Why I Like Slowdowns

It's no secret that fast growing markets are also immoral markets. When we spend wildly, we create wide vistas of selling opportunity. It's also not a secret that as market growth slows, those vistas shrink and with them, go a bunch of ideas that sit somewhere on a spectrum of mediocre to outlandish. Could the Escalade or the Credit Default Swap actually have been conceived had we not had a decade or more of decadence?

Rabid market exuberance produces superficiality in gross quantity. I won't begin to list nor will I pass judgment on the visible excesses of the years since the Dow passed 5000. I'm as guilty as the next. I counted no less than 7 iPods and 11 cellphone in my four person household yesterday. This post isn't about things we didn't or don't need. It's about what we need now.

Slowdowns are centering events. Slowdowns force us back to basics. Slowdowns don't just re-emphasize the things that matter, they remind us that in the end, value measured in quality of life is all there is. In that context, leaders are forced to listen and think, organizations are forced to change for the better, and teams see the clear power of collaboration.

Organic creativity is a natural outcome of destruction. At the end of the shaking and quaking of contracting markets are sparkling ideas, some new and some renewed, that improve lives. Consider the family picnic, where kids and parents toss a ball or play tag. Today, it may be a nostalgic rarity. But after a year or two of belt-tightening, you can be sure that parks will be packed, and families will be making memories. That's why I like slowdowns.

- Nicholas Hayes

Re-tooling Rules

Governments should step in to assist companies with retooling costs when it is a matter of strategic national interest. It was such a matter when auto makers become plane makers in World War II, and it well may be as SUV makers become Hybrid car and Train makers as we wean ourselves from oil imports and begin to fight climate change.

But let's be clear: this can't mean adding tooling --- it must mean re-tooling; tightly defined as the direct replacement of defunct lines and processes and the removal of related carrying costs. So it must not cover losses incurred from past poor management decisions. The mechanism for shedding these costs is clear and legal: it is Chapter 11.

So here's the order that we must follow:

1.) GM files for bankruptcy to shed its legacy costs and weak leadership
2.) The feds work with GM's new leadership to develop a real plan for lower energy transportation, and to agree on technologies and specific timeframes
3.) Re-tooling costs are shared -- with public monies treated as a capital infusion in return for equity.

The clear consequence is that retired auto workers are going to lose pensions and health care, and current workers may not have a place. Let's tackle issue one at a time. But let's also be honest:

Given where we are, it would be a terrible mistake to use the government to prop up obsolete production lines that are, in effect, counter to our strategic national interest. No American should play a role in the production of a gas guzzler, ever again.

Forget Consumer Confidence

Today's dominant headline shouts that consumer confidence has slumped and with it, goes the global economy. Breath deep; let's pause to consider that this event reveals a correctable flaw in how we measure growth and prosperity.

If your objective is to skim a few cents from many transactions, like many insurance companies, investment banks, or big box retailers, then of course, you can't afford to have the flow of those transactions slow much before you have to cut jobs.

But if your objective is to build a solid economic foundation that can withstand the ebb and flow of paper trades, you'll forever forget the idea of skimming and focus instead on value creation, with value measured as quality of life.

In this way of thinking, consumption isn't the engine of economic growth, it's just fuel for volatility. Debt-fueled consumption is counter to economic health because always carries dire long term consequences. Alternatively, the wise investor knows that debt is appropriate if it returns a higher quality of life in the future. We've become acutely aware of this concept in just the last two months. If we remain aware of it for a time, then we can plan for some realities:

• Oversupplied markets will shrink to their appropriate dimensions. We can afford fewer investment banks, for example.
• Actual measures of competitive advantage will apply. Fast, smart, long-lasting, purposeful products and services will always win. It's only in the last 10 or 15 years that lesser quality has been perceived to be better. This was always false.
• Good ideas in green, lean and local will come together in innovation hotspots and create new jobs. Expect a retooling from auto to Internet, infused to fresh, silos to collaboration. Manufacturers that stay put but reach out and remain flexible, and continue to solve real problems will emerge stronger.

Now is precisely the time to ignore consumer confidence, and instead focus on the positive outcomes that we know always emerge from austerity, discipline and real human energy, ingenuity and effort; outcomes like time, health, character, safety and comfort.

Obligation and the Social Safety Net

Americans are obsessed with taxes and welfare as if they are late-stage cancers. We’re wasting time worrying about the wrong things. It will take a generational view to see why, and what to do about it.

“Welfare” used to mean safety net. Today, “entitlement” is code-word for an addiction to welfare. This is not to say that welfare recipients don’t become welfare addicts. Some very well may.

Just 50 years ago, white Americans of Western European descent received most welfare. Just home after having been drafted into WWII and without much means, they were showered with housing, transportation, food and educational assistance supplied by the government and paid for with tax dollars. In time, they moved from housing projects to houses; from schools to jobs; from poverty to players in the first wave of the greatest productivity and prosperity explosion ever. They spring-boarded off of a strong social safety net to become the largest and most influential middle class in human history, responsible for building more industry, commerce, public infrastructure and valued social institutions like schools, parks and hospitals than had ever been amassed before.

Then their kids inherited the most powerful nation on earth and became the taxpayers.

Many of us boomers didn’t need the GI bill, public housing or food stamps. But we all received more free education than anyone in the world from the largest public primary and secondary school systems ever created. With mass literacy we became the largest upper middle class population in human history, bringing the second wave of economic growth to modern America.

Along the way we changed our minds about welfare. As upward mobility and the automobile left urban areas to decay, apathy towards public infrastructure morphed into anti-tax, anti-entitlement supply side conservatism. “I am not going to pay taxes so that black woman in the city can have more babies.”

Since addiction is unlikely without ample supply of the addictive substance, it’s logical to try to shut of supply. This doesn’t change the biology of addiction, it just starves the addict. Breaking the grip of an addiction requires that the addict demand something else, like time free of the vice. Any alcoholic can tell you that.

Had we denied vets a bit of help after the war, we’d not have inherited such prosperity. America needed welfare then to stay whole, and somehow its recipients avoided mass addiction. How?

Having looked into the face of evil as a nation, most Americans of the period recognized the privilege of time on this planet. They put welfare into perspective, treating it as a tool for buying a bit of time, nothing more. They used it like micro-financing during formative years to become things bigger, like workers, teachers and entrepreneurs.

Having bypassed life-affirming experiences like migration, war and living in poverty, we affluent boomers built fences along urban boundaries in fear for our things, leaving impoverished boomers with nothing but welfare. It is impossible to share hope remotely, so welfare became a lifestyle, instead of a life saver.

But we boomers are addicts too, not of welfare but of consumption, which demands cash. Our addiction crosses economic, racial and political lines. Consider that under both parties in the last 25 years, we’ve manipulated our financial markets to flame boomer consumption addiction. Taxation would seem to be an effective supply side solution to the problem, but that would threaten our addiction and is scary. Republicans have made the most of our fear by adopting Reagan’s main talking point that all taxes are bad, and in return, we’ve given Republicans the most power to make policy. When waves of us reach an age too old to work and having spent beyond our means during most of our lives, the last nets, social security and medicare, will be too thin too be useful for anything. This is going to be one wild detox.

Now we’re about two-thirds complete dismantling the American social safety net by starving it. We remain overtly racist and tax averse. The idea of diversity has been marginalized to mean bringing low skilled workers to fill jobs we don’t want. Instead of spreading lessons of opportunity in inclusive neighborhoods, we build gated neighborhoods and leave the old ones to rot. We are bankrupting our public schools and locking the public out of our new schools. We have imploding infrastructure and no hopes of fixing it. We know that most tax dollars go to pay the costs of the military/industrial complex and to debt service, but our conversation about spending invariably reverts to an overheated debate over which weak program to fund or not. The population is aging and will become less productive later in life. And our leaders have been spineless.

Welfare and the taxes collected to support it are not now and never were the root of our problems. Of course, welfare addiction is bad, but it is just a symptom of a dysfunctional society. Contrary to conservative claims, we are not failing because of welfare and taxes, we are failing because we stopped making smart investments in the character and capability of our young people, and promoted only a life of lifelong consumption, and now we can’t quit. We won’t agree to invest in America again until we break the American consumption addiction, which is much more powerful and sinister than the welfare addiction ever was. Taking a lesson from our parents and grandparents, we will do this only when we recognize individually and collectively that time is vastly more important than the things we collect.

I hoped that this would be the mass response to 9/11. But since, we’ve engaged in a war without consequence while consuming as if our resources and our time were infinite. In fact, 9/11 was our best modern opportunity to see the fleeting privilege of life and to stop wasting. I wonder what the next opportunity will look like. Will it have to be a catastrophe? Or can smart leaders shape good policy? 

Taking a lesson from the very best in American history, there are a few basic guidelines that we must agree to before we can move forward.

1.) There is no society without a safety net. This debate isn’t about addiction or entitlements; it is about the agreement we make with each other as citizens that we are better together than apart.

2.) Any safety net we create should invest in the young and spread risk amongst the old, nothing more. A balanced approach acknowledges the special needs of people at different times of life. If our children land in a net, we want them to leap back out with more resources, lessons and tools. Early in life the net is there for the propel the person. Later in life the net is there to defend the society.

3.) There should be no war without a draft. If we share a net, we share responsibility to protect it. When we go to war, it is in defense of our national ideology. If as individuals, we are to have access to the net, as individuals we must hold it up for others. Conversely, when our votes are votes for or against warring, then they mean much more than a term.

Our only entitlement is time. When we reach the shared understanding that our time is a privilege, we will protect it as individuals and in the whole.

###

Facts about plumbing and taxes

And so the election brings us to Joe the plumber. Given the talk about his potential to be amongst the nation’s highest earners, let’s check the probabilities using public data. I’ve downloaded the most recent market reports for plumbing companies from Dunn and Bradstreet and done some quick analysis.

Joe is one of about 950K plumbing workers in the United States, working at one of about 140K firms, with an average revenue per employee of about $110K each. Plumbers sell their time and some materials in return for doing some work, like fitting pipes or valves in a building. Smaller firms have smaller per/employee revenues, because they don’t share expenses like marketing and administration. The average sole proprietor plumber sells $87K in work, and might report $44K in earnings on his taxes before deductions. A plumbing company with two or three employees would typically provide between $180K and 270K in work, and split between $80 to $130K in earnings between the workers and owners, that they, in turn, would report as taxable earnings before deductions.

Since plumbing is a service business requiring skilled labor to create revenues, it takes lots of employees and lots of work to rack up meaningful business profits. A plumber turned investor must dispatch at least 25 plumbers to do at least $1.8M in work in order to yield $250K in business income. Given the count and ratio of large to small plumbing companies, the chances are 1:20 that this would happen. Accounting for deductions, fewer than 2% of all plumbing companies in the US have a chance to break the $250K profit threshold.

Furthermore, accounting for the ratio of owners to workers, and with insights from D&B into revenue and profit-per-employee, we can also estimate how many people have the potential to share in the profits that come from plumbing. Indeed, all plumbers in the US account for $1.7 billion in work, but net a mere $67 million in taxable earnings before deductions. Assuming these profits are split evenly between shareholders (which they are not), there can only be a maximum of 272 people who earn as much as $250K from plumbing activities in all of the United States.

So Joe’s chances of breaking the magical threshold of $250K in taxable earnings are somewhat less than 3:10000. If he does it he will have outperformed 99.96% of all the country’s plumbers.

What we know about Joe is that it is very unlikely that he’s pulled off such a trick. Moreover, given his odds, I’d suggest that he has much more to worry about today than the taxes he’ll pay on profits he dreams he’ll see in the future.

What happens if we don't bail-out?

This long time liberal wants the free market to be allowed to work. In my scenario, the exurb houses that shouldn't have been built using debt that shouldn't have been extended would be disassembled, the materials and land recovered and returned to proper use. Families would combine, two incomes might have to shrink to one, and the populations of weak victims of sinister, but dependent predators would naturally decline. Fewer cars, local food, better relationships, healthier life. The consequences of greed would play out, as they should, with lessons learned.

Banks Lobby for Bailout to Cover Any/All Risk

This is corporate welfare addiction run amok. Write your Senator/Congressperson and tell them to stop the madness, now.

http://www.nytimes.com/2008/09/22/business/22lobby.html?ex=1379822400&en=d9766c390cbb1bbf&ei=5124&partner=permalink&exprod=permalink

No bailout. It's time to face the real consequences of our ignorance and greed.

More on drilling

The BBC reports cites USGS/DOE estimates of 18B total barrels of oil under US soil or water. (Everything we could drill from now to the end of time.)

OPEC estimates '08 world consumption at 87M barrels a day.

So if we drilled and tapped everything, we'd have 207 days of world oil supply. If we didn't share any, we'd have two years worth.

I'm gettin' my shovel.

Drilling vs. Regulation

The debate over whether to lift the moratorium on offshore drilling is more about how we view regulation and markets than about pump-price. We have come to hate government with such rage that we're tripping over ourselves as the wool drops lower over our eyes.

The Bush administration is charging that the moratorium is the cause of spiking prices, when in fact there isn't even a loose correlation. For example, Florida's shelf holds natural gas, not sweet crude, and then only about a six month supply. Drilling there won't make a dent. You can make a similar case for each hotspot: California, Alaska, etc. Furthermore, when the moratorium was put into effect by Bush Senior, gas prices actually declined and stayed low for a decade afterwards. The rules and the price are unrelated.

Of course, today's high price is the result of growing demand from new customers in China and India. Consider that oil prices began to climb from their late '90's low at about the same time that China became a net-net importer (~2001). SUV's didn't help much either.

However, the visible demand curve has also attracted speculation, and that has exaggerated the recent sharp run-up. Of course, any smart futures buyer would have to have been in oil in the last 8 years (in a big way). It is their right to do so in a free commodities market. (Says one report: "As the dollar declines, commodities — including oil — attract investors. [It is] both a hedge against a weakening dollar and an investment vehicle that could yield substantial profit.") But in an election year, McCain has smugly suggested that we ought to tie the hands of these folks with some new rules.

My liberal friends are in turn asking "Why is a rule to protect the environment a bad one, and a rule to restrict a smart investment a good one?" In theory, conservatives should be thrilled that investors are free to run up prices.

... Say "Baaahh", 'cuz here comes the wool....

In fact they are: all energy prices have reached levels where producers can make a buck even on the most expensive and risky sources, including volatile Nigeria, and better yet, blissful Pensacola. So while McCain and Bush are telling us to be mad at government for making it hard to be energy-independent, what they are doing is easing the way for the energy companies to take a bit more, addiction-cure be damned.

Helmsley's Sad Legacy

Re: the woman's pitiful 5B donation to dogs.

All we know about domestic dog behavior is that they get what they need (strength in numbers, discipline and affection) from their human (surrogate) pack. Money usually confuses a dog's life, because the outcome of spending (doggy daycare, rescue centers and animal treatment clinics) confuses natural pack roles. We can be sure that some of the happiest dogs are the mangy ones hanging with the homeless. I love my pooch, but the folks celebrating this as a big win are a sad bunch. Sadder, of course, is the lost opportunity for any tangible good coming from this person's time on earth.

Brooks on debt

Sometimes Brooks is brilliant. Other times, he completely misses the point. Here's one such time. Credit card debt isn't a values issue, solved by PR. It's a market breakdown, solved by practical public policy. Debt correlates to deregulation. Deregulation correlates to GOP power.

Earth day realities

Do we help the Earth when we lower the household thermostat? Here is a simple analysis of our heating bill from January (Milwaukee weather, mind you).

• We lowered our target temp from 63 to 60F, about a 5% reduction...
• ... the average outside temp in January was 5 degrees higher than the year prior (16F in '07, 21 in '08)...
• ... resulting in a decrease of 17% in heating degrees required...
• ...which returned a 31% reduction in natural gas purchased.

Good news, right? For our bill, yes. For the Earth, maybe, maybe not. That depends on what you do with the windfall. By reducing our household consumption, we put downward pressure on the price of natural gas, which in turn makes it easier for others to buy and consume. So are we really winning or just shifting, even accelerating the burn?

As my economist friend points out, my limits are useless in isolation. Everyone (yes, everyone) has to do it too. The biggest energy challenge of our time will be universal conservation. First, Americans will have to agree to limits. Are you ready for 60 degrees (or 78 in the summer)? Then, who's going to tell the Chinese that they can't do what we've done for 80 years?

Happy Earth day. Buy a sweater.