Archive for May, 2010

Graduates Abound
May 5, 2010

In my previous career, I taught middle and high school students, many of whom are graduating from college this year.  This month, I will attend several ceremonies for those that are graduating from schools in North Texas.  I also recently watched online as  my nephew walked across the stage at UF.  Way to go Gator alum, Josh Richard.  Most people don’t like graduation ceremonies but I don’t mind them.  However, after attending multiple ceremonies for several years in a row, I’ve realized that graduation speeches are very similar from one year to the next.  Graduation speeches follow a predictable pattern: 1. speaker references challenges such as global warming, nuclear proliferation, oil scarcity, and viral epidemics, 2. speaker rallies the troops and recommends that the current generation is smart enough to solve all the problems the world faces, and  3. speaker wraps up the speech verbalizing the epiphany that he is glad he is not in their shoes but encourages the graduates to go out there and take on the world.  This year, the speeches have been especially melancholy (probably a sign of the times) but I was struck with the following idea about giving graduation speeches.  Generally, the speakers are successful people from the preceding generation but it might be the case that graduates would be better served to hear speeches from the subsequent generation.  Perhaps a speech from a first grader, a fifth grader, and a 12th grader to learn about their hopes and dreams for the future would be helpful.  Additionally, a speech from a young person who has experienced  and overcome some major hurdle in their life such as homelessness or AIDS or severe financial challenges would be useful.    The best graduation speeches are the ones that challenge and encourage the graduates to think outside the box (way outside the box), help their neighbors, be a friend, help a young person achieve their goals, assist the elderly, donate the most precious resource of all (their time), and be ready to lend a hand to those who are less fortunate.  Most importantly, great graduation speeches remind the graduate not to judge and to remember that change comes as a result of a bold vision implemented not in giant leaps but in baby steps.  Best of all, a great graduation speech compels the graduate to consider the most important reason of all to seek positive change – the subsequent generation.  I applaud the efforts of these graduates to obtain a degree, and I too believe that these graduates have the power to foster and create real change.  I am hopeful that preceding and subsequent generations will support efforts from this generation to create powerful and lasting change.  Congratulations to all the 2010 graduates, especially those I taught – I hope all your dreams come true!

Did Someone Say Demand Destruction in America
May 1, 2010

You share the planet with 6.5 billion other people.  Of those 6.5 billion, approximately 300,000,000 of them live in the US.  That’s a lot of people, but the reality is that the US population doesn’t grow much from one year to the next. 

http://www.google.com/publicdata?ds=wb-wdi&met=sp_pop_grow&idim=country:USA&dl=en&hl=en&q=population+growth+in+America

In fact, the birth rate has been declining in the US since the late 1990s.  When you consider that the population in America is not growing very much and is aging fast, US businesses are faced with an interesting dilemma – how to sell its goods and services to a group of people who generally have most everything they need and much of everything they want.  The obvious answer is to export goods and services to other markets.  Most businesses are doing just that, but what about here at home. 

Businesses are addressing demand destruction, the downward shift in the demand curve, here at home by creating new and innovative products and by discounting their existing goods and services.  The classic example of demand destruction is oil  and its impact on gasoline prices.  When gas prices reach a high enough level, Americans respond by replacing their gas guzzlers with smaller and more efficient cars, thereby reducing the overall demand for oil.  The result is cheaper gas.  But gas has an advantage over many other goods and services.  That is, you must fill the tank in order to get around.  The oil industry loves this fact and why not.  Unlike gasoline, however, most products don’t have a built-in rebuttal to demand destruction, and demand destruction is not limited to the oil industry.  The housing industry, for example, has been severely impacted by many economic factors in the last four years, but one of the main culprits is demand destruction. 

During the high-flying days of real estate, the financial and real estate industries searched high and low for home buyers.  They left no stone unturned and everyone was invited to the party, including those who were high risk borrowers.  Wall Street investors turned a blind eye and continued to believe the myth that real estate values would not decline.  As a result, the real estate industry fell victim to overall demand destruction.  Every would-be buyer was tapped.  The end result – less demand led to more incentives, more incentives cut into profits, less profit compelled home builders to rely on volume, which, in turn, destroyed demand.  It’s a vicious cycle.  

In a country where population growth is barely positive year after year, demand is not easily reestablished.   Without real population growth, innovation and lower prices have been America’s only answer to demand destruction.  That’s why everything is now on sale 24/7 in America.  It’s why dollar menus are so prevalent, zero percent financing options are extended to prospective buyers, and it’s why quality products and services are disappearing in the US. 

How, then, do we combat demand destruction?  The economic meltdown has forced the solution upon us– decrease supply until demand reappears.  In spite of Wall Street’s ability to create fancy financial derivatives and then bundle them in nice neat packages, the housing industry is still subject to the same basic laws of supply and demand as all other industries.   The mathematics are very simple, as simple as 2+2=4.  In the case of home building, it makes little sense to build 10 homes if you only have demand for 4.  Bringing supply into line with demand is an arduous tasks.  Especially after such an extended period of over consumption.  The good news – as long as inflation remains modest and unemployment subsides, we should see a return to a normal supply and demand curve and the process of demand destruction will begin again.  In real estate, the inventory of new and existing homes have decreased and in some cases reached all time lows.  Other industries have reduced their inventories as well.  The stage is set then for an economic recovery but the most crucial piece of the puzzle is still absent — job growth.  Now it’s up to our leaders to create regulation only where absolutely necessary without becoming overzealous.  This means we must trust the fundamental laws of capitalism.   

When the demand for goods and services returns, employers will be forced to hire in oder to expand their inventories.  Demand destruction, a powerful force in the economy, has also played an indirect but critical role in the high rate of unemployment.  In fact, demand destruction is the economic conundrum of American style, government subsidized capitalism.  It might not be a four letter word yet in America, but demand destruction is an integral part of the US economy.  Like it or not, it’s a naturally occurring element of capitalism and it’s not all bad.  Think about the cost of gasoline in the earlier example.   The government can’t fix it and businesses ultimately can’t be innovative enough to work around it, so our only viable option is to understand its positive and negative impact on us, our businesses, and the economy.