Chapter 3

We Are All Economists and Don't Know It

We all have to make decisions that are shaped by the economy as we see it at the time: Can I afford a new bedroom set? Should I expand my business or cut back on my employees' hours? Should I buy a sirloin steak or ground chuck?

In this chapter, we look at how context determines not only what we buy but where we buy it. When we feel good about the future, it's off to the malls and the department stores. But even if we have the same income, when we are worried about losing our jobs, we may want to buy as carefully as possible. Under that set of circumstances, discount stores may become the location of choice. These are the trade-offs we make as we substitute one product or shopping location for another, and that is what economics is all about.

There is nothing quite like a recession to make people focus on their choices. In Arizona, we find a household trying to make adjustments as a member of the family gets furloughed. In Tampa, the mayor tries to cope with shrinking revenues. The president of one of America's largest universities has to adjust to fewer state dollars for higher education. And a businessman fears the worst but decides to expand anyway.

Context Tells Us What We Can Afford

During the 1992 election campaign, in order to keep his frequently out-of-control candidate Bill Clinton from veering wildly from message, James Carville placed a sign in the campaign headquarters that said: “The economy, stupid.” Over time, that saying morphed into the more recognizable “it's the economy, stupid.” The message worked, and Clinton was elected president.¹

But if the key to winning the presidency was focusing on the state of the economy and how to make it better, there also had to be a strong belief that the average person would understand what made the economy weak and what policies would bring stronger growth to the country. Though not directly discussed, there was a real faith that voters were better economists than anyone gave them credit for.

The reality is that we are all economists; we just don't realize that we use economics all the time in our daily activities and our workplaces. We make clear economic decisions when we go to the supermarket, buy houses or SUVs, accept job offers, or determine which restaurant to eat at or what kind of vacation to take. If we are small-business owners or a cog in a huge corporation, our actions have economic implications. And if we run small towns or large universities, it's the economy, and we would be stupid if we didn't recognize it.

Think about your trip to the supermarket. It would be nice if all we had to do was fill up the cart with whatever we wanted and pay for it. But most of us cannot do that. We have limited resources. It would be wonderful to eat the finest cuts of meat or the highest-quality seafood every night, but that is just not possible. We don't have the money!

The most basic concept in economics is that there is a limited amount of resources. Indeed, economists talk all the time about the “allocation of scarce resources between competing uses.” Sounds complicated, right? Hardly. We all do that every day.

Let's go back into the supermarket. Since we don't have all the money in the world, or at least enough to not be worried about what to buy and what not to buy, we have to make hard decisions of what goods to put into our carts. Even if we don't budget exactly by setting a limit on what we can spend, we don't go up and down the aisles tossing just anything into the cart.

Instead, we decide how much we can afford to spend on meals. We allocate our money between breakfast, lunch, and dinner; proteins and vegetables; snacks and desserts, frozen and fresh products; healthy foods and junk foods; cleaning items and paper goods; pet products and light bulbs.

The list of decisions we have to make every shopping trip goes on and on but every one requires us requires us to be an economist. Yes, we have to limit our total cost at the checkout counter, but we must do that in a way that also maximizes our health and enjoyment of life. Do we buy the Oreos or buy a roast? Do we buy the two-liter soda or the six-pack? Is it hamburger today or boneless chicken breasts? Pasta or steak? Name brand or store brand?

The mixture of goods that wind up in the shopping cart adds up to a lot of money but a lot of enjoyment as well. And, frequently, no two trips look anything like each other. We have different needs and desires at different times. We like variety, and we can satisfy a sweet tooth by buying cookies, ice cream, cakes, or candy. There are infinite choices, but we have to make them.

Critically, for shoppers, context matters. Every adviser tells you not to go shopping on an empty stomach. We all know the results of that. Our basket is filled with what we want now, and we wind up spending more than we probably would if we didn't have eating on our minds.

But the state of the economy also matters. When times are goods, it is easy to splurge. We feel comfortable about the future, and that makes it easier to spend more money. We buy the better cut of meat and the name brand product and treat ourselves to desserts and snacks. But when the economy is in recession and we worry about our jobs, store brands and hamburger look pretty good.

The changeover from high quality to lower—or perceived lower—quality and priced products is what economists call the substitution effect. When prices rise or incomes fall, we substitute goods we can afford for goods that are no longer affordable. That is precisely what happened during the Great Recession when many households started buying increased amounts of store brand products and other, lower-cost meats, poultry, and fish. As the economy recovered, shoppers started to “up-buy” or once again purchase the more expensive name brands and higher-quality goods.

Frugal in Arizona

In Phoenix, Arizona, Jenny Kampp knows all about economic tradeoffs. Jenny, the mother of toddler Chloe, and her husband, Jon, fit the category of America's middle class. They live in a three-bedroom house with their Bichon Frise, Fozzy. Jon is in retailing; Jenny works as an executive assistant.

Before the recession hit, Jenny and Jon enjoyed going to local bars for happy hour with friends. But when the economic downturn started, Jenny says they noticed “things were sort of going downhill” even though both still had jobs. One of the first things they cut out were some of those happy hours. If they did go out with friends, they tried to make it on a night when drinks were two-for-the-price-of-one.

Then, as their perception of the economy darkened, they started to cut out going to restaurants and instead ate at home. Because they were eating in more, Jenny became far more price conscious. She started subscribing to the Sunday papers in order to get more coupons and look at the advertisements. She joined Groupon, a deal-of-the-day web site that sends vouchers for the specials that she signed up for.

As she got deeper into the frugality mind-set, Jenny also started to make even tougher economic decisions in the grocery store. Instead of buying brand-name products, she started to buy store brands of the same product. For example, she found she could buy the grocery store version of Wheat Thins. “They taste a little bit different,” she says, but they save $1 to $2 a box.

As the Kampp family started to eat at home more, Jenny's mom gave them a subscription to a meal-planning service called the Six O'Clock Scramble. Each week the service e-mails her five dinners and a list of everything she will need for cooking. Aside from reducing the stress of worrying about what to make at night, it helped to cut down on impulse purchases.

“It's kind of like going to the grocery store on an empty stomach,” she says. “It's a bad idea because everything looks delicious. But with the meal planning you know what you need, you have your shopping list, and then you are not as prone to deviate from the list.”

Of course, they did not cut out restaurants entirely. But since Jenny is a vegetarian, they tend to eat at Mexican or Italian restaurants that have lots of vegetarian options in the menu. And one of their favorite restaurants, Buca di Beppo, often has coupons in the papers or online.

“Sometimes we will go do that and I know the servings are so huge that we will also have leftovers that we can eat another night of the week,” she says.

The Economy Gets Worse

As the economy worsened, Jenny temporarily had her hours cut through a company-mandated furlough. “It definitely impacted me,” she recalls. “I was like ‘I need to cut out anything that I don't really need.’”

The family eliminated the movie channels on their cable network to save $30 a month. They cut their electric bill by agreeing not to use certain appliances, such as the dishwasher and the washer and dryer, during the peak hours of 3 p.m. to 6 p.m.

Luxuries became fewer and fewer. For example, Jenny cut trips to the beauty salon. “I previously would go to the salon and get a facial,” she says. “I try to do that at home—you know, an at-home spa treatment because I can save so much more money,” she says.

Jenny also started to look for any free things she could do with her daughter but still be stimulating. They found they could take Chloe to the park or to a lake to feed the ducks.

A membership in the Phoenix Zoo saved a lot of money compared to the cost of paying for each trip. “It's pretty expensive for a family of three to go to the zoo here, so a membership saved us a ton of money,” says Jenny. To save even more money when they go to look at the cheetahs and zebras, Jenny packs a picnic lunch so they don't overspend at the concessions.

The downturn in real estate has also affected their outlook. Jon and Jenny purchased their house in 2008, when real estate prices had started to decline. But Jenny thinks it's likely that their home continued to decline in value, partly because two of their neighbors walked away from their homes.

The foreclosed homes were ultimately purchased and spruced up. But, Jenny says they have come to the realization that they will likely be in the house for another ten years. “We are not going to be able to turn around and sell it for as much profit until then,” she says.

There was one economic trade-off Jenny and Jon decided not to make: cutting spending on day care for their daughter. “There were other places we could have gone that were maybe half the cost per week,” she says. “But, you know, you get what you pay for, and I wasn't willing to do that. It's expensive, but it's worth it to me.”

Public Officials as Economic Forecasters

If you think it is hard enough dealing with the crazies that populate government at all levels, imagine what it must be like when you also have to create a strong, vibrant economy while also balancing the needs of competing economic interests. That is what public officials do all the time, and the successful ones are not just good politicians but good economists as well.

A governing official is faced with a myriad of concerns. First and foremost is the budget. Budgets may sound like just a balancing act between revenues and expenditures, but it is not that simple. What is required is a forecast of what those two major items will be over the coming year.

Basically, if a budget is to be balanced—and at the state and local government level, that is a legal requirement—a mayor or governor has to be an economic forecaster. They have to make determinations about how fast the local economy will grow and what that means for jobs and income business activity.

What are the factors that matter most to the local political leader as economist? First, you have to know how you are doing. That is actually becoming easier than it had been. The information revolution has made data available in ways never before known. The housing market has information down to block levels. Data on tax revenues can be sliced and diced to understand what types of firms are growing or slowing.

Numbers are nice, but as an economist who has done forecasting for an extended period of time, a “feel” for what is happening is sometimes more important than the data. Indeed, there have been many times that I have written that the numbers just don't look right because they run contrary to normal trends or other data sources.

You have to augment the data with real-world experiences if you are going to understand how rapidly the economy is growing. Government officials who “take the pulse” of the electorate are also getting a feel for the unknowns in forecasting. If people feel uncertain, those positive views may not be seen in the data for months, but they matter when you are making a budget forecast. A cautious electorate might be pointing to a slowdown, and the worst thing you can do is overestimate growth and therefore revenues.

When it gets down to actually doing a forecast, it is critical to understand the basic structure of the local economy. While the national economy may determine overall growth rates, the devil is always in the details for forecasters. In the case of local economic analysis, the details are the key industries and sectors of the economy.

It is usually the case that a given area will grow at a different pace than the nation. Phoenix, Miami, and Las Vegas boomed in the mid-2000s because they were the center of the housing market surge. Energy price spikes have allowed places like Texas, Alaska, or, more recently, North Dakota to post growth rates that dwarf the national rates.

There are also special factors. In times of war, areas with major defense facilities spurt ahead, but when peace blossoms, they undergo huge adjustment problems. Areas with great tourist facilities tend to do really well but can suffer greatly in times of economic slowdowns. They may have more volatile economies. In contrast, retirement communities that are less dependent on job growth might rarely show higher than national growth rates but manage to do a lot better during the downturns. They have more stable economies.

Thus, the first thing state or local politicians must do is take stock of their strengths and weaknesses and how national trends interact with them in order to make a local economic forecast. That provides the basics for the revenue estimates any governor or mayor must make.

If budgeting is job one, building a stronger economy is job two. Every politician wants to look toward the future and create a better economy. That requires a longer-term forecast than with the budgeting process. Governing officials have to then recognize what the emerging economic trends are, and how those resulting changes will impact the local economy. It makes no sense to base a budget on a growing industry if the firms in those industries are being left behind.

When you think about it, a politician needs to be able to do both short-term and longer-term economic forecasting. For the budgeting process, understanding the next 12 to 24 months is usually good enough. But to build a better economic base, the next decade is crucial. It is doubtful that if you scratch a politician, you will find a person who views himself or herself as an economist. But it takes a good economic sense to be a successful political leader; just ask Bob Buckhorn, mayor of Tampa, Florida.

A Mayor as Economist

Economists like to consider themselves observers of human behavior. Are people optimistic? Are they buying new cars or used cars? Are they remodeling their homes or looking to trade up?

If economists are people watchers, consider Bob Buckhorn, the mayor of Tampa, Florida, an economist. Buckhorn says he can sense how his city is doing economically by walking and driving around Florida's third-largest city. Every day he tries to talk to as many people as he can: the drivers of the solid waste trucks, people out picking up groceries, merchants opening up their storefronts. He drives through upscale neighborhoods and areas of town that he describes as “teetering on the brink of some serious issues.” And he keeps an eye on the bulldozers and dump trucks: are developers confident enough to build “spec” houses, or are they just doing remodeling?

“Well, I think for me, the prism through which I always think about economics and the economy and how it affects the city is through the eyes of my neighbors, friends, and constituents,” says Buckhorn. “It's hard for me to separate my job from my personal opinion because as a mayor we feel the downturns as much as any elected official potentially could because it's our citizens that are affected most directly, whether it's by increased opportunities or unemployment or everything in between.”

In terms of the economy, the nation's mayors often observe some of the subtle movements first. When a big employer in the city is even thinking about laying off workers, the mayor hears the scuttlebutt. And when a firm is thinking of expanding, the mayor usually wants to know what he can do to help.

In the case of Tampa, Mayor Buckhorn keeps an eagle eye on permit activity. From about 2008 to 2010, developers pulled back and permits declined. In 2011 and also in 2012, permit activity started to rise again.² “So that tells me people are moving dirt and throwing up steel again, which obviously translates into tax revenues for local government,” he says.

But the mayor also has another more unusual way he gauges his local economy: he watches to see how many people are walking their dogs on the streets.

Yes, dog walkers.

“To me that is an indication that people are living downtown,” explains Buckhorn. “Part of our mission is to stop the brain drain leaving Florida, which has been a one-way street, and to attract that creative class, those bright young professionals to downtown Tampa, specifically. So that's sort of my unofficial polling I do every day as I am driving around the city—how many young people I see walking dogs in the downtown corridor.”

Tampa's Faulty Economic Model

Halting the brain drain is just one of Buckhorn's economic challenges. In 2011, his first year in office, he faced a $34.5 million deficit.³ To balance his budget, he eliminated 146 jobs. The following year, the budget gap shrank to $24 million and the city eliminated 30 positions. In FY2014, Buckhorn estimated a preliminary budget gap of $19.2 million, which he proposed bridging with increased property tax revenue and department reductions as well as some other changes.⁴

One of the major reasons for the red ink is that Florida has no personal income tax and instead relies on property taxes. “And, property taxes are cyclical, obviously, and very much tied to construction and the increase in valuation in people's houses,” says Buckhorn. In Tampa, after rising steadily, property values peaked in 2009 and then began falling. According to Buckhorn's budget documents, property values had fallen 23 percent from their peak to 2014. Property tax revenue tumbled from $163.6 million in 2008 to an estimated $123 million in 2014.⁵

The shortfall in property taxes is just part of the problem, says the mayor. He thinks Florida relies on what he terms a faulty economic model, which he describes as a three-legged stool. One leg of the stool is agriculture, such as citrus groves and vegetable farms. Another leg of the stool is tourism, mainly people fleeing the winter in Canada and the northeastern states or taking their children to attractions such as Disney World. Finally, the state relies on developers putting up new subdivisions and advertising to retirees to “come on down to the Sunshine state.” He thinks the real estate leg of the stool has been the most problematic.

In the mid-2000s, speculators started snapping up homes and condos in the expectation that the value of the house would rise. The buyers hoped to “flip” the house by selling it quickly to someone else. When the real estate bubble burst in 2009, banks foreclosed on thousands of homes in Florida that had been purchased by speculators who could not sell the properties and could not make the mortgage payments. “You can't build subdivisions for people that don't exist,” says Buckhorn.

His solution to Tampa's problem is to try to change what he terms the city's “economic DNA.”

Changing the Economic DNA

To change Tampa, he wants to start to add more “value-added clusters of jobs” that will allow Tampa to keep its educated young people from leaving. “My daughters and that intellectual capital, that creative class, is not coming to Tampa for a call center job,” he says. Instead, Buckhorn wants to build on existing strengths, such as education, that he thinks can provide sustainable jobs.

Tampa is home to the University of South Florida, which has 47.000 students at its three institutions in Tampa, St. Petersburg, and Sarasota-Manatee. Importantly, USF, considered a major research university, gets about $400 million a year in applied research grants, mostly from the federal government and private partnerships.

“So the key for us is to find how to move it out of the halls of academia and the Petri dishes and into the marketplace to create jobs, to create companies and new technologies,” says Buckhorn.

Tampa already has a model for this: it has worked with USF to help locate the Center for Advanced Medical Learning and Simulation (CAMLS) in downtown Tampa and away from its campus. CAMLS is a training center for simulation in robotics for doctors and surgeons from all over the world.

Buckhorn says the CAMLS center is expected to generate about 15,000 room nights a year in downtown Tampa. Tampa is also actively trying to get equipment manufacturers to set up in the city.

In November 2012, Buckhorn and the dean of the USF medical school went to Israel to try get companies there to “establish a footprint” in Tampa.

“This is the type of industry that will create lots of opportunities around it,” he says. “Not only is it doctors and PhDs, MPHs [masters in public health], it is also technicians who need to operate and service the equipment. Those are real jobs, real opportunities, real wealth, and it's in the downtown core, which heretofore hasn't had that type of technology.”

One might think the shift away from real estate development would put Buckhorn in the crosshairs of the real estate developers. Not necessarily, he says. “They realize if you don't have the jobs here with sustainable incomes, no one is going to be buying the houses. So, in a perverse way, they are all-in with me because they know they can't build for people who don't exist or don't have an income.”

For a mayor who terms himself the “cheerleader-in-chief,” this thrust into economics may seem like a far cry from fixing potholes and shaking hands at the shopping center. Not so, says Buckhorn. “Mayors tend to be ambidextrous, very pragmatic, far less wedded to an ideology and far more concerned with getting results,” he explains. “If I had to paint myself, I am pretty much of a pro-business centrist Democrat. But as a mayor, there is no Republican or Democratic way to fill a pothole. We just get the job done.”

While Buckhorn manages a city, Dr. Michael Crow, the president of Arizona State University in Tempe, Arizona, guides a center of learning. But, like Tampa, ASU has to adjust to the ups and downs of the economy, forcing Dr. Crow, who is not trained as an economist, to act like one. And just like the consumer in the grocery store, he has had to make decisions on how to make his budget stretch and stretch.

How an Educator Put on an Economist's Hat

Dr. Crow's passion is designing new systems to help people learn. Ever since he arrived at ASU in 2002, he has frequently rethought how to educate his growing student body. He has termed ASU “the New American University,” an inclusive educational institution that focuses on student access and a quality learning experience. He has brought in world-class professors but made it clear that ASU did not have a goal of being the equivalent of a Harvard of the Southwest.⁶

But once the recession rocked his state, economic circumstances became a major driver of Dr. Crow's penchant for reconfiguring the learning landscape at ASU, one of the nation's largest universities.

As he donned an economist's hat, Dr. Crow asked such basic questions as:

Can a department be merged with another department to give the students a broader education but save money at the same time?

Since some students prefer shorter semesters for some courses, can they be shortened but still get the job done and possibly give the students a chance to save money by taking more courses? And can the university itself be transformed from the mindset of a state agency into a series of enterprises that work with each other to solve societal problems and give everyone an incentive to work harder?

Asking these types of questions is not unusual for Dr. Crow, who calls himself “an architect of knowledge enterprises.” But in 2009, the questions were not rhetorical. Arizona was hemorrhaging money— an unusual situation in recent years. In the past, Arizona outpaced the national economy. Between 1963 and 2011 Arizona grew at noninflation-adjusted 8.9 percent per year compared to 6.9 percent for the United States over the same period.⁷

Behind the growth was a burgeoning population, which grew by an annual average rate of 3.07 percent per annum over the past 48 years compared to an annual average rate of 1.05 percent nationwide, according to the Bureau of Economic Analysis.⁸ People became attracted to Arizona because of its sunny weather, relatively low cost of living, and plentiful jobs.

The state's growth took off after World War II, when a significant number of veterans returned and remembered a stint they had in the state before being sent to fight, says Dr. Dennis Hoffman, an economics professor at ASU's W. P. Carey School of Business. “They remembered the climate and scenery of Arizona, so they moved back to the state after the war,” says Dr. Hoffman.

At about the same time in the postwar years, Arizona began to attract an increasing number of defense companies, helped in part by a congressional delegation that worked hard to keep contractors in the state, says Dr. Hoffman. “Our congressional delegation—very unlike today, I might add—was very keen on seizing opportunities for federal investments of all types in the state of Arizona,” he says.

Eventually, semiconductor companies, such as Motorola and Intel, started to build large chip-producing factories in the Phoenix area. The region's economy grew even more as financial services companies set up an increasing number of call service centers and data centers.

All this growth helped to support a vibrant construction industry. “If people want to move here and stay, you become a population magnet, you will invariably be reliant on construction,” says Dr. Hoffman.

A Fiscal Grand Canyon

But in the mid-2000s, developers in Arizona, much like those in Las Vegas, Florida, and parts of California, suddenly started to build and build. Speculators purchased homes hoping to flip them for large profits. “The national pro-real estate crowd would come in—kind of the cheerleader type—and they would say things like ‘We know housing starts are three times higher than a normal period, but housing will sustain itself because Phoenix is where the jobs are,’” recalls Dr. Hoffman. “There was this failure to think through that many of the jobs were in this real estate construction engine such as sales, financing, and contracting.”

When the housing boom imploded in 2007, Arizona was one of the worst-hit states. One indication of how bad the housing market had gotten is called negative equity, where the value of a home is worth less than the balance on the mortgage. In Arizona in the last quarter of 2009—one of the worst quarters in the real estate crunch—nearly 54 percent of mortgages in the state had a negative equity, more that double the 25.7 percent national rate, according to CoreLogic, a real estate data and analytics firm.

As the real estate sector tumbled, unemployment in the state soared from 3.5 percent in 2007 to 10.8 percent in January of 2010.⁹ With fewer people working, the state's revenues, which mainly come from income taxes and sales taxes, fell 21.9 percent in January of 2009 compared to the prior year. In an effort to get revenue, the state sold a significant part of its Capitol complex, including the House and Senate chambers, and then leased them back.

As the state scrambled, it cut spending. By FY2009, the impact on ASU's budget was dramatic. “In a 15-month period, we lost 40 percent of state revenue as a result of the recession,” says Crow. In dollar terms, Crow says it amounted to about $200 million in lost revenue. What made the losses even more dramatic is that $100 million of the cuts came in the last three months of the university's fiscal year after most of the money had already been spent.

“So that was a tremendously complex thing we had to go through and they combined that with another $100 million reduction in the next cycle,” says Crow. The economist part of his life kicked into high gear.

Crow Solutions

To start with, ASU had to immediately tighten its belt. Dr. Crow instituted a furlough program, where everyone from senior administrators, such as himself, and deans to secretaries took some form of pay cut. Some 500 staff and 200 faculty associates—people who may have taught one course, for example, lost their jobs. Travel was reduced or eliminated.

But Dr. Crow also realized he needed to make more fundamental changes: the university would need to find new sources of revenue by locating partners in the private and nonprofit sectors. Dr. Crow targeted an area where he was trying to make ASU into a leader: green energy. In sunny Arizona—296 days of sun or partial sun in Phoenix— solar energy made sense.¹⁰

ASU embarked on a program of partnering with such companies as Arizona Public Service, Salt River Project, another large utility, and a host of smaller companies to provide solar energy. For the most part, the companies built the solar facilities and ASU became the consumer. Dr. Crow estimates that, as of the beginning of 2013, the private solar investment was approaching $200 million. “It's an elaborate way in which we can secure our energy price, lower our carbon footprint and have no capital outlay,” says Dr. Crow.

ASU and Dr. Crow had experience with partnerships even before the recession hit. In 2006, the city of Phoenix wondered if ASU would be interested in moving some of its colleges from Tempe to downtown Phoenix. Indeed, Dr. Crow was interested. After an agreement by Phoenix to invest $300 million, the university moved its nursing school; its School of Public Programs, which had a lot of urban-oriented classes; the School of Arts and Letters (for people who had not yet declared a major); and the journalism school into downtown Phoenix.

In fact, the partnerships and other creative financing helped ASU add about $3 billion in new space with only about 10 percent of it paid for by the state. Adding the space was necessary: Dr. Crow estimates that from the beginning of the recession to 2013, student enrollment grew by 20 percent.

The move also helped the city of Phoenix dust off its downtown. Near the new campus, two major hotels have opened up as well as a complex of stores and restaurants. With more young people in downtown Phoenix, the city developed a night life, which is often considered a plus in helping to attract new businesses.

At about the same time, ASU went about trying to internally create new revenue streams. In 2010, for example, the university had practically no revenue from online classes. Three years later, the university was bringing in $100 million. The number of students getting online degrees went from zero to 6,000 in three years.¹¹ The addition of online classes fits in with Dr. Crow's belief that technology can work in traditional face-to-face enterprises such as universities and health care.

The imperative of adapting to the economic situation has been good for the university, says Dr. Crow, who now calls ASU “more adaptive” and capable of making faster adjustments to economic shifts. “We already had some experience in making the university more flexible, but we didn't anticipate we would encounter anything like a $200 million reduction in that scheme,” he says.

Dr. Crow has tried to use economics to convince lawmakers that there is an economic value in supporting higher education. “That has better prepared us to be of greater value as a force for economic competitiveness in Arizona,” he says.

One way Dr. Crow has tried to illustrate the economic value of the university is through an office he created in 2005, called the Office of the University Economist, which, among other roles, measures the value of knowledge and skill in the workforce. For example, he asked the office, which is headed up by Dr. Hoffman, to write a white paper on the return on investment for tuition-paying students. His questions include:

• When we drive our tuition up as the state investment goes down, what are the economics of that?
• What is the return to the state for each graduate that we produce?
• What would be the projected performance of the state with a higher level of college degrees?

Dr. Crow hopes that mixing economics and education will turn on a light bulb in the legislature. “What we've done is move away from the simple model that has evolved in other states and really doesn't work in Arizona, which is that you should invest in this public university just because you should,” he says. “I'm like, I don't think so. We've actually taken the legislature and tried to look at them as an investment community and to have them evaluate the case for investment in us.”

In other words, an educator has become an economist.

The Business Owner as Economist

For most businesspeople, understanding their product and their market is what it is all about. Then they can decide on their marketing, hiring, production, and budgeting issues. But what most businesspeople don't directly recognize is that it is really all about the economy. Indeed, the business motto of Naroff Economic Advisors is “Linking the economic environment to your business strategy.” If you don't know the economy, you are operating in a vacuum.

In the past, it seemed that the average businessperson suffered from tunnel vision. Their world consisted strictly of their industry. They knew all about production methods, new products, and emerging markets, but they had almost no idea whether their plans to grow and invest made any sense in the context of the current or projected economy and economic trends.

That is changing, and changing rapidly. We live in an integrated world where our competitors can and do exist anywhere and everywhere. The average businessperson, no matter what size business they operate, now recognizes that to succeed the economy and the trends implied by them matter.

For a business to succeed, they need to know not only how to produce but also where to sell and the location and size of their market or markets. Demand is critical, and that comes from determining market size. That may sound simple, but even for a small retailer, sales can appear almost magically from anywhere. A mobile society means the people you can attract are not limited to any single location. Add to that the Internet, where information about a business can be spread across the world, and it becomes clear that to succeed, a business needs to know what is happening close by and far away.

Understanding the market, then, means recognizing the condition of the economy in any location where sales could potentially take place. Businesspeople need to understand the local, regional, national, and even international economies not simply because customers come from anywhere and everywhere. The direction of a local economy is first and foremost determined by the direction of the national economy. It is hard for a small area to grow quickly if the nation is in recession since that probably means local companies are suffering as well.

But knowing the shape of the national or international economies is not enough. Regional economies can and do grow at different rates due to special factors. In the 1970s, the surge in oil prices caused large parts of the country to go into recession. But in the oil patch regions, it was “happy days are here again” as the higher prices led to a huge inflow of earnings. Rural parts of Pennsylvania or North Dakota that had stagnated for decades are booming as a result of the oil shale revolution. If you don't recognize what is special about your community, you don't know much.

Businesspeople have to understand markets as well as economic conditions. Commodity-market trends help determine the cost of their inputs and thus their expenses. If you are losing money on each sale, it is hard to make it up in volume. Things such as droughts, which affect agricultural costs, or wars, which affect energy prices, matter and have to be understood if a business is to successfully decide on what and how much to produce.

And then there is the little matter of financing the company. Where interest rates are going and what is the best time or rate to borrow at can often be a make-or-break issue for the average business. That means a business owner must also watch the financial markets and have a basic idea of what the Federal Reserve, which helps set rates, is going to do.

Finally, there is the issue of evolving trends. The information revolution has and will continue to change the way businesses interact with customers. You can go online and market your product or buy inputs from around the world. That means that traditional concepts about the way to do business can change almost overnight. For example, who would have thought that Microsoft would ever lose its monopoly over the computer world? But Apple, Google, and the cloud are changing the way we use information technology. Does anyone really know what the computer industry will look like in five years?

Failure to grasp the emerging trends in industries that may not even be directly related to the one you are in can lead to planning decisions that are disastrous. For example, should vehicle makers invest in plants that make gasoline-powered engines, or should they move toward natural gas-powered engines? The surge in natural gas and the drop in price means that changes will come. How the companies grasp those changes will determine their success or failure.

To succeed, the businessperson has to be a good economist or, of course, hire a good one. There is no escaping the fact that it is not enough to know your industry. The good ones succeed, which we can see by the decisions made by Greg Parker, the head of a chain of convenience stores.

Greg Parker: From Fast Food to Economics

When Greg Parker graduated from the University of Georgia in 1976, he intended to go to law school. But his father had been planning to construct a convenience store. He just had not gotten around to it. Parker decided to temporarily forgo law school to get the store up and running. He never did go back for the law degree.

Instead, he built the Parker Companies into a 30-store chain of convenience stores, plus a gourmet market open 24 hours a day, two self-service laundries, and a real estate development arm. Becoming a businessman instead of a lawyer means that he spends a lot more of his time thinking about the direction of the economy, not torts.

Three times a year, Parker organizes a meeting with other CEOs from a wide variety of industries to discuss the economy and figure out ways to become more competitive. He says the high-powered group might discuss what is going to happen to the price of gold or what are the safest banks in the world. One of the highlights of the meetings is a presentation by Walter Zimmermann, an analyst with United-ICAP, an advisory service.

“He's a contrarian; some call him a pessimist,” says Parker. “I call him the smartest man in the world.” Parker says Zimmermann predicted the financial collapse of 2007 and the subsequent stock market debacle. But he also predicted that the market would implode in 2012. Instead, the stock market rose.

Parker says Zimmermann has him thinking about the opportunities that might take place if the economy collapses again. “Maybe I want to be more liquid and have cash for the opportunities that will present themselves.”

Convenience stores seem like an unlikely place to make money, given the daunting economics of the business.

Convenience Store Economics

The average convenience store derives about 70 percent of its $4.6 million in annual revenue from gasoline sales. (About 80 percent of the gasoline purchased in the United States is from a convenience store).¹² However, gasoline consumption has been falling. In 2007, the United States consumed 9.3 million barrels of gasoline per day. By April 2013 consumption had fallen to 8.5 million barrels of gasoline per day.¹³

A typical convenience store gets 30 percent of its $12,600 per day in revenues from the products it sells inside its doors. Of that 30 percent, tobacco products, including cigarettes or smokeless tobacco, represent up to 40 percent of the store's sales, says Jeff Lenard, a spokesman for the National Association of Convenience Stores (NACS).

“While cigarettes still are the top revenue generator inside stores, they are still not considered to be a growth category like foodservice, in particular,” says Lenard. “Dollar sales for cigarettes the past few years have held up because of escalating state and federal taxes as well as manufacturer-driven price increases.” With that kind of economics, Parker thinks the industry should be contracting.

But, that's not the case. At the end of 2012, there were 149,220 convenience stores, up 14.2 percent from 10 years earlier. In 2009 and 2010—economically difficult years—the number of stores dropped by 1.19 percent compared to 2008 but bounced back some in 2010 and 2011.¹⁴

“Stores in our industry don't go away,” says Parker. “Say I divest a store and someone buys it; they don't seem to go away. You say, ‘How are they making it on those little sales?’ But they do.”

At the same time, an increasing number of companies, from drug stores to dollar stores to fast food restaurants, are trying to capture some of the consumers' dollars spent at the stores. For example, Lenard says stores such as Old Navy and Staples sell candy and soft drinks at their checkout counters.

Finally, the industry finds an increasing amount of regulation is headed its way. For health reasons, some local municipalities are trying to limit the size of sugary drinks that can be sold. Energy drinks, another big seller at convenience stores, are under attack for the amount of caffeine they contain. And, the way Parker describes it, federal inspectors are constantly buzzing around his offices looking at everything from retirement accounts to the height of cup and straw dispensers to make sure they comply with disability regulations.

Things Are Bad, So Expand

Despite all the problems, at the beginning of 2013, Parker Companies was starting an expansion push. This may sound counterintuitive but he is trying to grow because he is concerned that bad economic times are ahead of the nation.

He recounts how one of the CEOs who participated in his three-times-a-year Econ Group meetings has taken the approach of circling the wagons by divesting assets and paying off debt so he has a good credit rating for future borrowing. “I have taken a completely different approach,” he explains.

One reason is that he believes even with contracting demand for gasoline and cigarettes, consumers will still be going to convenience stores for immediate consumables such as milk and bread. Even in a diminishing marketplace, the retailer who uses the best technology and listens to the consumer will win, he says.

But, he also thinks there could be significant opportunities for entrepreneurs like himself in the years ahead. “My position is, if you look from an economic standpoint, huge wealth was accrued at the end of the last Depression. And I am of the belief that huge wealth is going to be made in these times of hardship, and I think people who are well positioned that are smart and understand risk and are well collateralized have a huge opportunity.”

To capitalize on this gloom-and-doom scenario, Parker took down a $10 million 15-year fixed-rate loan with a 3.03 percent interest rate. He views it as practically free money. “If you can't make 3 percent on your money, shame on you,” he says.

With the money, he bought land that the owners had told him they would never sell. He “negotiated the hell” out of his construction costs and started buying larger quantities of materials to get more savings. Contractors who used to be difficult to deal with are now scrambling for work, he says. “This is an opportunity to grow because the economy is eventually going to turn,” he says. “And we will have paid for this with very cheap dollars.”

Kampp, Buckhorn, Dr. Crow, and Parker have all had to become economists in a way. They have had to adapt to what was happening around them, to make tough choices—some professionally, some personally. But what is the foundation for those decisions? In the next chapter, we look at the types of forces that make us economists.

Notes

1. www.nytimes.com/1992/10/31/us/1992-campaign-democrats-clinton-bush-compete-be-champion-change-democrat-fights.html.

2. www.tampagov.net/dept_Budget/files/recommended_operating_and_capital_budget_FY14.pdf.

3. Interview with Bob Buckhorn.

4. www.tampagov.net/dept_Mayor/Presentations/files/budget_mayors_presentation_2014.pdf.

5. Ibid.

6. Among the faculty Crow has hired are two Nobel laureates, plus winners of many other awards. www.asu.edu/excellence/faculty/

7. Dr. Dennis Hoffman of Arizona State University, using Bureau of Economic Analysis data.

8. Ibid.

9. Bureau of Labor Statistics, http://data.bls.gov/timeseries/LASST04000003.

10. Current Results. www.currentresults.com/Weather/Arizona/annual-days-of-sunshine.php.

11. Virgil Renzulli, vice president for Public Affairs in an email on October 12, 2013. ASU Public Affairs Department.

12. Jeff Lenard, vice president National Association of Convenience Stores in an e-mail on January 28, 2013. NACS.

13. Energy Information Administration. www.eia.gov/todayinenergy/detail.cfm?id=7510; www.eia.gov/dnav/pet/pet_cons_psup_a_EPM0F_VPP_mbblpd_m.htm.

14. Jeff Lenard, vice president of NACS in an e-mail on January 29, 2013. NACS.