Hikes and Massages may be harmful to you

After giving my presentation (with the arcane title "Supply Chain Integration as a Marketing Lever: An Enhanced Conceptual Model for Customer Relationship Management") at the NARTS conference, I drove to the Phoenix Mountains with the intention of running a few miles up the mountain. However, as soon as I started running, there appeared before me a hiking trail with a couple of people of people starting the journey. I abandoned my running and decided to hike the trail. After reaching close to the summit point, realization dawned that a) running a few miles is quite different from hiking, b)I was in no physical shape to undertake a hike of this sort, c) I should have gathered data about the trail and got the right tools (shoes) before the hike. After completing the hike I read about it and found that it was one of the steepest and most strenuous hikes in the country (4 stars).
These are the lessons that are applicable to the U.S. economy and its population at large. As Andy Grove of Intel might put it, the economy and the standard of living are at an 'inflection point.' Given the daily dose of bleak news about the economy, some of my students and friends keep suffering from anxiety attacks and ask me to prognosticate about the immediate future. While recognizing that I might appear sillier than any Wodehousian villain, I will lay out in the next few posts a few ways of looking at the 'landscape' ahead and figuring out whether the country is prepared for the 'strenuous hike' ahead. However, there is good reason to tell any forecaster to 'take a hike.' To make forecasts with some level of confidence, one needs data, clean data. Unfortunately, we have to rely on public (and sometimes private) agencies for quite a few economic numbers. Often, these numbers are massaged, some by statisticians, some by bureaucrats and some by politicians. This will be the subject of the next post.

History of an "Ownership Society"

A few weeks ago, a student in my class commented that all the history courses she took were very limited because they all seemed to end with World War II or earlier. Other students chimed in- it appeared that stuff that happened in the recent past was of no historical relevance. As this was in my business course, I decided to give them a ten minute education on recent history related to the economy- the past fifteen years.

• 1992-1993 Beginning of the widespread use of the browser- we really need to thank Marc Andreessen and his buddies at U of I for making this blog and everything else on the Internet accessible so easily.
• 1992-2000 Massive (over) investments in technologies, esp. Communications, and Finance. This can be looked at as pulling future investment 'into' the present, thus forcing reduced investment in the future (reversion to the mean effect).
• 2001-2002 Reality check. Dawned on investors that some investments made above will never pay off, and some would take many years. Collapse of investment.
  9/11- collapse of travel.
  Recession.
  Job Losses, especially the higher paying high tech ones.
  Outsourcing of tech (part of the payoff from capital investments in 1992-2000).
  
• 2003 - 2Q 2007: President George Bush's two part response- Iraq War and Create an 'Ownership' Society.
  Shift the gains from wage earners to 'owner-investors.'
  Fed Chair Greenspan responds by lowering interest rates to 1% in July 2003. Became very cheap to borrow money, both for individuals and institutions.
  Reduced regulatory environment and lax enforcement made it very easy to borrow and lend money.
  Tax code changed to significantly benefit investors and owners- shifting the burden to wage-earners.
  Tougher bankruptcy laws made it more favorable for lendors.
  Massive borrowing to finance housing and other needs, as opposed to funding from savings.
  Spawns asset bubbles- Housing Bubble, Real Estate bubble, Stock Market Bubble, Commodities bubble, etc.
  Lower interest rates, with higher global demand, spawns inflation
  
• 2005-2007 Fed responds by raising rates trying to lower inflation
• 1Q 2007-3Q 2007 Cheap money not available. Borrowing to finance spending becomes difficult.
  Job Losses
• 3Q 2007 to present. Fed dramatically lowers rates and puts in other extra-ordinary measures to make it easier to 'borrow.'
  Assets being repriced.
  Ownership (that arose from borrowing) being reduced.
  

Next step is to take a stab at the future- that's for another blog.

PAC your problems- Look through RBV Lenses

PAC = Partition and Conquer; RBV = Resource-Based View

Doc has made an intriguing comment on my last post, referencing a resourcer-resource mismatch and the efforts of the affected to reach the resource in a quicker, better and efficient manner. This broad topic can be explored in many ways.
An Operations Researcher like myself looks at the world through a 'Resource-Based View' lens- or RBV. To him, the world (or the individual) has finite (often scarce) resources that have to be allocated so as to maximize (or minimize) certain objective functions. Often there are constraints on these resources, so this view is also referred to as Constraint Based Optimization (CBO).
At an institutional level, taking this view and using the PAC (partition and conquer) approach to the bigger problems has resulted in solutions that may be locally optimal for certain groups or individuals but are far from being optimal in a broader social sense.
As an example, by a number of estimates the world food supply in the recent past has been more than sufficient to feed the entire world population, but clearly dire hunger exists in several parts of the U.S., not to mention other countries. This resource has been allocated 'optimally' or dismally, depending on who's asked. Currently the shift by farmers to planting corn for ethanol is 'optimal' for one constituency, painful for another. There are plenty of lung surfactant drugs available to treat babies born with small lungs, but still babies die because of lack of access or affordability. OTOH Bill Gates decided that the optimal way to 'consume' his resources is through not-for-profit socially benefiting activities.

For an individual to get access to a resource he/she needs another resource to exchange or substitute, and information about resource availability and costs. Information asymmetry can distort resource constraints and allocation and deployment, but at the end of the day, it is the objective function- what we want to maximize or minimize, that matters. To that end, universal access to information and the education to process that information is, IMHO, the only long-term solution. Part of the education is 'social justice.'

An enjoyable and interesting book: Animal, Vegetable, Miracle: A Year of Food Life
by Barbara Kingsolver et al.

Education in America- An Article I wrote on January 25, 2007

Reports of potential employers and educators expressing serious concern at the skill levels of our high school and college students and their inadequate preparation for professional life are appearing with increasing frequency. A report[i] released on Oct. 2 by a consortium of business research organizations states that “The future U.S. workforce is here—and it is woefully ill-prepared for the demands of today’s (and tomorrow’s) workplace.” While this is a serious issue, a more ominous one is the preparation of today’s youth to be the ‘public’ citizens of the future. The youth of today are learning from the examples set by their parents, business leaders, politicians, educators and the like- examples that stand out for their notoriety.

A recent study[ii] found that 56% of graduate business students admitted to cheating one or more times in the past academic year, compared to 47% of nonbusiness students. Other reports indicate that acts of academic dishonesty, including cheating, are common in colleges and universities. On December 3, 2006, Columbia's Graduate School of Journalism announced that it was investigating charges of academic misconduct, i.e. cheating, in the final exam for the required ethics course "Critical Issues in Journalism." Before vilifying the students, the American public at large needs to examine its own acts, and the way it rewards positive and negative behaviors and actions. It is also imperative to remember that a “corporation” is a legal entity, and the actions of a corporation are always performed by people. Here are a few examples.

1. On January 2, a New York subway rider, Wesley Autrey, jumped onto the tracks of the New York Subway to save a man’s life from an oncoming train. He later pointed out that while many people were present, only he and two women aided the distressed person. He was later rewarded with the Bronze Medallion, New York City’s highest civilian honor, by the Mayor. Donald Trump cashed in on some publicity by giving a gift of $10,000, and a few others made other gifts to Mr. Autrey, a true hero.
On the other hand, on January 3, the Board of Directors of Home Depot Inc., removed Robert Nardelli from the Chief Executive Officer position for poor performance. After paying him $225 million during his six-years as the CEO, the Board gave him a farewell gift of $210 million as part of his separation package. Pfizer Inc.'s Board asked its CEO, Henry (Hank) McKinnell, to take “an early retirement,” in part because Pfizer’s stock price declined more than 40% when the market was up . However, the Board gave him a retirement package valued at more than $180 million as a farewell gift.

2. President Bush, in his address to the Nation on January 10, said “The situation in Iraq is unacceptable to the American people -- and it is unacceptable to me. …Where mistakes have been made, the responsibility rests with me.” Without saying that mistakes have been made, it is unclear as to what he meant by the statement “the responsibility rests with me.” Taking responsibility means paying a personal price for a person’s actions. For instance, on Mar 14, 2006, South Korean Prime Minister Lee Hae-chan resigned because he accepted responsibility for playing golf at a time when the country’s rail workers were on strike.

3. In the same January 10 speech, Bush reminded people that “The year ahead will demand more patience, sacrifice, and resolve.” While the families of those serving in the armed forces have demonstrated plenty of patience and sacrifice , the President’s sacrifices are unknown, as yet. Of course, he has taken more than 330 vacation days during his tenure, including an extended retreat at his Texas ranch last year which Hurricane Katrina rudely cut short. President Bush, based on public reports, apparently does not even sacrifice his sleep.

4. In a December 29, 2006 SEC filing, Apple Computer Inc. disclosed that records were falsified to support a 2001 options grant to its CEO Steve Jobs of 7.5 million shares. Apple disclosed that this grant was ``improperly recorded as occurring at a special board meeting on Oct. 19, 2001. Such a board meeting did not occur.'' The Company recognized total additional non-cash stock-based compensation expense of $84 million after tax, including $4 million and $7 million in fiscal years 2006 and 2005 respectively. In addition, the company reported that “although the investigation found that CEO Steve Jobs was aware or recommended the selection of some favorable grant dates, he did not receive or financially benefit from these grants or appreciate the accounting implications.” It does not seem to matter that a person who made hundreds of millions by exercising stock options is not expected to know the immorality of “backdating” options, or appreciate the accounting mischief. Apple has cleared him of wrongdoing, and the shareholders have bid up Apple’s stock price to an all time high.

5. On January 9, 2007, Lou Dobbs railed against Venezuelan President Hugo Chavez on his Lou Dobbs Tonight show on CNN. In a piece titled a “Leftist Menace” he said that “Venezuela's leftist president, Hugo Chavez, takes a major step toward socialism with his plans to nationalize two key industries in his country.” Earlier, President Chavez had said that he would consider nationalizing Venezuela's electrical and telecommunications assets because they "ought to be the property of the Venezuelan nation." Ironically, a little later in the same broadcast, Mr. Dobbs severely criticized state governments, including New Jersey and its governor John Corzine, for selling state toll ways to private interests. He claimed that these assets belonged to the ‘American people.” Of course, Mr. Dobbs does not call himself a socialist or a “leftist menace” for suggesting government control of assets.

America’s future depends on its youth. It is vital that parents, politicians, businesspeople, teachers, and others collectively educate them, with personal examples, to engage in broader intellectual discourse than to just apply labels, and reward them for socially positive behaviors.

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[i] Report titled “Are They Really Ready To Work? Employers’ Perspectives on the Basic Knowledge and Applied Skills of New Entrants to the 21st Century U.S. Workforce.” Published Oct. 2, 2006 by The Conference Board, Corporate Voices for Working Families, the Partnership for 21st Century Skills, and the Society for Human Resource Management.

[ii] Paper titled "Academic Dishonesty in Graduate Business Programs: Prevalence, Causes, & Proposed Action,” by Trevino, Linda., et al, to be published in an upcoming issue of the Academy of Management Learning and Education.