Easy money has become a big problem. Photographer: Xaume Olleros/Bloomberg
Just since December 2018, central banks have collectively
injected as much as $500 billion of liquidity to stabilize economic
conditions. The U.S. Federal Reserve has put interest rate increases on hold
and is contemplating a halt to its balance-sheet reduction plan. Other
central banks have taken similar actions, fueling a new phase of the
“everything bubble” as markets careen from December’s indiscriminate
selling to January’s indiscriminate buying. The
monetary onslaught appears a reaction to financial factors -- falling
equity markets, rising credit spreads, increased volatility -- and a
perceived weakening of economic activity, primarily in Europe and China.
If they heeded Walter Bagehot’s oft-cited rule, central banks would act only as lenders of lastresort
in times of financial crisis, lending without limit to solvent firms
against good collateral at high rates. Instead, they’ve become lenders
of first resort, expected to step in at any sign of problems. U.S.
central bankers are currently debating whether quantitative-easing
programs should be used purely in emergency situations or more
routinely.
Since 2008, the global economy has grown far too
dependent on huge central bank balance sheets and accommodative monetary
policy. The U.S. economic boom President Donald Trump loves to tout is
largely fake, engineered by artificial policy settings. Such dependence
is dangerous and, for various reasons, could well backfire.
For one thing, central banks are poor forecasters. GDP
growth, inflation and labor markets may prove more resilient than
feared, remaining at or above trend. Key risks, such as the trade dispute
between the U.S. and China, may recede. Financial markets and asset
prices have already recovered substantially. It’s possible that central
banks may be forced to make another U-turn to reduce the risk of
reflating asset price bubbles and overheating economies. This flip-flop
would be destabilizing and affect decisionmakers’ credibility.
While
monetary measures boost asset prices, too, their influence on
consumption and investment is unclear. Unlike fiscal or micro-economic
initiatives, they can’t target specific sectors or precise objectives.
Where central banks finance governments, they blur
the distinction between fiscal and monetary policy.
In fact, lowering the cost of money and increasing
liquidity may reduce rather than boost economic activity. Lower costs of
capital encourage automation, displacing workers and reducing
bargaining power for higher wages. This problem is compounded when low
interest rates encourage investors to look to shares for income; that
forces companies to increase dividends or buy back stock, frequently by
reducing their workforce to improve earnings and cash flow. Lower
rates reduce the incomes of retirees and thus their spending power.
They also increase the funding gap of defined benefit pension plans,
which could lead to a reduction in benefits. With investment yields low,
investors have to set aside additional savings for future needs,
shrinking their disposable income. If consumers then borrow more to
finance routine consumption, debt levels will rise.
Indeed,
central bank actions are already an implicit acknowledgement that
rising debt levels are unsustainable at higher rates and under tighter
liquidity conditions. In the U.S., a record 7 million Americans
are 90 days or more behind on their auto-loan payments, according to
the Federal Reserve Bank of New York -- a significant signal of distress
among low-income groups who typically prioritize such payments. The
actions also recognize that government funding needs, for example in the
U.S., require central bank support.
Easy monetary conditions also perpetuate the problems
of zombie borrowers, weak businesses that survive only because cash
flows cover loan interest at low rates. This prevents the reallocation
of capital from underperforming businesses.
An
overreliance on central banks exacerbates the crisis of trust. The
emphasis shifts from elected governments to unelected finance officials,
reducing accountability and undermining democratic forces. That allows
other economic actors to avoid dealing with the real issues. It creates
the impression that the central banks favor banks and the financial
system, rather than the real economy.
Central
banks’ new activism looks like a panicked capitulation to markets and
political pressure. This encourages market participants to expect
intervention regularly to prop up asset prices and smooth out
volatility. Ultimately, this reduces the effectiveness of lower rates
and additional liquidity infusions. As with any addiction, increasing
doses become necessary. That will increase the strains on central bank
balance sheets and tools, undermining their ability to respond in a real
crisis. Printing money was always going to be easier than
withdrawing it later. In effect, central banks are boxed into a
situation where they can’t normalize policy and must maintain low rates
and abundant liquidity, lest they destabilize fragile asset markets and
spur low growth and disinflation. This state of “infinite QE” risks
miscalculations and major policy errors. If central banks are, as is now
fashionable to state, the only game in town, then the game is lost.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Salvini Calls For Elimination Of Italy's Central Bank, "Prison Time For Fraudsters
On Friday, in a moment of predictive insight, Bank of America correctly warned that the greatest threat to EPS - i.e., markets - in the next 3 years "is an acceleration of global populism via taxation, regulation & government intervention."
Just one day later, this warning to the financial establishment was
starkly manifest in that ground zero for Europe's populist revolt,
Italy, where the country's coalition government hinted at where the
global populist wave is headed next when he slammed the country’s
central bank leadership and stock market regulator, escalating its
attacks on establishment figures ahead of the European parliamentary
vote in May.
Matteo Salvini, the outspoken head of the anti-immigrant League
party, said the Bank of Italy and Consob, the country’s stock market
regulator, should be "reduced to zero, more than changing one or two people, reduced to zero", or in other words eliminated,and that “fraudsters” who inflicted losses on Italian savers should "end up in prison for a long time."
As the FT notes,
this latest broadside against Italy’s financial establishment comes as
the two parties which are increasingly at odds with each other amid
speculation Salvini may hold elections to become the sole leader of
Italy, prepare to run against each other in the European parliamentary
elections in May, a contest widely seen as a proxy for national polls.
Meanwhile, both leaders have also increased their attacks against
targets including the EU and French president Emmanuel Macron.
Confirming the rising animosity between the two coalition partners,
the League and Five Star have openly squabbled over the future of an
Alpine rail line and migration, while the two leaders’ repeated attacks
against France which culminated with Di Maio meeting the leaders of the
anti-Macron Yellow Vest moment, triggered a diplomatic crisis which last
week saw Paris recall its ambassador from Rome.
Saturday's latest verbal crackdown targeting of the Bank of Italy
comes after central bankers issued more pessimistic economic growth
forecasts for this year compared with the numbers underpinning the
government’s budget. As we reported last month, Italy entered into a
technical recession in the second half of 2018, with the Bank of Italy
cutting its GDP forecast for 2019 to 0.6% compared with a 1% forecast
made by the government. At the same time, the European Commission
slashed Italy's GDP forecast from 1.2% to a borderline recessionary 0.2%
for the full year, hinting that Italy's budget deficit forecast will
not only be missed, but could re-emerge as a focal point of renewed
tensions between Rome and Brussels in the coming months.
Meanwhile, ECB head Mario Draghi, an Italian and former former
governor of the Bank of Italy, last year warned that central bank
independence was under threat by populist governments, while not making a
direct reference to Italy. Should Salvini cement his de facto Italian
leadership in upcoming elections, it would make life for the local
central bank especially complicated.
Separately, Di Maio and other Five Star ministers said they want to
block Luigi Federico Signorini, the deputy director-general of the Bank
of Italy, from renewing his term, according to La Repubblica. The
newspaper reported that the Italian cabinet was divided on the issue.
As previously reported, in the latest anti-establishment shot across
the bow, several days ago the government nominated Paolo Savona, a
veteran economist and prominent Eurosceptic who had previously served as
minister for European affairs, as the new president of Consob. Savona
was last year been blocked as the coalition’s first choice as economy
minister by Italian president Sergio Mattarella, following strong
pressure from Brussels and a revolt in the Italian bond market.
The author of this piece has chosen to maintain anonymity.
To those convinced that a secretive cabal controls the
world, the usual suspects are Illuminati, Lizard People, or
“globalists.” They are wrong, naturally. There is no secret society
shaping every major decision and determining the direction of human
history. There is, however, McKinsey & Company.
The biggest, oldest, most influential,
and most prestigious of the “Big Three” management consulting firms,
McKinsey has played an outsized role in creating the world we occupy
today. In its 90+ year history, McKinsey has been a whisperer to
presidents and CEOs. McKinsey serves more than 2,000 institutions,
including 90 of the top 100 corporations worldwide. It has acted as a
catalyst and accelerant to every trend in the world economy: firm
consolidation, the rise of advertising, runaway executive compensation,
globalization, automation, and corporate restructuring and strategy.
I came into my job as a McKinsey consultant hoping to
change the world from the inside, believing that the best way to make
progress is through influencing those who control the levers of power.
Instead of being a force for good, I found myself party to the most
damaging forces affecting the world: the resurgence of authoritarianism
and the continued creep of markets into all parts of life.
Your views of McKinsey’s impact on the world will be
largely determined by your views on capitalism’s impact on the world,
for few firms have made a greater impact on the prevailing economic
system. If you believe, as I once did, that capitalism is the least bad
system devised so far, that its worst excesses can be reined in through
effective regulation, that it has been the largest engine for human
progress in human history, then McKinsey is a Good Thing. As
missionaries for capital, it has helped spread the Good Word far and
wide, making the world more productive and efficient as a result.
If, however, you believe that, whatever capitalism’s role
in history, its continued practice poses an existential threat to
governments, the biosphere, and poor people the world over, then the
firm’s role is that of a co-conspirator to a crime in which we are all
victims. McKinsey is capitalism distilled. It is global, mobile,
flexible, and unabashedly pro-market and pro-management. The firm has an
enormous stake in things continuing more or less as they are. Working
for all sides, McKinsey’s only allegiance is to capital. As capital’s
most effective messenger, McKinsey has done direct harm to the world in
ways that, thanks to its lack of final decision-making power, are hard
to measure and, thanks to its intense secrecy, are hard to know. The
firm’s willingness to work with despotic governments and corrupt
business empires is the logical conclusion of seeking profit at all
costs. Its advocacy of the primacy of the market has made governments
more like businesses and businesses more like vampires. By claiming that
they solve the world’s hardest problems, McKinsey shrinks the solution
space to only those that preserve the status quo. And it is through this
claim that the firm attracts thousands of “the best and the brightest”
away from careers that actually serve the public.
“The firm does execution, not policy.” I remember the
phrase vividly. We were on a conference call with the entire
client-service team, including senior leadership. Trump had just begun
his term, and the direction of our client, a federal agency, had
markedly but predictably shifted. Our team of mostly young do-gooders
were concerned about the role we were playing to enable this shift. We
were up-in-arms! Well, as up-in-arms as overachieving Ivy League
graduates get. To quell dissent, the leader reassured us: We only do
execution, not policy.
This categorical claim was meant to assuage our fears. We
weren’t the ones steering the ship towards the cliffs, we were merely
tasked with keeping the ship afloat until it reached its destination.
But politics touches all things. When the direction of an
agency is set by the president, helping execute on that direction means
participating in politics. Had McKinsey been as global in the 1940s, the
“no policy” line of reasoning would not have prohibited them from
helping Bayer optimize its production of Zyklon B, adding a grim double
meaning to the partner’s promise to only focus on execution.
How did things turn out this way? McKinsey consultants gave 27 times more money
to Hillary Clinton’s campaign than to Donald Trump’s. The members of my
team attended the Women’s March while serving an agency shaped by the
man they marched against. The firm hires from top universities and many
of its consultants have graduate degrees, both strong predictors
of liberal political tendencies. McKinsey is at the top of its field,
affording it the unique opportunity to turn down lucrative work that
other firms cannot. The firm’s 14 values serve as a gold standard for professional services firms and are actually discussed and largely adhered to.
The best explanation is structural. McKinsey’s governing
model, when compared to other firms of its size and age, is anarchy. The
Managing Director (CEO equivalent) has surprisingly little ability to
control who the firm serves (said a partner about the Managing Director,
“you are definitely not in charge”). McKinsey remains the world’s
largest partnership, and partners rule. The general rule of thumb is
that if a partner can staff a team, the firm will do the work. If
associates don’t want to work with a tobacco company or a defense
contractor, they don’t have to. As a result, only a small portion of the
consultants need to buy into a client relationship for McKinsey to do
work with them. What this means in practice is that the firm doesn’t
work with North Korea, but that’s about it.
McKinsey has grown to the point that it
is taking on work that prior incarnations of the firm would have turned
down due to the political risk involved. To keep lavishing its partners
with multimillion dollar annual compensation packages, the firm needs to
sustain double digits year over year growth. In a world that’s been
thoroughly McKinseyfied, this requires a loosening of standards. With
its fingers in more pots than ever, McKinsey continues to be at the
epicenter of world-shaping events.
Beyond the impossibility of dividing the practice of
governing into “policy” and “not policy,” the claim itself is bullshit.
McKinsey teams often have a policy perspective. They will never frame it
that way on the shiny slide decks presented to clients. The team will
instead present options, with the preferred option appearing first, with
the best supporting evidence behind it. Sometimes the pretense is
disposed of and a little “*preferred option” will appear next to the
favorite. (On top of all this, the firm uses the client’s logo and
formatting on each slide deck. Rarely in a deck prepared for a client
would McKinsey’s name explicitly appear. If any of the materials were to
leak to the public, there would be nothing tying it back to the firm.)
Perhaps the greatest secret to McKinsey’s success is its
ability to benefit from its clients’ successes without being punished
for their failures, no matter what role the firm had to play in either
outcome. In perhaps the most famous example, the firm survived Enron’s
collapse, despite being as close to the company’s key decision-makers as
Enron’s accountants, Arthur Andersen, an entity that died with its
host.
Direct Harm Serving Governments
The “no policy” policy is classic
McKinsey: a complete abdication of responsibility (moral or otherwise)
for the courses of action it recommends. However, this line may no
longer cut it in today’s political environment. This summer, the New York Timesreported on McKinsey’s termination of its contract with ICE:
While stating that McKinsey’s work for the agency did
not involve carrying out immigration policies, [Managing Director]
Sneader wrote that the firm “will not, under any circumstances, engage
in any work, anywhere in the world, that advances or assists policies
that are at odds with our values.”
Note again the fiction that the firm isn’t involved in
carrying out immigration policy (obviously, McKinsey analysts aren’t
physically separating families). According to an award description for
one of the ICE contracts,
the firm was hired to assist the “ENFORCEMENT AND REMOVAL OPERATIONS
(ERO) ORGANIZATIONAL TRANSFORMATION INTEGRATED CONSULTING SERVICES.” ERO
is the “papers please” division of ICE, and any transformation and
integrated consulting services—a catch-all that could mean literally
anything—will have the goal of making the organization more effective at
carrying out its stated mission, which will mean more people detained
and deported and more families separated.
The second problem with this reassurance is that while
McKinsey’s “14 values” may be reassuring to a prospective client, they
say nothing about the firm’s larger role in the world. The closest value
is a commitment to “observe high ethical standards,” but I only ever
saw this applied to the treatment of clients: don’t lie to them, don’t
fudge your expenses, etc. If McKinsey had values that considered the
human impact of its work and attempted to honor Sneader’s pledge, it
would need to pull out of engagements all over the world. Fortunately
for the partnership, the value system is free of any mandate to examine
the human impact.
The firm was in the news recently thanks to a report it
made on the social media reaction to Saudi Arabian austerity policies.
The report identified Twitter users who led criticism of the measures,
and according to the New York Times,
after the report was issued, the users were reportedly surveilled or
arrested. Following the assassination and dismemberment of journalist
Jamal Khashoggi, many US firms and CEOs boycotted the Saudi Arabia Future Investment Initiative
(known as Davos in the Desert). McKinsey (along with many other top
consulting firms), however, remained “knowledge partners.” The firm’s
ties with Saudi Crown Prince Mohammed bin Salman are deep. In 2015, after preparing a report on how Saudi Arabia can move beyond oil, McKinsey began strategizing with the Crown Prince on the privatization of Aramco, the state-owned oil company and, according to Reuters,
“the one thing in Saudi Arabia that works well.” The Kingdom of Saudi
Arabia may be McKinsey’s single biggest client (between 2011 and 2016,
they ran 600 engagements in the Kingdom)—it will take more than the
assassination of a journalist (to say nothing of the brutal war in
Yemen) to undermine that thought partnership.
Illustration by Mike Freiheit
This is not to say that no one at the firm objects. According to the Times,
“Amid the Arab Spring, its consultants in the region argued that the
firm should consider curtailing business in Saudi Arabia.” The firm’s
relationship to the Kingdom was controversial during my time there, and
it is one of the most discussed topics on “OurBeesWax,” 4Chan for people
with an @mckinsey.com email address. (One choice quote: “If you want to
make money in the middle east do it with KSA [Kingdom of Saudi Arabia],
end of story – people need to get over this.”)
Of course, there is a justification offered for working with noxious dictatorial regimes. Per the Times report:
“But more senior consultants, including partners, said
McKinsey was not in the business of passing judgment on its clients’
cultures and values. The best way to improve the kingdom, they argued,
was to modernize the economy and make government and companies work
better.”
And yet:
“’Consultants who aim to help authoritarian governments
from the inside often give in to a desire to preserve their lucrative
assignments,’ said Calvert W. Jones, a professor at the University of
Maryland who studies the role of consultants in the Middle East. ‘They
soft-pedal… their fear is if they speak truth to power at this state of
their interactions, they will be tossed out.’”
In the repressive regimes the firm
serves, client norms tend to dominate whatever liberal values McKinsey
might initially attempt to smuggle in. As Jones says in a manuscript on the role of experts in the Gulf:
“As time goes on, they [consultancies] also engage in the art of not
speaking truth to power—they self-censor, exaggerate successes, and
downplay their own misgivings, due to the incentive structures they
face…”
Beyond the obvious conflicts of interest, this moral
relativist logic has no end. The Sinaloa Cartel wants to provide better
healthcare to its sicarios, and North Korea wants to modernize
its agriculture practices. The firm’s expertise could help. Who are we
to judge our clients’ cultures and values? Even hitmen need healthcare,
right? (In fact, they are probably expensive to insure.) And surely
North Korea’s citizens don’t deserve to starve?
But by serving unsavory clients, McKinsey lends them its
sterling reputation, legitimizing them in the eyes of the wider world.
Even if McKinsey’s advice improves practices that help ordinary people,
in so doing, they sustain despotic regimes. A competent authoritarian is
more dangerous than an inept one.
This year in South Africa, McKinsey faced the largest
scandal in its history (surpassing its deep implication in the Enron
implosion and the imprisonment of its former Managing Director Raj Gupta
for insider trading). The firm won a bid with the state-owned power
company Eskom, with a performance-based fee worth up to $700 million. According to a Times investigative report:
“The contract turned out to be
illegal, a violation of South African contracting law, with some of the
payments channeled to an associate of an Indian-born family, the Guptas,
at the center of a swirling corruption scandal.”
McKinsey may face criminal prosecution and has agreed to pay back the $74 million in fees it received for the six months of work it carried out.
These are just the stories that leaked to the press. McKinsey is one of the most successful government contractors, with federal contracts worth $613 million between 2012 and 2018,
with $150 million from the Department of Defense and $63 million from
the Department of Homeland Security. The ICE contracts alone were worth
$26 million. Public disclosures do not include the many projects
McKinsey does for America’s defense contractors. Many of these projects
are benign, bordering on banal, but some of them help organizations that
make the bombs blowing up Yemeni school buses.
It’s a good thing, then, that it’s McKinsey doing the
work, because, as former London Office Manager Peter Foy told Duff
McDonald, “There is no institution on the planet with more integrity
than McKinsey and Company.”
Shrinking the Solution Space
When speaking to candidates and clients, McKinsey often claims to solve the hardest problems in the world. Unfucking the F-35 program, overhauling Puerto Rico’s finances,
and managing mergers and acquisitions for massive multinational
businesses are all difficult problems (whether McKinsey has successfully
solved them is another question). But the hardest, most consequential
problems cannot and will not be solved by McKinsey. Ending poverty,
factory farming, and mass incarceration, fixing global governance,
averting catastrophic climate change, and managing the automation of the
workforce: These are all problems that can only be solved through a mix
of movement building and policy-making. Even in cases where the
technocratic incrementalism on offer at McKinsey could be useful, the
firm’s structural inability to look at solutions that would shift power
away from those who hold it (their clients and employees) negate its
ability to help.
A case study from my time at the firm
illustrates this: McKinsey was tasked with reducing violence in a
correctional facility through a massive organizational transformation.
Some of the work we did probably helped: housing the population based on
statistically-determined predictors of violence, offering progressive
rewards based on good behavior, and improving training for correctional
officers. But the reality is that any approach to reducing violence in a
prison that is limited to the prison’s walls will only go so far. The
biggest reason there is so much violence in prisons and jails is because
there are so many people there in first place. And trying to solve that
problem without looking at cash bail, prosecutorial discretion, mandatory minimums, and the war on drugs,
is like trying to solve a 1,000 piece puzzle with 500 pieces and the
wrong box: You may think you understand the problem, but you’re missing
way too many pieces. When I brought these topics up, I was told they are
“out of scope,” both because of the client’s limited jurisdiction and
because the firm “doesn’t do policy.”
McKinsey shouldn’t necessarily be blamed
for failing to stanch the bleeding, but its philosophy and recruiting
materials sell a kind of technocratic-utopianism: We just need
well-funded, smart people to look at the problems of the world, and one
by one they will fall away. A recruiting pamphlet offers undergraduates a chance to “Change the world. Improve lives. Invent something new.” This is echoed in the mindset of the nation’s elite. When Mitt Romney spoke to the Wall Street Journal editorial board during his 2008 presidential campaign, he said:
“So I would probably have
super-cabinet secretaries, or at least some structure that McKinsey
would guide me to put in place. I’m not kidding, I probably would bring
in McKinsey… I would consult with the best and the brightest minds… I
believe the free market works and government doesn’t—that when
government takes over a function which can be effectively managed in the
free market, we make a huge mistake.”
McKinsey claims to be the distillation of
the free market at its best, a true meritocracy made up of the top
people from the top institutions who are culled through the “up or out”
system (if you stop advancing, you’re asked to leave). And if the free
market knows best, then why not go to the best of the free market?
And as much as the firm likes to position
itself as a truth-teller, objectively scouring the data to come to
recommendations, with a group of people who jumped through every hoop to
sit at the commanding heights of society, how likely will they be to
recommend an idea that challenges their audience (who, almost
exclusively, are wealthy, powerful men)? The facts and data
all indicate that a single-payer healthcare system would be more
effective and cost-efficient, but how likely would McKinsey have been to
recommend that to a President Romney looking to solve the healthcare
crisis (again, prohibitions on policy aside)?
This belief in the superiority of the
free market at the expense of government didn’t start with Romney (or
Reagan or Goldwater). In 1958, McKinsey consulted on the organizing of
America’s response to Sputnik, NASA. According to historian Christopher McKenna in The World’s Newest Profession:
“From NASA’s establishment, the
organizational structure that Glennan and the consultants from McKinsey
& Company devised for the space agency promoted the use of outside
contractors over building internal expertise… Beyond the bare minimum of
internal technical expertise, however, the McKinsey consultants argued
that America’s ‘free enterprise society dictates that industry should be
given as extensive a role as possible.’”
This approach, “may have dismayed the
agency’s engineers, but the response cheered NASA administrators.” By
1964, 90 percent of NASA’s $5 billion budget went to private companies
and 350,000 contractors supported 32,500
NASA employees. Bill Clinton’s declaration of the end of big government
in 1996 and George W. Bush’s pledge to substitute contractors for half
of the remaining federal workforce in 2002 were influenced and made
possible by the work that McKinsey did in establishing the contractor
state. In an ironic twist, two months before the disastrous rollout of
healthcare.gov, McKinsey warned senior White House staff that, “the
project lacked comprehensive testing, noted many functions were
dependent on contractors and warned against taking risks to meet
deadlines.”
The hollowing of NASA was not an isolated event. According to The Firm, in the 1980s,McKinsey helped Carlos Salinas privatize 85 percent of Mexico’s state-owned businesses, Margaret Thatcher do the same in Britain, and West Germany do the same in East Germany.
The firm has played a role in privatizing government assets in Latin
and Central America, Eastern Europe, and Asia. In some of these cases,
privatization was inevitable, but in many, McKinsey made it more likely.
Inexperienced leaders looking to make a mark turn to McKinsey for
ideas, and they are all too eager to recommend privatization. The firm
can point to all of its experience managing privatization elsewhere, as
well as the influx of cash and positive Western press about how this
shows you’re a “serious reformer.” Beyond the fees, McKinsey is
motivated to do this work by its pro-market ideology. That privatization
increases inequality, primarily benefits the wealthy, is not immune to corruption,
and fundamentally shifts management incentives towards pleasing
shareholders and away from the public interest is of little concern to
McKinsey.
Beyond the literal privatization of
public assets, the steady creep of corporate approaches to governing
amounts to privatization in all but name. Government cannot and should
not be run like a business, as even the Harvard Business Reviewadmits.
One particularly egregious example was McKinsey’s recommendation that
the BBC use an internal market to buy and sell services, which led to
endless internal negotiations to do tasks as simple as reserving studio
time. McKinsey’s perceived success at improving corporate governance has
led to calls from publications like the Economist that it may be
“McKinsey’s turn to try to sort out Uncle Sam.” In anticipation of the
beginning of Obama’s presidency, the magazine unironically hoped
that “Obama may favour McKinseyites in much the same way as his
predecessor seemed addicted to hiring alumni of Goldman Sachs.” As we
all know, the Goldman Sachs-stuffed Treasury Department led to stable
markets and steady growth throughout the Bush administration. They go on
to hope that Obama hires “the best technocrats” like Ford Motor CEO
turned Defense Secretary Robert McNamara. That these two parties
contributed to and presided over the financial crisis and Vietnam War
respectively apparently does nothing to shake the Economist’s confidence in the wisdom of technocratic businessmen.
Spreading Management-Friendly Ideas
McKinsey claims to be a dispassionate
assessor of data and provider of recommendations, but its bias is given
away by the name of the industry it helped create: management
consulting. The people who enlist its services and pay its fees fall
firmly on one side of the labor-management divide. McKinsey will never
make a recommendation that truly threatens its core audience—any
analysis is bounded. Searching for cost savings? Everything is on the
table, except executive bonuses, of course.
The initial rise of McKinsey and other
management consultancies was due less to the force of their ideas or the
ability of their people than to government anti-monopoly legislation,
specifically the Glass Steagall Act of 1933. According to Christopher
McKenna, in addition to separating commercial and investment banking,
“the legislators also outlawed the consultative and reorganizational
activities previously performed by banks.” This created an opening for
management consulting firms: “Corporate executives, aware that the New
Deal laws prohibited them from employing trade associations, industry
cartels, or bankers to create industry benchmarks and to learn about
administrative innovations, turned instead to management consultants as
their primary source of interorganizational knowledge.” At McKinsey,
there are benchmarks for everything, whether it’s the percentage of
expected R&D savings following a pharma merger or the cost of
temporary IT labor in the American Southwest. Over the years, McKinsey’s
work with pretty much every player in every industry has made it the
panopticon of global business, willing to share what competitors are up
to (as anonymized “best practices” of course), for a price.
In addition to the favorable regulatory
environment, McKinsey’s pro-market, hyper-rational ideas spread through
what organizational theorists Paul DiMaggio and Walter Powell call “mimetic isomorphism,”
the tendency of institutions facing uncertainty to become more and more
alike. In a quest for legitimacy in the eyes of employees, customers,
and competitors, “Large organizations choose from a relatively small set
of major consulting firms, which, like Johnny Appleseeds, spread a few
organizational models throughout the land.” As a result, “…schools
assume the structure of the workplace, hospital and university
administrations come to resemble the management of for-profit firms, and
the modernization of the world economy proceeds unabated.”
McKinsey’s reorganization of most of the
large companies in post-war Europe demonstrates mimetic isomorphism in
action. Facing extreme uncertainty and pressure from American firms,
European companies modeled themselves after organizations perceived to
be successful (American ones) and relied heavily on a single source of
vital resources (McKinsey). Whether American corporate success was due
to the decentralized organization model or the fact that their
competition was in literal ruins is of little consequence.
Decentralization took off because the cool companies decentralized, with
McKinsey whispering in their ears. The net effect of these forces was
to exacerbate some of the most damaging trends in contemporary life: the
growth of wealth inequality and the increased insecurity of private
employment.
In the 1950s, McKinsey consultant Arch
Patton pioneered the field of executive compensation after discovering
that worker wages had risen faster than management wages. (Gasp!) This
led to a lucrative business: helping executives justify more and more
extreme paychecks. According to the Economic Policy Institute, the
typical CEO made 20 times the median employee’s compensation in 1965. In 2015, that ratio had climbed to 286. When Patton was asked in the 1980s how he felt about his legacy, he had one word: “Guilty.”
In the corporate world, the most terrifying words in the English language are: I’m from McKinsey, and I’m here to help. The firm’s appearance is known as a harbinger of layoffs (one of most famous representations of consultants in pop culture is “the Bobs” from Office Space).
While McKinsey will claim that it never identifies individuals to be
cut, its willingness and effectiveness in recommending the axe begins in
its roots. In 1935, James O. McKinsey left the firm he started to run a
client, the Midwest department store chain Marshall Field. He was
tasked with implementing the cost-cutting measures he recommended,
resulting in “McKinsey’s purge” of 1,200 employees. In The Firm, McDonald
writes, “McKinsey was a true forerunner of the 1980s revolutions in
reorganization, downsizing, and rationalization– which are really just
layoffs in different guises… McKinsey once argued that it ‘only assesses
situations, not people.’” Note the classic obfuscation. What are
situations without people? McDonald goes on, “…it may not be too far off
the mark to suggest that McKinsey has been the impetus for more layoffs
than any other entity in corporate history.”
Would these companies have laid off their
employees, McKinsey or no? The presence of data-driven outsiders
provides cover for executives to do things they may not have done
otherwise. McKinsey could also point out that their competitors were
taking similar steps (probably following the firm’s recommendations).
Would these companies have survived without mass layoffs? In some cases,
no, but in many cases, alternatives were possible but not considered
(like looking at executive compensation or the cost of expensive
consultants). Sometimes, layoffs are not even framed as necessary, like
when McKinsey client Proctor & Gamble laid off 13,000 workers and
the CEO said the public “has come to think of corporate restructuring as a sign of trouble, but this is definitely not P&G’s situation.”
In most companies, the fastest way to
find savings is to reduce headcount, but McKinsey doesn’t have to live
with the consequences of the decisions it makes—the irreparable damage
mass layoffs can do to a company’s culture and operations, in addition
to the impact they can have on the lives of the terminated.
“The Best and the Brightest”
For one of the most successful capitalist
enterprises in history, McKinsey controls surprisingly little capital.
There are no factories or machines owned by the firm. It has no
products, really (a few godawful pieces of software aside). Even its
offices sit in rented glass and steel towers in the world’s major
cities. McKinsey is nothing without its human capital. Who, then, are
these extremely expensive people?
There is a type. By and large, they have
at least one degree from a prestigious university. They are intensely
analytical and eager to deconstruct the world around them. They have
been rightly called “insecure overachievers,” a type of striving
neurotic endemic to the Ivy League campuses that feed McKinsey’s halls.
While there, I worked with Rhodes Scholars, special operators and
fighter pilots, doctors and advisers to presidents, physicists,
journalists, and Olympians. Excluding the U.S. government, McKinsey
employs the most Rhodes and Marshall Scholars as well as STEM PhDs from
top programs. It also recruits heavily at top medical and law schools
(though decreasing the number of practicing lawyers in the world may be
the most unambiguously good thing McKinsey does). More than 70 past and
present Fortune 500 CEOs are McKinsey alumni, and the odds of a McKinsey
employee becoming a public company CEO are the best in the world
(1 out of 690). Its alumni include Sheryl Sandberg and Chelsea Clinton,
Google CEO Sundar Pichai and former Enron CEO Jeff Skilling, and Yul
Kwon, the winner of Survivor: Cook Islands. The firm also has a
habit of producing some of the nastiest Republican politicians (Tom
Cotton and Bobby Jindal). Maybe these people already had the ability,
determination, ruthlessness, and emptiness that could only be filled by
professional achievement needed to attain these positions of status and
influence, but they often cite their time at McKinsey as a crucial step
in their path to world domination.
McKinsey is far from the only company to
harvest fresh graduates from the Ivy League, and if it disappeared
tomorrow, the best and the brightest would continue to fill the ranks of
Bain and the Boston Consulting Group (and Goldman and Google). But
McKinsey was the first firm to make the bet that raw ability and
potential trumps experience. It was the first major consulting firm to
hire straight out ofbusiness school and the first to hire straight from undergraduate programs, consistently drawing the top students from Harvard.
This is part of a larger pernicious trend. The age at which students start committing
to “careers of excellence” is getting younger and younger. Students
begin recruiting for jobs in management consulting in the fall of their
junior year amid an environment that leaves them,
“…wondering whether there’s something wrong with them if they’re not
interested in consulting and investment banking.” This is in large part
due to the hyper-competitiveness capitalism engenders. Young people are
making decisions about their academic and professional careers before
they’ve had a chance to interrogate their values and thoughtfully decide
how they want to spend their lives. One of the biggest appeals of
management consulting is that it serves as the undecided major of
careers, opening more doors than it closes. College seniors with a
McKinsey offer can accurately make a two-year commitment, learn useful
skills, gain an impressive network, and gold stamp their resume before
joining the Peace Corps and returning to their previously-planned career
of do-goodery. Beyond the skill-building, McKinsey markets itself as a
place to do good while you’re there (two of the four practice cases on
its interviewing page are in the social/public sector despite less than 10 percent of the firm’s work coming from those sectors).
But those two years change you. Idealism
turns to cynicism in the face of the cold realities of the world. Shitty
college apartments and dining hall meals turn into luxury Starwood
properties and expensed Michelin star dinners. The job opportunities at
the end of the brief stint can pay $300,000 per year (private equity
shops being a prime post-McKinsey destination). And throughout this
time, you’re surrounded by other people who made the same decision. For
some of them, those two years turned into four turned into 10. Most
others will leave as planned, but not to a career of do-goodery. All of
these people have come up with justifications for their decision and are
eager to share them. Some examples, “you’re building career capital
that you can apply to whatever nonprofit or political cause you support
down the line,” or “the speed and innovation of the private sector makes
it the best place to have impact”, or “someone is going to do the job,
so might as well be me (and I’ll do more good than the likely
replacement).”
Precious few of my colleagues have shown
signs that their post-McKinsey careers will be more prosocial than their
McKinsey career, but even for those who do, their understanding of how
to improve the world has been thoroughly McKinseyfied. In Winners Take All, writer and former McKinsey analyst Anand Giridharadas describes what he calls “MarketWorld,” which is:
“…an ascendant power elite that is
defined by the concurrent drives to do well and do good, to change the
world while also profiting from the status quo…these elites believe and
promote the idea that social change should be pursued principally
through the free market and voluntary action…that it should be
supervised by the winners of capitalism and their allies, and not be
antagonistic to their needs; and that the biggest beneficiaries of the
status quo should play a leading role in the status quo’s reform…The
MarketWorld problem-solver does not tend to hunt for perpetrators and is
not interested in blame.”
I’ve seen this tendency in myself. It was
harder for me to embrace a Left worldview because of the social ties I
have with people who are perpetrators of the many harms inherent in our
system. I have also seen this in my former colleagues, like a healthcare
specialist who volunteered for numerous Democratic campaigns and
strongly opposed single-payer healthcare. The definitive evidence he
marshalled for why single-payer was a terrible idea was a Vox piece
arguing that the system would only save money if doctors were paid
less. Clearly, this outcome was more intolerable than 30 million
Americans continuing to go without insurance. On his McKinsey
engagements, he works primarily with doctors and healthcare
administrators, the people whose paychecks and jobs would be most
negatively affected by a transition to a single-payer system. Their
lives and livelihoods are far more salient than the millions of
uninsured who exist only as numbers in spreadsheets. Any solution that
requires redistribution of any wealth or power from the ruling class
(the only class who can afford to hire McKinsey) is not even worth
considering.
It is the same situation described by
Tolstoy: “I sit on a man’s back choking him and making him carry me, and
yet assure myself and others that I am sorry for him and wish to
lighten his load by all means possible… except by getting off his back.”
We
are now living with the consequences of the world McKinsey created.
Market fundamentalism is the default mode for businesses and governments
the world over. Abstraction and myth insulate actors from the
atrocities they help perpetuate. Businesses that resisted the pressure
to rationalize every decision based on its impact on shareholder value
were beaten out or eaten up by those who shed the last remnants of their
humanity. With another heavyweight on the side of management, McKinsey
tipped the scale even further away from labor, contributing directly to
the increase in wealth inequality plaguing the world. Governments are
now more similar to the private sector and more reliant on their
services. The “best and the brightest” devote themselves to client
service instead of public service.
Not all of these results are wholly
attributable to McKinsey—there are many conspirators to these crimes.
But no firm has touched more and been seen less.
