GNP Not the Whole Story

Today from the AP:

Economy Has Worst Growth Since 2002

By JEANNINE AVERSA
The Associated Press
Thursday, May 31, 2007; 9:09 AM

WASHINGTON -- The economy nearly stalled in the first quarter with growth slowing to a pace of just 0.6 percent. That was the worst three-month showing in over four years.

The new reading on the gross domestic product, released by the Commerce Department Thursday, showed that economic growth in the January-through-March quarter was much weaker. Government statisticians slashed by more than half their first estimate of a 1.3 percent growth rate for the quarter.

The main culprits for the downgrade: the bloated trade deficit and businesses cutting investment in supplies of the goods they hold in inventories.

For nearly a year, the economy has been enduring a stretch of subpar economic growth due mostly to a sharp housing slump. That in turn has made some businesses act more cautiously in their spending and investing.

The economy's 0.6 percent growth rate in the opening quarter of this year marked a big loss of momentum from the 2.5 percent pace logged in the final quarter of last year.

Federal Reserve Chairman Ben Bernanke doesn't believe the economy will slide into recession this year, nor do Bush administration officials. But ex Fed chief Alan Greenspan has put the odds at one in three.

The first-quarter's performance was the weakest since the final quarter of 2002, when the economy recovering from a recession. At that time, GDP eked out a 0.2 percent growth rate. Economists were predicting the first-quarter performance this year would be downgraded, but not as much as it did. They were calling for a 0.8 percent growth rate pace.

GDP measures the value of all goods and services produced in the United States. It is considered the best measure of the country's economic fitness.

In more encouraging economic news, the Labor Department reported that fewer people signed up for unemployment benefits last week. New filings dropped by 4,000 to 310,000. That suggests the employment climate is weathering well the economy's sluggish spell.

Many economists believe the first quarter will be the low point for this year. They expect growth will improve but still be sluggish.

The National Association for Business Economics predicts the economy will expand at a 2.3 percent pace in the April-to-June quarter.

In the first quarter, there was a larger trade deficit than first thought. That ended up shaving a full percentage point from the GDP. Businesses cut back on inventory investment as they tried to make sure unsold stocks of goods didn't get out of whack with customer demand. That lopped off nearly a percentage point to first quarter GDP.

Those were the biggest factors behind the government slicing its initial GDP estimate released a month ago by as much as it did.

The sour housing market also restrained overall economic activity. Investment in home building was cut by 15.4 percent, on an annualized basis, in the first quarter. However, that wasn't as deep a cut as the 17 percent annualized drop initally estimated. And, it wasn't as severe as the 19.8 percent annualized drop seen in the final quarter of last year.

Even so, there is no doubt that troubled housing market is one of the biggest problems for the economy. Although some businesses tightened the belt in the first quarter, consumers did not. That helped to prevent the economy from stalling out altogether.

Consumers boosted their spending by a 4.4 percent growth rate in the first quarter, the most in a year. Consumer spending accounts for a major chunk of economic activity.

Some economists wonder how much interest consumers will have in continued brisk spending, however, given rising gasoline prices that have topped $3 a gallon in many markets. More money spent filling up the gas tank leaves less to spend on other things.

The chart up top shows income inequality in the U. S. over time. We now have a very top heavy economy, and average figures showing generally rising GNP mask the fact that the middle and lower ends of the income distribution scale are falling behind while the top 10% is cleaning up. Economists tend to pretend this doesn't matter because average GNP is up overall, but things don't work that way in societies.

The AP article above shows how consumers have so far been bailing out the economy, and it includes the necessary dose of economic happy talk to persuade people that the sun will come out tomorrow. But people will ignore the reality of their own lives for only so long.

The U. S. economy is in a very precarious position, as our current pattern of income distribution is unsustainable. We're close to the possibility of a new social, cultural and economic equilibrium in the U. S., where the establishment elites who have been benefiting most from the last 20 years of social and economic policy may no longer find themselves so influential. That's what happened during the New Deal under Franklin Roosevelt, where you see the big dip in the chart above. If we keep in the track we're headed in, then we're headed for another one of those radical shifts.

I'd like to say my peers in the intelligentsia understand this and will think more about how to support widespread prosperity, but I see the opposite going in the opposite direction. Businesses and economists are trying to cash out as best they can under the current equilibrium before the change comes, trying to support the status quo for as long as they can. Well, that's one way to go, but it's not sustainable, and it won't support our long term economic and social health.

This Makes Sense

For a while, the U. S. posture was to refuse to negotiate with Iran, but the U. S. had not good BATNA (best alternative to a negotiated agreement). Any hope for nuclear non-proliferation and a reduction in international destabilization due to Iranian funded armed groups in the Middle East begins with the U. S. engaging the players who can make deals. What's more, the enforcement of any possible future agreements relies on international cooperation, and the U. S. has so damaged its credibility internationally that a refusal to negotiate weakens, rather than strengthens, U. S. leverage.

All of this is to say the decision by the U. S to negotiate directly is a good one. Good negotiation of course relies on good execution, so who knows what will happen now, but the decision to sit at the table, at least, was a good one.

Here's the news story today:

U.S., Iran Open Dialogue On Iraq
Diplomats Call Meeting Positive; More Talks Likely

By John Ward Anderson
Washington Post Foreign Service
Tuesday, May 29, 2007; A01

BAGHDAD, May 28 -- The United States and Iran held their first official high-level, face-to-face talks in almost 30 years Monday to discuss the deteriorating security situation in Iraq, and officials emerged generally upbeat about the renewed dialogue, suggesting additional meetings were likely.

In briefings to reporters afterward, the chief negotiators -- U.S. Ambassador to Iraq Ryan C. Crocker and Iran's ambassador to Baghdad, Hassan Kazemi Qomi -- said the talks focused solely on Iraq and did not stray into the contentious areas of Iran's nuclear program or the recent detentions of four Iranian American citizens by Tehran.

Underscoring the crux of the security problem here, a suicide bomber detonated a truck loaded with explosives at one of Iraq's most revered Sunni shrines, the Abdul Qadir al-Gailani mosque in central Baghdad, shortly before talks concluded. The blast killed at least 19 people and wounded 69, raising fears of a retaliatory cycle of sectarian bloodshed similar to what happened last year when a Shiite shrine was bombed in Samarra. More than 1,000 people were killed in sectarian violence following the Samarra mosque attack in February 2006.

The article emphasizes the talks are focused on Iraq, which is valuable in its own right. The U. S. has inserted itself on the side of the Sunni's in Iraq's current civil war against the Shia sympathetic to Iran. The U. S. has done this to try to play some rearguard action as Iran's regional influence has skyrocketed in the wake of the backfired U. S. decision to invade Iraq. Aside from the wisdom of the U. S. taking a side on behalf of the Sunnis (in solidarity with the Sunnis of Saudi Arabia, playing to another regional U. S. ally), the decision itself to enter talks is a wise one.

One of my students wrote a good final paper last fall about the utterly failed U. S. posture toward international negotiations and relations, and from a purely rational negotiations point of view, it's impossible to disagree.

I don't like to bring politics into my teaching, or my business, but the news is what it is, and people learn by applying concepts to real practice, or, failing that, real cases. If people are watching the news, they can learn more about good negotiation if people like me, who believe conflict can be very good and very productive if managed and channeled appropriately, speak up.

Social Networkong Trend Continues

Social Networking sites like Facebook and MySpace are popular, but not terribly focused. As the Internet continues to function as a means through which people connect with each other, look for more affinity and interest sites to emerge. The tensions will be all about which communities allow the most flexibility, which makes advertisers hinky, since they want control and antispectic spaces to help propel their branding. Ultimately, the advertisers will go where the people are, and people online don't like fetters.

From the NYT:

But along with the recent purchase of a social network design firm, Five Across, the deal will give Cisco the technology to help large corporate clients create services resembling MySpace or YouTube to bring their customers together online. And that ambition highlights a significant shift in the way companies and entrepreneurs are thinking about social networks.

They look at MySpace and Facebook, with their tens of millions of users, as walled-off destinations, similar to first-generation online services like America Online, CompuServe and Prodigy. These big Web sites attract masses of people who have dissimilar interests and, ultimately, little in common.

The new social networking players, which include Cisco and a multitude of start-ups like Ning, the latest venture of the Netscape co-creator Marc Andreessen, say that social networks will soon be as ubiquitous as regular Web sites. They are aiming to create tools to let ordinary people, large companies and even presidential candidates create social Web sites tailored for their own customers, friends, fans and employees.

“The existing social networks are fantastic but they put users in a straitjacket,” said Mr. Andreessen, who this week reintroduced Ning, his third start-up, after a limited introduction last year. “They are restrictive about what you can and can’t do, and they were not built to be flexible. They do not let people build and design their own worlds, which is the nature of what people want to do online.”

Social networks are sprouting on the Internet these days like wild mushrooms. In the last few months, organizations as dissimilar as the Portland Trailblazers, the University of South Carolina and Nike have gotten their own social Web sites up and running, with the help of companies that specialize in building social networks. Last month, Senator Barack Obama unveiled My.BarackObama.com, a social network created for his presidential campaign by the political consulting firm Blue State Digital.

Read the whole article to get a flavor of what's going on with this trend.

Know Your Adversary

Today's negotiation lecture - sure to be a controversial one - comes from Internet writer Ian Welsh. Here's an excerpt:

America needs to stop treating its enemies as EVIL and MONSTROUS and HITLER. It needs to stop assuming that just because a movement is Islamic, it can't be negotiated with. It's not just that demonization often leads to horribly immoral acts, it's that it often leads to very bad foreign policy and to blowback which hurts the U S's interests.

And above all, Americans need to start seeing the world through the eyes of their enemies. They need to understand why others often hate them. Understanding something, in the US, is often taken as excusing it. Being judgmental comes before judging, and as soon as a regime is labeled “evil” suddenly they can't be talked to. (The definition of evil, of course, is very flexible. The Saudis and Egyptians, who supplied most of the money and men for 9/11 are good American allies, after all.) But “evil” isn't an analytical framework, and all it does is close down opportunities to actually have peace. Organizations like Al-Qaeda and Hezbollah have much less in common than they have differences, but in American discourse you'd never know that.

At Wharton, we teach "information based bargaining." We know from research that the most successful negotiators are those who ask the most questions, who can see the world frmo the other party's point of view.

It's impossible to ignore as I read the papers that the United States, my home country, is really very bad at this, and it works against the country's own interests.

It's getting really ugly out there.

I've been writing on and off about the real estate bubble and what it means for the wider U. S. economy. I learned during the dot.com stocks bubble not to trust what I hear on CNBC but to trust my gut as a psychologist who can spot a frothy, "irrationally exuberant" market.

This is a very well written story, but the bottom line is we may be well in line for a major economic correction as the subprime lending market collapse ripples out far and wide.

I've also done some writing about what I smell as the coming major political realignment coming in the country, for which business people need to be prepared. Here's a snippet from the article linked above (emphasis added):

The sub-prime and overall mortgage carnage is now likely to lead to a financial crisis whose cleanup and bailout costs will make the S&L bailout bill look like spare change. We are only at the beginning of this fallout but, already, several proposals and bills in Congress have been submitted to help millions of sub-prime homeowners on the verge of bankruptcy and foreclosure. The prospect of millions of homeowners thrown homeless on the street is already shaking politicians of every stripe. The relatively modest bailout envisaged by the first bills currently proposed in Congress will mushroom into a much bigger fiscal bailout of homeowners, borrowers and lenders once the garbage of sub-prime, near-prime and pseudo-prime toxic waste spreads around the economy and likely leads to a hard landing recession that will cause a much bigger financial and banking crisis.


Given the fallout and real, social and financial costs of this disaster the political blame game will soon start. So it is important to make sure that the self-serving spin game that accompanied the game of those who happily ignored since last summer the looming housing, mortgage and economic mess will not be repeated again. Powerful political and financial interests will spin their self-serving ideological spin on who is to blame for this mess. Specifically be ready for a cabal of supply side voodoo ideologues - from the Wall Street Journal editorial page (and its invited op-ed writers) to hacks (calling them economists would be an insult to my profession) such as Arthur Laffer, Steve Hanke and other assorted voodoo religion priests - to start spinning a tale blaming government regulation and interference for this disaster that has instead its core in the lack of sensible government regulation, not the existence of such regulation. In the meanwhile powerful financial interests that repeat the mantra – or better the proof-less dogma - of unregulated free markets and do not like any – even sensible – supervision and regulation of the financial system will happily blame government action – rather than their own reckless greed and stupidity - for this disaster while happily demanding and receiving billions in bailout funds from the same government that they so happily disdain. This will be the most appalling form of corporate welfare: privatize the profits in good times and socialize the losses in bad times.

This fairy tale spinned by free market supply side voodoo fundamentalism zealots will blame the otherwise appropriate current Congressional action on predatory lending for being one of the main causes of the credit crunch that will lead to a painful recession (as the WSJ editorial page recently claimed) while forgetting that predatory lending practices developed by free unregulated markets created the toxic waste that is subprime and near-prime mortgages.. This voodoo religion cabal will also incorrectly blame regulators – whose true blame was being asleep at the wheel for six years while being drugged by a philosophy of “laissez-faire” non-interference with free markets while this free market garbage was being originated – for now finally starting to crack down on monstrous “free market” practices such as zero downpayments on mortgages or NINJA (No Income, No Jobs and Assets) loans; this cabal will thus now blame regulators for “destroying” the sub-prime and near-prime mortgage market with their intervention into “self-regulating free markets”. The same voodoo economics religion priests has and will incorrectly blame the “easy” Fed monetary policy – rather than the lack of any sensible regulation of credit and mortgage market lending – for creating the housing bubble and letting it fester for too long. It will also incorrectly blame the GSEs for creating “moral hazard” via guarantees of mortgages and thus causing this mess when, instead, the GSEs largely got out of the subprime business in the last few years - and let the free market flourish to originate this toxic waste – when politicians and policy makers started to bash the GSEs for their “excessive” role in the mortgage market

[snip]

In summary, lack of sensible supervision and regulation of banks, mortgage lenders and other financial institution – partly induced by an ideology of free market fundamentalism – has been the core cause of this private sector created disaster, not excesses of regulation or of government policy. Thus, to minimize the fiscal costs of cleaning up this mess, use of public funds should be carefully managed and targeted to help the true victims of this mess – borrowers duped by predatory lending practices – while avoiding any bail-out of the culprits of this mess. Privatizing profits in good times while socializing losses in bad times is another form of reckless corporate welfare that generates moral hazard while fostering new bubbles. Ideological supply side voodoo zealots should not be allowed to spin a tale where evil government intervention caused this disaster. And the private sector institutions and investors that indulged in this unregulated reckless behavior should take their losses. Market economies are the best economic system but they work properly when private greed, manias, panics, stupidity and recklessness is tempered by sensible supervision and regulation. And may the unfolding mortgage disaster bury once and for all the neo-con supply side voodoo economics religion of unregulated free markets fundamentalism.

Heya, Stranger

Ok, I've been busy, and am embarrassed by how little content I've been creating and posting.

I'm not sure its going to get consistently better for me, that I'll have time to do as much content creation as I have been able to do in the past, but I'm dipping my toe back in today and hoping for the best.

The good news I've been busy in a good way, and there have been no health problems or any other such reason for my relative absence.

So, hello again!

Chugging Along

First of all, my apologies for the infrequent updtaes. I'm silly busy.

Today's news: consumers kept chugging along at the end of 2006:

Economy Grows 3.4 Percent in 2006

By Howard Schneider
Washington Post Staff Writer
Wednesday, January 31, 2007; 11:04 AM

U.S. economic growth accelerated in the final months of 2006, as strong consumer spending and an increase in exports helped boost the economy despite a steep downturn in the residential housing market.

Commerce Department figures released this morning show that Gross Domestic Product increased 3.4 percent in 2006, faster than the year before and despite a sharp dip in growth last summer. Gross domestic product is a broad measure of the goods and services produced by U.S. workers and capital.

Growth in the last three months of the year was especially strong -- an annualized pace of 3.5 percent, led by a 4.4 percent jump in personal consumption and a 10 percent increase in exports.

[snip]

The latest Commerce Department figures may quell speculation among analysts that the housing downturn would inevitably slow the economy as a whole and prompt the Fed to consider a rate decrease. With labor markets tight, incomes growing and economic growth on track, the bank will have little incentive to change course.

"The very good news is that the recession in housing continues to have a very limited impact on the rest of the economy," said Nariman Behravesh, chief economist with the Global Insight consulting firm. "The Fed has the economy where it wants it."

Some analysts say the housing downturn is in fact taking its toll -- and will continue to do so. Spending on housing, they note, fell at a nearly 20 percent annual rate in the last three months of the year compared with the year before, and subtracted more than a full percentage point from the estimates of growth for the period.

A run-up in business inventories also dragged down the economy's performance.

Though all of that was offset by strong consumer demand and exports, Ian Shepherdson, chief U.S. economist for the High Frequency Economics consulting firm, said he expects the Commerce Department to revise its growth estimates downward in coming weeks.

And he said that while Federal Reserve bankers will be "happy" that their current interest-rate decisions have kept inflation in check while sustaining growth, the first months of 2007 will be "much softer."

I'm still on the skeptical side that the fundamentals of the US economy can keep away a recession, but so far, consumers have not taken the folding of their real estate assets as hard as I had expected. Bad me! Good thing I'm not an economist or a pundit, though I must confess, I've never seen a business pundit take a career hit for being wildly wrong about anything, ever.

Are You A Teacher?

This is a recurring theme in my executive coaching: are you a "problem solver" or are you a "teacher?"

Executives who see themselves as problem solvers fix things but can't scale their efforts. There are always more problems to solve in the world than what you can get to. Some see that as job security, but that's elusive: your security and productivity go up exponentially when you can teach people how to solve problems, or even better, teach people how to teach others to make decisions and solve problems. Be a builder of systems, not just immediate solutions.

You'd be surprised how many executives with classroom type leadership training or year of experience think they know this when they actually don't. The art of converting moments of interaction with direct reports into teaching opportunities is too little studied and deployed. It takes a real knack for understanding your people, how they learn, how they feel, who they are. Any number of leaders are, truth me told, more interested in themselves than others.

So, what do you do?

Small Business, the Minimum Wage and Health Care

A bill passes the U. S. House:

Rise in minimum wage OK'd by House
Utah representatives are divided along party lines; Senate plans tax breaks for businesses

By Robert Gehrke

The Salt Lake Tribune Article Last Updated: 01/11/2007 12:54:35 AM MST
WASHINGTON - The U.S. House voted Wednesday to raise the minimum wage to $7.25 an hour, although Utah's Republican members voted against the bill.
"It's an issue that makes for some nice political rhetoric, but it actually hurts the people that we're trying to help," said Rep. Rob Bishop, R-Utah. "This bill will increase unemployment among the least skilled and lowest paid workers, including high school and college-age kids, and will increase costs for small businesses and consumers."

But Rep. Jim Matheson, D-Utah, who voted for the measure, said he doubts the doomsday scenarios painted by opponents of the wage increase. The House vote calls for a $2.10 increase in three steps over two years.

"I really don't think it's going to eliminate jobs. My gosh, the $5.15 wage was set years ago. It's long overdue," he said.

The U. S. Chamber of Commerce and other large groups are opposed to this, but this does nothing to hurt my small business clients. If people really wanted to help my small business clients, they'd move to. . .. wait for it. .. a single payer health care system that got private insurers out of basic care.

Health care premiums are really a drag on small business growth and job creation. But right now, all the insurance companies have an incentive to do is to weed out the people most likely to need care, all the while raising rates. Then, we all end up paying more because the uninsured get the most expensive care imaginable: emergency care, which we all pay for anyway, but now they're sicker than they would have been if we had dumped everyone into one big risk pool, creating a kind of Medicare for everyone. We already have a de facto universal health care system, it's just an insanely inefficient one. Insurance rates o down when risk is pooled over ever widening groups, but we've been narrowing our groups by weeding out the sick and pushing the resultant higher expense onto the insured. We get so little bang for our health care buck it's ridiculous, and it hurts our economy, and small businesses get hurt the most.

But the U. S. Chamber will never take this position, because on the national level, it represents big business, not small business, no matter what its rhetoric may be.

Quotes of Note

"Humanitarianism needs no apology. ... Unless we ... feel it toward all men without exception, we shall have lost the chief redeeming force in human history." -- Ralph Barton Perry

"It takes as much energy to wish as it does to plan." -- Eleanor Roosevelt

"Don't forget to love yourself." -- Soren Kierkegaard