Economic Value Add, teach your kids this one!

Hi,
It has been a while, I am sorry for not posting sooner. There's this thing about family and Christmas that always takes priority. Anyway, I promised I would talk about EVA - Economic Value Add as my next economics lesson. This will be in layman's, or common sense terms, so I don't expect any Washington politicians to really understand it, but maybe they could get one of the "unwashed masses" of their constituents to explain it to them in the backroom. If only they cared.

I am an engineer, and I am very proud of my accomplishments. I have been near the point of crying over the "too big to fail" concept and bank bailouts lately. Wall street bankers deserve ZERO bonuses if they accept money from the taxpayers, period. No exceptions. If a firm pays out 70% of its profits to employees, then what is left for the shareholders? Table scraps? In my world, this is crony capitalism, only a small step removed from socialism, where the powerful government lines the pockets of its friends at the expense of the general public.

During my career, I have literally built planes, trains and automobiles, and yes, I have felt like John Candy in that movie! I have traveled extensively and can start the lesson by giving you several examples of what Value looks like.

Value is a missile that works well and scares the bad guys enough so that they don't attack us or our allies.

Value is a military that eliminates the bad guys when they do. No second chances. "No partial credit." See below.

Value is a car that gets you to work without breaking down once per month.

Value is knowing that when you invest money in a firm in your 401k, that the government is watching to make sure there is no fraud (Enron?)

Value is a well built bridge that works - One of my college professors - mechanical dynamics - said something I will never forget - several girls in the class were complaining about getting the right answers on a test, but they only missed a decimal point. He gave them zero credit for this question. 10 question test, each worth 10 points, so this is a big deal.

He said - "You build bridge, bridge fall down, NO PARTIAL CREDIT!" That is how I was trained. Sorry if that is too tough for you. However, feel free to drive across any bridge I design with your kids in the car....

How do you "ADD value". well, making a computer chip run twice as fast adds value, no? When is the last time you got a paper paycheck? If any at all? Everything is computerized now. I do not have a brick and mortar bank account anymore, just plastic and Internet connections.

Want a chemistry example? I almost died in a car accident a few years ago - it was very scary, rainy night, etc. The airbags, I am convinced, saved my life. My college professor of chemistry worked on the patent for the airbag detonation device - thanks, prof! My family is grateful. For those hug a tree folks - fyi, the chemistry involved for a detonation is based on sodium hydrazine, the same thing used in rocket fuel. It looks like white talcum powder and smells like burning metal (sodium is a metal). I thought the car was on fire with my son in the back seat, but luckily it was not. If it was not for a military program designing better rocket fuel, we may never have had airbags. (except for Washington).

In business and economics, to be more professional, EVA occurs when you design a new business process that simplifies things, like processing an invoice - in some studies I conducted years ago, it could cost $75.00 to simply push a piece of paper around a company until it was paid. Now that I am an Oracle DBA, I can tell you it only takes as long as a person chooses to review the "paper" on their computer screen and hit the "ok" button. Seconds and slices of one penny. It probably costs more for the person to look at the screen than it does to process the transaction.

Another example is when a firm can reduce inventory, sometimes called a carrying cost. If you can build a refrigerator in one hour, 300 hundred per day, you need 300 sets of pieces of inventory. If you have a months worth of inventory on a shelf waiting to go, 29/30 days is too much. If that number can be reduced to only what you need for today's production, that is a good thing. Less money (from your investors, remember them?) is collecting dust on a shelf. That money can be used to fund more and other businesses, like toasters, microwaves, or missiles or cars. That in turn hires more people - jobs anyone? I wonder what it would be like if we had a microwave in our cars? I pray no one is living in their car to answer this question.

Now, ask yourself this question - What has DC done to add economic value to your life lately? Is your 401k safe? Is your banker making more than you? Did you get a bailout? Did he? Is your job safer? Get a raise lately? Are you able to buy a new car without federal help?

Specifically, I call your attention to the cash for clunkers bailout DISASTER - a reader wrote in a car magazine recently - he was a very upset engineer at Chrysler - (it should be called CRYsler. my note.)
The results are in: All the bailout did was increase sales of foreign cars - Chrysler had suspended production and had no more cars to sell, they missed out on a buying binge. Honda, Toyota, Hyundai, did really well. Great. Hey, UAW, how's that going for you - the Dems are really looking out for you, huh? In economic terms, its EVA was ZERO - yes ZERO. It only "borrowed sales from future months". What that means is people bought cars they would not buy until another year or so. Now, today, the auto biz is in a slump again. Gee, didn't see that one coming!
Actually, my personal opinion is that the EVA was NEGATIVE!

How? well, it cost the taxpayers about $20,000.00 to give a $4,500.00 rebate. Hmmm, can you say "government bureaucrat pension plan? "The Chrysler engineer also laments, correctly, that he could not help out his nephew going to college, to afford a $1,000.00 or $2,000.00 type clunker for school because they are all crushed. The student can't afford a new car, he has no job, he is in school. duh.

Hey Obama, great "change" job, make life more difficult for college kids and their families. Waste taxpayer money, make life more difficult for auto managers, accountants and the UAW workers to manage another slump.

Every day, as an American, you need to ask yourself - how can I make this country better? How do I add EVA? We already know the answers; we have the capabilities already. All we need to do to add a "Political EVA" is get the government out of the way. Shrinking it and its burden on society will add tremendous EVA for generations. It is our duty and obligation. Go for it!