Beyond the Debate – Common Economic Misconceptions vs. Reality

by | Oct 10, 2012 | Books, Current Affairs, Leadership, Lock-in

There was a time, before primaries, when each party's platform was really important.  Voters didn't pick a candidate, the party did.  Then voters read what policies the party planned to implement should it control the executive branch, and possibly a legislative majority. It was the policies that drew the most attention – not the candidates. 

Digging deeper than shortened debate-level headlines, there is a considerable difference in the recommended economic policies of the two dominant parties.  The common viewpoint is that Republicans are good for business, which is good for the economy.  Republican policies – and the more Adam Smith, invisible hand, limited regulation, lassaiz faire the better – are expected to create a robust, healthy, growing economy.  Meanwhile, the common view of Democrat policies is that they too heavily favor regulation and higher taxes which are economy killers.

Right?

Well, for those who feel this way it may be time to review the last 80 years of economic history, as Bob Deitrick and Lew Godlfarb have done in a great, easy to read book titled "Bulls, Bears and the Ballot Box" (available at Amazon.com) Their heavily researched, and footnoted, text brings forth some serious inconsistency between the common viewpoint of America's dominant parties, and the reality of how America has performed since the start of the Great Depression. 

Gary Hart recently wrote in The Huffington Post,

"Reason and facts are sacrificed to opinion and myth. Demonstrable
falsehoods are circulated and recycled as fact. Narrow minded opinion
refuses to be subjected to thought and analysis. Too many now subject
events to a prefabricated set of interpretations, usually provided by a
biased media source. The myth is more comfortable than the often
difficult search for truth."

Senator Daniel Patrick Moynihan is attributed with saying "everyone is
entitled to his own opinion, but not his own facts."  So even though we
may hold very strong opinions about parties and politics, it is
worthwhile to look at facts.  This book's authors are to be commended for spending several years, and many thousands of student research assistant man-days, sorting out economic performance from the common viewpoint – and the broad theories upon which much policy has been based.  Their compendium of economic facts is the most illuminating document on economic performance during different administrations, and policies, than anything previously published.

Startling Results


CH2_FHP
Chart reproduced by permission of authors

The authors looked at a range of economic metrics including inflation, unemployment, growth in corporate profits, performance of the stock market, change in household income, growth in the economy, months in recession and others.  To their surprise (I had the opportunity to interview Mr. Goldfarb) they discovered that laissez faire policies had far less benefits than expected, and in fact produced almost universal negative economic outcomes for the nation!

From this book loaded with statistical fact tidbits and comparative charts, here are just a few that caused me to realize that my long-term love affair with Milton Friedman's theories and recommended policies in "Free to Choose" were grounded in a theory I long admired, but that simply have proven to be myths when applied!

  • Personal disposable income has grown nearly 6 times more under Democratic presidents
  • Gross Domestic Product (GDP) has grown 7 times more under Democratic presidents
  • Corporate profits have grown over 16% more per year under Democratic presidents (they actually declined under Republicans by an average of 4.53%/year)
  • Average annual compound return on the stock market has been 18 times greater under Democratic presidents (If you invested $100k for 40 years of Republican administrations you had $126k at the end, if you invested $100k for 40 years of Democrat administrations you had $3.9M at the end)
  • Republican presidents added 2.5 times more to the national debt than Democratic presidents
  • The two times the economy steered into the ditch (Great Depression and Great Recession) were during Republican, laissez faire administrations

The "how and why" of these results is explained in the book.  Not the least of which revolves around the velocity of money and how that changes as wealth moves between different economic classes. 

The book is great at looking at today's economic myths, and using long forgotten facts to set the record straight.  For example, in explaining President Reagan's great economic recovery of the 1980s it is often attributed to the stimulative impact of major tax cuts.  But in reality the 1981 tax cuts backfired, leading to massive deficits and a weaker economy with a double dip recession as unemployment soared.  So in 1982 Reagan signed (TEFRA) the largest peacetime tax increase in our nation's history.  In his tenure Reagan signed 9 tax bills – 7 of which raised taxes!

The authors do not come down on the side of any specific economic policies.  Rather, they make a strong case that a prosperous economy occurs when a president is adaptable to the needs of the country at that time.  Adjusting to the results, rather than staunchly sticking to economic theory.  And that economic policy does not stand alone, but must be integrated into the needs of society.  As Dwight Eisenhower said in a New Yorker interview

"I despise people who go to the gutter on either the right or the left and hurl rocks at those in the center."

The book covers only Presidents Hoover through W. Bush.  But as we near this election I asked Mr. Goldfarb his view on the incumbent Democrat's first 4 years.  His response:

  • "Obama at this time would rank on par with Reagan
  • Corporate profits have risen under Obama more than any other president
  • The stock market has soared 14.72%/year under Obama, second only to Clinton — which should be a big deal since 2/3 of people (not just the upper class) have a 401K or similar investment vehicle dependent upon corporate profits and stock market performance"

As to the challenging Republican party's platform, Mr. Goldfarb commented:

  • "The platform is the inverse of what has actually worked to stimulate economic growth
  • The recommended platform tax policy is bad for velocity, and will stagnate the economy
  • Repealing the Affordable Care Act (Obamacare) will have a negative economic impact because it will force non-wealthy individuals to spend a higher percentage of income on health care rather than expansionary products and services
  • Economic disaster happens in America when wealth is concentrated at the top, and we are at an all time high for wealth concentration.  There is nothing in the platform which addresses this issue."

There are a lot of reasons to select the party for which you wish to vote.  There is more to America than the economy.  But, if you think like the Democrats did in 1992 and "it's about the economy" then you owe it to yourself to read this book.  It may challenge your conventional wisdom as it presents – like Joe Friday said – "just the facts."

 

Creating the “Best of Times” – Apple, Cisco, Virgin

by | Aug 12, 2010 | Defend & Extend, General, Leadership, Openness


Summary:

  • Your view of today will be determined by your future success
  • Conventional wisdom – often called “best practices” – will lead businesses to cut costs in today’s economy, leading to a vicious cycle of reductions and value destruction.  “Best Practice” application does not improve results
  • Winning companies don’t focus on past behavior, but instead seek out new markets where they can grow – Apple, Google, Virgin, etc.

To paraphrase Charles Dickens (A Tale of Two Cities) are these “the best of times” or “the worst of times?”  Few new jobs are being created in the USA, its hard to obtain credit if you’re a borrower, but there’s very little return to saving, the stock market has been sideways for a decade, asset values (in particular real estate) have plummeted while health care costs are skyrocketing.  Look in the rear view mirror at the last decade and you could say it is the worst of times. 

But the answer doesn’t lie in the rear view mirror – the answer lies in the future.  If you succeed in the next 2 years at achieving your goals, you’ll look back and say this was the best of times.

In “Do You Have the Postrecession Blues” at Harvard Business Review blogs the author tells of two shoe salespeople that show up in a remote African village.  The first sends back the message “No one here wears shoes, will return shortly.”  The second sends the message “No one here wears shoes, send inventory!”

The history of business education has been to teach managers, usually by studying historical case experiences, the “best practices” employed by previous managers. But BPlans.com tells us in an article headlined “The Bad News About Best Practices” that this is a lousy way to make decisions. “..most of the time, they won’t work for you or me. They worked for somebody, some time, in some situation, in the past.” 

The New York Times deals with fallacious best practices recommendations in “From Good to Great… to Below Average.”  Best selling Freakonomics author Steven Levitt points out that most business authors try to push somebody else’s Success Formula as the road to success.  However, the most popular of these are really very inapplicable.  Those held up as “the best practice” have most often ended up with quite poor results.  So why should someone else follow them?  Nine of eleven of Collins’ “great” companies did worse than average!

Best practices has led businesses to cut heads, slash costs, sell assets and in general weaken their businesses the last few years.  Most leaders would prefer to believe that they have somehow improved the business by eliminating workers, the skills they bring and the function they perform.  But the result is less marketing, sales, R&D, etc.  How this ever became “best practice” is now a very good question.  What company can you think about that “saved its way to success?”  The cost cutters I think about – Sears, Scott Paper, Fannie Mae Candies, etc. – ended up a lot worse for their efforts. 

These can be the best of times.  Just ask the people at Apple Cisco Systems, Virgin and Google.  These businesses are growing as if there’s no recession.  Instead of “focusing on their core” business with defend & extend efforts to cut costs, they are entering new markets.  They are going to where growth is.  Amidst all the cost-cutting, best practice applying grief these are examples of success. 

So will you continue to operate as if these are the worst of times, are are you willing to make these the best of times?  You can grow if you use scenarios and competitor analysis to find new markets, embrace disruptions to attack Lock-ins that block innovation, and implement White Space teams that learn how to develop new markets for revenue and profit growth.

Postscript – entire Dickens’ quote: It was the best of times, it was the worst of times, it was the age of
wisdom, it was the age of foolishness, it was the epoch of belief, it
was the epoch of incredulity, it was the season of Light, it was the
season of Darkness, it was the spring of hope, it was the winter of
despair, we had everything before us, we had nothing before us, we were
all going direct to heaven, we were all going direct the other way – in
short, the period was so far like the present period, that some of its
noisiest authorities insisted on its being received, for good or for
evil, in the superlative degree of comparison only.

Post-postcript – I am trying a new format for the blog.  Please provide your feedback.  I’m dropping the bold enhancements, and replacing their intent with an introductory summary.  Let me know if you like this better.  And thanks to reader Jon Wolf for his specific recommendations for improvement.