Recently, in The Wall Street Journal, a group of business people were asked what could be done to improve the business climate in the United States. Most of the comments involved corporate good citizenship initiatives and reinvesting in local production. The problem here is that this seems to miss the point of business, to maximize profits, and how you improve the general welfare of society through the economy. Whether or not these commentators have a point is open to debate. Here is the article: http://online.wsj.com/news/articles/SB10001424052702304017204579224072622277830?mod=hp_jrmodule
First thing to establish is that the point of a business is to make money and that in itself can be a benefit to society. In its most abstract, a business is a legal fiction, a false legal entity, in which a group of people get together to collectively produce a good or service. Back in the days of yore, most business arrangements were partnerships. People came together to collectively produce something for profit. Unfortunately, when businesses failed, the individuals were personally liable for the debts of the partnership. That meant when a business folded, often the members of that business were left destitute by the debts of the business. Go back far enough in time and that would end with debtors' prison for the founders and homelessness for their dependents. This created a large disincentive for individuals to take on a lot of debt, which also acted as a large impediment to business growth. This is why modern corporate legal codes create a variety of means for principals (people founding a business) to limit their liability through legal arrangements. This allows people the freedom to start businesses without the fear of utter ruination if they fail. The theory being that business growth, job creation and profits are in themselves a social good that society is willing to bear some risk to foster. Or, in other words, having a thriving business community that is growing and creating jobs generally works for the good of society and that justifies the added risk to lenders in not allowing them to raid the assets of the businesses' founders should the businesses fail.
Secondly, business founders who make a lot of money often use their largess to fund socially responsible endeavors. And even when they don't, the money and jobs their businesses create furthers the growth of the global economy, creating more wealth for society. One needs look no further than Bill Gates' creation of The Gates Foundation, or Warren Buffet pledging to donate the bulk of his fortune to charity, to see this in action. http://www.forbes.com/sites/alexmorrell/2013/07/08/buffett-donates-2-6-billion-in-berkshire-hathaway-shares-to-gates-foundation-other-charities/ . But even when the titans of industry are not as generous as Bill Gates or Warren Buffet, it is not like their fortunes turn to dust or are wasted. Society's wealth is held in banks, and through banks it is loaned to local businesses and the local community to further create more wealth. And if it is not put in banks, it is invested directly into the stocks and bonds of other businesses which funds those businesses' expansion which also creates more wealth. Money is never stationary, unless it is buried in the back yard and not spent, and the more it moves, the better off we are as a society.
So, with this understanding, why is it that so many business owners are concerned with corporate good citizenship and investing in the local community? Presumably, if these actions were profit maximizing in the first place, modern businesses would already be doing them to become more profitable and we would all be better off as a result. The reason is that, as the economy creates wealth, it does not do so equitably. What I mean here is that the economy creates winners and losers; some make huge amounts of money, and others do not. And while profit maximization improves aggregate well being, it does not do so for all individuals. These individuals who do not profit tend to resent the profits of others and feel cheated by the global economy.
In the USA there has been growing resentment of big business. As a result of outsourcing, and accelerated by the recent recession, many people have seen their livelihoods disappear and their nest eggs shrink. It is hard for the individual who is downsized when their jobs are outsourced to see the bigger picture. More over, it is harder still for that person to make a living and continue to contribute to the economy with no job. So while aggregate wealth is improved, local economies suffer. It is in these economies that the commenters in the above Wall Street Journal Article are urging businesses invest. The hope is that in investing in underutilized communities, it will create enough wealth and new jobs to make up for the lost profits caused by not outsourcing the jobs to cheaper international markets. Only time will tell if this burgeoning insourcing movement actually creates wealth. But it is clear that the commentators in the above article think this will be the case.
Saturday, November 30, 2013
Monday, November 11, 2013
The Death of Small Business Investment
There once was a time, long, long ago when small business was the driver of the US economy and where big business did not dominate our economic policies and concerns. While it is true that small businesses still employ a huge proportion of the working people in the USA, it is also true that this proportion has been shrinking and that small business has been suffering in the post recession economy while big businesses have been hording cash and recording record profits. http://www.forbes.com/sites/scottshane/2012/04/21/small-businesss-share-of-employment-is-shrinking/
This has become an area of concern both for economists and politicians alike as stagnant job growth has plagued our economy and economic policies of late. Currently, worries about the Fed tapering their monetary easing programs has a greater effect on the stock markets than good fundamentals reported by the companies themselves. This is a sign that our current tepid growth is capital driven instead of driven by company fundamentals. http://www.usatoday.com/story/money/markets/2013/06/19/stocks-wednesday/2437101/
One of the major things that separates big business and small businesses is access to capital. A large business with an established balance sheet and a long track record of profits is a much more credit worthy entity than a small start up with few employees that is in the process of developing marketable products and services. This is true, by the way, even if the large business is not public and does not have access to public stock and bond issuances to fund expansion. Its track record allows it to borrow money at a much lower cost from investment banks at rates that the small business would envy. In a post recession world where banks are increasingly reluctant to lend to business at all, this advantage is only compounding. Where a large business today can use a large chunk of restricted stock (essentially a large stake in the firm itself) and other company assets to secure a business loan, a small business owner usually has to mortgage both his business and his house to secure similar funding. And even then they borrow at much higher interest rates than the big business. A lot of this is driven by the perceived relative risk in investing in both companies.
But...
Complicating this factor has been the slow erosion of a post Great Depressions set of laws called Glass Steagall. Glass Steagall was a set of regulations that separated investment banking from consumer banking. The idea behind this was that, if the government is going to give you access to the Fed borrowing window, and access to deposit insurance, that it wanted you investing that money in the local economy to promote small business and home ownership. With the erosion of these laws, banks were free to invest in complex securities and derivatives instead of their communities. This sort of investment is what helped inflate the economic bubble that popped in 2008/2009. While arguments go both ways for whether repeal actually caused the Great Recession, not enough analysis has been done into how the repeal has affected small business borrowing and liquidity. What we do know is that small businesses have had a harder and harder time competing with big business in the years since repeal, and the extra competition from the securities markets now available to banks could not have helped. What I mean is that instead of competing with other small businesses and real estate for loans, now small businesses compete with investments in the securities markets as well.
At some point, we as a nation are going to have to revisit this change in regulatory scheme. Because the end result has been that while our banks and large businesses are investing in international capital markets, using international operations to avoid domestic tax liability and outsourcing jobs around the world, small business is suffering. Small business, the former driver of our economy, does not have the capital it needs to expand an flourish. And when small business can't expand, it can't hire, and thus our unemployment rate stays stubbornly high, tax revenues stay low, and our economy flounders.
This has become an area of concern both for economists and politicians alike as stagnant job growth has plagued our economy and economic policies of late. Currently, worries about the Fed tapering their monetary easing programs has a greater effect on the stock markets than good fundamentals reported by the companies themselves. This is a sign that our current tepid growth is capital driven instead of driven by company fundamentals. http://www.usatoday.com/story/money/markets/2013/06/19/stocks-wednesday/2437101/
One of the major things that separates big business and small businesses is access to capital. A large business with an established balance sheet and a long track record of profits is a much more credit worthy entity than a small start up with few employees that is in the process of developing marketable products and services. This is true, by the way, even if the large business is not public and does not have access to public stock and bond issuances to fund expansion. Its track record allows it to borrow money at a much lower cost from investment banks at rates that the small business would envy. In a post recession world where banks are increasingly reluctant to lend to business at all, this advantage is only compounding. Where a large business today can use a large chunk of restricted stock (essentially a large stake in the firm itself) and other company assets to secure a business loan, a small business owner usually has to mortgage both his business and his house to secure similar funding. And even then they borrow at much higher interest rates than the big business. A lot of this is driven by the perceived relative risk in investing in both companies.
But...
Complicating this factor has been the slow erosion of a post Great Depressions set of laws called Glass Steagall. Glass Steagall was a set of regulations that separated investment banking from consumer banking. The idea behind this was that, if the government is going to give you access to the Fed borrowing window, and access to deposit insurance, that it wanted you investing that money in the local economy to promote small business and home ownership. With the erosion of these laws, banks were free to invest in complex securities and derivatives instead of their communities. This sort of investment is what helped inflate the economic bubble that popped in 2008/2009. While arguments go both ways for whether repeal actually caused the Great Recession, not enough analysis has been done into how the repeal has affected small business borrowing and liquidity. What we do know is that small businesses have had a harder and harder time competing with big business in the years since repeal, and the extra competition from the securities markets now available to banks could not have helped. What I mean is that instead of competing with other small businesses and real estate for loans, now small businesses compete with investments in the securities markets as well.
At some point, we as a nation are going to have to revisit this change in regulatory scheme. Because the end result has been that while our banks and large businesses are investing in international capital markets, using international operations to avoid domestic tax liability and outsourcing jobs around the world, small business is suffering. Small business, the former driver of our economy, does not have the capital it needs to expand an flourish. And when small business can't expand, it can't hire, and thus our unemployment rate stays stubbornly high, tax revenues stay low, and our economy flounders.
Wednesday, October 16, 2013
Our Not So Free Market Economy
In America we throw a lot of economic terms around when describing how our economy works. One of the most used, and I believe one of the most overused, terms is "Free Market". The term is used most often in news reports that try to draw a distinction between the US economy and that of other countries. It is also used in politics as a way to refer to the perception of American exceptionalism and our status as being the largest single country economy in the world. Think news reports that set American free markets against European socialism or Chinese communism where everyone on the news looks serious and nods their heads like they have any idea what they are talking about. Unfortunately, as the laws and regulations in our country have increased over the years, this distinction is becoming more and more muddied when you look at how we actually run our economy and the way the rest of the world runs theirs.
First thing that needs to be addressed is what is meant by the term "Free Market". A free market is one that is run without governmental interference. It is one that is literally free to do what it wants without external restraint. The power of the free market is that prices are set by the market. This means that the aggregate of all people's purchasing and selling decisions dovetails to an equilibrium between consumers' demand for a product and sellers' demand to make as money as they can. This is distinct from a regulated or controlled market where the government interferes with regulations to create a new equilibrium that it believes is more advantageous to its interests.
The advantages of free markets are that the use the power of people's consumer decisions to keep prices low and supplies of goods and services plentiful. Their negatives are that goods and services are not regulated and business practices that create them may not be the most socially responsible means available. Price is the prime mover here so it is the first and primary concern of both the consumer and the producer. Compare this to a regulated market where government intervenes to regulate safety, social responsibility and other relevant areas. The negative repercussions of this intervention in the market are higher prices and a less than plentiful supply of goods and services.
Given these above definitions, it should be pretty clear that our economy is not in fact a "Free Market" but is instead a regulated or controlled market. But how, you ask (assuming you have a Fox News mentality), may we distinguish ourselves from those Socialists in Europe or Communists in China? The answer is that we probably can't. First, because we regulate markets just as much as Europeans do, with the possible exception of the healthcare market. And secondly, because while China does in fact have a Communist Party, it has been deregulating its economy and loosening its control of markets for years to more fully integrate with Western economies. The end result of this has been unprecedented growth and economic expansion in China while we in the West have seen tepid growth and shrinking economic opportunities.
If you need further proof, try to come up with some market in the USA that is untouched by government intervention, regulation or taxing and spending incentives. I'm reasonably certain you will be unable to find one. The difference then between ourselves and the rest of the world is, at best, the degree to which we interfere with the natural functioning of market economies.
First thing that needs to be addressed is what is meant by the term "Free Market". A free market is one that is run without governmental interference. It is one that is literally free to do what it wants without external restraint. The power of the free market is that prices are set by the market. This means that the aggregate of all people's purchasing and selling decisions dovetails to an equilibrium between consumers' demand for a product and sellers' demand to make as money as they can. This is distinct from a regulated or controlled market where the government interferes with regulations to create a new equilibrium that it believes is more advantageous to its interests.
The advantages of free markets are that the use the power of people's consumer decisions to keep prices low and supplies of goods and services plentiful. Their negatives are that goods and services are not regulated and business practices that create them may not be the most socially responsible means available. Price is the prime mover here so it is the first and primary concern of both the consumer and the producer. Compare this to a regulated market where government intervenes to regulate safety, social responsibility and other relevant areas. The negative repercussions of this intervention in the market are higher prices and a less than plentiful supply of goods and services.
Given these above definitions, it should be pretty clear that our economy is not in fact a "Free Market" but is instead a regulated or controlled market. But how, you ask (assuming you have a Fox News mentality), may we distinguish ourselves from those Socialists in Europe or Communists in China? The answer is that we probably can't. First, because we regulate markets just as much as Europeans do, with the possible exception of the healthcare market. And secondly, because while China does in fact have a Communist Party, it has been deregulating its economy and loosening its control of markets for years to more fully integrate with Western economies. The end result of this has been unprecedented growth and economic expansion in China while we in the West have seen tepid growth and shrinking economic opportunities.
If you need further proof, try to come up with some market in the USA that is untouched by government intervention, regulation or taxing and spending incentives. I'm reasonably certain you will be unable to find one. The difference then between ourselves and the rest of the world is, at best, the degree to which we interfere with the natural functioning of market economies.
Tuesday, September 24, 2013
"Life is pain, Highness. Anyone who says differently is selling something."
The above quote is from the iconic movie, "The Princess Bride" which came out in 1987. It's a fabulous movie and if you haven't seen it (I'm not sure how you avoided it up to now, but just in case) you really should. It's a classic. The reason I am quoting this here is that it is a surprisingly penetrating insight into the human condition for a movie that is otherwise a fairly lighthearted comedy. In one pithy statement the hero Wesley shows how hollow the movie's main message about true love conquering all and the hero getting the girl truly is. The implication here is that, even after Wesley has achieved his goals, gotten Buttercup and retired from being the Dread Pirate Roberts, life will not be lived happily ever after. And because it is Wesley saying it early in the movie, it shows he knows this from the very beginning.
As anyone alive knows, life is not easy. You spend the first 5 years of your life desperately trying to learn how to be a big boy or girl, to make your parents proud, only to then be shipped off to school for the next twelve years of your life, whether you want to be there or not. Those twelve years, or more, are often fraught with misery as bullies, school work and the dramas of everyday life weigh you down and crush your spirit. Then, when you graduate, it is either off to work in the real world, or to get even more schooling. All of this effort is merely to prepare you for your next big adventure, which is life in the working world. Life there is no picnic either as more work, the pressures of adult life and family obligations make finding time to do the things that you enjoy a rarity. The reality of life is that you will toil away, day in and day out on things you will likely not enjoy. Then what? Old age and physical decrepitude force you to retire, live off what little you have put away and whatever government handouts are available to you until you die. So when you are young enough to do the things you enjoy, you will instead spend your life laboring on things you don't; and when you are finally old enough to stop, you are likely no longer physically capable of doing those things anyway. Life is pain, Highness.
So, knowing this, it always comes a surprise to me that otherwise rational, moral, law abiding people I know choose to reproduce. Not only does having children add to the burdens of your life, but it also creates a new life upon which the burdens of life can now be placed. Having a child is giving a new life the gift of 65 or more years of hard labor. It appears facially immoral, cruel and heartless. Worse, unlike other human interactions and moral actions, it is not a deal that you make with society or even with another rational, intelligent adult. The child literally has no choice in the matter. It doesn't exist when the decision to create it occurs. It has no say in whether it wants to exist or not (as far as we know. Depending on your religious beliefs, your views on this could differ). The only times we, as a society, view the imposition of hard labor as morally justified is as a punishment for immoral deeds. Here however, there is no immoral deed (again, assuming you don't believe in Karma or some other theory of rebirth based on the quality of your actions in a previous life). It is merely the seemingly arbitrary choice of the parents to have unprotected sex which results in a baby. A baby who gets to learn, over the course of its life, the truth of Wesley's words: "Life is pain".
Thus, it surprises me not at all that, as the world industrializes and men and women are given access to prophylactics and abortion, that the total fertility rate drops, often below the replacement rate. As much as parents tout the gift of life, when given the option, fewer and fewer people choose to give that gift. The reason for this? "Life is pain, Highness. Anyone who says differently is selling something."
As anyone alive knows, life is not easy. You spend the first 5 years of your life desperately trying to learn how to be a big boy or girl, to make your parents proud, only to then be shipped off to school for the next twelve years of your life, whether you want to be there or not. Those twelve years, or more, are often fraught with misery as bullies, school work and the dramas of everyday life weigh you down and crush your spirit. Then, when you graduate, it is either off to work in the real world, or to get even more schooling. All of this effort is merely to prepare you for your next big adventure, which is life in the working world. Life there is no picnic either as more work, the pressures of adult life and family obligations make finding time to do the things that you enjoy a rarity. The reality of life is that you will toil away, day in and day out on things you will likely not enjoy. Then what? Old age and physical decrepitude force you to retire, live off what little you have put away and whatever government handouts are available to you until you die. So when you are young enough to do the things you enjoy, you will instead spend your life laboring on things you don't; and when you are finally old enough to stop, you are likely no longer physically capable of doing those things anyway. Life is pain, Highness.
So, knowing this, it always comes a surprise to me that otherwise rational, moral, law abiding people I know choose to reproduce. Not only does having children add to the burdens of your life, but it also creates a new life upon which the burdens of life can now be placed. Having a child is giving a new life the gift of 65 or more years of hard labor. It appears facially immoral, cruel and heartless. Worse, unlike other human interactions and moral actions, it is not a deal that you make with society or even with another rational, intelligent adult. The child literally has no choice in the matter. It doesn't exist when the decision to create it occurs. It has no say in whether it wants to exist or not (as far as we know. Depending on your religious beliefs, your views on this could differ). The only times we, as a society, view the imposition of hard labor as morally justified is as a punishment for immoral deeds. Here however, there is no immoral deed (again, assuming you don't believe in Karma or some other theory of rebirth based on the quality of your actions in a previous life). It is merely the seemingly arbitrary choice of the parents to have unprotected sex which results in a baby. A baby who gets to learn, over the course of its life, the truth of Wesley's words: "Life is pain".
Thus, it surprises me not at all that, as the world industrializes and men and women are given access to prophylactics and abortion, that the total fertility rate drops, often below the replacement rate. As much as parents tout the gift of life, when given the option, fewer and fewer people choose to give that gift. The reason for this? "Life is pain, Highness. Anyone who says differently is selling something."
Thursday, September 5, 2013
The Problem With Syrian Intervention
The hot issue du jour in international politics is Syrian intervention. If you haven't been paying attention to international politics for the past few years, there is a civil war going on in Syria. This civil war is an off shoot of the Arab Spring movement in the middle east. In countries like Syria and Egypt the populations have been rising up in protest of the ruling hegemony and trying to bring about political change. In countries like Egypt this has been successful, at least as far as regime change is concerned. In Syria, the movement has so far failed to bring about a change in power. Instead the protests have given way to an armed insurgency fighting running battles with government forces. This brings us to this week's G20 meeting and the debate raging about whether the international community should intervene in Syria.
The debate over Syrian intervention came to a head in the G20 due to evidence that chemical weapons were used on the rebel forces and civilians. A few years ago, when the Syrian situation first became a civil war, President Obama made a series of speeches in which he referred to the use of chemical weapons as a "Red Line". What he meant was that the use of these weapons to quell the insurgency would mean dire consequences for the Syrian government. Now that they have been used the President's hand has been forced and he must make good his threat or appear weak internationally. Unfortunately, there is no international consensus over who actually used the weapons. It is known that the Syrian government posses these weapons and has stock piles around the country, but it is also known that the rebels control a large section of the country and may well have secured these weapons for their own uses. It does not take much imagination to see how the rebel cause would be aided by international intervention and the Syrian government's would not be, so there is some debate over who actually released the Sarin gas.
Further complicating the debate is Syrian ties with Russia, a UN Security Council member and Veto holder, and Iran. Russia has long had military and economic ties with Syria and Russia has long had a military base on Syrian soil. Iran and Syria also have military and economic ties. Iran is also currently building up a supply of fissile material that the West thinks is for the purpose of making nuclear weapons, which is a problem because the Iranian government is hostile to Israel, a strong US ally. The end result of this is that Russia and many others are arguing against intervention, while the US and its allies are arguing for intervention.
So, with that scene set, I think it is important for us to discuss why it is the West feels it needs to intervene at all. For starters, the Syrian insurgency has been going on for years and has been largely ignored by the international community. Sure there has been some hand wringing about war crimes and civilian death tolls, but no one has cared enough to actually do anything about it until now. It seems mighty hypocritical to start caring now after 100,000 people or so have died and the country has fallen into ruin. The time for intervention was when the protests first turned violent and civilian lives were first put in danger. The reality here is that, if there were no broader concerns with Iranian nuclear weapons and Obama drawing lines in the sand, we would still be ignoring the situation.
Second, the world has a pretty miserable track record on intervening in foreign conflicts trying to keep peace and solving situations diplomatically. Even military intervention has a high rate of failure over the long run. We have good examples in both Iraq and Afghanistan of how a successful military campaign turns into a quagmire when it comes to nation building (i.e. we were very good at blowing up and conquering these countries, but not very good at building stable democracies afterwards). But the track record goes back further than that. Korea, Vietnam, South America... Even World War One can be argued as an example of how international intervention can lead to some pretty dire consequences (in this case World War Two). So why is it that this time we think Syria will be any different?
Third, we are all just starting to emerge from a global banking and real estate meltdown and most governments are running pretty untenable deficits as a result. These deficits and persistent unemployment mean that the world can little afford to spend billions dropping bombs on a foreign country that has little to no strategic or economic impact on the international community. A much better use of our money would be in providing refugees safe havens with humanitarian aide in neighboring countries. Essentially, cordoning off Syria and letting the government and the insurgency fight it out while allowing civilians to immigrate to other countries to live their lies in relative safety.
Lastly, even if we do bomb Syrian government targets and destroy its chemical weapons stock piles, it's not like that is going to end the fighting. The insurgency and the Syrian government will continue to fight it out until one or the other has been vanquished. Without the threat of putting boots on the ground as peace keepers, the fighting will just continue. And, as we have seen in previous interventions, putting boots on the ground just means we are putting our own people in harms way in a country we don't really care about. Intervention is pretty much a no win situation.
I think, in the end, that we would be a lot better off if we focused more on helping the refugees than bombing the Syrian government. In the long run, I think we would all be better off if we spent less money on foreign conflicts and more money on the home front. We have plenty of problems at home that could use billions of dollars that doesn't involve dropping bombs on people. But Obama was stupid, drew a line in the sand on both Syria and Iran, and now we are forced into yet another foreign conflict because we can't afford to look weak internationally.
The debate over Syrian intervention came to a head in the G20 due to evidence that chemical weapons were used on the rebel forces and civilians. A few years ago, when the Syrian situation first became a civil war, President Obama made a series of speeches in which he referred to the use of chemical weapons as a "Red Line". What he meant was that the use of these weapons to quell the insurgency would mean dire consequences for the Syrian government. Now that they have been used the President's hand has been forced and he must make good his threat or appear weak internationally. Unfortunately, there is no international consensus over who actually used the weapons. It is known that the Syrian government posses these weapons and has stock piles around the country, but it is also known that the rebels control a large section of the country and may well have secured these weapons for their own uses. It does not take much imagination to see how the rebel cause would be aided by international intervention and the Syrian government's would not be, so there is some debate over who actually released the Sarin gas.
Further complicating the debate is Syrian ties with Russia, a UN Security Council member and Veto holder, and Iran. Russia has long had military and economic ties with Syria and Russia has long had a military base on Syrian soil. Iran and Syria also have military and economic ties. Iran is also currently building up a supply of fissile material that the West thinks is for the purpose of making nuclear weapons, which is a problem because the Iranian government is hostile to Israel, a strong US ally. The end result of this is that Russia and many others are arguing against intervention, while the US and its allies are arguing for intervention.
So, with that scene set, I think it is important for us to discuss why it is the West feels it needs to intervene at all. For starters, the Syrian insurgency has been going on for years and has been largely ignored by the international community. Sure there has been some hand wringing about war crimes and civilian death tolls, but no one has cared enough to actually do anything about it until now. It seems mighty hypocritical to start caring now after 100,000 people or so have died and the country has fallen into ruin. The time for intervention was when the protests first turned violent and civilian lives were first put in danger. The reality here is that, if there were no broader concerns with Iranian nuclear weapons and Obama drawing lines in the sand, we would still be ignoring the situation.
Second, the world has a pretty miserable track record on intervening in foreign conflicts trying to keep peace and solving situations diplomatically. Even military intervention has a high rate of failure over the long run. We have good examples in both Iraq and Afghanistan of how a successful military campaign turns into a quagmire when it comes to nation building (i.e. we were very good at blowing up and conquering these countries, but not very good at building stable democracies afterwards). But the track record goes back further than that. Korea, Vietnam, South America... Even World War One can be argued as an example of how international intervention can lead to some pretty dire consequences (in this case World War Two). So why is it that this time we think Syria will be any different?
Third, we are all just starting to emerge from a global banking and real estate meltdown and most governments are running pretty untenable deficits as a result. These deficits and persistent unemployment mean that the world can little afford to spend billions dropping bombs on a foreign country that has little to no strategic or economic impact on the international community. A much better use of our money would be in providing refugees safe havens with humanitarian aide in neighboring countries. Essentially, cordoning off Syria and letting the government and the insurgency fight it out while allowing civilians to immigrate to other countries to live their lies in relative safety.
Lastly, even if we do bomb Syrian government targets and destroy its chemical weapons stock piles, it's not like that is going to end the fighting. The insurgency and the Syrian government will continue to fight it out until one or the other has been vanquished. Without the threat of putting boots on the ground as peace keepers, the fighting will just continue. And, as we have seen in previous interventions, putting boots on the ground just means we are putting our own people in harms way in a country we don't really care about. Intervention is pretty much a no win situation.
I think, in the end, that we would be a lot better off if we focused more on helping the refugees than bombing the Syrian government. In the long run, I think we would all be better off if we spent less money on foreign conflicts and more money on the home front. We have plenty of problems at home that could use billions of dollars that doesn't involve dropping bombs on people. But Obama was stupid, drew a line in the sand on both Syria and Iran, and now we are forced into yet another foreign conflict because we can't afford to look weak internationally.
Friday, August 16, 2013
The Problem With Focus Groups
In business, especially businesses that market things to the general public, it is common practice to hire a panel of random people to review products before they are released to the public as a whole. The purpose of this is to get feed back from would be consumers so that the company can refine their product to make it better and increase future sales before it is released. These panels are typically referred to as focus groups. In theory this is a very good idea. Having the public have a say in what you are selling them, letting them tell you what they want, should make products better and consumers happier. Unfortunately, this doesn't always work out.
A perfect example of this can be seen in the auto industry. Car companies are increasingly worried about the greying of their consumer base. The average car buyer age for most major automotive brands keeps increasing. In order to combat this greying, many of these auto companies are creating youth focused brands or youth focused cars. These companies have been talking to younger adults and trying to create vehicles that meet their needs. Apparently, what their research shows is that young people want cars that can haul their stuff, have lots of tech features, and not be too expensive. The end result are divisions such as Toyota's Scion and cars like the Kia Soul.
Unfortunately, these attempts have completely failed. As cataloged recently by The Wall Street Journal here: http://online.wsj.com/article/SB10001424127887323971204578628233538218960.html , the actual consumers of these vehicles have been seniors and baby boomers. 42% of all sales of these "youth" cars are going to baby boomers while a mere 12% are being sold to their target audience. While sales, regardless of who to, are always a good thing for the company selling them, it is hard to ignore the fact that this is essentially a complete failure in marketing. So the question then follows, why did the focus groups so completely fail?
The first, and most obvious, problem is that the younger generations have been hit hardest by the economic down turn of the last 5 years, with minority youths being the most effected (as measured by unemployment rates). When you are unemployed or under-employed, you tend to not be in the market for new cars. Until the job market actually heats up (and don't be fooled by unemployment rate declines caused by people leaving the workforce, or by people being forced by necessity to take poorly paid part time work, I mean real improvement in full time employment as measured by the labor participation rate) you will not see the percentages of young new car buyers increase.
The second is that companies are remarkably bad at breaking down consumers into functional focus groups. When looking at the car buying public, it is important to note that not everyone wants to buy the same car for the same reasons. A family looking for a people mover is going to be looking for a very different car than a weekend warrior looking for a track day car. Yet we see, especially in youth brands and youth vehicles, a mix of features aimed at appealing to both buyers in the same car. While this may appeal to a company looking for as broad a market for their products as possible, they risk alienating both buyers by making them pay for features that they do not want. The family looking for a people mover likely does not care about sporty rims, customizability or loud exhaust notes. Similarly, the weekend racer will care very little about trunk space, comfortable seating for large numbers of people or how many cup holders the vehicle has.
If car makers want to better tailor a car to the people who might actually buy it, they need to tailor the focus group in a similar manner. Get a bunch of sports car guys together to focus group sports cars, get a bunch of parents together to discuss family transportation, get a bunch of off roading enthusiasts to discuss the next 4x4. Also, understand that you can't pigeon hole people by age. Not all twenty somethings want the same thing in a car. Just because they are young doesn't mean they want the same thing.
Also, this doesn't apply to just the automotive market. Television programming is another area where they try to market one size fit all consumers and have been rewarded with dwindling market share for years. If you keep repackaging the same crap, people are going to stop watching. In an era where almost every popular old show is available online for public consumption, repackaging the same stuff over and over again doesn't work. Why watch another Friends or Seinfeld rip off when you can watch the original? You need to look over the market, find people who watch different types of shows, and cater to their needs. The TV viewer who likes Simpsons, American Dad, Family Guy and Archer will likely not be the same person who obsessively watches The Real Housewives. So trying to make a show that pleases both demographics will likely fail spectacularly.
It is an old adage, but knowing your customers really does help in selling them products. And while focus groups are a wonderful tool for helping to tailor products to consumers, you need to tailor the focus group to actually fit the product you are selling. Because if you do not, the end result will be youth divisions that sell primarily to retirees and TV shows that have no audience.
A perfect example of this can be seen in the auto industry. Car companies are increasingly worried about the greying of their consumer base. The average car buyer age for most major automotive brands keeps increasing. In order to combat this greying, many of these auto companies are creating youth focused brands or youth focused cars. These companies have been talking to younger adults and trying to create vehicles that meet their needs. Apparently, what their research shows is that young people want cars that can haul their stuff, have lots of tech features, and not be too expensive. The end result are divisions such as Toyota's Scion and cars like the Kia Soul.
Unfortunately, these attempts have completely failed. As cataloged recently by The Wall Street Journal here: http://online.wsj.com/article/SB10001424127887323971204578628233538218960.html , the actual consumers of these vehicles have been seniors and baby boomers. 42% of all sales of these "youth" cars are going to baby boomers while a mere 12% are being sold to their target audience. While sales, regardless of who to, are always a good thing for the company selling them, it is hard to ignore the fact that this is essentially a complete failure in marketing. So the question then follows, why did the focus groups so completely fail?
The first, and most obvious, problem is that the younger generations have been hit hardest by the economic down turn of the last 5 years, with minority youths being the most effected (as measured by unemployment rates). When you are unemployed or under-employed, you tend to not be in the market for new cars. Until the job market actually heats up (and don't be fooled by unemployment rate declines caused by people leaving the workforce, or by people being forced by necessity to take poorly paid part time work, I mean real improvement in full time employment as measured by the labor participation rate) you will not see the percentages of young new car buyers increase.
The second is that companies are remarkably bad at breaking down consumers into functional focus groups. When looking at the car buying public, it is important to note that not everyone wants to buy the same car for the same reasons. A family looking for a people mover is going to be looking for a very different car than a weekend warrior looking for a track day car. Yet we see, especially in youth brands and youth vehicles, a mix of features aimed at appealing to both buyers in the same car. While this may appeal to a company looking for as broad a market for their products as possible, they risk alienating both buyers by making them pay for features that they do not want. The family looking for a people mover likely does not care about sporty rims, customizability or loud exhaust notes. Similarly, the weekend racer will care very little about trunk space, comfortable seating for large numbers of people or how many cup holders the vehicle has.
If car makers want to better tailor a car to the people who might actually buy it, they need to tailor the focus group in a similar manner. Get a bunch of sports car guys together to focus group sports cars, get a bunch of parents together to discuss family transportation, get a bunch of off roading enthusiasts to discuss the next 4x4. Also, understand that you can't pigeon hole people by age. Not all twenty somethings want the same thing in a car. Just because they are young doesn't mean they want the same thing.
Also, this doesn't apply to just the automotive market. Television programming is another area where they try to market one size fit all consumers and have been rewarded with dwindling market share for years. If you keep repackaging the same crap, people are going to stop watching. In an era where almost every popular old show is available online for public consumption, repackaging the same stuff over and over again doesn't work. Why watch another Friends or Seinfeld rip off when you can watch the original? You need to look over the market, find people who watch different types of shows, and cater to their needs. The TV viewer who likes Simpsons, American Dad, Family Guy and Archer will likely not be the same person who obsessively watches The Real Housewives. So trying to make a show that pleases both demographics will likely fail spectacularly.
It is an old adage, but knowing your customers really does help in selling them products. And while focus groups are a wonderful tool for helping to tailor products to consumers, you need to tailor the focus group to actually fit the product you are selling. Because if you do not, the end result will be youth divisions that sell primarily to retirees and TV shows that have no audience.
Tuesday, July 30, 2013
Government: Symbiosis to Parasitic
Throughout recorded history, when human kind has come together to form a society, it has also created a government to govern these interactions. The reason for this is obvious. When people get together, crime, disease, and scarcity will plague human interactions and make large gatherings problematic. Governments exist, first and foremost, to protect the populace from malignant external incursions, protect the populace from the deprivations of its own citizens and to create the infrastructure that is required for large quantities of people to live together as healthily as possible. Society benefits from this governing because when humans work together, they accomplish great things. Everyone's lives benefit from human efforts working in concert for the common good.
Need proof? Think of all the wonders of the world. None of them would have been possible without a large governing body overseeing the huge masses of humanity required to create these masterpieces. In order to organize humanity, you need a group of people whose roll it is to oversee them. Someone needs to plan. This general thesis is the argument most people have against a purely libertarian or anarchic state. It is hard to see all the benefits of an organized modern society and not claim that humanity has benefited from the oversight of government.
But now let's look back at those great masterpieces, the wonders of the world. While they were the end result of a great mobilization of humanity made possible by government, they were not created without significant losses of life and other opportunity costs. Take the Great Pyramid of Giza. It was created using slave labor by the Pharaoh. It is not hard to think that Egyptian society of the time would have benefited more if all that effort was put into projects that benefited all of society. So despite that it is now a major tourist attraction and bringing in a huge amount of money to Egypt (well, between civil wars and unrest it does. Once Egypt figures out its government, it will no doubt become a major tourism draw once again) it is hard to argue that the Egyptian populace of the time benefited from its creation. You can say similar things about the Great Wall of China. While it was created with a noble thought in mind, namely keeping the Mongols and other western barbarians out of China (at a time in history when incursions involved murder, rape, theft and arson), it also cost countless human lives to make and failed in its primary purpose. After all, China was eventually conquered by the Mongols and forced to pay tribute to the mongol empire for centuries.
So at what point does a government move from a net positive to a society, to a net negative? This is a complex question and largely depends on what you view the ultimate purpose of government is. I tend to believe that a government that governs least governs best, but I realize there is a large contingent of humanity that wants government to take a more totalitarian roll and run all aspects of human life for the benefit of society. The problem here is that government, while great at organizing people to work for the common good, has historically been very bad at identifying what is in the common good, and terrible at selecting rulers who are actually interested in the common good instead of personal enrichment. Again, think of the Pyramid of Giza and the Great Wall of China.
I write all of the above as a prelude to my next observation. I believe that the US government in particular, though it is certainly not alone (I am looking at you Europe) have transitioned from net positive to net negatives for the societies they govern. Now don't get me wrong, I am not advocating the overthrow of any government. But I would like to see it reformed to better help the populace as a whole.
But lets not get ahead of ourselves. Why do I think government has become a net drag on society? The answers lie in our current economic malaise. We are currently dealing with the 4th or 5th year of a recession that started when the sub-prime real estate market collapsed. This caused property values to decline rapidly. Banks at the time were heavily invested in real estate securities, so this huge decline in value pummeled the stock market and the value of most banks' portfolio of assets. For some financial companies (Lehman Brothers in particular), this drop in value triggered margin calls on their loan agreements which they couldn't pay because their assets were suddenly illiquid and losing value rapidly. The fed then stepped in, bailed out the banks, preventing large scale failures and bank runs. This was government working properly to avoid a disaster.
The problem is that the above disaster was the fault of government in the first place. You see, financial panics caused by real estate collapses are nothing new. The panic in the 1890s, the great depression, and the savings and loan fiascoes all had at least partial roots in real estate crashes. The problem was that after years of economic success, the government relaxed lending standards under the guise of making home ownership more affordable to the less credit worthy, they gutted depression era protections from economic speculation (Glass Steagall), and they allowed easy money policies that further inflated the real estate asset bubble. The result was when property values began to falter due to lack of demand and mortgage rates ticking upwards (from option arms rates resetting), defaults skyrocketed and property values fell. Had better lending standards been in place, had banks not been allowed to speculate on real estate securities (Glass Steagall), and had the government had a less permissive monetary policy, this likely could have been avoided.
When you couple our current economic woes, with what we have been learning about the modern police state we live in. I am referring here to the NSA PRISM program (read more here: http://en.wikipedia.org/wiki/PRISM_%28surveillance_program%29 ) and our multiple costly wars in foreign countries with questionable strategic significance, it is easy to see how our government has become more parasitic than symbiotic (i.e. it is hurting us more than it is helping). To this I would also add the Affordable Care Act, the Dodd Frank Act and Sarbanes Oxley, but these assertions are likely more contentious to some readers and are better dealt with on an individual basis in separate posts. And while the government has been spending time on these projects, our local infrastructure crumbles, our local governments' tax revenues dwindle (further cutting funds to infrastructure) and our local civil institutions whither. In fact the only area of America to not suffer from the depression was the Federal Government and the greater DC metropolitan area. The government continues to raise taxes while providing worse and worse service to its citizens and the only people benefitting are in the government itself.
When an entity lives off another (in this case society) and benefits at the expense of the host, it is a parasite. And without drastic reform to our federal government, future prosperity will be difficult to achieve. It is time we wean ourselves off the teat of big government and start cutting budgets for programs that do more harm than good.
Need proof? Think of all the wonders of the world. None of them would have been possible without a large governing body overseeing the huge masses of humanity required to create these masterpieces. In order to organize humanity, you need a group of people whose roll it is to oversee them. Someone needs to plan. This general thesis is the argument most people have against a purely libertarian or anarchic state. It is hard to see all the benefits of an organized modern society and not claim that humanity has benefited from the oversight of government.
But now let's look back at those great masterpieces, the wonders of the world. While they were the end result of a great mobilization of humanity made possible by government, they were not created without significant losses of life and other opportunity costs. Take the Great Pyramid of Giza. It was created using slave labor by the Pharaoh. It is not hard to think that Egyptian society of the time would have benefited more if all that effort was put into projects that benefited all of society. So despite that it is now a major tourist attraction and bringing in a huge amount of money to Egypt (well, between civil wars and unrest it does. Once Egypt figures out its government, it will no doubt become a major tourism draw once again) it is hard to argue that the Egyptian populace of the time benefited from its creation. You can say similar things about the Great Wall of China. While it was created with a noble thought in mind, namely keeping the Mongols and other western barbarians out of China (at a time in history when incursions involved murder, rape, theft and arson), it also cost countless human lives to make and failed in its primary purpose. After all, China was eventually conquered by the Mongols and forced to pay tribute to the mongol empire for centuries.
So at what point does a government move from a net positive to a society, to a net negative? This is a complex question and largely depends on what you view the ultimate purpose of government is. I tend to believe that a government that governs least governs best, but I realize there is a large contingent of humanity that wants government to take a more totalitarian roll and run all aspects of human life for the benefit of society. The problem here is that government, while great at organizing people to work for the common good, has historically been very bad at identifying what is in the common good, and terrible at selecting rulers who are actually interested in the common good instead of personal enrichment. Again, think of the Pyramid of Giza and the Great Wall of China.
I write all of the above as a prelude to my next observation. I believe that the US government in particular, though it is certainly not alone (I am looking at you Europe) have transitioned from net positive to net negatives for the societies they govern. Now don't get me wrong, I am not advocating the overthrow of any government. But I would like to see it reformed to better help the populace as a whole.
But lets not get ahead of ourselves. Why do I think government has become a net drag on society? The answers lie in our current economic malaise. We are currently dealing with the 4th or 5th year of a recession that started when the sub-prime real estate market collapsed. This caused property values to decline rapidly. Banks at the time were heavily invested in real estate securities, so this huge decline in value pummeled the stock market and the value of most banks' portfolio of assets. For some financial companies (Lehman Brothers in particular), this drop in value triggered margin calls on their loan agreements which they couldn't pay because their assets were suddenly illiquid and losing value rapidly. The fed then stepped in, bailed out the banks, preventing large scale failures and bank runs. This was government working properly to avoid a disaster.
The problem is that the above disaster was the fault of government in the first place. You see, financial panics caused by real estate collapses are nothing new. The panic in the 1890s, the great depression, and the savings and loan fiascoes all had at least partial roots in real estate crashes. The problem was that after years of economic success, the government relaxed lending standards under the guise of making home ownership more affordable to the less credit worthy, they gutted depression era protections from economic speculation (Glass Steagall), and they allowed easy money policies that further inflated the real estate asset bubble. The result was when property values began to falter due to lack of demand and mortgage rates ticking upwards (from option arms rates resetting), defaults skyrocketed and property values fell. Had better lending standards been in place, had banks not been allowed to speculate on real estate securities (Glass Steagall), and had the government had a less permissive monetary policy, this likely could have been avoided.
When you couple our current economic woes, with what we have been learning about the modern police state we live in. I am referring here to the NSA PRISM program (read more here: http://en.wikipedia.org/wiki/PRISM_%28surveillance_program%29 ) and our multiple costly wars in foreign countries with questionable strategic significance, it is easy to see how our government has become more parasitic than symbiotic (i.e. it is hurting us more than it is helping). To this I would also add the Affordable Care Act, the Dodd Frank Act and Sarbanes Oxley, but these assertions are likely more contentious to some readers and are better dealt with on an individual basis in separate posts. And while the government has been spending time on these projects, our local infrastructure crumbles, our local governments' tax revenues dwindle (further cutting funds to infrastructure) and our local civil institutions whither. In fact the only area of America to not suffer from the depression was the Federal Government and the greater DC metropolitan area. The government continues to raise taxes while providing worse and worse service to its citizens and the only people benefitting are in the government itself.
When an entity lives off another (in this case society) and benefits at the expense of the host, it is a parasite. And without drastic reform to our federal government, future prosperity will be difficult to achieve. It is time we wean ourselves off the teat of big government and start cutting budgets for programs that do more harm than good.
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