It’s About the Economy, Stupid – Lessons from the election

by | Nov 4, 2010 | Current Affairs, General, Innovation, Leadership, Web/Tech


Summary:

  • Voters whipsawed from throwing out the Republicans 2 year ago to throwing out Democrats this election
  • Americans are frustrated by a no-growth economy
  • Recent government programs have been ineffective at stimulating growth, despite horrific expense
  • Lost manufacturing/industrial jobs will never return
  • America needs new government programs designed to create information-era jobs
  • Education, R&D, Product Development and Innovation investment programs are desperately needed

“It’s the Economy, Stupid” was the driving theme used during Bill Clinton’s winning 1992 Presidential campaign.  Following the dramatic changes produced in Tuesday’s American elections, this refrain seems as applicable as ever.  Two years ago Americans changed leadership in the Presidency, Congress and the Senate out of disgust with the financial crisis and lousy economy.  Now, Congress has shifted back the other direction – and the Senate came close – for ostensibly the same, ongoing reason. What seems pretty clear is that Americans are upset about their economy – and in particular they are worried about jobs and incomes.

So why can’t the politicians seem to get it right?  After all, economic improvement allowed Bill Clinton to retain the Presidency in 1996.  If smart politicians know that Americans are “voting with their pocketbooks” these days, you’d think they would be doing things to improve the economy and jobs.  Wasn’t that what the big big bailouts and government spending programs of the last 4 years were supposed to do? 

What we can now see, however, is that programs which worked for FDR, or Ronald Reagan and other politicians in the late 1900s aren’t working these days.  Everything from Great Depression Keynesians to Depression retreading Chicago School monatarists to Laffer Curve idealists have offered up and applied programs the last 8 years intended to stimulate growth.  But so far, the needle simply hasn’t moved.  Recognizing that the economy is sick, looking at the symptoms of weak jobs and high unemployment, could it be that the country’s leaders are trying to apply old medicine when the illness has substantially changed? 

What’s missed by so many Americans today – populace and politicians – is that the 2010 economy is nothing like that of the 1940s; and bares little resemblance to the economy as recently as the 1990s.  Scan these interesting facts reported by BusinessInsider.com:

These lost jobs are NEVER coming back.  The American economy has fundamentally shifted, and it will never go back to the way it was.  Clocks don’t run backward. 

In 1910 90% of Americans were working in agriculture.  By 1970 that proportion had dropped to 10%.  Had American policy in the last century remained fixated on protecting farming jobs the country would have failed.  Only by shifting to industrialization (manufacturing) was America able to continue its growth – and create all those new industrial jobs.  Now American policy has to shift again if it wants to start creating new jobs.  We have to create information-era jobs.

But government programs applied the last 12 years were all retreaded industrial era ideas (implemented by Boomer-era leaders educated in those programs.)  They were intended to grow industrial jobs by spurring supply and demand for “things.”  Lower interest rates were intended to increase manufacturing investment and generate more supply at lower cost.  These jobs were expected to create more service jobs (retailers, schools, plumbers, etc.) supporting the manufacturing worker.  But today, supply isn’t coming from America.  Nobody is going to build a manufacturing plant in America when gobs of capacity is shuttered and available, and costs are dramatically lower elsewhere with plentiful skill supply.  We can keep GM and Chrysler on life support, but there is no way these companies will grow jobs in face of a global competitive onslaught with very good products, new innovations and lower cost.  Cheap interest rates make little difference – no matter what the cost to taxpayers.   

Other old-school programs focused on increasing demand. TARP, cheap consumer lending, tax cuts, rebates and subsidies were intended to encourage people to buy more stuff.  Consumers were expected to take advantage of the increased supply and spend the cash, thus reviving the economy.  But today, many people are busy paying down debt or saving for retirement.  Further, even when they do spend money the goods simply aren’t made in America.  If consumers (including businesses) buy 10 Dell computers or 20 uniform shirts it creates no new American jobs. Spurring demand doesn’t matter when “things” are made elsewhere.  In fact, it benefits the offshore economies of China and other manufacturing centers more than the USA!

If this new crop of politicians, and the President, want to keep their jobs in the next election they had better face facts.  The American economy has shifted – and it will take very different policies to revive it.  New American jobs will not be created by thinking we’ll will make jeans, baby food or baseballs, so applying old approaches and focusing on increasing supply and demand will not work.  America is no longer an industrial economy.

The jobs at Dell are engineering, design and managerial.  Hiring organizations like Google, Apple, Cisco and Tesla are adding workers to generate, analyze, interpret and gain insight from information.  Jobs today are based upon brain work, not brawn.  An old American folk song told the story about John Henry’s inability to keep up with the automated stake driving machine – and showed all Americans that the industrial era made conventional, uneducated hand-labor of little value.  Now, computers, networks and analytics are making the value of manufacturing work low value.  Because we are in an information economy, rather than an industrial one, pursuing growth of industrial jobs today is as misguided as trying to preserve manual labor and farm jobs was in the 1960s and 1970s.

Directionally, American politicians need to implement programs that will create the kind of jobs that are valuable, and likely, in America.  Incenting education, to improve the skills necessary to be productive in this economy, is fairly obvious.  Instead of cutting education benefits, raise them to remain a world leader in secondary education and produce a highly qualified workforce of knowledge workers. Support universities struggling in the face of dwindling state tax funds.  Subsidize masters and PhD candidates who can create new products and lead companies into new directions, and do things to encourage their hiring by American companies.

Investments in R&D and product development are likewise obvious.  America’s growth companies are driving innovation; bringing forward world-demanded products like digital music, on-line publications, global networks, real-time feedback on ad links, ways to purify water – and in the future trains, planes and automobiles that need no fossil fuels or drivers (just to throw out a not-unlikely scenario.)  For every dollar thrown at GM trying to keep lower-skilled manufacturing jobs alive there would be a 10x gain if those dollars were spent on information era jobs in innovation.  America doesn’t need to preserve jobs for high school graduates, it must create jobs for the millions of college grads (and post-graduate degree holders) working today as waiters and grocery cashiers.  Providing incentives for angel investing, venture capital and other innovation investment will have a rapid, immediate impact on job creation in everything from IT to biotech, nanotech, remote education and electric cars.

A stalled economy is a horrible thing.  Economies, like companies, thrive on growth!  Everyone hurts when tax receipts stall, government spending rises and homes go down in value while inflationary fears grow.  And Americans keep saying they want politicians to “fix it.”  But the “fix” requires thinking about the American economy differently, and realizing that programs designed to preserve/promote the old industrial economy – by saving banks that invest in property, plant and equipment, or manufacturers that have no money for new product development – will NOT get the job done.  It’s going to take a different approach to drive economic growth and job creation in America, now that the shift has occurred.  And the sooner politicians understand this, the better!

Shifting Banking Market Requires New Strategy – JPMC, BofA, Citi, etc.

by | Mar 26, 2009 | Current Affairs, Defend & Extend, In the Swamp, Innovation, Leadership, Quotes

Clayton Christensen is a Harvard Business School professor who first described in detail how "disruptive" innovations shift markets, allowing upstart competitors to overtake existing companies that appear invulnerable.  I just found a 4 minute video clip "Clay Christensen's Advice for Jamie Dimon" at BigThink.com.  In this clip the famous professor tells the story about how the big "banks" allowed themselves to be overtaken by "non-banks" – and then he offers advice on what the big banks should do (Jamie Dimon is the Chairman and CEO of J.P.MorganChase, and an HBS alumni.)

Dr. Christensen lays out succinctly how banks relied on loan officers to find good loan candidates, and make good loans.  But increasingly, borrowers were classified by a computer program, not by loan officers.  Once the qualification process was turned into a computer-based Q&A, anybody with money could get into the lending business – whether for credit cards, or car loans, or mortgages, or small business loans, or commercial loans.  Losing control of each of these lower-end markets, the bankers had to bid up their willingness to take on more risk to remain in business while also chasing fewer and fewer high-quality borrowers.  The result was greater risk being taken by banks to compete with non-banks (like GMAC, GE Credit, Discover Card, etc.)  What should they do?  Dr. Christensen says go buy an Indian or Chinese phone company!!!

Hand it to Dr. Christensen to make the quick and cogent case for how Lock-in by the banks got them into so much trouble.  By trying to do more of the same in the face of a radically shifting market (people going to non-banks for loans and to make deposits), they found themselves taking on considerably more risk than they originally intended.  Rather than finding businesses with good rates of return, they kept taking on slightly more risk in the business they knew.  They favored "the devil you know" over the "the devil you don't know."  In reality, they were taking on considerably more risk than if they had diversified into other businesses that were on far less shaky ground than unbacked mortgages. 

This is Strategic Bias.  We all like to remain "close to core" when investing resources.  So we keep taking on more and more risk to remain in our "core" — and for little reason other than it's the market and business we know.  Because we know the business, we convince ourselves it's not as risky as doing something else.  In truth, markets determine risk – not us.  Because we assess risk from our personal perspective, we keep convincing ourselves to do more of what we've done — even when the marketplace makes the risk of doing what we've done incredibly risky —- like happened to Citbank, Bank of America and a host of other banks.

And in great form, the professor offers a solution almost nobody would consider.   His argument is that (1) these banks need to go where demand is great, go to new and growing markets, not old markets, and loan demand cannot be greater than in emerging markets. (2) To succeed in the future (not the past) banks have to learn to compete in emerging markets because of growth and because so many winning competitors are already there, and (3) you want to enter businesses that are growing, not what necessarily your traditional business or what you are used to doing.  He points out that the traditional "banking" infrastructure is nascent in emerging markets, and well may not develop as it did in the western world.  But everyone in these places has phones, so phones are becoming the tool for transactions and the handling of money.  When people start doing everything on their phone (remember the rapidly escalating capabilities of phones – like the iPhone and Pre) it may well be that the "phone company" becomes more of a bank than a bank!!

Who knows if Clayton is right about the Indian phone company?  But his point that you have to consider competitors you never thought about before is spot on.  When markets shift they don't return to old ways.  It's all about the future, and banking has changed, so don't expect it to return to old methods.  Secondly, you have to be willing to Disrupt old Lock-ins about your business.  If the "loaning" of money is now automated, banking becomes about transaction management – not making loans.  You have to consider entirely different ways of competing, and that means Disrupting your Lock-ins so you can consider new ways of competing.  Thirdly, you don't just sit and wait to see what happens.  Get out there and participate!  Open White Space projects in which you experiment and LEARN what works.  You can't develop a new Success Formula by thinking about it, you have to DO IT in the marketplace.

Big American banks have tilted on the edge of failure.  More will likely fail – although we don't yet know which the regulators will put under or keep afloat.  What we can be sure of is that the market conditions that put them on the edge will not revert.  To be successful in the future these organizations have to change.  Probably radically so.  So if they want to use the TARP money effectively, they had better take action quickly to begin experimenting in new markets with new solutions.

Gotta hand it to Professor Clayton Christensen, he's made a huge improvement in the way we think about innovation and strategy the last few years.  His ideas on banking are well worth consideration by the CEOs trying to bring their shareholders, employees and customers back from brink.

Subsidies – Newspapers, automobiles, banks need new Success Formulas

by | Mar 24, 2009 | Current Affairs, Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Weblogs

"Senator proposes nonprofit status for newspapers" was the headline at Marketwatch.com today.  Senator Benjami Cardin, a democrate from Maryland, has proposed allowing newspapers to convert to 501(c)(3) status so their subscription and advertising revenue woujld be tax exempt, while contributions to run the papers would be tax deductible. This would allow some newspapers to stay afloat.

Let me share with you a response I received from a fellow reader of this blog:

"I watched Chris Mathews and had the same feeling.  As they spoke I had visions of chiefs of Bethlehem, U.S. Steel, etc. sitting around a table in the 60s going 'continuous casting, those Japanese, that's not going anywhere.'

How can they say investigative reporting is going to be dead – there are a million reporters out there working for passion and curiosity.  As a matter of fact, if I was going to be paid for a year to chase a story, seems to me a strong incentive to create a story when there really wasn't one.

I loved the way they were holding the paper and saying how people will miss the periphery articles.  People will be limited to their feeds and be exposed to the rest of what's going on.  I look at it as if I read an article in a newspaper that is just one take of the situation.  With the internet I can drill down to get additional information and opinions.  Plus get immediate commentary from experts."

Lots of people are getting "subsidy happy" these days.  Money to banks, money to car companies, money to newspapers.  What we must realize is that these short-term subsidies should be targeted at stopping a worse calamity.  Nothing more.  Sort of trading off company subsidies against even higher costs for unemployment, uninsured health care, and the costs of letting companies fail short-term.  The reality is that none of these subsidized companies are sustainable as they are.  The market has shifted, and their Success Formulas no longer produce positive results.  They will burn up the subsidy money, as we've already seen happen at GM, and soon ask for more. 

When markets shift, new competitors emerge to thrive.  Provided we don't get in their way by propping up bad competitors too long with subsidies.  In banking, we saw the unregulated institutions on a global scale start doing all sorts of financial services.  While some of these are reverting back to regulated banks in the U.S. today so they can receive subsidies, globally we have seen the emergence of immense banks that are outside U.S. regulation.  These institutions can borrow and lend globally, and are creating a new approach to financial services.  We can't prop up an uncompetitive Citigroup against giant global banks making profits offshore.  Likewise, globalization of manufacturing now means that good, low cost cars can be produced in Korea, China and India – making rates of return on higher cost labor in the USA, Germany and Japan harder to obtain.  Additionally, many of these offshore competitors (in particular Japanese and Korean) have demonstrated they can deliver proifts on far lower volumes, thus requiring faster launch cycles and more niche products to succeed.  GM lacks the manufacturing cost structure (in short-term line costs as well as labor) and the new product introduction processes to survive against these competitors.   In newspapers consolidating the reporting into a daily made sense when you needed vast and costly infrastructure to print and deliver the news – no longer requirements in a web-enabled news marketplace.

Economists can make strong arguments for subsidies to help short-term dislocations.  Such as helping companies in New Orleans to get back up and running due to a hurricane.  That is a short-term problem not related to a market shift.  But arguments for subsidies offered during market shifts are strictly "public policy" efforts trading off one policy cost for another.  They cannot "save" a business.  The company and its employees must use the subsidy to change their Success Formula as fast as possible, so they can compete with some product in some market where they can grow — without need for a subsidy

TARP and its other stimulus products are intended to keep some air in some parts of the boat so it doesn't sink entirely.  But they aren't fixing the ship.  That requires new competitors emerge that are attuned to current market needs, and have Success Formulas that produce profits based upon future markets.  As the economist Schumpeter said 70 years ago, we rely upon these new entrepreneurs to give us the creative new solutions that create growth in the wake of the destruction of old businesses unable to keep up with shifting markets.  Let's hope we don't spend all our money trying to keep the old battleship afloat, because we'll need some to help the newer, faster, more agile competitors grow with solutions that meet current and future needs.