On my flight from JFK to LAX, I just read "A Country is Not a Company" by Paul Krugman.
My reason for this posting is two-pronged:
1. I figure if I begin my blog with an exceedingly boring post, my next post can only be more exciting.
2. An understanding of Economics does not come as naturally to me as an understanding of Business & Finance. My mind is more practically-wired so theory often evades me. The perfectionist that I am, I like to improve where I am lacking. Maybe you can relate?!
Anyway, here is what I learned, and I will try and attach my complete outline, if, in fact, there is a place to attach a document here:
1. Contrary to the belief of many businesspeople, The U.S. Economy's success in creating jobs has essentially nothing to do with its ability to increase exports or cut back imports. I found it particularly interesting that the real factor that limits the overall number of jobs available is the Fed's belief that, if it were to create too many jobs, the result would be unmanageable inflation. The permissive factor does not have to do with the U.S. economy's ability to generate sufficient demand.
2. Again contrary to the belief of many businesspeople, a country that attracts large capital inflows (say, they become the 'hot' new hub for manufacturing in a particular industry and attract billions of dollars from multinationals) will necessarily run a trade deficit! This is basically because they will import some parts of their manufacturing equipment so their important demand will increase, and, at the same time, the investment inflow with either drive up the currency's value (in the case of a floating exchange rate) or the result may be inflation (in the case of a fixed exchange rate); their domestically-produced goods will then be priced out of the export markets, while the purchasing power of their currency will be greater, so import demand will further increase and the result will be a trade deficit.
3. Business strategy and economic analysis are profoundly and fundamentally different, and must be approached and understood as such. A business leader cannot just 'jump' into being an economic manager without some serious schooling: the vocabulary and concepts are different, business accounting is different from national income accounting (measure different things and use different concepts); personnel management and labor law are not the same; corporate financial control and monetary policy are very divergent as well. Furthermore, businesses are open systems that typically experience positive feedback; the U.S. Economy is a closed system that typically experiences negative feedback. "In spite of growing world trade, 70% of U.S. employment and value-added is in industries, such as retail trade, that neither export nor face import competition. In those industries, one U.S. company can increase its market share only at the expense of another, and, furthermore, no matter how well-managed they are, all of the businesses in the same industry would not be able to increase market share exponentially simultaneously. Businesses, on the other hand, can increase share in all of their markets simultaneously if managed well enough to do so, and, if one part of a business is doing well, the feedback to the other parts of the business, or to the business overall, is usually very positive.
Basically, from a management perspective, when someone is running a business, he or she can bake more pies; when someone is running a country, he or she is dealing with many pieces of the same pie.
Who is Paul Krugman and why is there a good chance his words on this topic are valuable?
Paul Krugman is the professor of economics and international affairs at Princeton University. He was awarded the Nobel Prize for Economics in 2008