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Global Crisis Blog

Saving America: What Ronald Reagan Would Do

By Shlomo Maital

Ronald Reagan: Not your ordinary cowboy!

Suppose, theoretically, America is in deep deep trouble.  Suppose, theoretically,  the economy is barely growing and suppose you need at least 2-3 per cent growth to keep unemployment from rising above already high 10 per cent levels. [Why? Because productivity, output per worker,  is growing at 2-3 per cent.   So the economy can grow that fast without businesses hiring a single new worker!].    Suppose, theoretically, that President Obama (mis)-advised by his advisors is cutting government spending rather than increasing it, firing teachers and other superfluous public workers.

Is there anything economists can suggest, that can solve the problem?

As Isaiah said,  “come, let us reason together.”   When was America deep in recession?  1980-82.  Who was president?  Ronald Reagan, the B-movie actor who was widely mocked – and ultimately, greatly beloved.   What did he do?   He worked to limit imports, by forcing Japan (America’s China of the 1980’s)  to accept VER Voluntary Export Restraints on its car exports to America, limiting them to 1.68 m. vehicles annually.  And note, this was at a time when America had total automotive imports of $31 b. (1981).

The result was that Japanese companies (Honda, Mazda, Toyota, Nissan, Mitsubishi) were producing substantial numbers of cars in America by 1990.  This created well-paying jobs for Americans, and even exports (a car made in Honda’s Marysville, Ohio, plant, and shipped to Japan, is an American export).

From 1982 through 1991, America enjoyed strong economic growth, peaking at 7.2 per cent in 1984, growth that today seems unattainable.   Part of this growth was due to limiting imports.

Fast forward to 1992.   Bill Clinton becomes President, and is re-elected in 1996.  From 1992 to 2000, America’s automotive imports balloon from $91.5 b. to $195.9 b., more than double!  For vehicles alone, the import surplus in 2000 is $110 b.!    That alone lops one per cent off US GDP growth.    Clinton takes no action.  Yes, this is the President Clinton who insisted that America, the inventor of globalization, was a big winner from it.  Tell that to unemployed auto workers.

China has been unwilling to allow its currency, the yuan, to appreciate.   Its yuan is undervalued by half, making its import prices half of what they should be.  Okay,  use the Japanese VER card.  Tell China:  Restrain your exports to America – those thousands and thousands of containers that go to Wal-Mart —   or we will slap a tariff on them!  Horrors, you say.  A gross violation of World Trade Organization rules!   Sure.  So is China’s currency manipulation – far far worse.  But horrors!  China will retaliate.  China will restrict its imports from America.

Well – what imports?   Paper for recycling?

Once, there were American presidents who knew how to make policy, even though they were not silver-tongued.  Today we have an American president who gets A+ on oratory, but not even C-  on action.    This is not only America’s problem, but the world’s.

Innovation Blog

Rethinking Innovation: Start at the Bottom, Not the Top!

By Shlomo Maital

Anil Gupta

Sometimes, rarely, you find pearls in advertising supplements.

The Global New York Times’ “Dawn of the New Decade” ad insert seeking investment in Asia (as if Asia needs money and investment, rather than the overspending America) has an interesting interview with Anil Gupta, INSEAD Professor and expert on globalization. [1]

Here is Gupta’s ‘take’ on the changing world of innovation:

“Enterprises that hope to emerge as the global leaders in 2020 will also need to think differently about innovation.  Traditionally, innovation has originated in the developed countries….within industries, at the top of a product range, for example, a Lexus, and then worked its way down to, say, a Toyota Corolla.  ..In order to capture the very large market opportunities in the low-to-middle segments [in emerging markets], the leading global enterprise of 2020 will need to be good at not just top-down innovation but also at frugal innovation, whose roots would lie in the low- and middle-income markets of emerging economies.”

Prof. Gupta cites as an example Tata Group’s Nano car, the world’s cheapest, and its strategic plan to bring out an electric Nana in the EU and US, matching the performance of domestic equivalents at 1/3 less cost.  “We’ll see this phenomenon in many industries, from tractors to banking,” he notes.

Innovator:  Can you shift your focus from premium-priced ‘toys’ bought by those with scads of money,  to low-priced products that even low-income groups in low-income countries can buy?   The late C.K. Prahalad identified “fortunes at the bottom of the pyramid”…  but apparently, according to Gupta, there are also superior innovation opportunities down there.

[1] “Emerging economies change the game for global corporations”,  Global New York Times Friday Aug. 27, 2010,  Dawn of the New Decade.

Global Crisis/Innovation Blog

Global Crisis as an Oil Spill: Let’s Help Nature and Evolution

By Shlomo Maital

Oil eating bacteria

BBC reports today that the army of scientists researching the oil spill in the Gulf of Mexico have found that oxygen levels in the Gulf (normally excessively high after an oil spill dumps tons of hydrocarbons into the water) have not risen as much as expected.

Why?   It turns out that deep in the Gulf, oil-consuming bacteria have been proliferating rapidly and have been gobbling up the bad sticky goo.  Normally, such bacteria are few and far between. But suddenly, when their food supply expands a thousand-fold, they leverage their bounty by multiplying.   It is Nature’s way, and evolution’s way, of dealing with nasty surprises.

When the sticky oil has been eaten up by the bacteria, who transform it into energy needed to grow and to reproduce, the existing bacteria will run out of food.  They will die off, and their numbers will fall back to what they were before the oil spill.

It occurs to me that the Global Crisis 2007-9 is very similar.  Financial services firms of all kinds (Fannie Mae, AIG, Goldman Sachs, speculators, hedge funds, private equity, VC’s) all proliferated, like bacteria, when their ‘food supply’ suddenly became rich and plentiful (booming capital markets fed by the ‘oil spill’ of Alan Greenspan’s low-interest come-and-get-it-while-you-can money and credit).

Now that ‘food supply’ has dried up, mostly, and all those ‘financial services bacteria’ (no, I will not call them ‘germs’) will perforce shrink and decline, as they should.  At least, they will, if we behave rationally.  If we act to preserve them, as Geithner and Obama have, we are simply creating another oil spill, probably a worse one.

Often, after terrible wildfires, Nature appears utterly destroyed, burned.  In an amazingly short time, green shoots appear; indeed, some plants and trees need the fire in order for their seeds to germinate.   Similarly, in the Global Crisis, those green shoots can and will reappear, if we let them. But if public policy is bent on preserving the deadwood, there will be no air and water and earth for green shoots.

Global Crisis/Innovation Blog

How Internet Brings People Closer Together

By Shlomo Maital

In his seminal article 43 years ago, psychologist Stanley Milgram showed how very small our world is,  in his Small World experiment. [1] Milgram showed we are only, on average, six ‘degrees of separation’ apart from one another.

According to Wikipedia: Six degrees of separation (also referred to as the “Human Web”)  refers to the idea that everyone is at most six steps away from any other person, so that a chain of, “a friend of a friend” statements can be made to deliver a package from one person to any other randomly-chosen person in six steps or fewer.

Now come several new studies showing how the Internet has sharply reduced those six degrees to three or fewer.

  • In 2001 a Columbia University Professor, Duncan Watts, used an email as a ‘package’ and found , with 48,000 senders and 19 targets in 157 countries, the average number of intermediaries was six.
  • The average distance on Twitter (based on a study of 5.2 billion ‘relationships’ when Twitter users follow other users)  is 4.67.
  • Twitterers, or Tweaters, who also belong to the 14 largest Yahoo groups have only 3 degrees of separation.
  • Yahoo Groups, in turn, the world’s biggest online discussion boards, have 150 million members, and 10 million groups, in 25 languages.  This is perhaps even more surprising than Facebook’s 500 m. users, because Yahoo’s discussion groups create meaningful conversation, communication and interaction.  The biggest are “Athenians”, “Pure capitalism”, “Capitalists forever”, “globaltaxrevolt”, “blowback”, “clearcutforum”, “fireflyflash”…etc.

Milgram’s original study got a package from someone in the American Midwest to a pastor in Cambridge, MA.    Today, we can get an email message from anyone, anywhere, to anyone else, anywhere, in about the same number of handoffs.

In this smaller shrunken world, will the Internet ultimately foster the idea that all of us are brothers and sisters, regardless of ethnicity, race or religion, and that we can use technology to achieve deeper human understanding?

Will the tendency of our political leaders to lead us into conflicts and wars be replaced by the tendency of ordinary people surfing the Web to seek understanding and peace?

[1] Stanley Milgram, “The Small World Problem”, Psychology Today, 1967, Vol. 2, 60-67.

Innovation Blog

Want to Think Creatively? Shut Down Your Brain!

By Shlomo Maital

Today’s Global New York Times carries a great article by Matt Richtel, who is based in San Francisco and who covers the digital world. [1] Richtel cites scientific evidence that shows “when people keep their brains busy with digital input [cellphones, iPad, iPod, iPod, and so on], they are forfeiting downtime that could allow them to better learn and remember information, or come up with new ideas”.

Richtel interviewed Dianna Bates, who while churning her legs on an elliptical machine at a fitness center is listening to songs on her iPod, then tapping out an email on her iPhone and watching HD television.

All this activity is an antidote to the boredom of exercise, Richtel says.  But hey – let’s hear it for boredom!

I myself am a confirmed jogger, and love to do 5 km. runs along the boardwalk in my city Haifa, or sometimes 10 kms. on the weekend.    Some of my very best ideas have come from those runs.  The prolonged monotony and rhythm of running provide the perfect seed bed for thinking creatively.   Your mind detaches itself from your body, floats above your head at 10,000 feet, and wanders, tackling all the problems you have buried deep in your subconscious just waiting for the chance to solve them.     If you do not create down time,  and if your mind is constantly busy with its variety of digital gadgets, when will it have the space and time to ‘float’ and to create?

What is the evidence for this?

●   People learn significantly better after a walk in nature than after a walk in a city.

●   Digital games are increasingly played for shorter and shorter time periods; one mobile game, stacking blocks, gets played for an average of 2.2 minutes.  That is potential down time that is lost.

●   At the fitness center Richtel visited, of 70 cardio machines, 67 have TV’s attached.  Recently, when the cable TV went down, patrons went ballistic.  But one fitness fan gets it.  He looks out at the pool and the palm trees.  “I come here to clear my head,” he says.

So, innovator – get bored.  Do monotonous things without any toys.  Watch your mind wander – and be surprised at the things it tosses at you.   Be sure, however, to capture them – I always run with pad and pen.

[1] Matt Richtel, “Digital devices deprive brain of needed downtime”, Global NYT Aug. 24/2010.

Innovation Blog

Want to Be Very Rich?  Here is How!   8 Steps to Wealth

By Shlomo Maital

“It’s not about money!”

Research and my own experience with entrepreneurs show that the main motive for launching new businesses and products is not wealth or money, but rather, change-the-world aspirations, the quest for positive impact and the desire to create.

Nonetheless – for those who do want to become very wealthy, a study by  Keren Zuriel-Harari, published in the August monthly magazine of the Israeli business daily Calcalist, provides 20 proven ways, based on substantial research (by others).

I will recount here only eight of those 20, some of the more unusual and surprising ones.  If you email me, I will try to provide the rest, in English.

1.    Do a double undergraduate major.   Combining two fields is a powerful tool for innovation, which often links “X” and “Y” in ways others haven’t thought about.

2.  Stay married. Divorce slashes your personal wealth by 77 per cent.  Staying married increases it by 93 per cent.

3.  Rent your house, don’t buy it. The opportunity cost of putting your assets into a house is high, those funds could be used elsewhere more effectively, especially after the housing bubble burst.

4.  Be tall. Tall people are richer; presumably  they command respect and others accept their leadership more readily.

5.  Eat proteins.

6.  Be dyslectic. Dyslectic people find creative ways to overcome their deficiencies, and this translates into other realms, like innovation.

7.  Go on a diet. Thin people are richer.

8.  Rise early, before 6 a.m. Early-risers, like early-birds, get the worm.  Late-sleepers become one.

Innovation Blog

“The sky is falling on venture capital…”

By Shlomo Maital

“Once upon a time there was a tiny, tiny chicken named Chicken Little. One day Chicken Little was scratching in the garden when something fell on her head.

“Oh,” cried Chicken Little, “the sky is falling. I must go tell the king.”

Chicken Little was wrong.  The sky was not falling.  In contrast, according to Joseph Ghalbouni and Dominique Rouziès, “the sky is falling on the venture capital rainmakers”.  Their Harvard Business Review article “The VC Shakeout” [July-Aug. 2010]  claims that “venture capital hasn’t worked for a decade and must be radically restructured if it’s going to influence innovation – and make solid returns to investors”.

“There are few signs that things will improve any time soon,” they report.

The VC model is broken in three places.  First, there are fewer promising startups in which to invest.  Second, VC’s are unable to create IPO’s and acquisitions, for their exits.  Third, the lengthening time it takes for VC’s to extract their money lowers the internal rate of return by spreading that return over many more years.

The VC value proposition needs radical change.  It doesn’t work for investors, because the return on investment is too low. It doesn’t work for entrepreneurs, because the VC promise of handholding, managerial expertise and daily mentoring is rarely fulfilled.   The same shakeout that is afflicting the entire banking and financial services industry is now assaulting the VC’s.

“Venture capitalists must return to their roots of being more patient, hands-on consultancies that nurture their startups until they are sustainable,” note the authors.

I have known many venture capitalists over the years.  Frankly, very few of them were humble – many were over-the-top arrogant – though for years the data showed they had much to be humble about.  That hubris may have kept the VC industry from facing the facts and radically reinventing itself, until, now, when it is almost too late.

This is bad news for America, which is counting on its innovation to pull it out of the deep hole it is in.  And it is bad news for Israel, which counts on global VC funds to fuel its startups.  Both nations will have to find a substitute, and there is not much time left in which to do so.

Oh – and as for Chicken Little?    The story ends,   “….just as [Foxy Loxy] was about to lead them into his den to eat them… …the sky fell on him.  “Oh dear,” said Chicken Little.  “We’re too late,” said Henny Penny.  “Poor Foxy Loxy,” said Ducky Daddles.  “No sense in going to the king,” said Goosey Loosey.  “Nothing to do now but go home,” said Turkey Lurkey.  And they did.

Poor Foxy Loxy.   If only he had listened…

Innovation Blog

Tobacco Leaves as Solar Power Plants: Breakthrough from Technion

By Shlomo Maital

Prof. Noam Adir

This is one of the neatest pieces of research I have seen, in recent years, and it comes from my university, Technion – Israel Institute of Technology, here in Haifa.

According to a paper published in the prestigious Proceedings of the U.S. National Academy of Sciences, and cited as “must read” by a leading organization of senior biologists,  four Technion researchers have made a breakthrough in researching “greenest of the green” energy – literally, producing energy just as green plants do, through photosynthesis.   [Larom Shirley; Salama Faris; Schuster Gadi; Adir Noam. “Engineering of an alternative electron transfer path in photosystem II”].

In photosynthesis, plants absorb solar energy and convert it into efficient chemical energy.    But how?

Prof. Gadi Schuster (Dean of the Biology Faculty), Prof. Noam Adir (Faculty of Chemistry),  and doctoral students Shirley Larom and Faris Salama  found a key protein that extracts electrons from water and moves them through a membrane (in both bacteria and plants) that isolates the electricity flow and keeps it from escaping.  The researchers changed one single amino acid in the large protein molecule, from a “positive” charge to a “negative” one, so that electrons can flow OUT of the membrance instead of being trapped inside it.   They did this without harming the basic functioning of the protein, so that the bio-engineered plant or bacterium grows completely naturally, to create large amounts of the vital protein.   Note the interdisciplinary nature of the research team.  The collaboration between chemistry and biology was crucial and shows how current and future breakthroughs will require such cooperation as standard.   Perhaps it might be wise to merge the Biology and Chemistry faculties everywhere?

The Technion team also found an electron-carrying protein that could absorb the electrons emitted by the reverse photosynthesis process and transfer them to a kind of battery.

Imagine, the team suggests, a few tobacco leaves that could supply electrical energy equivalent to a one square meter photovoltaic cell.

What a redemption for tobacco – enriching people’s lives rather than shortening them!

Innovation Blog

Carly Fiorina, Mark Hurd:  HP Stands for Highly Perplexing

By Shlomo Maital

Mark V. Hurd

“Without vision, a nation perishes”. Isaiah 61, 11

If you track HP, now larger than IBM in global revenues ($115 b. in 2009), and if you are perplexed about why HP fired its CEO Carly Fiorina (now trying to become California Governor), and now has fired its CEO Mark Hurd  (“one of the great head-scratchers of modern times”),  read Joseph Nocera’s piece in today’s Global New York Times. [1]

Hurd led HP through the post-Carly crisis  to become the world’s leading computer company, and boosted its sales in about four years from $80 b. to $115 b., an increase of 31 per cent, while raising profitability as well in an industry known for its falling margins.  He was fired ostensibly for sexually harassing an HP contractor (he never laid a hand on her) and falsifying some luncheon expense accounts.

What in the world???

Nocera has the real story.  A long-time writer for Fortune,  Nocera is good at digging under the hype to find the truth.

Here is his explanation:

H.P. says its board should be applauded for not letting Mr. Hurd off the hook. But this is just after-the-fact spin. In fact, the directors should be called out for acting like the cowards they are.  Mr. Hurd’s supposed peccadilloes were a smoke screen for the real reason they got rid of an executive they didn’t trust and employees didn’t like.   The stand-up thing would have been to fire Mr. Hurd on the altogether legitimate grounds that the directors didn’t have faith in his leadership. But of course Wall Street would have had a conniption if the board had taken such a step. So instead, it ginned up a tabloid-ready scandal that only serves to bring shame, once again, on the H.P. board.

Carly Fiorina had a powerful vision for HP, reinventing the company founded by legendary entrepreneurs David Packard and William Hewlitt (the “H” and the “P”).  She led the acquisition of Compaq, which now turns out to have been a good deal, against fierce internal opposition.  She was fired by the Board of Directors led by her one-time friend Patricia Dunn.  Dunn herself was fired, because of a scandal related to use of private investigators to track information leaks.  It turns out, according to Nocera, that Hurd was responsible for the private eyes, but dumped the blame on Dunn.

Well, those who live by the sword die by it.  HP’s Board has taken revenge.   Hurd was a penny-pinching efficiency expert who slashed costs to the bone, boosted HP margins – and destroyed HP’s future by slashing R&D investment from 9 per cent of revenues down to only 2.   HP, for instance, has no answer to Apple’s iPad, nor will it,  says Nocera.    Hurd engaged in a classic and not untypical strategy of boosting short-run profits, for his own gain and ego, while destroying long-run competitiveness.  It will be up to his successor to clean up the mess, if he or she can.

The irony is this:   Fiorina’s vision was outstanding, but she was incapable of leading the operational excellence needed to apply it.   Hurd brought that operational excellence, but neglected and discarded the vision.  For a company like HP to become great and remain great, you need both. Hewlitt and Packard together had both – long-run vision and short-run operational excellence.  Somehow their successors have not.   As Nocera summarizes:

One thing I found surprising this week was learning that to many H.P. observers Ms. Fiorina no longer seemed quite so bad. It was actually her strategic vision that Mr. Hurd had executed, I heard again and again. Her problem was that while she talked a good game, she lacked the skill to get that big, hulking, aircraft carrier of a company moving in the direction she pointed. Mr. Hurd was a brilliant operational executive, but had the strategic sense of a gnat, and knew only how to cut costs.

The prophet Isaiah’s powerful statement in Hebrew reads, without vision, nations literally fall apart (“Nifra” means to disintegrate).   He might have added, without operational excellence, nations also disintegrate.   You need both, for nations and for businesses.  HP, under Carly, had vision (strategy).  HP, under Hurd, had operations (tactics).   Each is a necessary condition for long-term sustained success, and together, they are sufficient.  Firms, like armies, need good strategy and good tactics.  But if you lack one or the other —  in the long run, you are dead as a doornail.

[1] Joe Nocera, August 13, 2010 “Real Reason for Ousting H.P.’s Chief”, Global New York Times.

Global Crisis/Innovation Blog

Lost Generation of Youth: Is Entrepreneurship the Solution?

By Shlomo Maital

The phrase “lost generation” appears in the epigraph to Hemingway’s great 1926 novel The Sun Also Rises. The phrase was coined by Gertrude Stein, who got it from a Paris garage mechanic (he called the post WWI generation,  une génération perdue).

A new lost generation is emerging from the 2007-9 Global Crisis – youth unemployed.  In Bloomberg Business Week (“Viewpoint”, Aug. 10) Chris Farrell notes the jobless rate for Americans aged 16-19 has jumped to 26 per cent, part of “the worst job market in 60 years”.  And writing in the Global New York Times, Matthew Saltmarsh (“Global Youth Unemployment Reaches New High”, August 11) paints a much bleaker picture all over the world.

Farrell notes, “…among some minority groups the high school graduation rate is low: about 55 percent for Hispanics and 51 percent for African Americans, vs. the U.S. total of 69 percent, according to 2005-06 data….’You are really creating a society of people who don’t know what work is like,’  says Robert Straits, director of the Employment Management Services Div. at the Upjohn Institute for Employment Research. ‘It’s a generation of people who have never held a real job.’”

Saltmarsh reports:  “…the International Labor Organization, said in a report that of some 620 million young people ages 15 to 24 in the [global] work force, about 81 million were unemployed at the end of 2009 — the highest level in two decades of record-keeping by the organization, which is based in Geneva. … Spain had a jobless rate of 40.5 percent in May for people under 25.  That was the highest level among the 27 members of the European Union, far greater than the 9.4 percent in Germany in May and 19.7 percent in Britain in March.”

What can be done?  What MUST be done?

Part of the problem is geography.  Poorly-educated youths are mostly in inner cities, while entry-level low-skill jobs are far out in the suburbs.  But much of the problem is simply supply and demand – creating a supply of key job skills to match demand.  Germany has low youth unemployment partly because its superb vocational high schools equip youths for manufacturing jobs, and then Germany’s business model produces those jobs through competitive advantage and export success.

I wonder if an experimental program could be attempted, in which youths are taught the fundamentals of starting a business (delivering hot fresh-baked rolls early in the morning to lazy suburbanites), then given some micro-finance to get rolling.  Even one success out of ten that creates ten jobs will overcome the other nine failures.

It is unacceptable  that young people should be doomed even before they truly begin their lives.  It is unacceptable to have a “lost generation”, when Wall St. fat cats are bailed out with government money that could have been used for job creation.  And it is incredibly unacceptable that the world accepts the growing “lost generation” with equanimity, without loud political protests.    Perhaps if we gave the vote to 16-year-olds, they might have a voice.

Here is some food for thought. The heading is “social insanity”.

In the US  it costs $20,000 a year to keep a person in jail.  In Florida, fully 8.5 % of the state budget goes to “corrections” (jails), or $2 billion !   Suppose, just    suppose, one in ten of the unemployed youths ends up in jail.  Suppose he or she serves, during a lifetime, a 10-year sentence.  That’s $200,000 in direct    costs, not counting the huge damage done to victims.  The expected cost, then, is 1/10  times $200,000 or $20,000, not counting human suffering.  Would it    not make sense to invest $20,000 in prevention, for each unemployed youth, to keep the youths out of jail, by giving them skills and a livelihood ?  Is there    any other term for it, other than “social insanity”,  for spending $2 b. on jails instead of  $2 b. on a youth jobs programs?

Blog entries written by Prof. Shlomo Maital

Shlomo Maital
August 2010