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Teeth versus Tail

In one of his radio chats, Governor Patrick of Massachusetts talked about increasing the number of government jobs in the Commonwealth as a means to increase employment.  “After all [he remarked], government jobs are just as good a private sector jobs”.  That troubled me, and here’s why.

Gov. Patrick’s point, I infer, is that a government job supports a family just as well as a private sector job.  Better, in fact:  recent studies show that on average government employees earn more than private sector employees in the U.S. when the value of health benefits and pensions is considered.  More than half of union workers in the U.S. now work for government.  And government, education, and health care are sectors in the U.S. economy that have shown above-average job growth recently.  So we’re shifting the mix towards well-paid, unionized government jobs.  Is that a good thing?

When I served in the military, I learned a concept called the “Teeth to Tail ratio”.  In the army, “Teeth” refers to the people who fight: the soldiers in the combat brigades (most of them are in Iraq and Afghanistan today).  “Tail” refers to the people who support them:  recruiting, training, hospitals, procurement, general staff, etc.  The army understands deeply that Tail is important, but Teeth are essential, because only the Teeth can fight.  Tail tends to grow, so army leaders work on “increasing the Teeth/Tail ratio”.  Soldiers who are part of the Teeth are awarded special respect in many ways.

The Teeth/Tail ratio has relevance for economies, too.  The struggles of the Greek economy illustrate this.  My partner Thanasis, who is Greek, explained to me that the root of the economic problem in Greece is an economy with little internationally competitive industry and too many people working in generously-paid government jobs.  This was financed by international borrowing facilitated by the credit bubble, deceptive accounting, and Greece joining the Euro zone.  Now the bubble has burst, the full extent of Greece’s debt is revealed, and international debts must be serviced.  But, the Greek economy has very little export capability:  little Teeth, big Tail.

In a national economy, Teeth are the companies and jobs that compete in international markets and earn foreign exchange on favorable trading terms.  Tail is the part of the economy that is sheltered from global competition.  In the U.S. economy, Teeth is mostly product companies, and Tail is mostly services.  And the long, sharp Teeth are the technology-based companies:  they create a large surplus in the U.S. balance of payments, which is more than spent by imports of low- and mid-tech products (most of what you see in Wal-Mart) and oil.  The chart below quantifies this.

Source: The Economist, based on OECD data

The point for entrepreneurs and venture investors is this:  what we do makes a large contribution to Teeth, which are vital to the economy, especially now, and this contribution is undervalued in the national debate.  Most of the technology products sector of the economy has its roots in entrepreneurship.  But government is pushing for quick feel-good solutions.  Governor Patrick is promoting “Tail” (government) jobs.  President Obama proposes to double U.S. exports by creating councils composed of government officials and the CEOs of two big, mature technology companies (Boeing and Xerox) and increasing funding to the Ex-Im Bank, most of which goes to big, mature companies.  Most commentators doubt that President Obama’s program will reach its goals.

What would foster entrepreneurs to create innovative, technology-based products that are sold around the world?  It’s things like:  research funding that bridges the gap between basic science and commercial products (eg, SBIRs), readily-available study and work visas for talented foreigners who want to come to the U.S. and who frequently become productive entrepreneurs, and not raising taxes on the fruits of entrepreneurs’ and investors’ success.  This is missing from Obama’s proposals, although Senators Kerry and Lugar have proposed a smart law that would reward immigrants with visas and green cards if they show they can create jobs.

Our community needs to make the case for the vital importance of Teeth, and what creates Teeth.  Like Greece the U.S. has a chronic trade deficit and a growing Tail.  But, we have good Teeth: a vital innovation economy that can grow exports and quality jobs, if we invest in it.