Measured Stimulus

The pain our economy is suffering is very real; the proposed remedies appear to be theoretical. I'm no economist, but the businessman in me wonders, isn't there a way to close the gap between theory and practice, and measure the results of our fiscal experiments? What if we put them on debit cards?

The debate in Washington is about how the Federal government should dole out fiscal spending to jump-start the economy. Everything is on the table: direct investments in companies and in public infrastructure; tax credits, rebates and reductions; food subsidies and research grants. The argument is over which kind of spending will have the greatest impact, have the greatest "multiplier effect."

As far as I can tell, this dispute is as old as the practice of economics itself. The fact that it persists today, more than 230 years after Adam Smith wrote the Wealth of Nations (often thought to be the book that founded modern economics), is a sign that we don't really know the answer. Economists introduce models, based on the limited data available to them (predominantly from surveys), to promote competing points-of-view on the subject.

Few things are as awkward as missing an anniversary -- unless, of course, you didn't know that there was a date you were supposed to be marking in the first place. That was the case this past week when the National Bureau of Economic Research, the last word in gauging the state of the economy, declared that the US has been suffering a recession since December 2007.

Media coverage of this event was quick to point out that the economic news has not been entirely gloomy over the past twelve months. Most notably, the domestic economy saw 2.8% growth in the second quarter of 2008. Analyses tend to attribute this spike to our government's most recent experiment in fiscal stimulus -- the $152 billion package it issued this past spring which, by my calculations, was equal to about one-third of the total incremental growth in the economy. If that pay-out were the sole explanation for second quarter growth, we would have to conclude that for every dollar that government spent, the economy benefited by another two dollars.

But several other theories vie to explain the circumstances. The two I've seen most often is that, in the second quarter, imports dipped somewhat and US exports grew. Again, no one really knows the truth of the matter.

My good friend Marco Olmi reminded me that I should be outraged by this vagueness. It was Jully 11th and Marco -- a native of Genova, Italy -- had just become a US citizen. It was a perfect summer evening, and we were celebrating with our families in our front yard in brownstone Brooklyn, American flags and American wine distributed around a long table. Marco has built and run at least three successful businesses. His excitement about the occasion was tempered by his innate pragmatism, and a new sense of common cause with his fellow Americans. Reflecting upon the government's recent attempt to boost the economy, he was frustrated by its inefficient approach.

He had a proposal: Why doesn't the government issue debit cards, loaded with stimulus payments, that would permit us to record with much greater certainty where all that money went? Did people pay down their credit card debts, did they buy gas for their cars, did they purchase basic staple goods, did they go shopping, or did they deposit the funds into savings accounts?

Our conversation expanded from there. Putting tens of billions of dollars on the market gives the government tremendous negotiating leverage. It could target specific product categories that are especially important to people's lives or that are exceptionally expensive at the moment. It could zero in on industries that it wants to cultivate. So, for example, if the government wanted to counteract high gas prices, it could negotiate with all the major energy companies, requiring that they grant discounts to stimulus card holders. If it wanted to bolster the auto industry, it could drive potential customers to the Big 3's doors by, again, agreeing on a system of discounts. Invariably, this approach would also bolster credit card issuers, because only they are equipped to make such a stimulus card work.

Most important, precisely measuring the effects of stimulus payments in this way would allow the government to fine-tune its policies in the future, to achieve the type and volume of growth that it desires. This is not a foreign concept to the business world: Precision of this level has long been expected by direct marketers, and even more so by interactive marketers. As the world's single biggest investor, acting on behalf of tax payers, the US government should ask no less of itself.

The next round of fiscal stimulus will likely be far larger and more complex than the last one. The stimulus card idea might not apply in some instances, but the principal holds true: We need to approach fiscal spending in a methodical way that lends itself to measurement and calculated returns-on-investment.

Copyright 2008, John Hearn

Instantaneous Nostalgia

Nostalgia ain't what it used to be.

As the Thanksgiving holiday approaches, the stage is set for a changing tableau to play out in households across the country. Friends and relations will cluster in conversation, as small children scurry about their knees. A crackling fire, a televised football game, or both, will flicker in the corner. Applause will erupt when the turkey dinner is brought to the table. And someone will snap a few pictures with their camera phone, and immediately e-mail them to several other people in the room. Within seconds, cousins will be scrolling through the images they just received, holding their smart phones up to the still-unfolding scene, and nod approvingly at just how true-to-life the pictures are.

Instantaneous nostalgia strikes again.

It used to be that some time would pass before people felt compelled to reminisce. A thousand years separated the Roman Empire and the Italian Renaissance that mimicked it. 168 years elapsed after the Pilgrims first broke bread in Plymouth, before Thanksgiving was declared a national holiday in the US. It was ten years after the fall of the Soviet Union that Russians really yearned for Brezhnev, Khrushchev, and even Stalin.

Over time, the span between moments in time and our fond remembrances of them has been shrinking, in an ever-tightening spiral. I attended my first 1980s-themed party 1991, featuring British new wave music and a dance floor choked with would-be Olivia Newton Johns and Don Johnsons. I saw a video recounting the excitement of the 2008 Presidential campaign just three days after it ended.

The time-nostalgia spiral leads inescapably to a final destination: The future.

Don't laugh, there's a precedent for it. People's memories of the past are not comprised merely of people, places, and events. They also contain an intangible dimension, including the thoughts, hopes, dreams and aspirations that they once possessed. In other words, people are often nostalgic for a vision of the future that they held in the past.

Think back to the excitement with which you viewed the future on your graduation day from high school or college. Fast forward to your revised vision on the day you were married, on the day your first child was born, or when the clock struck midnight on January 1, 2000.

I still have tender feelings for how I expected the future to unfold during the dot com boom years. With a passel of pre-IPO stock options in hand, a back pocket brimming with business plans, and city intersections choked with dreamers and financiers every night, all things seemed possible.

People are nostalgic for moments that never happened.

It is not a giant conceptual leap, then, to imagine people feeling wistful about the constantly-receding horizon of the future as they they imagine it now...and five minutes from now.

This trend is more than a mind trick. It has practical, commercial applications.

Nostalgia has always been a mainstay of commerce. Ralph Lauren and Martha Stewart have built empires by evoking a history that, for the vast majority of people, never existed. How many of us have country squires nesting in our family trees? And witness how Corona beer revived its brand in this decade by conjuring a grown-up version of the Cancun Spring Break of the 1980s, when it first came to prominence. Their more recent ads picture a care-free couple lounging on a desolate beach, skipping cells phones across the ocean surf. The same couple might have been doing keg stands and dancing in a mosh pit on an adjoining beach, just twenty-five years before.

The instantaneous flavor of nostalgia also has its champions. Photo-sharing websites like Kodak Gallery, Snapfish and Shutterfly are hell-bent on getting people to convert pictures that they post online into physical prints, coffee mugs, holiday cards or other products.

What's next? For one, I expect to see more apps on handheld devices that will allow people to manipulate still and video images in near real-time. Recall our Thanksgiving dinner scene again, but visualize that, instead of mere snapshots being sent around the room, the pictures are first manipulated somehow. Your niece who was caught on camera dressing the family dog as a princess will now be transplanted into a Hollywood hair salon. Your nephews doing pro wrestling moves on the sofa will now be transported to a more appropriate WWE ring. Mom, holding a groaning platter of turkey before her, will now have Martha Stewart at her elbow to assist her.

Pictures aren't the end of it, though. With almost limitless storage capacity, people regularly archive years of e-mails, SMS chats, and instant messenger exchanges. I predict we will be presented with untold opportunities to re-purpose and re-mix those, too.

I am almost teary-eyed in anticipation of other people's thoughts on the subject.

Copyright 2008, John Hearn

Department of Economic Security

It is time that we create a Department of Economic Security.

The greatest surprise about the current economic crisis is that it came as a shock to anyone. In a rush to prove their prescience post facto, policy wonks and market watchers have unearthed a rich but disjointed narrative of economic signals that foretold the coming disaster. And yet, with few exceptions, no one connected the dots in time to save us -- or even themselves.

This follows the pattern of every market collapse. Even more, it reminds me of the terrorist attacks of 9/11.

In the wake of that tragedy, there was an outpouring of evidence that isolated intelligence officials, working at diffuse agencies, had suspected that trouble was coming. It also became clear that, collectively, our intelligence apparatus was not organized -- practically or culturally -- to effectively synthesize that information, draw actionable conclusions, and take preventative measures to avert catastrophe.

The omnipotent image of our intelligence services, so assiduously cultivated during the Cold War, was forever tarnished. James Bond, Dick Tracy, Jack Malone and Jason Bourne were knocked unceremoniously off their pedestals in the course of just a few news cycles. A flurry of finger-pointing and official demurrals ensued. What emerged from this bit of theater was the Department of Homeland Security.

DHS is opaque by design and necessity. The surest indication of its success is the fact that there has been no encore to 9/11.

Hunting terrorists carries us across continents and into a thicket of financiers, arms suppliers, military trainers, and collaborators. Likewise, monitoring the market recognizes no national borders or simple definitions of roles played by diverse financial institutions or financial instruments. Capital flows like a natural force; understanding it requires unnatural exertions.

The bankers and businessmen, policy-makers and credit-takers who steered us into the current economic storm bear absolutely no resemblance in their intent to the underworld of terrorists and criminals who launched the current world war. However, the global market system within which they operate is at least as complex as the international criminal underworld, and probably much more so.

Regulation became the watchword of the last Presidential election. The debate centered on how much regulation is appropriate. A more interesting question is what kind of regulation is appropriate.

A close member of my family runs a small retail bank. We don't discuss his work much, but it is impossible to ignore the gigantic tomes -- filled with infractions identified by regulators and the bank's itemized responses to each -- that sometimes take their place as impromptu furniture in his family room. I'm sure I must have rested a drink or a cocktail plate on them on occasion. My family member is as uncomplaining as he is diligent in complying with regulations, but I can't help thinking that his time consumed by addressing minutiae, as opposed to broader operating principles, would be better spent helping customers, overseeing employees, and growing the business. The fact that he manages to accomplish all of these things is a testament to his unstinting energy. It is not, however, an endorsement of the regulatory system to which he, and all bankers, must report.

Commercial banks -- the very institutions that originated many of the mortgage, auto, and credit card loans now blamed for the collapsing market -- are arguably the most regulated sector of the financial services industry. So why wasn't the current crisis killed at the root? The answer, I suspect, is a matter of scale and jurisdiction.

There is no scenario under which there would be enough regulators, cops on the beat, to investigate all the transactions performed by the American financial system. The scale of the job is just too big. Oversight, then, is an exercise in statistical sampling. Regulators dip into a sample of transactions and apply a battery of tests, rules and regulations. Chances are very high that they will find something wrong in any given instance, but the likelihood is just as high that they will miss broader patterns. That is precisely why the British regulatory system is designed around a set a principles, to be applied intelligently by individual regulators, instead an exhaustive catalogue of rules.

But even if an American regulator spies a disconcerting bank-wide trend, he does not have the jurisdiction to pursue it, as it moves from one financial institution to the next, from one sector of the industry to the next. He does not have the mandate or the expertise to trail a group of risky mortgages written by a retail bank, as they are bundled into a mortgage-backed security by an investment bank. A completely separate regulator, working for another agency, may not have the mandate or the expertise to follow that mortgage-backed security, as it is packaged by the same investment back, or another one, into a larger asset-backed security. The pattern continues as that original cluster of risky mortgages is continually re-packaged and re-sold, combined in credit default swaps and collateralized debt obligations, and traded among hedge funds and other institutional investors.

There needs to be a regulatory entity capable of riding these flows of capital in a systematic way, following them as they move from one type of financial institution to the next and transform from one kind of financial instrument into the next. There needs to be a government agency that can take a strategic view of market dynamics, and head problems off at the pass. There needs to be an organization whose oversight does not impose an onerous burden on the financial institutions it regulates. There needs to be a US equivalent to Germany's Federal Financial Supervisory Authority, Japan's Financial Services Agency, and the United Kingdom's Financial Services Authority. There needs to be an intelligent combination of the Securities and Exchange Commission, the Office of Thrift Supervision, the Office of the Comptroller of the Currency, the Commodities Futures Trading Commission, the Federal Deposit Insurance Corporation, and other existing agencies. In short, there needs to be a Department of Economic Security.

Copyright 2008, John Hearn

Manifesto

It is the most improbable moment to begin a blog about innovation.

The current economic meltdown requires no introduction: corporate and consumer spending is shriveling under the credit squeeze. Inflation is high and growth is low.

To most organizations, this looks like an imprudent time to invest in new ideas -- new products, new services, or new business models. That is discretionary spending, to be postponed for now, in expectation of a brighter day.

Product development is not the only victim of economic hard times. Many companies will assume a possum position, even in their basic branding and marketing activities. Forecasters of ad spending have revised their estimates down for 2008 by as much as much as 4 percent. Their predictions for 2009 are dimmer still.

So how does it make sense to initiate a new dialogue about innovation now?

The shortest answer is that innovation is no stranger to adversity. Even in the best of times, innovation stubbornly refuses to conform to conventional wisdom and its entourage of preconceptions, consumer research, and time-tables.

This is not a unique idea. Great organizations are in a state of continuous launch, to remain relevant to the ever-shifting desires of stakeholders, to secure strategic advantage over competitors, to justify their stock prices and, sometimes, to just plain survive.

Amid the gathering storm, the breaking point for me came on September 14th. Hurricane Ike finally came to rest, after wreaking devastation for nearly two weeks. Its options exhausted, once-proud Merrill Lynch announced that it was selling itself to Bank of America for a song. And one of my dearest friends in the world -- a 35 year-old man in his prime, running two successful businesses and providing for a family of three -- was diagnosed with leukemia.

It was this last development, one so visceral and close to home, that shook me most, and snapped my mind to attention. With all hell breaking loose in the streets of New York, I sat in a hermetically-sealed Brooklyn hospital, at the foot of my friend's hospital bed, staring mortality in the face and trying to grin back. On that day, we did not know the specifics of my friend's prognosis. In its many forms, leukemia can be managed for a lifetime or be an almost immediate death sentence. Friends, family and medical staff passed through the room continuously. In a rare private exchange, my friend and I agreed that only one thing was clear: My friend would have to fight, and all of us who loved him would have to fight with him.

We must combine a sober understanding of the alternatives and an unshakable conviction that we'll beat the odds.

The next day, I made a quiet commitment to myself to do something I had long intended: Launch a blog about innovation -- a place to record my thoughts and ideas, and spark a conversation around the quest for new things with enduring value.

I know that I will be in good company with my efforts. Many companies that are now household names were founded during economic down-turns: GE was started during the market panic of 1873, Disney during the recession of 1923-4, Hewlett Packard during the Great Depression, and Microsoft during the recession of 1975. More recently, eco-cleaning products company, Method, emerged from the burst dot com bubble.

The much-loved Apple iPod got its start in the dark days of 2001.

Procter & Gamble famously redoubles its product development and marketing efforts during economic hard times. Iconic brands like Camay and Ivory were born out of the Great Depression, carried by strategic investments in radio advertising, starring in the very earliest soap operas.

And, as the mood on Madison Avenue turns ever more sour, it is instructive to remember that, in the seven economic slumps since 1960, advertising spending only actually declined three times, and never by more than about 5 percent. The industry invariably bounded back, continuing on its inexorable rise, to grow a cumulative 2,800% over those 48 years.


Times like these have a leveling effect, putting start-ups and established enterprises on more equal footing, imposing greater discipline on both. Goals must be precise. Investments must be incremental. Failure is to be expected, and so the best-laid plans must assume that multiple attempts will need to be made to attain an objective. This is no time to bet the farm.

Then again, as I hope to explore in this blog, it is never the right time to bet the farm. Strategically, there is never a killer idea.

But that won't stop many of us from trying to think of one. Someone told me the other day that 75% of human consciousness is comprised of thoughts of the future. True or not, there is no doubt that humans have an insatiable appetite for dreaming. Some of us also have the gumption to translate those dreams into new realities -- to give substance to the shadows cast by sparks of insight. These are the people whom I hope will be attracted to this blog.

I am happy to report that my friend has been diagnosed with a form of leukemia that is relatively manageable. He is fighting it successfully, and re-engaged with his normal life.

I can't think of a better moment to begin this blog.

Copyright 2008, John Hearn