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Dr. Joe's Random Thoughts

The elections turned out a little different than discussed at Graph Expo,

By Dr. Joe Webb
Published: November 20, 2014

The elections turned out a little different than discussed at Graph Expo, but the effects are the same. There I presented the idea that the races for the Senate might be tighter and that there might actually be a chance of a deadlocked Senate rather than a Republican majority, depending how turnout was. I was wrong, but does it matter? The bottom line is that there is still a lame duck president for two years and a lame duck Senate for a few weeks. In the next two years, Congress is unlikely to pass anything with a veto-proof majority unless it's a blatant declaration of war after an attack, perish the thought. These political situations remind me of the old saying “when all is said and done, more will be said than done.”

More bills are likely to get to the Senate floor under the new leadership. One of the problems with the outgoing Senate leadership was that they were not letting legislation come to floor votes. This hurt Democratic candidates who were unable to point to even failed legislative attempts of interest to their constituencies. The Senate should run better, but it may be more dynamic inertia, where there is more activity to support an illusion of progress. It will be interesting to see: if nothing gets done, the proximity of the 2016 presidential elections will get the blame.

It's hard to believe that almost 30 years ago the vote in favor of the tax reform act of 1986 was 97-3, and that in the late 1990s, though they did not get along personally, Clinton and Gingrich found substantive political ground of mutual interest. That era starts to look better and better in retrospect though it was not generally believed so at the time.

* * *

Japan has been doing decades of quantitative easing and other monetary stimulation and they're still having problems. The cure of the problems always seems to be more monetary actions. Now they're in yet another recession. The declining population rate does not help, and neither does the aging population. The stimulation the economy needs is investment incentives and rising productivity. That cure is politically unlikely. I remember the 1980s fear-mongering lectures about how Japan was taking over the US economy. Things change.

* * *

Japan's growth in the 1980s was partly the result of the adoption of quality management principles, especially those developed by Edwards Deming. Many companies adopted the quality philosophies of him and others (Crosby, Juran, for example) and benefited greatly. The downside for many companies was that it fostered an inner-focused culture, a problem that caught up with them in the long run. It is fascinating that many of the quality initiatives were started at Motorola, which does not exist any more. There's nothing worse than producing goods of superior quality that no one wants.

This is what makes management so hard. You fix one thing and you realize something else is not right. Then when you fix that, the lack of attention to the thing you fixed earlier means that it's broken again. If there's one concept that's forgotten from the quality control movement, it's that it's supposed to be “continuous” quality improvement. It's continuous because markets, opportunities, technologies, resources, and other factors are always changing. Even strategic planning processes should be held accountable for continuous improvement.

* * *

There are growing concerns over the world economy, which make the US economy look better than it actually is. The rising dollar is reducing the costs of commodities here, but is also being used to create serious financial pressures on Russia's economy and its government since it relies so heavily on oil revenues. Russia's recent actions in Ukraine and other areas seems unaffected so far.

* * *

The current US debt is now $18 trillion. A reason interest rates may stay low is that Congress (and perhaps the President) will pressure the Fed to keep them that way, despite the Fed's independence. A one percentage point rise in rates will increase the annual deficit by $180 billion. No one on the current Fed board has the stubbornness of Paul Volcker, possibly the greatest Fed chairman in history, to withstand the pressure. There are lower rates around the world, so even if the Fed chose to try to raise rates, there is likely to be demand that will push rates back down. Fed actions can directly affect only short term rates, but their actions and economic outlook influence the others.

* * *

Since the Volcker years, there have been many changes in the nature of government reporting of economic statistics. There are changes in methodologies in inflation and employment reporting since that time that affect their levels. Inflation reporting using today's methods might have cut the inflation rate in half. Unemployment may have been lower by three percentage rates. That is, using the 1980s methodologies there are estimates that today's inflation rate is actually closer to 7%, and the most reported unemployment rate (U-3) would still be in double digits. The inflation rate in today's method is getting a “hedonic” adjustment for quality and technology advances; the employment rate drops out very long-term discouraged workers. The changes to these methods occurred more than 25 years ago. The concern is that we might be masking the extent of economic conditions, similar to putting a thermometer under cold water prior to reading it.

You really have to wonder if Volcker would have been presented with data prepared by today's methods if he would have acted as aggressively as he did.

* * *

You rarely see this figure, but that $18 trillion is not the real debt obligation of the US. If the Feds used GAAP accounting (generally accepted accounting principles) like large businesses must, it would be $95 trillion. That would include future obligations of contracts, mandates, and transfer payments.

* * *

Speaking of inflation, the USDA is looking for more money to promote beef sales. In current dollars, beef is at all time high prices. As the press release says “Additional resources could help increase demand for beef both domestically and internationally, thus benefiting cattle producers and the domestic beef industry. USDA is acting to help beef producers continue to enjoy these benefits—and strengthen them—in a way that works for all producers.” Did I miss it or is the word “consumer” missing from that statement? It is in the press release related to more consumer information and more consumer advertising. But there's nothing about making beef more affordable. It's running 3x to 4x the Consumer Price Index.

* * *

I was at the Print Community Forum held outside Toronto last week. Canada's always been an interesting market for me. I'm always amazed at how much Canadians know about the US and its economy and how little Americans know about their economy and their country. Toronto has now passed Chicago in size, is attracting people from around the world, and is growing in size at about 35,000 to 40,000 new residents a year. One of our family's favorite vacations was there; there's lots of great things to do that are free, one of which is the police museum.

* * *

The ACA kerfuffle with Jonathan Gruber is all about gaming the scoring (estimates of revenues and costs) of legislation by the Congressional Budget Office. The CBO is considered to be objective. More accurately, the CBO must follow proscribed rules for estimating the costs of legistlation. Everyone knows those rules, so the language of legislation is crafted in a way that gives the writers of legislation what they need. What was needed to pass the ACA was that the revenue raised not be considered a tax. They got what they needed, and strangely enough, the Supreme Court said that the ACA was legal because it was a tax. But that was long after the ACA had passed, and the Supreme Court does not have to consider anything the CBO does in its decisions.

How often do managers construct their forecasts, budgets, and timing of expenditures in a manner that will earn the approval of top level executives? That is, if those documents and spreadsheets had realistic assessments they would not be approved. How often has something been approved with the paperwork to follow, and that paperwork does not have a basis in reality? We've all seen it in business, and I've seen it in consulting projects.

It's a sign of a culture that cannot deal with direct talk and cold facts. When that culture is ingrained in a bureaucracy, a company leaves itself open to be blindsided by new competitors. Are there people in your company who operate like Jonathan Gruber? He's not new: he's just today's story. If you are in a large company, are there people who seemingly know how to get things approved when others can't? And are they getting things approved that people know won't work out? When energy is spent navigating a bureaucracy rather than the marketplace, something bad is bound to happen. One of those casualties is the death of creativity and enthusiasm, especially of younger staff whom you will need in later years. Be careful.

* * *

There are times the CBO gets frustrated when they know they are being played. They will often add comments or additional perspective to their analyses to make clear they know what's happening. They have a very tough job, one that must often feel vital and useless at the same moment.

* * *

USPS raised revenue by more than half billion, and lost $5.5 billion -- if the USPS was in Australia, would it swirl in the opposite direction?

There is a new Postmaster General about to take office, and yet again it's someone with USPS experience.

This is all another sign that the USPS is not a real business despite their protests. Any business that has revenue declines and deep losses would have fired their top management long ago, and stockholders would have demanded that new top executives come from outside the company and the industry. The Postal Regulatory Commission is not a Board of Directors, unfortunately.

* * *

I was having a talk about careers and those occasional things that discourage young executives. I realized that 2015 will be the 30th anniversary of my being told I had no future in the graphic arts industry. And it will be 35 years that I was told there was no future for me in one of the industry's largest suppliers. Funny how that happens. Strive to do your best. Listen to others who opine differently than you do. Stay true to your beliefs. Keep the faith.

* * *

To our US readers, have a healthy and happy Thanksgiving.

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Dr. Joe Webb is one of the graphic arts industry's best-known consultants, forecasters, and commentators. He is the director of WhatTheyThink.com's Economics and Research Center.

What do you think? Please send feedback to Dr. Joe by emailing him at drjoe@whattheythink.com.

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