Some interesting links

Prof.Raghu Rajan from the University of Chicago has written this interesting piece on the build-up that finally ended in the financial crisis from the Fault Lines blog. He explains lucidly why Keynesian spending might not work as well this time around.

The other interesting write-up is about secular shifts in the unemployment picture in developed countries and some of the underlying causes. From the MIT Technology Review.

Excellent food for thought along with this piece from Joseph Stiglitz that I summarized here.

The new lean economy

I have commented earlier (link here) on the phenomenon of the jobless recovery that the US economy (and definitely many of the more 'open' economies) are likely to be facing in the next few years. Of course, this precludes any serious effort by the government to create jobs through stimulus like efforts - though there is going to be a limit to that as well, given the relation of stimulus efforts to future debt creation.

In my opinion, the 2008-09 Great Recession has forced companies to seriously evaluate their cost structures. A lot of what passed before has been cut (in the fat bubble years) and companies have begun to realize serious benefits from cutting out fat, leveraging efficiencies at the work place by eliminating redundancies, moving their applications to open source platforms and so on. And my intuition is that many of these changes are not going to be just a reaction to the downturn. Companies are seeing that the quality of output has not significantly suffered because there aren't enough people to do the work, or because the work is no longer being done by expensive software. Thomas Friedman, in a piece in the New York Times, wrote that the Great Recession has also brought about a Great Inflection.

According to Friedman, the Great Inflection is "the mass diffusion of low-cost, high-powered innovation technologies — from hand-held computers to Web sites that offer any imaginable service — plus cheap connectivity. They are transforming how business is done." Friedman talks about two examples in his piece. One is a small, not-for-profit that needs to create an ad campaign. Given constrained budgets, the need of the hour is to be innovative, but with cost efficiencies firmly in mind. The ad creator uses a mix of collaboration tools (enabled by cheap and high throughput communication), online sourcing (through the availability of online marketplaces for media products) and multimedia editing (enabled by software and hardware improvements) to deliver a solution that is both innovative and appealing as well as one that fits in the client budget.

The second example, of the furniture manufacturer Ethan Allen, talks about transformations the business has had to make to drive productivity improvements. The transformations have been both traditional: workforce reductions of over 25%, multiskilling of the remaining workers to make them more fungible, consolidation of manufacturing and process engineering. Additionally the company has also adopted other non-conventional means to conserve cash and survive. This has included moving a lot of the advertising activity in-house leveraging the multimedia desktop tools that are available today.

Finally, Friedman makes a point that the flow of credit (which is still very constrained) would make these companies create jobs. I disagree. I think it is going to take a lot for companies to start hiring again. And when they do, they are going to be the multiskilled talent that is now constituting the workforce at Ethan Allen. Companies across the spectrum have tasted blood - of keeping productivity and output high and costs low. They are not likely to go back to being fat again anytime soon.

In Indian banks, I am seeing an increasing phenomenon in the growth of branches. Most big banks are expanding their branch networks - like HDFC Bank, ICICI Bank and even the venerable State Bank of India. But the branches increasingly are being staffed at low staff levels. Staff is usually multi-skilled. Specialists are assigned across branches and are mobile. As a customer, if you need any specialized service, the representative at the branch contacts the specialist who then makes an appointment within 24 hours. Instead of having committed staff in every branch, the staffing model comprises fungible generalists allotted to branches and shared, mobile specialists across branches.

Productivity growth and the never-to-return jobs

I have talked about the economy in a couple of previous posts. This was here talking about green shoots, and about the signs of frailness in the recovery. Over the months of April through August, the life of this blog, news about the economy did seem mixed. The first clear signs that things were beginning to stabilize came around the May timeframe when the drumbeat of negative economic news first started to turn mixed. The jobless claims did not rise as quickly as anticipated, the economy continued to lose jobs but fell off from the rate of close to 0.5 million a month. Around the same time period, existing home sales started to pick up for the first time in more than 2 years and finally in August, the sales pickup translated to rise in prices, for the first time in nearly 2 and a half years.

Meanwhile, Asia continued to power ahead, creating hope and optimism that it would serve as the engine for the stabilization and subsequent growth of the US economy. But even as sectors such as auto, manufacturing and - in some geographies - retail sales have started to show modest increases, job growth still eludes the economy. Quoting the WSJ blog Real Time Economics, a rough sketch of the numbers looks something like this. Average hours worked is declining at an annual rate of nearly 3%, based on quarterly numbers from earlier this year. This is largely driven by the job cuts, but also by anaemic hiring on part of companies. On the other hand, economic indicators point to the GDP growth returning to its cruising rate of about 2-3% a year. The combination of reduced work hours and economic growth translates to a positive growth for this interesting metric called Labor Productivity. One can therefore expect a productivity jump of nearly 4-6% in the third quarter. And given that incomes are flat, this is going to be good news for corporate profits. Dow at 11,000 by the end of year, anyone?

It has been said earlier that this looks like the famous jobless recovery that everyone fears. My take on what is going on. The slumping economy has given corporations the leeway to embrace job automation and computer-driven efficiency measures in a pretty radical manner. The people getting eased out are the ones who have enjoyed a successful run at holding down 'Old Economy' jobs in a world which doesn't value these jobs any longer. When the housing bubble was on, the inefficiency of these jobs never surfaced. But as corporate bottomlines are exposed, companies are making do with fewer and more talented people. Employees who are adept at computers and the use of technology and in its power to ruthlessly driven efficiencies.

For every one of us, this is a sign of how ephemeral our much 'valued' skills are in today's economic reality. A call to action that will be heard by the smart amongst us, but which will also be sadly ignored by many.

Connecting to the data centers - Netbooks

An apt follow-up to the post on data centers should be on the evolving tools to access the data centers. I had gone to Costco this morning and came across Netbooks. These are just stripped down laptops (or notebooks, if you may) that are perfect for accessing the Internet and getting your work done. Quite the rage with the college crowd apparently.

This is an attempt by the computer hardware industry to break the price barrier on portable computers. Used to about $1500 and came down to about $1000 four to five years back. But then the barrier stayed there for a while, with manufacturers adding feature on top of feature but refusing to reduce price. Till netbooks came along. These devices are priced at about $200-$350 and are pretty minimalist in their design. They have a fairly robust processor, a good sized keyboard and screen. No CD drive, for only neanderthals use a CD. But loaded when it comes to things like a Webcam, WiMax, etc. The netbook idea has two parallel phenomena that drove its evolution. One, the high-profile $100 laptop for third-world kids that really didn't go anywhere. The other was the increase in broadband penetration in the United States.

Another driver (probably) is the coming of age of the Millennial generation. When I grew up, the cool computer company of our times was Microsoft (or Apply, if you hated Microsoft). Both these companies had built their business models on paid products, products that needed upgrade and which cost money. We had therefore a certain reverence towards these companies and therefore an implicit acceptance of their pay-for-use business model.

Today's generation has come of age in the age of Google, Linux, Napster and other social networking sites. All of which are free. Today's kids feel less beholden to the idea of a computer company putting out formal products which you need to pay for and which get upgraded once every two years, for which you need to pay for again. In today's age, the idea of freeware and products that actively evolve with use is becoming more and more accepted. Ergo, the netbook.

Enough of my pop-psychology for now. Anyway, netbooks are really cool gadgets and I am tempted to get one really soon. The Economist had a good article on the subject. Let me know if you are early adopters of netbooks and your experiences so far.

The massive cloud of 1s and 0s

Read an interesting article in the New York Times about the growth in data centers as we become an increasingly internet based world. Some of the numbers around the data center capacities at places like Microsoft, Google and for e-commerce or bidding sites like Amazon and eBay, was quite astounding. Not to mention the various electronic financial exchanges in the world.

Some of the numbers are quite astounding. Microsoft has more than 200,000 and its massively bigger competitor has to have more. And this massive data center infrastructure capability is already beginning to have a serious impact on the power requirements for our new world. More power for our data centers to upload of pictures of the weekend do onto Facebook, or an intact polar ice-cap. You chose!