Lords of Strategy book

I have to comment about this book as this has been one of the best books I have read in the past 4 years.  Here is the link to the amazon website for this book http://www.amazon.com/Lords-Strategy-Intellectual-History-Corporate/dp/1591397820/ref=sr_1_1?ie=UTF8&qid=1326330950&sr=8-1

very engrossing, goes thru the history of all the strategy tools developed since the 60s.  gives a good perspective on how all these tools got developed, stories of consulting war along the way.  All those frameworks taught in the MBA school suddenly become much more contextual - the 7Ss, growth share matrix, five forces.  It is an unbiased treatment I would say, trashes a lot of consulting cos and academics along the way.  All these consultants pushed all these frameworks as magic bullets to grow cos and the results are spotty.   The frameworks provide a way to understand what is happening in the competitive environment but that doesn't automatically provide a way to act to your advantage.  It all depends how the info from the framework can be used to a company's advantage and execution is always a problem.  I wish I had this book when I went to the MBA school, would have given me the context to understand all the strategy tools that were taught in the courses.  The book was only published in 2010, so impossible for me to have had this book then. 

Are the Rich obstructing Job creation?

There was an article a week back by Henry Blodget on a rich American destroying the Fiction that Rich people create the Jobs http://finance.yahoo.com/blogs/daily-ticker/finally-rich-american-destroys-fiction-rich-people-create-152949393.html  The Rich american he quotes is Nick Hanauer.  "Suggesting that "rich entrepreneurs and investors" create the jobs, therefore, Hanauer observes, is like suggesting that squirrels create evolution."  The whole article is based on a wrong premise.  Job creation has nothing to do with the rich, middle class or the poor.  Job creation happens when there is more exchange of goods and services between people (read economic growth) and when this higher activity of exchange needs more people to support the exchange.  The whole eco system surrounding an economy matters - it is not just entrepreneurs or the customers or the govt that is solely responsible for job creation.  Everything must work together to keep the economic machine (of goods and services exchange) running smoothly.

Entrepreneurs play their part by thinking up new products or services that people may be interested in exchanging and those new products or services are necessary for the economy to grow.  The people involved in the exchange must have productive skills to make the exchange happen.  We all earn a certain amount of money based on the skills we possess and that money is used to exchange for products or services with other people.  If I need to afford to buy an iPhone, I must have provided sufficient skilled work in the economy to be able to afford the iPhone.  Ultimately the economic growth and job creating power of a nation comes down to the productivity of the people in the economy.  Productivity is measured in the amount of resources needed to create a certain product or service.  The Productivity increases as we learn to use lower amount of resources to create the same product or service - this raises the standard of living of a nation.  The reason I can't sell an iPhone to an average Bangladeshi is because that average person in Bangladesh is not productive enough to sell a service or product in exchange for an iPhone. 

Personal Savings rate of a Nation - How much is enough?

There was once again another op-ed in the New York times last week bemoaning the US's low savings rate and how other developed nations in Europe are saving a lot more.  The author pointed to a data that savings rates have recently fallen below 4 percent.  So I wondered where that info would have come and stumbled upon the data on the Bureau of economic analysis website (http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1, abbreviated data attached below).
http://www.nytimes.com/2011/11/25/opinion/why-we-spend-why-they-save.html

[Billions of dollars] Seasonally adjusted at annual rates
Bureau of Economic Analysis
Last Revised on: November 22, 2011 - Next Release Date December 22, 2011
Line		2011
		I	II	III
27	Disposable personal income	11,481	11,559	11,565
28	Less: Personal outlays	10,902	11,003	11,131
29	Personal consumption expenditures	10,572	10,676	10,799
30	Personal interest payments /3/	160	156	160
31	Personal current transfer payments	170	171	172
32	To government	97	97	98
33	To the rest of the world (net)	74	74	74
34	Equals: Personal saving	579	557	435
35	Personal saving as a percentage of disposable personal income	5.0%	4.8%	3.8%

 This is aggregate savings rate and doesn't tell us anything about the more important inter-generational savings rate.  Let's make a bullet list of why we need to save in general:

• To tide over any short-term job loss.  My rule of thumb would be 6 months of earnings.  You can't save for long-term unemployment - long-term unemployment is due to structural problems in the society and a savings rate boost won't cure it.
• To pay for a big expense in the future that can be forseen today - like kid's college education.  Again rule of thumb would be to have atleast 50% of each kid's college expense saved by the time they enter college.  
• To pay for the down-payment on a home - the 0% down-payment days are gone, but one can still get decent mortgage rates with a 10% down.  Again a savings goal could be to have the downpayment saved in say 5 years time.   
• To tide over some unexpected expenses that happen every now and then.  This could be for a hospital stay, a car repair, a home repair etc.  Rule of thumb would be like one month of pay.  You are not going to save for a Cancer care or a heart surgery - one has to have insurance coverage to pay most of those kind of high dollar expenses.   
• Save for Retirement - this is the biggie.  This topic is worth several blog articles.  One has to be reasonable on it - everybody can't retire at 55, can't retire in the Caribbean islands, can't expect a lavish lifestyle.  I see a lot of bank websites that show huge amounts of retirement money needed on their retirement calculators.   

We shouldn't expect retirees to save on the social security or the dividend checks they receive every month.  We can't expect every citizen to save and so the society needs to have safety nets to protect the basic necessities of the population that doesn't save.  People who can't save shouldn't expect to buy a home but keep renting.  There are different savings needs and so different savings rates needed for the different age groups.  There is no point bemoaning the low aggregate savings rate of a nation.  A net export nation can sustain a high savings rate but every nation can't be a net exporter (mathematically impossible).  A high aggregate savings rate in a balanced economy (that doesn't have huge trade surplus or deficit) points to large inefficiencies in exchange of goods and services.  A nation can have an aggregate savings rate close to zero and still be a vibrant society as long as there are different inter-generational savings. 

Personal Finance advice on Savings relies on Legal Ponzi scheme

I find a lot of Personal Finance advice on the net about savings - how to save, how much to save, how to kill the credit card debts etc.  The 'Latte savings' buzzword got a lot of coverage a few years back - how you can save $1000/year by skipping the $3 starbucks latte every morning.  So what if everybody takes this advice and cuts down the morning latte from Starbucks - Starbucks will eventually close down, fire all its employees.  These employees may have been buying some product that your company may be making and that would vanish as well.  The economic wheel turns by people exchanging goods and services between each other.  If that exchange slows down, it will have a negative impact on the unemployment rate and the good health of the economy.  The 'Latte savings' only works in the bigger picture if you and a few others skimp on the latte and have greater fools who will keep spending their money on the latte - same as how a Ponzi scheme works though this savings advice is a legal one. 

There are umpteen reasons to save but there has to be some specific goals for the savings.  Savings, for the sake of being frugal, is not a good enough reason.  will continue to write on this topic.   

10 Myths about Taxation

Myth #1: Higher Taxation will lead to loss of Jobs

This is an argument made by small business owners all the time. They say that they will have less money to hire people. Every business makes its decision to hire or invest capital based on the return it can expect on the investment. The investment decision is not based on the amount of money they have left over. Many businesses have cash loaded on their balance sheet as they don’t see good opportunities in this economic environment to earn a good return on their investments. A higher tax rate will not automatically increase the unemployment rate.

Myth #2: Higher Taxation will slow down consumer spending

It all depends on how the tax rates are structured. A household with higher than $100k in earnings are saving rather than spending all their disposable income. A higher tax rate is needed today to fund the deficits of the govt. The govt. in turn uses those taxes to pay the salary of all its employees and pay for the social programs and govt. infrastructure. A higher tax rate shifts some of the disposable income from the private workforce to the govt. This should also slow down the layoffs of the govt. The higher taxes won’t hit consumer spending in a big way as the upper middle class is saving, not spending their extra cash. Higher tax rates are preferable to the alternative of long-term deficit spending and govt defaults.

Myth #3: Taxes need to be fair

Taxes are usually progressive in nature, with the tax rate increasing as the taxable base amount increases. It serves to reduce income inequality in the society. It doesn’t do any good to raise taxes from minimum wage people when they spend all their income on basic life necessities. Flat tax rates are cruel to the poor and the govt. will have to come back to support them with more social programs. So it is inefficient to tax the poor.

Myth #4: Higher taxes will lead to movement of capital to other lower tax countries

Capital moves around the world based on relative net returns. A higher tax rate may reduce net returns in the USA but it may still produce greater relative returns. Capital is not going to move to Mongolia because they have zero tax rates. Companies are not going to abandon the USA because of higher tax rates – the consumers are here and they have to market their products to their consumers.

Myth #5: Lowering the Tax rate will bring in more Tax revenue dollars

This is usually called the Reganomics, referring to the economic policies promoted by the U.S. President Ronald Reagan during the 1980s, also known as supply-side economics. President Reagan did actually increase taxes twice during his term. This effect is true when the top marginal tax rate is high, like 70%. The top marginal tax rate is currently only 35% and the average tax rate is more close to 15%. A 1% reduction in the tax rate would reduce taxes to the population by 0.01*2.162 trillion = $21.62 billion. The federal govt will only collect the same level of taxes if the $21.62 billion freed up for the consumers have a money multiplier factor of atleast 6.7 to the GDP (=21.62*6.7*0.15). Tax rebates during the D.W. Bush presidency were mostly saved and not spent. Tax cuts have more effect when they are lowered from very high rates.

Myth #6: Higher Income taxes are communist policies

Communist govt policies usually takeover of the assets of the individual citizens. A communist govt owns all the country’s assets. Income taxes are not about taking over the assets of individuals but taking a portion of the income realized from those productive assets to fund the govt. If an entity earns zero income from its assets, the income tax would be zero. An income tax rate greater than 50% does reduce some of the motivation to earn the income. As the famous economist Laffer pointed out – Taxes would be zero at 0% tax rate and 100% tax rate.

Myth #7: Just tax the super-rich to close the govt deficit

There isn’t enough super-rich to tax to close all the govt deficit. The US govt ran a deficit of $1.3 trillion in 2011. The top 1% of americans had an AGI of $1.685 trillion dollars in 2010 and they paid $392 million in taxes (average tax rate of 23.27%). They had an after-tax income of $1.293 trillion and we would have to tax that at 100% to close the govt deficit. The top 50% has to contribute in some fashion to close the deficit gap. It cannot be achieved by taxing the top 1% or the top 5% of the taxpayers.

Myth #8: Taxes should be simple

Taxes by their very nature become complex. The salary or revenue is easy to know. The complex part is all the deductions allowed on an individual’s income to arrive at the Taxable income. The deductions are there for various social, political and economic reasons. There is no reason to have a mortgage interest deduction but the federal govt has instituted it to raise home ownership – how much di d the home builders’ lobby have an influence on this? Now that it is there, it is very difficult to get rid of. It is the case with most of the deductions. Every politician during the presidential election season will present his/her own simplified tax policies which are never practical to implement.

Myth #9: Taxes should be abolished and there is no need to balance the budget

There is a small group of people still in the US that refuse to pay taxes based on the notion that taxes are unconstitutional. That aside, any govt should have checks and balances and one of those checks are its revenue vs spending. The govt. cannot keep spending on deficits continuously – it is not sustainable. It will lead to lack of credibility in the currency of the nation as a long-run deficit spending is equivalent to printing more paper currency. It will eventually lead to the debasement of the dollar and cause huge economic catastrophes. The loss of confidence and the subsequent economic problems don’t happen gradually but happen suddenly.

Myth #10: Deficits should always be closed by reducing govt spending

There are two issues around taxation – how to structure it (where everybody wants to tax the other guy) and what is the appropriate size of the govt. The Republican camp wants to cut the size of the govt to close the deficit and the Obama camp wants to raise taxes to close the deficit. Lost in this argument is the need for a dialogue on an appropriate size for the govt. The federal govt doesn’t operate in a competitive environment and its spending is not based on a ROI. So the question should be as to whether the govt is spending its money efficiently. The answer doesn’t lie in shrinking the govt to the size of its current revenue base. The govt does perform an important function in providing public services to our nation. Raising taxes and shrinking the govt size should both be on the table.