Current economic debate: a secret decoder ring

Politics now days is the era of sound bites and so these are attempts to reduce complex subjects into something that is can be recognized but yet contrasted to a candidate’s opponent. If you’re like many you’re wondering about the frenzy and debate around two phrases:

  • Trickle down economics (really supply side economics)
  • Middle class out economics (really behavioral economics)

What are the core ideas behind each concept, you might ask? These are not just phrases invented on a whim and each have some depth that I hope to share with you in as unbiased a fashion as I possibly can. I specialized in Finance as part of my MBA, not that fact should impress you but that I have formed my own conclusion after considerable study, albeit mandatory study lol!

Trickle down economics was used widely during Reagan’s run as President but is attributed as a theory much earlier than that. Today it is used as a pejorative (negative comment) and summarized as the “failed economic policy of the previous 8 years”. Ironically looking at history, Reagan nor Bush ever used the phrase to describe their own policy. A more accurate phrasing of the Reagan’s core economic policy is what’s called Supply Side economics but that’s not as catchy so rarely used. It’s core concept is around the idea that tax breaks lead to an increase in capital formation which then leads to job creation and hence top to bottom trickle of economic activity. One of the central changes was the reduction of long term Capital Gains tax from then 35% to 20% (today it is 15%). The following 10 years after this change saw an enormous level of job creation and economic expansion. The reduction of capital gains resulted in an increase of tax receipts through an effect called expanding the base. In other words more people participated because of lower rates creating a net positive even though a single individual would pay less in tax.

Middle class out economics is a new phrase adopted by the Obama campaign but is nothing new. He’s been using this approach since his first days in office back in January 2009. The policy is more accurately referred to as Behavioral Economics which sounds ominous so they have to call it something else. The economic theory does mean actually what it says with the core concept that people act irrationally and motivated by emotion and so it is the policy to entice behavior. If you’d like to get a survey of the concepts check out the book “Nudge” by Cass Sunstein and Richard Thaler. Yes, that’s right the same Cass Sunstein on Obama’s Regulatory Czar until just recently. The NY Times did a piece on this policy theory in an article back in 2010: http://www.nytimes.com/2010/05/16/magazine/16Sunstein-t.html?pagewanted=all

A quote from the article that summarizes this economic approach is this: “But in the real world, Sunstein and Thaler argue, people are subject to all sorts of biases and quirks. They also argue that this human quality, which some would call irrationality, can be predicted and — this is the controversial part — that if the social environment can be changed, people might be nudged into more rational behavior.” (emphasis mine). And if you’re a bit scared by that statement it’s because you should be. I am moved to who’s definition of “more rational behavior”? Theirs? That feels very uncomfortable for me on MANY levels.

There is one major problem with “Middle class out” theory, for a person to follow the incentives they must have money. If you don’t have a job, you don’t have money….unless the government gives it to you. Who is it that employs the middle class? If you want jobs you have to form capital, very simple concept. But the nasty double dose of behavioral economics is that if you don’t have a job, the government can create economic activity through handouts. Did you catch the headline recently about ads and promotion of Food stamps? No coincidence, the policy wonks think they can stimulate the economy leading into the election by putting people on Food stamps. There is no altruistic motive in the policy of “serving the poor”. That’s a line they tell people while doing something else.

Behavioral economics is new stuff and never been proved before on a real economic scale….except for the last 4 years as the policy theorists have been running the store called the US economy. If you draw a basic head to head comparison of 1981 to 1984 vs 2009 to 2012 (similar periods of crisis and recovery), I think you have a fair contrast of economic policy effectiveness that lets you draw your own conclusion. But the real question that you must answer is this as we all decide to cast our votes:

  • Do you want to continue an experiment (Behavioral economics) that has so far not delivered improvement?
  • Do you want a track record (Supply side economics) that brought back prosperity to the US in a similar period of economic distress?

That choice won’t come without tradeoffs. We can’t afford to write checks the politicians mouths can’t cash (which is you and me by the way). People need jobs, and we need owners of businesses to want to create jobs. Tune out the pundits and click on the brain.

Student Finance 101

Last week I wrote a post about the Presidents pandering to college students and recent graduates with his executive order to change student loan financing. There is no denying that the debt load of student loans is extreme, but where I take exception is by coddling students that make poor choices by avoiding talking reality with them.

I found this article the other day that provides recent data on what professions generally pay:

http://www.fastcompany.com/1755375/what-are-college-majors-really-worth

Find a profession that you enjoy but don’t forget that your CHOICE of profession has direct correlation to how well you can pay for the investment in education to get there.

Truth is simple

I have come to a basic conclusion in life that one of the critical tests of truth and wisdom is how simple it is to express or explain. Which is very different from how I started as a young engineer years ago where my very livelihood was built on fixing complex things. But even in engineering I have come to appreciate that the ingredients of a truly successful engineering solution are simple things, not complex ones.

Steve Jobs is quoted as saying:

Simple can be harder than complex. You have to work hard to get your thinking clean to make it simple.

I didn’t know he said this until after his death recently but you can see this embodied in Apple products. I am often chided by my engineering colleagues for using so many Apple products since from their perspective they are “dumbed down” or inflexible. And then I take my iPhone out and do a basic test case side by side with their “better” phone, and most of the time I am done with the task much faster than my friends with their “better” phone. As I tell people, I use Apple products because they are simple to use……they just work.

My experience is that this principle extends to many other subject areas: life, relationships, politics, and religion. Looked at from the negative point of view, many deceptions are built on complexity for the simple reason to confuse and distract from the real story and truth. Some deceptions are not intentional or willful. The complexity vs simplicity principle remains the same but in those cases we use a different word: fallacy, something generally accepted but is not true.

A caution in this is that simple does not mean easy whether taken from the perspective of sharing truth to others or accepting simple truth ourselves. Why? From the perspective of the truth sharer, reaching the simplest form in order to express truth is hard work with a lot of cutting away to reach that point. Alternately, from the perspective of the truth receiver, it may be simple to understand but very difficult to accept the intuitive and natural conclusions that a truth requires.

This reminds me of an old consulting story I heard years ago. An older, retired businessman is asked to give a lecture at a conference and asked his fee for the service. He responded with 3 options:

Option 1 – a 60 min lecture for $5000

Option 2 – a 30 min lecture for $15000

Option 3 – a 15 min lecture for $25000

As any writer or spokesperson will tell you, the shorter the time you have to deliver a message, the more time it takes to hone and sharpen it to the ideas and concepts that truly matter. Truth is simple!

The Great Transfer State

One of the blogs I track is Econompic. Today he had a post that shows the sheer fiscal insanity that has taken hold in the USA in recent years. This is the key graph in his article:

There is a component of personal outlays called Transfer Payments. What is a Transfer Payment and why should you care? Here is the simple definition:

In economics, a transfer payment (or government transfer or simply transfer) is a redistribution of income in the market system. These payments are considered to be nonexhaustive because they do not directly absorb resources or create output. Examples of certain transfer payments include welfare (financial aid)social security, and government subsidies for certain businesses (firms). (Source wikipedia.com)

Basically Transfer Payment is code word for government sponsored welfare.

Why should you care? The data indicates that from 2001 to 2007, the rate of government sponsored welfare tracked the growth of wages. That’s not a bad problem but I would expect better considering over this period of time the USA had a boom in employment. The root of that problem is: DECREASING taxes. This may shock you the reader since I am a fiscal conservative, but in my humble opinion, the broad tax reductions over the past 10 years were very unwise.

Second reason to care about this data, as if you need another? In the economic train wreck of 2008, wages fell through the floor due to unemployment, no surprise. But, transfer payments (aka government welfare) shot through the roof filling a huge gap between wages and personal outlay. Hence why the USA is racking up so much debt over the same period.

The problem is that both policies, tax reductions and massive handouts, are fiscally insane taken to their extremes as is the case over the past 10 years. Put them together and the nation is at a level of insanity that is going to destroy this country. This is the simple truth of our situation:

  • There will always be taxes, it is what funds the government that provides our liberties and secures our safety. Be thankful for it.
  • There is an inherent need for personal responsibility. By providing for yourself, you get the natural satisfaction from working with your hands that a welfare payment can NEVER provide.
Folks, the current dialog in the media and the country is a death spiral. To restore fiscal sanity is to say that some taxes are necessary at a level we need to operate as a free people. AND we need people to contribute productively and get off welfare. Both major political parties are to blame; there is currently no right side of this debate IMHO. If we don’t the sign at the border will read:

Welcome to the Great Transfer State of the United States of America, population YOU!

Mr President, seriously?

I understand politics well enough to see from a mile away the motives for moves like this one, and it makes me want to wretch every time. My beef with the president on his “move” is that it perpetuates a mindset:

  1. That people can be isolated from their choices…even when they don’t understand the choices
  2. Personal responsibility doesn’t exist, the government will protect me and fix it for me
  3. Financial common sense is a virtue that is to be punished instead of rewarded

http://news.yahoo.com/obamas-student-loan-debt-relief-plan-too-good-234242818.html

I don’t want to over-simplify the problem with Student Loans but why can’t people just speak the truth on these subjects instead of pacifying, pandering, and coddling?

I have room to speak authoritatively about this subject because in 2010 I finished my MBA and paid for it myself out of my own pocket. It’s no hidden secret that College is expensive and just this morning I saw the average cost increased by 8.3% last year alone! The problem will have to be attacked on both ends of the curve: the cost of education side AND the student education side!

Here is some basic Student Finance 101:

  1. Target a career post education and understand it’s basic structure of pay and benefits
  2. Estimate the costs of education to qualify you for the career you’d like
  3. Pick a college that fits your estimated costs
What I see far too often now days is this:
  1. I have no idea what I want to do as a career or what it takes to make a living
  2. Since I have no idea, that degree in Basket Weaving looks fun, let’s do that!
  3. I want to tell my friends I went to “CoolSchool U” now and later in life, I don’t care what it costs
And then you wonder why kids drop out of school as the reality of college cost sets in with no career in mind? Or they get out and then can’t find a job? We’re not giving our kids the skills to make intelligent choices based on FORESIGHT, UNDERSTANDING, and WISDOM! Mr President, please speak the truth about this problem and just maybe you can be taken seriously as the leader of the free world. Until then, you make us look like a Banana Republic that tries to change the rules of reality in an attempt to stay in power.

I could see that coming from a mile away

“I could see that coming from a mile away.” It’s cliche and hyperbole all in one! The phrase is often used when an obvious outcome reaches fruition. Sometimes you get lucky based on intuition with an outlook. But what separates the lucky from the good is the ability to use Strategic Analysis to cut through the “chatter” and see what really matters and then do that over and over again.

Now before those not interested in business click off the window, this is also a life principle. Instead of “Strategic Analysis” replace it in the above sentence with “Wisdom” and you have the same relationship and outcome. Wisdom provides the ability to see where others cannot. To project out in time with a reasonable confidence that an outcome will take place. Crazy thing is this as I’ve observed: people love Wisdom when it reaches a conclusion they like, but they despise Wisdom when it reaches a conclusion they don’t like. That is completely upside down thinking when you look at it objectively and hence why I do this blog.

Anyway, here’s a real world, bonafide case in action in the business world. Two years ago as I was having dinner with a colleague while on a trip in Germany, I whipped out my pen and drew this diagram on a napkin and then took 2 minutes to walk through the implications of what it means to the Semiconductor Test Equipment segment:


Given where the industry segment was at the time I said these are the following long range implications:

1) There will be industry consolidation of existing firms

2) The companies in the ditch must choose to stand toe-to-toe with the emerging “big guys” or become industry specialists

3) The industry has matured and with that the game is now about making money, not beating each other up through market share

So what’s happened over the last 2 years (and no, I’m not revising my memory or history, my colleague can attest to me saying this):

1) Two attempts at consolidation with the last one successful: Advantest buys Verigy. This leaves 2 big guys at the far right of the curve in the diagram above: Advantest and Teradyne. This principle is called the “Rule of 3” unless the market is clearly dominated or too small which can be revised to the “Rule of 2”.

2) There is one company, LTX Credence, that has been historically in the “ditch” for the past decade. They have a choice, become a specialist or languish with below average returns. The trouble with most Executives is that shrinking the firm in the course of specializing doesn’t align with their ego even if it means the outcome will result in making profit. So the bad news is that LTXC probably languishes with below average returns.And lo, you get headlines like this morning from them that their orders dropped off a cliff in the last quarter: http://www.forbes.com/sites/ericsavitz/2011/08/31/ltx-credence-issues-dire-fy-q1-guidance-shares-tumble/?partner=yahootix

3) Sometimes the hardest to rationalize is that an industry has reached maturity. I know this one from the inside given I grew up with the birth of modern technology era and innovation. Folks here’s a message for Tech Workers: the industries making up Tech have matured in general. The days of tabloid grabbing headlines are largely over, and it’s down to the day-to-day life of making healthy profit. The implications are harder to swallow though. No more “risky tech projects” with visions of huge gains. No more acceptance of an idea just because it sounds cool. Get used to having to rationally justify your ideas and projects in ways that show they MAKE MONEY! Hype and visions of grandeur will no longer sell ideas.

I’m no wizard at business but I did stay at a Holiday Inn. LOL! Actually, I just spent time gaining practical business wisdom and then applied it to a situation. See wisdom itself is not what’s hard, it’s the application of it to myself that is truly challenging.

How’s that change working out?

I really don’t like politics. To me politics is equivalent with selling snake oil. And recently as I was reading some proverbs I came across this one and reminded me why I didn’t buy into the fluff of the 2008 Presidential election cycle:

21 My son, fear the LORD and the king;
Do not associate with those who are given to change,
22 For their calamity will rise suddenly,
And who knows the ruin that comes from both of them?   Proverbs 24:21-22

There are several fallacies that I’ve learned over my years with the proposition that all we need to do is change.

Fallacy #1 – Change is better than perseverance and endurance

Fallacy #2 – Change is without risk or negative consequence

Fallacy #3 – Change is better than where we are today

Fallacy #4 – The change to state is “good” and the current situation is “bad”

Fallacy #5 – Principles don’t matter, all we need is a healthy dose of change

Make no mistake that there are times when change is necessary and required. However, a Progressive mentality that constant change is required to “advance” and improve ignores basic intuition that looking before leaping really does work out for the better.