The Economy

On my way into the office this morning, I was listening to news radio and was treated to a good news story – Canada’s labour market added almost 36,000 jobs in April. [READ] After months of major job loss announcements, this was music to my ears. He also said that self-employment accounted for a good portion of this growth – a fact that caught my attention. Then the announcer stuck his foot in it. He said “self employment is often seen as a sign of desperation in a weak economy”. I just about choked on my coffee. WHAT? Is this guy for real? I brought it up to my client when I got downtown and she said “I agree. Self employment is a sign of desperation.”

With all due respect to these narrow-minded individuals, self-employment is absolutely not an act of desperation. Anyone who thinks that starting your own business when the chips are down is a way to solve your problems needs to reassess that view. I think there are advantages to being self employed and risks that make it a hard road for anyone considering the move.

First and foremost, let me be clear – becoming self-employed is the hardest option out there when you need money to live. It takes in many peoples’ estimation; 10,000 hours or 3-4 years to build up enough experience and a reputation that will land you work consistently. There is no way to shortcut this. In the meantime, you could be making better money doing just about anything else. The money is not why people should become self employed.

I think that self-employment is a strategic decision and it’s not for everyone. There are definite advantages and disadvantages (taken from the Ontario Council of Agencies Serving Immigrants):

Advantages

• Independence, control and freedom from routine: Companies or individuals you work for are your clients, not your employers. As clients, they can state what results are expected from you, but cannot direct your work. You will want to satisfy your clients if you wish to receive more work, favourable referrals or better rates. But you are your own boss – you decide when, where and how to work to get the job done.
• Financial rewards: A business may become very profitable. Companies are willing to pay more to independent contractors because they don’t have the expensive, long-term commitments that they do with permanent employees, such as benefits, unemployment compensation and pensions. Independent contractors may also deduct business expenses from their taxes, which may increase their net pay.

Disadvantages

• Less security. It will be your responsibility to make sure you always have work to do. This means you may sometimes be without work and therefore income.
• No free benefits. You will have to pay for your own sick leave and vacation, fund your own retirement plans, and buy dental, disability and life insurance. Self-employed people are generally not entitled to receive Employment Insurance benefits.
• Paying your taxes. As a self-employed person, you are solely responsible for doing all the paperwork and paying your taxes on time. If you are an independent contractor, you will pay estimated taxes quarterly to pay your Canada Pension Plan contributions and income tax.
  

These are the kinds of things that someone needs to consider before becoming self employed. A cursory web search will turn up these results. Given these facts, how could someone turn to self employment out of desperation? You’d have to be desperate and naive. I think there’s a real opportunity these days for those who are brave enough to go the self-employment route:

1. Turmoil in the economy creates opportunities for project work that needs to be done quickly and effectively. Many organizations are laying off staff or do more with the staff that they have. This doesn’t mean that new projects stop coming up. When they do, many organizations turn to self-employed people to fill those human capital gaps.
2. There was a labour shortage before the economic downturn and in many fields, there still is. Anytime demand outstrips supply, there’s an opportunity for the more entrepreneurially-minded among us to profit.
3. Sub-contractors come cheap. Because there are more potential hires on the market these days due to economic turmoil, your selection of sub-contractors is greater now than ever. You still need to source quality people to help you grow your business but chances are they’re going to be cheaper now than when the economy is at its peak.

That’s my rant. I invite anyone who thinks that “freelancing” or “self-employment” is the easy route to comment here. I double-dog dare you.

By 2015-2018, Canada (and most other major economies) will have reached a point where there are more jobs available than people to fill them. That’s not very far off and, to the best of my knowledge, no one has a good plan on how to solve this problem. Much sooner than this, we will be facing a management labour shortage. Why? Because managers, mostly due to seniority, tend to be older than the average entry-level employees. I don’t think we, as an economy, have thought about how to fill this management labour shortage which is already starting to impact the trades.

The Journal of Commerce – Western Canada’s construction newspaper – identified this problem in mid-2007. [READ] Another article from 2006 predicted that management labour shortages would correct themselves as companies increased management pay to attract people into those roles. [READ] Russia and EU countries are having similar problems. [READ] Even China is not immune to the management labour shortage. [READ]

A few solutions have been bandied about that I want to identify and address here as evidence that we really don’t have a handle on this problem:

1. Immigrant recruits
   

   Many a pundit cite “immigration” as the great saviour of our economy as labour shortages rise. While I know many very capable immigrants, I also recognize that there are huge cultural differences between Canada and other countries that mean managers from these countries cannot just be parachuted into management roles here. Leadership and communication styles can vary wildly.

   Just as Canadian managers often have a hard time motivating employees in say, India – Indian managers have a difficult time motivating Canadian employees. This is not to say that we shouldn’t recruit immigrants to help fill the labour shortage. We should. We just shouldn’t expect them to be able to jump straight into management roles here.

2. Increased post-secondary education
   

   Labour market analysts occasionally assume that if we increase university participation rates, we can increase the supply of skilled labour. I think this is a dangerous assumption because as the shortage grows, employers will have to be less picky about their candidates. I actually believe that university enrolment will go down as the labour shortage increases.

   Why would you go and get an MBA to land an amazing job when you can land a good one without the degree? That might actually be a strategy to address the shortage – lower your standards. It’s important that managers also understand the industry they’re working in. A university degree doesn’t give you industry knowledge – that’s something you gain with experience.

3. Accelerated management training programs
   

   Some employers, like BC Hydro and the Federal Government, have management fast-track programs where new recruits go on rotation for two years through a number of departments, receive in-depth management training and mentoring. I have a colleague at BC Hydro who is going through this program right now. I actually think these programs are pretty effective but they’re not very scalable. For a company like BC Hydro who has hundreds of managers and only runs a handful of people per year through its accelerated management program, this program alone cannot solve their management shortage.

   These programs are not very scalable because it requires current managers to take time out of their normal duties to groom, train and mentor the program participants. This puts a hard limit on the number of participants. Without a low ratio of participants to managers, these programs are not that effective. Hence, there is a ceiling on the scalability of these programs.

Some of you might be thinking “so what? Does the world really need more managers?” Maybe we can do without as many managers – I suspect that management is self-replicating and in some instances, overbuilt. Can we do without 50%+ of all managers? Not a chance. We need to solve this problem ASAP. I’m open to suggestions.

I am not eager to see local newspapers go the way of the dodo but with all the recent news about print editions of major newspapers shutting down [READ], it seems more likely that this 450 year-old medium is on its way to extinction. My friend who is a newspaper publisher attributes the newspaper industry’s current woes to the economic downturn. I have no doubt that the faltering economy has more than a minor role to play in the downfall of the newspaper as a viable business platform but I also remember this same publisher friend calling me well before the economic downturn complaining that their classifieds section was taking a beating from Craigslist. The real question in my mind is why the Internet hasn’t already killed this platform like pundits have been predicting for over 10 years?

The 10% Problem

There is an interesting trend in newspaper circulation and advertising rates vs. Internet circulation and advertising rates. For major newspapers, like the New York Times, the print publication reaches only 10% of the total audience that online version reaches but the online version only garners 10% of the advertising revenue that the print version does. [READ]

The reason for the disparity between advertising revenues is the fact that online ads are priced at a fraction the price of print ads. Online ads aren’t worth the same as print ads because they’re not perceived to be as valuable by media buyers. Either that or newspapers have intentionally kept the price of online advertising low so as to maintain the perception that it’s not valuable so that online real estate doesn’t cannibalize print real estate. At the end of the day, attribution of real value to advertising is almost impossible to do and pricing is dictated more by what the market will bear than real value.

The Internet Made Newspapers Better

As much as traditional publishers worried that the Internet would scoop them on every story, the Internet put some very valuable tools in the hands of journalists. Google, blogs, online databases, online archives and clippings services like Lexis-Nexis meant that any journalist anywhere could have access to the sources they needed to fact check, cross-correlate and research their articles. For example, I was featured in an Edmonton Journal article back in December, 2008 [READ]. The young reporter who interviewed me for the story found me through Google. She put “consulting” and “economic downturn” into Google and one of the first results she came across was this article I wrote in April, 2008 [READ]. With a few keystrokes, she found a unique perspective that allowed her to write an interesting article which subsequently got picked up in many major newspapers across the country.

The Internet also allows journalists in the field to submit articles and print-ready photos in a very timely manner. Print articles that are simultaneously posted online get a lot more traction than blogs (which are perceived to be of inferior quality to print publications), especially if the article makes it onto the daily roster of a major news aggregator like Digg.

Blogs Aren’t Journalism

Even though bloggers have many of the same tools at their disposal that traditional reporters do – there is a perception out there that the quality of most blogs is not up to the same standard as a newspaper or magazine. I concur. Blogs shouldn’t even try to compete with that medium. They’re something different. However, more than a few pundits have been watching the rise in popularity of blogs and forecast the demise of newspapers. Sure, the cost of production for a blog is far less than that of a newspaper but the branding that has gone into establishing newspapers is long-term and expensive. The only online publication that I’ve seen compared to real newspapers in recent years is the Huffington Post which is, in my opinion, one big op-ed paper. With the exception of technology news, real hard-hitting news is still found only in traditional newspapers.

Demographics

Generation Y/Millennials are probably not that enamoured with print publications but pretty much every previous generation (mine included) grew up with print publications. While I read online news far more often than I pick up a newspaper, my parent’s generation (the Boomers) will never be big consumers of online news. Until the Boomers stop reading newspapers entirely, that platform is unlikely to go away. Boomers also represent a much bigger base of disposable income than the more net-savvy generation.

Conclusion

I think after seeing how the Internet has been unable to kill newspapers over the past ten years, it would be safe to attribute their current woes to the economic downturn. Like other industries, these times will see closures and consolidations. These are things that happen in a free market economy. I don’t think we should waste any time bailing newspapers out. The ones that are making ends meet are tightening their belts and keeping their doors open. My friends’ newspaper – a small community paper in the Interior of BC – seems to be hanging on despite everything that’s happened. I attribute their success to his business savvy.

My good friend Mark Mawhinney recently forwarded to me a think piece done by Tony Rudd – a war vet (RAF – WWII) a prominent economist that has previously served with the Bank of England and the IMF in Washington. [READ – if article isn't #430 "Throttled by Debt", check the Back Catalog – no permalinks on this site.] The summary of his argument is that what we’re doing right now to try and kick-start the economy won’t work because we’re enabling lenders to create more debt without requiring anyone to give up any equity that our existing mountain of debt is secured against. After talking about some poor solutions, Tony comes up with a more elegant solution – go to the equity holders in our economy and offer to waive some of the debt they owe in exchange for equity in their company/assets. I agree with the spirit of his argument but have concerns about its application on small-to-medium-sized businesses (SMEs) whom Tony suggests should be targeted with debt for equity.

Governments are already experienced with debt for equity swaps. In essence governments go to major corporations –ones that will cause a lot of public pain if they go belly up – and give them the ultimatum. When the writing is on the wall for a given company, government can swoop in and say “you are at risk of going under. We are offering to pay off some of your debts in exchange for shares. Yes, it will dilute your existing shares but a smaller share of something is better than 100% of nothing.”

While normally, the more conservative amongst us balk at the prospect of government owning equity in anything – Sweden saved its economy by temporarily nationalizing its banks in the early 1990s. [READ] Their economic meltdown was similar to the one we are experiencing in the US today – near total insolvency of banks and financial institutions following a collapse of their housing bubble. Instead of throwing money at the problem in the form of government bailouts like the US and Canada is currently doing – the Swedes opted for (in some cases) a total debt for equity swap. For a time, Sweden’s banks were effectively nationalized. Under the steady hand of government oversight, bad debts were let go and the health of the financial system recovered.

Once the banks were worth something approaching what they were worth before the collapse, the government sold these banks back to the market – in some cases returning a profit to the taxpayers of Sweden. This was their reward for shouldering the risk of nationalizing the banks. In essence, I agree with the economic principles that Tony is arguing in his piece but only insofar as it deals with government offering to buy up debt for equity from anchor companies (and industries) that are key economic drivers.

The argument gets a lot muddier when you start to talk about doing the same thing with SMEs. The reason why debt for equity works as an economic lever (as demonstrated by Sweden) is because the new equity holders take an active role in the management of company affairs. You can’t save the economy by buying up all of a troubled industry’s debt and letting them run business as usual – that’s essentially what the US is doing with its bank and auto industry bailouts. Money for nothing (and chicks for free). In other words – Dire Straits. When you start talking about SMEs, you’re talking millions of businesses – some of whom may have serious financial problems – but on a scale far below the radar of most governments.

Tony Rudd’s article seems to imply that government should embrace the debt-for-equity concept and approach SMEs with this offer. I just don’t see how this would work in practical terms. The government has a very limited capacity to oversee millions of investments. With little or no oversight, government stepping in to help these companies with this kind of a deal is effectively a bailout and in my opinion, a mistake. Who else could do this then? Individual private investors? Unlikely.

There’s also the assumption made in Tony’s piece that SMEs would “snatch your hand off” if offered a debt for equity swap. Rationally, one would assume so. Having worked closely with many entrepreneurs trying to build and grow their business, my experience is that rational decision-making is a rarity. People start companies because they want to be a star. Most entrepreneurs are non-conformists and to many of them, the concept of giving up equity for debt relief might not sit so well. The personal buffer provided by incorporation means that the risk to the entrepreneur (who is often the majority shareholder) is, in practical terms, minimal. Add to this our business culture that failure in business is a learning opportunity and not the ultimate shame and I think few SME owners would jump at the opportunity.

Psychology tells us that people are more likely to risk total loss over an insurance policy while when looking at gains, will take a sure thing over a long-shot. For example, how many people do you know who will take “the safe bet” by working for someone else for their entire life instead of working for themselves while at the same time skimping on health insurance or life insurance? That’s how most people behave – irrationally. Now think of majority shareholder owners of SMEs – a debt for equity swap is the safe bet when trying to avoid loss. If they’re like most people, their instinct will likely be to take their chances with the economy and the market and maintain their majority of shares.

In conclusion, I think Tony’s piece is a good one and raises some interesting discussions about debt for equity swaps and SMEs but overall, I think these mechanisms will have the most success at the government to anchor industry level – not the SME level.