Businomics Blog

Federal Deficit is Making Us Poorer

The Washington Times published my commentary entitled, "Europeanization is no vacation: The federal budget deficit is making us poorer."  Key point: expect higher tax rates, and thus lower economic growth, due to the budget deficit.

Business Challenges in the Economic Recovery: Working Capital

This is the first of a series of videos about the business challenges that companies face as the economy improves.

How Companies Advance: Marginal Gains, Breakthroughs and Strategic Positioning

Today's Wall Street Journal has an article about efforts to win the Tour de France (subscription content, I think). They quote a support person for one team who has the title "head of marginal gains."

Wow.  What a wonderful title.  Let's step back and catalog how companies (or non-profits or governments) advance:

1. Marginal gains are small, like three yards and a cloud of dust.  The Tour de France team with the great title did things like have a truck that carried the beds of each of the nine team members.  A good night's sleep is important, so they each slept on their own bed, albeit in a different hotel room every night.
2. Blockbuster gains are huge, like the iPhone, changing the game for everybody.  Think sliced bread, interchangeable parts, nuclear bombs.
3. Strategic Positioning is not about better products, but about getting to the right place at the right time.  Nokia got into cell phones at the right time, IBM moved from hardware into services, Western Union emphasized money transfers over telegrams.

The marginal gains should come regularly.  Starbucks, as I've written about, is using a classic time and motion study to improve efficiency in their stores.

Some companies gamble on a blockbuster improvement, but usually they wait until their back is against the wall.  A better approach is to regularly evaluate blockbuster possibilities.  Perhaps after the annual plan is completed, management teams across the company could take half a day and brainstorm on blockbuster opportunities.

Strategic positioning is usually the purview of the executive suite, and the question should be framed as: what business segments in the neighborhood of our competencies are likely to grow rapidly in the next three to ten years.

Many senior business leaders like to focus, but the best companies cover all the bases.

How to Manage Your Business in a World With Hard-to-Forecast Sales

I'll be speaking on this topic to the National Fluid Power Association, and I'm soliciting help.  I have plenty of tips in my toobox, many that were included in my book about the economy and business, but I'd like to hear your suggestions.  Please add a comment.

Thanks

The Economic Problem: A Recalculation View

Warning: this post is more about theoretical economics than practical business implications that I usually focus on here.

Most views of the current economic problem (the recession and subsequent laggard recovery) are based on a modern Keynesian model, a good bit more sophisticated than the textbook models you may have seen 30 years ago.  A few of us are relying more on a monetarist model.  Some folks from the Austrian tradition of economics are focusing on what they call "The Recalculation Story."  Arnold Kling summarizes the Recalculation Story in 16 short points. 

The key element is to think of a very diverse, complex economy, rather than an economy that can be explained in just a few equations.  (A Keynesian model might have one equation for total consumer spending, for example, whereas the Austrians think of iPhones as distinct from Droids as distinct from Blackberries, etc.).

This diverse, complex economy requires that people with very specific skills must be matched by employers with very specific needs.  When the underlying structure of the economy changes quickly (construction falls to pieces and won't recover soon), then we have a great mismatching problem that is not solved by traditional stimulus programs.

I think that this viewpoint has validity, but can be overdone.  I have a comment on that post, currently awaiting moderation.

The Greek Crisis Explained by Merle Hazard

For a simple explanation of the Greek crisis, check out my favorite country and western troubadour, Merle Hazard.

Technical Debt, or "Technical Naked Call Option" ?

Last year I wrote about technical debt, which is a term that start-up companies use when they have finished some software, but not yet cleaned up all the bugs and scalability issues.  I mentioned that many seasoned companies may have technical debt as well.  My software son gave me a link to an alternative concept: bad code is more like a call option than like debt.  Whatever you call it, your best business strategy is to understand it.

And if you have not been keeping up on the economy and how your business strategy needs to change with the business cycle, then you have something like technical debt--or even worse, like a naked call option!

Value is Subjective: An Advertising Guy's Explanation

When economists were trying to figure out why some things are valuable and some things are not worth very much, they wallowed in conundra:  Water is absolutely necessary for life, but the price is pretty low.  Gold, which is pretty much a frill, is tremendously valuable.  The solution came from two directions.  First, the insight that value is subjective, not determinable by looking at the physical attributes of a good or service, but rather in the eye of the potential buyer.  The second key insight was that decisions are made at the margin.  We as consumers don't decide whether we want water or gold.  We decide whether we want to purchase one additional gallon of water, or one additional ounce of gold.  Our judgment depends on how much of each we already have.

Listen to a great and humorous TED talk about value, from an advertising man's perspective.

Hat tip to Patrick Galvin of the Buzz Builder blog.

Why is Economic Growth So Slow?

I think the Federal Reserve has unknowingly slowed the rate of economic growth.  We are not in a second dip, but we are hardly expanding at all.  Recent data have been lackluster, though not dreadful.  Employment excluding Census workers, car sales, the ISM survey, consumer confidence, all show flat results.

Take a look at the money supply.  The monetary base (the raw material out of which money is made) rose very sharply in late 2008.  The money supply rose at a fast pace, but not nearly as fast as the typical relationship would show.  That was fine, because there was enough money supply growth to get the economy growing again late in 2009 and early 2010.  However, the economy has slowed down to about zero, which I believe is due to the Fed dialing down money supply growth.  Over the past 12 months, the money supply has grown by about the rate of inflation, leaving no further growth for real expansion of the economy.

The Fed had gotten used to thinking of monetary policy as working through interest rates.  When the Fed Funds rate drops near zero, one view says they are out of ammunition.  However, Milton Friedman would have said “No.  Just add more money to the economy and you’ll get stimulus in the short run.”  This is called quantitative easing.  It is was the Fed was doing—but they did not acknowledge they were doing that.  Their large purchases of mortgage-backed securities were, in the Fed’s view, simply stabilizing that particular market.  (Tim Duy has a good explanation of the Fed’s mindset.)

The Fed’s balance sheet shows relatively weak growth lately, as I mentioned in my recent post The Fed’s New Policy: Quantitative Tightening?  They are simply choking off the economy.

What needs to be done to get the economy moving?  The Fed needs to get the money supply growing faster.  They have plenty of ability to buy securities, putting money into the financial system.  However, the time lags are long, “long and variable” to quote Milton Friedman.  So the time to act is now.  Forget about watching interest rates, the Fed just needs to get some money supply growth.