2019: The Year in Pre-view

Who died?  Who thrived? What happened? Who cares?  It was 2018.  It’s over!  So, let’s take a look at what happens next.

Foreign affairs: All eyes are on Syria and ISIS as we end 2018. But, the country to watch is Turkey. 

It is said that nature abhors a vacuum. Pundits adopted the phrase as an idiomatic description of President Obama’s strategy in the Middle East.  His “Pivot to Asia” intended to leave Middle East wars, terrorism and the refugee crisis for Europe to deal with while the US worked to develop beneficial trade relationships with the fast growing economies of Asia.  It seemed to make sense in the context of a shrinking defense budget and economic competition from China and the EU. President Trump’s decision to withdraw our troops from Syria is another step in this direction.

There’s one big problem with this strategy: the vacuum it creates will be filled by Russia.  It’s fair to say that Russia is not much of a military threat to the US.  Their economy is in shambles and, lacking economic power, they don’t have the military might to challenge our global interests.  But, to understand their motives, you must brush up on your geography because geography is destiny.  

To play a role in the global economy, you need access to the sea.  Russia’s access is limited.  Bounded by China to the East, Europe to the West, the Arctic to the North and the southern Asian countries from the Himalayas to the Mediterranean, they are choked off from global trade.  In that context, it’s easy to understand why they would annex the Crimea, support the Assad regime in Syria and create an alliance with Iran.  Ultimately, they hope to exploit cracks in the NATO alliance. So, I expect them to increase pressure on Turkey, a NATO member, by increasing their troop presence not only in Syria but also in Ukraine.  

Is it any wonder Russia wanted Trump in the White House?

Economics:Both the US and global economies have been pumped up by Central Bank interventions and extraordinary growth in government and corporate debt.  

Is the party over? Well, the US Federal Reserve took the punchbowl away when they stopped buying up bonds and started raising interest rates.  So, construction is slowing and the stock market is taking a hit.  Compound those troubles with the economic inefficiency of a trade war and you have the making of a recession. 

It’s fair to say the new Fed Chair is taking appropriate steps to restore interest rates to their natural level.  My greater concern is that they do so while allowing the Fed’s balance sheet to run off. In other words, they are playing with two independent variables simultaneously.  So, when the economy responds, how will we know the cause of that response?

As rates rise, many corporations will incur permanent damage from too much debt and a drop in consumer demand. Our recession may be brief but the deadly combination of overleveraged companies, shoppers rapidly moving from bricks to clicks, a trade war and the Fed’s actions will have a longer lasting effect. 

Going local:  As a nation, we have ceded too much control to a federal government ill suited to address our needs. Liberals have long argued for federal solutions to problems; and lately, conservatives, from the Tea Party to Trump, making bold promises of federal intervention, have joined them.  Yet, nearly everything we need is generated at a local level.  We need better healthcare, better schools, more new businesses, more innovation, more financing, more giving, more connectedness… In short, we need more local control over the institutions that affect our communities.  

It will begin with our schools. Federal and state mandates have imposed unfunded costs on the last important institution over which we have a modicum of local control.  Here in Rochester, our inner city schools have been rated worst in the nation.  Our progressive governor told our local editorial board that he would support reform if and only if it was initiated at a local level.  He was being politically crafty a la Pontius Pilate. He also created an opening for local initiatives to make a difference. 

I hope it will be the beginning of a trend.

Business: Low unemployment and a workforce lacking the skills demanded by highly technical work environments will accelerate the adaptation of artificial intelligence (AI) to practical uses.  It’s already showing up in marketing, warehousing and machine maintenance.  The next wave will likely affect selling. AI will identify cross-selling opportunities, optimize prices and forecast revenue.  It will improve itself by learning from the results.

Like all disruptive technology, the pioneers in this field will be big corporations that can afford the R&D expense.  And, like all disruptive technology, it will eventually become affordable to smaller businesses and trickle down.

Companies that succeed in this new environment will be those that can best capture data, analyze it and generate actionable insights.  

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Predictions are a tricky business.  Will these trends and events take root in 2019?  I’m not sure.  However, I am fairly confident we’ll see them soon enough. 

WHO WILL LEAD? 

Globalization vs. Nationalism: It's not your fault; it's our fault

In the 20+ years since the establishment of the WTO ushered in the era of free trade, the world has become more prosperous. And, that prosperity has been spread far and wide.  Billions of people in the developing world have moved out of extreme poverty.  The free exchange of goods, capital, and labor has created these opportunities under the umbrella of globalization.  Innovation, political leadership, social activism, entrepreneurship, and technology have all contributed.

As nations grow prosperous, their values change. First, as economies industrialize, the population moves away from “traditional values” in which religion, and deference to authority are important, and become more open to change. Second, as they grow wealthier, nations move away from values that emphasize the security of one’s family, or community, toward “values” that emphasize individual rights, not just for one’s own community, but also as a matter of principle, for everyone.

Of course, wealth creation does not automatically result in an equal distribution of rewards. Popular support for globalization has always rested on the premise that most would benefit, some could succeed beyond their wildest dreams through their own efforts, and a social safety net would protect temporary losers.

Among nationalists, those left behind economically see these trends as threats to normative values. Their shared sense of identity, norms, and history promotes trust within their cohort but not beyond.

This divergence in values has led to tribal behavior and polarization in developed countries.  Populist politicians – from Trump Republicans in the U.S. to the AfD in Germany and 5-Star Movement in Italy -- appeal to the emotions of those left behind with impossible promises of policies that will return to the good old days, while those with more cosmopolitan attitudes eschew the values that would support those policies.

“If you don’t behave according to your values, you will constantly be at odds with yourself. You’ll be in physical distress, treat others badly and destroy the relationships that you value most.” -- Excerpt from "The Reluctant CEO: Succeeding Without Losing Your Soul"

Today’s polarization is a result of how we, as a society, have chosen to manage globalization and technology.  Both political and business leaders share the blame. However, in this environment, business leaders -- who normally view themselves as problem solvers -- can no longer afford to view these circumstances as someone else’s problem.  Too many of our citizens feel we are off on the wrong track and socialism is now the preferred economic system among 44% of Millennials, an attitude that threatens our prosperity.

The right response lies in addressing these challenges head on.  For example:

• The era of cost-based offshoring will be succeeded by geographically dispersed, technology-based systems, like 3-D printing, to broaden the base of people who can benefit from a capitalist system.
• Technology platforms have evolved to support entrepreneurship that will decentralize the concentration of economic value in large, global enterprises.
• Most importantly, as we approach full employment, businesses can address their biggest challenge (lack of qualified employee candidates) by investing in human capital.  An education system that focuses on point in time certification (degrees, certificate programs, etc.) could be replaced by continuous education and training.  Technology platforms, like EdX and Coursera, can support an initiative like this today.

Even if successful, these efforts will not be seen as a path to societal economic success unless business leaders own the narrative.  A national – or perhaps global – business alliance should take on the task of economic renewal, telling and retelling their story in order to overcome current political trends and societal attitudes that will, over time, undermine our economic foundation.  

The only question…

WHO WILL LEAD?

The Demise of the Big 3 is Good for our Community

Last week’s announcement of the acquisition of Xerox by Fuji, Ltd. is another nail in the coffin of Rochester’s Big 3.  I would contend that they have been long dead and good riddance.

I don’t mean to minimize the suffering of those who may lose their jobs as a result.  Nor, am I ignoring the emotional impact on a community that long identified with our erstwhile leading employers and benefited from their contribution to our community. 

I am simply saying that these events over the last 25 years or so are part of the natural order.  Just as the Bronze Age gave way to the Iron Age, companies come and companies go.  Both Xerox and Kodak were part of the Nifty 50 highflying stocks in the early 1970’s, a list that includes many companies that are long gone.  Those that have survived, including GE, IBM, and AT&T, have done so by morphing into something else.  A time traveler from the 70’s wouldn’t recognize them today.

I am tempted to quote Michael Douglas’ “greed is good” speech from the movie “Wall Street.”  But, the last time I did that I was buried by hate-email.  I could also quote its counterpart in economic theory, Schumpeter’s “Theory of Creative Destruction.”  But, that would put you to sleep. Instead I’ll simply point out that the demise of the Big 3 is not one of the Seven Deadly Sins and, moreover, we are complicit. 

As a consuming society, we have explicitly expressed a preference for email over the post office and Netflix over Blockbuster – to say nothing of the number of businesses that have been disrupted by the Internet from travel agents to Big Box retail.  No one looks back and mourns the loss of jobs from those transitions.  We’re too busy consuming what they sell.

And, so, the Big 3 are no longer Rochester’s biggest employers because their customers now prefer the better products and services of others. 

For the most part, the impact of the Big 3 on the local economy has been gradual.  The move of Xerox’ headquarters, the big layoffs at Kodak, and the sale of Bausch & Lomb occurred over a 30 year period.  And, what has happened in the wake of those activities?

Entrepreneurs have founded companies, like Conserve, eHealth Technologies and SunCommon NY, which have grown quickly, providing jobs and healthy working environments.  In short, our community has become less dependent on large mega-corporations and thrives on fuel provided by smaller companies with local owners. 

Local business owners are more likely to be good citizens of our community.  They support local charities, create jobs locally, and ask less of taxpayers in the form of infrastructure and tax breaks. 

We -- their neighbors, customers and stakeholders – should stop mourning the loss of a bygone era and begin to identify with the community we have become.

It's time for labor unions to change

This post was adapted from an essay in the January 6, 2018 edition of Rochester's Democrat & Chronicle.

In a guest essay in Rochester’s Democrat & Chronicle, local union leader Ove Overmeyer advocated

for strong trade unions to strengthen the negotiating position of today’s workers.  I couldn’t agree more.  With unemployment at an historic low, it’s the perfect time for labor to take advantage of their negotiating power through collective bargaining. 

Absent from this argument is any mention of how labor unions should operate in the 21^st Century, leaving me to speculate that Mr. Overmeyer would continue the approach unions pursued during the last century.  I would like to suggest that the union operating model, which is older than Bernie Sanders, is due for an update. 

The booming economy of the 1950’s created a middle class throughout the Midwest and northeastern US underpinned by union workers.  This was the culmination of a decades long battle where labor and business were adversaries.  Union leaders from Eugene Debs to Harry Bridges were jailed for activities that are legal today.

By the 1970’s, however, the impact of a new, more global economy called for a paradigm shift. Union wages and benefits added costs to the manufacture of finished goods that made US industry uncompetitive on a global scale. And so union membership has declined precipitously. In 1950, 25% of American workers belonged to a union. Today, the percentage is less than half that. And, tellingly the percentage among employees of private companies is 6.4% while over 34.4% of public employees are union members. 

If a business had seen such a precipitously decline in its fortunes, it would have to transform itself or face liquidation.  Instead, unions have resisted change.

I am puzzled. Why would anyone think that the 19th Century model honed to perfection 60 years ago will work now?

Further, Mr. Overmeyer’s call for unions to use their political power to advocate for higher minimum wages. This argument suggests a continuation of the entrenched warfare between management and labor and bypasses an opportunity for both unions and their members.

The greatest challenge businesses face today is lack of qualified workers. Manufacturing has become more high tech, requiring math and science skills. Such jobs are plentiful. Rather than advocate for higher minimum wages, unions should focus on training workers for higher paying jobs.  A well-trained workforce would add economic value, expanding the size of our economy.  Rather than fight for a larger share of a static pie, unions should help make the pie larger. 

Were they to position themselves as a solution by transforming into Centers for Human Capital Development, businesses would view unions as beneficial to their business rather than as an adversary.  If unions offered benefits – healthcare, 401K’s – to their members in addition to training matched to employers’ needs, their value proposition would be more attractive to prospective members. Everyone would be a winner: the employers, the employees and the unions. 

Isn’t it time?