Tuesday, December 23, 2008

The trouble with budget surpluses

The trouble with a government (or any big organization) running a budget surplus and sitting on a big pile of cash is that people start asking questions like, "Why don't we do something with that money, especially since there's so much to fix?" At that scale, having some cash ready for a rainy day is not an excuse that people are able to handle, especially when the quoted figure is in the billions of dollars. Surpluses may seem like a lot of money, although when divided on a per-person basis, they seldom amount to much at all.

In this deficit-infested time, it's easy to rail against profligacy in our budgets. I'm not trying to engage in what-ifs here. I'm suggesting a way we can avoid this same problem in the future.

We've been told that it's wise to save up for the future, to have some cash on hand just in case — folk wisdom that was reinforced by the big collapses this year. We also know that it's hard for most people to hear about a surplus in the billions of dollars without wanting to spend it on something.

If an even moderately sized government were wise and careful in its spending, it would quickly accumulate a large surplus. That large surplus would then get people dreaming about capital improvements, social services, and other goodies that drain the public purse.

Those who advocate for smaller governments would say that the problem could be solved by striking the problem at the root — shrinking the government and therefore its potential to accumulate large sums of money. But pools of large capital certainly have their advantages, and whether by conscious choice or mere political expediency a large government must stay large, it could do better to quote the figures based on the population of the governed; that is, on a per-person basis. This might make billion-dollar surpluses less distasteful to the vast majority of us, whose visceral reaction to large dollar amounts placed before us is to spend imprudently.

Thursday, December 11, 2008

Small business owners: don't be a jerk

My girlfriend Sophia is an assistant manager at Abercrombie and Fitch, and is thus bombarded with more than her fair share of rude customers. One story she told me this week was about a woman who went ballistic after asking to try on one of the mannequins' jackets and being told no.

Now, people are just crazy, and Sophia has told me many stories like this before. What was so different this time?

Well, the crazy lady played the business owner card: if it were her store, she would have gladly taken the jackets off the display mannequins. This know-it-all "business owner" then proceeded to hound Sophia for her full name and pressed her for her employee ID so she could file a formal complaint, and refused to go through the normal channels.

It is precisely this self-serving arrogance and provincial, narrow-minded ignorance that keeps small business owners from being taken seriously. As a former small business owner myself, I know that the burden is heavy: you've got to worry about employees, customers and growing your business. On top of that, you have the responsibility to make sure any legal paperwork is in order and that taxes are taken care of. But just because you're able to handle this does not mean that you know all there is to know, and that your way of doing things is the only way.

In response to this growing sense of self-importance, here are three things to keep in mind. (I use these reminders to keep myself in check, too.)

a) Rules and processes have a place, even if you choose to forgo them. As a small business owner, you can get by with fewer rules and processes in place. In fact, in most cases you do much better when you're flexible. But larger businesses have a much harder time being flexible; it's not impossible, just much harder. They have to manage everything more strictly in order to hold together the larger whole. A little sloppiness in your store can be passed off as "charming." In a national chain where customers expect extreme tidiness and consistency, that sloppiness is not charm. It is chaotic, and it is poor business.

b) Not everyone enjoys the same latitude to call the shots as you do. You may be your own boss, but most people have someone else to answer to. I've found that being a business owner, seeing the bigger picture, and having the power to remedy things has turbocharged my ability to take the initiative, even after going back to working for someone else. Still, despite having passion for my line of work and understanding its larger implications, I have much less scope to make important decisions. In large companies, even CEOs don't wield absolute power, because they have a board of directors and shareholders to please.

c) You are not special, so don't expect special treatment. A couple of years ago, I received a parking ticket by mistake. I knew that I had moved my car in time, and so I decided that I would write in to contest it. One of my co-owners suggested that I take a tough stance and mention that I was a business owner — as if that had anything to do with my guilt or innocence. I mentioned it anyway, thinking that a little reminder about my contribution to the community wouldn't hurt. Still, I didn't want to rely on that mostly irrelevant fact, so I put much more effort into stating the facts of the case. I drew a diagram of where I had parked, when I had moved my car, when I had been ticketed, and why it was a mistake. In the end I got the ticket waived, but I have a good hunch it had more to do with stating the facts than mentioning that I was a "business owner."

Saturday, December 6, 2008

Conceptual tools for allocating finite resources

I have lived and worked in Greater Los Angeles for over a year now. Since the area is one of the world's major population centers, it only makes sense that I'd come across plenty of opportunities to observe the interplay between two forces: lots of people and limited resources.

It's a common problem, but always a multifaceted one. Coming up with a solution means that planners (who could be church volunteers, business managers, or software engineers) must consider various factors. Having to stop and think about this can slow down decision making, and even when there's time to ponder and plan, thinking of a solution from scratch is more error-prone than referring to a proven set of guidelines and rules.

Consider the situation when lots of people are elbowing each other to buy concert tickets. There's no increasing the supply of these tickets since a concert hall or stadium can only hold a set amount of people without the Los Angeles Fire Department throwing a hissy fit.

Many eager economics students and libertarians automatically want to apply the law of supply and demand here: why not just raise the prices? In fact, that's what some organizations have done: Britney Spears concert tickets for Staples Center start at $150.00. (How do I know this? My girlfriend told me. Really.)

As the purveyor of tickets, you can do that when you have some idea of how much demand there will be. But what if demand shoots up while your supply stays the same? When it looks like you're about to sell all your inventory and are hours away from turning away your customers and disappointing them, you could double your prices. But then, your customers would be angry that you're gouging them. Your company would appear disreputable for "arbitrarily" changing prices on consumers.

If you're looking at it from an economist's point of view, there's no problem there: you're just changing the price to meet demand. But from a public relations vantage point, you run a very real risk of alienating your customers. It'll look like you're exploiting them, when all you're doing is ensuring availability (while making a few extra bucks).

On top of that potential PR nightmare, there's a downside that even economists must acknowledge. It's the phenomenon that economists call "sacrificing equity for the sake of efficiency." That's all fine and high-sounding, but what does that mean? It means, "It's not fair." And the customer will feel this way. Your costs haven't changed: it still costs you the same to make it, doesn't it? This gives your customers a reason not to trust you, and therefore not to come back.

Changing your prices is certainly an effective tool to curb or increase demand, but raising them is an extremely delicate matter in the age of consumers who expect posted prices to stay the same.

Waiting list: first come, first served
A common alternative to raising prices is to let people buy stuff on a first come, first served basis. The folks at Ticketmaster do this, in case the $150.00 concert tickets sell out (which they often do).

As you may recall from your economics class, this is considered more equitable, but not as efficient: the people selling tickets could make a lot more money just by raising the prices. (If you do not recall from your economics class, shame on you for not paying attention. But hey, now you know. Trust me on this one.)

As far as fairness is concerned, lower prices with waiting lists are an improvement over simply raising the price. But if you're not one of the first served, you probably won't feel like it was very fair. Maybe you had to be at work that time of day, or don't have time to wait in line.

A different spin on fairness is to let people enter a lottery to let them buy what they want at lower prices. If you were to enter such a lottery and your number got drawn, you could then buy what you're after. Typically, submissions to this lottery are accepted during a specified time window. So if you have to be at work when the lottery first opens, that's not a problem. You have just as good of a chance as the first person who entered that lottery.

This was part of Saddleback Church's approach when they hosted the Saddleback Civil Forum with Barack Obama and John McCain during the presidential campaign. Since Saddleback Church is very high-profile, it was important that a purely pricing-based model was avoided. Taking an exclusively pricing-based allocation of tickets to see the candidates would have looked too much like favoritism towards the rich, a Biblical no-no.

Then again, Saddleback Church also had to cover its costs, so it actually opted for a brilliant hybrid approach that consisted of various tiers, each with a different price. It was a multi-tiered lottery. Higher-priced tiers would likely yield a smaller pool and a higher chance of being selected. You can't please everybody, but such a creative and enlightened approach likely pleased quite a few free market die-hards while at the same time placating those who were concerned about equality. If only governments and businesses were as wise.