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Understanding Macroeconomics Makes You a Better Manager

When we try to understand the current economy, we often default to thinking about its institutions and actors. How is the AIG mess threatening other actors on the economic stage? Is Tim Geithner helping or harming the economy? Which firm gets the next government bailout?

But taking a broader view of the economic situation through understanding macroeconomics tends to clarify patterns, like rising to a height of 10,000 feet shows how the local geography knits together in meaningful ways.

According to Harvard Business School professor David Moss, who recently wrote a primer on macroeconomics for executives, terms we hear every day in the business press such as GDP, labor productivity, and foreign direct investment all impact how we go about our business and can be used to advantage by the savvy manager.

"There's a lot of information out there -- particularly in the business press," Moss tells me in a recent interview, A Macroeconomic View of the Current Economy. "If these aren't familiar terms, and if one doesn't have a way of putting it all together, then you can't process all of this information as effectively as possible."

Take interest rates. Though they can fluctuate wildly in highly unpredictable ways, we can spy from our balloon view above the landscape some long term patterns in how they act over time, he says.

"For example, countries that are running large and ongoing current account deficits tend to see their currencies depreciate over time. This doesn't mean that the currency of a country running consistent current account deficits is going to depreciate tomorrow or next week or even next month. But over time, you expect it to depreciate. So if you're a business manager, you probably want to be fairly well hedged against this possibility, either by making use of certain financial instruments or by carefully spreading out your real investments across various countries."
On the current economy, Moss believes:
  • Expectations matter. A downturn can be prolonged if consumers have a dour view of the overall economy and their income possibilities, even if for the wrong reasons. They stop purchasing as a result. Businesses cut back as a result of the reduced spending. Layoffs follow. Thus an extended downturn becomes a self-fulfilling prophecy. "Both aggressive monetary easing (lower interest rates) and large-scale deficit spending send the signal that demand will increase, and thus both aim to break the cycle of negative expectations about the economy."
  • Increased savings are crucial. We need to increase our national savings rate quite substantially, says Moss. "We need to figure out how to encourage households to increase their savings, especially once the recession is clearly behind us. I think that will have to be front and center. Also, once the recession is over, we'll definitely need to get our budget deficits under control -- most likely by controlling spending and raising taxes. We'll certainly need to prepare for the retirement of the baby boomers"
  • More research is needed. The study of macroeconomics has come a long way, Moss says. But not far enough. "Excessively low interest rates during the boom years may well have helped to cause the crisis. So monetary policy, while much better than in the past, is still nowhere near perfect. For example, we still know very little about how to prevent a bubble from becoming a problem in the first place."
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