Here's my column in this weekend's Financial Review:
Jack Frost nipping at your nose and bells ringing on Fifth Avenue mark the time of year: ’tis the annual tipping season in New York. That’s when all the doormen, supers, nannies, housekeepers, mail carriers, newspaper deliverers, garbage men and the like get a year-end bonus from their clients.The individual amounts can range from a few dollars up into the thousands. In total, seasonal tips will add up to a substantial chunk of a service person’s annual income.
But deciding whether and exactly how much to tip is entirely up to each New Yorker. For some it’s a matter of conscience. For others it’s a more self-interested calculation, a spreadsheet exercise.
The amazing thing about the peculiar American culture of tipping is that it actually works quite smoothly. There’s absolutely no recourse if an anticipated tip never materialises. Nevertheless, the tips arrive like clockwork. And in New York, it’s been perfected to a high degree.
Perhaps that’s only natural in a city that runs on voluntary payments. The waitress at the lowliest hamburger joint depends on tips for survival. And at the other end of the spectrum, a discretionary bonus is likely to make or break the year for New York’s loftiest banker.
The principle of letting the client decide how much an intangible service is worth, in some cases after it is rendered, has lots of interesting implications for business. As the global service economy continues to grow, entrepreneurs have been testing new business models that reflect the usefulness of voluntary payment schemes.
This month, comedian Louis C.K. became the latest entertainer to experiment with a version of pay-what-you-decide business model on the web.
For $5, fans of Louis C.K. could download a video of his comedy show recorded live at the Beacon Theatre in New York. Or they could watch it without paying anything since he didn’t even try to prevent pirating. Louis C.K. says he chose the low $5 price because it was nearly free. And he wanted downloading to be easy, almost like hitting a link and streaming.
In the first week 175,000 people paid the $5 to download his show. The comedian expects that to top out about 200,000. Assuming that pans out, Louis C.K. will have grossed $1 million. After production costs of $250,000, he estimates making $750,000 in profits from his experiment.
Other entertainers who have tried similar pay-what-you-decide business models include Radiohead, hip-hop singer Niggy Tardust, and comedian Steve Hofstetter.
And it’s not just limited to entertainers. The sandwich chain Panera Bread opened a pay-what-you-decide cafe in St Louis, Missouri, about a year ago. The company found it generated valuable goodwill towards its brand. Perhaps just as important, it turned a profit. Since then, Panera has opened a further two pay-what-you-decide cafes.
From its initial experiment, Panera gleaned an important insight into the behaviour of its customers. The sandwich chain found that roughly 60 per cent pay the suggested price and 20 per cent pay more. Only about 20 per cent underpay for their food.
For some time, small software operators on the web have been experimenting with the pay-what-you-decide model.
The potential for this approach is very large. After all,the entire charitable sector is based on a pay-what-you-decide model. Last year Americans paid almost $US300 billion to charitable organisations. That is the biggest sector by far of the pay-what-you-decide economy.
It could be a lesson for other sectors. Some that are in trouble, such as music and publishing, have struggled to adapt old business models to the ubiquitous online world. So far, much of their effort has gone into devising schemes to protect content from unauthorised, meaning unpaid, use.
This month in a lower Manhattan court, Sony Music and Warner Music joined Universal Music Group’s suit against Grooveshark.
Grooveshark isn’t selling the other companies’ content. Instead, they are streaming it without requiring payment to listeners who (presumably) don’t keep a copy.
There’s just one little problem. Given the state of technology, there’s no way to keep a lid on content. And worse, if you actually happen to succeed in your efforts to discourage somebody from listening to a song, or reading a story, you lose a potential supporter. Illicit users could turn out to be an important source of “word of mouth” advertising. And if the product is good, what’s to say they won’t become paying customers one day.
After all, if nobody pays for the waitress, or the musician, or the corporate executive’s bonus, why should anyone expect them to keep doing their thing?
In the end it all boils down to a matter of trust. And the thing is, people actually like it when you trust them. Letting the customer know that you are confident in the value of what you do, and then trusting the customer to pay fairly for that can build a strong relationship. There’s no better way to communicate your worth or to build a business.
The Australian Financial Review
Saturday, December 24, 2011
Saturday, December 17, 2011
Obama, Romney, Same Difference
America Inc: Please read my column in this week's Financial Review
As US businesses close out what looks to be a fairly good fiscal year, there’s plenty of uncertainty about what comes next.
The euro crisis still threatens to slow down the global economy. China’s economy has cooled as dramatically, making it difficult to predict growth coming from Asia. And recent signs of life in the US economy look suspiciously like a mirage that could disappear at any moment. Until there’s real movement in wages and employment it’s hard to believe consumers will be back en masse.
On top of all that, there’s a pretty vigorous competition to challenge for the presidency next year. With so much in play, companies struggle to figure out what they can count on.
On the political front at least, they may have less to worry about. When Americans vote next year, there may not be all that much at stake for business.
Start with the Republican primaries. As the contest unfolds, a parade of potential challengers has captured headlines then faded away. Former Alaska governor and “grizzly mom” Sarah Palin came and went. Self-described business success and reality TV host Donald Trump had his moment in the sun. For a brief time the right was enthralled with former Texas governor Rick Perry, until he couldn’t remember exactly which parts of the government he was desperate to shut down.
Now it’s Newt Gingrich, former House speaker, grabbing the spotlight. Gingrich is an interesting character. A former history professor at a small college who has described himself as a “world historical figure”, he has floated some pretty newsworthy ideas. Recently he made headlines by suggesting poor schoolchildren should be forced to work as janitors in their schools.
Despite the outlandish proposals, though, Gingrich has real leadership experience. He was the prime force behind a Republican takeover of Congress during the Clinton presidency.
But his political success is long gone. He never regained his power or popularity after he shut down the government under Bill Clinton. Since then sordid details of his personal life have come to light. He can count on a segment of the right wing for support, but if he is nominated to challenge Barack Obama it could be a disaster for Republicans.
Gingrich’s momentary popularity has surprised even him. He is only now trying to put together an organisation that could seriously campaign for the presidency, and it’s somewhat late in the game for that.
So that leaves Mitt Romney. Smart, disciplined and well financed, he has the organisation, the résumé and the staying power to earn the nomination. He doesn’t have personal popularity, true, but he can raise money and avoid mistakes.
The smart money is on Romney to get the nomination. If he does, a lot of the political uncertainty facing corporate America goes away. Obama and Romney are more alike than different on most issues affecting business.
Three years into his presidency, Obama is pretty much a known quantity. He’s pragmatic and incremental. And conservative, not in the ideological sense but in his basic character.
The Iraq war was his signature campaign issue and he’s only now winding that down. His biggest policy achievement, health care reform, wasn’t a radical departure from the status quo. And any president who squelches new clean air rules and allows oil drilling over the objections of environmentalists can’t be viewed as rabidly anti-business.
Conservatives label Obama “liberal” but when it comes to corporate America, he’s careful not to rock the boat. Witness the Occupy Wall Street movement. If Obama was really on the side of the “99 per cent”, the movement would not exist; its activists would be out campaigning for him.
While Obama is less of a liberal than he is often labelled, Romney is more of a centrist than he lets on. That’s why the right wing of the Republican party is so loath to elect him. In addition, his record as governor of Massachusetts isn’t exactly pro-business. One of his signature policies was to go after corporate tax loopholes to narrow the state budget deficit.
And then there’s the practical matter of a divided government. Even if Obama or Romney turn out to be more activist than they appear, it’s unlikely they’ll find the legislative support to make big changes. If Romney is elected, the Republicans could also take control of Congress. But experts consider that unlikely at this point, and they give Obama virtually no chance of getting a Democratic Congress. As president, either one would be forced to take a centrist approach.
As the presidential race gets into full swing, the candidates will be forced to promise lots of changes. The reality, though, looks to be more of the same.
Anna Bernasek writes on financial markets, the economy, Wall Street and public policy from New York. Her book The Economics of Integrity was published in 2010. Her column America Inc. appears each week in the Weekend Financial Review.
As US businesses close out what looks to be a fairly good fiscal year, there’s plenty of uncertainty about what comes next.
The euro crisis still threatens to slow down the global economy. China’s economy has cooled as dramatically, making it difficult to predict growth coming from Asia. And recent signs of life in the US economy look suspiciously like a mirage that could disappear at any moment. Until there’s real movement in wages and employment it’s hard to believe consumers will be back en masse.
On top of all that, there’s a pretty vigorous competition to challenge for the presidency next year. With so much in play, companies struggle to figure out what they can count on.
On the political front at least, they may have less to worry about. When Americans vote next year, there may not be all that much at stake for business.
Start with the Republican primaries. As the contest unfolds, a parade of potential challengers has captured headlines then faded away. Former Alaska governor and “grizzly mom” Sarah Palin came and went. Self-described business success and reality TV host Donald Trump had his moment in the sun. For a brief time the right was enthralled with former Texas governor Rick Perry, until he couldn’t remember exactly which parts of the government he was desperate to shut down.
Now it’s Newt Gingrich, former House speaker, grabbing the spotlight. Gingrich is an interesting character. A former history professor at a small college who has described himself as a “world historical figure”, he has floated some pretty newsworthy ideas. Recently he made headlines by suggesting poor schoolchildren should be forced to work as janitors in their schools.
Despite the outlandish proposals, though, Gingrich has real leadership experience. He was the prime force behind a Republican takeover of Congress during the Clinton presidency.
But his political success is long gone. He never regained his power or popularity after he shut down the government under Bill Clinton. Since then sordid details of his personal life have come to light. He can count on a segment of the right wing for support, but if he is nominated to challenge Barack Obama it could be a disaster for Republicans.
Gingrich’s momentary popularity has surprised even him. He is only now trying to put together an organisation that could seriously campaign for the presidency, and it’s somewhat late in the game for that.
So that leaves Mitt Romney. Smart, disciplined and well financed, he has the organisation, the résumé and the staying power to earn the nomination. He doesn’t have personal popularity, true, but he can raise money and avoid mistakes.
The smart money is on Romney to get the nomination. If he does, a lot of the political uncertainty facing corporate America goes away. Obama and Romney are more alike than different on most issues affecting business.
Three years into his presidency, Obama is pretty much a known quantity. He’s pragmatic and incremental. And conservative, not in the ideological sense but in his basic character.
The Iraq war was his signature campaign issue and he’s only now winding that down. His biggest policy achievement, health care reform, wasn’t a radical departure from the status quo. And any president who squelches new clean air rules and allows oil drilling over the objections of environmentalists can’t be viewed as rabidly anti-business.
Conservatives label Obama “liberal” but when it comes to corporate America, he’s careful not to rock the boat. Witness the Occupy Wall Street movement. If Obama was really on the side of the “99 per cent”, the movement would not exist; its activists would be out campaigning for him.
While Obama is less of a liberal than he is often labelled, Romney is more of a centrist than he lets on. That’s why the right wing of the Republican party is so loath to elect him. In addition, his record as governor of Massachusetts isn’t exactly pro-business. One of his signature policies was to go after corporate tax loopholes to narrow the state budget deficit.
And then there’s the practical matter of a divided government. Even if Obama or Romney turn out to be more activist than they appear, it’s unlikely they’ll find the legislative support to make big changes. If Romney is elected, the Republicans could also take control of Congress. But experts consider that unlikely at this point, and they give Obama virtually no chance of getting a Democratic Congress. As president, either one would be forced to take a centrist approach.
As the presidential race gets into full swing, the candidates will be forced to promise lots of changes. The reality, though, looks to be more of the same.
Anna Bernasek writes on financial markets, the economy, Wall Street and public policy from New York. Her book The Economics of Integrity was published in 2010. Her column America Inc. appears each week in the Weekend Financial Review.
Friday, December 9, 2011
America Inc: Heinz meanz big or small beanz
Please read my column in this weekend's Australian Financial Review called America Inc:
Americans are getting a sense that the nation has split into haves and have-nots. Corporate America already knows it.
Since the industrial revolution, American business prospered on the back of a simple strategy: sell to the growing middle class. That formula produced corporate icons such as Ford, Procter & Gamble, Johnson & Johnson and Avon.
As the middle class grew, so did Corporate America’s reach. Products like Campbell’s Soup and Tide laundry detergent could be found in any home across the nation. So universal were certain consumer products that in the 1960s Andy Warhol famously painted Campbell’s soup, Coke and other household names.
“What's great about this country is that America started the tradition where the richest consumers buy essentially the same things as the poorest,” Warhol said. “You can be watching TV and see Coca-Cola, and you know that the President drinks Coca-Cola, Liz Taylor drinks Coca-Cola, and just think, you can drink Coca-Cola, too. A Coke is a Coke and no amount of money can get you a better coke than the one the bum on the corner is drinking. All the cokes are the same and all the cokes are good. Liz Taylor knows it, the President knows it, the bum knows it, and you know it.”
Today perhaps the only household product Warhol could paint is Google. With the growth of premium products, organic goods and fancy foods, there aren’t many brands appealing to all levels of customers.
Welcome to the bifurcated market. Selling to consumers in the U.S. means picking a side: the haves or the have-nots, the high end or the low. And tellingly, companies are preparing for the change to last.
In the past two years, the trend toward segmentation has accelerated. This is due to greater inequality and an economic recovery weighted towards the top. While unemployment remains stubbornly high at close to 9 percent, the stock market has been very strong. The Dow Jones Industrial Average is up 85 percent since its low back in March 2009.
Some companies are scrambling to capture the high end. Ford is one example. Finding itself on the back foot in one of the fastest growing markets in the industry, luxury cars, Ford is investing heavily to revamp Lincoln, its premium brand. In a much anticipated launch this January, Ford has promised to deliver a luxury vehicle unlike any other on the market. And analysts say the launch is critical to the carmaker’s success.
Focusing on the opposite end of the market are companies like H.J. Heinz, maker of ketchup, frozen foods, baked beans and condiments. Heinz recently announced a drop in earnings largely due to flat sales in its North American consumer products division. As a result, it has changed its strategy and will accelerate product launches targeting consumers at the low end of the income scale, essentially households earning less than $50,000 a year.
Heinz found that more consumers at the low end were buying smaller sizes of products because they came with a lower price tag. To get at this market segment, Heinz will launch a 10 Oz package of ketchup in a stand up pouch at a suggested retail price of 99 cents. In addition, Heinz will sell other products like mustard and beans at 99 cents.
Procter & Gamble, traditionally selling to the middle class is also being forced to change course, repositioning its products away from the middle but toward both the high and low end. For the first time in 38 years, Procter & Gamble launched a new dish soap called Gain with a bargain price.
But those companies already positioned at either end of the spectrum aren’t sitting still. The high end is going more up market and the low end more down market.
This is evident in prices where luxury retailers are raising prices while low-end retailers are discounting heavily. For instance, the most expensive pair of shoes at Saks Fifth Avenue cost a bit over $1,000 a year ago. Since then it’s passed $2,000. Increasing prices for premium products and services are evident in everything from business and first class air travel, wine, jewelry, restaurants, and clothing.
Operating in a market where perceived value is often measured by price, high-end retailers want to make sure they are seen as the ultimate for luxury. After all it’s a lucrative market. The top 5% of income earners accounts for about one third of spending.
At the same time, companies like Walmart, catering to the low-end, have to watch their step. Walmart has to be careful not to be undercut by other discounters such as Family Dollar Stores, a growing low price merchant.
What’s good for companies is good for investors. Two years ago, Citigroup created a stock market index of two dozen or so companies that are best positioned to benefit from the segmentation of the consumer market. Included in the list of companies are Saks and Estee Lauder at the high end, with Family Dollar Stores and Kellogg at the low. Since its formation, the index has outperformed the broader market.
It’s hard to foresee any change in a trend that’s fracturing the American market. It would probably take a sharp drop in unemployment and a convincing rise in wages to reverse the momentum. And the chances of that happening anytime soon are pretty slim.
Americans are getting a sense that the nation has split into haves and have-nots. Corporate America already knows it.
Since the industrial revolution, American business prospered on the back of a simple strategy: sell to the growing middle class. That formula produced corporate icons such as Ford, Procter & Gamble, Johnson & Johnson and Avon.
As the middle class grew, so did Corporate America’s reach. Products like Campbell’s Soup and Tide laundry detergent could be found in any home across the nation. So universal were certain consumer products that in the 1960s Andy Warhol famously painted Campbell’s soup, Coke and other household names.
“What's great about this country is that America started the tradition where the richest consumers buy essentially the same things as the poorest,” Warhol said. “You can be watching TV and see Coca-Cola, and you know that the President drinks Coca-Cola, Liz Taylor drinks Coca-Cola, and just think, you can drink Coca-Cola, too. A Coke is a Coke and no amount of money can get you a better coke than the one the bum on the corner is drinking. All the cokes are the same and all the cokes are good. Liz Taylor knows it, the President knows it, the bum knows it, and you know it.”
Today perhaps the only household product Warhol could paint is Google. With the growth of premium products, organic goods and fancy foods, there aren’t many brands appealing to all levels of customers.
Welcome to the bifurcated market. Selling to consumers in the U.S. means picking a side: the haves or the have-nots, the high end or the low. And tellingly, companies are preparing for the change to last.
In the past two years, the trend toward segmentation has accelerated. This is due to greater inequality and an economic recovery weighted towards the top. While unemployment remains stubbornly high at close to 9 percent, the stock market has been very strong. The Dow Jones Industrial Average is up 85 percent since its low back in March 2009.
Some companies are scrambling to capture the high end. Ford is one example. Finding itself on the back foot in one of the fastest growing markets in the industry, luxury cars, Ford is investing heavily to revamp Lincoln, its premium brand. In a much anticipated launch this January, Ford has promised to deliver a luxury vehicle unlike any other on the market. And analysts say the launch is critical to the carmaker’s success.
Focusing on the opposite end of the market are companies like H.J. Heinz, maker of ketchup, frozen foods, baked beans and condiments. Heinz recently announced a drop in earnings largely due to flat sales in its North American consumer products division. As a result, it has changed its strategy and will accelerate product launches targeting consumers at the low end of the income scale, essentially households earning less than $50,000 a year.
Heinz found that more consumers at the low end were buying smaller sizes of products because they came with a lower price tag. To get at this market segment, Heinz will launch a 10 Oz package of ketchup in a stand up pouch at a suggested retail price of 99 cents. In addition, Heinz will sell other products like mustard and beans at 99 cents.
Procter & Gamble, traditionally selling to the middle class is also being forced to change course, repositioning its products away from the middle but toward both the high and low end. For the first time in 38 years, Procter & Gamble launched a new dish soap called Gain with a bargain price.
But those companies already positioned at either end of the spectrum aren’t sitting still. The high end is going more up market and the low end more down market.
This is evident in prices where luxury retailers are raising prices while low-end retailers are discounting heavily. For instance, the most expensive pair of shoes at Saks Fifth Avenue cost a bit over $1,000 a year ago. Since then it’s passed $2,000. Increasing prices for premium products and services are evident in everything from business and first class air travel, wine, jewelry, restaurants, and clothing.
Operating in a market where perceived value is often measured by price, high-end retailers want to make sure they are seen as the ultimate for luxury. After all it’s a lucrative market. The top 5% of income earners accounts for about one third of spending.
At the same time, companies like Walmart, catering to the low-end, have to watch their step. Walmart has to be careful not to be undercut by other discounters such as Family Dollar Stores, a growing low price merchant.
What’s good for companies is good for investors. Two years ago, Citigroup created a stock market index of two dozen or so companies that are best positioned to benefit from the segmentation of the consumer market. Included in the list of companies are Saks and Estee Lauder at the high end, with Family Dollar Stores and Kellogg at the low. Since its formation, the index has outperformed the broader market.
It’s hard to foresee any change in a trend that’s fracturing the American market. It would probably take a sharp drop in unemployment and a convincing rise in wages to reverse the momentum. And the chances of that happening anytime soon are pretty slim.
Friday, December 2, 2011
Obama's job on the line with jobless
My column in this weekend's Financial Review:
If there’s a single number that could put President Barack Obama out of work it’s the US jobless rate. Since April, the picture has been pretty much the same.
Unemployment has been stuck around 9 per cent and most economists aren’t forecasting big changes for the year ahead. Even the White House predicts a jobless rate of 9 per cent in 2012 with a five-year wait before employment returns to more normal levels.
Despite the grim outlook, there’s no significant jobs initiative from Congress or the Federal Reserve. That seems due to a widely prevalent sentiment that the nation can’t afford a big jobs program. But in all the bickering and feet dragging, something critical has been lost: high unemployment carries a huge cost. Without an understanding of the magnitude of that cost, it’s hard to justify spending on policies to increase employment.
So how big is the cost? Start with how many people are out of work today. According to the official metric, 13.9 million Americans were unemployed in October.
That figure alone provides only part of the story. In addition to the official rate, the Bureau of Labor Statistics tracks what it calls alternative measures of labour under-employment.When these are added to the official rate, a more accurate picture of the unemployment situation emerges.
There are three components of the bureau’s underemployment measure. The first is discouraged workers – people not looking for work at all because they don’t believe there are jobs available to them. This is close to 1 million.
Second, there are people who have been looking for work but didn’t actively do so in the four weeks before the Bureau of Labor Statistics conducted its survey. The bureau calls these people marginally attached to the workforce and there were around 1.6 million in October.
Third, the bureau adds in involuntary part-time workers, people who would like to work full time but can’t find employment or have had their hours cut back. There are about 8.9 million Americans in this group.
The bureau adds these numbers to the official rate to come up with an alternative measure of unemployment with the catchy name U-6. As of October, U-6 was 16 per cent. That means out of a total civilian workforce of 154 million, 25 million Americans were idle or only partially utilised.
The economic cost of that missing output is significant.
While it’s tempting to imagine unemployment at zero, even in the best of times natural changes in industries and movement among the workforce results in some portion sitting idle. There will always be workers who voluntarily forgo an available job because they see better prospects just around the corner. So economists talk about a natural rate of unemployment.
In the last few decades, the natural rate of unemployment in the US has been about 4 per cent. In fact, unemployment was at 4.4 per cent in May 2007. At that time U-6, the alternative measure, was 8.8 per cent. Rounded off, each measure was precisely half the rate today.
Given the average weekly wage of $US795, putting half the jobless and underemployed into full-time positions would increase output by about $US432 billion a year. That represents the direct loss of output, or GDP, from jobless rates twice as high as it could be.
But that’s just a baseline number. The benefit of moving to full employment could be far larger. Economists still use a rule of thumb called Okun’s Law, named after economist Arthur Okun who found a relationship between unemployment and national output in the 1960s. It’s thought a rise in unemployment by 1 percentage point causes real GDP to drop 2 percentage points.
Cutting unemployment in half might lift GDP by $US1.4 trillion a year, three times the increase in wages alone. That is nearly 10 per cent of the total economy. And even that may be just the tip of the iceberg. The value of an additional $US1.4 trillion a year in output over a long term could be something like 10 times that number. A potential $US14 trillion reward awaits if policymakers can shrink unemployment.
None of this considers the human side of unemployment. Diminished health, marital strife, child neglect and social ills are all associated with the stresses of involuntary unemployment. There’s no accepted way of measuring these in dollar terms, but there is little doubt they exist.
Meanwhile, Congress and the Fed dither, apparently relying on an implicit assumption that unemployment really only hurts the unemployed and they may well deserve it. The truth is it’s a huge cost to the whole nation. With next year’s elections drawing closer and no action in sight, job security among Washington’s political class may be at stake.
She is a business commentator for CNBC. Her book The Economics of Integrity was published in 2010. Her column AMERICA INC appears each week in the Weekend AFR.
Anna Bernasek writes on financial markets, the economy, Wall Street and public policy from New York. A former finance reporter for The Sydney Morning Herald, Bernasek has been based in the US since 1999 writing for Fortune Magazine, The New York Times, The Washington Post, and the Huffington Post.
If there’s a single number that could put President Barack Obama out of work it’s the US jobless rate. Since April, the picture has been pretty much the same.
Unemployment has been stuck around 9 per cent and most economists aren’t forecasting big changes for the year ahead. Even the White House predicts a jobless rate of 9 per cent in 2012 with a five-year wait before employment returns to more normal levels.
Despite the grim outlook, there’s no significant jobs initiative from Congress or the Federal Reserve. That seems due to a widely prevalent sentiment that the nation can’t afford a big jobs program. But in all the bickering and feet dragging, something critical has been lost: high unemployment carries a huge cost. Without an understanding of the magnitude of that cost, it’s hard to justify spending on policies to increase employment.
So how big is the cost? Start with how many people are out of work today. According to the official metric, 13.9 million Americans were unemployed in October.
That figure alone provides only part of the story. In addition to the official rate, the Bureau of Labor Statistics tracks what it calls alternative measures of labour under-employment.When these are added to the official rate, a more accurate picture of the unemployment situation emerges.
There are three components of the bureau’s underemployment measure. The first is discouraged workers – people not looking for work at all because they don’t believe there are jobs available to them. This is close to 1 million.
Second, there are people who have been looking for work but didn’t actively do so in the four weeks before the Bureau of Labor Statistics conducted its survey. The bureau calls these people marginally attached to the workforce and there were around 1.6 million in October.
Third, the bureau adds in involuntary part-time workers, people who would like to work full time but can’t find employment or have had their hours cut back. There are about 8.9 million Americans in this group.
The bureau adds these numbers to the official rate to come up with an alternative measure of unemployment with the catchy name U-6. As of October, U-6 was 16 per cent. That means out of a total civilian workforce of 154 million, 25 million Americans were idle or only partially utilised.
The economic cost of that missing output is significant.
While it’s tempting to imagine unemployment at zero, even in the best of times natural changes in industries and movement among the workforce results in some portion sitting idle. There will always be workers who voluntarily forgo an available job because they see better prospects just around the corner. So economists talk about a natural rate of unemployment.
In the last few decades, the natural rate of unemployment in the US has been about 4 per cent. In fact, unemployment was at 4.4 per cent in May 2007. At that time U-6, the alternative measure, was 8.8 per cent. Rounded off, each measure was precisely half the rate today.
Given the average weekly wage of $US795, putting half the jobless and underemployed into full-time positions would increase output by about $US432 billion a year. That represents the direct loss of output, or GDP, from jobless rates twice as high as it could be.
But that’s just a baseline number. The benefit of moving to full employment could be far larger. Economists still use a rule of thumb called Okun’s Law, named after economist Arthur Okun who found a relationship between unemployment and national output in the 1960s. It’s thought a rise in unemployment by 1 percentage point causes real GDP to drop 2 percentage points.
Cutting unemployment in half might lift GDP by $US1.4 trillion a year, three times the increase in wages alone. That is nearly 10 per cent of the total economy. And even that may be just the tip of the iceberg. The value of an additional $US1.4 trillion a year in output over a long term could be something like 10 times that number. A potential $US14 trillion reward awaits if policymakers can shrink unemployment.
None of this considers the human side of unemployment. Diminished health, marital strife, child neglect and social ills are all associated with the stresses of involuntary unemployment. There’s no accepted way of measuring these in dollar terms, but there is little doubt they exist.
Meanwhile, Congress and the Fed dither, apparently relying on an implicit assumption that unemployment really only hurts the unemployed and they may well deserve it. The truth is it’s a huge cost to the whole nation. With next year’s elections drawing closer and no action in sight, job security among Washington’s political class may be at stake.
She is a business commentator for CNBC. Her book The Economics of Integrity was published in 2010. Her column AMERICA INC appears each week in the Weekend AFR.
Anna Bernasek writes on financial markets, the economy, Wall Street and public policy from New York. A former finance reporter for The Sydney Morning Herald, Bernasek has been based in the US since 1999 writing for Fortune Magazine, The New York Times, The Washington Post, and the Huffington Post.
Sunday, November 27, 2011
Why U.S. Bankers Can't Sleep at Night
The Australian Financial Review, November 26, 2011
Anna Bernasek New York
What a difference a month makes. When US banks released third- quarter earnings in October, sentiment was riding high. In stark contrast to their European counterparts, US banks had recovered from the 2008 financial crisis and were poised to gain momentum. But now a looming euro debacle is fuelling fears that again America’s financial institutions are vulnerable.
With the sharemarket under heavy selling pressure this week, financials were singled out for punishment. The mood has soured since November 16 when Fitch Ratings warned it might reduce its “stable” rating for major US trading banks. “Unless the euro zone debt crisis is resolved in a timely and orderly manner, the broad outlook for US banks will darken,” Fitch said. “The risks of a negative shock are rising.”
By most reported measures though, US banks are in far better shape today than leading up to the 2008 financial crisis.
Start with capital levels. From the end of 2008 to 2010, common equity increased by more than $US300 billion at the 19 largest US bank holding companies, the Federal Reserve says. Capital levels increased further in 2011 and by the third quarter were at their highest level since 1938. Timothy Geithner, the Secretary of Treasury, says most US banks have reached the new minimum capital standards set out by the Basel III international agreement.
In addition to substantial capital, banks have considerable liquidity as economic softness kept US banks from ratcheting up risk. For the first time, US banks have fewer loans on their books than deposits. Meanwhile, plentiful cheap money has kept profits healthy. The Federal Deposit Insurance Corp reported this week that the industry earned $35.3 billion during the third quarter, up $11.5 billion from a year ago. That puts US bank earnings at their highest level since the second quarter of 2007.
In another sign of health, legacy issues from 2008 have shrunk. The number of problem banks on FDIC’s watch-list declined again in the third quarter to 844. The majority of the troubled banks are small, having combined assets amounting to under 3 per cent of total industry assets.
The rules of the road have tightened. The Federal Reserve’s annual stress test got underway this week. That process will culminate with a pass or fail verdict handed down to major banks early next year. The test is tougher than last year’s to take into account the European crisis.
Banks have been asked to prepare for a “doomsday” scenario of 12 per cent jobless next year, an 8 per cent drop in GDP and home prices down another 20 per cent.
While the European crisis seems threatening, it may also turn out to be an opportunity. As French banks in particular disappear from large syndicated loan deals, US banks are there to step in.
Perhaps the biggest threat is the one that keeps bankers up at night. “Ask any US bank of significance today and you’d find they’re not worried about direct exposure to Europe,” says Tom McGuire, head of the capital advisory group at Barclays Capital in New York. “They’re worried about what happens to confidence. No one knows the downside if the European crisis isn’t resolved.”
If business and consumer confidence vanishes, banks will be hit in their weakest area, loan growth. That would bring earnings under pressure, weakening their entire business model. Instead of being poised for growth, banks would be back to shrinkage. Knock-on effects such as weakness in housing and real estate would affect asset quality, potentially reversing the positive trends.
While bankers seem unconcerned about direct exposure outside the US, industry experts believe it is still a big unknown. Fitch’s downgrade was based on the industry’s exposure to potential losses arising in Europe. Up to now only a handful of banks have released any details. These include Bank of America, which said its exposure to Greece, Ireland, Portugal and Spain totalled $US14.6 billion, while Citibank said its exposure was $US20.6 billion and JP Morgan $US15 billion.
But the amounts do not clarify all the issues. In its report, Fitch criticised the banks for not airing the extent of their holdings of European sovereign debt or their trading positions with European counterparties.
In addition, if the crisis spreads, US banks will find it difficult to avoid. The Congressional Research Service estimates that while the exposure of US banks to Greece, Ireland, Portugal and Spain amounted to $US641 billion, their exposure to German and French banks comes to more than $US1.2 trillion. Combined, that makes up something like 15 per cent of total US commercial banking assets.
As Europe lurches along, counterparty risk could become a big threat. Still an opaque subject, the vast interconnectedness of modern banking nearly brought the global financial industry to its knees during the 2008 crisis.
And no one really knows how big a problem counterparty risk is until it’s too late. After all who can forget Lehman Brothers. On the day of its bankruptcy, Lehman held an investment-grade credit rating.
Anna Bernasek New York
What a difference a month makes. When US banks released third- quarter earnings in October, sentiment was riding high. In stark contrast to their European counterparts, US banks had recovered from the 2008 financial crisis and were poised to gain momentum. But now a looming euro debacle is fuelling fears that again America’s financial institutions are vulnerable.
With the sharemarket under heavy selling pressure this week, financials were singled out for punishment. The mood has soured since November 16 when Fitch Ratings warned it might reduce its “stable” rating for major US trading banks. “Unless the euro zone debt crisis is resolved in a timely and orderly manner, the broad outlook for US banks will darken,” Fitch said. “The risks of a negative shock are rising.”
By most reported measures though, US banks are in far better shape today than leading up to the 2008 financial crisis.
Start with capital levels. From the end of 2008 to 2010, common equity increased by more than $US300 billion at the 19 largest US bank holding companies, the Federal Reserve says. Capital levels increased further in 2011 and by the third quarter were at their highest level since 1938. Timothy Geithner, the Secretary of Treasury, says most US banks have reached the new minimum capital standards set out by the Basel III international agreement.
In addition to substantial capital, banks have considerable liquidity as economic softness kept US banks from ratcheting up risk. For the first time, US banks have fewer loans on their books than deposits. Meanwhile, plentiful cheap money has kept profits healthy. The Federal Deposit Insurance Corp reported this week that the industry earned $35.3 billion during the third quarter, up $11.5 billion from a year ago. That puts US bank earnings at their highest level since the second quarter of 2007.
In another sign of health, legacy issues from 2008 have shrunk. The number of problem banks on FDIC’s watch-list declined again in the third quarter to 844. The majority of the troubled banks are small, having combined assets amounting to under 3 per cent of total industry assets.
The rules of the road have tightened. The Federal Reserve’s annual stress test got underway this week. That process will culminate with a pass or fail verdict handed down to major banks early next year. The test is tougher than last year’s to take into account the European crisis.
Banks have been asked to prepare for a “doomsday” scenario of 12 per cent jobless next year, an 8 per cent drop in GDP and home prices down another 20 per cent.
While the European crisis seems threatening, it may also turn out to be an opportunity. As French banks in particular disappear from large syndicated loan deals, US banks are there to step in.
Perhaps the biggest threat is the one that keeps bankers up at night. “Ask any US bank of significance today and you’d find they’re not worried about direct exposure to Europe,” says Tom McGuire, head of the capital advisory group at Barclays Capital in New York. “They’re worried about what happens to confidence. No one knows the downside if the European crisis isn’t resolved.”
If business and consumer confidence vanishes, banks will be hit in their weakest area, loan growth. That would bring earnings under pressure, weakening their entire business model. Instead of being poised for growth, banks would be back to shrinkage. Knock-on effects such as weakness in housing and real estate would affect asset quality, potentially reversing the positive trends.
While bankers seem unconcerned about direct exposure outside the US, industry experts believe it is still a big unknown. Fitch’s downgrade was based on the industry’s exposure to potential losses arising in Europe. Up to now only a handful of banks have released any details. These include Bank of America, which said its exposure to Greece, Ireland, Portugal and Spain totalled $US14.6 billion, while Citibank said its exposure was $US20.6 billion and JP Morgan $US15 billion.
But the amounts do not clarify all the issues. In its report, Fitch criticised the banks for not airing the extent of their holdings of European sovereign debt or their trading positions with European counterparties.
In addition, if the crisis spreads, US banks will find it difficult to avoid. The Congressional Research Service estimates that while the exposure of US banks to Greece, Ireland, Portugal and Spain amounted to $US641 billion, their exposure to German and French banks comes to more than $US1.2 trillion. Combined, that makes up something like 15 per cent of total US commercial banking assets.
As Europe lurches along, counterparty risk could become a big threat. Still an opaque subject, the vast interconnectedness of modern banking nearly brought the global financial industry to its knees during the 2008 crisis.
And no one really knows how big a problem counterparty risk is until it’s too late. After all who can forget Lehman Brothers. On the day of its bankruptcy, Lehman held an investment-grade credit rating.
Friday, November 25, 2011
Friday, November 18, 2011
Can the U.S turn itself around?
Read my new weekly column on the US Economy and Business for the Financial Review.
Thursday, October 13, 2011
Trust is yours to build
As I was reading about the trust deficit on Wall Street this morning in the NYT business section, I was struck by our conventional notion of trust. We tend to think of trust as something that one has or doesn’t have and it’s almost out of our control. Kind of like the weather. Either it rains or not and we can’t change that. But trust is a company’s most valuable asset and the key to building long term wealth. The sooner Wall Street understands that, the better off everyone will be: banks, financial markets, the public and the entire economy. Canadian financial leaders seem to get it. I just came back from Toronto where I gave a presentation on “The Integrity Opportunity” to the Investment Industry Association of Canada. It was their annual conference and the entire theme was about building trust in the financial industry. Why aren’t our banks and financial institutions talking about how to build trust? Until they do, their economic fortunes will suffer and ours too.
Wednesday, February 9, 2011
Toyota: a classic case of trust
The reaction to the announcement that a federal investigation into Toyota found no electronic flaws in its vehicles was revealing. Some commentators tried to pick holes in the 10 month long investigation aided by NASA engineers while others like the NYT editorial column shifted its focus off Toyota to a problem of federal oversight. (Without dealing with its past criticisms of the carmaker in any way) Even a news story in the NYT business section played down the findings saying in the third paragraph of the story: “The findings, reached after a 10 month investigation, neither implicated Toyota nor exonerated it any further than had been the case after the earlier investigation.” (Why write about the findings of the investigation on the front page of the business section then if it isn’t news?) Isn’t the lukewarm response to a long awaited federal investigation really just a barometer of trust in Toyota itself? At least to this observer it appears that Toyota still has a trust problem on its hands in the United States. To be sure, it is a much smaller trust problem than it had a year ago, but it is still a problem nonetheless. It’s an important reminder to any company that relationships of trust are valuable assets that take time to build. In Toyota’s case, rebuilding that trust means a relentless focus on quality and customer satisfaction plus lots of patience. Luckily for Toyota, that means playing to its strengths. After all, those are the same factors behind its global dominance.
Friday, January 14, 2011
Credit unions have a great integrity opportunity for building their business
Big banks making big profits! That’s the trend we’re seeing at the moment. Yet it doesn’t seem as if the banks are passing on any of those benefits to their customers. High interest rates on credit cards, gotcha fees and penalties are still common experiences for most people. So while big banks are steadily destroying the bond of trust with customers, credit unions have a great opportunity to invest in their integrity and build their business.
With a single minded focus on customer relationships, credit unions can win customers over from banks and keep them. In practical terms that means looking at their fee structure and determining how much they can give up in order to win additional customers. What’s more, operating in an open and fair way with customers, paying attention to customer service and thinking creatively about new products will fill a need that’s not being met by banks. Credit unions are poised to capitalize on the short sightedness of the big banks and have a successful 2011.
With a single minded focus on customer relationships, credit unions can win customers over from banks and keep them. In practical terms that means looking at their fee structure and determining how much they can give up in order to win additional customers. What’s more, operating in an open and fair way with customers, paying attention to customer service and thinking creatively about new products will fill a need that’s not being met by banks. Credit unions are poised to capitalize on the short sightedness of the big banks and have a successful 2011.
Monday, January 10, 2011
Bank of America provides a great lesson for any business
I read with interest about the behind the scenes work B of A has been doing in response to the possibility that Wikileaks could release embarassing documents about the bank. It reminded me of a quote from the CEO of Best Buy when he said "There's no such thing as an internal memo anymore." It's an important lesson for any company. Don't do something in secret that you wouldn't do in public. It's not worth it. If you do, it's kind of like building a business with landmines that could go off at any time. Simply put: you have nothing to hide when you're creating long term value!
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