I listened to Former Prime Minister Tony Blair speak last fall to a group of executives, and I met Former Prime Minister Gordon Brown this month at Georgetown University - different venues, different views, and a few different ideas.
Blair and Brown rose together as leaders of the New Labour movement, Blair as a true politician and Brown as a pedagogue by training and trait. Watching, comparing, and contrasting the two former prime ministers is an interesting study that holds valuable insights for business leaders.
Both spoke of the shifting economic balance of power from developed to developing economies and the new approaches it demands. Blair spoke to the role of businesses, Brown to the role of institutions and individuals. And both underscored the point that global problems require global solutions, and no country, corporation, or citizenry can truly afford to sit on the sidelines.
Lessons from Blair
Blair’s focus is on companies as the engine for change, and he implores business leaders to avoid responding to change with retrenchment. He believes they face one of their finest moments to engage and collaborate with the new market players. Change demands focus on three fronts, according to the former prime minister:
1) Redefining the relationship between government and the private sector, particularly in light of pending tax reform, regulatory changes, and strengthened global oversight.
2) Balancing hard and soft power when dispelling dangerous myths, and galvanizing those around you to embrace change.
3) Embracing the rise of non‐western economies (e.g., Indonesia, Brazil, India, Mexico, Russia, and several African economies).
Lessons from Brown
Brown is concerned about individual ideals as well as the mindset at the international-organizational level. Change demands new thinking on three fronts, according to this former prime minister:
1) Individual governments and multinational institutions (corporations and banking networks) are not set up to address the economic and social challenges we face. Even bilateral agreements are insufficient, as problems tend to seep across borders.
2) The strength of global institutions (and corporations) lies in their ethical underpinnings. Human beings share a common understanding of ethics, and we should follow our instinctive tendencies toward empathy and cooperation to create new structures.
3) Investment and development must head off a race to the bottom in terms of standards (e.g., capital requirements for banks, and pollution controls). Companies should be meeting needs beyond their bottom line.
It’s always a good idea to learn from the views of leaders who’ve faced diverse challenges (one faced a war; the other a global economic meltdown) and have had time to reflect on their successes and failures. It provides us a framework for our own actions.
Marx wrote that “the production of too many useful things results in too many useless people.” If you watch Downton Abbey, you can see that tension playing out through the British class system of the early 20th century.
Fast forward to today, and the story is far more complex. Yes, there are too many qualified people who cannot find steady employment, but there are also many companies that can’t find the talent they seek.
Fear of inflation and commodity costs abound, but should it change a company’s outlook? Maybe not. But what about labor costs? For many companies, the answer is yes. I have summarized four points below to help business owners, casual economists, and investors make sense of the current business environment.
- Pricing power and profits do not always go hand-in-hand. Profits depend on relative pricing power (growth in prices relative to unit costs). Rising profits, therefore, imply that selling prices are improving relative to production costs. With high unemployment rates and unprecedented productivity, costs have been low for many companies. But they are rising alongside demand for scarce talent, as well as commodity costs.
- There is usually a temporary profit spike early in recoveries when there is a surge in productivity growth and a slowdown in compensation costs, but that doesn’t tend to last as labor costs pick up. Don’t assume that growth rates will be even, and watch for rising labor costs.
- The rule of thumb for developed economies is that labor costs dominate business input costs. While the costs of energy and other raw materials are significant, labor costs are the largest business costs. In the nonfinancial corporate business sector, labor costs are roughly three times more significant than non-labor costs, according to Merrill Lynch. Factor in expected pay raises and hiring costs, looking at the supply and demand for the labor you seek. For startups, this may mean that locking in full-time talent may be less costly now than in the near future, even though labor costs are often your riskiest investment.
- Rising commodity prices will not hit companies as hard as many pundits believe, but some companies may feel the pain of consumer restraint. Watch commodity prices, but know that they don’t necessarily spell inflation. It may be a good time to revisit your supply chain costs and find a more efficient distribution model.
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I have been struggling to understand the headlines over the past few days that have charted the increasing value of the yen against the U.S. Dollar and other currencies, ultimately leading to an intervention today.
Finally, I bit the bullet and called a friend at Merrill Lynch who told me that the yen’s rise is due to the unwinding of the carry trade. You see, global investors have been borrowing in yen, and investing in other currencies to take advantage of Japan’s low rates, and the growing value of other currencies (mostly in Asia). Now, investors are buying back their yen as instability and uncertainty mounts.
Don’t worry though the giant global pool of money will likely seek a new intermediary for its currency market gambit, and the bubbles will continue to form.
The municipal bond saga poses a significant threat to small businesses, which should expect higher taxes and more aggressive tax auditing as state and local governments look to close budget shortfalls.
Many companies are located in states that are tipping dangerously toward default (check your state’s status), and the likeliest and most assured way out of such a debt fix is to raise taxes and pursue tax revenues more aggressively.
So while Congress takes up the task of rationalizing the corporate tax system (to the disadvantage of many small businesses, by the way), expect unevenness at the state and local levels. Already Illinois has proposed raising the individual income tax rate by about 66% and California is considering temporary increases on income and sales taxes to plug the state’s $25.4 billion budget hole. Higher property taxes (for many) are anticipated as well.
Raising individual tax rates is the go-to deficit response for many states, and such a move would impact the majority of small businesses located in those states.
Does this mean that you should consider a move if you operate in a high risk state? Not necessarily. Keep in mind that the best place to locate your small business may not be in a state with lower-than-average tax and regulatory costs. Rather, you should go where your customers and the best talent live.
Finally, it isn’t too much of a stretch to foresee states pursuing taxable income earned out of state. Be sure that your books are in order so you don’t face a tax double-whammy in the states where you have business operations.
As always, follow the cardinal rules of small business accounting (see above and below):
- Compile good books and records for your business activities.
- Retain required receipts and other documentation for a minimum of three years.
- Use separate bank accounts and credit cards for your business and personal finances.
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