The U.S. Economy following the November Election

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The U.S. Economy following the November Election I generally disagree with Rana Foroohar of Time magazine; we usually seem to see the world differently, perhaps through different lenses. In Foroohar (2012a), however, I find several points of agreement.

Foroohar (2012a) noted the bet made by Fed chairman Bernanke that implementing quantitative easing (QE), in both iterations, would be complemented by political moves to simplify the tax code and to improve the confidence and optimism of business leaders to invest in job creating activities. Instead, the Norquistians, who seem to dominate the Republicans in Washington, DC, and the Democrats, who seemingly never passed a course in finance or accounting, never mind a full business curriculum, continue to constipate the bowels of governance. Bilateral cooperation in 2012 seems to mean collaborating with anybody who agrees to do what I want, holding fast to some illusory ideal of no increases in revenue or decreases in the spending I want, in the embodiment of Voltaire’s perfection-as-the-enemy-of-the-good scenario.

As a result of the QE imbalance, US equities and corporate cash are at relative highs, while confidence, never mind certainty, in the direction of financial and economic policy remain at or near all time lows. Ironically, as Foroohar (2012a) observed, the beneficiaries are the wealthiest 10% who own 90% of U.S. equities, the very group the Democrats love to bash and resent. While commentators lament the stalemate in federal governance, the targets of proposed higher taxes are reaping the benefits. Ironically, as long as both sides rigidly stick to their platforms, the wealthy in the U.S., both individuals and institutions, gain. The losers are the sustainable economy and those praying for job creation, or are they?

Foroohar (2012b) noted a housing market recovery, improved consumer confidence, increased consumer spending, reduced delinquencies on credit cards, and lower mortgage debt, apparent indicators that the consumers in the lower 90% of the wealth continuum are also benefiting from the current economic condition. The question of sustainability, however, remains. Foroohar (2012b) pointed to lower-than-expected third-quarter earnings reported by industrial and tech corporations and artificially-low interest rates as indicators of unsustainability. Bernanke and the U.S. governance structures may have helped dodge a deeper recession but little they have collectively done and not done seems to be able to stimulate capital spending and hiring and more than seasonally-adjusted modest levels. If we can find some sustainability, perhaps a do-nothing Congress may emerge as a good thing, at least doing no harm.

References
Foroohar, R. (2012a, September 24). The S&P soars, the economy snores. Ben bankrolled stocks to boost demand. But what if the wealth effect doesn’t work? Time, 180(13), 24.

Foroohar, R. (2012b, November 5). The two-faced economy. Consumers are spending, corporations are not. Which group is getting it wrong? Time, 180(19), 21.

Solyndra and Innovation Support

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Michael Grunwald (2012) discussed Solyndra within the context of the appropriateness of government investment in innovation.  Conceptually, government support for innovation has a lengthy precedent.  What few pundits discuss is that the Solyndra loan under the stimulus plan represented 97.7% of all loans under the program made within the state of California, $535 million directly to Solyndra and $284 million to Rudolph & Sletten, a prominent green energy general contractor, as a subcontractor to Solyndra.  The balance of the loans in California went to government agencies and Native American entities.

Under the stimulus plan, California-based entities received more than 12,000 grants, most seemingly for infrastructure, research, or education projects.  The sheer scale of the stimulus program would seem to make the prospects for a “where are they now?” type of report.  Nearly three years after the receipt of many of these awards, an accounting of the taxpayers’ investments would be interesting and appropriate, even if an overwhelming undertaking.

Government support of innovation seems generally connected to new or newly emphasized policies.  In the Solyndra example, the policy was to support green energy in general and solar in particular.  Grunwald (2012) observed that the solar industry has grown dramatically since 2009.  The Solyndra example would seem, then, to have been a bad investment in an otherwise good industry for investment.

Individuals, governments, and investment firms, including venture capital, private equity, and angel groups, make bad investments every day, collectively that is.  Unless investment decisions are the result of some secret sauce or proprietary black box assessment that somehow produces above-market success rates and returns, any investor would be unwise to put all her or his proverbial eggs in one basket.  In the case of the US investment in Solyndra debt, the investment was 0.1% of the total portfolio of loans, grants, and contracts, certainly not an all-in-one-basket scenario.

Was Solyndra a bad investment of taxpayer money?  Certainly, if the standard is return on investment.  Was Solyndra an unwise allocation of risk capital?  No, since 0.1% of the portfolio would not seem to be over-allocation into one investment.  Was Solyndra risky?  Yes, but probably not any more risky, and possibly less risky, than other ventures at the same stage of development.  Should the Solyndra experience cause government decision makers to use a different assessment of innovation potential?  Probably, but the Solyndra failure should not become an excuse for governments to stop investing in innovation.  Early stage companies in innovative industries are risky investments; they always have been and always will be, and that is why investors demand and recieve the potential returns that they do.

References

Grunwald, M. (2012, August 27). Yes, more Solyndras. The solar company failed, but the decision to invest in it was the right one. Time, 180(8), Business 4.

Bain Capital and 1980s-vintage Management Consulting

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The discussion of Bain Capital provides an interesting backdrop to the first topic for this course. Bain Capital (2012) began in 1984 as the investment arm of management consulting firm Bain & Company. In 1984, I completed my MBA studies at Rutgers University’s Graduate School of Management and joined a management consulting firm to help that firm, not Bain, transition from their traditional expertise of scientific management and productivity improvement to process and quality improvement based on the principles of Deming, Juran, and numerous disciples. Consulting firms and their clients interested in improving operational and financial performance had one primary tool in their toolkit, productivity improvement leading to staff layoffs of, typically, 20-30%.

It seems easy to complain about companies buying companies or parts of companies and then reducing costs, often through labor reductions, in order to realize a profit on their investments.  Investment firms have an obligation to their investors to produce a positive return on their investments.  For many of the firms that Bain and others purchased, the alternative was closure; companies like Bain may not have been able to save every job but some organizations were able to survive as the result of significant changes in operations.  In some cases, however, the seller to the investment firm made out much better than the investment firm or the purchased company’s employees.

Productivity improvement from the 1950s through at least the middle of the 1980s had scientific management based on the work of Taylor, the Gilbreths, Emerson, and Henry Ford, among others. Work measurement and work management were common. Colleagues of mine from my early years of consulting would tell of consulting firms that would, as crude as it sounds, essentially take a list of people and simply mark every fifth one for termination. The consulting world still includes firms who offer little other than work measurement-based productivity improvement and resulting staff reductions. I knew the techniques, but my clients seemed to only need me to use them to optimize the use of staff without staff reductions.

Scientific management principles applied to manufacturing firms initially, most likely because manufacturing was the basis of the economy in the United States and Western Europe for much of the 1900s. I was director of operations for a productivity consulting firm that worked primarily for government and service organizations. We helped then-growing telecommunications companies determine how best to staff and organize hardware installation teams and customer service organizations. We helped government entities figure out how to handle rapidly-increasing work volumes without expanding staff, since tax revenues were not keeping pace with demand for services.

In the 27 years since I began my consulting career, automation has changed most work processes. The automation of processes relies significantly on the principles and practices of scientific management. Improvement of operational and financial performance, of efficiency and effectiveness and quality, and the reduction of waste in its many forms continue to keep the attention of managers and to be central to the conversation about improving business and government performance. It is easy to forget that scientific management is at the root, even today, of how organizations get better, including enhancing the value of shareholder equity.

Today’s tools often seem more sophisticated than those my colleagues and I had available in the 1980s.  However, a goal of investors continues to be a positive return on investment. Managers and executives, among their many and conflicting objectives, have an obligation to shareholders to improve performance and assure investors that investment in certain companies and industries is good and not utter folly.

References
Bain Capital (2012). About Bain Capital. Retrieved from http://www.baincapital.com/AboutBainCapital/Default.aspx

The American Divide – Causes or Effects?

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A fascinating read providing some insight into causes, or possible effects, of division in the United States. http://online.wsj.com/article/SB10001424052970204301404577170733817181646.html?mod=WSJ_WSJ_US_News_10_1

I’m not sure whether this article identifies causes or effects, but it seems clear that people who profess a religion, delay children until after marriage, stay married, and finish high school, if not college fare better economically than people who profess no faith or religion, have children outside of marriage, get divorced, and do not, at least, finish high school.  The article does not examine whether the more “traditional” lifestyle leads to more economic success or whether people who are more economically successful gravitate toward a more “traditional” lifestyle.  The presented facts are food for thought.

The demographic differences seem to suggest that, as the middle class experienced division since 1960, during a time of broad cultural change in the United States and elsewhere, two seemingly distinct cultures emerged.  These distinctions may help account for the increasing sense of division in U.S. society and among our elected officials, along with the increasing sense of polarization in general.  Whether these are causes or effects, what is the vision of leaders for addressing the causes and the effects?

Leadership and Innovation: Engines for Economic Recovery

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Two links, parts 1 and 2 of a lecture I gave to the University of Phoenix Leadership Colloquium.  500 doctoral learners and faculty from Phoenix’s School of Advanced Studies registered.  I have another 10-20 minutes of responses to questions posed during the lecture and am constructing a document drawn from online discussions during the week before and the week after the lecture.

 

Leadership and Innovation, Part 1 (10:31)

Leadership and Innovation, Part 2 (10:22)