A Federal Reserve Report says Economists Fail at Forecasting – Really?

Robert J Samuelson had a syndicated column recently reporting on a U.S. Federal Reserve study of the accuracy of Macro-economic forecasting.  The study looked at forecasts of “important economic” indicators such as unemployment, interest rates, gross domestic product and compared the forecasts with the actual outcomes.  The study concluded that “considerable uncertainty surrounds all macroeconomic projections”. In fact, he said that the study authors found forecasting mistakes have worsened since the 2008 – 2009 financial crises.  The study he said compared forecasts from the Fed, the Congressional Budget Office, and the Survey of Professional economists.  The macroeconomic forecasts are no better than were the forecasts in the 1920’s before macroeconomic Keynesian theory.  Samuelson concluded that if macro-forcasts are flawed then we are destined to have periodic recessions.  The reason for the inaccuracy he concludes is that there are too many variables and people tend to think that the future will resemble the past.

I don’t disagree with anything he said, but I think there may be some things of importance to add.  Looking back on my experience, I think we could improve our forecasts.  Maybe not enough to avoid recessions, but maybe enough to avoid government policy adding to the problem.  Keynesian Economics was developed in the late 1930,s and seems to be a reflection on Roosevelt’s governmental policies during the great recession.  By the 1960’s we had decided that the government, which had not tried previously to control the national economy, not only could, but should try to control the health of the Economy.  The debate among the well-respected economist was between whether government fiscal policy or monetary policy was more important.  The monetary people put the most emphasis on the growth of the money supply and to a lesser extent on interest rates, while the fiscal folks looked at government spending and budget deficits.  On the fiscal side, the theory was to have a balanced budget during good times and run a deficit only as a stimulant during down times.  That made sense to me then, but we seem to be running a budget deficit now in good times or bad.  I have a problem with that.  On the monetary side, the emphasis was on monetary growth.  The problem there was that monetary growth did not seem to come from only the government printing money, but also from things like borrowing which was controlled by interest rates, was difficult to measure and possibly beyond government control.  But when I was in graduate business school in the early 1970’s the emphasis was on macroeconomic policy and forecasting. Adam Smith’s “invisible hand” was pretty much thought to be a thing of the past with very little importance to the overall economy. Not that microeconomics was wrong, it just wasn’t important.  In fact, my good friend who was also one of the PhD Economics professors told me when I mentioned that I might like to take a microeconomics course that micro was not important, only macro was important.

I decided later that maybe macro was important to him, because he got interviewed frequently by the media when government policy was involved, and that only involved macro variables.  In my graduate level economic forecasting class, Keynesian economic principles seem to assume that people would react the same way to the same government stimulus every time.  While working for a private company with operations in many different markets, I used micro and hardly ever used macroeconomics.  In between government forecasts of the entire economy and Adam Smith’s invisible hand is the subject of Industry Economics, which involves more micro theory than macro theory.  Working in a corporate planning group of a Fortune 100 multi-industry conglomerate we had several industry economists and only one macro-economist.  The industry economists were at the forefront of most of the planning studies and got questioned regularly by the organizational executives.  The macro guy was pretty much ignored by the corporate leadership.  (The media rarely talked to him either.)

I think Samuelson is right, part of the problem with macroeconomic forecast is that there are many variables.  But there may be more to it than that.  Keynesian Macro-economics, and the government’s ability to control the economy boils down to a very few variables.  The Fed today has as its major variable – interest rates.  Maybe to a lesser extent money supply.   The fiscal side is what the government spends money on – and not everything seems to have equal stimulus to the national economy – some things tend to be more job creating and some less. But the basic idea is that deficits are economically stimulating.  But with politics and different points of view on when and what to spend money on, the timing of most things that congress does is usually off – and timing is frequently a critical factor to keep the economy out of recession.  But the biggest problem is people and how they will react.  In physics in college I learned the “Ideal Gas Law” that is simple with few variables not unlike the government’s macro economic variables. In Engineering I learned that there is no “ideal gas” in the real world, and so there have to be corrective factors for each type of gas.  But with atoms and molecules, once the corrective factors are determined by experiment, the real gasses will react the same way every time.  That’s not true with people.  They tend to react more consistently to micro and industry economic factors.  But at the macro level, other things get in the way and make reactions inconsistent.

People have different needs and expectations depending on a lot of other variables.  How they react is dependant on a number of others factors that are not always consistent. .  Inanimate objects – atoms and molecules will react the same way over decades and centuries.  For example, as Samuelson said, anything that has been going in the same direction for several years, people expect to continue in the same pattern.  “Real estate went up for several decades, therefore it will continue.”  was part of the problem that led to the 2007 great recession.  It’s hard for me to believe how many of my friends saving for retirement got burned in the market by the tech bubble and decided to invest in real estate because “it will go up for ever”.  And the tech bubble or the end to the “new” economy was brought on at least in part, because a lot of people thought that companies would continue spending on tech the way they had been doing in the late 1990’s.  Demographics has something to do with a lot of this.  When the baby boomers were coming to maturity in the 1960’s , low-interest rates tended to be welcome because they made spending on things that people wanted and needed when they are coming out on their own, marring and having family’s. Now the Baby Boom generation is in retirement or saving for retirement and the low-interest rates penalize their retirement goals.  Micro – economics variables have much more consistency and stability than macro variables do.  The test period for a lot of government stimulation was in the 1960,s, but the population is not reacting the same way now as then for understandable reasons.  But what made this change worse was the market crash in 2001 (the end of the “new economy”?)  and the Fed dropped interest rates at a time when the housing markets were still going up and people thought they would forever.  The low-interest rates helped people buy real estate, and when the real estate bubble came apart in 2007, the Fed was accused of causing the problem by holding rates down too far for too long.  Rates since 2007 have been down 3 or 4 times as long with not much apparent effect.

The government organizations in the study – the Fed and the Congressional Budget Office seem to concentrate on the effects of changes in the government controlled variables –   Interest rates, Tax rates, government spending and deficits.  I don’t think they look at new government regulations that don’t affect government spending and tax rates.  The Fed dropped interest rates in 2007, which was a stimulus for more borrowing, but at about the same time we had new Financial Bank Regulations which means the banks did not have as much money to loan and had to be more stringent in who they lent it to.  Individuals might had lower interest rates if they could get loans.  But many who would like to have it could not get it.  This did not increase government spending, but it probably negated some of the effects of lower interest rates.  This is not in any of the macro-economic classes that I had in Grad School, but it is distinctly a factor in industry economics since it both raised their administrative costs and cut the loans they could make effecting their revenue.  Other regulations with good intentions no doubt raised costs and had other micro-economic consequences not accounted for in the forecasts.

But colleges and doctorate programs tend to emphasize macro-economics because we still believe that government can control the economy.  It also gets their economics departments more visibility with media interviews.  It’s one more of those beliefs that people need to change, and as Samuelson suggests, we should be prepared for more economic ups and downs.

 

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Unintended Consequences and Positive Results

In the previous post I tried to demonstrate how  unintended consequences on the part of a central government can have negative results.  Unintended consequences can sometimes have positive results.  Adam Smith used the term “invisible hand” in his work on free market economics.  What he said, in effect, was that individuals when taking responsibility for their own welfare and working for their own interest could help the general economy un-intentionally.  We started out in this country with a free market economy, and it has worked pretty well for many years.  Individuals produced things that other people wanted to buy.  They produced these things in order to provide for themselves and their families.  If they did not produce things that others wanted then their would be no sales, no revenue and no profits.  In providing goods that others wanted and valued they helped themselves.  So in helping themselves, they also helped the overall economic well-being of the whole even though that was not their primary intention.

That doesn’t mean that we did not have some problems.  As Charles Kindleberger in his book “Manias, Panics, and Crashes”  pointed out is that sometimes people become part of a Mania.  They buy stuff because everybody else seems to want it and the price goes too high.  When a lot of people start to believe that the price will go up forever,  it will not end well.  It’s worse for those participating in the mania, but that doesn’t mean that other non-participants won’t be hurt by the overall economic effect as well.  His example of the first mania was the Tulip Crises in the 1400’s.  That one primarily effected people who bought into the tulip bulb mania.  As we have become more economically connected, more us are no doubt effected.  The 2000/2001 crash brought the stock market down pretty sharply which did harm to a lot of people who did not invest in World Com or Enron. But those of us not invested into those type stocks recovered pretty quickly.  The Sarbanes-Oxley legislation was passed by the government to us from another recession?  Did it work?  We had a worse one in 2007, but the subject of the mania was different.  The answer then was the Dodd-Frank legislation.  Will that work to prevent another one?  Maybe we learn from our mistakes, but we seem to find new ones.  We’ve never had another “Tulip Crises” and most, if not all of the other manias have only happened once.

In the U.S., we had a free market economy without a lot of government intervention until the depression of the 1930’s.  Not that we did not have business cycles.  My father graduated from college in 1932 with a business degree.  In the business school they taught students how they should learn to deal with business cycles because we would always have them.  Then we had the “New Deal” followed by a “macro-economic” theory book by John Maynard Keynes.  The result was we began to think that the government could control the economy.  Our fore-fathers thought that each state should manage  the rules of business in their state and the federal government should stay out of it except for regulation of “interstate” commerce.  With modern technology and more goods moving “interstate” our federal legislature seems to have ruled that everything is “interstate” commerce and therefore subject to Federal regulation.  And with Keynesian economic theory they can “manage” the economy so that we will never have another recession.  Right????

When I was in college in the late 1960’s we learned “macro” economics and were told that “micro” economics was not worth the time to study.  Adam Smith’s invisible hand free market economy is “micro” economy.  Keynesian economic theory has always seemed to me to have been inspired by the New Deal.  Did the “new deal” end the depression?  That is something that has been subject to debate since the 1930’s.  A couple of months ago, Robert Samuelson – who writes an op-ed syndicated column – had a piece in the Tulsa paper.  In it he said he had recently discovered that there had been a severe down turn in the economy about 1920, and it appeared from the data to as bad or almost as bad as the depression that happened 10 year later.  The 1920 down turn was over in about a year to 1.5 years and was followed by the “roaring twenties”.  The government had not tried to manage the 1920 recession, but the recovery was very much quicker than happened in the 1930’s.  Maybe he thought the “New Deal” had made the made the 1930’s down turned not so severe to individuals, but had made the recovery much longer.

So why do our government leaders and economists think that macro-economics is so good for us and that the government should be able to manage our economy?  For starters the theory is very appealing.  Who wants to trust “an invisible hand” ?  It’s more comforting to think someone has control and wants to help our well-being.  From the politicians standpoint it makes their job more important and gives them something to promise the electorate during campaigns.  (And even if it doesn’t work, they can promise the voters that they tried by passing “comprehensive” legislation.)  For the economists it also makes their job more important.  They can now get appointed to important staff positions in Washington.  For those not going to Washington, they get questions and interviews in the local news media that they would not get otherwise.  They can become well-known even without going to Washington.  For the news media, it probably makes their job easier because they have some “knowledgeable” individuals to talk to that they can quote as an authority in the news.  And if there is disagreement between experts, the news media has conflicts to report which no doubt draws readers and viewers.

So what do you think?  I think Samuelson is probably right the government may be able to mitigate the pain, but that may cause the recovery to take longer. Is that good or bad?  It probably depends.  But I think that a key is not so much the idea of an invisible hand vs. governmental intervention, but the belief that I have to take responsibility for my own well-being.  A lot of the government well fair programs put in place to help people hurt by a problem that’s not their fault, give them money, but do not do other things to help them get back on their on two feet.  Giving people money without requiring anything from them tends to create dependence, when they really need help to get back to independence in a reasonable period of time.  With where we seem to be today, there are too many people who think that the government should be at least partly, if not fully responsible for their well-being.  Without people taking responsibility for their own well-being, we are going to have problems regardless.  Private non-profit agencies generally do a much better job than the government, because they know the individuals and provide help beyond the money.

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It’s a Wonderful Life, the Rationing of Capital, and Economic Recovery

The movie “It’s a Wonderful Life” is shown every year at Christmas and we usually watch it.  This year was no different.  Mr. Bailey of Bailey Savings and loan is shown what life would be like if he hadn’t been alive.  It was not very pretty.  His town was called “Pottersville” after Mr. Potter who was a financial rival who was not willing to take chances on where he invested or loaned money.  He only wanted to finance things that he knew would be good for him.  Bailey Savings and Loan was willing to loan money to people who were of good character and needed money and Mr. Bailey knew they would try to pay him back if they could.  Mr. Potter was not willing to do that.  He was not willing to do anything with his money if he would be good for him.  So in his world – “capitol was rationed”.  The result was not pretty.  People did not have as much and weren’t nearly as happy.

There have been a couple of articles lately about the our Federal government and the Dodd-Frank legislation which was supposed to protect us from a repeat of the “Great Recession” which has caused banks through well-meaning legislation to “ration capitol” by in essence becoming “Mr. Potter”.  The rules require banks to act like Mr. Potter and have caused a lot of the Bailey Savings and Loans to close.  The authors say the result may have a lot to do with why low-interest rates have not been much help to the economy.  Low interest rates are good only if you can qualify for loans, and if you can qualify, you probably don’t need the money.  The statistics are that “since 2008, one in four community banks have vanished.  That ‘s 1,971 banks according to the institute for Local Self Reliance.”  The people needing money the most are typically small start-up companies who have not been able to qualify for loans with the bigger banks.  And the bigger banks are under tougher requirements.  And start-up companies in the past recession recoveries have supplied most of the new jobs.  So in the name of saving us from another great recession, the federal government has become Mr. Potter and the country may be starting to look like “Pottersville”.

Another article that has made my paper recently has been about the results of the “Sarbanes-Oxley” legislation that was written after the 2001 recession as a way to save us from a repeat.  (Interestingly enough, the Fed dropped the rates after that recession to almost the level of today for about 18 months instead of the 8 or 9 years that we have had since the “Great Recession”.  The Fed was accused of keeping those rates down too long and causing the “Great Recession”)  Maybe the culprit of 2007 recession might have been – at least in part, the Sarbanes-Oxley legislation which was passed in 2002 with the good intentions of keeping us free from future recessions.  Sarbanes-Oxley required a significant increase in auditing requirements for public firms.  Since 2002 academic studies and annual reports apparently reveal that auditing costs have increased to double, triple or even quadruple what they were before.  A 2009 SEC study found that smaller public firms have auditing costs 7 times more than large public companies. Not surprisingly over the past decade the number of firms that are listed on the U.S. stock exchanges has dropped by almost 30% .  And the size of companies launching IPO’s (going public) has gone up significantly.

The alternative to getting bank loans for most small companies is doing equity financing through stock offerings.  If one getting loans is not permitted and the other is too expensive – what is one to do?  The “road to Hell is paved with good intentions” and the “Law of Un-intended Consequences” has not been repealed.  Our representatives in Washington are well-intentioned, but they are also interested in re-election and don’t seem to have any interest in admitting that things did not go quite the way they had hoped. But instead make promises to fix problems.  Maybe the best answer is to keep the Federal Government from “trying to save us”.  We might be better off if the government did nothing?

There is a book by Charles P. Kindleberger called “Manias, Panics, and Crashes” .  What he did was study all the economic crashes since the Tulip Crises of the late 1400’s.  His conclusion is that they all go through the same phases.  People development a mania for something and put way too much money into it driving up the price expecting it to go up forever.  Which it of course doesn’t, and so panic sets in and there is a crash where people lose money and economies crash.  The crash of the economy may hurt people who do not participate in the mania.  Sound familiar?  But economies usually recover on their own after they get over people and governments trying to help.  One interesting thing about the book is none of the manias that lead to the crashes happen over the same thing twice.  Since the 1400’s we’ve never had another Tulip Mania.  Nor has anything else ever been the cause of a crash twice.  Apparently we learn from our mistakes without the government’s help.

So if the same thing never happens twice, do we need government to help us with what we have all ready learned.  The military is often accused of preparing to fight the “last war” which is a mistake because with the advancement of weaponry, skills, and tactics, we have never fought the same war twice.  Maybe we have our government saving us from the crash, when we’ll never have another one like it.  We will have another one, but it will have a different cause.  And the government action may cause untended consequences that will either cause another problem or keep us from recovering as fast from the last one.  Maybe it would be better if the government did not do anything?

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Sympathy, Empathy and Compassion?

I was an ROTC grad from college.  So I got my 2nd Lt. bars and had to report for two years active duty within a year of graduation.  I was assigned to the U.S. Army Artillery so my first stop was at Fort Sill in Lawton, Oklahoma for the Officer’s basic artillery course.  I got there about the first of May and spent most of the summer there.  The Fort Sill assignment was a temporary duty (TDY) assignment so none of the approximately 20 in the class had their wives with them.  We had some free time on the week-ends, but there is not much to do in Lawton, Oklahoma.  So some of us on Saturday night ended up in the bar of the local Ramada Inn.  The Ramada Inn was one of the better hotels in Lawton at the time and the bar keep was a young, nice looking, single lady.  The first two or three week-ends a group of us spent two or thee hours there drinking and talking before.  After that we decided it would be smarter to go to a movie first rather than sitting and drinking all night.  But it was 1964 – an election year and on those first Saturday nights the conversation naturally turned to politics.

Included in our class was a 1st Lt. Marine officer from a marine base in California.  He had been assigned to an artillery unit, but had never had Artillery training and the Fort Sill class was the one for the Marines as well as the Army officers.  Our class had some reasonably technical aspects.  We learned about ballistics theory and how to aim a gun to hit things that you could not see. Those subjects involved some physics, map reading, math, and trigonometry.  In class this Marine Lt. had impressed me as one of the smarter, more intelligent officers in our group.  But in the bar on Saturday night, it became obvious pretty quickly that we were on the opposite sides of the political spectrum.  We disagreed on most political issues.  I thought my positions were pretty logical and defensible so how could this guy who seemed so intelligent come up with positions that seemed to me to be irrational?  We had the time and my curiosity got the better of me, so I decided to ask him how he got to those positions.  So I began with the “why do you think that” questions.  I was not arguing with him, I was merely trying to understand his logic.  The first “why” questions led to a 2nd round of “why” questions.  It probably took several hours (and maybe a couple of Saturday nights in the bar) but we finally got back to things that he had experienced growing up.  He grew up in Philadelphia, Penn. in a neighborhood of factory workers – laborers and maybe Union members.  I grew up in a small town in central Florida (less than 10,000 people).  We did not have any factories, much less factory workers.  The population was mostly farmers, ranchers, and shop-keepers.  It was two totally different environments and our “beginning ideas” were based considerably on what we had learned growing up in those environments?  Who’s beginning assumptions best fit the whole country at large?  The first thing I learned at that point was that neither of us could prove in any absolute sense that our “beginning ideas” were right for the country at large.  The second thing I learned was that given his beginning ideas, his political conclusions in 1964 were perfectly logical.  I did not change my opinions, but I understood and respected his.  He was as smart as I thought he was and we remained friends.

After the Army, I returned to Graduate Business School where my area of concentration was “management”.  In Human Resources management classes they talked about building productive relationships and communications.  There was a term – “active listening” – that a writer used in a 1950’s book that described a way to listen that would help you understand how he was seeing things, and let him know that you were listening and understanding.  This was considered important to building relationships.  Later in his best-selling management book, Stephen Covey’s habit #5 was “Seek First to Understand” then to be understood.  The idea of both of these was that actually listening to understand another person was good for building relationships even if you did not agree with what he was saying.  People appreciate the effort to be understood even without agreement.  In graduate school I learned a word for this was “empathy”.  I’d never heard the word before, but I was assured that it was different from sympathy.  Sympathy meant that you felt sorry for someone who had a problem.  “Empathy” meant simply being able and taking the time to understand another person, and how he/she saw the world.  Even though they may not have to have something to feel sorry for, everyone appreciates being undertood.  Today’s word that one hears a lot is compassion.  My dictionary defines “compassion”  as understanding someone who has a problem with an intent to help.  My experience with my Marine friend in the service did not involve anything that either one of us had to feel sorry for.  But the understanding helped our relationship even though we did not find a lot to agree on.  In Graduate School in the early 70’s, I thought that was “empathy”.  I have repeated “seeking to understand” many times since then with many different people and it has helped our relationship.  I have also learned much even though I did not always agree with the other persons thoughts.  The learning experience Stephen Covey said often leads to a third alternative that works for both of you that neither one of you would have thought about before.  A third alternative may be better than either of you would have thought of independently.  In other cases when we did not need a 3rd alternative and even though we did not agree, I may have modified my thinking because I’ve learned something new.

But apparently the definition of “empathy” has changed in the last few decades to mean what has sometimes been called “emotional empathy” which means feeling someones “suffering” without knowing any logical history or rationale for how or why they got to the point of suffering.  Dr. Paul Bloom, a Professor of Psychology at Yale University has recently published a book titled “Against Empathy: The Case for Rational Compassion“.  Apparently the term has been corrupted by politicians and the media who either have not been true to the definition that I learned or are trying to sound like they care about people of all stripes.

I would agree with his argument for rational compassion.  But with the people that we have in this country today with different religious backgrounds and different countries of national origin, we need better understanding between and among us. I had a talented young man of Mexican decent tell a group that he was speaking to that we are all shaped by the beliefs and practices that we grew up with. He is not suffering.  He is successful at what he does like my Marine friend at Fort Sill.  But we all need understanding and some knowledge of where other people are coming from.  Understanding doesn’t necessarily mean agreement,  but it helps relationships even if no one is suffering.  I think we need a word for that – empathy seems to have been corrupted, sympathy and compassion imply that someone is suffering.  Understanding is a broad term that applies to much more than just human relationships.  But we need to encourage meaningful dialogue of people of different backgrounds and relationships even though they don’t need sympathy or compassion.  We can all learn from that and it will bring us closer together even though we may not always agree.

 

 

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Tribal Politics and This Year’s Election

In the Review Section of Saturday’s edition of the Wall Street Journal, the lead article was entitled “A Truce for our Tribal Politics”. It was written by Dr. Haidt – a social psychologist at New York University Stern School of Business and Dr. Iyer  – a social psychologist and data scientist who is the executive director of CivilPollitics.org.  Their analysis of this years political race is that the country is divided and hostile to each other because the hotly contested race for president has spawned a return to humanities tendency to form tribes that result hostility.  Their first quote is a Bedouin saying, “Me against my brother, my brothers and me against our cousins, then my cousins and me against strangers.”  In other words even though we may be related, we are often on opposite sides.  Then they talk about some ways of dealing with each other that could minimize the hostility.  The way things are going at this point, they say it’s likely that by Wednesday of this week, nearly half the voters will wake up and think we’re doomed.

With this blog, I tried to stay out of politics, but given where we are this election day and the article in the Journal,  it’s hard not to make some observations.  The article made me think about the candidates and political comments I’ve seen on TV and in the paper, along with conversations that I’ve had with my friends on both sides of the aisle.  All of this confirms what the polls seem to be saying – the two candidates we have for president are two of the least liked candidates in our history.  All of which would seem to indicate that people are going to vote for whoever they dislike the least rather than the one they like the most.  So what’s going on here?

The first problem is that no one seems very happy with where the country is and where we have been in the last several years.  The economy is still not good, terrorism is worse, the media has talked a lot about gridlock in Washington, and the current president has pushed the limits of presidential and administrative authority.  And there has been a lot of reports in the press about changes in income distribution.  We have a lot of reason for fear in our land, and fear probably drives tribalism.  With one party there were two candidates, one was known and the one who was not so well-known, but wanted to change significantly the country.  We git the better known, less fearful one.  On the Republican side there were so many candidates that initially the votes were split.  But one got the most media time because he made a lot of statements which were not standard political comments and probably played on people’s fears.  He promised a lot of things that would be nice if he (or anyone) could deliver them.  So we ended up with two people with extremely large egos, promising things that most of us don’t believe they can deliver.  A lot of people who I know don’t like either candidate, but are going to vote for the one from their party  (Tribalism?).

My definition of “leadership” has been that it is the ability two bring people together and have open, productive discussions that lead to solution alternatives that maybe no one had thought of initially.  Ideally the solutions would be “win-win”, but at least you end with one that everyone “can live with”.  The media seem to have a definition that says good leaders are the ones with the “best ideas” that can be sold to the majority.  Selling ideas can result in something good or bad, depending on the person and how it’s sold, but it is hard for me to believe that one person’s idea is better than a group could come up with in an open productive discussion.  I’m not alone in thinking this, it’s fairly common in management/leadership circles, the most popular – but not the only spokesman for this idea – was Stephen Covey.

But that type of leader is not who we have running for president this year.  We have two people with big egos who don’t like to be disagreed with.  They both seem to think they have the best ideas and should be allowed to go forward regardless of who might disagree.  They don’t like people who disagree with them, but they have different ways of dealing with disagreeable people.  One seems to combat disagreement with intimidation – public statements that attack them and are either un-truthful or at least exaggerate the truth.  The other address this more from a back room manipulation and conspiracy process.  Neither is good leadership from my point of view.  They are both a little scary, but for different reasons.  The public intimidation approach I believe drives people into tribal hatred.  The back-room manipulation approach is not as obvious, but if it’s ever discovered by the media, can become a big deal with the public from a trust standpoint.  But I think the public intimidation approach is potentially a bigger problem, because it almost guaranteed to drive us to “tribal politics” – both internally and externally.  It is probably not going to get us into outright civil war, but it could hurt us internationally.

So who does one vote for?  The people I know who are going for the intimidator are assuming are hoping that once elected he would calm down his public statements. and would represent fairly the party’s policy positions.  But who knows, there have been almost no policy discussion in the campaigns, so we don’t really know what he will do with respect to the issues, we only know that he is carrying one tribes name.  The other candidate has a public record, so we have some idea of where she would probably go with policy decisions. But she doesn’t seem very trustworthy and she could do some “back room stuff” that no one would like or if the media ever got hold of it – it could be disaster.  If she were elected, with a congress from the other tribe, nothing might get done – which could be good or bad.  The other candidate represents a “crap shoot”.  One doesn’t know what he would do from either a public or a policy point of view.  If he calms down, and respects the opinions of congress from both tribes, it could be great, but that isn’t a sure thing.

I don’t think – like the writers in the Journal article that we have to have tribal politics.  The good news is that we all pretty much have the same objectives – we want a better economy, with enough jobs for everyone who want to work, we’s like to think our children and grand children would be at least – if not better – off than we were in terms of standard or living.  We’ d like to help people who need it through no fault of their own, or even to get back on their feet if they have made mistakes.  And we’d like to continue to have a democratic – republic and “peace in our time”.  Most disagreements are not with “what we’d like to accomplish, but “how”.  With most groups of people in my experience,  if we have agreement on “what”, we can have civil, non-tribal, discussions of “how”.  But to do that we need to be able to ask “why” other people believe in the “how” they are suggesting.  Good leaders should be able to lead those discussions.  But it can’t be done in 10 second sound bites that we  get from the media.

 

 

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What Would Make the Economy Roar Again?

The last week-end edition of the Wall Street Journal contains an article by Marc Levinson entitled “Why the Economy Doesn’t Roar Anymore”.  Marc Levinson is a former finance and economics editor of the Economist.  He points out that in the last few years, our economy has struggled to make a 2% annual growth.  During the 60 years after the end of WWII we averaged between 3 & 4%.  In an election year, our politicians are promising that they can get us back to that level.  He points our that he believes productivity growth is the key to economic growth and productivity growth is not something a president can decree.  He says we have little idea of how the government can stimulate innovation.  He points out that over the past two centuries the compound growth rates of the advanced economies – including the U.S. – have been in the range of 1.5-2.0%.  That – he points out – may be normal, and the second half of the 20th century may have been an exception due to factors outside of the government.  During the 1970’s he writes, government leaders thought they knew how to stimulate the economy using interest rates, taxes, and government spending.  But he says “when it came to finding a fix for declining productivity growth, their toolbox was embarrassingly empty.”  Maybe 2% growth rate is normal and government can’t change it, so we should ger used to it.

I wouldn’t disagree with his article, but I don’t think it’s the whole story.  I learned in business school that to commit money to capital projects one should do financial analysis based on annual forecasted sales and costs that calculate the annual payout and % return.  That to go forward with the project the return on investment should exceed the cost of capital.  Later when I was working for a Fortune 500 company I learned that the biggest factor in the analyses and the most uncertain was not the cost of capital but the forecast of product sales.  The cost of capital could vary considerably without making much difference in the return and whether the project went forward or not, but sales growth was critical.  To build new plants, sales growth might be the most critical factor.  Much has been written about the boom at the end of WWII.  But the critical item might be the boom in demand.  It was partly but not totally pent-up demand from the constraints on consumption during the war (rationing).  But rather it was likely a combination of things. During the war, there was a lot of research but most of the demand was for military items.  After the war there were new commercial products as a result of the war research.  Also we were helping rebuild Europe and helping Japan re-develop.  All of which no doubt stimulated demand growth.  But one of the most critical items that lasted in some form or other for the next 50 years was the “Baby Boom”.  The growth in population had a direct stimulus to growth in demand for products.  Improvement in productivity helped, but,  I think, that was not the only significant driving force.

Toward the end of the period that Mr. Levinson cites – a period that went from the end of WWII to the early 1970’s, the U.S. had the reputation of being the world’s most productive country with the best knowledge of how to manage productive industry.  But we had steel capacity to meet our needs from plants built-in the late 30’s to early 40’s.  Much of this was going to the military during the war, but after the war much of that shifted to the civilian products without requiring an increase in production capacity.  By the 1970″s, the steel market – including U.S.demand was going to Japan.  One of the reason’s cited by numerous sources was that Japan had built new steel plants in the 50’s and 60’s after the war and ours were 10-20 years older and therefore not as efficient.  Innovation can drive productivity, but innovation alone is not necessarily going to result in new plants.  In the petrochemical industry in the 1970’s, I learned the M.E.P. acronym (Modern Efficient Plant).  The demand for petrochemicals and plastics was growing rapidly and a round of new larger capacity plants were being built every 2-4 years.  Innovation was driving plant efficiency, but it was the volume that was driving the new construction of the necessary MEP’s.  The new plants were producing more product volume per plant, and the plant processes were largely automated which meant a large “fixed cost” component in per unit production costs.  When production is done with automated processes and high fixed costs, the productivity per person-hour goes up significantly and the unit cost is reduced.  But as with the steel industry, the savings alone is not necessarily enough to drive new MEP construction without an increase in demand.

With the “baby boomers” retiring today and in the next few years.  It is not likely that demand for many things is going to grow as it did in the last 50 years of the last century.  As Mr. Levinson points out the government doesn’t have much control over innovation.  And traditional economic stimulus programs like lower interest rates aren’t going to have much effect on either growth or productivity.  However with demand growth seemingly tied to population growth, it is at least predictable.   And it would seem that our  working population is going down for the next 15 or 20 years.  Can the government do much about that?  Maybe.  But traditional macro-economic theories of what the government should be doing are not working for all the reasons cited in previous posts.  (See Micro-Economics and the Ideal Gas Law, and The definition of insanity and the Fed)

There are some things that the government might try in this slow population growth environment.

  • The other thing that affects growth in demand is personal wealth.  Most of the countries of the world are not as well off as we are in the U.S.  Increasing immigration would help with the work force size and U.S. consumption of products.  We are after all a society that made up of many years of immigrants which has helped both the immigrants and our economy.  Poor immigrants become better off and need and can afford more consumption.  Increasing immigration could increase both work force and the demand for goods and services.  This worked well in the 1800’s and early 20th century.  But that was in a time when our character traits put a premium on personal responsibility and not looking toward a Socialist Government to bail us out.  Would it work today?
  • Then there is the matter of Free Trade Agreements:  The free trade agreements are two-edged swords to a degree.  The negative edge is that we can lose jobs to foreign countries, but with a shrinking workforce that might happen anyway.  The government could probably help this with making corporate tax rates at about the same level as other countries.  But we would probably lose some jobs anyway and U.S, wage rates would likely be held down by the foreign competition.  But with low-income countries improving, it would likely grow international demand way more than anything the U.S. might do internally.  And in the U.S., the costs of products (inflation) would no doubt be held down as well, which would help with low wage increases (which would likely be low anyway).  This could be a net positive for our economy – or not.  But it might be worth a try.

There is probably no magic here, but we probably need some new outside the box thinking in order to get through this in the best way.  It’s not clear that the government will have too much control over any of this – certainly not the way we’ve heard in this election cycle.

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College Costs have risen because of competition? And Government Help?

In the 1950’s and 1960’s I don’t recall a national rating system on how good colleges were.  High school guidance counselors and others had ideas on which colleges in their region of the country were good quality schools, but I don’t really remember a rating system on a national basis.  Some time – probably in the 1970’s – there started to be rating systems by national publications so that by the 1980’s and 1990’s it was possible to read news magazines and other sources that put out national ratings of colleges based on slightly different criteria, but most had a rankings and a score.  Most colleges are “not-for-profit” organizations.  But not-for-profit organizations can still compete.  After I left my job with a large “for-profit” corporation, I was involved for several years with “not-for -profit”organizations – both as a board member and as a consultant.  If non-for -profit organizations are to survive, they still need to at least have enough revenue to cover expenses.  Revenue can be either charges for services or contributions or both.  They are allowed to have more income than expenses – a profit – but if they do they don’t have to pay income taxes, and their contributors get tax deductions for their contributions.  All their revenue doesn’t come from customers, which may make them more competitive in some ways, because they also compete for donors.

When I was in college, there were a number of teachers who had work experience and some did not have PhD’s.  A few had not worked outside the classroom.  The best math teacher I had did not have a doctorate although he obviously had knowledge beyond what was required in classes at the freshman and sophomore levels.  He also understood what things we might struggle to understand and he knew how to help us with those things.  My worst math teacher was supposed to be the most brilliant mathematician in the department.  He seemed to think we should understand everything he said without questions,.  So he never took questions or seemed to understand why we might struggle with certain concepts.  The best engineering professor I had, was one who had worked in industry for several years.  He understood how some things were applied.  The worst engineering professor had doctors degree but had never had a job outside of academia.  He understood the theory, but not the practical application.  The same was true in graduate business school.  The best professors were the ones with experience outside the class room.

Today colleges seem to emphasize the desire to have PhD’s as instructors whether they have any practical experience or not.  I suspect that this is the result of the numerous rating systems that have been developed.  Most of the rating systems that I am familiar with are based on objective empirical data like how many of your teaching staff have doctorates and what is the student – teacher ratio and the average classroom size.  These rating people are commended for trying to be fair and objective rather than judgemental.  But the difficulty is that to rate the quality of an education program requires some judgement of the results, not just the input.  The bottom line result of any educational process is “how well are the graduates prepared for “real life and work?”  This requires some judgemental evaluation of the results.  Theory is always logical and sounds good, but it doesn’t always work in practice.  Experience helps learn what actually works in practice.

My early boss who liked to say that “the best government in a benevolent dictator, except dictators tend not to stay benevolent”, also liked to say on occasion “that’s a hell of a good idea, the only thing is, it’s not worth a sh_t”.   Theories are logical good ideas but they may not always work in practice.  instructors who only know the theory without the experience of knowing what really is needed and works in practice are not, I believe, the best teachers.  Experience may in many cases may be a better teacher.  In 1490, all the learned people believed the that the earth was flat and that the sun circled the earth. There was logic for this theory, but  Columbus sitting in the port of Genoa  watching the ships come across the sea to dock in the harbour decided the world was round.  This belief changed the world.  What Bill Gates and Steve Jobs saw, changed our world and it could not have been learned in the classroom at that time.

But colleges to survive and thrive need students and donors.  It helps if they ge rated highly by the rating systems.  And the rating systems look at how many teachers have doctorates as well as how many student applications the schools have.  So they become very competitive.  To attract students they need high ratings, they also need comfortable environments – not necessarily dorms I had with 10′ by 10′ rooms and bathrooms at the end of the hall, but apartments with built-in amenities.  And if you’ve been paying attention, the highest public employees in most states are college football coaches (most are in the top 5% of all annual incomes).  The next highest paid ar the men’s basketball coaches.  What have college football coaches got to do with quality education?  Not much, but a winning football team in the top-tier attracts students and donors.  When my daughter was at the University of Tulsa, a lot of her fellow students told me that being a division I sports school was important to their selection.  Not long after, I was working with a law firm in Boston and they told me that after Boston College became a national name in football, donations went up considerably and not just for sports.  Then the government helped by making student loans available to most students.  The colleges were raising their costs by competing with each other in ways that did not have much to do with student class room success.  But they were able to raise tuition (their price to customer)  because of the availability of  student loans made by or guaranteed by the government.   The result of all this may not be good for any of us.  What do you think?

The other thing that has happened is that the schools have gotten “politically correct”.  The professional staff has never worked in industry and only knows companies by the negative stuff reported in the news.  And the news mostly reports negative stuff that will draw viewers or readers (“If it bleeds, it leads”).  So it is not surprising that the guy graduating in finance found that most college professors have a negative view of industry.  And they are working for an organization that by their “not-for -profit” status are officially recognized as existing for the benefit of the public.  So they are on the Holy Ground.

But are they really?  Part of the benefits of college should not just be a better job, in a democracy it’s also important to have educated voters.  Most of the issues of the day are scientific, economic, or cultural.  When I was in college, freshman and sophomores were required to take courses in history, science and math regardless of their major.  In the 1950’s and 60’s the history requirement was Western Civilization; today is should be world history, and the math should be statistics.  Statistics is the least intuitive, most used and often mis-used math by the news.  Most of today’s issues don’t have easy or perfect answers, so understanding the pluses and minuses of each alternative is important.  The possible solutions are kind of like Winston Churchill’s famous comment on Democracy – ir’s not perfect, but it’s better than any other alternative that we have tried.  But some of these required courses weren’t popular with the students (my hang-up was on the foreign language requirement which I managed to avoid, but now wish that I had taken.)  So some colleges have apparently eliminated some or most of these requirements for the reason (I suspect) of attracting more student applications to help their ratings.

Most colleges seem to want to be “politically correct” so as not to be reported negatively in the news.  They are generally being staffed with faculty not only devoid of any real work experience but leaning toward a particular political persuasion.  The result is that many colleges and universities have restricted campus debate on different issues.  Many of us think that college is the one place in life where one should be exposed to, and learn about the various alternative positions.  Apparently this is no longer the  case and one result is  the Finance major’s article in the Wall Street Journal about the anti-business bent at his university.  It has also led to a recent article in the New York times, under the headlines, “College Students Protest, Alumni Fondness Fades and Checks Shrink”

While I don’t have a magic answer to making college education more useful, maybe the idea that “checks shrink” will bring about some changes.  On balance, I still value my college experience and would like to see college education continue on a reasonable, open, and balanced basis.  And that may require colleges to return to their basic objective of serving the population rather than competing for a better standing in the ratings poles and enhancing their own prestige.

 

 

 

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