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The Wall Street Journal
June 19, 1997
Denver May Be Seen as Model Of Flexibility in U.S. Markets
By JACOB M. SCHLESINGER
Staff Reporter of THE WALL STREET JOURNAL

DENVER — When President Clinton talks economics over lunch with fellow leaders of the world’s rich nations in the public library here Saturday, they will compare America’s success with the laggard performance in Europe and Japan.

“There is a deep, interconnected relationship between economic growth and economic change,” lectures a briefing paper that Clinton aides will give to the top officials of Britain, Canada, France, Germany, Italy and Japan — countries that, by and large, are averse to turbulence — and to Russia’s president, who is trying to decide which Group of Seven economy to emulate. “The process of economic change inevitably involves a certain amount of creative destruction,” the paper adds.

How does America’s flexibility spur America’s prosperity? Can other developed nations replicate it?

Probably. “It’s not genetic,” says Mancur Olson Jr., a University of Maryland economist who studies international economic patterns. But to match America’s dynamism, they must overcome significant differences in culture, history and geography. While Americans tend to embrace change for its own sake, Europeans and Japanese tend to mistrust it.

“We have a private sector … where there’s a very strong entrepreneurial, risk-oriented spirit,” Mr. Clinton said in an interview with The Wall Street Journal Wednesday. “It’s indefinable and intangible, but I think it has a lot to do with why we are who we are… . We’re sort of constantly in the act of becoming.”

One place where the foreign leaders — who open a three-day annual summit here Friday — could study American-style creative destruction, of relentless reinvention, is the Rockies’ booming capital.

Born on a Bet

Denver was born on a bet. In the mid-19th century, 100,000 people scrambled here on the long-shot hope of finding gold and, ever since, the city has ridden wave after wave of boom and bust. One silver tycoon, Horace A.W. Tabor, lost his shirt but remains a local hero; a downtown marketplace carries his name. “There’s a Western optimism, almost a romanticism of the roller coaster,” says Thomas J. Noel, a University of Colorado at Denver historian known as “Dr. Colorado,” who will give guided tours to the eight leaders’ wives. “This is a flexible, open city. Look at the movers and shakers — they all moved here from somewhere else.”

The latest bust came a decade ago when oil prices plunged and the city’s dominant petroleum companies either shut down or left town. Office vacancies neared 30%. “It became difficult to find a U-Haul because everyone was moving out,” recalls Chamber of Commerce President John I. Lay.

But, as in the wake of earlier collapses, the city rose again, not by preserving old foundations but by building new ones. The tally of mining, oil and gas industry jobs is half that of a decade ago. But that loss is more than offset by the 1,000-plus technology firms — such as computer-equipment makers and telecommunications companies — that have started up or moved here since 1992, according to the Denver Metro Chamber of Commerce. They have contributed to a gain of about 150,000 jobs in the past five years. Meanwhile, about 150,000 people have moved to the metropolitan area — many from California, once the main magnet for restive fortune-seekers.

Signs of Growth

Signs of creation amid the destruction are everywhere. John Hickenlooper, a furloughed oil-company geologist, used his severance check in 1988 to open Denver’s first “brew pub,” which now claims to be the country’s biggest. When his Wynkoop Brewing Co. opened in an abandoned warehouse, it was in the heart of a downtown skid row. Now, this neighborhood is home to busy restaurants and residential lofts, some costing more than $1 million. A few miles east, a failed Burlington Coat Factory store is now kept humming round the clock by TeleTech Holdings Inc., which has nearly 900 people working at the site with computers and headsets in a business that didn’t exist 15 years ago — taking toll-free phone calls for corporations that outsource the job.

Along U.S. Highway 36 toward Boulder, new corporate headquarters are rising from once-empty fields. Standing out is the jagged glass roof of Corporate Express Inc., a supplier of office products and services that was founded a decade ago by a Czech immigrant who claims to have set a national record for acquisitions last year. Meanwhile, the downtown Petroleum Club atop the gleaming Anaconda Tower, once the exclusive preserve of rich executives, changed its name just before its 50th anniversary last year to “Top of the Rockies,” reflecting the city’s corporate changing of the guard.

Not all Coloradans embrace change, of course. Conservationists constantly battle development. And the old guard frets as its clout erodes. “All these newcomers came here and want to change the rules after they get here — they immediately want the mountain roads paved, and fiber-optic cables and sewers put out to their homes,” gripes Greg Walcher, president of Club 20, which represents the mining, logging and agricultural interests in Colorado’s 20 western counties. “The traditional businesspeople are finding themselves in a small minority all of a sudden.”

Colorado Gov. Roy Romer notes, “I’ve tried to stay with traditional industries, but you know that’s not where the new world is.” Recently named chairman of the Democratic National Committee as a symbol of the party’s attempt to appear more centrist and pragmatic, he explains his governing philosophy this way: “I have never been a person who tried to draw a line or build a fence around Colorado. The free market just doesn’t work that way.”

The Flexibility Factor

An essential force behind America’s comparative dynamism is its flexibility — in labor markets, capital markets and corporate culture. “The real issue is whether the economy can take a fixed set of resources at any point in time and allocate them to their most productive uses,” says Paul Romer, a Stanford University economist, an expert on growth — and the governor’s son and sometime adviser. “If you lock in those resources where they are, when opportunities change you won’t be able to respond.”

One basic tactic for reallocating resources is the ruthless firing of workers, a common American practice that horrifies most Europeans and Japanese. Storage Technology Corp.’s record profits partly result from laying off about 1,700 employees — nearly 15% of its work force — in less than two years, says David E. Weiss, the chief executive of the Denver-area maker of mainframe tape and disk drives. “We looked in the mirror and saw we just weren’t fit,” he explains. “It took us too long to get products out, and it was too expensive to develop products.”

Mr. Weiss says he tried to handle the layoffs “with a humanistic approach.” But he shudders when contemplating how he might have revitalized the company if impeded by European-type labor rules. “Take France with their latest election — they want a 35-hour work week but don’t want to change pay,” he says incredulously. “Nobody knows how they’re going to pay for it.”

American-style volatility can impose severe side effects, such as job insecurity, wage stagnation and increased inequality of income. “The U.S. has done a better job of creating employment, but Europe has done a better job of maintaining wages for those staying employed,” says Lawrence Katz, a Harvard University labor expert. The Denver Metro Chamber of Commerce concedes that regional wages rose more slowly than inflation as thousands of jobs were created between 1993 and 1996.

Wealth in the Long Run

But the American model assumes that, in the long run, an economy usually produces new wealth by not trying too hard to preserve old wealth. “Our firms can fire; so they hire,” says C. Fred Bergsten, director of the Institute for International Economics in Washington. “Japanese and German firms can’t fire; so they don’t hire.” The American model, he argues, “is definitely better for everybody. In a world where all companies have to compete globally, you have to get with it in terms of market-oriented approaches, or you will suffer.”

In a vibrant economy, labor flexibility also lets workers job-hop for higher wages, an option not available to, say, the many Japanese workers still tethered to a lifetime employment system. These days, StorageTek worries less about shedding inefficient employees than about losing its best ones to Sun Microsystems Inc.’s research-and-development campus opening this fall just across the road.

Moreover, job-market flexibility helps foster the new companies that many economists say can spur job growth. StorageTek was founded in 1969 by defectors from International Business Machines Corp.’s Boulder facility. Then, in 1985, three StorageTek engineers moved on to create Exabyte Corp., a maker of tape drives and automated-tape libraries that now has more than 1,000 employees in the area.

American creativity also flows from a huge, free-wheeling capital market. In the late 1980s, analysts hailed the stable, centralized financial sectors of Japan and Germany, which supposedly permitted wise planning by freeing corporate managers from quarterly profit worries. But now experts say those systems didn’t force needed restructuring and shunned innovative outsiders seeking seed money.

“Anybody can raise money in this country,” says David Hale, chief economist of Zurich Kemper Investments Inc. in Chicago. “Our venture-capital market is unchallenged. Our banking system is highly decentralized. In America, there are all kinds of second and third chances to raise money.”

Rapid Success

Denver’s main telecommunications company, U S West Inc., recently cut a seven-figure check for 21-year-old Yale senior Stewart Ugelow — a former summer intern at this newspaper — for a 35% stake in his Internet Web site, which publishes news-feature stories and data such as TV and concert listings for college students. Student.Net Publishing LLC is less than two years old, and none of its six founders has any prior business experience. “We don’t have anybody on staff yet old enough to rent a car. That’s one of our goals for our next hire,” Mr. Ugelow says.

“You bet there’s a risk” in this investment, says Tony Pantuso, director of business development for U S West’s interactive-services group. But Mr. Ugelow’s very greenness makes him appealing. “In the multimedia world, a lot of good things are being done by people under 25,” Mr. Pantuso, 34, explains. “It’s not polluted by people such as myself that kill these things because they can’t see the business.”

Government also plays an important role in fostering Denver’s, and America’s, boom, more by providing the foundations for growth than by managing a lot of things in the European or Japanese mode. Gov. Romer supports new transportation projects, such as the Denver International Airport. The federal government is a large, stable employer in Denver. Colorado has a highly educated work force, thanks to heavy public spending on universities. The University of Colorado’s biology and chemistry departments have generated a thriving biotechnology industry.

To be sure, traits considered American assets could again become liabilities, as they were not long ago. Flexibility works “in an era of rapid change,” such as the current period of technological advances and globalization, says Yale School of Management Dean Jeffrey E. Garten, a former Clinton adviser. “If we get to another plateau where it’s possible to anticipate long-term trends, I think we’ll see a dramatic resurgence of Japanese and European companies.” The idea “that we have the superior model for all time is a very dangerous mindset.” And Mr. Bergsten concedes that America’s sometimes-excessive market brutality “could trigger a backlash against our model.”

Copying Some Ideas

But for now, the Europeans and Japanese are trying to emulate some elements of the American model. On Monday, European leaders endorsed creation of a European Investment Bank credit line to help small high-tech companies on a continent short of venture capital. When meeting with President Clinton, Japanese Prime Minister Ryutaro Hashimoto is expected to offer a progress report on plans to deregulate Tokyo’s rigid financial markets.

However, some differences between the U.S. and its main allies transcend labor, capital and regulation policies. America is blessed with a large, integrated market — something Europeans are struggling to create — that facilitates great changes within national borders. Common language, currency and customs allow companies and workers to move easily among states. “Imagine if IBM was in one country, and Microsoft and Intel were in another country,” says Mr. Romer, the economist. “Nationalism would have led to a very strong attempt to protect IBM. We’re very fortunate to have a big-enough marketplace to allow this process of entry and exit to take place without invoking the kind of nationalistic fervor that makes people want to stop this process.”

U.S. companies don’t feel tied to specific states. When TeleTech founder Kenneth D. Tuchman grew frustrated with California’s business climate, he shut his headquarters there in 1993 and moved to Colorado. In California, “the governor never seemed to find the time to take our phone calls, let alone meet with us. We clearly weren’t big enough; we weren’t well-known,” he says. “In this state, I can pick up the phone, call the governor, and I’ll be put through immediately.”

There’s also a historical and cultural divide between the U.S. and other countries. Americans share myths and images about themselves quite different from those treasured by Europeans and Japanese. The American Revolution and the Jeffersonian ideals that shaped the early republic sought, in part, to abolish the Old World’s rigid hierarchies and government controls. France, too, had its revolution, in pursuit of “liberty, equality and fraternity,” but in recent years its policies have sometimes promoted equality and fraternity at the expense of economic freedom.

Frontier Mentality

The U.S. “frontier mentality” romanticized the notion of boundless opportunities to seek new chances and create new lives; the North American continent’s seemingly infinite natural resources enhanced that optimism. The Japanese, in contrast, call themselves “a small island nation with few natural resources” needing careful planning and sharing; they speak with mistrust about “confusion in the marketplace.” Mr. Clinton cites “the fact that we’ve remained open to new entrants, to new immigrants, to [this] sort of new energies” — in contrast to other developed nations defined more by common race, religion or nationality. Despite great social changes, Britain’s elite is still strongly shaped by family and old-school ties.

American innovation is spurred as well by an acceptance of business failure that other countries find unnerving, plus an embrace of rapid success that others consider crass. Failure in the Old World can permanently stain a business reputation. But to Bank of Boulder President Steven K. Bosley, “bankruptcy doesn’t have a stigma” if it isn’t because of poor ethics or poor management. “We’ll lend money to such a person in another venture. There are examples of people here who haven’t made it, but come back on their second, third or even fourth try to be successful.”

And entrepreneurs can get very rich very quickly. Bill Phillips used $185 of savings a decade ago to found Experimental & Applied Sciences Inc., a maker of nutritional supplements for athletes. He now estimates his net worth at $40 million. Last week, when the 31-year-old was honored as a “Rocky Mountain Entrepreneur of the Year,” his acceptance speech was an unabashed defense of American-style success. “I’m sorry,” he told a cheering crowd, “but winning does not suck!”