Coyote Blog

I have written about this mix effect many times, eg here.  Imagine a corporate division that sells tables and chairs.  The CEO is reviewing this division's performance, and sees that their revenues are increasing but their profit margin is falling.  He asks his analyst to look into it - is it the tables or the chairs or both that are showing falling margins.  Our poor harassed analyst comes back and says, uh, neither.  The profit margins for both tables and chairs went up last year.  Well, the CEO asks, if revenues are up and all their component margins are going up, how is their total margin falling?  It turns out that tables make a much higher margin than chairs, and over the last year the company has seen a much higher growth in chair sales than table sales.  The mix is shifting towards a lower margin product and is bringing the averages down.  By the way, I can say with authority that this conversation is much harder when the analyst is yours truly and the CEO is famed tough (but talented) boss Chuck Knight of Emerson Electric.

Whether the media mentions this effect or not, it is happening all the time.  Here is an example from the WSJ:

One mystery of this economic expansion is that wage growth has remained slow even as the labor market has finally tightened. One widely cited culprit is historically low productivity growth. But a new analysis from the Federal Reserve Bank of San Francisco adds a more optimistic, albeit paradoxical, explanation.

The Bureau of Labor Statistics recently reported that median weekly earnings had risen in July by a healthy 4.2% on an annual basis, the fastest growth in a decade. As labor markets tighten, employers typically increase wages. Until this past year, however, median weekly earnings growth had hovered near 2%, which is significantly less than the 3.25% average from 1983 to 2015.

So why haven’t wages risen faster amid an increase in hiring and unfilled jobs? One answer is that wages have actually been growing at a faster clip—around 4% to 5%—at least for full-time workers with steady jobs. But new full-time workers who are generally paid less than the retirees they replace are dragging down the average wage increase.

Researchers at the San Francisco Fed this week updated their 2016 paper that disaggregated the wages of full-time workers with steady employment from recent entrants—that is, new workers or those returning to full-time work. Their earlier analysis showed that average wage growth had slowed less than expected during the recession while staying relatively flat during the recovery.

That’s because workers who lost jobs during the recession were generally lower skilled and lower paid, so average weekly wages didn’t fall significantly. However, many of those workers have since been rehired at below-average wages, which has depressed the aggregate.

In prior expansions, wage growth has been driven mostly by continuously full-time employed workers, and the researchers find that’s still the case. Wage growth for these workers is now close to the pre-recession 2007 peak. But there are now many more workers who have been on the labor-force sidelines who are moving to full-time employment, thus creating a drag on wages.

This is frequently how mix shifts play out in the news.  Notice that there are actually two pieces of good news here:  1.  Wages for full-time workers who have been employed for a while are growing well and 2.  lower-skilled and less experienced workers who left the labor force are now getting jobs and returning to work.  However, when these are combined, the net is portrayed as bad news, ie wage growth in the US is sluggish.  Because the mix was ignored.

This week's episode:  Spending enormous resources on a program to reduce X, and then not tracking (or even putting in place a mechanism to track) whether X was reduced as promised.   James Taranto quoting the National Journal quoting Administration officials:

The Congressional Budget Office estimates that the health care law will reduce the number of uninsured people by about 24 million over the next few years, and that about 6 million previously uninsured people will gain coverage through the law's exchanges this year. So, is enrollment on track to meet that goal? Overall enrollment is looking pretty decent, but how many of the people who have signed up were previously uninsured?

"That's not a data point that we are really collecting in any sort of systematic way," Cohen told the insurance-industry crowd on Thursday when asked how many of the roughly 4 million enrollees were previously uninsured.

Nicely done.  The PPACA was passed first and foremost to bring insurance to the uninsured.  I always thought that the Left misunderstood (accidentally or on purpose, I do not know) the nature of the uninsured and thus overestimated what impact the PPACA would have in this regard.  But one way or another, you would track the impact, right?  I can just imagine trying to explain to my old boss Chuck Knight why we spent billions to gain new customers for a product but didn't track how many new customers we gained.

Postscript:  Here is my prediction -- The Administration will declare that no one had "real" insurance (as they define it) so everyone in the exchange was previously uninsured.

TJIC quotes Scott Rafer:

Rafer's Rule #1: "˜Un-sexy' is good business. This is a riff on a market
principle Rafer picked up from a couple of his ancestors back east: one
who ran Rafer's Kosher Meats; and his grandfather, who ran Rafer's Army
Navy Surplus (both were in business in the 1950s, long before Rafer was
born.) The idea here is that there is potential in furnishing a
(seemingly) boring business that plenty of people need, but which few
people want to do - a.k.a. stuff that ain't sexy. Which also means
you're likely to have a reliable market for your business, and might
not have so much competition - good!

I absolutely agree.  I have been in sexy and I have been in boring, and from a long-term profit perspective, boring is better.  Here is the way I put it to friends:  "Avoid any business where there are substantial non-monetary reasons why people might want to start a business there."  For example, the bankruptcy roles are littered with brew-pubs.  Guys have a male fantasy of owning their own bar and brewery, and, shazam, there are way too many of them.  Many parts of aerospace are the same way, filled with guys who love aviation more than making money.

From reading the press, it would seem that what the world is short of is "bold new visions."  But in fact bold new visions are a dime a dozen.  I had to try to sell a number of them when I was in the Internet world.  I would argue that what is in fact in desperately short supply is managers and companies who can focus, day after day, ruthlessly on operational excellence.  I worked for years for a company called Emerson Electric in St. Louis, a conglomerate that owned the world's greatest collection of boring businesses.  In their prime, under CEO Chuck Knight, they were unbelievable at blocking and tackling in boring businesses.

This point about boring and sexy is so important that when I was at Harvard Business School, the first two classes in the first year competition and strategy course hammered these points home.  Class one was the story of Rockwell Water Meters.  Class two was the story of some go-go semiconductor business (maybe Fairchild?)  These two cases epitomized "cool" and "uncool", but in the end it turned out the semiconductor firm never made a return on capital, while the water meter business had stratospheric returns.

The common response I get to this is, "but what about all of those Internet millionaires?"  With a few exceptions (Amazon, eBay), most of the folks who made millions in the Internet did not make them from operating profits.  They made them with timing, selling out inflated stock to the public or to a bigger sucker (e.g. Yahoo) before the whole Ponzi scheme crashed.  Does anyone really think that Maria Cantwell created real value in the marketplace?