Those who see no inflation in our future usually rest their argument on slow wage growth. The argument is that if wage rates don't increase, then there is nothing to pass on in the form of higher prices. Would that it were so?
The real issue is not whether wages are rising. The real issue is whether or not labor costs are rising. Wages are only one component of the cost of labor to business and wages represent a declining portion of that cost. Ask Walmart.
As Walmart faces a potential multi-billion lawsuit, companies around the US brace themselves for massive copy-cat employee lawsuits. All large companies now have to factor in dramatically higher potential liability costs associated with the Walmart lawsuit. Don't believe that companies aren't watching the developments in the Walmart case -- they are.
As for Walmart, you can be sure that they will make every effort, over time, to pass their litigation costs on to their labor force. But, in the short run, the cost of labor at Walmart has just risen dramatically, while wages have gone nowhere.
Lawyers are the big winners here. The losers are folks looking for a job or looking for a wage increase. Even if wages decline, there will be substantially higher labor costs ahead thanks to government efforts to "protect" employees. All of these protection mechanisms are costly and will be passed on to consumers in the form of higher prices.
The issue is not whether wages are rising. The issue is whether labor costs are rising. The answer is that labor costs are rising and rising at an incredible pace. Hence, higher prices.
Wednesday, 30 March 2011
Monday, 28 March 2011
Inflation is Picking Up
While Bernanke continues to look in the rear view mirror hoping to spot some deflation, the facts on the ground and the road ahead are clearly all about rising inflation. The February CPI numbers released today, an annual rate of five percent should give Bernanke and his QE2 activity a reason to reflect. It is true that in a world of no food and no energy the numbers look better, but who lives in that world?
What are the implication of rising inflation? Trouble in bond land. This means investor losses on bonds and headwinds for stocks. Unanticipated inflation is always bad news for stocks. Inflation reduces the value of the national debt, but inflation increases the deficit, offsetting the former effect.
One big plus: the housing market will benefit from increasing inflation, mostly because homeowners are big debtors and have fantastic tax advantages compared to the owners of any other asset (even better than owning oil wells!). Those who buy homes now and over the next year or two will be big winners. Stocks will do fine longer term, bonds are headed for disaster, and homeowners will strike gold.
What are the implication of rising inflation? Trouble in bond land. This means investor losses on bonds and headwinds for stocks. Unanticipated inflation is always bad news for stocks. Inflation reduces the value of the national debt, but inflation increases the deficit, offsetting the former effect.
One big plus: the housing market will benefit from increasing inflation, mostly because homeowners are big debtors and have fantastic tax advantages compared to the owners of any other asset (even better than owning oil wells!). Those who buy homes now and over the next year or two will be big winners. Stocks will do fine longer term, bonds are headed for disaster, and homeowners will strike gold.
Sunday, 27 March 2011
Cost Is Not The Real Issue
You hear the President criticized over the cost of the new Libyan military adventure. Whatever the merits or demerits of the President's new military activities, they are not really that costly. That's why they are so easy to do. The cost restraint for military adventurism is not really binding anymore. We could fight a number of wars all over the globe for a pittance of what it costs to support Medicare, Medicaid, Obamacare, and Social Security.
War is cheap! The volunteer army did that for us. It replaced conscripts with folks that really wanted to do this. So we have fewer of them, pay them better, and they do a better job. Plus, war technology has improved.
So, Obama gets a push-button war on the cheap. Whether it's a good idea or not is an entirely different story, but cost is not the issue.
War is cheap! The volunteer army did that for us. It replaced conscripts with folks that really wanted to do this. So we have fewer of them, pay them better, and they do a better job. Plus, war technology has improved.
So, Obama gets a push-button war on the cheap. Whether it's a good idea or not is an entirely different story, but cost is not the issue.
Saturday, 26 March 2011
Bob Herbert on "Losing Our Way"
Bob Herbert is a hard left columnist for the New York Times. Normally, his columns are showers of praise for the Obama Administration (like most every other political column in the NY Times). Today, Herbert is on a different tack. He is criticizing the Administration for spending tax dollars in Libya (and other foreign adventures) while "...simultaneously demolishing school budgets, closing libraries, laying off teachers and police officers and generally letting the bottom fall out of the quantity of life here at home." Sounds compelling doesn't it.
This article shows the depth of the lack of understanding of the hard left for what is really going on in the US and Western Europe. First and foremost, there is absolutely no reason whatsoever for laying off any public employees. Were it not for the absurd work rules and legal restrictions, public employees would take compensation adjustments and there would be few, if any, layoffs.
In my own county of Albemarle County, Virginia, rather than take a five percent paycut, the teachers lobby prefers to have five percent of the teachers laid off. That is a cruel and unfair outcome for the five percent who are laid off. The 95 percent who retain their jobs and benefits could care less. All that matters to them is that their pay and benefits are maintained. Under seniority rules only the newest teachers are at risk. The old fuddy duddies are completely protected from layoffs (as well as from any accountability at all). The "children be damned" attitude of the public school teacher lobby in this community (and in this state) mirrors that of teacher lobbies and teachers unions across the US and Europe. It is their decision to have layoffs. These would be very easy to avoid. Ditto for other public employees.
But, Herbert's column raises a deeper question. If money is spent on foreign adventures, doesn't that take money away from funding an economic recovery in the US? The answer is a resounding "no." Regardless of the merits or demerits of foreign adventures, there is simply no evidence that governments who spend money promote economic recovery, progress or growth. In fact, the opposite is true. What the government needs to do is get out of the way. No amount of government spending can undo the damage of the Dodd-Frank legislation or Obamacare. Sending Elizabeth Warren back to Harvard and dismantling the mis-named Consumer Protection Agency would do more for economic recovery than spending another trillion dollars funding Obama's political allies (Obama's definition of stimulus spending).
A similar argument applies to public education. Public education in the US and increasingly in Europe is in shambles. Why? Money? Just look at the numbers. Schools, public and private, higher education and lower education, absorb an increasing share of national output, not only in the US but throughout Europe. Are our schools getting better? Our schools, in fact, are poorly run, dominated by administrators and teachers with political, not educational, motivation. It is easy to teach students, if that is what you want to do, But, increasingly, teaching students is not what teachers want to do. You can see this most clearly in higher education, but it shows up dramatically in the modern public schools as well. The recent activities by teachers in Wisconsin show you where their true interests lie...it is not in the classroom.
Money isn't the issue, Bob Herbert. In fact, more money can cause even more mischief for our public schools, for our economic recovery. The best thing the government can do is to shrink itself and get out of the way.
This article shows the depth of the lack of understanding of the hard left for what is really going on in the US and Western Europe. First and foremost, there is absolutely no reason whatsoever for laying off any public employees. Were it not for the absurd work rules and legal restrictions, public employees would take compensation adjustments and there would be few, if any, layoffs.
In my own county of Albemarle County, Virginia, rather than take a five percent paycut, the teachers lobby prefers to have five percent of the teachers laid off. That is a cruel and unfair outcome for the five percent who are laid off. The 95 percent who retain their jobs and benefits could care less. All that matters to them is that their pay and benefits are maintained. Under seniority rules only the newest teachers are at risk. The old fuddy duddies are completely protected from layoffs (as well as from any accountability at all). The "children be damned" attitude of the public school teacher lobby in this community (and in this state) mirrors that of teacher lobbies and teachers unions across the US and Europe. It is their decision to have layoffs. These would be very easy to avoid. Ditto for other public employees.
But, Herbert's column raises a deeper question. If money is spent on foreign adventures, doesn't that take money away from funding an economic recovery in the US? The answer is a resounding "no." Regardless of the merits or demerits of foreign adventures, there is simply no evidence that governments who spend money promote economic recovery, progress or growth. In fact, the opposite is true. What the government needs to do is get out of the way. No amount of government spending can undo the damage of the Dodd-Frank legislation or Obamacare. Sending Elizabeth Warren back to Harvard and dismantling the mis-named Consumer Protection Agency would do more for economic recovery than spending another trillion dollars funding Obama's political allies (Obama's definition of stimulus spending).
A similar argument applies to public education. Public education in the US and increasingly in Europe is in shambles. Why? Money? Just look at the numbers. Schools, public and private, higher education and lower education, absorb an increasing share of national output, not only in the US but throughout Europe. Are our schools getting better? Our schools, in fact, are poorly run, dominated by administrators and teachers with political, not educational, motivation. It is easy to teach students, if that is what you want to do, But, increasingly, teaching students is not what teachers want to do. You can see this most clearly in higher education, but it shows up dramatically in the modern public schools as well. The recent activities by teachers in Wisconsin show you where their true interests lie...it is not in the classroom.
Money isn't the issue, Bob Herbert. In fact, more money can cause even more mischief for our public schools, for our economic recovery. The best thing the government can do is to shrink itself and get out of the way.
Friday, 25 March 2011
A Soft Economy Amidst a Sea of Liquidity
Some parts of the economy have returned to pre-crisis levels. The stock market for one. The stock market is now well ahead of where it was just prior to the collapse of Lehman Brothers. Prices of the best buildings in NYC and London are nearing the peaks reached in 2007, if not exceeding them. Luxury homes are on the rebound. Yet the overall US economy is moribund and headed nowhere. How can this be?
The simple answer is the Federal Reserve. The Federal Reserve is monetizing substantial amounts of US treasuries (buying treasuries, in other words). This is equivalent to printing money instead of selling debt from the point of view of government financing. This is QE2. This process, QE2, adds enormous amounts of liquidity to the financial system, available to whatever suits the fancy of the financial system. Normally, such excess liquidity feeds directly into asset prices -- stocks, bonds, high end real estate -- and that is exactly what has been happening.
Business is not really using the excess liquidity to expand capital equipment and employment. Business is not optimistic about the future, mostly because business understands all too well what the Obama Administration is all about. Instead the excess liquidity is being soaked up into an asset bubble -- a bubble that will inevitably end badly.
Don't look for further rallies in asset prices. QE2 is coming to an end soon and there is not likely to be a QE3. Incredibly slow economic growth will continue on pace for the next two years as we slog our way to a 7-8 percent unemployment range with rising inflation -- a condition known as stagflation. Stock prices will stall here and bond prices will get hammered. High end asset prices, rising now from Bernanke's foolishness, will settle back to earth. There won't be a crash or a double dip, but the asset price rally will be ending soon while the economy will continue to trudge along.
The big unknown is the exploding debt nightmare. That nightmare could upset the slow moving turtle that is the American economy.
The simple answer is the Federal Reserve. The Federal Reserve is monetizing substantial amounts of US treasuries (buying treasuries, in other words). This is equivalent to printing money instead of selling debt from the point of view of government financing. This is QE2. This process, QE2, adds enormous amounts of liquidity to the financial system, available to whatever suits the fancy of the financial system. Normally, such excess liquidity feeds directly into asset prices -- stocks, bonds, high end real estate -- and that is exactly what has been happening.
Business is not really using the excess liquidity to expand capital equipment and employment. Business is not optimistic about the future, mostly because business understands all too well what the Obama Administration is all about. Instead the excess liquidity is being soaked up into an asset bubble -- a bubble that will inevitably end badly.
Don't look for further rallies in asset prices. QE2 is coming to an end soon and there is not likely to be a QE3. Incredibly slow economic growth will continue on pace for the next two years as we slog our way to a 7-8 percent unemployment range with rising inflation -- a condition known as stagflation. Stock prices will stall here and bond prices will get hammered. High end asset prices, rising now from Bernanke's foolishness, will settle back to earth. There won't be a crash or a double dip, but the asset price rally will be ending soon while the economy will continue to trudge along.
The big unknown is the exploding debt nightmare. That nightmare could upset the slow moving turtle that is the American economy.
Portugal, Greece and More
Greek unemployment has now surged to 16.5 percent as it struggles to implement a half-baked austerity program. Greek's austerity program is an example of policy gone berserk. The austerity program that Greek politicians have pursued (with the support of the EU) is too little to have any impact on their spiraling debt problems and too much to permit the economy to avoid collapse. Why do this?
The Portuguese have rejected austerity. Others will follow. Austerity without at least a partial debt default is a foolish and unsustainable policy. The best historical precedent for the madness going on in the European union today is the reparations payments program foisted onto Germany by the Treaty of Versailles. We know how that experiment ended. Enough.
There is no reason to insulate bondholders from the folly of their investments. They should bear the brunt of bad decisions. Portugal, Greece, Ireland, Italy, and Spain should default, at least in part, on their sovereign debt. "Should" will eventually turn to "will" anyway. There is no way that these austerity programs are bearable.
None of the European economies are truly competitive any more. Europe has been carried along by the American economic engine for the past two generations. But, the US can't be the engine that pulls the EU anymore. The US has problems of its own that increasingly mirror the problems of the European zone.
The economic future is with countries that have competitive economies fostered by governments that see economic growth, not economic pie redistribution, as the number one goal of economic policy. This means Asia. This means parts of Eastern Europe. It means one or two isolated situations in Latin America. Everywhere else, the number one goal is to divide up the economic pie. That never leads to good things for the average person who finds, inevitably, his/her share of the diminishing pie diminishing as well.
The rich do not necessarily get richer. Sometimes the rich get preoccupied with implementing policies that stifle economic growth. Hubris breeds incompetence. That is what has happened to Europe and the United States.
The Portuguese have rejected austerity. Others will follow. Austerity without at least a partial debt default is a foolish and unsustainable policy. The best historical precedent for the madness going on in the European union today is the reparations payments program foisted onto Germany by the Treaty of Versailles. We know how that experiment ended. Enough.
There is no reason to insulate bondholders from the folly of their investments. They should bear the brunt of bad decisions. Portugal, Greece, Ireland, Italy, and Spain should default, at least in part, on their sovereign debt. "Should" will eventually turn to "will" anyway. There is no way that these austerity programs are bearable.
None of the European economies are truly competitive any more. Europe has been carried along by the American economic engine for the past two generations. But, the US can't be the engine that pulls the EU anymore. The US has problems of its own that increasingly mirror the problems of the European zone.
The economic future is with countries that have competitive economies fostered by governments that see economic growth, not economic pie redistribution, as the number one goal of economic policy. This means Asia. This means parts of Eastern Europe. It means one or two isolated situations in Latin America. Everywhere else, the number one goal is to divide up the economic pie. That never leads to good things for the average person who finds, inevitably, his/her share of the diminishing pie diminishing as well.
The rich do not necessarily get richer. Sometimes the rich get preoccupied with implementing policies that stifle economic growth. Hubris breeds incompetence. That is what has happened to Europe and the United States.
Thursday, 24 March 2011
The Beat Goes On
Jose Socrates, Prime Minister of Portugal, failed this week to get his country to complete the fiscal austerity program designed to save Portugal from defaulting on their sovereign debt. The truth is that no one cares about Portugal. The big concern is Spain. Portugal is a relatively small economy and EU bailout fund could easily accommodate Portugal's needs (and probably will do so soon). But, that leaves Spain. Spain's problems are so immense that the EU has no serious way of dealing with it.
Thoughts of Portugal lead to the contemplation of Spain, in true domino-theory progression. It is hard to see what the EU will do when Spain is the headline. That could be game over (and we haven't even begun to speak of Italy).
All of this is a policy of wishful thinking by the EU, of course. It is simply a matter of time until all the PIIGS countries (Portugal, Ireland, Italy, Greece, Spain) default on their sovereign debt and are forced to nationalize their largest banks. Why they think putting this off is a good idea is something of a mystery. It only gets worse with time.
The US is not far behind.
Thoughts of Portugal lead to the contemplation of Spain, in true domino-theory progression. It is hard to see what the EU will do when Spain is the headline. That could be game over (and we haven't even begun to speak of Italy).
All of this is a policy of wishful thinking by the EU, of course. It is simply a matter of time until all the PIIGS countries (Portugal, Ireland, Italy, Greece, Spain) default on their sovereign debt and are forced to nationalize their largest banks. Why they think putting this off is a good idea is something of a mystery. It only gets worse with time.
The US is not far behind.
Monday, 21 March 2011
Check out Matthew Klein's Piece in NYTime Today
Matthew Klein's article dubbed "Educated, Unemployed, and Frustrated," describes the plight of American young people looking for a job and a future. He notes that 21 percent of workers between ages 16 to 24 are unemployed. These, of course, are mostly not college graduates, although Klein strongly suggests that they are in a typical NYTimes manner. The truth is that college grads have a very low unemployment rate, less than 5 percent in the aggregate, while non college grads have five times that number. Klein doesn't bother to ask why?
Klein does note the burden of entitlements which systematically favor age over youth, but that doesn't explain why young folks are struggling so in the job market, especially those without a college degree. Perhaps, he should look at some of the other editorials that grace the NY Times -- the ones that support employer mandates, the ones that suggest that all business folks are crooks, the ones that support higher taxes for employers, the ones that support Obamacare and other back breaking mandates on business, the ones that encourage frivolous lawsuits aimed at deep-pocket business when business is not really the offender, and on and on.
The answer is simple. We have priced these young folks out of the market. Who can afford to hire them. Not American business. The rest of the world, fortunately for them, unfortunately for us, does not load up employees with goodies that need to be financed by those who hire them (except in Europe, where young people face the same dismal future as our own). If you increase the price of something, people want less of it. Employees are no different than anything else.
Klein does note the burden of entitlements which systematically favor age over youth, but that doesn't explain why young folks are struggling so in the job market, especially those without a college degree. Perhaps, he should look at some of the other editorials that grace the NY Times -- the ones that support employer mandates, the ones that suggest that all business folks are crooks, the ones that support higher taxes for employers, the ones that support Obamacare and other back breaking mandates on business, the ones that encourage frivolous lawsuits aimed at deep-pocket business when business is not really the offender, and on and on.
The answer is simple. We have priced these young folks out of the market. Who can afford to hire them. Not American business. The rest of the world, fortunately for them, unfortunately for us, does not load up employees with goodies that need to be financed by those who hire them (except in Europe, where young people face the same dismal future as our own). If you increase the price of something, people want less of it. Employees are no different than anything else.
Sunday, 20 March 2011
Smokescreens
Whatever your source of the news, you must feel bombarded by the headlines from Japan, from Libya, and from other troublespots around the globe. These headlines and news stories are obscuring the underlying facts about what is going on.
Oil is not going to spike to $ 200 -- no matter what happens in the Middle East. There is not going to be a nuclear conflagration in Asia or even in Japan resulting from the damage to Japan's nuclear facilities. And, yes, there is no one to blame for the earthquake and tsunami.
The news media is so preoccupied with finding people to blame about every possible difficulty that the world faces that it obscures the real facts about what is taking place. The real facts remain: the western economies are mired in one of the slowest economic recoveries in the history of the world, while Asian economies and some Latin American economies and Eastern European economies are booming.
Western economies have mortgaged their futures by massive transfer payments to current citizens, mostly the older half of the population, financed by younger citizens and citizens yet to be born. The method, debt financing, is now seen as unsupportable. This is true of Greece as it is true of the United States (and Japan). There is no real answer other than some form of bankruptcy. Whether these steps are taken now or in the future just depends upon the outcome of political jockeying. But, it will take place. The numbers do not permit any easy fix, short of some form of bankruptcy.
The slow pace of economic recovery in the Western economies is mainly a result of their governmental policies toward labor, health care, the environment, and the regulatory regime. The attempt to shower private and public employees with benefits has made labor much more expensive to (all) employers -- hence a dramatic and permanent drop in hiring. This has been a deliberate policy in the United States and in Western Europe. If you increase a price, the demand for the product falls. If you increase the cost of employees, the demand for them will decline and has declined in the Western world (and will continue to decline).
Economic growth, which will continue in the West, will eventually lead to more jobs and, two or three years from now, to lower unemployment rates. But, we will never regain the vigor of the past unless the rules governing employees change in the Western world, which is unlikely. Slow growth and decadence are the future for the US and Western Europe. This is the new normal. Only a move toward free markets can change this and a move in that direction seems politically unlikely. Politicians of all stripes in the US and Western Europe support the legislative agenda that has lead to the current morass. That's not likely to change.
Meanwhile, Asia marches on, Japan aside. Asian nations have not mortgaged the future of their young and unborn to the current older generation. Thus, they have a real future. Economic progress is not shackled by a host of walls built by good intentions. You can't eat "good intentions."
Rich folks everywhere support making employees more expensive and increasing the stranglehold of regulations on businesses. Bill Gates and Warren Buffett certainly support this program, but so do most rich folks, because it is not going to change their lifestyle.
Many college students, dreaming of working for non-profits and basking in the glow of self-congratulatory adulation, have been sheltered from the harsher side of the economy for most of their lives. They have little or no sympathy for the plight of the average citizen, struggling to find work, but finding themselves priced out of the market by government rules and regulations.
The elites, as Tom Sowell calls them, are mainly about looking in the mirror and talking about what "good people" they are. Katie Couric is the poster child for this kind of self image. But, others, like the NPR folks, are pretty stong candidates for runner-up poster children. If it feels good and sounds good, who cares how many people get hurt in the process. That seems to be the position of the elite of the news media.
That lower incomes are battered by these policies is not the concern of the elite who push these regulations. If you were to ask a college senior if he/she would support a law making it against the law to hire someone at a salary less than $ 100,000 per year, they would instantly recoil. But that same college student supports minimum wage increases, living wage proposals and other things that damage the future prospects of the poorest among us. Bill Gates and Warren Buffet will never suffer from an increase in the minimum wage, but countless millions of Americans have already suffered from this type of punitive legislation and untold millions will be similarly penalized in the future.
So, don't get lost in the hysterical headlines about Japan and Libya. The real facts on the grounds are that government policies in the Western economies are hastening their declining share of real economic output. Other parts of the world, that have not put such policies in place, are growing rapidly and will, within a generation, surpass the Western world economically. This is the real story.
Oil is not going to spike to $ 200 -- no matter what happens in the Middle East. There is not going to be a nuclear conflagration in Asia or even in Japan resulting from the damage to Japan's nuclear facilities. And, yes, there is no one to blame for the earthquake and tsunami.
The news media is so preoccupied with finding people to blame about every possible difficulty that the world faces that it obscures the real facts about what is taking place. The real facts remain: the western economies are mired in one of the slowest economic recoveries in the history of the world, while Asian economies and some Latin American economies and Eastern European economies are booming.
Western economies have mortgaged their futures by massive transfer payments to current citizens, mostly the older half of the population, financed by younger citizens and citizens yet to be born. The method, debt financing, is now seen as unsupportable. This is true of Greece as it is true of the United States (and Japan). There is no real answer other than some form of bankruptcy. Whether these steps are taken now or in the future just depends upon the outcome of political jockeying. But, it will take place. The numbers do not permit any easy fix, short of some form of bankruptcy.
The slow pace of economic recovery in the Western economies is mainly a result of their governmental policies toward labor, health care, the environment, and the regulatory regime. The attempt to shower private and public employees with benefits has made labor much more expensive to (all) employers -- hence a dramatic and permanent drop in hiring. This has been a deliberate policy in the United States and in Western Europe. If you increase a price, the demand for the product falls. If you increase the cost of employees, the demand for them will decline and has declined in the Western world (and will continue to decline).
Economic growth, which will continue in the West, will eventually lead to more jobs and, two or three years from now, to lower unemployment rates. But, we will never regain the vigor of the past unless the rules governing employees change in the Western world, which is unlikely. Slow growth and decadence are the future for the US and Western Europe. This is the new normal. Only a move toward free markets can change this and a move in that direction seems politically unlikely. Politicians of all stripes in the US and Western Europe support the legislative agenda that has lead to the current morass. That's not likely to change.
Meanwhile, Asia marches on, Japan aside. Asian nations have not mortgaged the future of their young and unborn to the current older generation. Thus, they have a real future. Economic progress is not shackled by a host of walls built by good intentions. You can't eat "good intentions."
Rich folks everywhere support making employees more expensive and increasing the stranglehold of regulations on businesses. Bill Gates and Warren Buffett certainly support this program, but so do most rich folks, because it is not going to change their lifestyle.
Many college students, dreaming of working for non-profits and basking in the glow of self-congratulatory adulation, have been sheltered from the harsher side of the economy for most of their lives. They have little or no sympathy for the plight of the average citizen, struggling to find work, but finding themselves priced out of the market by government rules and regulations.
The elites, as Tom Sowell calls them, are mainly about looking in the mirror and talking about what "good people" they are. Katie Couric is the poster child for this kind of self image. But, others, like the NPR folks, are pretty stong candidates for runner-up poster children. If it feels good and sounds good, who cares how many people get hurt in the process. That seems to be the position of the elite of the news media.
That lower incomes are battered by these policies is not the concern of the elite who push these regulations. If you were to ask a college senior if he/she would support a law making it against the law to hire someone at a salary less than $ 100,000 per year, they would instantly recoil. But that same college student supports minimum wage increases, living wage proposals and other things that damage the future prospects of the poorest among us. Bill Gates and Warren Buffet will never suffer from an increase in the minimum wage, but countless millions of Americans have already suffered from this type of punitive legislation and untold millions will be similarly penalized in the future.
So, don't get lost in the hysterical headlines about Japan and Libya. The real facts on the grounds are that government policies in the Western economies are hastening their declining share of real economic output. Other parts of the world, that have not put such policies in place, are growing rapidly and will, within a generation, surpass the Western world economically. This is the real story.
Tuesday, 15 March 2011
Japan Will Get Through This
Don't count out the Japanese. They will get through this current crisis and find a way to deal with their difficulties.
The radiation leakage will likely be localized. The lingering problem will be energy shortages for the Japanese economy and for the needs of Japanese families. The market reaction in Tokyo is much overdone. The real financial problem in Japan is Japan's sovereign debt and Japan's unreasonable commitments to old age pensions and medical care. Sound familiar? The demographics are not helpful -- Japan is an aging and declining population -- but that is a problem that most of the developed world faces.
The earthquake is not good news, but it is by no means as catastrophic for Japan as much of the media assumes. The sell-off in American stocks, more muted, is more reasonable than the 15 percent decline in the Japanese market during the first two days of this week.
The media is not helpful in this crisis, which is usually the case in crises of any description.
The radiation leakage will likely be localized. The lingering problem will be energy shortages for the Japanese economy and for the needs of Japanese families. The market reaction in Tokyo is much overdone. The real financial problem in Japan is Japan's sovereign debt and Japan's unreasonable commitments to old age pensions and medical care. Sound familiar? The demographics are not helpful -- Japan is an aging and declining population -- but that is a problem that most of the developed world faces.
The earthquake is not good news, but it is by no means as catastrophic for Japan as much of the media assumes. The sell-off in American stocks, more muted, is more reasonable than the 15 percent decline in the Japanese market during the first two days of this week.
The media is not helpful in this crisis, which is usually the case in crises of any description.
Wednesday, 9 March 2011
A New Beginning in Wisconsin
No one objects to the freedom of assembly. Workers anywhere should have the right to form a union. The issue is: what is the union permitted to do? That is the central concern in Wisconsin.
The idea behind collective bargaining is that workers need protection against a potentially rapacious employer -- so what is the applicability of this notion to public employees? There is no application at all, unless what is being said is that the taxpayer at large is a rapacious employer. Public employee unions should not have the power to engage in collective bargaining.
Not only does collective bargaining lead to absurdities (seniority, tenure, etc.), but there is no profit pie to divide up -- just unsuspecting taxpayers (typically unborn ones) footing an absurd system of benefits.
Lets face it, unions have busted every industry where they have organized workers. Is there an exception? Now, unions are busting state and local governments.
Should a public employee union have the right to bankrupt the taxpayers of Wisconsin and burden future unborn taxpayers? The voters in Wisconsin elected Scott Walker governor on his promise to eliminate union collective bargaining for public employees. Walker and his legislative allies have fulfilled that campaign promise. This is good news for Wisoonsin and a harbinger of more to come.
The idea behind collective bargaining is that workers need protection against a potentially rapacious employer -- so what is the applicability of this notion to public employees? There is no application at all, unless what is being said is that the taxpayer at large is a rapacious employer. Public employee unions should not have the power to engage in collective bargaining.
Not only does collective bargaining lead to absurdities (seniority, tenure, etc.), but there is no profit pie to divide up -- just unsuspecting taxpayers (typically unborn ones) footing an absurd system of benefits.
Lets face it, unions have busted every industry where they have organized workers. Is there an exception? Now, unions are busting state and local governments.
Should a public employee union have the right to bankrupt the taxpayers of Wisconsin and burden future unborn taxpayers? The voters in Wisconsin elected Scott Walker governor on his promise to eliminate union collective bargaining for public employees. Walker and his legislative allies have fulfilled that campaign promise. This is good news for Wisoonsin and a harbinger of more to come.
Monday, 7 March 2011
It Can't Be Oil
The stock market went from up to down today and it really hasn't done much for several weeks. The Dow Jones got above 12,000 sometime back and it is barely above that level now with a lot of huffing and puffing.
The pundits point to oil and to events taking place in Libya. Don't believe it. There's plenty of oil and even if the bad guys get a hold of some oil, the first thing they will do is sell it to the highest bidder. So what else is new? Chavez sells to us. I rest my case.
The more serious problem is what is (not) going on politically. Except for some valiant souls in selected state governor mansions, there is no serious discussion afoot to tackle the US's entitlement nightmare. Europe is no better. Greece was quietly downgraded again by Moodys over the weekend without a comment from the US or European press.
It is not surprising that the press isn't noticing what the problem is here. The press seems to think that fighting to boost the income and benefits of folks making triple the average income in Wisconsin is somehow a great cause. They should start campaigning to pay baseball players and movie stars more money. That would fit their "activist" credo. They have completely lost sight of the people who are struggling in the US (and in Wisconsin). I'll give you a hint...it's not tenured school teachers in Wisconsin.
Oil is not the real problem here except in its manifestation of inflation. The real problem is debt, debt, and more debt. Until the President and the Congress acknowledge what the real issues are and begin to advance policy positions that move the needle in the right direction, markets are going to be sluggish. This is isn't much of a recovery after all and Obamacare is standing right in the way.
The pundits point to oil and to events taking place in Libya. Don't believe it. There's plenty of oil and even if the bad guys get a hold of some oil, the first thing they will do is sell it to the highest bidder. So what else is new? Chavez sells to us. I rest my case.
The more serious problem is what is (not) going on politically. Except for some valiant souls in selected state governor mansions, there is no serious discussion afoot to tackle the US's entitlement nightmare. Europe is no better. Greece was quietly downgraded again by Moodys over the weekend without a comment from the US or European press.
It is not surprising that the press isn't noticing what the problem is here. The press seems to think that fighting to boost the income and benefits of folks making triple the average income in Wisconsin is somehow a great cause. They should start campaigning to pay baseball players and movie stars more money. That would fit their "activist" credo. They have completely lost sight of the people who are struggling in the US (and in Wisconsin). I'll give you a hint...it's not tenured school teachers in Wisconsin.
Oil is not the real problem here except in its manifestation of inflation. The real problem is debt, debt, and more debt. Until the President and the Congress acknowledge what the real issues are and begin to advance policy positions that move the needle in the right direction, markets are going to be sluggish. This is isn't much of a recovery after all and Obamacare is standing right in the way.
Sunday, 6 March 2011
Wisconsin Democrats Cave
It's amazing what a $ 100 per day fine will get you -- the return of the missing Wisconsin Senate Democrats. They, the missing Senators, have agreed to return to Madison and vote on Governor Walker's bill to reign in the suffocating power of the union bosses. Populism and Progressivism is alive and well in Wisconsin!
That makes two states, so far, to begin to roll back the exhorbitant demands of the union movement -- Wisconsin and Ohio. There will be more to come.
That makes two states, so far, to begin to roll back the exhorbitant demands of the union movement -- Wisconsin and Ohio. There will be more to come.
Michael Moore Fights for the Rich
Yesterday, Michael Moore cheered on the highest paid workers in the state of Wisconsin in their fight to maintain their status as the richest folks in Wisconsin. This is consistent with Moore's other well known battles to defend rich people and tin horn dictators around the world. Moore's contempt for middle class Americans and taxpayers is palpable. Unfortunately, the poor and the middle class are tapped out and cannot indulge Moore's fantasy of furthering pampering the wealthiest workers in the state of Wisconsin.
Truth and the New York Times
The New York Times has absolutely no standards. Even the truth is not a prerequisite for their news reporting. The latest example of non-facts in the New York Times is today's article by Peter Lattman. In an article in today's Business section on the prosecution of the Rajaratnam insider trading case, he refers to "...when Rudolph Giuliani, the United States attorney, prosecuted Wall Street executives for insider trading crimes, including Ivan F. Boesky and Michael R. Milken....."
Boesky, indeed, pled guilty to insider trading, but Milken? Why is Milken mentioned in this article? Not only was Milken not convicted of insider trading, he was never charged by Giuliani or anyone else. Indeed no one ever alleged that Milken engaged in insider trading -- never, not once. Milken plead guilty to "parking" securities, a victim-less crime that no one else in history has ever been charged with, much less convicted. The government never alleged that Milken was an inside trader. So, why the slander by the New York Times or is it just a habit with them?
When will truth become a standard for news reporting by the New York Times? How does the New York Times justify reporting outright falsehoods as in today's article and claim to be a news organization?
Boesky, indeed, pled guilty to insider trading, but Milken? Why is Milken mentioned in this article? Not only was Milken not convicted of insider trading, he was never charged by Giuliani or anyone else. Indeed no one ever alleged that Milken engaged in insider trading -- never, not once. Milken plead guilty to "parking" securities, a victim-less crime that no one else in history has ever been charged with, much less convicted. The government never alleged that Milken was an inside trader. So, why the slander by the New York Times or is it just a habit with them?
When will truth become a standard for news reporting by the New York Times? How does the New York Times justify reporting outright falsehoods as in today's article and claim to be a news organization?
Saturday, 5 March 2011
Standing Up for the Big Guy in Wisconsin
The protestors in Madison make, on average, three times what a typical taxpayer makes and have a benefit package for retirement and health care that the average Wisconsin citizen can only dream about. This is as if Marie Antoinette was out demonstrating in the streets of Paris for more champagne.
Students, of course, join in. There is no more privileged part of American society than college students, especially at elite schools like University of Wisconsin. The children of the average taxpayer in Wisconsin can't afford to attend University of Wisconsin, even if they could get in. But households headed by two public employees with income in the $ 200,000 plus area can certainly afford it .... and more, so long as taxpayers and bondholders are willing to pay for this largesse.
It is truly astounding that the wealthiest folks in Wisconsin, which, as a group, are the public employees, have such a "public be damned" attitude. Not since JP Morgan has the country witnessed such contempt for the average citizen as it evidenced by the demonstrators in Madison, Wisconsin.
Students, of course, join in. There is no more privileged part of American society than college students, especially at elite schools like University of Wisconsin. The children of the average taxpayer in Wisconsin can't afford to attend University of Wisconsin, even if they could get in. But households headed by two public employees with income in the $ 200,000 plus area can certainly afford it .... and more, so long as taxpayers and bondholders are willing to pay for this largesse.
It is truly astounding that the wealthiest folks in Wisconsin, which, as a group, are the public employees, have such a "public be damned" attitude. Not since JP Morgan has the country witnessed such contempt for the average citizen as it evidenced by the demonstrators in Madison, Wisconsin.
Palin is Right on Track
Sarah Palin is drawing attention to the real policy issues that the country faces by redirecting our attention to the entitlements and social security in particular. Social security is easy to fix, only courage is required. We need only tax social security to recoup it from higher income tax payers and move the age of retirement out (a similar strategy solves the problems of the enormous unfunded liabililties of state and local government pension plans).
Palin is not distracted, as Obama and the Congress seem to be, by worrying about the current $ 60 billion spat between House Republicans and the Obama White House. $ 60 billion isn't even two weeks of the current deficit at the federal level (not to mention the horrendous situation in state budgets). Palin was right when she referred to "death panels" in Obamacare and she is right to redirect our attention to social security and the health care entitlements.
Check out Paul Johnson's take on Sarah Palin in today's lead editorial in the Wall Street Journal. Palin, like Reagan and Thatcher before her, has had to to deal with the media hate mongers, but has maintained her focus and vision. If you want to see how the press treated Ronald Reagan, go to archives of the NY Times in the 1970s and you will read about Reagan characterized in essentially the same terms as Palin is today. Something about Sarah Palin's courage and forthrightness strikes a raw nerve with the left and with the most arrogant of the right (Peggy Noonan, George Will, Charles Krauthammer, etc.). America doesn't need more arrogance. What America needs is more people that are forthright about our debt situation, forthright about the need for free markets and less interested in demagoguery. In short, America needs more Sarah Palins.
Palin is not distracted, as Obama and the Congress seem to be, by worrying about the current $ 60 billion spat between House Republicans and the Obama White House. $ 60 billion isn't even two weeks of the current deficit at the federal level (not to mention the horrendous situation in state budgets). Palin was right when she referred to "death panels" in Obamacare and she is right to redirect our attention to social security and the health care entitlements.
Check out Paul Johnson's take on Sarah Palin in today's lead editorial in the Wall Street Journal. Palin, like Reagan and Thatcher before her, has had to to deal with the media hate mongers, but has maintained her focus and vision. If you want to see how the press treated Ronald Reagan, go to archives of the NY Times in the 1970s and you will read about Reagan characterized in essentially the same terms as Palin is today. Something about Sarah Palin's courage and forthrightness strikes a raw nerve with the left and with the most arrogant of the right (Peggy Noonan, George Will, Charles Krauthammer, etc.). America doesn't need more arrogance. What America needs is more people that are forthright about our debt situation, forthright about the need for free markets and less interested in demagoguery. In short, America needs more Sarah Palins.
Health Care -- First Principles
Americans are now facing the staggering first glimpses of sticker shock associated with Obamacare. Insurance companies are ratcheting up fees to meet the new burdens of Obamacare and hospitals are doing the same. There is really no limit to where these costs are headed. Even absent Obamacare, health insurance costs would be rising, but, with Obamacare, they are escalating out of sight. Meanwhile more and more doctors and hospitals are backing away from servicing medicare and medicaid patients, which replaces expensive health care with no health care. These are the fruits of Obama's ambitious health care vision and we are just at the beginning of this nightmare.
What is wrong with this picture?
First and foremost, health care should be expensive if it is important. Consumers of the service should pay a lot to get it. That principle underlies any reasonable allocation of a scarce resource. You can't promise inexpensive luxuries on a grand scale. The numbers will never add up. So, even if you are unlucky and your genes lead to an expensive-to-treat disease, you should not have a free ride financially.
Second, it is important to recognize the role of incentives in the provision of health care. Any system of provision of health services that does not require patients to pay for the bulk of their own health care means that patients will be less likely to take steps necessary to prevent future health problems. Why are older Americans among the most obese humans on the planet? The reason is that Americans see no connection between their own financial situation and how obese they are. They assume that other people (the government) will finance their future health care woes, so why worry? Why do low income Americans smoke in such large numbers? Because they assume that they will not be paying for the resultant health care problems (and they are right)! By taking away the financial burden of future health care costs (or convincing the public that you are taking away the financial burden of future health care costs), you are eliminating the incentives for individuals to take actions that improve their future health care. Some folks may do the right thing anyway, absent any financial incentives, but it very obvious that most do not.
Third, by setting up a system that will eventually require cost controls on hospitals, doctors and other health care providers, you guarantee a reduction in the supply in the quantity and quality of these services. If you want good health care, those who work in the industry must have financial incentives. These incentives are broadly under attack with current belt tightening in medicare and medicaid and the clear direction of Obamacare.
Only the free market supplemented with charity and a public safety net of modest proportions for the indigent can supply a truly efficient and quality health care system. The systems in Europe and other developed countries are notorious for inefficiencies and rationed care. The best health care in the world is to be found in the USA for those that can afford it. Medicare, medicaid and Obamacare will guarantee that fewer and fewer Americans will be able to afford good health care. Only a free market in health care and a free market in health care insurance can produce top quality, affordable health care for all Americans.
What is wrong with this picture?
First and foremost, health care should be expensive if it is important. Consumers of the service should pay a lot to get it. That principle underlies any reasonable allocation of a scarce resource. You can't promise inexpensive luxuries on a grand scale. The numbers will never add up. So, even if you are unlucky and your genes lead to an expensive-to-treat disease, you should not have a free ride financially.
Second, it is important to recognize the role of incentives in the provision of health care. Any system of provision of health services that does not require patients to pay for the bulk of their own health care means that patients will be less likely to take steps necessary to prevent future health problems. Why are older Americans among the most obese humans on the planet? The reason is that Americans see no connection between their own financial situation and how obese they are. They assume that other people (the government) will finance their future health care woes, so why worry? Why do low income Americans smoke in such large numbers? Because they assume that they will not be paying for the resultant health care problems (and they are right)! By taking away the financial burden of future health care costs (or convincing the public that you are taking away the financial burden of future health care costs), you are eliminating the incentives for individuals to take actions that improve their future health care. Some folks may do the right thing anyway, absent any financial incentives, but it very obvious that most do not.
Third, by setting up a system that will eventually require cost controls on hospitals, doctors and other health care providers, you guarantee a reduction in the supply in the quantity and quality of these services. If you want good health care, those who work in the industry must have financial incentives. These incentives are broadly under attack with current belt tightening in medicare and medicaid and the clear direction of Obamacare.
Only the free market supplemented with charity and a public safety net of modest proportions for the indigent can supply a truly efficient and quality health care system. The systems in Europe and other developed countries are notorious for inefficiencies and rationed care. The best health care in the world is to be found in the USA for those that can afford it. Medicare, medicaid and Obamacare will guarantee that fewer and fewer Americans will be able to afford good health care. Only a free market in health care and a free market in health care insurance can produce top quality, affordable health care for all Americans.
Friday, 4 March 2011
The New Normal on Unemployment
The pundits cheered today's unemployment rate, which was reported to be 8.9 percent. After adjustments for January, net job creation was an anemic 180,000 -- a pitiful number for this stage of an economic recovery. The fact that a number this bad was greeted with applause says a lot about how low expectations for the economy have become since the Obama presidency began. Obama was quick to note that 1.5 million jobs have been added since last year -- an abysmal record for the second year of a recovery by any standard. If Obama is proud of this number, he must have given up hope for any kind of serious growth in employment levels or economic recovery.
To create jobs, it is crucial to make labor affordable. Everything the Obama Administration and its Congressional allies have done so far has made labor much more expensive. That's the failed European strategy, an area of the world that thinks that double digit unemployment is perfectly acceptable. Young folks in Europe have no real future -- the rich get richer and the young have lost hope. Most European children stay in their families' homes until they reach mid 30s. The wealthiest families in Europe are the same families that dominated European wealth 50 years ago. There is no economic mobility in Europe. Is that where we are headed?
Don't forget that in the "bad old days," that Obama doesn't want to see returned, unemployment dipped below 4 percent at times and was typically below 6 percent during the preceding 25 years. Gee, we certainly don't want to return to that, do we?
Booms and busts are part of life. Trying to eliminate busts by the heavy hand of government with bailouts, excessive regulations and payoffs to public employee supporters is absurd policy. But, it is the Obama way. What Obama means by "investments" is to spend money to reward his supporters. That's basically what the stimulus package was all about. Obama's proposed budget proposes more of the same.
Lets go back to booms and busts. They were certainly a lot better than this. The opportunities that were abundant in the 1980s and 1990s have vanished with the new normal of the Obama era. We need to go back to the bad old days.
To create jobs, it is crucial to make labor affordable. Everything the Obama Administration and its Congressional allies have done so far has made labor much more expensive. That's the failed European strategy, an area of the world that thinks that double digit unemployment is perfectly acceptable. Young folks in Europe have no real future -- the rich get richer and the young have lost hope. Most European children stay in their families' homes until they reach mid 30s. The wealthiest families in Europe are the same families that dominated European wealth 50 years ago. There is no economic mobility in Europe. Is that where we are headed?
Don't forget that in the "bad old days," that Obama doesn't want to see returned, unemployment dipped below 4 percent at times and was typically below 6 percent during the preceding 25 years. Gee, we certainly don't want to return to that, do we?
Booms and busts are part of life. Trying to eliminate busts by the heavy hand of government with bailouts, excessive regulations and payoffs to public employee supporters is absurd policy. But, it is the Obama way. What Obama means by "investments" is to spend money to reward his supporters. That's basically what the stimulus package was all about. Obama's proposed budget proposes more of the same.
Lets go back to booms and busts. They were certainly a lot better than this. The opportunities that were abundant in the 1980s and 1990s have vanished with the new normal of the Obama era. We need to go back to the bad old days.
Thursday, 3 March 2011
Future socio-economic conflict
I actually posted this on my main blog ages ago, and forgot to copy it to the finance one. Anyway...
Democracy isn't perfect, but as a means of keeping a large population working together more or less as a team, it is the least bad system we know. Such is the received wisdom. One of the major faults of democracy is that it sometimes allows a majority of beneficiaries to vote in measures that they know will have to be paid for by other people. The people paying may have no choice if they are a minority, or otherwise without power, and simply be unwilling victims of a selfish majority. Such is the situation facing much of the west right now. Many countries have overspent, with governments investing large amounts of borrowed money to ensure votes from large parts of the population, knowing that the price would be paid by other future governments and by different parts of the population. Now that the time has come for savings to be made, we are seeing some very selfish squabbling indeed, with everyone wanting someone else to pay the bills, leaving them undisturbed. The results in some countries are not pretty, with street demonstrations and rioting. The UK hasn't gone that far yet.
There are some basic principles that most people give at least lip service too. The weak and the deserving poor must be protected, and those that are able to do so should carry more of the burden. No major political party disagrees significantly with that, though they differ enormously when defining poor and deserving. Until recently, there has also been a consensus that children should be protected. Now that appears to have vanished. The debts that have been incurred by the adult generations are to be handed on to their kids, who of course have no legal say in the matter. Various groups of adults blame each other for the mess, but it is the future generations who will suffer most of the pain. Any suggestions of reductions of benefits, pensions, pay, jobs or public services are being resisted furiously, but if everyone insists that we must delay repayments, then it is today's and tomorrow's kids who are being left with much of the bill. And of course, if the services and benefits are eventually reduced, as they must, those same kids picking up the bill won't even benefit from them.
This does not seem a sensible, moral, or sustainable approach to democracy. If unwilling generations are forced to pick up large bills for benefits only available to their ancestors, we can be pretty sure they will rebel. Inter-generational conflict will see young people refusing to pay for the luxurious benefits their elders voted for themselves.
The same is true of any other sectors of society. All must see that they are having a reasonable package of price and reward. This is important, as it is this balance that make democracy stable and prevents revolution. No sector should be seen to benefit unduly at the expense of others.
Some people have gained much more than others from the various decisions that accrued the debts we now face, indeed some of the costs can be attributed to vote buying. For example, much of the debt is due to generous pension commitments in the public service. While private industry long ago recognised that increasing lifespans have made traditional final salary pension schemes unaffordable, and abolished them, the public sector has conspicuously carried on large scale recruitment with terms and conditions associated with lifespans that became out of date in the 1960s, knowing they were unaffordable (increasing longevity has caught noone by surprise) , and understating costs by using different pension valuation formulas than the private sector (e.g. 8:1 instead of 20:1). It does not seem unreasonable for those paying the bills to demand that terms and conditions such as pensions, holidays, pay and bonuses, be realigned to a more sensible baseline. All wealth generation arises in the private sector, so it makes little sense to provide public service conditions more generous that their equivalent in the private sector. Of course, those living very comfortably at the expense of others can't be expected to surrender their comfort without a struggle, but if public sector staff are seen to be very comfortable while those who have to pay them suffer, conflict is inevitable as stresses increase.
Similarly, benefits and welfare are already being addressed to ensure that those who are able to work (including those who are sick or disabled but who retain some saleable skills and abilities) must do so before they can claim state support, and to ensure that working will always make them wealthier than idleness. In a wealthy society, provided that everyone looks after themselves as far as they can, the state can easily ensure that everyone can afford survival with reasonable comfort. Ideally, welfare provides a basic existence for everyone, and then everyone could add to their personal comfort by making whatever contribution they reasonably can. This would be affordable and sustainable and would not disincentivise personal effort. It will take time to deliver this principle, but we are heading in that general direction.
But inter-generational problems will prove far more problematic than those between private and public. Inter-generational conflict in fact is already overdue. For me, the biggest surprise about the French demonstrations against pension age increase is not that they are happening, which isn't surprising at all, but that young people have also joined the demonstrations. It is the young who are being left with the huge bills, and they ought to be demonstrating in favour, not against pension age rises. Today's retirees are retiring at the same age as their parents, but unlike them, they will cost far more than they ever paid in. They are in effect demanding a huge unearned windfall, paid for by younger people. The older ones on the demonstrations may hope to benefit similarly themselves, but it is near impossible that younger people will be able to do so, yet they are being expected to pay the bills for those older people fortunate enough to do so. When someone else gets a big cake free, and you have to pay for it, it is not unreasonable to be annoyed. It is very surprising if you demonstrate in support of them getting the cake. The young French may be a little sluggish in realising the situation they are in, but they will catch up eventually. In the UK, the retirement age increase looks like it is being accepted, but it still leaves the young with huge bills. With the duration of the payback times being considered, many of the kids who will have to pay the bills are in school, and aren't politically aware yet, but as they come on stream politically and realise the enormity of the debts they face entering adulthood, we should expect them to start complaining. We may well see a Europe-wide rebellion against older population, and demands that they pay for themselves and their own retirements.
Immigration is an interesting issue too. The papers are full of stories about resentment of perceived advantages enjoyed by immigrant populations, but most of the stories are from communities that are under stress with limited employment or housing. The economics are interesting. On one side, someone immigrating and becoming a citizen gains a share of all the accumulated wealth of the country built over the centuries, and we may also pick up some liabilities to overseas family. On the other hand, we get the benefits of their education and skills free, and presumably benefit from any wealth they bring with them, plus their future contributions, and perhaps those of their families. And we gain also from their overseas links and networks, helping trade and reducing military threats. Set against that, some people emigrate, with the reverse economics. Of course, the two groups don't match. Emigration often happens in retirement, when people have a lot of wealth. Immigration tends to be of younger people with lower wealth. And of course, there is a lot in between in both directions. It is this that presents the biggest problem. Many people who immigrated to the UK to get a better life are now going back, because conditions there are improving while conditions here worsen. This new flow may be called remigration. It is strongest in those areas that are most useful, such as engineering and medicine. Remigration is a threat to the economy, because we tend to lose those immigrants who make the greatest contributions, leaving skills shortages, but we still are left with the costs of the lower contribution immigration. Adding to this, intergenerational conflict, if left unsolved, could lead to a large brain drain as young people decide to leave for lower tax regimes elsewhere, leaving behind the debts they were to be saddled with. If we lose the most able people from society, we not only lose their economic contribution but also face a skills shortage. The nightmare scenario would see the UK becoming an ill-funded retirement home, with lots of expensive old people, lots of people needing state support, a lot of people just about paying their own way, and too few wealthy taxpayers to pay for the difference.
So it is rapidly becoming apparent that society has many stresses to face over the next decade, and obvious that some communities in France are already at the point of rebellion. The first trouble is resistance to change. But soon some parts will realise that they want change and demand it, then trouble won't be against the state but between communities. The degree to which that spreads to the UK, and to other pressures, is debatable, but we will soon see.
Democracy isn't perfect, but as a means of keeping a large population working together more or less as a team, it is the least bad system we know. Such is the received wisdom. One of the major faults of democracy is that it sometimes allows a majority of beneficiaries to vote in measures that they know will have to be paid for by other people. The people paying may have no choice if they are a minority, or otherwise without power, and simply be unwilling victims of a selfish majority. Such is the situation facing much of the west right now. Many countries have overspent, with governments investing large amounts of borrowed money to ensure votes from large parts of the population, knowing that the price would be paid by other future governments and by different parts of the population. Now that the time has come for savings to be made, we are seeing some very selfish squabbling indeed, with everyone wanting someone else to pay the bills, leaving them undisturbed. The results in some countries are not pretty, with street demonstrations and rioting. The UK hasn't gone that far yet.
There are some basic principles that most people give at least lip service too. The weak and the deserving poor must be protected, and those that are able to do so should carry more of the burden. No major political party disagrees significantly with that, though they differ enormously when defining poor and deserving. Until recently, there has also been a consensus that children should be protected. Now that appears to have vanished. The debts that have been incurred by the adult generations are to be handed on to their kids, who of course have no legal say in the matter. Various groups of adults blame each other for the mess, but it is the future generations who will suffer most of the pain. Any suggestions of reductions of benefits, pensions, pay, jobs or public services are being resisted furiously, but if everyone insists that we must delay repayments, then it is today's and tomorrow's kids who are being left with much of the bill. And of course, if the services and benefits are eventually reduced, as they must, those same kids picking up the bill won't even benefit from them.
This does not seem a sensible, moral, or sustainable approach to democracy. If unwilling generations are forced to pick up large bills for benefits only available to their ancestors, we can be pretty sure they will rebel. Inter-generational conflict will see young people refusing to pay for the luxurious benefits their elders voted for themselves.
The same is true of any other sectors of society. All must see that they are having a reasonable package of price and reward. This is important, as it is this balance that make democracy stable and prevents revolution. No sector should be seen to benefit unduly at the expense of others.
Some people have gained much more than others from the various decisions that accrued the debts we now face, indeed some of the costs can be attributed to vote buying. For example, much of the debt is due to generous pension commitments in the public service. While private industry long ago recognised that increasing lifespans have made traditional final salary pension schemes unaffordable, and abolished them, the public sector has conspicuously carried on large scale recruitment with terms and conditions associated with lifespans that became out of date in the 1960s, knowing they were unaffordable (increasing longevity has caught noone by surprise) , and understating costs by using different pension valuation formulas than the private sector (e.g. 8:1 instead of 20:1). It does not seem unreasonable for those paying the bills to demand that terms and conditions such as pensions, holidays, pay and bonuses, be realigned to a more sensible baseline. All wealth generation arises in the private sector, so it makes little sense to provide public service conditions more generous that their equivalent in the private sector. Of course, those living very comfortably at the expense of others can't be expected to surrender their comfort without a struggle, but if public sector staff are seen to be very comfortable while those who have to pay them suffer, conflict is inevitable as stresses increase.
Similarly, benefits and welfare are already being addressed to ensure that those who are able to work (including those who are sick or disabled but who retain some saleable skills and abilities) must do so before they can claim state support, and to ensure that working will always make them wealthier than idleness. In a wealthy society, provided that everyone looks after themselves as far as they can, the state can easily ensure that everyone can afford survival with reasonable comfort. Ideally, welfare provides a basic existence for everyone, and then everyone could add to their personal comfort by making whatever contribution they reasonably can. This would be affordable and sustainable and would not disincentivise personal effort. It will take time to deliver this principle, but we are heading in that general direction.
But inter-generational problems will prove far more problematic than those between private and public. Inter-generational conflict in fact is already overdue. For me, the biggest surprise about the French demonstrations against pension age increase is not that they are happening, which isn't surprising at all, but that young people have also joined the demonstrations. It is the young who are being left with the huge bills, and they ought to be demonstrating in favour, not against pension age rises. Today's retirees are retiring at the same age as their parents, but unlike them, they will cost far more than they ever paid in. They are in effect demanding a huge unearned windfall, paid for by younger people. The older ones on the demonstrations may hope to benefit similarly themselves, but it is near impossible that younger people will be able to do so, yet they are being expected to pay the bills for those older people fortunate enough to do so. When someone else gets a big cake free, and you have to pay for it, it is not unreasonable to be annoyed. It is very surprising if you demonstrate in support of them getting the cake. The young French may be a little sluggish in realising the situation they are in, but they will catch up eventually. In the UK, the retirement age increase looks like it is being accepted, but it still leaves the young with huge bills. With the duration of the payback times being considered, many of the kids who will have to pay the bills are in school, and aren't politically aware yet, but as they come on stream politically and realise the enormity of the debts they face entering adulthood, we should expect them to start complaining. We may well see a Europe-wide rebellion against older population, and demands that they pay for themselves and their own retirements.
Immigration is an interesting issue too. The papers are full of stories about resentment of perceived advantages enjoyed by immigrant populations, but most of the stories are from communities that are under stress with limited employment or housing. The economics are interesting. On one side, someone immigrating and becoming a citizen gains a share of all the accumulated wealth of the country built over the centuries, and we may also pick up some liabilities to overseas family. On the other hand, we get the benefits of their education and skills free, and presumably benefit from any wealth they bring with them, plus their future contributions, and perhaps those of their families. And we gain also from their overseas links and networks, helping trade and reducing military threats. Set against that, some people emigrate, with the reverse economics. Of course, the two groups don't match. Emigration often happens in retirement, when people have a lot of wealth. Immigration tends to be of younger people with lower wealth. And of course, there is a lot in between in both directions. It is this that presents the biggest problem. Many people who immigrated to the UK to get a better life are now going back, because conditions there are improving while conditions here worsen. This new flow may be called remigration. It is strongest in those areas that are most useful, such as engineering and medicine. Remigration is a threat to the economy, because we tend to lose those immigrants who make the greatest contributions, leaving skills shortages, but we still are left with the costs of the lower contribution immigration. Adding to this, intergenerational conflict, if left unsolved, could lead to a large brain drain as young people decide to leave for lower tax regimes elsewhere, leaving behind the debts they were to be saddled with. If we lose the most able people from society, we not only lose their economic contribution but also face a skills shortage. The nightmare scenario would see the UK becoming an ill-funded retirement home, with lots of expensive old people, lots of people needing state support, a lot of people just about paying their own way, and too few wealthy taxpayers to pay for the difference.
So it is rapidly becoming apparent that society has many stresses to face over the next decade, and obvious that some communities in France are already at the point of rebellion. The first trouble is resistance to change. But soon some parts will realise that they want change and demand it, then trouble won't be against the state but between communities. The degree to which that spreads to the UK, and to other pressures, is debatable, but we will soon see.
Future high street retailing
Retailers are complaining afresh about their high street shops being finely balanced between survival and closure: http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/8358028/Retail-chiefs-warn-Treasury-over-wave-of-shop-closures.html.
It is hard not to feel some sympathy with them, but I also feel a degree of annoyance at their lack of vision. They look like yet another British industry group whose managers can seemingly only understand two tools - cost reduction and price increases. I guess they could get jobs with government if they are made redundant, they are obviously a good match for those who are seemingly only able to tweak tax and interest rates (I feel another blog entry coming on).
In brief, many people have much less money due to the recession, and petrol and food prices have risen a lot, so they have consequently reduced their spending on clothes to help balance their budgets. Like many people, I buy almost everything online or in out of town superstores, and only ever go into town if I need clothes. But the clothes I buy do come from the high street, apart from basic stuff that you can easily pick up at Tescos. (I did notice that my favourite men's shop in Ipswich has now gone. I have often joked that Ipswich used to be a one-horse town, but then the horse died. So my joke has become a personal reality. Anyway, back to the point).
The retail industry leaders want less financial and administrative pressure on them from government (fair enough) and the ability to pay less to young people (not so sure here). They argue that being able to reduce wages for young workers would let them employ more, thus increasing employment and leading to a retail-led recovery. There is some truth in the argument of course. Reducing the cost of labour allows prices to be reduced, increasing sales. Extra sales stimulates more manufacturing, more supporting services, more R&D, new ideas, and some of all that might be suitable for export. So the argument is not without merit, but economics is very complex, and it is very easy to trip up and invest too much in policies with poor returns. For example, retailers could simply abuse wage reduction to increase profit margins, without either creating increased jobs or reducing customer prices. Also, many clothes are imported so much of the associated economic benefit from increasing sales would go elsewhere. So, even though allowing retailers to pay lower wages might yield a little economic benefit for the UK as a whole, I think other policies might prove better.
There are many factors in costs of running a high street shop, and many that affect the overall cost of a shopping trip other than the price of the goods. Some have a natural feedback loop. If lots of high street shops close, and there is insufficient demand for yet more coffee shops, the rents demanded by the property developers will fall - they make nothing at all if they charge so much that their building is left vacant. If town centres are left sufficiently empty, the amount that councils can demand for car parking will fall.
There are also lower limits on how far demand will fall. Not everyone is severely affected by recession. A high proportion of the workforce is still in jobs with high job security, especially in the public sector. Some have just as much money as ever, and if anything, have benefited from reducing prices and interest rates. Most are not facing any likely redundancy that might make them unwilling to spend. Others have seen only small reductions in income, via reductions in pay rises or overtime. This bulk of the population guarantees a continued demand for products and services, even in luxury sectors. They will still want clothes, regardless of price reductions, so some stores will certainly be able to stay in business.
So although reducing wages and using the savings to lower prices or increase jobs a bit might help a little, what we really need is the development and deployment of new manufacturing and services that can be sold elsewhere as well as internally. Moving wealth around inside the economy doesn't help nearly as much, and only yields slow growth. If the retailers focused less on cost reduction and more on other ways to stimulate sales, the benefits would be greater. This is actually true throughout the UK economy, in every sector. UK managers have generally been far to focused on cost reductions instead of looking at ways to improve revenues.
During the 1990s, many retailers introduced coffee shops and restaurants into their high street stores. Since then, there has been little change. The next decade will have to be a bit more imaginative. There are many areas where shops should be innovating and many new areas will be opening in the next few years. High street shopping could and should be much more exciting, and retail revenues could be increased. Some of the services and technologies required would be well suited to exports, so the UK economy as a whole would grow. It is developing these that should be the priority, not wage reductions. So what are they? I looked at some upcoming retail trends in my blog last summer, slightly more nicely packaged in http://futurizon.com/articles/retailing.pdf, but I'll cut and paste the more relevant bits now to save you having to click, and maybe update a bit.
Since the iPhone and iPad became popular, followed by numerous competitive offerings, mobile internet access is now much more useful and accessible. People can now access the net to compare products and prices, or get information, or add value to almost every activity. But the underlying, less conspicuous trend here is that people are getting much more used to accessing all kinds of data all the time, and that ultimately is what will drive retail futures. With mobile access increasing in power, speed and scope, the incentives to create sites aimed at mobile people is increasing, and the tools for doing so are getting better. For example, people will be able to shop around more easily, to compare offerings in other shops even while they remain in the same one. Looking at a suit in M&S, I'll also be able to see what comparable suits Next has across the street, and make a sensible decision whether it is worth going to try it on.
This will be accelerated by the arrival of head-up displays - video visors and eventually active contact lenses. The progress in 3d TV over the next few years will result in convergence of computer games and broadcast media, and this will eventually converge nicely into retailing too, especially if we add in things like store positioning systems, gesture recognition and artificial intelligence (AI) based profile and context engines. These are all coming quickly. Add all this in to augmented reality, and we have a highly versatile and powerfully immersive environment merged with the real world. It will take years for marketers and customers to work out the full scope of the resultant opportunities. Think of it this way: when computing and telecoms converged, we got the whole of the web, fixed and mobile. This time it isn't just two industries converging - it is the whole of cyberspace converging with the whole of the real world. And while technology will be the main driver, it will also stimulate a great deal of innovation and progress in the human sides of retailing.
So we should expect decades of fruitful development, it won’t all happen overnight. Lots of companies will emerge, lots of fortunes will be made, and lost, and there will also be lots of opportunities for sluggish companies to be wiped out by new ones or those more willing and able to adapt. Companies that only look at cost reductions will be among the losers. The greatest certainty is that every company in every industry will face new challenges, balanced by new opportunities. Never has there been a better time for a good vision, backed up by energy and enthusiasm. All companies can use the web and any company can use high street outlets if they so desire. It is a free choice of business model. Nevertheless, not all parts of the playing field are equal. Occupying different parts requires different business models. If a store has good service but high prices and no reason someone should not just buy the product on-line after getting all the good advice, then many shoppers will do just that.
An obvious response is to make good use of exclusive designs. A better and longer lasting response is to captivate the customer by ongoing good service, not just pre-sale but after-sale too. A well cared for customer is more likely to buy from the company providing the good care. If staff build personal relationships and get to know their customers, those customers are highly unlikely to buy elsewhere after using their services. Augmented reality isn't just a toy for technophiles. We'll all be using it, just as we all now use the web and mobiles. Augmented reality provides a service platform where companies can have an ongoing relationship with the customer. Relationships are about human skills, technology is just a tool-kit.
As we go further down the road of automation, the physical costs of materials and manufacturing will generally fall for any particular specification. Of course, better materials will emerge and these will certainly cost more at first, but that doesn't alter the general cost-reduction trend. As costs fall, more and more of the product value will move into the world of intangibles. Brand image, trust, care, loyalty, quality of service and so on - these will account for an increasing proportion of the sale price. So when this is factored in, the threat of customers going elsewhere lessens.
AI will play a big role in customer support in future retail, extending the scope of every transaction. Recognising when a customer wants attention, understanding who they are and offering them appropriate service will all fall within the scope of future AI. While that might at first seem to compete with humans, it will actually augment the overall experience, enabling humans to concentrate on the emotional side of the service. Computers will deal with some of the routine everyday stuff and the information intensive stuff, while humans look after the human aspects. When staff are no longer just cogs in a machine, they will be happier, and of course customers get the best of both worlds too. So everyone wins.
Adding gaming will be one of the more fun improvements. If a customer's companions don't want to just stand idly and get bored while the customer is served, playing games in the shop might be a pleasant distraction for them. But actually games technology presents the kind of interface that will work well too for customers wanting to explore how products will look or work in the various environments in which they are likely to be used. They can do so with a high degree of realism. All the AI, positioning, augmented reality and so on all add together, making the store IT systems a very powerful part of the sales experience for shopper and staff alike.
Positioning systems exist already, via GPS and mobile phone networks, with Galileo also maybe coming soon. Indoors, some of these systems don't work, so there is a potential niche for city positioning systems that extend fully inside buildings. With accurate positioning, and adding profiling and AI, retailers can offer very advanced personalised services.
Social networking will change shopping regardless of what retailers do, but if the retailers are proactively engaged in social networking, adding appropriate services in their stores, and capitalising on the various social networks fads, that is surely better than being helpless victims.
Virtual goods have a significant market - online gaming and social networking has created a large market for virtual things, and some of these overlap with stuff sold in high street shops - clothing, cards, novelties, even foods. People in games spend real money buying virtual goods for their characters or their friends. There is no reason why this can't happen in the high street. Someone playing a fantasy character in World of Warcraft may well be open to trying on a magic cloak in a high tech changing room in a high street clothes store, or drinking something in a coffee shop based on a potion their character is drinking. In fact, the good on offer in a shop could extend to vastly more than are currently on display. With augmented reality, a shopper might walk around a physical store where the entire display area is full of goods customised to them personally. The physically present items that are not suited to them might be digitally replaced in their visors by others that are. This increases the effective sales area dramatically. The goods need not be entirely virtual of course. They might well be real physical products available online, or form a larger store, or from associates. We may see companies like Amazon using real high street shops to sell goods from their stores - they've effectively been doing that with bookshops for years without even having the consent of the bookshops, so why not extend it using proper business alliances, implemented professionally, instead of simply digitally trespassing?
Try-on outlets are another obvious development. People mostly want to try clothes on before purchasing them (I am one of the many men who lets their wives buy most of their clothes, so am not sure how much of a 'mostly' it is). But not everyone is a standard shape or size, in fact very few people are. So although an item might fit perfectly, usually it won't. Having a body scan to determine your precise shape and size, and having a garment custom manufactured would be a big improvement. With advanced technology and logistics, this wouldn't add very much to the purchase price. A shopper in a future high street outlet might try on a garment, and if they like it, they would take it to the checkout, or more likely, just scan the price tag with their mobile. Their size and shape would be documented on a loyalty card, mobile device, store computer, or more likely just out there somewhere on the cloud. The garment then goes back on the shelf. A custom garment (the customer may be able to choose many personalisation options at this stage) would then be manufactured and delivered to the person's home or the store, and this process could well be as fast as overnight. The customer gets a garment perfectly suited to them, that fits perfectly. The shop also gains because only one item of each size needs to be stocked, so they can store more varieties. The store evolves into a try-on outlet, selling from a greatly increased range of products. Their revenue increases greatly, and their costs are reduced too, with less risk of being left with stuff that won't sell. Local manufacturing benefits, because the fast response prohibits long distance outsourcing. If the services and technologies required for all of these advances are developed in the UK, there may well be large export potential too. From a UK perspective, everyone wins. None of this would happen simply by trying to cut costs.
Clothes and accessories stores will obviously benefit greatly from such technology, allowing customers to choose more easily. But technology can also add to the product itself. Some customers will be uninterested in adding technology whereas for others it will be a big bonus having the extra features. Today, social networking is just starting to make the transition to mobile devices. In a few years’ time, many items of accessories or clothes will have built in IT functionality,enabling them to play a leading role in the wearer's social networking, broadcasting personal data into surrounding space or coming with a virtual aura, loaded with avatars that appear differently to each viewer. Glasses can do this, and also provide displays, change colour using thin film coatings, and even record what the wearer sees and hears. They might even recognise some emotional reactions via pupil dilation, identifying people that the user appears interested in, for example. Health is another are obviously suited to jewellery and accessories, many of which are in direct contact with skin. Accessories can monitor health, act as a communications device to a clinic, even control the release of medicines in smart capsule.
But the biggest change in retailing is certainly the human one, adding human-based customer service. Technology is quickly available to everyone and eventually ceases to be a big differentiator, whereas human needs will persist, and always offer a means to genuine value add. This effect will run throughout every sector and will bring in the care economy, wherehuman skills dominate and computers look after routine transactions at low cost. Robots and computers will play an important part in the future, but humans will dominate in adding value, simply because people will always value people above machines - or indeed any other organic species. Focusing on human value-add is therefore a good strategy to future proof businesses. The more value that can be derived from the human element, the less vulnerable a business will be from technology development. The key here is to distinguish between genuine human skills and those where the human is really just acting as part of a machine.Putting all this together, we can see a more pleasant future of retailing. As we recover from the often sterile harshness of web shopping and start to concentrate more on our quality of life, value will shift from the actual physical product itself towards the whole value of the role it plays in our lives, and the value of associated services provided by the retailer. As the relationship grows and extends outside the store, retailing will regain the importance it used to have as a full human experience. Retailers used to be the hub of a community and they can be again if the human side is balanced with technology.Sure, we will still shop on-line much of the time, but even here, the ease and quality of that will depend to some degree on the relationship we already have with the retailer. Companies will be more responsive to the needs of the community and more integrated into them. And when we once again know the staff and know they care about us, shopping can resume its place as a fun and emotionally rewarding part of our lives.In the end it is all about engaging with the customer, making them excited, empowering them and showing them you care. When you look after them, they will keep coming back. And it is quite nice to think that the more advanced the technology becomes, the more it humanises us.
So, retailing, and even in the high street, has a potential very bright future. There is lots of competition, but good companies will thrive. Cost cutting is the wrong approach, even during recession. Investing in advanced technologies and improved services increases revenue, increase profits, leads to real economic growth, maintains potentially high wages, stimulates lots of new jobs in many sectors, and improves quality of life for all concerned. It really should be a no-brainer. Retailers should stop moaning and get on with it.
It is hard not to feel some sympathy with them, but I also feel a degree of annoyance at their lack of vision. They look like yet another British industry group whose managers can seemingly only understand two tools - cost reduction and price increases. I guess they could get jobs with government if they are made redundant, they are obviously a good match for those who are seemingly only able to tweak tax and interest rates (I feel another blog entry coming on).
In brief, many people have much less money due to the recession, and petrol and food prices have risen a lot, so they have consequently reduced their spending on clothes to help balance their budgets. Like many people, I buy almost everything online or in out of town superstores, and only ever go into town if I need clothes. But the clothes I buy do come from the high street, apart from basic stuff that you can easily pick up at Tescos. (I did notice that my favourite men's shop in Ipswich has now gone. I have often joked that Ipswich used to be a one-horse town, but then the horse died. So my joke has become a personal reality. Anyway, back to the point).
The retail industry leaders want less financial and administrative pressure on them from government (fair enough) and the ability to pay less to young people (not so sure here). They argue that being able to reduce wages for young workers would let them employ more, thus increasing employment and leading to a retail-led recovery. There is some truth in the argument of course. Reducing the cost of labour allows prices to be reduced, increasing sales. Extra sales stimulates more manufacturing, more supporting services, more R&D, new ideas, and some of all that might be suitable for export. So the argument is not without merit, but economics is very complex, and it is very easy to trip up and invest too much in policies with poor returns. For example, retailers could simply abuse wage reduction to increase profit margins, without either creating increased jobs or reducing customer prices. Also, many clothes are imported so much of the associated economic benefit from increasing sales would go elsewhere. So, even though allowing retailers to pay lower wages might yield a little economic benefit for the UK as a whole, I think other policies might prove better.
There are many factors in costs of running a high street shop, and many that affect the overall cost of a shopping trip other than the price of the goods. Some have a natural feedback loop. If lots of high street shops close, and there is insufficient demand for yet more coffee shops, the rents demanded by the property developers will fall - they make nothing at all if they charge so much that their building is left vacant. If town centres are left sufficiently empty, the amount that councils can demand for car parking will fall.
There are also lower limits on how far demand will fall. Not everyone is severely affected by recession. A high proportion of the workforce is still in jobs with high job security, especially in the public sector. Some have just as much money as ever, and if anything, have benefited from reducing prices and interest rates. Most are not facing any likely redundancy that might make them unwilling to spend. Others have seen only small reductions in income, via reductions in pay rises or overtime. This bulk of the population guarantees a continued demand for products and services, even in luxury sectors. They will still want clothes, regardless of price reductions, so some stores will certainly be able to stay in business.
So although reducing wages and using the savings to lower prices or increase jobs a bit might help a little, what we really need is the development and deployment of new manufacturing and services that can be sold elsewhere as well as internally. Moving wealth around inside the economy doesn't help nearly as much, and only yields slow growth. If the retailers focused less on cost reduction and more on other ways to stimulate sales, the benefits would be greater. This is actually true throughout the UK economy, in every sector. UK managers have generally been far to focused on cost reductions instead of looking at ways to improve revenues.
During the 1990s, many retailers introduced coffee shops and restaurants into their high street stores. Since then, there has been little change. The next decade will have to be a bit more imaginative. There are many areas where shops should be innovating and many new areas will be opening in the next few years. High street shopping could and should be much more exciting, and retail revenues could be increased. Some of the services and technologies required would be well suited to exports, so the UK economy as a whole would grow. It is developing these that should be the priority, not wage reductions. So what are they? I looked at some upcoming retail trends in my blog last summer, slightly more nicely packaged in http://futurizon.com/articles/retailing.pdf, but I'll cut and paste the more relevant bits now to save you having to click, and maybe update a bit.
Since the iPhone and iPad became popular, followed by numerous competitive offerings, mobile internet access is now much more useful and accessible. People can now access the net to compare products and prices, or get information, or add value to almost every activity. But the underlying, less conspicuous trend here is that people are getting much more used to accessing all kinds of data all the time, and that ultimately is what will drive retail futures. With mobile access increasing in power, speed and scope, the incentives to create sites aimed at mobile people is increasing, and the tools for doing so are getting better. For example, people will be able to shop around more easily, to compare offerings in other shops even while they remain in the same one. Looking at a suit in M&S, I'll also be able to see what comparable suits Next has across the street, and make a sensible decision whether it is worth going to try it on.
This will be accelerated by the arrival of head-up displays - video visors and eventually active contact lenses. The progress in 3d TV over the next few years will result in convergence of computer games and broadcast media, and this will eventually converge nicely into retailing too, especially if we add in things like store positioning systems, gesture recognition and artificial intelligence (AI) based profile and context engines. These are all coming quickly. Add all this in to augmented reality, and we have a highly versatile and powerfully immersive environment merged with the real world. It will take years for marketers and customers to work out the full scope of the resultant opportunities. Think of it this way: when computing and telecoms converged, we got the whole of the web, fixed and mobile. This time it isn't just two industries converging - it is the whole of cyberspace converging with the whole of the real world. And while technology will be the main driver, it will also stimulate a great deal of innovation and progress in the human sides of retailing.
So we should expect decades of fruitful development, it won’t all happen overnight. Lots of companies will emerge, lots of fortunes will be made, and lost, and there will also be lots of opportunities for sluggish companies to be wiped out by new ones or those more willing and able to adapt. Companies that only look at cost reductions will be among the losers. The greatest certainty is that every company in every industry will face new challenges, balanced by new opportunities. Never has there been a better time for a good vision, backed up by energy and enthusiasm. All companies can use the web and any company can use high street outlets if they so desire. It is a free choice of business model. Nevertheless, not all parts of the playing field are equal. Occupying different parts requires different business models. If a store has good service but high prices and no reason someone should not just buy the product on-line after getting all the good advice, then many shoppers will do just that.
An obvious response is to make good use of exclusive designs. A better and longer lasting response is to captivate the customer by ongoing good service, not just pre-sale but after-sale too. A well cared for customer is more likely to buy from the company providing the good care. If staff build personal relationships and get to know their customers, those customers are highly unlikely to buy elsewhere after using their services. Augmented reality isn't just a toy for technophiles. We'll all be using it, just as we all now use the web and mobiles. Augmented reality provides a service platform where companies can have an ongoing relationship with the customer. Relationships are about human skills, technology is just a tool-kit.
As we go further down the road of automation, the physical costs of materials and manufacturing will generally fall for any particular specification. Of course, better materials will emerge and these will certainly cost more at first, but that doesn't alter the general cost-reduction trend. As costs fall, more and more of the product value will move into the world of intangibles. Brand image, trust, care, loyalty, quality of service and so on - these will account for an increasing proportion of the sale price. So when this is factored in, the threat of customers going elsewhere lessens.
AI will play a big role in customer support in future retail, extending the scope of every transaction. Recognising when a customer wants attention, understanding who they are and offering them appropriate service will all fall within the scope of future AI. While that might at first seem to compete with humans, it will actually augment the overall experience, enabling humans to concentrate on the emotional side of the service. Computers will deal with some of the routine everyday stuff and the information intensive stuff, while humans look after the human aspects. When staff are no longer just cogs in a machine, they will be happier, and of course customers get the best of both worlds too. So everyone wins.
Adding gaming will be one of the more fun improvements. If a customer's companions don't want to just stand idly and get bored while the customer is served, playing games in the shop might be a pleasant distraction for them. But actually games technology presents the kind of interface that will work well too for customers wanting to explore how products will look or work in the various environments in which they are likely to be used. They can do so with a high degree of realism. All the AI, positioning, augmented reality and so on all add together, making the store IT systems a very powerful part of the sales experience for shopper and staff alike.
Positioning systems exist already, via GPS and mobile phone networks, with Galileo also maybe coming soon. Indoors, some of these systems don't work, so there is a potential niche for city positioning systems that extend fully inside buildings. With accurate positioning, and adding profiling and AI, retailers can offer very advanced personalised services.
Social networking will change shopping regardless of what retailers do, but if the retailers are proactively engaged in social networking, adding appropriate services in their stores, and capitalising on the various social networks fads, that is surely better than being helpless victims.
Virtual goods have a significant market - online gaming and social networking has created a large market for virtual things, and some of these overlap with stuff sold in high street shops - clothing, cards, novelties, even foods. People in games spend real money buying virtual goods for their characters or their friends. There is no reason why this can't happen in the high street. Someone playing a fantasy character in World of Warcraft may well be open to trying on a magic cloak in a high tech changing room in a high street clothes store, or drinking something in a coffee shop based on a potion their character is drinking. In fact, the good on offer in a shop could extend to vastly more than are currently on display. With augmented reality, a shopper might walk around a physical store where the entire display area is full of goods customised to them personally. The physically present items that are not suited to them might be digitally replaced in their visors by others that are. This increases the effective sales area dramatically. The goods need not be entirely virtual of course. They might well be real physical products available online, or form a larger store, or from associates. We may see companies like Amazon using real high street shops to sell goods from their stores - they've effectively been doing that with bookshops for years without even having the consent of the bookshops, so why not extend it using proper business alliances, implemented professionally, instead of simply digitally trespassing?
Try-on outlets are another obvious development. People mostly want to try clothes on before purchasing them (I am one of the many men who lets their wives buy most of their clothes, so am not sure how much of a 'mostly' it is). But not everyone is a standard shape or size, in fact very few people are. So although an item might fit perfectly, usually it won't. Having a body scan to determine your precise shape and size, and having a garment custom manufactured would be a big improvement. With advanced technology and logistics, this wouldn't add very much to the purchase price. A shopper in a future high street outlet might try on a garment, and if they like it, they would take it to the checkout, or more likely, just scan the price tag with their mobile. Their size and shape would be documented on a loyalty card, mobile device, store computer, or more likely just out there somewhere on the cloud. The garment then goes back on the shelf. A custom garment (the customer may be able to choose many personalisation options at this stage) would then be manufactured and delivered to the person's home or the store, and this process could well be as fast as overnight. The customer gets a garment perfectly suited to them, that fits perfectly. The shop also gains because only one item of each size needs to be stocked, so they can store more varieties. The store evolves into a try-on outlet, selling from a greatly increased range of products. Their revenue increases greatly, and their costs are reduced too, with less risk of being left with stuff that won't sell. Local manufacturing benefits, because the fast response prohibits long distance outsourcing. If the services and technologies required for all of these advances are developed in the UK, there may well be large export potential too. From a UK perspective, everyone wins. None of this would happen simply by trying to cut costs.
Clothes and accessories stores will obviously benefit greatly from such technology, allowing customers to choose more easily. But technology can also add to the product itself. Some customers will be uninterested in adding technology whereas for others it will be a big bonus having the extra features. Today, social networking is just starting to make the transition to mobile devices. In a few years’ time, many items of accessories or clothes will have built in IT functionality,enabling them to play a leading role in the wearer's social networking, broadcasting personal data into surrounding space or coming with a virtual aura, loaded with avatars that appear differently to each viewer. Glasses can do this, and also provide displays, change colour using thin film coatings, and even record what the wearer sees and hears. They might even recognise some emotional reactions via pupil dilation, identifying people that the user appears interested in, for example. Health is another are obviously suited to jewellery and accessories, many of which are in direct contact with skin. Accessories can monitor health, act as a communications device to a clinic, even control the release of medicines in smart capsule.
But the biggest change in retailing is certainly the human one, adding human-based customer service. Technology is quickly available to everyone and eventually ceases to be a big differentiator, whereas human needs will persist, and always offer a means to genuine value add. This effect will run throughout every sector and will bring in the care economy, wherehuman skills dominate and computers look after routine transactions at low cost. Robots and computers will play an important part in the future, but humans will dominate in adding value, simply because people will always value people above machines - or indeed any other organic species. Focusing on human value-add is therefore a good strategy to future proof businesses. The more value that can be derived from the human element, the less vulnerable a business will be from technology development. The key here is to distinguish between genuine human skills and those where the human is really just acting as part of a machine.Putting all this together, we can see a more pleasant future of retailing. As we recover from the often sterile harshness of web shopping and start to concentrate more on our quality of life, value will shift from the actual physical product itself towards the whole value of the role it plays in our lives, and the value of associated services provided by the retailer. As the relationship grows and extends outside the store, retailing will regain the importance it used to have as a full human experience. Retailers used to be the hub of a community and they can be again if the human side is balanced with technology.Sure, we will still shop on-line much of the time, but even here, the ease and quality of that will depend to some degree on the relationship we already have with the retailer. Companies will be more responsive to the needs of the community and more integrated into them. And when we once again know the staff and know they care about us, shopping can resume its place as a fun and emotionally rewarding part of our lives.In the end it is all about engaging with the customer, making them excited, empowering them and showing them you care. When you look after them, they will keep coming back. And it is quite nice to think that the more advanced the technology becomes, the more it humanises us.
So, retailing, and even in the high street, has a potential very bright future. There is lots of competition, but good companies will thrive. Cost cutting is the wrong approach, even during recession. Investing in advanced technologies and improved services increases revenue, increase profits, leads to real economic growth, maintains potentially high wages, stimulates lots of new jobs in many sectors, and improves quality of life for all concerned. It really should be a no-brainer. Retailers should stop moaning and get on with it.
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