Author: tomkapostasy

Retired finance and operations executive interested in public policy, especially where data can help to frame the issues.

Banking in Bedford Falls

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As the Great Recession moves along into its third calendar year, the focus in Washington is on “Financial Reform”.   The backlash at Democrats and Republicans alike over the “bank bailout” continues to grow.  The politicians are posturing to allocate credit for the so-called reforms, but seem destined to “give the people what they want”.  It might help the politicians and the people if there was a shared understanding of the inherent factors universally at play in the home lending market.

I propose that everyone take an evening off and watch the classic 1946 film “It’s a Wonderful Life”, starring James Stewart as George Bailey, the initially reluctant but eventually heroic, manager of the Bailey Building & Loan Association in Bedford Falls.

http://en.wikipedia.org/wiki/It’s_a_Wonderful_Life

The essentials of banking are exhibited in this film.  Bedford Falls is the whole universe.  All of the actors know one another.  The cast is composed of depositors, owners, board members, bankers, borrowers, regulators and landlords. 

There are inherent conflicts between the roles.  Depositors don’t really trust the bank as shown by the bank run.  Landlords would like to see lending restricted to boost rents.  The owners are motivated by self-interest (enlightened or not) and set policy accordingly.  The board seeks a trustworthy banker to be its agent, and provides incentives to attract and retain him.  The banker has fiduciary and personal motives.  The regulators enforce the laws, unaware of all key facts.  The borrowers want loans, even if they can not afford them, in order to escape the costs of the landlords.  People act out of self-interest.  They respond to incentives.  There are trade-offs to be evaluated and decisions to be made.

A bank fills a valuable social role, attracting deposits in order to lend money.  A bank profits by the spread.  A bank is in business to lend money whenever it sees a profitable opportunity, irrespective of the moral concerns of owners, depositors or borrowers.  Banking is subject to real risks such as bank runs.  Banks are subject to poor decisions by bankers, mistakes by employees and fraud by anyone involved in any transaction. 

Historically, banks have operated by the 4 C’s of credit: capacity/cash flow, capital/collateral, conditions and character.  This is especially effective in a small town such as Bedford Falls.  Although George and the audience might hope that every citizen should qualify for a loan, some may not have the earnings to cover the principle, interest, insurance and maintenance of a home.  Some may not be able to save for a down payment to create adequate collateral.  As business conditions change, the income of the citizens is at risk and the ability of the bank to manage its affairs fluctuates.  A banker with a long-term perspective and proper incentives adjusts lending accordingly.  Finally, character counts.  Past financial and personal performance are good predictors of future performance.  Character is part objective and part subjective.

Even in this simplified setting, risks abound.  Public pressure for universal home ownership can result in too many loans.  Regulators can enforce laws mechanically while missing larger problems.  Institutional knowledge can be lost through staff turnover.  A single fraudulent act can threaten a bank.  Changing external business conditions can disrupt the bank.  Lending policies can be too loose or too tight.  Business judgments can be wrong.

The film delivers an escapist, idealist, overly simplistic view of life.  Mr. Potter is the evil bank owner and plotting, fraudulent landlord.  George Bailey is the selfless hero.  Yet, behind the scenes, we have a social institution performing a social function.  We need banks to provide the social function of collecting deposits, allocating credit and collecting from borrowers.  In spite of the vastly more complex institutional structures today, the role of a “building & loan association” is essentially the same.  As a society, we allow these institutions to connect savers and borrowers across varied time frames because this is a necessary function.  Our laws and regulations should be based on this real-world understanding, not upon the simplistic dualism of “good and evil”.

Labor and Tax Law Changes to Create Jobs

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The U.S. labor market remains mired in a post WWII land of large employer paternalism that is unsuited to the needs of global competition.  Major changes to labor laws should be made to lower the full costs of hiring employees.  At the same time, major changes to unemployment insurance should be made to provide a meaningful safety net, without reducing the incentives for the unemployed to actively seek re-employment, even at lower wages when needed.

In return for a variety of actions to reduce the unit cost of labor by more than 20%, employers should be required to fund one-half of an unemployment insurance fund that provides meaningful benefits.  Employees would fund the other half through payroll deductions.  Unemployed workers would receive an initial payment of one-half of six months’ worth of wages.  Additional 50% payments would be made at the beginning of third and fourth quarters of unemployment.  This lump-sum approach maintains the incentive to actively seek new employment, while providing a true safety net in a world where 6 month bouts of unemployment are recurring career experiences at all levels.

The federal government could lower the transaction costs of employment by maintaining a national ID card system that qualifies individuals for employment and removes the hiring cost and risk to employers.  The federal government could certify 3-5 firms to operate a standardized resume/profile system that records and certifies the basic education and employment history for individuals in one place. 

Employees would be more attractive to employers if they invested more in their professional skills.  A continuing education tax credit would improve candidate skills and remove the need for employers to offer most internal training and educational benefits.

Employers would hire more individuals if the terms of employment were more flexible.  Labor laws could more clearly allow “paid time off” banks to be used in place of overtime compensation.  The trigger for required overtime premiums could be raised from 40 to 48 hours for the first 10 weeks of annual overtime.  Seasonal positions could be exempted from employer unemployment compensation responsibility.  A new employment category could be created to clearly allow 100% incentive based sales positions.  The IRS rules defining employees and contractors could be simplified to reduce administrative costs and risks.

Federal labor laws and regulations could be simplified to reduce administrative costs and limits could be placed on potential liabilities.  The equal employment opportunity, family medical leave, disability and other employee “rights” acts incentivize employers to take extreme defensive steps and avoid hiring in order to avoid potential liabilities.

The federal government could incentivize the creation of new positions directly by paying half of the first six-months of wages.  The rules for unpaid internships could be clarified, allowing students to work up to 700 hours per year within win-win educational programs which lead to employment.  The labor laws could be clarified to allow “no fault” dismissals within 180 days.

In a globally competitive environment, labor laws need to benefit employers and employees.  Steps can be taken to reduce the total cost of employment and protect employed and unemployed workers.  The cost to employers and society through taxes is modest.

In addition to macroeconomic steps to improve the economy and administrative steps to provide meaningful unemployment compensation benefits and lower employment costs and risks, the federal government could change tax policies to significantly reduce the incremental costs of employing workers.

The federal government could incentive continuing education through tax credits.  Unemployment compensation insurance could be shared by employers and employees.  Family medical leave benefits could be funded by the federal government as is done in other developed nations.

Tax changes could be made to incentivize individuals to invest in their own life and disability insurance plans.  Tax credits could be used to promote individual charitable contributions and reduce the need for corporate gifts and matching programs.  The dollar and percentage limits for tax –deferred retirement plan contributions could be raised, increasing the value of compensation.  The rules for qualified plans could be modified to allow a greater share of “highly compensated” employee pay to be made on a pre-tax basis.

Finally, the two biggest fringe benefits – social security and health benefits – could be migrated to government and employee funded programs over a decade, releasing employers from this responsibility.  Social security can be funded from federal income tax revenues or simply made employee deduction.  Health care insurance programs could lose their tax-deductible status.  If no better option is found, employer contributions to consumer choice (HAS/HRA) plans could retain their tax-deductible status.

Allowing American employers to focus on creating jobs, operating their firms and making money will unleash incentives to increase productivity, competitiveness and our standard of living.  Finding the political will to fund desired public services will not be easy, but the total benefits justify the short-term challenges.

Roar Out of the Great Recession

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It’s time to place some bets on the recovery.  Buy low and sell high.

 The labor market is softer than it has been since 1982.  It’s time to act.

 0. Reset the terms of employment with staff.  Reduce health care, pension and other benefits to a sustainable level.  Increase the share of incentive versus base compensation.  Hire some support staff to avoid burnout.  Offer a nominal pay increase now.  Provide extra time and flexibility to staff to balance.

  1. Hire qualified director/VP level staff to lead “on hold” initiatives.  They are available for lower base compensation and are highly motivated to earn incentives.
  2. Identify the most qualified scientific and technical staff in key R&D and product development areas.  They are unable to obtain venture capital support and would welcome a paycheck or contract.
  3. Complete your quality staffing, training and initiatives.  The market is loaded with very highly qualified individuals who have the business savvy to deliver value.

 Most suppliers are in weak positions, eager to begin to make progress.

 0. Propose long-term agreements with key supplier partners in return for a 5% per year reduction in unit costs.  Negotiate to a win-win position.  The best partners can reduce costs every year.  Focus on professional services firms.  Legal, accounting, insurance, HR and real estate firms face a new reality of lower revenues and profits.  They are ready to negotiate to maintain business.

  1. Take another look at outsourcing areas that are not strategic core competencies.  The third-party providers are more effective than ever and eager to do business.  All of the line and staff areas should be reviewed:  customer service, finance, accounting, HR, marketing, purchasing, logistics, distribution, manufacturing, and R&D.
  2. Engage contingency based cost saving consultants.  They are eager for business and can do their work with limited time from your staff.
  3. Look at domestic suppliers of key products and components.  The dollar is falling.  Transportation and environmental costs are rising.  Inventory and stock out opportunity costs are rising.  The remaining domestic manufacturers have outstanding capabilities.

 Make a few strategic investments.

 0. The real estate market is very weak.  Re-negotiate existing leases.  Look at sale and lease back deals.  Lease or secure options on properties for the future.  Hire or contract for unemployed real estate experts to reduce total costs of facilities and their associated risks and taxes.

  1. Take out those IT investment project lists.   Invest in the high ROI projects.  IT firms are ready to bargain, especially for larger, long-term deals.  Consider applications like Microsoft Sharepoint that knit together web, sales and communications.
  2. Pursue strategic acquisitions to acquire market share, products or talent.  Equity values have recovered.  Debt for solid larger firms is becoming available at low rates.  Smaller and highly leveraged firms are nearing the end of their liquidity options and need to sell.

 Pursue market share.

 0. Strategically evaluate the structure, number and incentives of your sales force.  You’ve maintained market share for the last 2 years.  Remove low performers.  Revise incentive schemes.  Invest in sales training for younger staff.  Make sure that your sales management team is the best possible.  Hire strong performers from the real estate, banking and insurance industries.

  1. Invest in export sales opportunities.  The markets are growing.  The dollar is falling.  The infrastructure is available to get started with a lower initial investment. 

 Great firms make progress at times like these.

Reverse Logistics

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Reverse logistics is the orphaned step-child of many businesses.  The liability and recovery potential are often marginal.  Unit volume is too low for heavy automation.  The process is complex and touches many departments, often requiring “stop and go” judgments.  And, the process works backwards from everything else the firm does.  Nonetheless, it is a necessary business function that can be managed using familiar financial and quality guidelines.

  1. Make sure that the returns and testing process captures the essential data for the quality process to reduce the root cause sources of product and fulfillment errors.
  2. Integrate returns processing with supplier management programs, holding suppliers responsible for returns rates above agreed upon levels.
  3. Don’t throw good money after bad.  Implement a “destroy in field” program for those lower unit cost items which don’t warrant evaluation, testing and recovery efforts.
  4. Simplify decisions to the extent possible.  Initial inspections should follow a triage process.  Testing should focus on final “yes/no” parameters.  Repairs should be limited to a few well-defined replacement steps.
  5. Pre-define the allowable recovery steps by product or product family.  If unit cost or dollar returns vary by more than a single order of magnitude, a rough cut categorization scheme can be used to define allowable routings and recovery actions.
  6. Define a simplified linear process flow.  Allowing too many options leads to wasted handling, scheduling and obsolescence.  Cost-effective product batching is usually not justified due to the low volume of returns. 
  7. Treat returns and recovery like any other operations process.  Define objectives and measure results.  Define, follow and improve processes.  Use simple, visual tools to facilitate the flow of product.
  8. Invest in people.  Match the skill and experience level to the potential recovery value.  Provide the training, materials and equipment to do the job well.
  9. Invest in recovery options.  For higher value products, repair, third-party services, return to manufacturer and parts salvage strategies may be cost-justified.
  10. Identify bottlenecks and design the process around them.  Packaging materials, test equipment, limited space, large returns batches, research requests, inventory and parts systems, complex products and resources shared with quality assurance or special projects can all create bottlenecks.  A good process eliminates some and works around the others.

 

The reverse logistics process needs a clean process re-engineering review about every five years and a quick review at least annually.  For businesses with 1-10% net margins, the returns process offers a material opportunity for improvement.

Both/and Trumps Either/Or

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The business and political worlds are catching up with what the great religions have long known and science has discovered in the last 200 years.  The deepest understanding and practical progress in all fields is driven by a “both/and” approach, rather than by a deterministic “either/or” approach. 

Post-enlightenment westerners have struggled to fully digest the slippery, evolving dynamic nature of the Asian concept of yin and yang.   Many believers, clerics and secular leaders have simplified, denied or ignored the deeper meanings of the Christian trinity, relationship with Judaism and tension between the vertical (God) and horizontal (community) demands of the faith.  The fully developed religions provide training, terminology, sacraments and advice to attract, retain and grow members, without reducing “the mystery of faith” to a simple recipe.

The western scientific tradition meets the heartfelt needs of man for a deterministic description of the universe, delivering the potential for security expressed in Maslow’s “hierarchy of needs”.  Aristotle, Euclid and Newton are rightfully celebrated for their authoritative development and formalization of logic, geometry and physics.

Nineteenth and twentieth century science shattered the deterministic paradigm, replacing it with a probabilistic paradigm.  This was presaged by Hegel’s philosophical method of thesis, antithesis and synthesis.  Thomas Kuhn’s mid-twentieth century history/philosophy of science documented both the human process of how science progresses and the Necker Cube-like way in which a new paradigm destroys the old and blinds us to any new ways of perceiving.

The Heisenberg uncertainty principle demonstrated that the location and speed of material items was dependent upon the measurement applied and was inherently uncertain.  At the same time, it became clear that the location (energy level) of an electron was only probabilistic!  Kurt Godel’s impossibility theorem destroyed the hope of defining a Euclidean basis for a fully functional arithmetic and algebraic system of mathematics that could include the concept of infinity.  Darwin’s theory of evolution included the concept of random events in populations determining the future of biological species, without necessary guidance from god.  Biology then described the details of genetics, which includes random mutations, reproductive combinations, multiple genes, developmental sequences and the impact of the environment.  Freud described the role which unconscious thoughts, drives and the “mind” can play in determining consciousness and behavior.  Statisticians defined populations, estimates and metrics, emphasizing that there are inherent conflicts in making estimates.  Finally, Einstein developed the theory of relativity, making time, space, matter and gravity functions of each other.  Ironically, Einstein unsuccessfully devoted 20 years of his life to finding a unified theory that would combine all aspects of physics into a deterministic framework.

In the last 50 years we have seen the development of insightful “both/and” approaches throughout the business and political worlds.  Management has evolved from unilateral theories X, Y and Z to situational leadership which uses both task and people factors to deliver results.  Effective thinking coaches have defined the best use of convergent and divergent thinking skills or six thinking hats to improve results.  Jim Collin’s “Good to Great” book highlights the central role of a fixed vision/goal and flexible means/strategies.  Gallup’s Strengthfinder approach to personality profiles overcomes the “either/or” nature of Meyers-Briggs, concluding that some individuals do have apparently conflicting “talents”.  Bottom-up and top-down planning approaches have been incorporated into the balanced scorecard framework.  Goods production has evolved from custom craft work to mass production to a combined lean manufacturing pull system.  Goldratt’s book “The Goal” provides further insight on how defining the goal is logically distinct from the means of reaching the goal.  “Best practices” project management has evolved from informal management to fully prescribed sequential tasks to a new hybrid approach that retains the broad project stages, but allows cycles to resolve issues when needed.

In economics, the Keynesian revolution overturned “Say’s Law” which deterministically stated that supply always creates its own demand.  In governing, representative democracy seems to balance various needs.  In politics, the “third way” attempts to use market mechanisms to deliver liberal objectives.  In religion, the reformed faiths attempt to adapt received faith to current knowledge and realities.

The “both/and” approach is not inherently best, but everyone should be challenged to consider it at all times based upon its impressive track record.

I’d like to thank Mark Cavell, Annamarie Melodia Garrett and Doug Loudenslager for their contributions to identifying this pattern.

Creating a Jobs Boom

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Creating a “jobs boom” is within the power of the government if the legislators and president are ready to create confidence in the government and economy, incentivize job creation and business investments, make a long-term commitment to transportation/energy and stimulate the government and not-for-profit sector.

Confidence in the Future.

1 Start the process to set a constitution maximum marginal tax rate at 50% of income.

2. Start the process to set a constitutional maximum spending limit for all government budgets at 30% of GDP.

3. Drastically simplify the federal tax for incomes below $200,000, maintaining the current level of progresseness and number of tiers.

4. Eliminate the corporate income tax, replacing lost revenues with personal income tax rate increases at higher incomes.

5. Complete a health care cost reduction bill, based upon cross-state insurance competition and limits on lawsuits.

Direct Job Incentives.

6. Move the full benefits social security retirement and medicare age up 2 years for 2010-2011.

7. Allow direct tax expensing of all capital investments for 2010-2012.

8. Provide firms with 50% tax credits for hiring college graduates in minimum wage, full-time internships.

9. Provide a $10,000 tax credit to firms for hiring engineers and IT professionals in project positions.

10. Sign the country to country free trade agreements that are ready.

Investment Incentives

11. Increase the life of patents and trademarks by 5 years. 

12. Allow direct tax expensing of all capital investments for 2010-2012.  

13. Cancel 25% of federal regulations within 90 days and 50% within 6 months.

14. Improve the value of tax loss carryforward benefits from business losses.

15. Fund the property acquisition in 10 cities to stimulate blighted area development.

Long-term Transportation/Energy Direction

16. Make a 3 year commitment to continue the stimulus level of funding.

17. Loosen the energy regulations for offshore drilling and nuclear power.

18. Select one national highway project, such as I-69, and commit to 7 year completion.

19. Make a 10 year finding commitment to the high-speed rail network.

20. Create a carbon tax scheme for the next 2 decades with a 10% per year transition to full effectiveness.

Government and Not-for-Profit Effectiveness

21. Loan states the money to start independent board governed rainy day funds.

22. Privatize Fannie Mae and Freddie Mac quickly.

23. Privatize large state and federal agencies: post office, licenses, air traffic control, and community colleges.

24. Allow first $10,000 of charitable donations as 50% tax credits.

25. Tighten inheritance tax limits, but allow doubled charitable deductions.

Any ten of these easily understood policy changes would jump start the economy, benefiting everyone.

Economic(s) Progress?

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Adam Smith started a conversation in 1776 about the economic and moral benefits of the “invisible hand” in the marketplace – making society better off, in spite of there being no coordinated plan.  Karl Marx argued that the unstoppable workings of history would inevitably lead to a socialist utopia.  In 1976, the sociologist Daniel Bell wrote of the “Cultural Contradictions of Capitalism”, whereby the underlying Protestant Work Ethic is corroded because of the hedonistic consumerism in a capitalist society.  Marx was wrong.  Bell was wrong about the end of capitalism, even if his critique of an aimless society still stings.  Where do we stand today on Smith’s breakthrough claims regarding the moral and economic superiority of the “free market”?

Support for the most simplified view of markets being truly perfect reached its peak following the Reagan/Thatcher years when the totalitarian communist alternative collapsed and the Atlantic version of a mixed economy demonstrated significant ongoing advantages compared with the Nordic version with greater state involvement.  Events of the last two decades – rise of China/emerging markets and fall of US/UK from the Great Recession – have undercut the plausibility of an extreme market solution being the best,  only or final answer.

It is obvious in hindsight that the business cycle has not been tamed, that financial markets are inherently unstable and subject to “animal spirits”, that markets are not perfect and that greed will continue to drive many market participants.  In spite of the positive societal benefits of financial innovations such as options, mutual funds, checkable deposits, portfolios and securitized assets, the broad financial sector seems to be an ongoing source of the greatest failures in capitalism.  The formal definition of “perfect market theory” has not reduced volatility, but it has led to a finance sector where every possible trick is used to generate “wealth”: Ponzi schemes, the carrying trade in foreign investing, borrowing short and lending long, off-balance sheet vehicles, hedge funds and extreme leverage to name a few.

A visible part of the general business sector appears to be equally enamored of finding every possible way to create financial wealth beyond “the old fashioned way, we earn it”.  Mergers and acquisitions continue because they can reduce competition, leverage overvalued stock prices and employ low-cost borrowing, even though on average they do not provide a net return to stockholders.  Corporations manage reported earnings, producing smooth growth for quarters until the next recession provides an opportunity to report losses due to extraordinary items and business conditions.  Executive pay increases as a share of revenues, as stockholders find themselves unable to solve “the agency problem”.  Corporations promote legal and public relations executives to the highest levels because the opportunities to create incremental wealth through influencing public policy are greater than investing in new products or markets.

On the other hand, it remains clear that capitalism remains a tremendous value creating mechanism for society, with productivity growth, innovation and personal incomes rising at strong rates without any long-term end in sight.  The system’s incentives do focus resources on innovation and dynamic value creation.  In spite of John Kenneth Galbraith’s old claims in “The Affluent Society”, there appears to be no limit to the demand for personal consumption at any income levels in society.  The recent work “Richistan” notes that individuals with $5M of annual income feel they would be secure if they only earned 50% more!

In a fundamental way, we’ve come back to the basic framework and issues of economics raised in the post-war period.  What is the right role for government in a mixed economy? 

We have learned some things in the last 50 years and the consensus view is more to the right than it was in 1950 or 1970.  The dynamic long-run wealth creating role of capitalism is better appreciated, including its role as a poverty and inequality reducing strategy.  Most agree that monetary policy matters, expectations about government behavior matter and “fine tuning” is only a theory.  Market competitors are the best anti-monopoly force, so regulation should be light and focus on anti-competitive actions rather than narrowly defined market shares.  Ongoing growth of real incomes in the bottom third of society can offset rising dollar inequality.  John Rawls’ philosophical justification for some income redistribution resonates for many moderates and liberals, but Robert Nozik’s emphasis on “fair rules” alone provides conservatives with a deeply felt alternative view.  Government actors are as subject to self-interest as consumers and capitalists, especially with regard to being “captured” by those they aim to regulate.  Countervailing forces such as labor unions are blunt instruments, which may not even benefit the groups they aim to support.

Many economists would like to see the public policy debates return to the post-war topics, with the two political parties sliding from left to right within the informed framework of current economic knowledge.  Capitalism provides great value as Adam Smith demonstrated.  There are inherent risks due to relying on self-interest (as Smith also noted).  There is a role for government in counterbalancing the business cycle, maintaining fair markets, managing the self-interest of government actors and ensuring public support for capitalism in spite of the unequal distribution of benefits.  The political parties exist to find a “happy medium” on these issues.

The current political climate does not readily support this possibility.  The Republican Party has become increasingly consistent, philosophical, libertarian and monetarist in its views.  Its leaders increasingly define a single economic viewpoint: minimal government, no taxes, minimal economic regulations, rules based monetarism, minimal anti-competitive policy or enforcement, zero income redistribution, etc.  While each of these views has philosophical and substantive research support, the combination of doctrinaire views leaves no room for a sliding scale in public policy, for the only preferred solution is “zero”. 

The Democratic Party has not lost its preference for “redistributing the pie” versus “growing the pie”.  It has not helped its union supporters to evolve into a German or Japanese style alternative way.  It has championed continued protection of its public sector employee supporters from accountability or competition.  It has reached the goal of universal social welfare coverage for health care.  In spite of some tactical moves to the center on economic issues (welfare reform, the means of health care reform, international trade), the Democratic Party continues to emphasize those policy areas that increase the role of the state versus the individual, rather than identifying ways to better leverage the value creating potential of markets.

It seems that it will take more than President Obama’s slogans of “hope and change” to get our political parties and politicians to focus on the potential for increased economic growth and pragmatically justified economic roles for the government.  Perhaps, we need another “political economist” to develop a breakthrough theory of the political sector as insightful and valuable as Smith’s view of the market.

Infinite Progress

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At the start of 2010, I put a positive spin on the nascent economic and psychological recovery with blogs on “The Sky Has Stopped Falling”, “Good Riddance to Utopian Views of 2000” and “Self-Improving Systems”.  Today, I want to promote the broader subject of “Infinite Progress”.

Economics has earned its label as “the dismal science”.  It has been serious, analytical, realistic, short-term and marginal.  Imitating calculus and physics, it has sought to optimize production functions and maximize results subject to multiple linear constraints.  Like other academic disciplines, economics has been shaped by the dominant culture.  Economics has progressed through the Physiocrats, Marxists and Marginalists who in turn proclaimed that land, labor and capital each held the key to economic value.  Even Paul Samuelson’s neoclassical synthesis focused on these three “factors of production”, while mentioning that there was some remaining role for “technology” and “entrepreneurship”.

The “law” of diminishing marginal returns emphasizes that in the short-run, with given technology, additional inputs eventually yield lower incremental results.  This is certainly true, but development and growth economists focusing on the international and business sectors have demonstrated that this fourth factor (technology/entrepreneurship) is the primary driver of progress.  In fact, rather than being subject to diminishing returns, knowledge is the one factor that is subject to increasing returns through time!

In spite of the slow recovery in the current economic cycle, I believe that we are only 50 years into the greatest productivity expansion in history.  Annual labor or multi-factor productivity growth of 2-4% has become commonplace.  Even in the recession, we experienced 6-8% productivity growth.  Productivity growth will accelerate in the coming years to a minimum of 5% annually, in spite of our various challenges (aging population, protectionism, extremism, political polarization, religious stagnation, terrorism, global warming, limited natural resources, multi-polar international powers).

In no particular order, knowledge and practice has expanded and will continue to expand in all of these fields:

  1. Trade.  Lessons were learned in the Great Depression.  Tariffs have continued to fall.  Multilateral treaties have stalled, but bilateral trade agreements are accelerating.  English is becoming the global language, followed by Mandarin Chinese and Spanish.  A majority of the global population produces at a near-subsistence level.  They will all generate modern western levels of output within 40 years, providing added value globally.
  2. Physics/Engineering.  Basic physics, mechanical and civil engineering continue to advance.  Modern materials, energy, devices and structures will advance and be refined in light of breakthrough understandings (supercollider).
  3. Chemistry.  “The Graduate” whispered “plastics” as the key to the 20th century.  Plastics has delivered, but has not exhausted its secrets.
  4. Biology.  Biotechnology and modern medicine is on the verge of major breakthroughs in individualized medicine, medical information, preventive medicine, devices, new drugs and nano-technology based solutions.  Mental health care is leveraging improved understanding of the mind, behavior and chemistry.
  5. Energy.  Delayed by politics and prices, energy exploration and solutions are emerging.  Wind, solar, nuclear, clean-coal, tidal and other answers are now real.  Break-through shale, gas and deep-sea extraction technologies are imminent.  Major investment in alternative transportation options is producing results.
  6. Natural Resources.  The food, fiber and natural resources sector continues its 200 year track record of innovation, with genetically modified organisms, drip irrigation, weather forecasting, satellite guided farming and fish markets adding value.
  7. Transportation. New highways, hiking, biking, high-speed trains, point to point aircraft, larger container ships and usage tolls suggesting continued progress.
  8. Electronics.  Songs, movies, video, instruments, observation, robots, entertainment, games, virtual reality, and the list goes on and on.
  9. Computer Power.  Moore’s Law. ‘Nuff said.
  10. Telecommunications.  Cell phones, internet, computer integration, GPS, much faster speeds.
  11. Integration.  Electronics, telecommunications, media, entertainment in one place, on demand.
  12. Community.  Tribes, cities, nations, world.  Clubs, games, blogs, social media, Face book, LinkedIn, Twitter, no limit.
  13. Specialization.  Professions, suppliers, outsourcing, matrix organizations, consultants, global suppliers, increasing economies of scale, niche markets
  14. Process Improvement.  Process, quality, cost of quality, value added, variability, bottleneck, ISO, TQM, benchmarking, process re-engineering, quantum leap, lean manufacturing, lean, six sigma, kaizen, self-improving systems.
  15. Computer Systems.  Automation, systematization, mainframes, minicomputers, personal computers, applications, man-machine, GUI, windows, mouse, ERP, cloud computing as a utility.
  16. Library Science.  Dewey decimal, multimedia, informatics, knowledge management, Wikipedia, Amazon.com, tripadvisor.com, Angieslist.
  17. Economics.  Markets, global trade, auctions, information, behavioral economics, EDI, e-commerce, capitalism embraced everywhere in one form or another.
  18. Finance.  Stocks, bonds, pork-bellies, futures, puts, calls, mutual funds, checkable deposits, insurance, hedges, securitized debt.
  19. Management/leadership.  Strategic planning.  Product innovation. Growth/margin. Core competencies.  Discipline of Market Leaders.  First or second. Operational excellence.  Situational leadership.  Theory X, Y, Z.  Motivators and de-motivators.  Covey’s 7 habits, urgent and important.  Meyers-Briggs, personality styles and Gallup talents.  Change management.  Engaged/disengaged.  Creativity and thinking hats.  Accountability/Oz Principle.  Good to Great, Both/And. 

 

Knowledge will continue to increase in every discipline.  Market pressures will ensure rapid adoption, expansion and innovation.  The work world in 2010 could not be seen in 1980.  The work world in 2040 will exhibit the same degree of discontinuous change from a much higher base.

2010 Elections

tomkapostasy1 Comment

The 2010 election campaign is about to begin in earnest.  The events of the last three months have certainly swung the Republicans’ way.  Even the “health reform” victory is likely to have a mostly negative impact on short-run Democratic prospects.  Opposing parties always make progress in midterm elections.  The real question is “how much?”  Eight months from the elections, I give a strong edge to the Republicans, but believe that the “Tea Party” movement may backfire on the right.

Politicians are experts at getting elected and re-elected.  They know that winners occupy enough of the middle to attract swing voters and enough of their edge to motivate the party faithful.  In the 1968 election, George Wallace highlighted the role that socially conservative and economically moderate voters could play.  Richard Nixon and Spiro Agnew capitalized on the interests of the silent and moral majority, realigning politics for two generations.  Ronald Reagan clarified the pitch and a more coherent philosophy, solidifying the right-wing strategy.  Subsequent moderate Republicans like the Bushes proclaimed the new message, adopted the tax cut strategy, courted the religious right and increased expectations of their new supporters. 

During this time the Republican Party has successfully shifted the definition of left and right on the critical economic scale, forcing Clinton and Obama to adopt economically conservative means, programs and terminology, while continuing to pursue their leftward goals.  The Republicans have also undercut the Democrats’ classic appeal to the economic interests of the working and middle classes by touting growth, entrepreneurship and economic freedom as higher ideals.  They have increased the weight of social issues and courted a populist libertarian strain in America through fringe candidates such as Ron Paul and Sara Palin.  The Republicans have mastered the tactical dimensions of politics, beating the Dem’s at fundraising, participation, communications and media influence.  Although taunted as “the party of ‘no’”, the Republicans have effectively avoided major responsibility for the weak economy, ongoing terrorist threats, the banking meltdown, immigration gridlock, increasing healthcare costs, wider income distribution and the coming retirement cliff.  Now that Obama has a year under his belt, they are effectively painting him with responsibility for these and other situations.

The Democrats have responded to this shift in the playing field by sending three southerners to the White House (Johnson, Carter and Clinton) positioned as moderates.  The Democrats have maintained their hold on a growing minority and shrinking union base.  They have improved their posturing skills and election tactics, especially in social media.  They have adopted some centrist programs and begun to fight for key terms such as “accountability” and “economic progress”.  The Democrats have taken care of their base through laws and funding.  President Obama has provided a message of bipartisanship, hope and change which deflects attention from controversial specific programs.  He and his colleagues have not hesitated to blame George Bush and the Republicans for a variety of “messes” and dodged their responsibility. 

It is no surprise that a weak economy (it’s the economy stupid) would catch up with Obama, especially given his pursuit of so many distracting goals.  However, the impact of “Tea Party” is something of a surprise.  Sara Palin was clearly chosen as a VP candidate by John McCain to appeal to part of the party faithful.  Her candidacy, the stirrings of Ron Paul, the unfulfilled promises to social conservatives by the Bushes and the demonization of national Democratic leaders and programs for two decades have crystallized into a true populist backlash against the evils of “big government” and its mostly Democratic supporters.

Will the “Tea Party” help or harm the Republicans?  In the short-run, it has clearly scared moderate Democrats, especially those in conservative districts.  On the other hand, it has also scared moderate Republicans, including John McCain.  In some cases, the more conservative primary winners will be defeated due to their extreme positions.

I think that there is an even greater risk that the Republican Party has unintentionally moved so far right in its rhetoric, positions, legislation and new affiliation with the “Tea Party” that it will lose touch with classic moderates and swing voters.  In 1968, Hubert Humphrey wanted nothing more than growth of New Deal and Great Society programs.  He was not seeking a social revolution or a counterculture.  However, the activists painted a picture of revolution that frightened most of the country to embrace the solid posture of twice-defeated Richard Nixon as the safest choice in an emotional time.

If the “Tea Party” continues to gain publicity and become affiliated with the Republican Party, the same kind of social distancing may take place in 2010 or 2012.  By belief or by framing, the ”Tea Party” appears to hold extremist views on the economy (radical self-sufficiency), the role of government (none, including popular entitlement programs), banking (gold standard), religion (one fundamentalist, end of times, withdrawal from society) and security (gun rights and military adventurism).  The “true believer” statements are passionate, direct and uncompromising.  They may provide the Democrats with an “extremist” straw man to replace the current “banker” straw man.

We certainly live in interesting times.