Yesterday I was listening to CBO head Doug Elmendorf on NPR (CBO Chief On Health Care Bills) and was disturbed by the lack of robustness in the analysis being conducted on the fiscal impact of Health Care reform. Read the transcript here and tell me if this doesn’t sound like industrial age thinking to you:

• models that may not actually fit reality “a model is developed using estimates of how people have behaved in the past.”
• Uncertainty expressed but not part of the model “And we always emphasize the uncertainty that surrounds our estimates.”

But the quote preceding the last one is really telling:

“The challenge is that the changes being considered are really outside of the range of changes that we've seen in the past in most of the country.”

The CBO isn’t using scenario to imagine different futures in which health care reform exists. In fact, they are primarily driven by historical data, not forward looking explorations. Tomorrow will not be like yesterday, especially when you combine a recession with a major policy and legislation shift in an industry that currently accounts for about 15% of GNP.

The Health Care bills and proposals are all directionally incorrect because they are too tied to the past and they suffer from a lack of imagination. The US government needs to step back and reimagine health care in America, not “fix” what is wrong with it. Tweaks here and there won’t solve systemic, design-oriented issues. The size of the bill reflects the contortions necessary to fit multiple visions of the future into the reality of today. The White House has not offered a vision, nor has a vision grown organically from Congress. If we don’t have a clear view of where we are going, the old Zen adage of any road will take us there is played out. Congress is taking a road, but it isn’t the right road, it is just a road, and even the watchdogs don’t know how to model the implications.

When you have a set of key performance indicators, you have to make sure they are still valid for the current performance you really want to achieve. The problem with America’s economic recovery is that we don’t know what we want, not in Washington, and not on Main Street. Well, we do know one thing. We want jobs. What we don’t know is what kind. Housing starts will put people back to work. Back to work consuming things, taking down trees, expanding footprints where we might be spend those resources refurbishing older areas to create more sustainable areas out of underinvested neighborhoods. It will put people back to work earning low wages. It will ripple, but not enough. But that isn’t all. Housing starts is pure consumer. There is very little knowledge economy in housing starts. It is a backward indicator looking to re-establish the pre-recession, pre-internet economy. In the knowledge economy, perhaps we want to look at school starts, or matriculation rates of high school students. Let’s harp on keeping kids in school, which is a better way to drive economic success than having low wage workers build houses for increasingly fewer high wage earners. (hear some old school thinking here at Marketplace Is gov't aid nearing its limits?)

My stimulus plan would focus on reinventing the community college system to become the life-long learning center of the nation. Expand programs, qualify more instructors, expand charters and increase available funds for scholarships and improve facilities. Building schools requires drywall experts and painters too, but they can hang out after work and take a class on nursing or radiology or history or literature. They can earn certificates in leadership or management or network topologies. As we reinvent the economy, fund the method for people who need to reinvent themselves.

We need to decide what we want to be as a nation. Do we want to bring back bobby pin manufacturing from China, or do we want to export our talent, the next generation of ideas. The Whitehouse is talking green tech, but I am becoming convinced their metrics are wrong. They are about buying stuff:  wind mills and caulk and new insulated windows for existing homes -- not transforming the economy into a 21st Century model of sustainability, at all levels (environment, jobs, energy). If we want to be the leaders of the free world, then we need to lead forward, not backward. I know this sounds like an Obama campaign speech, but he’s starting to forget what he said. And during the campaign, all one can do it talk. Now it’s about implementation, not rhetoric. Let’s actually create some new metrics that attach to a vision for America, and then track our way forward, and stop looking to the indicators of the past to see if we have rebooted the status quo.

IT has value. No doubt. What is uncertain is how that value is realized. In a new article by Joe McKendrick on a ZDNET Blog (Why IT can't seem to deliver measurable productivity), the topic once again finds the light of day. It is time we put a magnifying glass on it and start a fire, not just expose it occasionally. Without a solid economic model for the knowledge economy we will continue to yearn for what we do not have, and under value what we do, because we don’t have a language for accurately describing either.

I have said it many times here. Sustainability requires a new view of economics. The following quote brings home a stark contrast between the business world in which most of us spent our careers.

“I had a conversation with Sir Richard Branson (about this). He said it used to be the case if you looked after your employees and made a profit then you had a good business. His comment was that (this model) actually describes a criminal syndicate but it doesn't describe modern business. Modern business has to be rooted in ethics – ethics of our society and our environment. Modern business is so powerful that unless they're rooted in those they become destructive. We're just emerging from a culture of business that was potentially destructive.”

Debra Black, The forecast: Warmer, with a chance of survival, thestar.com

It will take time and leadership to reinvent our industrial age culture. It has started, but we need to make a continuous investment to see it through.

Writer Mike Holderness reinforced my call for a new economic language in the current New Scientist. Read his article here.

His pull quote:

“An alternative economic index will have immense power to drive policy.”

The fall of the dollar may well reshape the world economic landscape. Those who see only one future with a powerful dollar may be surprised when the world’s appetite for our economy wanes. Morici advocates strong regulation of the banking system – he also suggests that the language of economics deepens the chaos --, as in booking profits that don’t exist except in metaphor. You need to read this interview  (Peter Morici: Behind the Dollar’s Dog Days) with Maria Bartiromo and then start doing your own research, and your own reflection, on what a world with a weaker dollar may look, or how we avoid such a future. Both are still possible, but the time to act is growing short.

Peter Morici from BusinessWeek article

To manage risk, we need to recognize it first.

Well, praise for cost-cutting probably isn’t misplaced, but it may not be understood all that well. When a company cuts costs to drive efficiency in operations, the cost reduction can often be a good thing. Many companies, in times of plenty, grow beyond the edges of what should be comfortable. But those operational cost cutting measures may not serve so well when it comes to innovation and customer relationships. Deflecting a customer account to a new account manager can create a relationship reset. Cutting customer facing employees may also reduce corporate learning. The reduction in inputs reduces the combinations and permutations of ideas.

So when BusinessWeek looks for upbeat forecasts (read more here) they may be right. Cost cutting is being praised, but that is because investors are short sighted. Organizations need long-term investments to stay nimble. It isn’t just about getting out of one’s own way, its about having the limbs, the heart and the brains to navigate change. Cut too deeply and you run the risk of disabling the capacity to adapt. The cost-cutting of today may not look so good six months from now unless it is combined with investments that keep the capacity for change alive.

Yet another call is being made to adjust the lens through which we see our world. In the 19 September 2009 Economist Finance and economics column the venerable newspaper makes the call to move beyond GDP to embrace broader measures of human well-being. This report focused on a French commission’s recommendations.

The full article can be found here.

The following are high level observations from the commission:

• GDP does not account for depreciation of capital goods, thus overstates production, often because the price of some things has gone to zero
• State health-care, education, owner-occupied housing and unpaid child care estimates are very poorly estimated
• Statisticians should focus on incomes, consumption and wealth and move away from total production (with new accounting France’s GDP went from 73% of the US to 87%)
• One number might not be able to reflect the subtleties of current account, let alone speculating about the future value of current investments

The commission further suggests:

• Developing “quality of life” measures as wealth has proven to be a poor indicator of well-being
• Create future looking numbers that capture things like education and environmental issues that the current generation will pass on to the next

I agree with the recommendations from the Economist and conclude:

• Statistics independent of the government (I would even suggest, of governments, perhaps an international body that can create an apples to apples picture of world economic health, and applying new learning consistently across the globe)
• Legislators need to understand the impact of moving to multiple measures as special interest groups will use statistics to manipulate logic and emotion
• The we get on with the task of figuring out measures that are more meaningful than the current industrial age legacy by which which judge our success.

It is time to embrace the knowledge economy, the role of environment and sustainability to economic health and the perceptions of individuals. We are not here to serve the productive capacity of nations, they exist to serve the citizens of the world.  Until nations translate our well-being into something other than factors of production, many points of dissonance between citizens and government will remain. Behavior, it seems, is often predicated on what we measure. It is indeed time to measure things that really matter.

Further reporting from the FT here. 

The full report can be found here.

BusinessWeeks James C. Cooper discusses global rebalancing in the current issue of BusinessWeek (28 Sept, 2009). What he doesn’t say in his commentary (read it here: Business Outlook: How the Global Economy Is Rebalancing – BusinessWeek) is that America isn’t sure what it wants to be anymore, as an economy. We are struggling to return to pre-recession levels of everything, but that isn’t the right answer. We need to reconsider our knowledge economy, distribution economy, consumer economy directions. Does American want to lead the 21st Century by crafting the economy of the century, or will we allow others to craft it for us?

Information Technology and Innovation Foundation President Rob Atkinson’s heart is the in the right place. Increase productivity, re-establish leisure time. When the means of production is a field or a factory, you can walk away from it. The difficulty I have with Atkinson’s recent NPR analysis (It's High Time We Focused On Down Time ) is that we’ve reinvented work (moved people who would have become agriculture or factory workers in the past to information and knowledge worker roles) without changing expectations or creating new measures. Productivity is not the measure of success for a knowledge worker.

As I do my work, thinking about the future work, it has no boundary. I can choose to ignore it, but it is always there. Stacks of magazines, unread blogs and e-mail. No matter now productive I am, the work is of a nature that it cannot be accomplished in 8, 12 or 24 hours. There is just too much to know. At points in time, I can do a project at a more rapid pace, but the only reason I get to do the project is because I have a reputation for knowing something that adds value to the project. It isn’t about how quickly I do something, it is about my credibility, approach and tenacity. Productivity only applies to my work when I am doing an “assignment,” in other words, do an assembly job, it just happens to be that I am assembling knowledge to share rather than a bicycle. Once that is done, however, the work of maintaining credibility and relevance continues independent of any productive output. Therefore the productivity can help me know more in less time, but not enough difference to matter. It is a rounding error for credibility. Productivity helps me accomplish my project so I can get back to the work of building credibility and relevance again.

Rob my well believe what John Maynard Keynes wrote in an article entitled "Economic Possibilities for Our Grandchildren" that the steady increase in productivity would one day lead to a day when we would be led "out of the tunnel of economic necessity into daylight." I don’t. I think we have a new economic necessity, and that is life-long learning, and just concentrating on learning faster won’t get us to daylight. We need to set expectations that you get to choose daylight without being guilty, and that choice is part of sustaining you as a valuable employee. In a sustainable economy (a growth economy is not sustainable, watch Independence Day for that message) we will need permission to seek balance and harmony, only then can we take the time to see daylight. Perhaps the need for things and food may one day be fulfilled by thousands of robots who allow us to just sit around and eat lotus leaves, contemplate nature and write poetry. I don’t think that is the fate of humankind. We will work forever, reinventing contexts as our nature and our technology evolves, but our work won’t always be about the treadmill of productivity, that is an industrial age myth perpetrated by industrial age economists. As with the 8 hours day movement, knowledge workers need to take control of the burden they are willing to accept,and negotiate with society for some downtime.

When the financial crisis started. When housing prices collapsed and banks failed, we knew something was wrong. Most consumers of goods and services don’t understand the relationships the govern the system they just live in. When the system stops working, though, it doesn’t matter if one understands it or not, people want it fixed. Unfortunately, economics isn’t like natural science. Natural science has laws. Theories in science are there to test suppositions in search of a law. Economic theory is a constant experiment that may reveal a “law” but the quotation marks never leave. And economic “law” is contextual. The economics of a capitalist society and a communist society, if they ever existed in pure form, would demonstrate dramatic differences. The system itself defines its laws. Economics, even if some factors come from psychological predispositions, is mostly a human creation, a fiction we all accept. When our fiction falters, we become uncomfortable.

As we deal with our discomfort, we find, as reported in the July 28th 2009 Economist (What went wrong with economics), that the arbiters of economics are frantically rewriting the fiction we live in, the rules that govern how we gain wealth, how that wealth is distributed and the relationship between governments and private commerce.

I have spend the last several weeks in deep exploration of the problems with productivity, a concept some economists find troubling, a concept for which numerous version exist. Our leaders select a story to tell us every month about our productivity, but it is just one story among many. How we are doing, how our economy is performing, is up for discussion every day in business schools around the world. When there is no right answer, there is discussion with a hope of consensus, but all involved in the dialog know that they are grappling toward shared myth, not a truth.

If we want to better influence our society, we need to engage in the dialog, with knowledge of the underlying ideas, at least to some level. If we don’t come to the dialog informed, we run the risk of passing on more and more of our rights to those who do understand the mechanisms of economic creation. The web is full of papers. I suggest you take a look at Erwin Diewert’s paper called What Is to Be Done for Better Productivity Measurement and see how you relate the issues he describes. Are these personal or abstract? If we don’t understand your productivity, or your firm’s, or your nation’s, then what else are we having a problem describing and what does that mean for policy? For reporting of economic conditions? For our future prospects?

Jeff Rubin is making the circuit with his new book, Why Your World is About to Get a Whole Lot Smaller (Oil and the End of Globalization). An interesting read that doesn’t necessarily accept the ingenuity of people motivated to keep connections alive through invention and innovation. We don’t have an energy shortage, just a future oil shortage. I would love to see talk ships back on the sea or nuclear powered transport ships either. And the return to blimps for transporting people might be fun. Of course, we’ll figure out even more elegant solutions. That’s why the future is so fun. No matter how hard you think about it, you are bound to be surprised – but hopefully you’ve contributed to the shape of the dialog, maybe even an idea or two that catches on.

http://www.amazon.com/Your-World-About-Whole-Smaller/dp/B0028MBKLG/ref=sr_1_8?ie=UTF8&s=books&qid=1247242384&sr=8-8

As GM exits bankruptcy, Fritz Henderson has a new mantra: customers, cars and culture. The equation isn’t that simple. I know they know that, but from a company just existing an area of glib arrogance, they need to be open, honest and transparent with customers.

Here are a few things for GM to consider going forward.

Customers. You have a lot of customers with a lot of expectations. You can’t fulfill all of them. GM needs to focus on strategic choices that differentiate it in the market, while continuing to maintain pre-bankruptcy GM autos on the road. That will be an interesting balancing act. Just being smaller doesn’t necessarily mean strategically more savvy. GM is going to have to continue to make choices, and communicate those choices well so that it doesn’t become randomized in the market.

Cars. Not everybody wants a little car with no character. In America not everyone is little for one thing. GM needs to make fuel efficient automobiles and implement alternative fuels– but why companies think that means turning off their design sensibilities is lost on me. GM can change that with cutting edge, attractive designs, good materials and great styling, while still delivering a more sensible engine and drive train. Let’s face it, opening the hood to show off your engine isn’t really a 21st century activity (unless you have a 1950s or 1960s classic), but driving a stylish car is still in vogue, and one that is not only stylish but environmentally sensitive will be the right formula for success in the next decade. Make a good product that last, appeal to emotion through style and quality and get points for the environment. And what every style choices you make, pay attention to detail. The way parts fit together, the way a door sounds when it closes, technology that adds to the driving experience and doesn’t detract. Those things still matter.

Culture. I am a former GM employee through Hughes Aircraft. I worked on dealer software and joint ventures. This is a potential moment of cultural disruption that GM can capitalize on to change the slow and methodical ways it approaches design and markets. GM still has a huge, deep, multifaceted network of suppliers and dealers, they now have a new partnership with labor. All the negotiations didn’t end with the final echo of the bankruptcy judges gavel. They will need to focus on the continued reinvention of their culture at its most fundamental level, and that will mean combining strategic focus with open and honest negotiations that may be painful early, but clearly lead to longer term success.

Finally, Mr. Henderson, if you open yourself up to a website and accept input, make sure you are committed to a feedback loop that communicates which ideas you accepted and where they came from, and also communicate the ideas you didn’t accept and be willing to say way. You didn’t create a new co-op, you created a leaner organization. Do defer leadership to the customer – or assign blame in the future. The future of this new GM is yours and that of your executives, managers and board. Being more responsive to customers isn’t just about listening, its about being clear on intent and when customer need and strategic intent collide, you will find rewards for the leadership and management acumen that recognized the convergence.

Despite the incorrect date at the top of the web page, the April 27, 2009 BusinessWeek holds an article on how the technology geeks of startup land are landing in less posh settings to conserve their cash for actual investment in their ideas rather than on extravagant edifices (and offices) to what might be but probably won’t ever be. As a former IT analyst, I spend countless hours counseling startups to focus on product rather than enjoying the thrill of spending someone else’s cash on caché.

Enjoy the read (Bedroom Startups) on frugal startups starting to act like entrepreneurs of old who knew success was a privilege reserved for those who act with reserve.

Hope you enjoy!

Dan Rasmus, Director of Business Insights at Microsoft, opens our podcast series on business solutions for today's economic climate

When popular writing becomes a modern mythos, it invades the way we see the world, including the business models that we believe drive the economy. Recent research, as reported in New Scientist (I want what she wants) suggest that we need to trim the long tail because the reality of online retail reinforces limited selection and blockbuster behavior, rather than complementing it with a wide input from diverse sources. Top bands, top games and top books remain the influencers of influence.

Barry Schwartz has talked about the paradox of choice for years, telling us that more choice doesn't make us satisfied. IT appears, according to Will Page of the UK's MCPS-PRS Alliance that although traditional retailing constrains choice, it may also reflect an "economically optimal inventory," meaning that what people really want is available at the retailer - stocking more, he proposes, would do little to create more economic viability and that choice does little to make online firms more viable.

If we consider this in light of evolutionary theory, the niche markets may still exist, but they are just that, niches. Occasionally something from the fringe may erupt on the scene and radiate outward toward dominance (JK Rowling for instance) but all of the books, music, video and other items that are ubiquitously available will remain hidden to the masses because they aren't, as Woody Allen said about art films in Star Dust Memories, "what the people want."

As a writer out on the fringe, it would be nice to find mass appeal, to suddenly see thousands of blog hits a day, but people have made their choices about trusted opinion and online commentary. I appreciate those of you in this niche, and I will continue to write for you. As for the long tail, I'm pretty convinced that it probably doesn't wag with the vigor that Chris Anderson ascribed to it. We writers often try to invent something that will lift us momentarily above our niche. With the long tail Anderson did that, but by doing so, probably disproved his own point.

The automotive industry is in need of a bailout, but the bailout needs to come in the form a fundamental reinvention, not government financial assistance.

The relationship with labor, multiple brands with overlapping promises and little differentiation, and a geographic-centric view of manufacturing (my apologies to Detroit, a state which needs to create new economic models rather than foster a hope for the return of the Motor City).

The automobile market has changed dramatically and for good, and many signs existed - when the money was available for multiple bets the bets were often not laid down.

We all lived through the dot-com failures. The companies that survived and thrived did so through perseverance and dedicated experimentation that led to new innovations, and in many cases it came from a deep understanding of customers and markets, which helped select among innovations to create strategic focus.

It is my hope that President-Elect Obama not hire a Car Czar. Czar's didn't work so well in Russia and they didn't work for the war on drugs. What we need is an industry that is willing to learn from its mistakes, rationally and robustly consider its options (including market-sized offerings people will buy) and look for private investment to move it forward. If we bailout old models we run the real risk of reinforcing bad practice, and therefore simply pushing off the inevitable. The financial market will never look the same, although it is getting infusions of cash, the basic model of American finance has been shaken to its core and will emerge from this crisis a very different business than the one we knew three months ago - automotive manufacturing needs a similar disruptive impetus.

The automotive manufacturer's stocks are priced like startups now, perhaps they should start acting like a startup. Walk away from what doesn't work and invent their way out of their dilemma (BTW, that invention should not be limited to products, it should include finance arms, supply chains, labor models and anything and everything that needs to be rethought in order to create the transportation companies of tomorrow  - note, I didn't say automotive manufacturers of tomorrow because one of the biggest issues is that car companies see themselves as car companies).

Overconfident and cocky are words that describe people who are absolutely sure that they have all the information they need to succeed. They are also terms often applied to the financial sector prior to the recent global meltdown.

A recent NewScientist article (The blunders that led to the banking crisis) helps us understand what we don't understand about the financial markets. It mostly comes down to a rare event that is hard to predict because a.) it is rare and b.) no two have ever been alike. Which comes down to as much as you think you know, you don't know everything - and given that these models are statistical in nature, they ignore social phenomena like eroding trust and rumors of failure.

The current liquidity crisis scraped the bow of the financial Titanic that we built, complete with its free market safeguards, all of which failed, in painfully accelerated slow motion just like the containment chambers on the cruise ship Titanic when it encountered the unforeseen circumstances that led to its demise.

The best way to predict the next liquidity crisis is to keep a few dollars in your mattress. It may seem old fashioned, but you will be 100 percent correct the next time a crisis hits. You can say, "I saw it coming in 2008." And when your mattress fails, all you get a sore back, not evaporating wealth.

See The blunders that led to the banking crisis in the 25 September 2008 print edition of New Scientist or read it online here.

The financial crisis takes much from the Heisenburg Uncertainty Principle. You can track its position, but if you try to understand its velocity with any accuracy, you will be increasingly wrong about where it is taking place.

• Economics is a human invention. That means that the rules we write or rewrite are the only rules there are. So let's not rush this economic bail out.
• The world is an ecosystem and the financial markets will recover. They will be very different, but they will recover.
• Failure is tough, but it is necessary. Somebody other than Lehman Brothers needs to learn.
• There is money to be made in restructuring.
• The end may not be in sight, but prepare for it anyway. Those who do will prosper.

Friend and colleague Rob Salkowitz posted an entry today on the IIIP today at internet evolution. You can read it here: Group Seeks Better Web 2.0 ROI Metrics.