After a year in which it seemed that the new administration was merely an extension of the old, many people are waiting to see some of the “change” they were promised. Others fear that change, seeing it as moving us down a road to Soviet-style destruction, and therefore, they oppose the initiatives of the new administration.

In my own view, the new administration came in with too many expectations. It was expected that the President would be able to walk on water and to cast out evil & selfish bankers. In fact, the President has worked hard not to offend the banks and insurance companies, a much more moderate approach than his most extreme backers expected. He was expected to put millions of people back to work. It is likely that his ’shovel-ready’ public works programs had the effect of using federal funds to pay for projects that would have been built anyway, with state and local funding. It was expected that he would bring a surge of assistance to the urban areas where low-income minorities have been left out of the productive side of the economy. He has actually been a little preoccupied–it isn’t just White people that sometimes ignore the needs of the inner cities–with other parts of his job. There are other areas such as these, but the point has been made that many Americans thought they voted in the Messiah, and are finding that he is just another man.

This year has barely even started, but I see it being a time when everything we thought was so secure will be exposed as being built upon sand. The idea that the government and its various regulatory bureaus can provide for us and protect us from the cold, cruel world is likely to be shown as false. Back in the 1930s, Herbert Hoover and then Franklin Roosevelt tried interventionist “let’s do something to put people to work” policies. They did not succeed at ending the Depression. Congress tried to reduce oversupply with the Smoot-Hawley tariff act, putting up barriers to a wide variety of imports. The result was predictable: our trading partners retaliated with their own trade restrictions, and the economy sunk even lower. The thing that finally brought an end to the Great Depression was war: World War II, with its nearly unlimited demand for munitions and weaponry.

I’m trying to point out that government intervention isn’t going to save us from this mess. Because this isn’t just a recession or even just a depression. This is a time of transformation, similar to the one we experienced at the beginning of the Industrial Revolution. This has been going on underneath the covers for some time, but with the massive job losses and the wholesale nationalization of the auto industry, we can finally see it clearly. The government cannot save us, because the government does not know what is going on, nor does it know what is going to arise to replace the big industrial companies. None of us know what is going to arise.

That is why we’ll face challenges getting the economy started–putting people to work again–as we learn that allocating money for “shovel-ready” public works projects mostly shifts payment responsibility for projects that were already going to be built away from state and local governments (the taxpayers of that area) onto all of us who pay federal taxes. We’ll find that this isn’t just about big make-work programs. This is about the de-industrialization of America, coupled with the export of the high-tech jobs that we thought were going to be the replacement for the manufacturing jobs being lost. America is at a crossroads, and no one seems to know where to go next.

The challenge, then, for you and I, is going to revolve around building and maintaining our small, locally-owned businesses. We need to be the ones who reshape our communities. One way that we can do this is to local-source most of our products, services, and labor. By doing this, we can help our own towns and cities to regenerate some of the jobs that were lost. Now, I have to be clear that you won’t find everything you need in your local community–at least, not if your community is like mine–but you can expand that to cover in-state production or in-country production. Do not forget that not every product produced nearby is sold out of a storefront. Sometimes, you may need to buy online–don’t forget to look for PayPal or Google Checkout instead of giving your financial information directly to every vendor–in order to get goods and services that are being produced relatively close to your homebase.

The econolypse isn’t just about the recession. Your challenges aren’t either. Get ready to face your challenges and do not let yourself be cowed by the howling and noise of the large out-of-area corporations (LOOACs) who are even now lined up to request special favors from the government. You have a job to do, and your town or city is depending on you (even if they don’t know it).

In a way, it is a good thing that judges are questioning the authority of government agencies to act. On the other hand, Comcast and the cable industry are creations of the FCC, in that it was federal rules that gave them the ability to do what they do. Just as with the telephone companies, FCC rules, including the choice to allow them to cut out ISP intermediaries for their high-speed Internet access services, is at the heart of the problem.

You see, if I sign up for dial up service, I might be able to get it through my local telephone company. There are, or were, dozens of companies (including AOL) that offered such Internet access across the country. Locally, Sunrise Internet Services offers it to this day.

If I want high-speed Internet across DSL or cable connections, the company that owns the lines does not have to allow other companies to compete, thanks to decisions made by the Commission. This decision was the one that enabled Comcast to take anti-consumer actions such as polluting the downloads of its paying customers. The errors the FCC (and Congress and the Department of Justice) made dating back into the late 1990s are what allowed Comcast and other “last-mile” owners to act with impunity toward consumers.

This is a pretty amazing animation that shows just how widespread and how deep the recession has been.

The only thing is, this is not just a recession. It might not even be just a depression. It seems to be a permanent inflection point in the national economy. If you look at the job losses, for example, most of them are gone forever. Chrysler, for example, will probably close entirely in 2010. The current and former employees are not going to get their jobs back. Ever.

Unfortunately, the government’s recovery efforts are focused around two things: protect the banks and get state governments (and their contractors) spending, so that their employees will spend, in the hope that we can return to the conditions of recent times. We all know that the conditions of recent times were an illusion, that America has been losing industry after industry and exporting its middle-class jobs since the late 1970s. Thus, we all know that the government’s efforts, as the now stand, are doomed to failure. We, and most other nations, are ignoring the lessons of this econolypse.

Do not get me wrong. They very well could convince enough consumers that things are better so those consumers will be willing to take on debt to buy more stuff. They could very well convince enough bankers and business managers that things are better so they will be willing to make more loans, make more products, and hire more workers. But it will not last. The economy has fundamentally changed, and we would do better to face the facts and act accordingly.

In many ways, this is equivalent to the Industrial Revolution, when farm labor dried up and factory jobs arose to replace them. Many people decried the end of their traditional employment, but their complaining had no impact on the eventual replacement of their whole economic basis. That base was replaced with one focused solely around the exchange of currency, with the use of mechanical equipment to replace the human and animal labor that had previously powered the whole world’s economy. The only thing is, it is not apparent what the new model will be, nor what business structures will arise to exploit it.

Still, we do know that hyperglobalism [PDF] has made every community very dependent upon the choices of strangers in remote places. We know that information assymetries of the type that brought down the financial industries will continue to exist. Therefore, we ought to try very hard to “close the circle” in our communities. Do you have a local banker, local baker, local butcher? Does your local baker have a nearby miller to supply his flour? Does that miller and that butcher have a local farmer to supply the grain and the meats? Does your local construction guy get his lumber from a locally-owned hardware store, and does that hardware store have a nearby lumber mills to supply its own needs? We need to build networks of small, locally-owned businesses (SLOBs), whether they are family-owned businesses (FOBs), minority-owned businesses (MOBs), owner-managed businesses (OMBs), woman-owned businesses (WOBs), or community-based groups (CBGs).

At least until things start to gel, and we can understand what the new world will look like, your best bet is your nearby community. If you are betting that your future economic lifeline will come through some large, out-of-area corporation (LOOAC), you will probably be disappointed. It is up to YOU and your family members, friends, and neighbors, to work in “coopetition” and help trap a larger fraction of your area’s income within the community. Close the circle or prepare to starve.

AARP backs Democrats in Senate health care fight

With a Senate showdown looming, the politically potent AARP rode to the rescue of Democrats on Wednesday, supporting $460 billion in Medicare cuts to help pay for landmark health insurance legislation.

As Republicans pressed to restore the cuts, AARP said Democrats merely were recommending elimination of waste and inefficiency within the giant health care program for seniors.

“Most importantly, the legislation does not reduce any guaranteed Medicare benefits,” A. Barry Rand, the AARP’s CEO, said in a letter to senators.

Believe me, I am in favor of health care reform. We definitely need something. In my years of employment, I have never yet had employer-sponsored health insurance. What I have learned through attempting to obtain individual coverage is that I could eat and have a roof over my head or I could have a decent health care plan, but not both.

For this reason, I think this bill is going to be a hugely expensive flop. First of all, the health insurance industry promised us sixteen years ago, when Bill Clinton’s administration proposed something similar, that they would take care of us without government taking over health care. The current mess that we have is what privately-owned insurance companies gave us. Is this really the best we can do? Seriously?

Secondly, the bill repeats the mistake of Massachusetts’ law. MA’s law presumed that the problem was that healthy younger workers were choosing not to buy coverage, and were therefore depriving health insurers of the funds needed to adequately cover older and sicker people without huge price increases. The truth is, twenty-somethings struggling with the cost of college; struggling with the cost of buying, repairing, maintaining, insuring, and driving a car; struggling with their sub-twenty-thousand-dollar incomes; and trying to lay the foundation for the rest of their lives.

Thirdly, those who think government subsidies will do the job needs to turn their brains in for refunds, since they are not using them. Government subsidy programs come with all manner of verification requirements and little details that exclude otherwise-eligible people from consideration. It is true in Social Security, and in Medicaid, and in school lunches, and even in student financial aid for those attending college.

I can tell you from experience what is likely to happen: those who are already struggling will not buy medical insurance, because the additional costs would mean missing their car payments or skipping meals or wearing clothing that shows private personal body parts. Or, my favorite, skipping utility payments. Ooh, here’s one I forgot: being forced to move back into mom and dad’s place, because that’s the only way they can afford to pay their bills.

Unfortunately, not everyone who will be skipping payments is fresh out of high school. Thirty, forty, and fifty year-olds are also working for hugely profitable but low-paying companies, too. It sounds funny to hear it, but the reason I cannot support this proposal is because it takes money out of people’s pockets to give to the insurance companies, the very same insurance companies whose mess we are trying to fix.

I do have to say that all the ultra-conservatives who are calling this “socialized medicine” need to put down their crack pipes. Requiring citizens to purchase the services of certain favored corporations is the farthest thing from socialism. If anything, it is a step toward fascism.

This news means that it may be a while before most people can look to large employers for jobs that will help their personal recessions end. Instead, we should be looking around us to see what needs are not being met in our local communities. Providing some needed service that is currently missing in the local area is going to be the best thing that any of us can do to get something going right now.

As individuals, family members, and small business owners (or prospective and hopeful small business founders), we have to stop telling ourselves that some large, out-of-area corporation (LOOAC) or government agency is going to save our bacon. It is going to be you and your family (and any employees) working together to meet your individual and collective needs, not big corporations, big banks, or big government. While the government is telling us that the recession may even have already ended, the data does not agree. Unemployment is rising, as are foreclosures. Almost one in seven homeowners is in the foreclosure process or behind on payments. In addition, there are a lot of commercial rental properties that are considered in danger. If retail sales this holiday season do not recover from the depressed levels of last year, landlords (who typically get a percentage of gross from tenants as part of their rent) will have even less money to pay their mortgages. The first half of 2010 could see a wave of bankruptcies, foreclosures, and bank failures. Recession ending? I wouldn’t bet on it.

When I say this, I am not taking a political stance. I am not for or against any politician. I am for smaller, locally-owned businesses (SLOBs) and against whatever I perceive to be against SLOBs (and their owners, managers, employees, and investors). The government is not really going to advance the needs of small business over those of LOOACs and big banks (LOOABs), nor will it subordinate the urge to pull more power and funds into each agency to the need of smaller businesses for less control and lower taxation (or at least less complicated taxation).

As with any other LOOACs, we cannot depend upon the MSM (mainstream media) to give us accurate information about what we need to do to survive the crisis. It is my suggestion that you develop a network of information sources, individuals and smaller, localized organizations (SLOs), including SLOBs, which are “on the ground” in the areas that interest or affect you. You will surely find, as I have, that whenever I know about a subject or event, the news media consistently gets it wrong. How are you supposed to decide when to invest, when to expand, when to hire, when to relocate, if your information comes from biased and controlled outlets? Answer: You cannot do so with any expectation that your decision is based on the best information. Instead, turn off organizations like ABC News, CNN, MSNBC, and Fox News. Get yourself connected with those who are most likely to supply accurate and timely information.

Finally, do not be a knucklehead. One of the things America did in the 1930s and 1940s that helped our nation survive the severe hardships of those years was pray. Get to know the God who is in control, the one who made you and the universe in which you live. Depend upon him to give you the intelligence to properly use the information you obtain, and the empowerment that enables you to actually perform the tasks you need to do in order to get through. Do not waste your resources on Cadillacs and expensive living. Try to live for the long term.

I have discussed the Econolypse over on Owner-Managed Business several times this year. You can find that content on that blog.

If you have been listening to the news coverage of business and the economy, you probably thought that things are really getting better. After all, the banks and other financial industry companies are reporting profits again, and even some of the tech industry companies are seeing gains. But the reality is different.

The biggest part of the gross domestic product–somewhere around 70%–consists of consumer purchases, which in recent years was primarily financed through debt, including refinancing of residential real estate. In other words, the level of purchasing we saw in 2003-2006 wasn’t supported solely on personal incomes, but on borrowings, including loans against home values that were far too high. How do we expect to repeat this when between 10 and 22% of the workforce is unemployed?

With layoffs and foreclosures continuing at above-average levels, I would expect that the overall economy will remain at a lower level for at least the next six months. After all, real estate prices still have not fallen to sensible levels, and even if they had, every state in the union is trying to squeeze more money out of its residents. California, for example, raised its payroll withholding rate by one-tenth, as an interest-free loan from its employed citizens.

So I ask you, how does any supposedly competent economist expect things to pick up soon? Is money supposed to fall from the sky? Indeed, I am surprised that economists and financial analysts did not notice that the economy’s underlying fundamentals changed some time in the past twenty years or so. If they had noticed, they would not have been surprised when the debt-fueled growth stopped. And they wouldn’t have supported economically-illiterate moves like the bank bailouts, because they would realize that the overly-expansive financial industry had thrown common sense out the door in the pursuit of ever-increasing profits.

This irresponsibility of finance industry companies hurts families, small businesses, and municipalities, primarily because it hides their need to dramatically constrict spending, and to save up for larger purchases. Irresponsible finance companies make it too easy to spend now, even when the better way would be to defer spending and save. Naturally, fiscally-aware families soon find themselves left behind as overspenders continue to pile up more and more new “stuff”. Finally, even many fiscally-aware families have to take the dangerous course of living on credit just to avoid divorce.

In finance classes, they talk about “financial leverage”, where using debt to finance a part of a company’s capital needs can increase the return to (a reduced-size group of) shareholders. The other side of this, of course, is that the firm’s profits become much more sensitive to changes in sales. In other words, returns can be increased at the expense of making those returns more risky. This kind of financial education is badly needed in every corner of our society, from the White House on down to the guy living in the shack downtown.

Perhaps the media chooses its pundits based on the desired message. It surely cannot be choosing them based on any rational criterion related to understanding the impact of continuing job losses and lender paralysis on the largest part of the economy. For then they would not be seeking out the “the crisis is ending” group. This is not a “jobless recovery”. It isn’t a recovery at all. In fact, it is only the constant promotion through the mainstream media (MSM) that has kept the economy from going into full free-fall.

What should you do? Well start by turning off the media, going to the library, and reading history, economics, political science, and related books. Learn to understand the knowledge gathered by many generations of curious and independent thinkers before you. If you have a back yard, plant a little vegetable garden. This isn’t an attempt to become a subsistence farmer–if things get that bad, your neighbors will kill you and take your food–but an a way to help you feel a little bit of independence. Start cutting your unnecessary spending, so you can save something just in case things get hard.

It might never get harder. In that case, keeping your spending in check and saving up funds can put you in the group we call “investors” instead of the group we call “consumers”. You can be one of the ones who rejoice when the Dow Jones Industrial Average goes above 10,000. But if things do get harder and you have an extra three months worth of income saved up, you might get to keep your home when your neighbor loses his.

Important: I am not a financial advisor. If you take financial advice from some random person on the Internet, you’re being foolish. Instead, consider this an opportunity to start thinking for yourself.

When The World Changes Around You, You Must Change With It

Many times, when we are starting a business, we start with what we already know. We act as though the world we live in has always been the same, and that the business models that our former employers utilized are necessarily the best ones for us. A look at the history of the world’s climate should be enough to remove that idea.

Just as the Vikings found Greenland a warm and hospitable place 1,000 years ago, but were driven out by cold temperatures a few hundred years later as part of a changing climate, so too yesterday’s business models were built upon the social, legal and economic situation in the preceding years, and the business models of today are likewise built upon the social, legal, and economic situation of the recent past. What exists today may not work in a decade, simply because the world is not the same place today as it was ten years ago, and it won’t be the same place ten years from now as it is now.

Newspaper Example

Fifty years ago, publishing a newspaper was a high-margin business. The returns were high, and the barriers to entry were also high. This enabled thousands of local papers to support large editorial, production, and distribution staffs. But the world was changing. First of all, there had been two world wars and a global economic depression within the previous two or three generations, so the nation was now aware that people needed to be aware of overseas events. This really made wire services, such as UPI and the AP, an important part of a paper’s story collection process. Social and economic change was coming to the nation, too. And radio and the new thing, television, were starting to provide news at no cost to the audience.

Thirty years ago, the newspaper industry was starting to show the first signs of pressure. In major cities, the Justice Dept. started allowing two major local papers to share production (printing) and distribution operations, as long as their editorial operations remained competitors. Twenty-five years ago, the Los Angeles Herald-Examiner closed down, leading to an exceptionally profitable few years at their rival Los Angeles Times. But KNXT-TV2 (now KCBS) added local news broadcasts from 4:30 PM until the network news. Local AM radio stations KFWB (960 kHz) and KNX (1070 kHz) were and are all-news stations, with sports, traffic, and all the top stories of local or national significance covered every half hour. Again, this comes without any out-of-pocket costs to their listeners.

In the late 1990s, Time Warner, which is both a publisher and a broadcaster, saw the rise of the Internet, especially the World Wide Web, and knew they needed to be involved. They launched Pathfinder. Over the next few years, they and other media companies experimented with models: paid subscribers only, split access (some for paid, some for unpaid with memberships, some for anyone), ad-supported sites, and e-mail blasts (with or without an actual web-resident story). With few exceptions, none of those has worked out–the papers are looking for something with high enough returns to allow them to keep their cost structures, and it isn’t going to work.

Now you will hear publishers blaming the Web for their losses: “If it wasn’t for sites like Google and Yahoo plastering our headlines and story summaries on their sites, we’d be able to charge people to read our stories,” they say. Unfortunately, that isn’t really true. Google and Yahoo generally link back to the original site, so that people who choose to read it see whatever advertising or “buy a subscription” messages the paper chooses to put up. There are definitely content-stealing sites (they also plague bloggers, such as myself) but they aren’t the major reason that papers are in trouble–the world has changed, and they are still trying to live somewhere that no longer exists.

Rationale

In my business classes when I was in college, I learned that high returns tend to attract new entrants into the market. But they also seem to attract competition from “replacement products”. For example, if the price of automobiles gets too high, people can purchase other products and services to get them from point A to point B, including bicycles, motorcycles, skateboards, hang gliders, commuter rail lines, bus routes, running / jogging / walking and so on.

Likewise, high costs of entry tend to keep competitors out of the market, raising prices and profits. In the case of the newspaper industry, the high capital costs of printing plants tended to keep the number of competitors low. The broadcasting industry is also fairly capital intensive, what with the limited availability of licenses, the cost of transmitters and antennas, and the constant flow of electricity. Building a business in a field with high capital costs and high barriers to entry tends to be profitable, unless something changes. When change comes, it often sweeps away even entrenched companies.

Cruise Control

In effect, our entire business has been pretty much on cruise control … for the past several months we’ve been neglecting many important tasks and just letting our business coast. –Steve from MyWifeQuitHerJob.com

A successful business has a business model that is working. Such a business also has a number of other factors working on its behalf, including some that the owner(s) and manager(s) may not know about. For example, the United States automobile industry benefited from a combination of the legal environment, the economy in the 1900 to 1970 period, a huge unified market, and wide availability of (motor) fuels. It wasn’t necessarily the quality of their products or their management prowess that made Detroit the world leader in motor vehicles. When things changed, these companies started a long-term decline that continues to this day.

Operating your business successfully means taking an occasional look at your market and at the situation that supports your business. You want to understand what circumstances are contributing to your company’s success, so that you will be aware when changes could upend it. Your business model can be considered a simple sentence or two that describes how you make (or intend to make) money. For example, the model for Twitter, the popular “micro-blogging” service, could be described this way: get as many users as possible, while raising lots of venture capital, then figure out what to do about earning money. (NOTE: This probably won’t work for you, so don’t even think about it.) Anyway, remember that there is more to your success or failure than your good looks or smart decision-making, and if those things change, your business could be on the rocks like the auto companies were.

It is important that you have a clear idea in mind of what your business will do to make money, your business model. If your plan is to make money when people walk into your store to buy products, emphasize that in the choices and decisions you make. If your plan is to sell products to the stores, so the stores will have something to sell, then make sure to prioritize this in your decisions and choices. Your product line may change, your industry may change, but if you don’t understand your business model, you will still find it difficult to succeed.