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CEO Daily: Thursday 15th September

Good morning.

 

A new report from the Harvard Business School this morning says the United States is “failing the test” of economic competitiveness.

 

The report is part of a project launched in 2011 by Michael Porter and his colleagues to understand the disappointing performance of the U.S. economy in recent years and identify steps to restore growth. Looking at the last five years, it finds unusually slow economic growth, declining productivity growth, slow employment growth, declining labor force participation, stagnant or declining real incomes, and a slowdown in small business formation.

 

That’s not to say that the U.S. doesn’t still enjoy some outsized advantages in the global economy. The Harvard study cited strengths in higher education, entrepreneurship, innovation, management and capital markets as key areas where the U.S. still leads. But, it said, “these strengths are being offset by weaknesses,” including the corporate tax code, the K-12 education system, transportation infrastructure, health care, and a broken political system.

 

“Many of the weaknesses, are in areas driven by federal policy,” the report concludes. “The federal government has made no meaningful progress on the critical policy steps to restore U.S. competitiveness in the last decade or more.”

 

What’s to be done? In true business school form, the Harvard report offers an eight point plan:

 

1) Reform the corporate tax code

2) Move to a territorial corporate tax system

3) Ease immigration of highly-skilled individuals

4) Address distortions and abuses in the global trading system

5) Improve infrastructure

6) Simplify and streamline federal regulation

7) Create a sustainable federal budget, including entitlement reform

8) Responsibly develop America’s energy resources

 

But the number one task is to fix a broken U.S. political system, which has stymied progress on the eight points above. “To us, the confused national discussion about our economy and future prosperity in this election year is our worst nightmare. There is almost a complete disconnect between the national discourse and the reality of what is causing our problems and what to do about them. This misunderstanding of facts and reality is dangerous, and the resulting divisions make an already challenging agenda for America even more daunting.”

 

 

Amen to that. You can read the full report here. More news below.

 

Alan Murray
@alansmurray
alan.murray@fortune.com

Top News

The Feds Investigate Wells Fargo

Federal prosecutors are investigating the abusive sales practices at Wells Fargo, with a focus on the question of whether or not managers at the bank directed staff to falsify documents and open accounts without customers’ knowledge, according to The Wall Street Journal. That’s a significant escalation of an issue which clearly has a long way to run beyond the $185 million fine it paid to other regulators last week, and an implicit challenge to CEO John Stumpf’s claim that rogue employees, rather than the bank’s culture (still less its senior management) were responsible. Wells Fargo has fired 5,300 ‘bad apples’, while so far resisting the temptation to claw back any of the $124.6 million retirement package taken by Carrie Tolstedt, the executive who led the responsible division. Fortune

Leaks and Selective Disclosures on the Campaign Trail

The presidential campaign continued to be overshadowed by private documents being made public—some with, some without their owners’ consent. Leaked e-mail showed former Republican Secretary of State Colin Powell wishing a plague upon the houses of both candidates, calling Donald Trump “a national disgrace” and lambasting Hillary Clinton for her “greed” (something for everyone, there). The leak stemmed from DC Leaks, which cybersecurity experts believe has ties to the Russian intelligence services (according to the Wall Street Journal). Clinton, meanwhile, released more details about her health regimen since her 2012 fall and concussion, while Donald Trump handed over some of his medical records on a TV interview with Dr. Mehmet Oz. Fortune

Uber Debuts Self-Driving Cars in Pittsburgh

Uber’s fleet of self-driving taxis started operations in its pilot project in Pittsburgh. It’s an important milestone in many ways: firstly, a big step to cutting the cost of on-demand mobility to a level that is more likely to transform the whole experience of car usage the world over; secondly, and more awkwardly, it’s the beginning of the end for Uber drivers, exposing the fragility of employment in the much-hyped ‘gig economy.’ The development eliminates the kind of driver risk that has generated negative publicity over recent years, while exposing it to the kind of technology risk that Elon Musk’s Tesla Motors is currently struggling with. The loss of its driver community will ultimately make Uber more dependent on support from its customers in its myriad struggles with regulators the world over, so those cost reductions had better be real and substantial. Finally, the development also removes the essential intermediary that allows it to argue that its value-added comes from its intellectual property, rather than from the provision of mobility services to end customers. In the light of Apple’s recent EU tax ruling, that could badly hit the (for now still extreme) efficiency of its tax planning overseas. Fortune

May Rides Into Brexit Talks on a White Elephant

The U.K. government gave the go-ahead for a controversial $24 billion ‘Hinkley Point C’ project that will be the U.K.’s first nuclear power plant in over 20 years. The government’s commitment to a project widely condemned as uneconomical illustrates how much it needs political goodwill from Hinkley Point’s backers, state-controlled electricity generators from France and China, in a world without the safety net of unlimited free trade with its neighbors. London needs to keep Paris sweet during the upcoming ‘Brexit’ negotiations, and will also need Chinese inward investment to help cover the country’s yawning current account deficit, the biggest in the G7. In the process, Prime Minister Theresa May has also had to shelve her concerns about national security in the form of Chinese co-ownership of a plant that will supply 8% of the U.K.’s electricity needs. The price: committing U.K. consumers to pay over $120 a megawatt-hour for Hinkley Point’s output for 30 years, a figure more than double the average spot price over the last year.   Financial Times, metered access

 

Around the Water Cooler

Desert Development Rules Frustrate Green Energy Lobby

After eight years of political wrangling, the federal government published its final ruling on which desert sites in California would be available for development for large-scale solar and wind power projects. The energy industry was less than happy at the final result, which it said restricted too much acreage for land conservation and would consequently limit the U.S.’s ability to meet its carbon reduction goals. The first phase of the plan designates 388,000 acres out of a total of 10.8 million considered as optimal for renewable energy development. Applications for projects in those areas will receive a streamlined permitting process and possible financial incentives. Environmentalists cheered the results, saying it struck the right balance between preserving wildlife and plant habitats while still allowing ample room for wind and solar development. Fortune

Ford Warns on the Cost of Technology

Ford Motor warned that its profits would suffer over the next few years due to the high cost of developing electric and autonomous driving technologies for its next generations of vehicles. At an investor day, the company said pretax profit would fall next year from an estimated $10.2 billion this year, before recovering in 2018 (without being any more specific). Ford aims to invest $4.5 billion in electrification and introduce 13 new EVs—40% of its model catalogue–by 2020. It also said it would complete the migration of its small-car manufacturing from the U.S. to lower-cost Mexico “within two to three years,” in a move that will revive Donald Trump’s narrative about how U.S. workers have suffered from globalization. Fortune

Target “Won’t Be a Grocer”

Don’t try to make Target out to be something it isn’t, CEO Brian Cornell said Wednesday in defense of his stuttering attempts to make over the chain’s grocery offering. “It’s not one of our signature categories nor will it be,” Cornell told reporters ahead of the retailer’s national meeting later today. “We’re not a grocer.” Cornell was bristling at unfavorable short-term comparisons with Walmart, whose parallel efforts to offer more fresh and healthy foods have gone hand-in-hand with better overall sales numbers. While Cornell may be right that Target’s traditional strengths in household goods and electronics are more ‘core’, he does expose himself to the risk of appearing half-hearted about something that is still costing shareholders a decent sum of money. Fortune

Apple Shares  Hit 2016 High 

Apple shares hit their highest level this year as the company said that initial shipments of the iPhone 7 had now sold out. It’s hard to quantify that statement without knowing how many it had shipped in the first place, and the company’s new-found reluctance to publish first-weekend sales statistics itself suggests that it is leery of comparisons with previous years’ launches. All the same, the shares appear to found something of a sweet spot, having ridden out the initial storm over the company’s tax problems in the EU. Mobile operators Sprint and T-Mobile, as well as international ones, have reported strong demand for the new model. It also helps, of course, that its chief rival’s products are literally going up in flames all over the world.  Fortune