Monthly Archives: January 2014

Manage to a single number

For a long time, I had various business goals — revenue per year, cost per month, widgets per microsecond, and so on — but business only took off when I boiled it all down to a single number I could measure daily.

Essentially, that number was “net daily change in gross profit.”  What was today’s revenue from new clients, minus revenue lost from any departing clients, minus the cost to acquire new clients?

Because my other costs were relatively fixed, that one number turned out to explain most of any change in fortunes for the whole business.  This, in turn, told me exactly how I was doing every day — a highly motivating and focusing flow of information.

Imagine how effective US economic policy might be, if managed to a single number.

The Federal Reserve once managed to a single number — inflation — but this was abandoned  in recent years, in favor of two numbers, namely inflation and unemployment.  There are legitimate reasons to want to reduce unemployment, but the two are often irreconcilable, and at minimum are a dilution of focus.  So this was a step backward from a management perspective.

Still, at least the Fed uses only two metrics.  Congress and the White House use an unlimited number, ranked in no particular order.  Cut inflation?  Control unemployment?  Flatten the income distribution?  Yes, yes, and yes.  Everything is important, so nothing stands out.  And then, nothing ever happens.

US economic policy could be hugely effective if we developed a single number that captured all the other goals.  The best metric, in my opinion, would be one that doesn’t exist yet:  median real disposable income per work hour.

What a mouthful!  But every word matters.  “Median” forces government to act in the interest of the middle class, because the median won’t go up much unless the masses earn more.  “Real” forces inflation management.  “Disposable” holds policy makers accountable to uncontrolled expenses like healthcare, education and housing, which for a generation have eaten up more than 100% of the real increase in middle-class income.  “Per work hour” acknowledges that workers’ time is not unlimited:  working twice as many hours doesn’t make them twice as well off.

If that single number goes up, Americans are generally getting better off, in a way that they will actually feel.  If it does not, then they are not.  Simple.