Profit as Slack
These ideas have been percolating for a while. I'm getting around to writing them up now because the Coronavirus situation has really shown the value in carrying a margin in good times. Also, at the bottom of the post you can find some links on the topic of what's next as many places are coming out of lockdowns.
The concept of slack, in the sense I'll be using it herein, can be found in this post (and also check out this one):
Slack means margin for error. You can relax.
Slack allows pursuing opportunities. You can explore. You can trade.
Slack prevents desperation. You can avoid bad trades and wait for better spots. You can be efficient.
Slack permits planning for the long term. You can invest.
Slack enables doing things for your own amusement. You can play games. You can have fun.
Being a slacker normally carries bad connotations, but the linked post reframes the issue:
When about to be run over by a truck or evicted from your house, Slack is a luxury you cannot afford. Extraordinary times call for extraordinary effort. Most times are ordinary. Make an ordinary effort.
Only by having a margin (of time, money, energy, concentration, etc.) that is surplus and unspoken for in the good times will there be extra to give in lean times (consider Pharaoh's dream of seven ample cows and seven scrawny ones)—or when a really good opportunity comes along.
Profit is surplus revenue left over after expenses are paid. Certain categories of expenses (e.g. taxes or depreciation) may sometimes be included or excluded from the calculation; profit can be expressed as a percentage of revenue or of the capital (investments and/or loans) tied up in its generation. Profit is viewed with suspicion in some quarters, but I think the present crisis shows its importance. A business that simply aimed to break even in normal times would have no slack available for times that aren't normal. A type of trigger for abnormal times is "Black swan" events, which are unexpected yet have an impact that drastically exceeds normal events. An investment fund advised by Nassim Taleb, the author who popularized the concept, did pretty well when the Coronavirus crisis started. Another concept Taleb has promoted is "skin in the game"—when there's something riding on your decisions, you'll get filtered out if you don't make good ones. Making a profit (normally) is how entities with skin in the game survive.
During the Coronavirus crisis, a lot of businesses have stepped up and responded in beneficial ways:
It turns out that the larger, more profitable businesses are the ones that have the talent, the command of public attention and the financial resources to adjust to these changing conditions.
Big business also has been ahead of the curve when it comes to prediction and adjustment. The NBA postponed its season before most politicians, including the president, realized the gravity of the situation.
I can also think of other examples, from Amazon helping to keep supply chains going, to local breweries making hand sanitizer. And lots of employers have taken action to keep essential services going safely (e.g. rapidly putting up plexiglass shields at grocery store check outs) while letting employees who can work from home. I've been impressed by the planning and communication from my own employer over the past few months, for example.
Outside of times of crisis, profitable companies are more likely to have the slack to engage in R&D. Bell Labs in its heyday contributed to the development of a wide range of technologies, including encryption, lasers, digital cameras, and widely-used operating systems and programming languages. Many Google products arose from encouraging their employees to devote 20% of their time to side projects. Peter Thiel's ideas on monopolies are probably relevant here, since they can maintain enough slack to have these kinds of programs.
As mentioned in the introduction, I've got some links to share related to the post-pandemic recovery and other thoughts on what's next. I don't necessarily agree with every single one, but think they're good for stimulating thought and discussion.
- First off, here's a really cool interactive simulation on how things (such as viruses, but also ideas) spread.
- The National Post newspaper has a series on rebuilding the Canadian economy in a robust way.
- This post does some thinking through of the impacts of ultra-low interest rates (one of the stimulus tools that may be used to try to recover the economy).
- Lots of cruise ships are sitting vacant (or have crews trapped on them, but no passengers). Travel-related assets like this (and other things like malls/commercial real estate that have been hit hard by quarantines) might be sold cheaply as some of the companies that own them go bankrupt. So it will be interesting to see if there are any interested buyers with new ideas for how to use such things.
- In my recent links post, I had one about the renewed appeal of domesticity. Others also suspect that being a homebody will become the new normal. I recently saw a statistic that online shopping had grown about as much in the past 12 weeks as it had in the past 12 years; having weeks where changes that normally take years occur definitely fits with the Black Swan concept referred to above. But while the convenience of doing many things at home has increased, don't neglect the spiritual value of physical gatherings (when/where it's safe to do so).
- Between the pandemic and riots, suburbs might see a fresh wave of popularity.
- The education industry (K-12 and higher ed) seems like it will definitely get shaken up.
- I believe local community matters, so here's a tip for supporting small businesses near you.
- I liked this quote from an article about taking the opportunity to try to simplify life (keeping what's truly important), on both and individual and social level:
That’s because one of the side effects of Covid-19 is to expose the accumulation over decades — at least in the wealthy West — of untenable complexity in the individual, political and economic spheres of life.
Finally, I want to revisit the topic of universal basic income, since the income support programs introduced during the pandemic might shed some light on its potential costs.
Canada's Parliamentary Budget Office (PBO) costed out a guaranteed basic income (GBI) for a six month period starting in October 2020. Note that it isn't a full UBI: it is only for adults 18 - 64. Their report puts an estimate of $72B gross cost for a 6-month GBI (in the intermediate scenario they show), with offsetting measures (cancelling redundant support programs) of $15B available. This gives an annual net cost of $114B, around a third of the federal budget (~$350B) in a normal year (this year, the deficit alone is trending to be as much as total expenditures were last year). For comparison, this is around double what is currently spent on elderly benefits. The details of their plan is a payment that starts at 75% of Low-Income Measure (so around $1,500/month for an individual or $2,100/month for a couple) and 25% (in the intermediate scenario) is clawed back for each dollar of employment income—this is not counted as a new tax, but might feel like one from some perspectives (for comparison, the current federal marginal tax rate on first tier of income is 15%). Around 16 million people would receive GBI payments under this scenario, with the average recipient getting $745 per month after clawbacks. Because this plan doesn't include children or seniors, the offsetting savings don't get rid of the Canada Child Benefit or Old Age Security either. Lots of people are out of work due to the pandemic and related restrictions, but as far as I can tell, the report doesn't assume any additional people quitting their jobs due to the GBI. In summary, the PBO's analysis shows that the cost of a fairly modest, not-truly-universal, basic income would be a significant increase (around 32%) to the federal budget.
I also recently saw this analysis costing out a UBI in the UK. It is based on replacing income taxes and national insurance with a 47% flat tax, then giving everyone £8,000 ($13,600 CAD) annually as a UBI. It is intended as an argument in favour, but the cost it comes up with strikes me as politically unpalatable (but agree or disagree, I certainly appreciate that they took the time and effort to work through some numbers). Specifically, middle class voters will end up worse off. The tax brackets of £30,000 - £50,000 ($51,000 - $85,000 CAD) and higher will end up contributing more taxes on net with the UBI than before. Only the middle class provides a large enough tax base to support a UBI, but making them worse off is not generally a good path to [re-]election.