Will an "economic adjustment" mean a renewed American humility?

It's a fundamental question based on a fact pattern universally known and fairly well understood. The nation has been spending too much, producing too little, for too long. Debt is high, credit is low. There is little utility to delving further into the specifics before asking, what happened to the America we grew up reading about in history books? And more importantly, can it come back?

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From the lay person's perspective, the American economy has two fundamental problems. The first is that there are vast, established parts of the economy which are wholly phantom in nature. (The second will be addressed at a later date and time.) Bernie Maddoff's ponzi scheme is one such piece. Sub-prime mortgage backed securities are another. But sadly, the phantasm doesn't end there. Large national law firms, for example, are engaging in massive layoffs as work stops coming in. The phantom component to their business plans wasn't some non-existent client--it was inflated value for the work they were providing. Ideally, when a client hires a consultant or retains an attorney, fees are paid for a service which will ultimately save the client money. The value added to the client must excede fees charged. Billing that works off of a percentage of value-added (ie attorney/consultant takes home 10% of value-added) has been discussed for years, but the difficulty and uncertainty in actually quantifying the value-added leads clients and consultants to choose hourly billing instead.

Regardless of how fees are calculated, the ratio of fees to value-added is the most important decision making factor when deciding to retain services in most cases. The problem with law firms and other struggling service providers is that their rates are too high for the value that they add. That's why business has slowed. While no one may actually have quantified value-added, clients are often more savvy than metrics. They know their bottomlines and have a sixth-sense for where their profits actually come from. They've stopped buying because the fees to value-added ratio is simply too high.

So, why doesn't service-providing America simply drop prices? It's incredibly humbling for a professional who has built his or her livelihood for charging for their time and spent decades preparing to charge a high rate, to accept that maybe their work/their time/their effort is simply not as valuable as previously thought. If the market will require, in order to stay in business, an adjustment in prices, will the result correspond with a Darwinian selection of the humblest surviving and the arrogant dying off?

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Recessions, and especially depressions, are times for soul-searching and a reevaluation of the metrics by which we determine our own success. If before, the pursuit of material things allowed us to self-value, now with their evaporation and without practical opportunity to pursue them at will, we find value in new things. We revalue our time, what it is worth. What before might have been a $500/hr services, is now $250. Not because quality or effort has dropped, but because the value to the client never actually supported $500. We are in this mess because we moved away from our equilibrium, our pricing, lending and investing was not sustainable.

Sustainable pricing has been ethically necessary in some form or another since the beginning of professional services ethics. Engineers, lawyers, even auto mechanics engage in it all the time. I took my car to the body shop once, to ask if a scratch could be touched up. The previous shop I had taken it to gave me a $300 estimate. At the second auto shop, the mechanic took a look at the scratch, grabbed a towel and some de-greaser, and cleaned the scratch out to the point it was barely noticeable. By doing so, he lost the $299 he could have charged me by bidding less than the first shop. But he was honest, so he did the job at lowest cost to me. I now take my car to his shop only.

As we move forward, we need to realize that there is little difference between the a mechanic charging me $299 for a service he could to for $5 and a lawyer charging $500 for a service that only adds $3000 to the client's value (assuming the maximum sustainable ratio of fees:value-added is less than 1/6, which I believe it might be) or a doctor charging $600 for a procedure that he could charge $400 if HMOs or Medicare weren't footing the bill. What was the additional money going to pay for before for the client? The prestige and ego of retaining a pricier service?

Ultimately, inflated prices for professional services will have to go the way of mortgaged backed securities and magical Madoff funds. Hopefully, the void left will be filled with a renewed sense of honesty and humility.