21st Century Economics

Baby Boomers - The Real Cause Of Our High Taxes 

If you tilt your head to one side and stand on one foot, you might see what some have seen - that Baby Boomers are the cause of our high and rising federal and State taxes.  More importantly, Vermont may be the harbinger of what is in store for the entire nation over the next two decades. 

Between 1946 and 1964, approximately 78 million babies were born and America would never be the same again.  Even before the boomers began paying taxes, the government was spending a lot of money on taking care of them.  More elementary schools were built in 1957 than any other year, before or since.  In 1967, more high schools were built than any other year, before or since.  From 1965 to 1975, 743 new colleges were opened and the college student population rose from 3.2 million to over 9 million.  During this same time, the average school enrollment for all schools rose by more than 500%.  All that cost a lot of money and started a trend that continued, as the boomers grew older. (1)

As the boomers moved into their peak earning years from age 24 to 55, the economy exploded and taxes poured into the State and federal governments.  Annual federal budgets rose from $478 billion in 1978 to an estimated $2.5 trillion for the budget now being developed for 2008. (2)

More money came into the government coffers from other sources.  In 1977, $39 billion excess dollars were paid into social security.  By 2006, when the median age of the boomers was 51, the annual excess payments rose to $1.99 trillion.  These excess payments are spent each year without regard for the future debt created to the soon-to-retire boomers – estimated to be $2.5 trillion per year by 2075. (3, 4)

Spending all that boomer paid tax revenue is what our government does best and they spent every last penny collected - $19 trillion between 1993 and 2003.  Then they spent all the excess social security contributions – $14 trillion between 1993 and 2006.  Then they continued to spend far more than was collected for 36 of the past 40 years - accumulating and additional $8.7 trillion in public debt. 

This massive influx of tax revenue paid for more and more welfare, healthcare and entitlement programs and infrastructure changes.  Today’s government paid (with tax revenue) healthcare has risen 700% from 1980 levels.  Total annual welfare rose from 6,400% from 1965 to FY2005 costing cost taxpayers $8.29 trillion (in 2000 dollars).   As the boomer tax revenue rose, the spending spree extended to hundreds of small programs.  Dairy Subsidies rose 673% and soybean subsidies are up 501% between 1998 and 2003. (5)

All this available money has established a pattern of massive spending that has pervaded our government and our cultural attitudes for more than five decades.  An entire generation has grown up with a lifetime of increasing benefits paid for by the government.  History has shown that such spending attitudes have a momentum of their own.  It is hard for our politicians to stop or even slow the spending.  It is harder for the aging boomers to reassume the responsibility for paying for what has been provided by the government for their entire lives.  So the spending continues.

The problem is that beginning now and for the next two decades, we will see the boomers moving out of their peak earning years and their peak tax paying years.  Tax revenues will decline but those persistent welfare, healthcare and entitlement programs and infrastructure changes will remain, costing us long term commitments of increased administration, maintenance and operating costs.  And soon the retiring boomers will compound the spending with demands for large increases for Medicare, Medicaid, Social Security, Veterans Assistance and other costs.

Vermont has one of the smallest and oldest populations in the entire US and will see more people retiring earlier than most states.  Our unique demographics magnify this pattern of spending and make us more sensitive to the effects of lowered tax revenue and higher medical costs from the retiring boomers.

For a large and growing population, the burden of our taxes outweighs the benefits of the government programs.  It will take a significant effort by our government to slow or reverse a generation of spending.  It will take a larger effort for the public to give up on the extravagant, noble and excessive benefits of that spending – but we have to try.

References

1              Digest of Education Statistics, 1998, National Center for Education Statistics

2              Data from the Office of Management and Budget

3                Congressional Budget Office, Long Range Fiscal Policy Brief #9 July 1, 2003

4.                Congressional Budget Office, Long Range Fiscal Policy Brief #2 July 3, 2002

5.                Backgrounder Report #1710, Heritage Foundation, Dec. 3, 2003 by Brian Riedl    

  It is a little known fact that Yogi Beri is one of this nation’s best business philosophers.  Although often misunderstood by the layman, his insights and profound understanding of business are so deep that his writings have been compared to the explicit quatrains of Nostradamus or the precision of Salman Rushdie.  His writings and quotations, in fact, combine the very essence of true philosophical malapropisms, Colemanballs and modern mondegreens.  In my humble way, I’d like to share some of the genius of this icon of wisdom and insight.

“You can observe a lot just by watching.” As in most of Yogi’s obiter dicta, he emphasizes the difference between the common use of words and their literal meaning.  “Observe”, in this use, refers to the recognition of what is happening around us.  In business, this is profound when applied to observing the behavior of customers and the competition.  The enormous consulting and analysis business of Customer Relationship Management (CRM) has its basis in this simple Yogi-ism.

 “Even if you’re on the right track, you’ll get run over if you just sit there.”   Although sometimes credited to another great paronomastic master, Will Rogers, it is generally agreed that if Yogi did not say this, he might have.  Yogi’s intent in this thought was originally based on his profound insights into the declining railroad industry but he quickly imagined its application to every business and industry.  As a result, we now generally recognize that without a continuous effort in innovation and growth, the essence of market competition, a business will quickly lose market share and experience declining sales. 

“If you don’t know where you are going, you will wind up somewhere else.”   Yogi modernized and simplified this wisdom that dates back to 470 BCE when the Chinese philosopher Confucius observed. “Any man can make long journey, takes smart man to know which direction”.  Even more profound is that there is no evidence to show that Yogi copied this from Confucius – he developed it independently!  The whole industry of business process analysis, workflow management and strategic planning has evolved from this analect.

“Yeah, but we’re making great time!”  A response by Yogi when asked, “Are we lost?”.  He was, of course, speaking of the corollary to the two above observations, to point out the difference between business activity and progress, between productivity and efficiency and between effort and effectiveness.  He so rightly commented that business is a journey, not a destination and when you arrive, you’re there but you always have to keep moving so you can get there otherwise you’ll get run over by those that have arrived.

  “If you can’t imitate him, don’t copy him.”         Recognized as one of the most informed and perceptive academians in modern times is Michael Porter, the Harvard Business School professor.  Although he modestly has never admitted this, if he did, he would probably give credit to Yogi for most of his recognition as one of the most influential management and strategy thinkers.  Professor Porter now teaches what Yogi was, of course, referring to: differentiation from your competition as the cornerstone of marketing position and sustainable competitive advantage.  Virtually every agency and consultant in the marketing Mecca of the world, Madison Avenue, owes his or her very existence to Yogi. 

“I never blame myself when I’m not hitting. I just blame the bat, and if it keeps up, I change bats.”  Yogi was a master of the ironic subtleties that are so effective at teaching lessons about business.  Here, it is clear that he is making fun of those managers that can’t assume responsibility or accurately define cause and effect in management decisions.  Out of this observation and its obvious extrapolations, an entire industry of decision support and risk analysis has grown.  That industry’s methods and techniques are critical to the discovery and definition of the root cause of a management or business problem – perhaps one of the least understood aspects of improvement analysis and planning.  Unfortunately, the complexity of his thinking and subtlety of his expression caused some people to interpret this prima facie and corrupted it to mean what it says instead of its intent.  The financial industry has adopted this misguided interpretation as the hallmark of their investment strategy proving that sometimes even the best wisdom is not the wisest. 

“If you come to a fork in the road, take it.”    Of course his most famous quote needs no explanation because it so clearly describes the true secret to business success. 

Yogi Berra is as wise as he is a great philosopher.  His observations will forever be the visions we all could have if we saw it his way.  Everything I have written about him is true or should be.

References:  Wikipedia at http://en.wikipedia.org., facts not found in Wikipedia, aren’t.

Future Customers, Employees and the Economy 

It is prudent for any business, large or small, to look ahead at what might change in the future so they can prepare today.  Not having a crystal ball, I tend to look at the mega-trends and intuitively obvious changes and their consequences.  Here are three that you might consider:

The predictable whiplash from the Bush-Oil-Big Business Axis of Corruption will undoubtedly result in a more “green” oriented federal government that will be more environmentally friendly, small business oriented and more protective of personal and privacy rights.  Combined with a greater awareness of the global warming issue, the sales of energy efficient appliances, energy reduction construction, alternate energy heating and cooling and other energy and environmentally friendly products and services will thrive in this new economy.  Solar panels, solar heating, home insulation, metal roofs, hybrid cars, thermal windows and other similar products will experience record sales over the next decade.  Big cars, luxury boats, huge houses and other big energy users could very well face tax penalties and fees to discourage their purchase.   The federal tax breaks and tax penalties will filter down to local governments and into commercial sales.  If you can wait, some major expenses may have better tax advantages in 2010 than now.

Here come the Boomers!  Age Power!  With 32% of the Vermont population being baby boomers (third highest in the nation), we will feel the effects of the boomers sooner and to a greater degree than most states.  This is good and bad.  Their vast numbers will dominate politics, marketing, sales, jobs, styles and design.  Their large numbers will also put a burden on public and welfare services and health care.  With an annual spending power of $2.1 trillion, the boomers will have a powerful impact on the economy but they will have very specific preferences for goods and services.  The good news for Vermont is that travel, resort services and vacation spending will rise significantly over the next two decades.  Financial and medical services will thrive.  However, new car sales will flatten or decline slightly.  Real estate sales will take a marked decline as large and second boomer homes are put on the market at a time when the quantity of buyers will decline even faster.  Many boomers will have to work to fund their longer-than-expected retirement and lack of savings in their working years.  The good news is that boomers will make good employees – mature, good work ethic, honest.  The bad news is that they may drive up employee medical expenses.  Vermont businesses would be prudent to examine how to best cope with this inevitable change by planning inventory changes, store access improvements, new marketing methods and employment. 

Technology is also a major force in shaping our world.  Robotics have replaced thousands of assembly-line workers in factories.  Automation and computers have eliminated thousands of other jobs in almost every industry and business.  The speed of computers and the improving ability and efficiency of the human-computer interface is making it more and more possible to replace humans in most “left-brain” jobs.  Any job that is based on a set of rules that is logical, sequential, rational, and analytical or objective can be performed by a software program.  When you think about it, that is a surprisingly long list.  Jobs like ATM bank transactions, telephone operators, self-service checkout at stores, GPS navigation, assembly-line workers have already been automated.  Designers are planning driverless cars, pilotless aircraft and banks and courthouses without people.   A great deal of accounting, sales, medical and financial services are already automated with more coming.  In the military, we now have UAV’s (unmanned aerial vehicles), autonomous weapons and robotic combat vehicles.  By contrast, right-brained jobs are in high demand and growing.  Jobs that involve imagination, synthesis of ideas, and subjective views will thrive in the future.  These are jobs that cannot easily be programmed.  These jobs include artistic design, music composition, writing, dance, theatre, architecture, design and marketing.  These are jobs that involve innovation of ideas and solutions and to the application of new concepts in a holistic, intuitive and sometimes random manner.  Lots of businesses are now creating job positions with titles like envisioneer, design strategist, marketing coordinator and creative engineer.  It might be time for your business to consider institutionalizing thinking outside the box.

Remember, “It is not the strongest of the species that survives, nor the most intelligent, but the one most responsive to change”, Charles Darwin.

The 21^st Century Business Model  

Here in Vermont, we spend a lot of time and effort holding on to “the good old days”.  Its nice to walk into a local store where you know all the sales people and the owner by their first names and they all know you.  Mostly because of that, we don’t mind that the store’s inventory is not as large and prices are not quite as low as the mega-mart over in the big city mostly because of that good old fashion Vermont service.  This is a 20^th Century business model that is coming under increasing pressure to change.

Part of that change is that the growing use of computers and the internet is making it more and more possible for people to shop almost anywhere in the world for almost anything they need or want and at prices to which most store-front sellers can’t compete.  Even without the competition of a nearby mega-mart big-box store, the global economy will eventually affect most merchants and many service industries.

One way to address some of that competition is to go online.  Nowadays, even local stores are often expected to be listed in online directories with store hours, maps and phone numbers.  It is becoming increasing important to have an online presence just to remain competitive but with a little extra effort, you can also create added income streams and cash flow with a surprisingly modest investment

The most elaborate web sites cost about $250 per page but it is possible to begin with building a simple static web site using free template-based applications and online web hosting services with monthly hosting fees as low as $10.  Alternatively, you can use some easy online services or hire a programmer to create a dynamic web site in which you frequently change web-page content in as little as one hour per month.  Annual costs can be as low as $360.  Any business can break into this market with one of three basic options without the need for expensive computers or training.

The Menu Option:             You can setup a simple static web site that offers a menu or inventory listing of your sales offerings.  Similar to a restaurant menu, you list what you sell or just list types or groupings of merchandise or services, but without prices.  You also list store hours, maps and contact information.  The advantage is like having a large, detailed, online business card or permanent advertisement for about $120 per year.

The Take-Out Option:            If you already have a small or computer-based inventory, you can easily setup an online version of a take-out order by allowing web users to see all or some of your inventory listing and place orders online for later store pickup.  By adding a simple order save function, you can allow people to build their shopping list over some period of time (weeks or months) and then schedule the in-store pickup for a specific date or they can place special orders or orders that require preparation.  The order could show up on an in-store printer and be prepared for customer pickup and payment.  This avoids online money transactions but can still enhance sales and provide a value-added service for your customers.

The E-Commerce Store:  The most elaborate online sales option is to put up a full function store web site.  There are turnkey, off-the-shelf, e-commerce software packages and online services that can provide this capability starting around $50/month.  Such a web site does everything for you except delivery.  It takes the order, adds in shipping, handling and tax and then collects the payment.  All you have to do is collate and mail the order or prepare it for pickup.  Such sales can be for a very select portion of your inventory that might appeal to online buyers outside of your immediate store location. 

Don’t dismiss these options too quickly because experience shows they can enhance customer service and might lead to large volumes of sales at less labor and lower overhead expense than in-store sales.  These options are ideal for home-based or Vermont specialty stores and many small businesses.

This is the 21^st Century and your sales competition as well as your potential buying market is growing every day.  You need a 21^st Century business model if you are to survive.   It is possible that your regular customers of the future could be a rancher in Wyoming or a schoolteacher in Japan.  They, too, might get to know you by name and you know them and they are repeat buyers from you because of your good old fashion Vermont service.

Essential Business Strategy

“Tactics without strategy is the noise before defeat”; Sun Tzu 540 BCE,  “If you don’t know where you are going, you won’t know when you get there”; Yogi Bera 1950.  All through the ages, great thinkers have commented on the value of strategy.  Today, the world’s best-known business academic is Michael Porter, a Harvard Business School professor.  His first book, Competitive Strategy: Techniques for Analyzing Industries and Competitors (Free Press, 1980), is in its 53rd printing and has been translated into 17 languages.  He offers some good advice for the Vermont small business owner.Although the basic concepts of business strategy predates Michael Porter,  his notions on strategy are preached at business schools and in seminars around the globe.  However,  his concepts of strategy are being replaced by expedient and easy fad-based notions of competition analysis and profit optimization.   In effect, short term tactics and an emphasis on operational effectiveness are replacing strategy and long term planning.  To understand this, we have to look at the difference between business tactics and strategy.

Strategy consists of making decisions and choices, trade-offs; it’s about deliberately choosing to be different; delineating how a company seeks to be unique.  The essence of strategy is that you frame and limit what you’re trying to accomplish. You can’t be all things to all people.  Strategy defines the basic value you’re trying to deliver to customers and who your customers are.  It serves as the map to optimum sales.A company without a strategy is willing to try anything. If you’re strategy is to do the same thing as your rivals, then it’s unlikely you’ll be successful. It is, in fact, incredibly arrogant for a company to believe that it can deliver the same sort of product that its rivals do and actually do better for very long. That’s especially true today, when the flow of information and capital is incredibly fast and the consumer is more informed and mobile than ever before.  Only strategy can create sustainable advantage.Business tactics or operational effectiveness, is about how to do the things that you do in the best manner possible; it’s about what every business should be doing.  In today’s market, you need to define how you’re going to be distinctive.  Word processors repalced typewriters because it was operationally effective.  Using computers to manage inventory, analyze sales and examine cash flow are all tactical functions.  Tactics is a means, strategy is a direction.  Unfortunately, the line between tactics and startegy is getting fuzzy.Porter says that companies have bought into an extraordinary number of flawed or simplistic ideas about competition and quick-fix, automated solutions that promise fast and easy increases in profits — what Porter calls “intellectual potholes.” These include TQM, JIT, TCO, BPR, BSC, ERP CRM and many others.  The thinking is that these analysis methods provide immediate results and, as a result, many have abandoned strategy almost completely.  To be sure, these tactics have their uses but not as a substitute for an effective strategy.  Driving faster does not replace knowing where you are going.This focus on operational effectiveness actually creates a mutually destructive form of competition. If everyone’s trying to get to the same place, then, almost inevitably, that causes customers to choose based only on price. This is a bit of a metaphor for the rush to globalization of the labor market and big box retailing in which we’ve seen a widespread focus to lower prices.  This leads to operations on such a thin margin that relatively minor market or economic fluctuations can be disasterous.There are those that will argue that such a form of destructive competition is simply the way competition has to be.  Michael Porter believes that there are many opportunities for strategic differences in nearly every industry; the more change there is in an economy, in fact, the greater the opportunity.  

Therein lies the challenge to business owners:  Can the locally owned businesses adapt their strategy to remain competitive in the face of big box retailers, national chain stores and internet sales?   We must, of course, assume that local governments will not favor the big box chain stores with massive development subsidies and tax advantages.  Once they are on a level playing field, the local businesses must adopt strategies that differentiates them sufficiently that the consumer is aware and understands the benefits of “buying local”.   The development of such strategies could benefit from guidence from Michael Porter and a clear understanding of the distinction between business tactics and strategy.

It has begun!

It has begun!

The January Effect is a well known and fairly consistent trend in stock market swings. In the 4th quarter, each year, large institutional investors dump losing stocks to take losses that will offset their wins over the previous year. This puts a lot of supply of poor stocks on the market and puts a lot of cash into the hands of the investors. The fact that these are stocks that normally are not swept up by others and the holiday spending spree of the consumers, usually absorbs most of this sell-off so we normally do not see a large drop in the market nor a rush to sell off winners. However, after the New Year starts, these same investors, now flush with cash, want to invest and most do so in January.

With all this pressure to increase the market, in fact, quite the opposite is happening. It is taking a dive. This means that the market drop is actually much worse than it appears. It is diving despite all this upward pressure - or more precisely, investors have lots of reasons to buy but instead they are selling in large numbers.This is not a new trend. The NASDAQ and Dow hit highs in October and have mostly been going down since. This has a lot to do with the Bush administration’s policies of trade, tax and politics but it also has to do with the normal cycles of regression to the mean of normal and typical stock performance. We have been due for a recession for some time.

I may have been wrong about that date. It might have already started. This is not that unusual since it is common for investors to buy on rumor and sell on history (news) – making them always over reactive to even the hint of good or bad news. In this case, they are perhaps acting sooner than I had expected or maybe just reacting to a shorter term crisis that will coincidentally run into the large crisis looming just ahead.As one of the more informed generations of investors, they may well be aware of the coming problems created by the boomers and may well be also reacting to that crisis a few years in advance. This can happen if the institutional fund managers are of the mind to be cautious about what they know will happen eventually.

Bottom line is that a major financial downturn has started and will continue for the next two decades or it will take a short spurt upward for a year or two before taking the plunge for two more decades. Either way, prepare now or suffer later. 

Value of the Labor Force

The Value of the Labor Force

It has been firmly established that the IS staff of an organization has the second greatest influence on the success or failure of the organization than any other organizational element, second only to senior level managers. This is because of the degree that changes in the IS environment has on nearly every aspect of the organization. Each IS Staff member has the potential of influencing far beyond his or her immediate areas of responsibility. Until the entire critical strategic role of the new organization is fully explored and defined, it may be premature to cut the IS staff. 

Corporate Communications

Corporate Communications

One way to save money is not to spend as much of it. If you are a business owner or a project manager that is involved with corporate management, there are some proven ways to reduce your costs of management. One of these methods is to fully understand what and how your organization communicates. This is perhaps the most important aspect of your business that you can manage to influence efficiency, productivity, morale, effectiveness, and ultimately, improved profits.

This is a simplistic example but the idea is that the software can do this without being told what specific data to look at. It can identify patterns and trends that might otherwise slip by the human operators or end users. 

Federal Marketplace

New Business Development
in the
Federal Marketplace

This is a $600+ Billion annual marketplace that sells buys goods and services from virtually every aspects of the economy from pencils to airplanes and from plumbers to computer programmers. The buyers in this market often pay top dollar and once you get a contract, it often leads to others at even larger profit margins.

It costs to get on the GSA schedule and it takes some time to qualify but it is worth it if you are a supplier of some product or service that is in demand in the federal market.