Big Picture Economics

How to Navigate the New Global Economy

Joel Naroff, Ron Scherer

• Publisher: Wiley
• Year: 2014
• ISBN:
  9781118415313
• Edition: 1
• Topic: Business
• Subtopic: Finance
• Index: Business

Navigate the economy with this insightful new book

The world is awash with economic information. Governments release reports. Pundits give their interpretation on television. And the stock market may go its own way, confusing everyone. How can you better understand what it means for you?

Big Picture Economics, a new book by award-winning columnist and futurist Joel Naroff and veteran journalist Ron Scherer, says the thread that ties everything together is "context."

The authors show how consumers, business, the Federal Reserve, and government take into account what's going on around them to make critical decisions like buying new products, building new factories, changing interest rates, or setting budget goals. The book provides a clear roadmap to understanding the whole story behind the global economy.

Big Picture Economics helps readers understand how context impacts decisions and decision makers. - The Federal Reserve and Congress in formulating economic policy
- Consumers in a shopper nation and what makes us buy or not buy
- Corporations making decisions on whether to build new factories and buy other companies
- The federal budget that must deal with complex issues, including the reduction of health care spending
- A simple test for tax cuts or increases: will they help the economy grow?
- Where to produce and where to sell in a global economy that is more like a Mobius strip than a flat world
- International events that can ripple through the economy and ultimately affect workers in the Midwest
- Technology, such as intelligent drones to wearable computers, are changing the future

Experts laud the book for its perceptive insights: "It all sounds like common sense, but it is actually based on a close, expert reading of economic history and what that history implies for the future. Read this book to become a more educated judge of economic policy."
—Robert Moffitt, Krieger-Eisenhower Professor of Economics at Johns Hopkins University "Naroff and Scherer show how seemingly unrelated things like an upgrade of the Panama Canal, a Tex-Mex restaurant's menu change, or how many Americans are overweight turn out to be intricately linked to our daily experiences. What brings the book to life is the authors' focus on these hidden interconnections."
—Brendan Conway, blogger and columnist, Barron's

Chapter 1
Introduction to the Economics of Context

Economic thinking, whether we recognize it or not, is an essential part of household, business, government, and Federal Reserve decision making. But how do we use economic information to make intelligent decisions so we can make our lives or businesses better? The answer is not complex, but it does require a certain logic that is too often missing in most economics books.

When it comes to using economics to help make decisions, what matters most is context. While economists like to argue that theory is the truth, theory only gets you so far. Economics and economic policies don’t operate independent of the way people think and react. Economics is all about taking human reactions and creating a way to understand how those decisions are made. Those reactions will differ under a variety of economic circumstances. Thus, you need to know where you have been and where you are so you make a correct decision about how you can go forward.

If real people or real businesspeople want to manage their lives or their companies in a way that actually takes into account the economic factors in which they are operating, they need to know why the growth, decline, or stagnation they are experiencing is occurring. That is because we haven’t repealed the business cycle.

It is all about where you are in the business cycles and how outside factors, such as the world economic activity as well as human perceptions, combine to create the economy we must deal with. And, most important, it needs to be recognized that conditions change and any business decision must be made in the context that what currently exists may not be the case going forward.

We will look at examples from two different industries—trucking and hospitality—to see what context means in the real world.

Adapting to the Economy—View from the Cab of a Truck

In the trucking business, the difference between a down time in the economy and a buoyant economy can be felt in the pocketbook.

During dry times, truckers sit around waiting for loads to haul. Competition for the few available loads is fierce. To save money, truckers put off buying new equipment.

But when the good times are rolling, truckers rock. They can pick and choose where they want to go and when they want to go there. They can buy vital fuel-efficient equipment that can save them money in the long run or just make the rig look good. Trucker Scott Grenerth, who has been driving since 2002, has seen it all. Here’s how the business cycle matters to him.

When Grenerth pilots his powerful tractor-trailer down the highway, he sees more than the road ahead—he sees the economy. He has that unique view because most of the time he’s moving large coils of steel that are used to make vehicles.

In a typical day, Grenerth, who owns and operates his own rig, picks up a coil of steel at a mill in a place such as Burns Harbor, Indiana, and then drives it 463 miles to a steel service center in La Vergne, Tennessee, near where a Nissan plant turns out vehicles.

As he makes his run, he gets a rough idea of what’s going on—or not going on—at the auto plants by looking at the lots where they store cars until they get an order from a dealer to ship them.

Is the lot full? Is it empty?

On a day when the lake-effect snow was slowing traffic as he arrived at a steel plant to pick up a load, he talked on his bluetooth phone about his experience when the economy was at its lowest point in the recession.

“Anytime I drove past any of the auto plants, whether Detroit-based companies or Japanese-based, or the BMW plant down in South Carolina, any of the plants—and I see them pretty good from the cab of the truck—you could tell the number of vehicles sitting in their lots ready to ship out,” he recalls. “I mean I am going 65 miles per hour, and you can see there are 20 of them sitting there. You can easily estimate it and that is not normal.”

And, of course, Grenerth could also tell how bad the economy was by what was happening to him. After delivering a load, he would pull into a truck stop and sit there with other truck drivers waiting for a dispatcher to offer him an assignment.

“If I arrived first thing in the morning, I would not get a load to pick up until the next day,” he says. “So I would miss an entire day’s work to make some income.”

Bottom of the Recession

He remembers what turned it around for him: the Cash for Clunkers program started in 2009 by President Obama. The federal government, in an effort to stimulate the economy and help the auto industry, gave individuals cash to trade in gas guzzlers for new cars. The plan, which cost Uncle Sam over $2.8 billion, resulted in about 700,000 trade-ins, according to the Department of Transportation, which managed the program.¹

In addition, under the American Recovery and Reinvestment Act (ARRA) of 2009, the Obama administration gave extra tax breaks for small business.²

According to the IRS, the ARRA allowed small businesses the option to expense up to $250,000 of the cost of certain equipment and property. And the IRS, on its web site, said many small businesses that had expenses exceeding their income for 2008 could carry back their losses for up to five years instead of the normal two years.³

However, Grenerth says that he did not get any help from any of the government programs. “My truck was already paid off by then,” says Grenerth. “To the best of my knowledge, there was nothing substantial in the way of government programs that I used.”

From the Bush Economic Stimulus Act of 2008, Grenerth and his wife did get a rebate check, which would have been about $1,200. “I have no clue what happened to that money,” says Grenerth. “It went in the checking account and got spent.”

As Detroit recovered, Grenerth’s business started to improve as well. In fact, by January 2013, the economy had improved so much that his dispatcher at Fikes Truck Line, Inc. in Hope, Arkansas, which leases his rig, was offering him loads 24 hours in advance.

What the Business Cycle Meant to the Business

But there is also no question that the downcast economy affected his business and his life. For a trucker, one of the major factors in whether they make any money is how much they spend on fuel. Fuel is critical since they put so many miles on their trucks: Grenerth estimates he logs 120,000 miles a year. In early 2013, his 2002 International 9200 had over 1,120,000 miles on the odometer. So his big white truck has burned a lot of diesel.

One way to cut down on fuel consumption is to install what are called “low rolling resistance” tires. He describes the tires as made of compounds that lower the rolling resistance of the tire. “It takes less effort to get down the road,” says the trucker.

Grenerth had wanted to switch to the tires before the recession, but they were an expensive purchase. Once things slowed down, so did the idea of getting the new tires.

“When you are not making as much profit as you were before, you are more likely to say, ‘Put that on the backburner,’” he says. And, indeed, they went on the backburner until 2012.

At the same time, as things slowed down, Grenerth became a lot less picky about his jobs. For example, when times are good, he’ll ask his dispatcher to try to find a load at the end of the week that will get him relatively close to his home in Arlington, Ohio, which is about an hour south of Toledo. But as he waited for work, he told the dispatcher, “I’ll take whatever and wherever you’ve got. I need to go where loads are available.”

Like a lot of truckers, the 44-year-old Grenerth gets to experience the ups and downs of the economy firsthand—in fact almost before most people because he hauls semiprocessed material that is used to make other things.

The closest to the economic action are the truckers who move goods to retailers, says Grenerth. When consumers pull back, merchants stop ordering. Goods back up at the warehouse. “People who are hauling goods to the retailers are feeling it pretty close to the economy when it slows down,” he says.

But, eventually, the company buying the goods stops ordering as well. And that’s when Grenerth feels it. “I know if it slows down for me, it’s eventually going to slow down for everybody else,” he says.

Of course, Grenerth was correct.

During the recession, at the same time Grenerth was waiting at truck stops for work, the restaurant business was struggling to fill tables, which leads us to the next example.

The Service Sector—The Enchilada Stops Here

The restaurant industry is particularly tied to the business cycle and consumer confidence. When times are good, Americans go out to eat. And, for the most part, times have been good and the restaurant industry has grown.

According to the National Restaurant Association, industry sales in current dollars have increased from $239 billion in 1990 to a projected $660.5 billion in 2013, an increase of 176 percent.⁴ The Restaurant Association says the industry share of the food dollar has grown from 25 percent in 1955 to an estimated 47 percent in 2013.⁵

However, there have been some minor downturns in sales during economic sniffles in 1974, 1980, and 1991. By far the worst fall-off in dining out was in 2008 and 2009 when the economy caught a really bad cold. According to Restaurant Association data, inflation-adjusted sales fell 1.2 percent in 2008 and 2.9 percent in 2009.⁶

Although sales dropped, many consumers just scaled back where they ate, says Mary Tabacchi, an associate professor of food and beverage management at the Cornell School of Hotel Administration.

“If they were eating at a better restaurant, they might have just scaled down to T.G.I. Friday’s,” says Ms. Tabacchi. “If they had been eating at T.G.I. Friday’s they might have scaled down to something cheaper. The consumer does not stop going to restaurants.”

The belt tightening in the most recent recession caught Posados Restaura...

Table of contents

• Cover
• Contents
• Title
• Copyright
• Dedication
• Preface
• Acknowledgments
• Chapter 1: Introduction to the Economics of Context
• Chapter 2: The Federal Reserve, Congress, and the Use of Context in Economic Policy
• Chapter 3: We Are All Economists and Don’t Know It
• Chapter 4: How a Perfect World Would Work
• Chapter 5: Shopper Nation: Why We Buy or Don’t Buy
• Chapter 6: How Is a Can of Tuna Like a Smartphone? Yes, Context!
• Chapter 7: When to Spend, When to Cut, and When to Scratch Your Head Over the Federal Budget
• Chapter 8: Tax Policy: Does Cutting Taxes Cure All Ills?
• Chapter 9: Monetary Policy: Money, or Maybe the Federal Reserve, Makes the World Go ’Round
• Chapter 10: The Panama Canal Widens and the Middle Class Grows in China—How Does That Affect Indiana?
• Chapter 11: What Do We Do Now?
• About the Authors
• Index
• End User License Agreement