Economic Recovery Is a Certainty

There are, however, some strategies for recovery that are known to work.  For some reason they are minimally represented in the various stimulus bills that have been passed or are being discussed.

But it is not too late to include them.

Investments in people.

There is little disagreement over the importance of the GI Bill and its fundamental and important role in creating a wealthy middle class in the U.S.  People should remember that the unemployment rate increased from 1.9% at the close of 1945 to 3.9% in 1946, throwing 5.3 million Americans out of work in one year. Fortunately the GI bill made it possible for many of them to colleges and universities.  What they subsequently learned was that their ability to add value, or to become more productive, skyrocketed as a result.  Here is what happens to lifetime income for various levels of educational attainment:& 

Not graduating from high school could cost millions for drop-outs, regardless of reason. Any advanced education after high school adds to lifetime income, and studies have shown that education is highly correlated not only with income, but with health and life expectancy as well. Since income is closely linked to productivity, going to school is by itself a productivity improvement program, and likely the most useful strategy for a stimulus program that aims to increase growth during a recession. But if more formal schooling is not within reach in hard times, how about training?  And in particular, how about training for the most economically disadvantaged?

In Minnesota, a program called Twin Cities RISE!, as reported by Raymond Robertson and Art Berman in the Minneapolis Star Tribune of March 5, 2009, is a nonprofit work skills training program.  Over the last 15 years, Twin Cities RISE! has served a population of very poor and chronically unemployed people with multiple barriers to long-term employment success.  After a year of training, those placed into the work force in 2008 were paid an average salary of $24,700 (an increase of $20,500) with benefits.  Long-term job retention for the program is 82% after one year and 73% after two.

We know that the state of Minnesota invested $3.6 million in the program from 1997 to 2008, and received $14.1 million in what economists call “net present value return.”  That is a return on investment of 295%.  The high return comes from converting recipients of state support into taxpayers.

If the federal stimulus program were to focus on job training as well as formal education programs, this current recession could be a blessing in disguise.  Very few investment strategies could compete with investments in education and training. But there is one strategy that goes directly to the creation of value, and that will be our next focus.

Investments in productivity.

People instinctively know the importance of education and training.  As with the GI Bill, millions of Americans are now signing up for night school classes, seminars and training — mostly at their own expense. In-depth education is best when taught by master teachers and in a resource-rich environment that can offer exposure to state-of-the-art computers, equipment, libraries and experts.  Unemployment rates are low in Scandinavia because people generally work or are in training, and that creates the flexibility a dynamic economy needs.  Expenses for retraining are really investments in human capital — fully comparable to what we invest in upgrading and maintaining machinery.  At a per capita income of $56,000, a Norwegian carries a human capital value of $1,400,000 at 4% interest.  That is the value of an expensive home, for which taxes, maintenance, insurance and mortgage are paid without flinching if the house is valued accordingly.

But productivity in the Knowledge Economy (which is 80% of our GDP) carries a distinguishing characteristic:  There is, in principle, no ceiling on the potential value a human being can create!  Just knowing the laws of adding value will yield returns of 100:1, and these laws should be taught in every school and in every workplace.

Teaching these laws and learning to apply them could be the very best immediate measure we could take to lift the contribution of every man, woman and child in this country. It was this strategy that helped Singapore develop from a Third World nation to a First World nation in one generation. It was this strategy that turned China into an economic powerhouse. And it was pursuing this strategy that, over time, made the Scandinavian countries among the richest in the world. Why?  Their exceptionally high productivity enabled them to compete successfully in global markets in spite of paying some of the highest wages in the world.

Micro and Macro.

Economists often look to physics as a reference field for stringent thought. The

Universe, as it is explained by Newton and Einstein, looks orderly and beautifully calibrated.  By using laws of physics, we can place a solar-powered vehicle on Mars in the desired place with precision.

However, at the quantum mechanics level, physics is ruled by laws of probability — not by the laws of mathematics.

So it is with microeconomics.  Our best bet for understanding and applying economics at this level is to understand the laws of leadership: Leadership at the levels of the individual, family and society.

Leadership is squandered when it is ineffective.  A recession is, by definition, negative growth.  To resolve it, we must achieve positive, wealth-creating growth, and that cannot happen without increasing productivity.  When money is spent that is not increasing productivity, we know that the recovery is being postponed, or worse, that the money is accelerating the downward spiral.

We must introduce high performance principles to all sectors of our faltering economy.  These are not the principles that take out the variation of all processes and all products.  Those principles actually drive productivity to zero, or a to negative figure, because productivity improvement requires variation.  Variation is the lifeblood of growth:  New ways of doing things, innovative thoughts and behaviors, new technology, new knowledge.  When Silicon Valley sets a goal of doubling speed and storage capacity of a chip every 18 months, they cannot double it again with the same technology that brought them there.  And this is the way we have to think in all sectors, especially health and education, where productivity improvement has been negative for a generation.

Taking out variation has its place, but not until positive variation has been introduced on the front end.  Then the elegant principles of Deming, Juran and Crosby apply perfectly.  But not until then.  And that is why the focus on reducing variation has brought so much grief to the finest companies in the US. Productivity is what creates new wealth, and quality is what locks in the positive changes. Both are indispensable, but productivity improvement must come first.

In quantum mechanics, an entangled pair of spinning electrons behaves exactly the same, even when separated by a great distance. If one changes, so also does the other — at the same time and in the same direction.  So it can be with the effect of leadership.  The 305 million Americans, highly individualistic, respond to leadership.  We saw it in WWII.  We saw it on 9/11/2001.  And we see it today.  But it must be leadership in which we can believe.

We can defeat this recession.   But we must do the right thing, in the right way, all the time. As Toby Keith sings, “Ain’t no right way to do the wrong thing.”  And that holds for all of us. In particular, it holds for President Obama and his economic recovery strategy. Good decisions and good leadership from the Administration will reverberate through the economy, restore confidence, and ignite growth. The mighty potential and creativity of the American work force must be unleashed, as it was in 1946 when what Tom Brokaw called The Greatest Generation spurred the growth that caused the greatest prosperity the world has ever seen. We must do it again. And we must do it now. Leadership is all that is needed.

It is only growth that can cure a recession. So we must grow, as Norman Mailer says in The Deer Park, or else pay more to remain the same.

Haven’t we paid enough to remain the same?

Aren’t WE the change we have been waiting for, Mr. President?

How about investing more of the stimulus in what will create the most value, the people of the United States?

Tor Dahl & Associates Productivity Improvement Seminar