue living with high gas prices -- and suffering the consequences.

Don't get me wrong. I'm all in favor of having a healthy environment. But there are always tradeoffs in the decisions we make, as every business owner knows. The desire to achieve one important objective, like having cleaner air, has to be balanced against other important objectives, like keeping the economy strong. That requires planning. At SRC, we make sure in advance that we have enough labor and equipment to reach our goals each year. Otherwise we could run into capacity constraints that would trip us up. Clearly, Congress did not do the same when it passed the legislation clamping down on oil refinery emissions. If you really want to boost oil production, you'll have to force Congress to go back and do it now.
The Raw Materials Shortage and Global Warming

As you know, we face a serious raw materials shortage that's likely to get worse as the economies of countries like India and China continue to grow. In the past year alone, the price of steel has more than tripled, from 15c a pound in October 2003 to 46c a pound in October 2004. Meanwhile, you've taken a lot of flak for refusing to sign the Kyoto Protocol without proposing any alternative plan to reduce emissions of carbon dioxide and other heat-trapping greenhouse gases. You've said you were concerned that such efforts would cost America jobs.

Well, I've got a way for you to kill two birds with one stone: Embrace remanufacturing. Tell business owners they need to come up with ways to recycle whatever they make. The effect will be to reduce pollution, relieve the raw materials shortage, and create jobs all at the same time. The company I work for is living proof of it. As a business, remanufacturing is labor-intensive and environmentally friendly, and it cuts down on our nation's need for raw materials by reusing the materials we have.

I should warn you that other developed nations are ahead of us in this regard. Japanese car manufacturers, for example, already figure out where every tire, rim, and crankshaft will go after their cars die. Last year, the European Union began requiring all automakers to recycle the cars they sell in Europe. Caterpillar is putting increased emphasis on its remanufacturing business because it sees it as a growth industry. The company melts down and reuses the plastic, steel, aluminum, and copper in its old worn-out equipment. Last year, it began offering that service to other companies. Why can't every business owner follow Caterpillar's lead? Considering that the U.S. is unable to meet its domestic demand for steel in any given year, I'd say that this is an urgent matter. Let's push the voluntary, patriotic remanufacturing of everything from cars to computers. Let's challenge U.S. companies to take the initiative and come up with the world's best recycling programs. I have no doubt we can do it.
The Accounting Mess

You've said that you want to streamline tax-reporting requirements for America's small businesses, and I believe you. In one speech, you estimated that 2.6 million small-business owners would save 61 million hours as a result of tax simplification and the resulting reduction in paperwork. Regulations, you noted, put an enormous strain on the small-business sector. Those of us in the sector couldn't agree more.

Unfortunately, our reporting requirements have become more onerous, not less, in the past four years, thanks mainly to passage of the Sarbanes-Oxley Act in 2002. Although it was intended to regulate reporting in publicly held companies, it has had a huge impact on private companies like ours because of what accounting firms have done with it. Sarbanes-Oxley has created a whole new business for them. To comply with the act's rules, they've adopted new audit standards that dramatically increase the price of an audit. Our accounting firm told us recently that our auditing bill would almost double, from $50,000 in 2003 to $90,000 in 2004, because the firm would need 250 more hours to audit our books this year than it needed last year. That shocked our employees, who told me to find another accountant. But I suspect another firm will charge just as much. The new regulations, and the new penalties, have increased demand for accounting services and created an accountant shortage, driving up prices across the board. All of us who did nothing wrong are paying through the nose for the sins of Enron and WorldCom.

It's not too late to reverse some of these regulations, and I hope you'll press Congress to do so. They obviously need some teaching as well. You should remind them that, when they pass laws and makes rules, they need to think more about the effect the changes will have on small entrepreneurial companies. That's where the future lies. We're not going to see any more Microsofts or Wal-Marts being built from the ground up. Big companies aren't where it's at. Young people are instead starting their own small businesses in the communities where they live. Local organizations like the chambers of commerce are helping these upstarts, but the federal government has done little or nothing for them, as far as I can tell. If that's going to change, you'll have to lead the way.

But enough. By now you're undoubtedly asking, "Who are these guys, and what do they really know about the U.S. economy and global economics?" Well, we're just an employee-owned company that loves hearing you talk about creating an ownership society. We realize that at the end of the day, quarter, year, or even the end of a presidential term, change begins at home. The revolution starts with us on the factory floors and in the service bays. It is our responsibility to make sure we are capable of competing and contributing to a better community and a better quality of life here and throughout the world.

We're just asking for a little help in holding down our overhead. I know that you feel strongly about tax issues, and I agree that they're important, but I haven't talked about them here because it's the escalation of invisible costs that's killing us these days. That's where we really need your assistance. We're like the little train that kept saying, "I think I can! I think I can! I think I can!" We think we can too, if you help us make sure our overhead doesn't weigh us down too much.

Oh, and by the way, please don't feel that you have to answer this letter in person. Not that we wouldn't like to see you again. You're always welcome here in Springfield.

Respectfully, Jack Stack

Jack Stack, a longtime contributor to Inc., is CEO of SRC Holding Corp. in Springfield, Mo., and co-author of The Great Game of Business and A Stake in the Outcome. This article was written with Nadine Heintz and Bo Burlingham.

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