(Pat from Plymouth, Michigan)


A comment and a question…


When I saw the various measures for deflating nominal GDP, to get to real GDP, I noticed that two of the three indices showed no evidence of recession (2 consecutive quarters of negative growth).  Why is this?


Any index using a fixed basket, such as CPI and PPI, has a tendency to overstate inflation resulting in a failure to address issues relating to substitution and quality (see the 1st Issue).  Currently, chain indices address substitution effect issues, rather than quality issues.  The point is that the recession itself was very mild, and a more thorough and accurate measure of the inflation rate might not have shown a recession at all.




(Tim from Seattle) 




I think I have a good example of restructuring, but I need to get the details.  Boeing is in the process of retooling their whole supply and procurement system.  Their previous system was designed around very large orders.  The new system will lower the effective start-up cost on small contracts by making customization much cheaper.  It currently takes a team of engineers weeks to spec out and create order lists for a new customization.  They want to get that down to a single engineer and about eight hours.  It's costing them a fortune to put the system in.  So it sounds like a pretty classic case.  Their buyers are less and less a “Big Three” and more and more a bunch of smaller airlines.  Every airline needs some level of customization, because they all make their own choices with respect to exactly what amenities they need: size of first class, density, etc.  Even the controls can be different depending on the duty the jet is designed for.  Apparently not every jet in every model is rated for the same distance/conditions.  So if you don't fly transatlantic and you don't have flights over x miles then apparently you can get by with a slightly cheaper plane.  So here's an example of a very large company spending quite a bit of money during a period in which sales are off to retool it's cost structure in favor of smaller buyers.  Seems like the sort of example you want.



Tim, not only is what you relate a good example of what is explained in the New Paradigm in Economics, it is the archetype of how American firms will have to respond to changing market pressures in the future.   Let’s hear it for the American Entrepreneurial Spirit responding to the demands of the 21st Century!



(“Overtaxed” George in San Diego)




While the mantra for those of us that continue to have gainful employment is “at least I have a job,” I can’t help but wonder how many more 80-hour work weeks I have to endure before the management deigns to bring more people onboard.  From what I have read, productivity is rising by leaps and bounds, but how much more of this can we take? 


…also, what is the textbook definition of 'deflation'?


From a strictly mercenary point of view, your 40-hours of overtime a week is probably 50% less expensive to your employer because your benefits are paid for in the first 40-hours you worked this week – subsequently, your employer gains from every hour of overtime you work.  The limiting factor, of course is that your productivity certainly declines after a certain number of hours worked.  Yes, burn-out is a growing and real fear in the workplace, but employers are hesitant to bring on additional employees because your 80-hour work-week is cheaper than two 40-hour work weeks…in the meantime, at least you still have a job, George.


…the definition of deflation is "change in prices of a market basket of products over a given period of time."  The question then becomes who changes prices?  The answer to that is that firms change prices - lowering them in the case of deflation and raising them in inflation.  Please note there is nothing inherently wrong with deflation.  People fear that deflation will result in lower wages - well, why not?  So long as their purchasing power remains intact/improves, who cares?


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