Category Archives: Economics

Sticks & Carrots

 

Creativity101:  A valuable tool when it comes to creative thinking is the “unrelated stimulus,” taking an image, experience or lesson from one discipline and applying to a totally difference situation.  The power of this technique grows exponentially when you draw on multiple analogies.  Today’s post is inspired by two totally unrelated experiences.

Changing the culture of any organization occurs only when the individuals who lead and work within that culture modify their personal behavior.  There are two ways to do this.  We can either punish those who violate standards and norms or we can reward those who contribute to the fulfillment of the highest values and expectations.

Meat Processing use of HOClAs demonstrated by the following example, shifting from a culture of punishment to one of reward can make a significant impact on outcomes.  For most of its history, promoting safety in the meat processing sanitation business, one that involves high-pressure, scalding hot water and chemicals, has been stick-oriented.  The overwhelming majority of injuries, and even fatalities, have resulted from “pilot” error, employees’ not observing safety procedures.  Violations resulted in suspensions without pay or, in the most grievous cases, termination.

Employee turnover is among the highest in any industry.  It is not the most desirable way to make a living. Crews arrive after the second plant shift (around midnight) and must complete their tasks before USDA inspectors arrive the next morning.  If the plant fails inspection, crews are called back to address regulatory violations.  In these cases, the contracts between the processing company and the cleaning business generally require the latter to reimburse the former for lost revenue if the morning shift cannot start work on schedule.  In this industry, time is money and the focus is on systems and procedures.

Until someone outside the industry took a different approach.  Lance White, a financial analyst at ChemEx, which owned DCS Sanitation Management, was asked to prepare a prospectus to sell the company.  While evaluating the venture’s worth, White determined the business had substantial growth potential and decided to make an offer himself.  Upon taking the reins at DCS, White chose to prioritize employee safety as workers compensation insurance and client reimbursements for lost revenues were a major drain on profitability.

White decided to take a different tack from the industry norm.  Instead of docking employees for safety violations, he created a bonus schedule based on the number of days each employee completed a shift without an incident.  The result?  Fewer injuries, less payout to clients and eventually lower insurance rates.

30 years of innovation continues to carry out Mr. K's promise ...The second unrelated stimulus was Project Choice, a program of the Ewing Marion Kauffman Foundation in Kansas City.  Mr. K, as he was affectionately known to friends and business associates, wanted to help the largely minority student body that now attended the high school where he had studied as a young boy.  He viewed education as the way to break the cycle of poverty and incarceration which were a part of so many of these students’ family histories,  But Mr. K also believed in personal responsibility.

Mr. K melded these two principles in the design of Project Choice.  He offered to sign a contract with each boy and girl who entered Westport High School, beginning in their freshman year.  If that student graduated with a B average or better and stayed out of trouble, he would fully fund their college education (tuition, fees, books, room and board).  In some cases, the payout included graduate school or professional training.  As Mr. K would say at each assembly when new Westport students were introduced to the offer, “When others did not give you a chance, we wanted to give you a choice.”

I have thought a lot about Lance (a Miami University graduate, who I invited to speak every semester in my Imagination and Entrepreneurship class) and Mr. K over the past 10 days.  In particular, I wondered if the lessons I learned from each provided guidance to help us move beyond the anger, frustration and division which have plagued the nation since the murder of George Floyd.

Of the two, Lance’s approach to worker safety is an obvious alternative to law enforcement officers being fired and charged with crimes for excessive force and endangerment.  Imagine a system where police are rewarded when they demonstrate compassion and understanding for the residents of the communities in which they serve.  Or receive bonuses in incidences where they deescalate tension in situations which might otherwise lead to unrest and violence.  Do not tell me law enforcement budgets cannot support such payments.  Compared to the settlements and legal fees associated with civil suits, an economic case can be made that rewarding good behavior would be much less expensive than cleaning up after bad actors.

The relevance of Project Choice to the current racial environment is much more complex.  Putting aside those who have resorted to violence to achieve political goals, I cannot help but think looting, for the sole purpose of obtaining something to which the looter thinks he/she is entitled, has been exacerbated since the onset of the coronavirus pandemic.  Economic analyses show the increase in black unemployment since the outbreak is two percent higher than the population as a whole.  And more than 50 percent of African-American men are currently out of work.  As strange as this may sound, watching celebrities on late night television  and journalists/pundits on cable news shows from their spacious and well-appointed homes is a reminder of the disparity in lifestyles between the rich and famous and the average black household.  It is just one more piece of evidence of the income and wealth gap which has existed since the first African slave arrived in the new world 401 years ago.

I have been warned by more than one person to be careful about using the term reparations; so, I will let readers decide what to call the following analysis and proposal.  Regardless of label, the goal is economic justice and racial reconciliation.

Here are the facts.

  • In 2019, there were just over 17 million household described as “black alone” meaning they were not inter-racial.  Those represented 13 percent of the total 128.6 million American households.
  • That same year, the median annual household income in “black alone” households was $41,361 compared to $63,179 for all households, a difference of $21,818/year.

Suppose, as recognition of  the “knee that has been on the neck of black America” for four centuries as Al Sharpton preached at Floyd’s memorial service, Congress passed legislation which would allocate the differential in median income to each black household for one year.  The total cost would be just under $375 billion.  I know, budget hawks will be screaming bloody murder (one more false equivalency).  But it is nothing compared to the bailouts to corporate America since 2008 when one totals the housing bailout, the Trump tax cuts and now the COVID19 CARE package.

There are two more points that need to be considered.  First, some opponents of this concept will argue, “Why include every black household? Not all African-Americans are descendants of slaves.”  That is the easiest objection to address and is the main reason the use of the word reparations can be misleading.  Did Fred Trump ask those he prohibited from renting Trump housing whether they were descendants of slaves?   Did the NFL owners ask Colin Kaepernik if there were slaves in his family history when they blackballed him from the league?  As he pressed his knee on George Floyd’s neck, did Derek Chauvin think it mattered if his detainee was the great-great-grandson of a slave?  Every African-American, regardless of when and how they came to this country, has been impacted not by direct lineage to pre-Emancipation status, but by the underlying rationale for slavery, that people of color were less human than those with pale complexions, and thus, less deserving of equal housing, equal pay, equal justice under the law and equal rights delineated in the Declaration of Independence and the Constitution.

The second and final point is a recognition by African-Americans that they can also use this opportunity to make a reciprocal gesture to those who over the years have been the victims of illegal behavior by members of the their own community.  What if public officials and clergy in the black community began a discussion about how best each family could use the federal payment to promote reconciliation.  For example, what if black leaders suggested that anyone who had looted during the Floyd protests make an anonymous payment to the store’s owner?  I am not idealistic or naive enough to believe this would happen on a grand scale, but no movement in history every started with an expectation everyone would jump on the bandwagon immediately.

Every entrepreneurship class I have taught or attended began with some variation of the model devised by Jeffrey Timmons which described the three elements essential to any successful venture:  opportunity, team and resources.  The size and makeup of the team and the amount of required resources depended on the magnitude of the opportunity.  If the demand for change precipitated by George Floyd’s murder is as big an opportunity as some believe, we should not be afraid to assemble the proportionate team and resources to respond in kind.

For what it’s worth.
Dr. ESP

 

Birx’ Law

 

If people can social distance and do those things, then they can do those things.  I don’t know how, but people are very creative.

~Dr. Deborah Birx

The above quote is Dr. Birx’ response to the following question by CBS White House Correspondent Steven Portnoy during Tuesday’s “press beefing”.  “How do you safely have hair salons and nail salons and tattoo parlors where people have to be inherently close together?”

For someone who has spent the last 20 years of his life researching and teaching the art and science of creativity, I welcome the challenge.  Below are just a few ideas to placate the “Liberate Coronavirus” protesters.

Barbershops with Roomba Shave™

Purell-Based Tattoos™

Paintball Nail Salons™

Drone Bowling™

And finally, for Mayor Carolyn Goodman of Las Vegas, Masked One-Armed Bandits™

I encourage readers to suggest other innovative ways to re-open the economy.  No suggestion is too outrageous as no Trumpster is too gullible.  Your time stamped comment on this site can serve as evidence of copyright in case Alex Jones, Sean Hannity or Laura Ingraham makes your concept the next hydroxychloroquine.

For what it’s worth.  Stay safe.
Dr. ESP

The Government They Deserve

Every  nation gets the government it deserves.

~Joseph de Maistre

King Emoji Emoticon | King emoji, Emoticon, King cartoonThose who are unfamiliar with the above quoted 19th century philosopher might surmise he was warning citizens in democracies to carefully consider their votes.  Quite the contrary.  Actually, he was defending the French monarchy against those who advocated a more representative  form of government.  If de Maistre were alive and well on social media today, his avatar would be a royal emoticon and Donald Trump’s occupancy of the Oval Office would be his “ITUS” moment (“I told you so” in Twitter lingo).

Except for one thing.  Nations do not vote.  People do.  And in 2016, three million more Americans said, “We do not deserve Donald Trump.”  Therefore, while all Americans are now feeling the brunt of this minority-driven, electoral coup d’etat, it is the 62.9 million voters who thought it was a good idea putting a reality show host in the White House who deserve what they got.

Not that they need reminding, but what did they get for their four plus years of blind loyalty?  As of this morning, 16,693 deaths attributed to COVID-19 and more than 16 million first-time unemployment claims over the past three weeks, surpassing the worse days of the Great Depression.  If not for the gravity of the current situation, the ITUS moment belongs to the 69 million voters who said, “Not on our watch.”

What I find more ironic this morning is my new appreciation for Trump’s claim that he understands “forgotten Americans,” those who live paycheck to paycheck.  It certainly is not due to a sense of empathy for those less fortunate than himself.  It is because he is one of them.  How do I know this?  By comparing Trump’s behavior, not as president, but as CEO of his family business and as the head of a household, to my own.

Our household is the epitome of the classic Henny Youngman joke about the man who is hit by a car crossing the street.  The EMT asks, “Are you comfortable?”  To which the man replies, “I make a nice living.”  In the midst of a global pandemic and economic shutdown, my wife and I, if asked the same question, would respond, “We make a nice living.”  We are both what you might call semi-retired senior citizens who are self-employed.  We do not depend on the revenues from our small businesses. We live off two pensions and Social Security.  Our home and two cars are debt free.  None of the promised benefits in the coronavirus relief bills will make a significant change in our financial situation.  The only discussion we have had about our anticipated $2,400 federal check is how best to spend it in our community to help those for whom the payment is not even a drop in the bucket.

At the other end of the continuum are those less fortunate.  In our home state of Florida we see them standing in long-lines at the unemployment office because governors Rick Scott and Ron DeSantis emasculated the unemployment programs in the Department of Economic Opportunity.  We read how local banks are swamped with requests for assistance under the small business loan and grant programs authorized in the $2.2 trillion CARES Act.  And what must be the single most outrageous travesty, 20 states have included payday lenders as “essential services” under their shelter-in-place orders.  (NOTE:  The Pew Foundation reports clients of payday lenders lose an average of one-third of their purchasing power as a result of these lenders’ fees and interest.)

So where does Donald Trump fit on this continuum?  Within days of shutdowns in several states where Trump properties are located, the Trump Organization was asking Deutsche Bank to renegotiate loans. As of April 3rd, the Trump Organization has laid off more than 1,500 workers in the United States and Canada.  And while other hotel owners are offering space to first responders and medical staff in COVID-19 hot spots, the Trump Organization has made no such gesture.  And finally, while REAL billionaires like Bill Gates, Mark Cuban and Jack Ma have reached into their own pockets to pay for testing, medical supplies and research, not a dollar from Donald, Junior, Eric or Ivanka.

Bottom line?  All those who voted for Trump in 2016  thought he was a rich guy who cared about Americans who live hand-to-mouth.  Sorry, that does not seem to be the case.  You got someone more like you than the image he projects.  Remember, net worth is not about assets alone.  You also have to take account of liabilities.

Many pundits refer to Trump as a “day-trader.”  His actions suggest such a description is far too generous.  He thinks and acts more like those who depend on the next check to make it through the month.  Yet, instead of empathy for his kindred spirits, he prefers to spend his time talking to CEOs of Fortune 500 companies, many of whom are donors.  Maybe if you sign over your relief check to Trump’s re-election campaign you too will get a call.  But do not hold your breath.  Or what you have left of it after contracting the coronavirus from carriers who have not and never will be tested.

EPILOGUE: Bookends

This postscript to today’s post comes from the Deprogramming101 “Wish I’d Said That” Department.  This week, New Yorker magazine editor David Remnick wrote:

The Trump era began on July 21, 2016 with “I alone can fix it,” and ended on March 13, 2020 with, “I don’t take responsibility at all.”

For what it’s worth.
Dr. ESP

 

War and Piece

The crash is also estimated to knock out about half of all shale producers, according to analysts at Raymond James Inc., if prices remain at between $20 and $30 per barrel. (The price as of midday Monday was $22.73 per barrel by the standard West Texas Intermediate benchmark.) A price at that level would cost thousands of jobs and deal a serious blow to the vision of U.S. energy independence.

~Ben Lefebvre/POLITICO.COM

If not for the more pressing health crisis and its impacts on the U.S. economy, the lead story on every business news outlet would be the collapse of oil prices.  The decline in domestic production reported by Lefebvre comes with some important lessons.  Premiere among these,  American oil independence is an illusion, at the mercy of other players in the market, especially Saudi Arabia.  Economic and political stability in many middle eastern, oil-rich countries depends on a steady flow of revenues to provide public benefits to the general population.  And as long as demand remained high, the Saudis did not need to dominate the market, an opportunity for others to join the market at a price point per barrel which made investment in additional capacity profitable.

But a decrease in demand requires the Saudis to recapture a larger share of the market as evidenced by the announcement they plan to increase production to a record 12.3 billion barrels per day beginning in April, an approximate 33 percent increase over current levels.  Why?  Because they can.  They have both the capacity and the cash reserves to wage a successful price war.

If American oil producers did not see this coming, it is their own fault for failing to learn the same lesson from the 1979 energy crisis.  Triggered by the Iranian Revolution, a decline in global oil production resulted in higher prices and spot shortages around the world.  Consistent with the principle of supply and demand, a barrel of oil, selling at a premium, represented an incentive for new entrants in the markets and made a shift to alternative sources economically feasible for the first time.  It was this factor which nurtured the growth of the shale oil sector with several federally subsidized pilot projects in the Mountain States, especially Colorado and Utah.

That is, until Saudi Arabia decided U.S.-based shale oil production represented a threat to their share of the global energy market.  At which point, the Saudis slashed the price per barrel and flooded the market.  Within five years, almost all of the new drilling companies declared bankruptcy and the shale projects vanished, unable to compete with cheap Saudi oil.

At the time, I had one of the worse jobs in America, deputy director of the Texas Economic Development Community.  The Lone Star State was now the epicenter of a perfect economic storm.  Oil prices had collapsed.   Banks were reeling from the savings and loan scandal.  Housing values were under water.  And commerce with Mexico was at a standstill as the peso went south (pun intended).   [HISTORICAL FOOTNOTE:  On the bright side, these events resulted in a long-overdue diversification of the state economy.  Resources which had always gone to the oil industry were diverted to attract technology companies such as Cypress Semiconductor and Apple.]

Image result for whartonIn 1986, I attended a breakfast with representatives of the Texas oil industry.  The opening presentation was made by Robert Bass of Bass Brothers Enterprises, Inc., the largest independently owned oil company in the state.  In what might have seemed like a satirical commentary on the times, Bass suggested the Wharton School of Business at the University of Pennsylvania was to blame for the disintegration of the state’s oil industry.  He told us how classrooms were filled with the offspring of Arab oil Sheikhs, where they were introduced to concepts such a price wars and market domination.  Thirty three years later, I can only paraphrase his warning, “Any time the Saudis feel their position in the global market is threatened by newcomers or alternative sources of energy, they will cut the price of oil below ten dollars a barrel for as long as it takes to wipe out the competition.”

So, when Donald Trump, as he surely will, claims that no one saw this precipitous decline in U.S. oil production coming, just remember he was probably sitting in one of those same classrooms.  And while his Arab colleagues focused on how to stage a price WAR, young donny was more concerned with how he might get a PIECE of the action.  Or as a visitor to the Rostov home observed in Leo Tolstoy’s classic novel about the French invasion of Russia, “Everything depends on upbringing.”

For what it’s worth.
Dr. ESP

 

Mythed It By a Mile

 

Image result for cnbc stock dropThere is nothing like a national health crisis to expose Republican economic orthodoxy for the fraud it is and the realization that economic growth for the past three years was in spite of Trump administration policies, not due to them. Consider the following.

Since the beginning of time, conservative economists have praised the value of monetary versus fiscal policy.  For those unfamiliar with the difference, monetary policy involves changing interest rates (the cost of borrowing money).  Proponents of monetary policy hail it as a stimulus in bad times and a way to tamp down inflation in good times.  In contrast, fiscal policy revolves around public revenues and expenditures, the argument being lower taxes and public investment (e.g. the Civilian Conservation Corps during the great depression) puts money into individuals’ pockets when the market economy sags.  To be fair, both monetary and fiscal policy can be misused to benefit other than the public interest.

If you tuned into CNBC around 2:00 p.m. this afternoon, you witnessed something that was beyond imagination four weeks ago.  A panel of the channel’s regular pundits, long-time critics of fiscal policy including the stimulus package which helped ease the economic pain associated with the 2008 financial industry meltdown, said it was time for public works expenditures by the Trump administration.  You know, a stimulus package.

When “Power Lunch” host  Melissa Lee asked Steve Liesman, “Would a 100 basis points reduction in the federal reserve rate help,” the answer was “unlikely.”  (NOTE:  100 basis points is the equivalent of a one percent decrease in the cost of borrowing money.) And in one fell swoop, Liesman either wittingly or unwittingly admitted Donald Trump’s actions throughout his time in the Oval Office had set the stage for what another commentator referred to “as the chickens coming home to roost.

Liesman’s argument goes as follows.  If the national economy was a strong as Trump claimed, cutting interest rates over the past 12 months was contrary to sound monetary policy.  And prodding Federal Reserve chairman Jay Powell to impose the emergency rate cut on March 4 only made things worse.  Why?  Because you want future rate cuts to stimulate borrowing and investment.  But if rates are already so low (1.00 percent as of today), another cut does not represent much of an incentive.  Want to know who it helps?  Companies with highly leveraged assets.  Can you say, “The Trump Organization.”  They can refinance debt at the lower rates to decrease debt service.

Yet, that is only half the story.  Liesman’s and others’ new found affinity for fiscal policy remedies which involve public investment and tax cuts comes at a price.  Raising questions whether the already ballooning Fiscal Year 2020 deficit could absorb more debt without causing further long term damage to the U.S. economy.  The annual deficit has increased by 68.5 percent since Barack Obama left office ($984 billion in 2019 versus $585  billion in 2016).

So all those Trump syncophants and conservative pundits who did not want to heed media warnings their leader was a “day trader” with no interest in the long-term impacts of his policies, hopefully now understand it was not “fake news.”  Squandering the fiscal benefits of 10 consecutive years of economic growth lands us where we are today, without the resources that should have been there to counteract the next economic downturn regardless of whether it was a result the normal business cycle or a global health crisis.

On July 4, 2019, I posted an article to this blog titled, “Eco-NO-mics.”  The central point was to highlight how a period of consecutive years of economic growth which began or was sustained by every Democratic president since 1952 subsequently ended under the succeeding Republican administration.  I pondered how long it would take for Trump to bring an end to the Obama recovery.  Now we know.  Approximately three years and two months.  Once again, it’s time to bring back the Democrats to clean up one more Republican disaster.  But don’t be surprised when Trumpists complain the Democrats do not care about deficits.  For a party whose symbol is a elephant, they have a VERY short memory.

For what it’s worth.
Dr. ESP