Friday, April 25, 2008

The Chain of Command

First let me say that I wholeheartedly believe that the majority of our government is comprised of good people doing their best to do what they believe is right. However, I also believe that the chain of command in this country has been turned on its head in many instances.

Businesses and individuals are not here to serve the will of the government. It's the other way around. We are the bosses. They are the employees. We oversee and direct them. Yet government has taken on a leadership role in many aspects of our society, whether it be through zoning regulations, tax policy, resource distribution, or any number of tactics aimed at influencing the behavior and direction of the people they represent. They have taken the leadership role, not by force, but by default. Too often, people are too afraid of potential fines, permit denials, or some other form of retribution to speak out when they feel the government has overstepped its bounds.

Fortunately, I have found these fears to be largely unwarranted in our particular community. While I disagree with many of the tactics and policies of local authorities, as have many others, I have been able to speak my mind and make my case without undue reprisal. Spirited discourse, yes, retribution, no.

My suggestion here is not revolution but open and honest communication. When your government appears to be going astray, go tell them. Go to the public meeting, make the phone call, send the email. Keep it civil, concise and on point. You may not get "Gee you're right" right off the bat, but they will listen. If you make your grievance widely known (again make the logical case, not the emotional one), other voices will join yours, then they have to listen. After all, we're the boss.

This is your country. Start running it.

Thursday, April 24, 2008

Afghanistan - An alternative to Opium Production

Even as NATO proposes troop drawdowns in three years as the Afghan army gains strength, they know they may be leaving behind a major problem in establishing order and stability in the region. Afghanistan produces 93% of the worlds opium. Efforts to erradicate the poppy production have utterly failed.

As illustrated in the book Freakonomics, it's always helpful to approach these types of problems by looking at incentives. Why do so many Afghans risk the wrath of authorities to continue to produce poppy seeds? That's an easy one: money. The solution: money. Not a hand-out, a switch-out. New technologies have made a vast variety of agricultural products suitable for producing fuel. Amyris Biotechnologies has developed genetic engineering techniques that allow microbes to convert plant products into a number of commodities, including fuel.

NATO should consider appropriating funds to research the optimum agricultural product to commodity formula for the terrain currently being used for poppy production. It doesn't have to pay as well as the opium trade. Just enough to make the risk/reward ratio for poppy growing much less attractive.

Such technologies are already transforming Brazil into an alternative fuels powerhouse. When you factor in the cost of fighting poppy production by force alone, helping the locals get rich from other crops could be a real money saver as well as a path to peace. Who knows, Amyris may even come up with a way to turn poppy plants into fuel, or medicine or something much more productive than opium.

Sunday, April 20, 2008

A Stimulating Proposal

Suppose you're a municipality searching for ways to encourage and enable small business success in your community. What type of incentives should you provide? To whom should you offer them? You can't answer these questions without an understanding of the role of the small business in the economy.

First of all, you have to understand what makes a market. Transactions take place when I have something that is of more value to you than it is to me. For example, I have a marble handled widget polisher. In my opinion it's worth $1.80. In your eyes it's worth $2.20. I offer it at $2.00. A transaction takes place. Difference of opinion in regard to value is what makes a market.

Second you need to understand what types of businesses are necessary for the local economy and how you go about determining "what we need". Too often this is done in meetings or even public forums. Neither of which is more efficient than the market. It has been conventional wisdom that for a business to thrive, it must grow. However, as Doug Tatum points out in his book "No Man's Land", not all business models are conducive to growth. Some work better on a small scale. Indeed there are a number of businesses that have existed for decades that never have had more than a couple of people working them. Are they not valuable? How do you know? The fact that someone is making a living doing something is evidence in and of itself that the activity has value to the community. You cast a vote every time you buy something. You're saying "I like that" "Keep doing it".

Third you must look at how the small business fits into the overall economy. Large businesses need small businesses. Even big call centers need their carpets cleaned, their windows washed, they need phone techs, somewhere for people to eat lunch, office supplies and a host of other support products and services. These things cannot always be efficiently provided by other large businesses. In addition, the small business market offers a place for employees of large business to go when they decide it's time for something new. The typical large business has a few great paying jobs and a lot of not so great paying jobs. The supply of opportunity does not meet the demand. The small business market provides a venue for new ideas and innovation that may not fit the bill for the company someone is currently working for. The economy is not a big business vs. small business proposition. They work in tandem.

How can government help? Primarily by understanding and being aware of the principals above. Let's look at the marble handled widget transaction again. Suppose I were required to collect a sales tax, have a pre-sale safety inspection and file a widget sales registration for a fee. Now the price of the widget has increased by 50 cents, the "cost of commerce". Remember in my mind the widget was worth $1.80. For the transaction to make sense from my end I have to get more than $2.30 for it. But, in your mind the widget is only worth $2.20. You'd have to get it for less than $2.20 for the transaction to make sense to you. The transaction doesn't take place. The cost of commerce has squelched it. It is an obstacle to the free market. Governments interested in promoting commerce should focus on minimizing the cost of commerce.

Which businesses should be helped? All of them, and equally so. As explained in point two, the free choices of free individuals will determine which products and services are needed or wanted. The role of government in this dynamic should be limited to restricting products and services that are for some reason undesirable to the community. All legal entities should be equally enabled in the marketplace. No one needs a gaurantee of success. Only the opportunity to put forth their ideas on a fair playing field.

Finally, all decisions on creating a thriving market environment should start with the premise that every business is valuable. A business that employs one person is of great value to that person. If the market deems them unworthy, they will fail. You don't have to push them out or encourage them to take on a growth strategy that doesn't make sense for their business model.

In the short term it is politically tempting to tamper with the mechanics of the free market. After all, if a policy is implemented with your name on it and it leads to some measure of success, it can greatly further your career and your stature. However, the market doesn't respond well to tampering in the long term. One of the best things a municipal govenment can do to stimulate creativity and energy in the local marketplace is to understand and trust the free market and occasionally send a message to participants: "Thanks for participating. We're glad you're here. Keep up the good work." Then, just let the market do its thing.

Friday, April 4, 2008

Could "Talking Down" the Economy be a Good Thing?

Many politicians and pundits have been accused of "talking down" the economy for political gain. That is, exaggerating problems and using terms that don't really apply to the current situation to try to influence the general public's perception of how the economy is doing.

Technically, a recession is two consecutive quarters of negative growth. There's a couple of weeks' lag time between the end of a quarter and when the results are published. Since we haven't recorded even one quarter of negative growth yet, we won't know if we are currently in a recession until July of this year (assuming the first quarter was negative). This allows plenty of time for speculation and pronouncements.

A case in point may be President Bush Sr's re-election bid in 1992. We were in a recession at the end of '91. Hyperbole was the rule of the day. "Worst economy since the great depression...yadda, yadda, yadda") Statistically speaking the recession was shallow and short, actually ending in Spring of '92. However, it takes a couple of months to get the data that confirms what's happening in the economy. By the time people realized the recession was over and we were growing again, the election was also over.

All of the politically motivated hyperbole and the consequences thereof may actually have a positive effect in the long term. Our tolerance for economic pain has dropped substantially in the past few decades. Unemployment of 5% or less used to be considered "full employment" and many suggested we would never achieve it. Now, 5.1% unemployment is unacceptable. In the 70's inflation was in double digits, now 2.5% inflation is "out of control". It wasn't that long ago that a 30 year fixed interest rate of 8% was a bargain. Today, 7% would spur calls for impeachment and resignations. The politically motivated hyperbole has actually raised the bar for economic performance. This has been transferred to the business world due to the fact that politicians have very little power to change what's happening in the market place, except to the extent that they can influence the behavior of the players. They actually have to enable commerce and free trade, often by reducing taxes and regulation. This isn't a giant shift in philosophy, it's job preservation, but works almost as well.

A key component in this dynamic is the explosion of the number and variety of information outlets available to everyone. People become aware of, and respond to information much more rapidly than ever before. The task before incumbents today is to ensure that if first quarter growth is negative, second quarter growth is positive. In other words, this recession has to end before it even technically qualifies as a recession.

Not a bad challenge I think. Politics may be ugly, but every once it a while it can produce positive results. Elected officials may not always believe in or trust the free market, but they can understand that if it gets sick, they get fired. So like it or not, they have to take care of it.