NAIRU (no, I did not have a stroke)
And yes, you aren't time traveling, the newsletter is late
Top of the morning, afternoon or evening to you. As many of you have noticed (and thank you for checking in), this email is coming to you late.
Not a lot of explanations needed, I felt like a break was due and took it. Cheers to myself for learning how not to burnout for the 10th time.
This week’s Friday email will be a bit longer, since I need to catch up on last week, so stay tuned.
Let me know what you think of today’s lateral exercise - it’s pieced together from a story I heard a long time ago, but still find it’s a great example:
A small local pizza place is doing great. They’re the community’s most valued enterprise and their “get your pizza in 30 minutes or it’s free policy” is legendary.
Out of nowhere, Pizza Hut opens a shop right across from them. Because of their greater production means (and to stifle out competition), they enforce a “get your pizza in 15 minutes or it’s free” policy.
There’s no way the local pizza shop can compete with their prices and new policy.
What should they do?
One potential answer, as usual, at the end.
Also, fun fact, if you search all my newsletters I have never used the word “pizza” in them. For that, I truly apologize.
But you also need to apologize if you don’t subscribe.
What the fuck is NAIRU?
Obviously, it’s Non-Accelerating Inflation Rate of Unemployment.
Don’t worry, I also pretended to understand that the first time.
What’s fascinating about it, if you don’t have the time or patience to read, is that it explains how LOWER unemployment means HIGHER inflation.
In my mind, that didn’t make any sense.
However, I’m no economist, so some of you are surely puffing and huffing right now and preparing your Twitter threads on how I’m wrong in every way imaginable.
But I’ll take a chance for the rest of us and explain it, because I found it fascinating.
Common sense (and media) tells you that unemployment is bad. We should ideally try to get it to 0, if possible, right? Wrong.
Yes, HIGH unemployment is bad. But (too) LOW unemployment is just as bad. Why? For a lot of reasons, but lets name a few:
Reduced productivity. Yes, in a “kill work” mindset, this seems like capitalist propaganda. However, it’s simple math. If you have too many unproductive employees (meaning they cost more than they produce), that extra cost ends up being shifted to the consumer - so they pay more for the same product (hello, inflation)
Unsustainable wages. Hello, IT industry. When everyone is hiring, wages increase, which is generally a good thing in the short term, but if they increase exponentially, like they did in the past few years, companies who have relied massively on external funding falter. Just look at business that have gone public in the past years and are now well below their initial IPO valuation
Low employee retention. When a lot of jobs are on the market, employees switch jobs often. That means companies lose money (or have to raise wages well beyond normal rates, see point #2) and they reflect that in their product’s price. Which theoretically sounds amazing (power to the people), but it also means you pay more for the same thing.
So in an ideal economy, unemployment should stay around 5-6%, according to experts.
As much as I know some people love the “crush all corporations” stance, they’re actually crushing themselves. No company will take the hit on their own dime, they’ll just pass the cost along to consumers.
Why recessions can be (and often are) good
Economic cycles are part of our society, but people have short memory. Every time there’s a period of economic prosperity, a lot of companies that don’t make sense pop up.
A recession helps filter those out and creates an opportunity for businesses that actually contribute real value to the supply and demand chain.
When the dotcom bubble burst, hundreds of companies disappeared overnight. But the ones that remained ended up improving the quality of our life in the long run - we wouldn’t have good internet, good package delivery systems or easy payment solutions if this didn’t happen.
So, to paraphrase my favorite Fifth Element scene: You see good in evil. That’s a very good philosophy.
If you want to learn more on this topic, I recommend this short video.
Potential answer: You close up shop for a week. Pizza Hut won’t be able to keep up with the influx of orders and will offer a poor dining experience (and a lot of free pizzas, so they will most likely retract the offer). When you open up again, people will appreciate the difference between your shop and a chain restaurant.