Category: business cycle

Framing Politics With a Ruler

tomkapostasyLeave a comment

Peggy Noonan’s suggestion to use a 36 inch ruler to gauge right versus left in politics does help to explain the opposing views of tea partiers, Republicans and Democrats.  Noonan describes 0 inches as pure right and 36 inches as pure left (opposite of what you might expect).  She bemoans her perception that modern-day politicians negotiate between the 25 and 30 inch mark on the far left end of the ruler.  She asserts that tea partiers will try to move back to the 5 inch mark.

In politics, he who sets the framework usually wins the game.  Using American history since the agricultural 1770’s, urbanizing 1860’s, industrial 1920’s or depression 1930’s as a base, a case can be made that post-war politics and economics has been debated on the left end of the ruler, with a mixed economy government share of GDP at 20% and government spending/taxing share of GDP at 25-30%.  These shares of the economy double those of laissez-faire capitalism, the roaring twenties or the depression.  Noonan takes this long-run historical view of how the yardstick should be labeled.

Noonan is right in pointing out that politicians of both parties in a democratic system inherently seek to spend more money.  The rise in government spending in the Bush presidency after the unusual decline in government spending in the Clinton presidency (with Republican congress) is a modern reminder.  Tea partiers are right to have gut level concerns that government spending will continue to climb unchecked.  The trend in 2000-2008 was up.  Extraordinary banking and industry bail-out funds were piled on top of the stimulus spending for the Great Recession.  Health care and social security spending increases are expected in the next two decades.  Whether the various spending increases are justified or not, the trend is clearly up, without any clear countervailing force in Washington.

Those on the left might agree with the challenge to be faced, but they use a different scale to gauge left versus right, object to the accusation that they have driven up government spending, hold the Republicans responsible for inciting anger in the tea partiers and offer different long-run solutions.

If the scale is set between 100% individual, 0% government pure libertarianism versus 0% individual, 100% government pure socialism, the Democrats argue that the post-war game has all been played on the right (0-18 inch) side of the ruler.  Government share of GDP is 20%.  Government spending and taxes share of GDP is 30-35%, including all transfers.  This did not increase between 1960 and 2008.  The US tax burden at 27% of GDP is only 75% of the 36% average level for 30 developed countries.  Only Mexico, Turkey, Korea and Japan spend less than the US.  Total government spending in western European democracies is 40-55%.  Government spending did increase with the Vietnam War and Great Society policies, but was reduced by the Reagan revolution.  Government spending fell from 37.2% of GDP in 1992 to 32.6% in 2000. 

Democrats argue that their fiscal discipline was demonstrated in 1992 to 2000 when they balanced the federal budget and reduced the deficit, employing the “pay as you go” policy to force spending cuts to offset spending increases.  They point to Bush led Medicaid and defense spending increases as the cause of increased government by 2008.  They see the Bush tax cuts as redistribution to the wealthy and don’t see the overall tax-cut initiated economic growth claimed to increase net tax revenues.

Democrats argue that they have not purposely increased the long-run share of government in the economy.  They claim that the one-time investments/guarantees for the banking/auto industries were necessary for the whole economy, addressed issues that had grown for decades, will be partially recaptured and do not require continued funding.  Similarly, they pursued a moderate one-time Keynesian fiscal stimulus in response to a deep recession, just as was done by other governments of all parties in all countries for the last 60 years.  The stimulus spending lies between the 4.7% of GDP boost in 1982 and the 2.3% growth in 1992. Democrats argue that these actions are necessary and moderate and would have been undertaken by a responsible Republican successor to the Bush administration.

Democrats argue they are unfairly characterized as “big spenders” by the Republicans.  This simple accusation has stirred a populist response from “regular Americans”.  While Democrats have historically focused populist rage on big business and big banking, the Republicans and tea partiers have effectively used big government, Washington, elites, foreign countries and religions as targets, tying them to the Democratic Party.  Democrats argue that the monetarist, supply side, tax cut economic policies of the Republican Party since Reagan have been adopted for their populist simplicity and political effectiveness alone, further polarizing economic policy making.

Finally, Democrats have adopted part of the Republican play book in fundamentally looking to the private sector to drive the future economic growth required to support even the historic level of government spending.  The stimulus spending was partially focused on future industrial growth and infrastructure.  The banks and auto firms are returning to pure private ownership.  Small business lending and investment tax credits have become a focus.  Health care reform maintained private providers and insurers as the core of the system.  The costs of the war in Iran have been reduced.  A bipartisan group has been appointed to work on the Medicare/social security future.  Steps are being taken to promote exports.  A reduced public sector role for the mortgage industry has been proposed.  Obama and many Democrats have continued the pro-business approach used by Clinton.

On the other hand, Republicans can fairly point to steps taken by the Democrats that indicate a continued desire to “tax and spend”.  The stimulus bill benefited state government, construction and other Democratic interests disproportionately.  Health care reform achieved growth in government commitments without structural cost solutions.  Labor unions were given special treatment in the auto bail-out.  Fannie Mae and Freddie Mac’s roles were not touched in the banking reform.  The financial consumer protection agency smacks of unlimited and uninformed regulation.  The proposed increase in taxes for high earners is significant and is not coupled with structural spending reforms.  A second mini-stimulus has been approved and unemployment benefits have been extended to record lengths.

The current economic situation has raised the stakes for politics.  We should expect to see ongoing attempts to define the ruler and place the participants at marks that favor one group or another in the public eye.

Better Management, Less Demand for Labor

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The Bush administration experienced a weak jobs recovery from 2002-2007 and the Obama administration is facing even stronger headwinds in 2009-2010.  Are there structural factors that are more important than the widely discussed business cycle and macroeconomic policy factors?

On the labor supply side, the growth of internet based job applications processes has greatly improved the effective supply of high quality candidates for all positions.  This increases the expectation of firms of finding great fit candidates.  On the other hand, until recently workers had inflexible wage expectations due to worker experience, pride, assets and family income alternatives.  The decline in family housing and investment assets together with the greater experience of long-term unemployment has recently increased the willingness of potential employees to be flexible in seeking work.  Human resources departments remain reluctant to greatly reduce hiring wages in fear of turnover, legal and internal equity challenges. 

Extended unemployment benefits reduce the incentive to find work for some individuals, but this has a relatively minor labor supply impact.

Much greater structural changes have been experienced on the demand side of the equation.   Perhaps most important has been the ongoing growth in labor productivity, which has reduced the effective demand for incremental employment.   Increased staff flexibility in working long hours has also reduced the demand for peak-time or just in case workers

Firms have become more aggressive and experienced in downsizing employee groups as dictated by business conditions, thereby reducing the demand for labor.  This could eventually result in greater future employment demand, since the expected future cost of maintaining partially productive staff is reduced.  It appears that this cost reduction has been offset by a greater awareness that hiring an employee is a long-term investment decision.  Firms that have been trying to rework the employment bargain from one of life-time loyalty to one of “fair dealing” remain very reluctant to plan for future downsizing, so they have set higher new staff addition thresholds, subject to the sensitivity analysis once reserved for major capital investments.

Firms have also become more aware of the all-in cost of hiring.  Health care benefits costs per employee have increased significantly, especially as a percent to wages for hourly and entry-level jobs.   Internet application processes have increased hiring costs for many firms.  The level of firm-specific training required for break-even in many jobs has increased.  With better models of hiring, firms are less willing to hire “good enough” candidates who do not fully meet all functional, industry, character and culture needs, resulting in positions which remain open for longer periods.   Overextended managers have less incentive to add permanent positions.  Firms are also less likely to invest in entry-level professional staff positions due to the higher turnover and lack of investment returns.

Labor force reductions have escalated in the last decade.  Downsizings are conducted when indicated, even in times of plenty.  Marginally productive or engaged staff members are moved up or out sooner.  Employees in obsolete functions see their jobs eliminated.  Protected functions or industries are quite rare today.   In a labor intensive business world, firms are more aggressive in pairing staff.

Productivity improvement projects have become less labor investment intensive.  Much improvement comes from getting more value out of the existing resources.  The declining role of physical capital creates fewer tag along positions.   Firms have learned to manage peak seasons and major projects with less incremental staffing.    Information technology investments had stimulated some new forms of project and analytical staff needs in the last 30 years, but that demand is flat today.  Firms have adopted standard process and project management templates that reduce the demand for new positions to accompany IT investments.

Firms are now fully aware of the use of contractors, part-time staff, consultants, outsourcing and imports to fill most functions.  The need to hold partially employed staff is greatly reduced.  Many processes have been re-engineered specifically to allow outsourced resources to be used to accommodate peak demands.  

Finally, overall business investment has been weak in the post Y2K period.  Firms have learned to manage inventories much better.  They have installed significantly higher project hurdle rates based upon their experience with project failures.   The lower market cost of capital has been a very minor factor outside of industries like real estate and banking.   Through productivity improvements, the effective capital stock has increased without as much new investment.  Sensitivity to the risks of change has caused firms to reduce the number of minor investment projects.

Business investment has been especially weak in the last 3 years, with firms freezing capital expenditures until the overall economic climate is resolved.  This includes fiscal, monetary, trade, tax and regulation policies.  The credit crunch has reduced hiring by small firms.

In general, firms have become much more effective in managing their capital, inventory, technology, brand and labor resources.  Many of these changes in the last decade have reduced the demand for labor.  Some of these changes may have a long-term impact on the minimum or natural unemployment rate, while others will cycle through business profits to business investment to increased labor force demand in the long-run.

Dow 15,700

tomkapostasy1 Comment

Dow 35,000 was a dream in the go-go 1990’s when the new economy had supposedly broken all of the old rules.  Dow 3,500 was a distinct fear in March, 2009 when stocks had fallen by more than half from their peak.  Dow 10,000 is the most visible reference point in the current stock market.

Every investor and business degree holder knows that stock values are fundamentally based on the expected risk-adjusted net present value of future after-tax cash flows.  They are also tempted by the “efficient markets hypothesis” that says that stock valuations incorporate all information about future returns and therefore set the present value in a rational manner.  On the other hand, they understand fluctuations, random walks, animal spirits and the history of under and over valued stock markets.

http://stockcharts.com/charts/historical/djia1900.html

http://www.investorsfriend.com/return_versus_gdp.htm

Individuals who believe that stocks return 7-8% on average in the long-run through 2-4% dividend yields and 4-6% price increases, must conclude that the stock market is inherently irrational.  It has been 30% undervalued or overvalued a majority of the last 100 years.  Overvalued 1922-31.  Undervalued 1932-54, except for 1936-37.  Undervalued 1974-86.  Overvalued 1996-2008. 

Stocks were overvalued by 137% in 1929 before tumbling to -67% undervalued in 1933.  Stocks reached an undervaluated low of -58% in 1942.  Stocks reached a new -50% undervaluation during the depths of the 1982 recession.  In 15 short years, by 1997, they reached a 57% overvaluation.  They rose to 115% overvalued in 2000, before retreating to a mere 38% overvaluation in 2003.  In 2008, stocks were 67% overvalued compared with the long-run trends.

Based on 100 years of history, the Dow Jones Industrial Average at the end of 2010 should be 9,000.  The expected value in 2020 is 15,700, providing a 5% annual valuation return and 2% dividend return.  Investors who bet against long-term average valuations do so at their own risk.

Year  Trend  Actual +/-
1910             50 62 24%
1911             53 60 14%
1912             55 60 9%
1913             58 60 4%
1914             61 58 -5%
1915             64 56 -12%
1916             67 80 19%
1917             70 80 14%
1918             74 70 -5%
1919             78 75 -3%
1920             82 100 23%
1921             86 70 -18%
1922             90 80 -11%
1923             94 90 -5%
1924             99 85 -14%
1925            104 100 -4%
1926            109 130 19%
1927            115 140 22%
1928            121 190 58%
1929            127 300 137%
1930            133 250 88%
1931            139 190 36%
1932            146 80 -45%
1933            154 50 -67%
1934            161 90 -44%
1935            170 90 -47%
1936            178 130 -27%
1937            187 175 -6%
1938            196 100 -49%
1939            206 130 -37%
1940            216 125 -42%
1941            227 125 -45%
1942            239 100 -58%
1943            250 125 -50%
1944            263 130 -51%
1945            276 160 -42%
1946            290 200 -31%
1947            304 170 -44%
1948            320 170 -47%
1949            336 175 -48%
1950            352 200 -43%
1951            370 250 -32%
1952            388 260 -33%
1953            408 260 -36%
1954            428 260 -39%
1955            450 380 -15%
1956            472 500 6%
1957            496 500 1%
1958            521 475 -9%
1959            547 525 -4%
1960            574 600 5%
1961            603 580 -4%
1962            633 700 11%
1963            664 550 -17%
1964            697 750 8%
1965            732 900 23%
1966            769 950 24%
1967            807 850 5%
1968            848 900 6%
1969            890 950 7%
1970            935 800 -14%
1971            981 850 -13%
1972         1,030 900 -13%
1973         1,082 1000 -8%
1974         1,136 850 -25%
1975         1,193 700 -41%
1976         1,252 850 -32%
1977         1,315 1000 -24%
1978         1,381 850 -38%
1979         1,450 850 -41%
1980         1,522 850 -44%
1981         1,614 950 -41%
1982         1,710 850 -50%
1983         1,813 1000 -45%
1984         1,922 1200 -38%
1985         2,037 1200 -41%
1986         2,159 1300 -40%
1987         2,289 1900 -17%
1988         2,426 1900 -22%
1989         2,572 2100 -18%
1990         2,726 2600 -5%
1991         2,890 2500 -13%
1992         3,063 3000 -2%
1993         3,247 3300 2%
1994         3,442 3700 8%
1995         3,648 3800 4%
1996         3,867 5000 29%
1997         4,099 6500 59%
1998         4,345 7800 80%
1999         4,606 9000 95%
2000         4,882 10500 115%
2001         5,175 10000 93%
2002         5,485 10000 82%
2003         5,815 8000 38%
2004         6,163 9500 54%
2005         6,533 10500 61%
2006         6,925 11000 59%
2007         7,341 12000 63%
2008         7,781 13000 67%
2009         8,248 7000 -15%
2010         8,743 10000 14%
2011         9,268    
2012         9,824    
2013       10,413    
2014       11,038    
2015       11,700    
2016       12,402    
2017       13,146    
2018       13,935    
2019       14,771    
2020       15,657    

2009 and 2010 College Grads Struggle

tomkapostasyLeave a comment

http://www.dailytoreador.com/la-vida/college-s-seniors-face-unusually-dismal-job-market-1.2245660

http://www.macon.com/2010/04/25/1106422/tough-assignment.html

http://www.marketwatch.com/story/2010-college-graduates-to-face-a-highly-competitive-job-market-but-one-that-may-pay-better-than-last-year-finds-careerbuilders-annual-forecast-2010-04-14?reflink=MW_news_stmp

http://www.tampabay.com/news/education/college/new-college-graduates-face-a-tight-job-market/1090306

http://www.economist.com/business-finance/displaystory.cfm?story_id=16010303

http://online.wsj.com/article/SB10001424052748704207504575130171387740744.html?mod=rss_com_mostcommentart

http://www.usnews.com/articles/education/best-colleges/2010/04/29/rosier-job-outlook-for-college-graduates.html

From sunbelt Florida to Georgia to Texas the local hiring reports remain negative for college grads for the second straight year.

When engineering students can’t find jobs, you know there’s a major problem.

When the Wall Street Journal  writes about white collar parents and unemployed children, you know there’s a major problem.

The recovery graph in the latest Economist article shows that recovery is far slower than in past recessions.

Only the US News & World Report headline writer could find a way to put a positive spin on the situation with “Rosier Job Outlook for College Grads”, but even they recognized that “the job market remains treacherous for college grads”.

Net job creation finally turned positive last month.  The leading economic indicators have been positive for 12 months in a row.  Some reports, like record 27% housing sale increases, are “off the charts” positive, even if driven by an expiring tax credit. 

Nonetheless, this will be a slow recovery.  The 2002-2008 recovery was panned as the jobless recovery.  Historically, financial crises require significant time to heal.  The overextended American consumer, government, banks and dollar need time to adjust.  The flexible US workforce has responded by increasing productivity by 6%, reducing the need to hire.  Corporations budgeted for capital projects and new hires in 2010, but have not yet released the funds. 

Like “the little engine who could”, it will take time for this economy to build up a head of steam.  As the economy recovers, hiring will increase and employers will welcome those new college grads to cost-effectively replace those retiring Baby Boomers whose investments have gained 70% in the last year.

Labor and Tax Law Changes to Create Jobs

tomkapostasyLeave a comment

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.

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?

tomkapostasyLeave a comment

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.