Gates on Economy

On a conference call with reporters last week Bill Gates made some comments about the economy. He was realistic: said it will likely take years for the economy to correct itself after years of unsustainably high spending rates, particularly in the United States. Although he said things are different now than in the Great Depression, he also noted that there are many factors putting pressure on the economy, many of which feed on one another.  "If Company A lays people off, that impacts...Company B," Gates said. "We are just seeing impact after impact, as that rolls through the economy."  Microsoft, announced its first-ever companywide layoffs on Thursday, saying it planned to cut up to 5,000 jobs over the next 18 months, with 1,400 of the job cuts being made last week.

(From CNET January 26th 2010)

Friday's positive economic numbers were, in my opinion, an illusion. I have spent a great deal of time talking to business owners lately, mostly of two types of businesses. 1) mid-size ($250M revenue and under) private companies, mainly B2B and manufacturing; 2) startups, of all types but especially B2B infrastructure. There is a clear and compelling message from these conversations.

> The economy has indeed found a bottom. Yet businesses are still finding it incredibly difficult to get credit after 18 months. This has been cited as a reason why companies are not hiring and expanding. I would argue it is causing a more long-lasting change in business culture. Eighteen months during which their businesses have been starved of their lifeblood -- financing -- make it likely that many business owners are rethinking their ability to rely on flexible financing in the future -- ever. They may run their operations differently -- making more cautious growth plans, avoiding relying on outside capital, constantly whittling overhead. All this even after the credit spigot begins to flow again. There is a great lack of trust in banks to honor their LOC commitments that is likely to linger and constrain the economic expansion. The economic forecasts I see do not appear to account for this.

> Many of the startup businesses I've encountered, if looked at correctly, will not create jobs -- they will destroy jobs. The mantra that innovation creates jobs is only partly true. The rise of open-source software and the Internet have enabled entrepreneurs to create business models and applications that automate, unbundle, and outsource -- at an astounding rate -- work formerly performed by human beings who have jobs and benefits such as health insurance, 401(k)s and office space. Unbundled pricing is coming for nearly everything you currently buy in bundled form. Latest example: the Financial Times has set up Internet-only subscription pricing. You will see this sort of thing happen more and more because the Internet lets competitors reach you anywhere, anytime, flushing out the inefficiencies that permitted bundling.  It is beginning to look like a compounding function -- somewhat like what happened in manufacturing in the 1990s. Even work such as pharmaceutical R&D and engineering is beginning to be unbundled and outsourced.

> One third of the US workforce now consists of non-traditional "contract" workers, a pool that is growing twice as fast as the traditional workforce. At that rate it will not take too many years for the balance to tip and the majority of Americans to be self-employed. What does this nation of freelancers mean to the economy? For one thing, the reported 1% real average growth in wages of the past decade is overstated. When someone goes freelance they are now paying their own self-employment tax, health care, home office expenses and so forth. Corporate profits improve by shedding these expenses, and the workers' standard of living declines. As this trend accelerates, we need to find some way to adjust reported wage trends to account for the overhead burden that is being transferred onto the self-employed, outsourced workforce.

> All of this represents is a deflationary tailwind -- to say the least -- and as such it will become a tremendous boon to mankind, albeit accompanied by some short-term pain for some people. Many will thrive and find it exhilarating to work in collaborative alliances as opposed to sitting in a cubicle being directed by a boss somewhere in the upper rungs of the corporate ladder. Some of us will find our inner entrepreneur. All kinds of intermediaries will spring up to help freelancers and the outsourced gain bargaining leverage (help in finding jobs to bid on and in writing standardized contracts, for example).  New business models are springing up everywhere. We are entering an exciting era in which significant social disruption is possible, accompanied by winners and losers on a massive scale. Put very simply, the gain in economic productivity to society as a whole will be huge. 

> People under age 30 are better prepared for this world than the rest of us. If we're smart we'll learn from them.