21st Century Economics

If you are a consultant or a programmer, becoming a BPR facilitator can be a very lucrative career move right now as there is an increasing demand for people that can support the analysis and process improvement of businesses - collectively known as being a “change agent” for “organizational change management”.

Today’s global economy, enhanced and hastened by rapidly changing technologies of all types, is putting pressure on companies to increase the efficiencies of all their business processes. Likewise, budgetary constraints are putting similar pressures on government administrative processes. Many organizations around the world have turned to business process reengineering (BPR) as a methodology to achieve these efficiencies. A majority of BPR projects really do not do any “engineering” at all. That is, many BPR practitioners are not using proven quantitative analytical techniques to analyze and design business processes. This defeats the entire purpose of BPR and results in few BPR projects that actually implement new process designs based on a consideration of reliable performance metrics or reliable expected differences between competing alternatives. Instead, all too frequently, BPR projects tend to have decisions based on subjective notions of “what should work well.” This is wrong and often does not work. When it doesn’t work, BPR is blamed for the failure. In fact BPR dictates the “proper” method.

Stumbling Between Vision and Implementation

Intuitive notions about what would work well for a business process can provide excellent frameworks for creating the “vision” of the new process. Every BPR project should have a clear vision (see Barrett, “Information Systems Management”, Spring 1994). However, the vision has to be implemented successfully to realize the benefits. This is where many BPR projects stumble badly - not because implementation is so difficult, but because careful analysis of exactly what to implement has not been done. There are an infinite number of ways to “achieve the vision.” The problem is in selecting the “right design for the new process that, once implemented, can be expected to achieve the desired results with a high degree of confidence.

Unfortunately, most BPR analysts select a design based primarily on intuition or “best practices correlation” (e.g., ABC company implemented a similar process and they are a market leader) without thinking through, and certainly without carefully analyzing, the dozens of details and alternatives associated with implementation inside the subject organization. Some would argue that considering a number of alternatives and/or significant details takes too long and costs too much compared to the benefits received. On the contrary, we argue that considering such alternatives and details is not costly and does not take a long time. In addition, the benefits are enormous - especially when compared to the often hidden cost and risk of project failure.

Lack of Analysis Contributes to Lack of Executive Commitment

End-to end business processes (e.g., customer order fulfillment) are comprised of many (maybe dozens) activities and tasks, utilize a myriad of the organization’s scarce and costly resources, are managed (and non-managed) by a host of written (and unwritten) policies and form the basis for most corporate culture existing in the organization.

Aeronautical engineers prototype their airplanes. Why shouldn’t you prototype your business process planes?

When an aeronautical engineer prototypes an airplane, she must use calculus. She can take pictures of other airplanes and make drawings of her new airplane. She might even use algebra for answers to her design questions. Eventually she must prove to herself her design will produce an airplane that will actually fly. Why? Because top management will want to have a high degree of confidence her airplane will fly before committing time and money to go ahead with the project. Any aeronautical engineer will tell you she must use calculus to help her prove her airplane will actually fly. This is because calculus is the only proven tool telling her how all aspects of her airplane design will interact during simulated flying time. She has no choice if she wants detailed answers with a high degree of statistical confidence.

Exactly the same reasoning applies to a business engineer who wants a reliable business process plan. She must use simulation (actually, real-time discrete-event simulation, as we explain later). She can study designs of other business process planes, make static sketches of new ones with drawing or diagraming tools and personally visit similar business process planes of other organizations. She will also use algebra or spreadsheets to try and get answers to her design questions. She too must prove to herself her design will produce a business process plane that will actually fly. Why? Because top management needs to be confident her business process plan will fly before committing the organization’s time and money to build the business process plane and operate it with real customers.

The “U” shaped graph has two peaks at the top of the “U”. The inner one - the one with the high Y or profit values corresponds to businesses that compete by selling an item at good profits. But this end of the curve is also low on the “X” axis values meaning that it has little market share.

This is the “niche” market. To a small but focused market, you can sell a service for a high profit. Let’s look at the drug companies as an example. They make a drug that addresses a disease that only 10,000 people in the whole US have a need for. They ask and get $5.00 per pill. A small market that has a narrow but high demand for a product can command a high price for that product.

The other end of the “U” is also a high profit point but with much improved market share. This is characterized by Japanese autos. The price is not the lowest on the market but they still command a large market share. Why? The answer is that at this end of the graph, businesses “differentiate” themselves in some manner from their competition in order to command a price that is not the lowest. In the case of Japanese cars, the differentiation is “quality”. Buyers will pay more for perceived or real quality because that is important to them. Japanese cars have invested in both the real and perceived sense of quality.

Volvos, on the other hand, differentiate themselves as the “safe” car. Mercedes Benz is the “rich man’s car”. Land Rover is the car of choice for safaris…and so on… All these cars are significantly more expensive than their competition but they still command a large share of the market because they differentiate themselves in the eyes of the buyer.

The bottom of the “U” is characterized by low profits and only a medium market share. A good example of this is McDonald’s hamburgers which are sold at nearly the cost to make them. There is very little profit because they are so cheap. (McDonald’s, as a company, makes their profits off drinks and fries). Their market share is a portion of the fast-food market in that they are appealing to those buyers that want that kind of food, fast and cheap. This means that they are very vulnerable to price fluctuations from their suppliers and from their competition.

Another aspect of the older business model is that any given marketplace can typically support up to three top competitors. Others can and will enter the market but they will play a distant second place to the top three.

Sears-Wards-Pennys…..
Ford-Chevy-Chrysler…..
McDonalds - Burger King - Wendy’s.

If you are a consultant or a programmer, becoming a BPR facilitator can be a very lucrative career move right now as there is an increasing demand for people that can support the analysis and process improvement of businesses - collectively known as being a “change agent” for “organizational change management”.

One of the basic precepts of a properly executed BPR analysis effort is that a graphic representation of the processes, information system or both is created to better visualize the enterprise. This graphic representation, if done properly and with the right software tool, will be an accurate computerized model of the enterprise.

A less common step in many BPR activities is the use of simulation to exercise the model into various “what-if” scenarios. I contend that, not only are these essential elements to every BPR activity, but these are THE CRITICAL ELEMENTS to gain the benefits that BPR promises and has the potential to deliver. The combination of modeling and simulation is what allows BPR to totally eliminate the trial-and-error management methods of the past and allows the decision makers to know that the improvement implementation decision will work the first time and will have a predictable benefit. This article will focus on the generic aspects of what modeling and simulation is and how it is applied.

MODELING

Let’s make sure that we understand that there is no single method, technique, or tool that can always produce the best model, despite the claims of the software makers. There is, however, a set of specific criteria that every model must contain for it to be useful to a proper BPR analysis. These criteria can be modeled by more than one physical or logical model but all models should contain the following:

Processes - This is the activity or work that is performed, usually symbolized by a simple box with a process name on it. A test of a process is that it must cause some change or produce some new product.
Information - Sometimes called “data” or “systems”. This is the entity that is moving from one process to the next. It is what is acted upon, changed or created. It can be in the form of paper, mail, network data or electronic images - the media or content is not important. With the exception of manufacturing, information is usually both the input and the output of most processes.

Cost - The essential aspect here is to quantify the value of the process by some significant and useful measure. Costs do not need to be measured in dollars. Costs can be measured in labor hours or in other comparative measures or benchmarks. For instance, a valid measure might be the number of documents processed per person. It is not uncommon to use a separate cost model and technique. One of the most common in BPR is Activity Based Costing (ABC).

Resources - This is what it takes to accomplish the process in the time and cost specified. Resources are generally “expended”, meaning that they are consumed and not reusable. If electricity, gasoline or some other ingredient is needed to perform the process, it is consumed by the activity of the process. Resources also have the quality of being finite and can become a limiting factor in the process.

Time - As with costs, time is an essential element to quantify but it is not limited to measurement by the clock or calendar. A process can be valued as a comparison to past performance or to an industry standard or benchmark.

Regulation - Sometimes called “controls”. Regulation is generally a limitation on the process, cost, time and/or resources. For instance, no matter what is changed, a certain process must be repeated to completion monthly. Regulations are most often imposed from outside the model and the enterprise and cannot be adjusted.

The modeling tool used must provide a means to interrelate these elements in a meaningful manner. For instance, resources may be expended per unit time as in labor hours or for a given number of process outputs as in the case of fuel for deliveries. Likewise, cost must be tied to consumed resources and information flow must be linked to time.

There are a number of modeling tools and techniques currently available. Each one has good and bad features and models the six essential enterprise elements to a greater or lesser degree, however, this writer is not aware of one that models all six elements and their proper interrelationships. To properly model the entire enterprise and all six essential elements, more than one model is used.

One of the most common modeling techniques in BPR applications is called Integrated Definition or IDEF. IDEF models can emulate either the enterprise processes, referred to as IDEF-0 Models, or it can emulate the data or information systems, referred to as IDEF-1X Models. IDEF has been standardized to such a degree that is has its own federal standard (FIPS 182 for IDEF-0 and FIPS 183 for IDEF-1X). Some IDEF tools allow you to create both the process and the data model as a single integrated model. These are among the most powerful tools available.

Despite being a powerful BPR modeling technique, IDEF still does not include cost or time values. One cost model that has shown a good application to BPR analysis is called Activity Based Costing (ABC). The “activity” in ABC models is the same activity or process being modeled in the IDEF-0 model. This allows for easy cross-relationships to be established. Integrated IDEF process and data models with the ABC cost model and the interrelationships are the most ideal models.

Simulation

If the models have been created in a format and method that accurately simulates the six essential elements of the enterprise and models the interrelationships of those elements, then quantitative changes can be made in one or more of the elements in order to simulate changes to the enterprise. For instance, if resources are reduced, what will be the impact on time, output or. Any one or more elements can be changed to see the effect on the other elements. These are relatively simple mathematical relationships that lend themselves to easy representation in spreadsheet form. In fact, most simulations are based on basic spreadsheet formats and can be done using standard spreadsheet programs such as EXCEL.

A powerful variation of the cause-and-effect simulation is called “goal-seeking”. This is when you establish the element relationships and then specify a change or goal desired in one element and discover the necessary changes required in the other elements to achieve the desired goal.

There is, in fact, a “trial-and-error” aspect to this modeling and simulation analysis. You change the model and see what happens. You are, however, changing a computer representation of the enterprise, not the real thing. In less than and hour, you can cut the budget, change the staff or alter the processes and analyze the effects with no cost or risk to the organization.

Using your own management decision experience, you can assess the benefits of each change until you decide what should be done. Once you have determined the change required, you can run a series of simulations of intermediate levels of change to establish what might be expected in each phase in the way of cost, schedule and performance improvements.

These become benchmarks to measure progress by during the transition.
If a change is made and the computed improvement is not realized, then you can analyze the change to see if it matched the modeled change or is the model flawed in its representation of the enterprise. One or the other is adjusted and the next phase is implemented. As time and experience continue, the model will become a more accurate representation of the enterprise until it is able to emulate every aspect of operation. If it is maintained, it will continue to be the most perfect form of change test bed for enterprise improvements and analysis.

Summary

Modeling and simulation are not just exercises in computer graphics and math. They represent a method to rebuild and manipulate your enterprise in a form that allows you to determine if your decisions for change will work and to what degree.

Many investors today are interested in the high flying, fast growing and most profitable investments possible. An inviolate law of economics is that high profit comes at high risk. So far, no one has been able to break that law, although many have tried or thought they had. In the long run, it has proved to be true in every case.

Unfortunately, the high risk, usually expressed as a high beta value, can be misleading because many people do not understand that in the area of investments, if you lose 10% and gain 10%, you are NOT back where you started. Let’s take an exaggerated case:

Suppose you invest $1000 in a volatile stock. As it is prone to do, it whips up and down and in the first year after you buy it, it suffers a total of a 25% loss. Being high risk, it also can go up so in the second year it ends with a 25% gain. How much money do you have? $1000? NO! You actually have $937.50. It is down more than 6%! Here’s why.

The first year’s loss of 25% of $1000 is $250 so you end the year down by that amount to $750. Now you start the second year with $750 and go up 25% or $187.50 to $937.50.

You would have to have about 34% gain in the second year to just get back to your original investment.

Now let’s take a much more conservative investment with a low beta. In this case you start with your $1,000 in a blue chip or balanced mutual fund that has a 10 year average return of 10%. At the end of the first year, at that rate, you will have $1100 and at the end of the second year you will have $1,210. That is $272.50 higher than the volatile, high risk, high return stock - or 27% better!

Of course, you invest in the high risk stock because it has more positive net returns that used in this example. More likely is fluctuations of up and down 25% but with more ups than downs but even that can be misleading. Here’s why.

Suppose the stock, from July to January, goes down 25% and then back up 45% by June of the following year. If you were to read their ad or see one of those investment magazines, it would show you a “YTD Rtd” (Year To Date Return) of 45% in the first 6 months of the second year. So you put $1,000 into this stock in July. It goes down 25% by December and you end the year with a balance of $750. But you hang in there and watch it rise from January to June by a whopping 45% - wow! Hmmmmm wait a minute - what have you really got now.

$1,000 down 25% to $750 in 6 months and then up 45% for a second 6 months gain of $337.50 to $1,087.50 by July of the second year. You end the 12 months with $12.50 LESS than the buy that invested in the conservative stock at 10% annual return!

You can change the percentage numbers and shorten or lengthen the periods of time but you get the same result. If you have a volatile stock and it incurs a loss early on in your investment, you have to have a very hard working investment to make up for it later. For instance, if you invest in a stock with an expectation of getting 10% per year but in the first year you take a 10% loss, you now need to have an average annual return of 15.7% for the remaining 4 years to get the original expected 10% average return for the 5 year period. Look at the stock ans see if that is reasonable.

It is predicted that in the relatively near future, newspapers will have so much competition with other forms of news delivery that many, if not all, will go out of business. In perhaps 10-20 years, technology will be such that you can pick up a flat panel LCD screen, about the size of a notebook page and weighing about 10 ounces. It will be a wireless computer that has been programmed to receive news that interests you including hourly updates. It will be text, audio or video, whichever you prefer. Such technology exists today but the public is not ready for it yet, but it will be soon.

Visualize Information:

There are several researchers working on new ways to visualize information. The hypertext method of non-linear reading has lots of advantages and will be the basis for future capabilities. You will be able to quickly “bore down” thru a long list of topics to the exact bit of information that you want to see at that moment.

As the Internet’s bandwidth is expanded and the speed of computers - particularly graphics - is improved, the actual mechanism of how you move thru the information will become more and more graphic. Eventually, you will do it with virtual reality. A hood of 3-D viewers will allow you to move in a three dimensional world and “open” virtual files that contain the information you want.

Access

There are devices now that can broadcast selected news stories directly to your computer while you are asleep so that you can read topics that interest you in the morning. This is also happening using wireless technology into laptops and palmtop computers. The cost is high and the available sources of information of this nature is limited now but that is changing. If one of the major news networks like CNN were to offer a service, it would spark a major competitive race that would open a huge market. The end result will be that you will be able to access what you want, when you want it 24 hours a day, no matter where you are.

Social Complications:

Unfortunately, this is not all roses. We are developing into a nation of “haves” and “have nots” but instead of money or power, it is information access that is separating us. There will be a marked difference in the success of people that have access and the equipment to get this information and those that don’t have it. If you have it, you’ll be better informed of everything - including job and investment opportunities, social and economic trends and general information about the world we live in. If you are one that does not have this access, you will miss those job and investment opportunities, not be aware of the politics and societal issues of the day and will generally be less successful in your career and life.

Nearly all of the wars in the past 3,000 years can be traced to having a strong motivating factor of a disparate distribution of wealth within or between countries. When that has not been the direct cause, it has been a major contribution factor.

Now consider this:

The United Nations reported last month that the net worth of the three richest families in the world (the Gates family, the Sultan of Brunei and the Walton family) is greater than the gross domestic product of the 43 poorest nations on Earth — combined.

A recent issue of Nation contained an article noting that pharmaceutical companies spend far, far more money researching lifestyle drugs for the affluent than life-saving drugs for the hundreds of millions of the world’s poor people. Instead of trying to come up with treatments for life-threatening diseases, resources go into treatments for wrinkles, impotence, baldness and obesity.

Recent business surveys indicate that the ratio of the salary and perks of a firm’s CEO to that of the average employee of the firm is at an all-time high. Nowhere in the world is it higher than in the US.

Other studies indicate that although profits are rising, productivity is increasing and the stock market is advancing, employee compensation remains flat.

A professor at New York University estimates that the richest 1 percent of Americans own half of all stocks, bonds and other assets.

These stories and many more like them indicate that there has a been a basic paradigm change in our basic moral sense of fairness and philanthropy. Greed, ego and self-preservation has taken over as the predominant factor in many social and business decisions. Although this is being observed all over the globe, it is by far the most egregious in America.

Other reports in this information service have also told you about the “information haves and have-nots” and the impact of that growing gap.
Combine this with the historical cause of revolutions, wars and social upheavals and you have the formula for some bad, sad times to come.

Of course, the object of this blog is to discuss Profit and that does certainly seem to demand that we limit our rock throwing while standing in our glass house but there are good reasons why we must examine even the worst of our most advantageous behavior.

The simple answer is that there is not a shred of evidence, analytical data or economic, historical or scientific justification to believe that the good times will continue for very much longer. In fact, by historical standards, we are way overdue. By social standards, we are stretching the rubber band of class tensions almost to the breaking point. By economic standards, we have surpassed conditions which have, in the past, precipitated great economic upheavals or social unrest. Standby, it will happen again.

As an investor, you should understand two very important factors that have been absolutely proven to be fact:

Timing Does Not Work - Study after study has shown that, in the long run (actually as short as 3 years)that investment timing does not work as compared to invest and hold strategies.

This does not, of course, apply to investments in known events that have an economic consequence. In fact, that is precisely the premise of 21st Century Economics - that the only way to make a timely investment is to either (1) plan for a long term investment or (2) invest in a known event that has economic consequence. The failure of the timing in the classic sense is that it applies to the chasing of money that is common in day trading and in the rapid and short sighted buy-sell mentality that has always pervaded Wall Street. See a separate report on this subject elsewhere on this service.

Good Times Don’t Last Forever - The extensive reporting contained elsewhere in this service on the concept of Regression to the Mean is not an investment philosophy. It is scientific and mathematic fact. The mean growth rate of the stock market since before 1900 has been under 7% - no matter how you figure it or what adjustments you make. We have had a 3 year growth rate in excess of 25%. It is a FACT and an absolute certainty that 50 years from now, we will again look back at the average growth of the stock market and it will not be appreciably higher than 7%.

Any finite period can show growth or loss depending on the time selected but over long periods of time, a gradual increase in the rate of growth is possible but nothing like 25% - more like 3% in 50 years. If the mean that the average growth of the market returns to is 10% in 50 years - then when do you suppose it will change from 25% growth back to less than 10% so that its mean will be 10% in 50 years?

What all this rambling is about is that the known event that has economic consequence is that our world society is headed for a major adjustment in the social order based on the distribution of wealth, information and influence. That “adjustment” will be of such large economic consequence that those that have money now will need to begin now to prepare for it.

How? Like this:

Diversify your portfolio - The tried and true investment strategy of spreading your money across a range of investments is an old one precisely because it works.

Pay off Debt - We are a debtor nation now, currently spending more than we earn and with a national savings that is negative. When the economic turnaround happens, you don’t want to be in debt for a lot of luxury items that you can’t afford to maintain. If you are wealthy now, use that wealth to pay off your debt. If you are spending beyond your means now, stop and begin to prepare for a time when those that do that will be on the streets, out of work or worse.

Save - I am not going to predict the nature of the economic turnaround that will happen, only to say with confidence that it will happen but there are certainly some powerful pointers that it will not be good.

The retiring baby boomers will cause the real estate collapse of the second decade of the new millennium will the worst in history.

The boomers will also create the worst stock market fall in history - mostly because of how high it has risen above the “norm”.

If we make it to 2010 without a major social upheaval that is economically motivated, then the one that is motivated by the aging world population, demands on the publicly funded infrastructure and the disproportionate power of the older generation will certainly cause problems.

Wealth:
A professor at New York University estimates that the richest 1 percent of Americans own half of all stocks, bonds and other assets.
Power: Largely as a result of the wealth and also due to the usual time in one’s life that you typically gain that wealth, the vast majority of the power in this country is in the hands of the “older” generation - that is, those age 43 to 65. This is the age that most people exercise the most influence on their environment because it is in their interest and ability to do so.

Influence:
A recent study revealed that 80% of the domestic news stories on television network news concern only 4% of people; most of the remaining 20 percent of domestic stories on the evening news cover the other 260 million of us.

Demographics:
The aging population of the US and the rest of the world means that the wealth, power and influence will continue to shift more and more into the hands of an older and older population.

Impact

Politics:
We know that the older generation is largely conservative and mostly Democrats. They favor the continued high levels of spending on the federal level to fund programs that they benefit from such as Social Security, Medicare and tax benefits for the elderly.

This will not only continue but it will rise to levels never seen before - Rise to levels that will make the other age groups and generations into minority citizens with no control over their own lives and futures.

Investments:
For the most part, the finances of the era of retiring boomers will be a shambles.

(1) 71 million baby boomers will be trying to sell their stock portfolios at the same time - dropping the market to its lowest level in 75 years;

(2) 71 million baby boomers will be trying to sell their expensive homes in order to move into more modest sized retirement condos. This will create the greatest drop in real estate prices in history. One bedroom Florida condos will cost $200,000 while the 30 room brick colonial in upstate New York will remain on the market for 3-4 years while the price drops to below its current mortgage balance and sells for under $150,000;

(3) When 71 million baby boomers reach retirement, we will see the effects of three decades of excess at the expense of no savings. Social Security and Medicare will be overwhelmed while millions of boomers that did not save discover they cannot maintain their previous lifestyles on their $900/mo. social security stipend. They will vote, in mass to increase Social Secuity taxes to the loss of millions of younger workers.

Society:
The conservative nature of society will pervade everything. Care designs, books, movies, music, religion and news. The majority of the audience for the mass media will be old people with money. Who do you think they will cater to?

Wealth, Power and Influence is about to undergo a major adjustment in the next two decades, it will change everything - especially investment opportunities - or lack thereof.

In the 60’s and 70’s, as the baby boomers moved into the marketplace, the flood of labor drove labor prices down and created intense competition for jobs. The early boomers - born in the late 40’s and early 50’s - moved into and up the corporate ladder fairly easily but they were still there when the late boomers - born in the late 50’s and early 60’s - arrived. This slowed expansion and limited movement up the corporate ladder.

This and other aspects of the massive movement of the baby boomers into the labor force have had far reaching effects on our economy and on the world economy. Many of these effects are not immediately obvious.

Let’s examine some:

As the competition for jobs increased, businesses found that they did not have to pay premium rates for labor to get a good labor force. Conversely, they discovered that they could grow in size of the labor force while keeping their percentage of investment in labor about the same. This allowed many companies to grow every large at relatively modest increases in labor costs.

For awhile, the large labor market and large company sizes worked well but when normal cost of living and inflation caused labor prices to rise, the companies found they had a glut of labor that they did not need and that productivity was inefficient. This set up the stage for massive layoffs in the late 80’s and early 90’s that eliminated entire layers of management and consolidated tasks into fewer workers.

The lower labor cost prompted many companies to NOT invest in labor saving devices such as robotics in the automobile industry. Meanwhile Japan did invest in robotics and other forms of automation and labor saving devices.

When the slowly rising labor costs did push US companies to re-examine their labor situation, they found themselves no longer competitive with foreign manufacturers and labor markets. This setup the massive movement to move labor off-shore and into cheaper third-world labor markets. The loss of revenue from the labor and taxes of the lost jobs created recessions in 1975, 1980, 1982 and 1990. The median household income dropped to a 14 year low in 1982 and dipped again to 1971 levels in 1994. During that same period, personal savings as a percentage of disposable personal income dropped to record lows in the late 80’s and has continued lower every since. It hit 3.8% in 1997, the lowest level in 58 years.

Because it took time to adjust the labor market and the productivity efficiencies to the global market changes, the business inventories versus sales ratio rose to a record high in 1991 of 1.80 before falling to a low of 1.35 in 1999. This 1991 figure meant that we had more supply than demand and prices, at that time, were not competitive. This put even greater pressure to lower prices to clear out existing inventories and to control production.

For reasons not entirely clear, there has been a remarkable correlation between the percentage of the labor force that is aged 16 to 34 and inflation. As the boomers moved through this age group in the late 70’s and early 80’s we saw double digit inflation. One theory is that the politics of the economy followed the mood of the voters - at that time, being more liberal than conservative. As he boomers move into their late 40’s and 50’s, we should be able to expect a more conservative economic policy being demanded by the voters.

As the work force ages, there will be changes in how the labor is performed. For instance, one grocery chain found that its employee turnover rate dropped from 400% per year to just 80% per year when they began to hire more older workers.

The middle boom years, 1964 to 1977 when birth rates were down, will create a relative scarcity of workers that will have the reverse effect that the boomers had. Labor wages will climb as companies compete for the fewer workers available. In fact, labor costs have risen by 45% over the past 10 years. There will also be a renewed interest in capital investment in labor saving equipment such as robotics and computer automation. This has created a large rise in investments in plant and equipment since the mid 1990s. It is therefore not a surprise that in 1997, the business investment in plant and equipment as a share of total economic activity rose to a record level of 16% in 1997 (not counting WWII years).

All in all, the demographic economy of the boomer labor force has been one of intense competition in a buyers (employers) market, over supply and lowered wages. In the later retirement years of the boomers, that trend will reverse and there will be an intense competition in a sellers (employees) market, a significantly reduced market and higher wages.

It should be noted that the present economic bull years when the boomers are investing heavily in business and industry, there have been significant expansions of those businesses. This is reflected in the lowest unemployment figures in decades. Unfortunately, when the bulge of the boomer’s prime employment years pass, the period from 1964 to 1977 produced a greatly reduced birth rate. This expanded demand plus the reduced supply will drive wage prices up, unemployment will remain low and there will be a major growth in incentives and benefits to attract and keep workers.

The market demand from the buyers controls the market supply from the sellers. In other words, the seller sells what the buyer is buying. If the demand increases, the supply will expand to meet that demand. There is often a small delay between rapid rises in demand before the supply catches up but this is not of particular importance to large slow swings of market demand as a result of demographic changes. (It can be a factor in fad or impulse marketing, however.)

It is an established fact that people in certain ages of life and career will, on average, buy certain things that are often in common with others in that same age of life or career. For instance, we know that, on average, people buy their first homes between the ages of 25 and 34. Most of this is common sense - you don’t market hearing aids to teenagers or toy dolls to senior citizens. In fact, nearly the entire market of a capitalist economy is based on this concept.

Having established this short list of facts that most of us will agree are intuitively obvious, let’s now look at some additional facts. These are FACTS that can be verified from a number of sources but perhaps the best is the US Census Bureau.

There are 71 million households (76 million people) that can be called part of the Baby Boomers - those born between 1946 and 1964.
An Echo Boom of 64 million people (currently making up 41 million households and growing) are the children of the Baby Boomers - are those born from 1977 to 1993.

Between 1964 and 1977, there was a relatively slow birth rate of 41 million babies.

In the next 50 years (1999 to 2050), the share of the US population age 65 or older will go from 12.5% today to 21% - a 68% rise.
The number of people 85 and older will grow to 19 million from just over 3 million today - a 533% rise.

In 1940, 7% of those 65 are expected to survive to age 90. Today, the figure is 25%. By 2050, 42% of the 65 year olds will survive to age 90. (Believed to be a conservative estimate)

These and other similar statistics make up what we call the demographic economics of the boomers and their effects on our economy. Because so many of us are actually a part of this group, we have not visualized it as an historical or unique event but simply the way life is. If you can step back and see this in perspective to what has happened to world economies in the past and how it will affects us in the future, you begin to see this a much more powerful and predicable series of events. And as you know by now, If you can predict an event, you can profit from it!

Imagine if you had been aware of this situation in the 1950’s - what would have been a good investment? How about everything related to schools? As the bulge in boomers moved from kindergartens, to elementary to high school, the demand for books, clothes, food and schoolteachers expanded to historic highs. Gerber foods, for example, doubled its sales in just two years from 1948 to 1950.

In the 70’s and 80’s, the real estate boom was entirely predicable. You had 76 million people competing for the existing housing and the demand exceed the supply for a long time.

If you had invested in industries that supplied this massive but evolving demand, you could have made a fortune - as many did.

In retrospect, you can see lots of missed opportunities but the nice thing about demographics of this kind is that the opportunities are not over yet. The boomers and echo boomers are still there and still affecting the economy in a very big way.

The massive bull market we have been experiencing is no accident and it surely is not the results of actions by our President or Congress - despite the fact that they try repeatedly to take credit for it. It is because 76 million baby boomers (roughly 27% of the entire US population) have moved into their peak earning and their peak spending years.

Sales of new accounts in mutual funds exceeded $1 billion in a 30 day period in January 1998 for the first time in history. In 1960, there was a total of $640 billion in all mutual funds. Now there is more than $7 trillion. Almost all of that was invested by the boomers during their peak earning years. The early boomers are already moving into the age of retirement. This is why there is now more money in mutual funds and other investments than ever before in history.

But it’s not a totally rosy picture. The boomers will move on to the next stage in life starting in 2007 when the oldest ones begin to reach retirement age. The related changes in their buying and saving habits will have a marked and profound affect on our economy and the world. In fact, it is predicted to be the worse economic period in our history and perhaps for the entire world will follow the boomers into retirement.

21st Century Economics will show you the what’s, why’s and how’s to survive this megatrend and how to profit from it. In fact, if you don’t profit from it, you will be caught in it and suffer significant financial losses and personal hardships. This is not a prediction, it is simply a fact that has not yet happened.

We will be updating this service on a regular basis with new information of what the latest active trends are so that you can get in on the earliest part of the upward turn or get out on the earliest downward turn of a number of specific markets.

Background:

Robotics can be defined as any mechanical device that reduces manual labor by humans. This is obviously a simplistic perspective but it suits the purposes of this discussion. You either have cheap labor or you have expensive labor. If you have cheap labor, you have little incentive to seek out and invest in labor saving devices.

If you have expensive labor, you will seek ways to reduce the costs of the labor. That works fine until all your competitors are do the same thing to reduce labor costs.

You might also find that competition has found a way to reduce its labor costs while maintaining a very high degree of productivity, efficiency and quality. Japan did that in the early 80’s.

In the late 70’s and early 80’s, Japan was faced with a labor shortage, increased competition but a potentially large demand for its cars. To reduce costs, it invested heavily in the development of robotics for many of its auto plants. There are now plants that turn out auto parts hours a day and the entire plant employs 15 or 20 people - to watch the robots.

Japan did the same in the electronics industry. Their products dominate the markets in electronics and have challenged the American auto manufacturers in their own country by keeping quality high and costs low.

When Japan was experiencing their high labor costs, America was in the peak years of the baby boomers moving through their most productive labor years - 16 to 34 years old. All 76 million of them reached that age in the same time. This flood of the labor market held down prices for more than two decades with the effects only just now beginning to subside.

While the labor was cheap in this county, there was no incentive to seek labor saving devices. Even after Japan reduced its labor costs, the US industries did not respond until they began to lose large amounts of market share to Japanese products. Then they sought ways to reduce costs. One of those ways was to begin to move their assembly plants to other locations where labor was very cheap. The thinking was that this was cheaper than what Japan did and it avoided the problems of pollution controls and labor unions.

Unfortunately, a robot that can work 20 hours a day, 7 days a week for little more than a can of oil for pay will never be able to compete with a human worker. US auto makers underestimated the degree of efficiency and quality that a robotic force could apply to the complex assembly of cars and electronics. Despite moving 1000’s of jobs to other countries to reduce labor costs, the US businesses have never been able to compete with the quality and productivity of the Japanese robotic assembly plants.

New Motivator Coming:

American business, on average, has never been particularly smart when it comes to long range strategic planning. They are more driven by the quarterly stockholders reports and the annual fiscal balance sheets to worry about three to ten years away. As a result they almost never invest in the long term strategic development of their industry unless and until motivated by loss of profits.

Despite the massive bull market and the long running market expansion that has been flooding billions of dollars into US business, we are about to head into a much different market that will increase the pressure on many American manufacturers to invest in robotics.

Following the baby boom years of 1946 to 1964, when 76 million babies were born, there was about 13 years of reduced birth rates. In this 13 years, 41 million births occurred or about 45% of the baby boom years.

This baby lull period is now coming into the labor force as the boomers leave. In 1999, they are 22 to 35 years old while the boomers are 35 to 53 years old and beginning to move out of the labor force. By 2007, the boomers had started retiring. The net effect is that the labor force is decreasing by more than 30 million people.

There has also been a shift in attitudes and work ethics of these post-boomer babies. Many of them grew up in schools with computers and many more of them went to college than the boomers did. This effectively reduces the blue collar labor force even more. As with any limited supply, and constant or increasing demand, the cost goes up. Labor rates, as a share of real business costs have risen 45% in the last decade and will continue to rise sharply for the next 7 to 10 years - until the echo boomers (the children of the boomers) enter they work force.

The response to this gradual rise over the past decade has been a gradual rise in capital investment in plants and equipment resulting in a 1997 record high post-WWII investment of 16% of their total economic activity. That percentage will be seen as low by comparison in the next few years.

Robotics to the Rescue