The DISH
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Vol. 14 No. 24…Dedicated to the Dialogue on
Race…June 13, 2011
Bit of History
W. Edwards Deming (1900-1993)
William Edwards Deming, American
statistician, professor, author, lecturer and consultant, is best known for
teaching top Japanese management how to improve design, product quality, testing
and sales 
through
various methods, including the application of statistical methods during the
1950s. The first of three children of William Albert Deming and Pluma Irene Edwards, he was born in
His father was trained in
mathematics and law, while his mother was a musician. The Deming's insisted
their children be educated. Young William attended school in Powell and held
odd jobs. After graduating from the
Dr. Deming married Agnes Bell (1922) and the couple adopted a daughter,
Dorothy. Agnes died (1930), and Deming married Lola Elizabeth Shupe in 1932. The couple had two daughters, Diana and
Linda. The family moved to
While studying at Yale, Deming received an internship at Bell Telephone
Laboratories, where he met Walter A. Shewhart, the
originator of the concepts of statistical control of processes and the control
chart (1927). Through this collaboration, Shewhart
introduced Deming to his idea of common and special causes of variation, which
led to Deming's theory of management. Deming believed these ideas could reach
beyond manufacturing processes and be applied to general management. This key
insight led to his enormous influence on the economics of the industrialized
world after 1950. Deming became a mathematical physicist at the United States
Department of Agriculture (1927-39) and edited a series of lectures by Shewhart into a book published in 1939 entitled Statistical
Method from the Viewpoint of Quality Control.
Dr. Deming developed sampling techniques used by the US Census Bureau
(1939-45). He also served as a census consultant to the Japanese government
after WWII. The Japanese Union of Scientists and Engineers (JUSE) sought Dr.
Deming as an expert to teach its members statistical process control (SPC)
techniques as part of
The JUSE board of directors was so grateful it established the Deming Prize
(1950) in recognition of his friendship and kindness; this prize continues to
reign as the archetypical symbol of quality control and quality management. The
Prime Minister of Japan (Nobusuke Kishi),
acting on behalf of Emperor Hirohito, awarded Dr.
Deming Japan's Order of the Sacred Treasure, Second Class in 1960 to recognize
his contributions to Japan's industrial rebirth and worldwide success.
Despite his high regard in
Ford Motor Company was among the first
Dr. Deming authored a book
entitled Out of the Crisis in 1986 in which he offered a theory of management
based on his famous 14 Points for Management. "Management's failure to
plan for the future brings about loss of market, which brings about loss of
jobs. Management must be judged not only by the quarterly dividend, but by
innovative plans to stay in business, protect investment, ensure future
dividends, and provide more jobs through improved products and services."
In 1993, Dr. Deming founded the
W. Edwards Deming Institute in
Among his many honors, an exhibit
memorializing Dr. Deming's contributions and his famous Red Bead Experiment is
on display outside the board room of the American Society for Quality. Dr.
William Edwards Deming died in his sleep at the age of 93 in his
Ignoring Dr.
Deming at Our Peril
In the early part of the
Twentieth Century as the
The Second World War (1942)
forced the
But after the war, as American
service men returned to take jobs back from women, companies quickly forgot the
lessons of quality. Any company that could produce had a ready market,
especially since much of the manufacturing capacity of the rest of the world
had been destroyed. US quality improvements stalled and in many cases went
backwards.
An
Example: Jack Welch's Legacy
Jack Welch was the much
celebrated CEO of GE from 1981 to 2001. During his reign he instituted several
management ideas that became strongly identified with him and influenced many others.
He called for set goals from every manager in every one of GE's 
businesses,
generally looking for increases in profit of 15% per year every year. He
insisted that the bottom 10% of managers be fired each and every year. And he
adopted a secret weapon, Six Sigma, a statistical tool that was meant to
improve the operation and profits every year. And GE became the most valuable
company in the
It is only natural that other companies and managers would try to emulate Welch
because of his apparent success. Other companies embraced strong goal setting.
At least one school taught Welch's methodology of firing the bottom 10%, and
Six Sigma became all the rage among American managers, eclipsing other process
improvement tools and systems. Dr. Deming seriously warned about the dangers of
all three of these ideas. Goals, which are just another form of management by
objectives, distort the system and create many more problems. To fire the
bottom 10% of any group is madness and Six Sigma, as practiced by Welch was
seriously flawed. As Deming said, it is possible to have zero defects and zero
customers.
What did we learn from Jack Welch? How well has the Welch legacy held up? If
you had invested in GE when Welch was at the height of his fame, in 2000, when
Six Sigma was being adopted throughout the company, you would have lost over
70% of the value of your investment.
Shortly after taking over as CEO,
his successor, Jeffrey Immelt, sold a major GE
subsidiary, their reinsurance business, to another large insurance company.
When the buyer looked over the financial books during the due diligence
process, it was clear that GE had kept reserves at extraordinarily low levels
to artificially increase profits over the prior decade. In order for the sale
to go through, the reserves had to be dramatically increased.
GE had to put much more capital
into their insurance subsidiary and financial results for the last few years
needed to be restated. Instead of profits having grown by 15% a year, as Welch
had reported, they had fallen or been flat the last five years of Welch's
tenure. When Jack Welch needed additional profits he got them the old fashioned
way-he resorted to financial alchemy. The sterling results were completely
illusory, which is totally in line with Dr. Deming's prediction.
However, this was just the tip of
the iceberg. Immelt was forced to admit that Six
Sigma was not working so he resorted to the old game of putting lipstick on a
sow. He renamed it Lean Six Sigma. Now tens of thousands of managers and
consultants are running around doing great damage with a new word.
But even that understates the extent of the damage. What was obvious to
competent financial analysts, although not managers, consultants and the
general public was that Welch was dangerously increasing debt, leverage and
risk. It is easy to increase profits if you have borrowing capacity; just
borrow more short term and lend it out long term at a higher rate.
Dr. Deming stated that anyone could increase short term profits. But doing so
can destroy a company. The problem is that short term interest rates can rise
precipitously or short term funds can cease to be available at all. And if the
financial assets of the company, such as commercial real estate loans, are
questionable the results can be devastating. This is exactly what happened to
mighty GE during the financial crisis of 2007. It would have been forced into
bankruptcy except for the largess of the federal government which started
guaranteeing GE's commercial paper.
The
Deming System of Profound Knowledge
Dr. W. Edwards Deming taught that
by adopting appropriate principles of management, organizations can increase
quality and simultaneously reduce costs (by reducing waste, rework, staff
attrition and litigation while increasing customer loyalty). The key is to
practice continual improvement and think of manufacturing as a system, not as
bits and pieces."
"The prevailing style of management must undergo transformation. A system
cannot understand itself. The transformation requires a view from outside. The
aim is to provide an outside view-a lens-that I call a system of profound
knowledge. It provides a map of theory by which to understand the organizations
that we work in.
"The first step is
transformation of the individual. This transformation is discontinuous. It
comes from understanding of the system of profound knowledge. The individual,
transformed, will perceive new meaning to his life, to events, to numbers, to
interactions between people.
"Once the individual understands the system of profound knowledge, he will
apply its principles in every kind of relationship with other people. He will
have a basis for judgment of his own decisions and for transformation of the
organizations that he belongs to.
"There is no substitute for knowledge." This statement emphasizes the
need to know more, about everything in the system. It is considered a contrast
to the old statement, "There is no substitute for hard work!"
Instead, a small amount of knowledge could save many hours of hard work.
"In God we trust; all others must bring data." "Experience by
itself teaches nothing." This statement emphasizes the need to interpret
and apply information against a theory or framework of concepts that is the
basis for knowledge about a system. It is considered as a contrast to the old
statement, "Experience is the best teacher" To Dr. Deming, knowledge
is best taught by a master who explains the overall system through which
experience is judged; experience, without understanding the underlying system,
is just raw data that can be misinterpreted against a flawed theory of reality.
"Knowledge is theory. We should be thankful if action of management is
based on theory. Knowledge has temporal spread. Information is not knowledge.
The world is drowning in information but is slow in acquisition of knowledge. There
is no substitute for knowledge."
Faith-Based Economics of Deficit Reduction
By Dean Baker
Deficit cutting has become the
common 'wisdom' of economic policy wonks in DC. But it can't muster one
rational argument
Sometimes,
it can be fun to get inside a crazy worldview to ask how it deals with
contradictory evidence. For example, how do creationists reconcile their view
that all plants and animals were created in their current form around 10,000
years ago, with fossil evidence of life forms dating back hundreds of millions
of years?
In this vein, it's worth asking how the proponents of deficit reduction think
that lower deficits will lead to increased growth and job creation in an
economy mired in a severe slump. There
is not an easy answer.
There is a standard "econ 101" story about how reducing deficits can
boost the economy. The theory goes that if the government reduces its deficit,
and therefore borrows less, it will reduce interest rates. Lower interest rates
will, in turn, give firms incentive to invest more.
Lower interest rates should also
cause the dollar to decline, since it will make US government bonds and other
dollar assets less attractive to foreign investors. If the dollar falls in
value, then our goods will be more competitive on world markets. This will
cause us to import less and export more, thereby creating jobs.
Is this what the deficit hawks
believe will happen now? The interest
rate on 10-year Treasury bonds is already down to 3.0%. Assuming a 2% inflation
rate, this translates into a real rate of about 1%. How much lower do the
deficit hawks think interest rates will fall if we were to sharply cut the
deficit? Furthermore, how much more investment do they think we can induce even
if we got a large reduction (for example, 0.5 percentage point) in real
interest rates?
Do they think that this sort of
decline in interest rates will send the dollar tumbling and thereby improve our
trade balance? Against which currencies will a lower interest rate cause the
dollar to fall sharply?
Neither of these stories really passes the laugh test. At best, we may hope to
see modestly lower interest rates, if cutting the budget deficit slows growth
further. But there is no reason to expect any future decline to have any more
impact than the recent decline in the 10-year Treasury rate from 3.6% in the
winter to near 3.0% present this month.
There is another story that the deficit hawks occasionally push. This one says
that if we lay off workers in the public sector that will increase employment
in the private sector. The story here is, presumably, that mass layoffs of
public sector workers will depress the wages of workers further, thereby making
it more profitable for employers to hire them. There's a simple problem in this
picture. In order for wages to actually fall, the additional employment in the
private sector must not be as large as the job loss in the public sector.
In other words, if we lay off 500,000 public sector workers, then the private
sector must increase employment by less than 500,000 workers; otherwise, wages
would rise, not fall, and businesses would then not have any incentive to hire
more workers. This means that this route of economic stimulus through government
cutbacks can, at best, get us close to where we were before the layoffs. It is
not a way to add jobs to the economy. And even in a best case scenario, it
would take a considerable period of time to get close to that situation, since
wages do not fall quickly.
Neither of these channels sounds very promising, as almost any serious person
would have to acknowledge. This leaves the mystery channel of bad feelings.
This story goes that businesses feel bad about the deficit. They are worried
that they might pay higher taxes in the future, there could be inflation, or
the government could collapse. For these reasons, businesses that would
otherwise be investing their hefty profits are, instead, sitting on them.
There are two problems with the
bad feelings story. First, businesses actually are investing at a pretty
healthy rate. There was huge overbuilding of structures in the real estate
boom, but investment in equipment and software as a share of GDP is almost back
to its pre-recession level. Given the excess capacity in this sector, we really
should be asking why investment is so high, not why it is low.
The second problem with this story is that the fear of higher taxes in the
future is a good reason for businesses to try to invest and earn profits now. When
the congressional budget office used various models to examine the impact of
Bush-type tax cuts, the ones that showed the most positive effects were ones
that assumed the tax cuts would be temporary. This effectively pulled
investment and work effort forward into the low tax period. The point is that
if people really believed they would pay much higher taxes in the future, then
they should be working hard and investing today - the opposite of the deficit
hawk story.
So, finally, we don't have a
coherent story as to how reducing the budget deficit will boost growth - just
as the creationists don't have a coherent explanation for what we know about
the plant and animal kingdoms. The big difference is that the deficit hawks are
determining economic policy.
About Me: Baker is co-director of the
Center for Economic and Policy Research in
Why
By Robert Reich
The silence is deafening. While
the rest of the nation is heading back toward a double dip,
Republicans don't want to do
anything about jobs and wages. They're so intent on unseating Obama they'd like
the economy to remain in the dumps through Election Day. They also see the
lousy economy as an opportunity to sell Americans their big lie that government
spending is the culprit -- and jobs will return if spending is cut and
government shrinks.
Democrats, meanwhile, don't want to admit the recovery has stalled. They worry
such talk will further undermine consumer confidence or spook the bond market.
They don't want to head into the election year sounding downbeat. And they
don't think they have the votes for anything that will have much effect before
Election Day anyway.
But there's a third reason for
The unemployed are politically invisible. They don't make major campaign
donations. They don't lobby Congress. There's no National Association of
Unemployed People.
Their ranks are filled with women
who had been public employees, single mothers, minorities, young people trying
to enter the labor force, and middle-aged men who have been out of work for
longer than six months. You couldn't find a collection of people with less
political clout.
Women who had been teachers, public health professionals and social workers have been hit hard. These jobs continue to be slashed by state and local governments. Public schools alone accounted for nearly 40% of the nation's total public sector job losses in the last year. From March 2010 to March 2011, women lost 214,000 public sector jobs, compared with a loss of 115,000 public jobs by men.
Unmarried mothers are having a
particularly difficult time getting back jobs because their work was heavily
concentrated in the retail, restaurant and hotel sectors. Many of these jobs
disappeared when consumers reduced their discretionary spending, and they won't
come back in force until consumers start spending more again.
According to a new report by the
California Budget Project, the recession erased more than half the jobs single
mothers in
Blacks also continue to be hard
hit. Their unemployment rate here in
Many young people who have never been in the job market are unable to land a
first job. Employers with a pick of applicants see no reason to hire someone
without a track record, particularly those without much education. Unemployment
among high school dropouts is hovering around 30%. Even recent college
graduates are having a much harder time than usual finding a job. Many are
settling for jobs that don't ordinarily require college degrees, which pushes those with less education even further back in the
line.
Older workers who have lost their
jobs are at the greatest risk of continued unemployment. Employers assume they
aren't as qualified or reliable as those who are younger and have been working
more recently. According to research by the Urban Institute, once you're laid
off, your chance of finding another job within a year is 36% if you're under
the age of 34. But your odds drop the older you get. If you're jobless and in your 50’s, your
chance of landing another job within the year is only 24%. Over 62, you've got
only an 18% chance.
What do these jobless have in
common? They lack the political connections and organizations to get the ears
of politicians, and demand policies to spur job growth. (Source:
http://truthout.org)
Can you smell the fear? Right now
world financial markets are visibly nervous and many are worried that Wall
Street is about to go into panic mode.
The following are 10 signs that
Wall Street is about to go into panic mode….
1. According to The New York Post, nearly all of the
major Wall Street banks are planning huge layoffs. "Barclays Capital,
Goldman Sachs, Bank of America, JPMorgan Chase and
Morgan Stanley are among those financial institutions either weighing staff
cuts or actually paring payroll"
2. A new CNBC article claims that
a "negative feedback loop" has "taken control" on Wall
Street. Essentially what is happening is that bad economic news is creating an
"environment of pessimism" which creates even more bad economic news,
etc. etc.
3. OPEC has announced that oil
production levels will not be raised. This is likely to spook the financial
markets and cause the price of oil to go up even higher in the coming weeks.
The last time US energy expenditures were over 9 percent of GDP was back in
2008 and at that point the economy rapidly plunged into a very deep recession.
4. QE2 will wrap up at the end of
June, and many on Wall Street had been counting on yet another round of
quantitative easing. Over the past couple of days, however, it has started to
become clear that is just not going to happen - at least for now. In fact, Pimco's co-chief investment officer, Bill Gross, is telling
investors that for the Fed it will "be difficult to initiate a QE3."
But without artificial stimulation the
5. Moody's recently warned that it may downgrade the debt ratings of Bank of
America, Citigroup and Wells Fargo. Bank stocks were on the cutting edge of the
financial collapse of 2008, and it looks like that may happen again this time.
6. Faith in the US dollar continues to decline. Back on April 18th, Standard
& Poor's changed its outlook on
7.
8. A whole slew of bad economic
news has been pouring in lately. Mike Riddell, a fund manager at M&G
Investments in London, recently pointed out to CNBC some of the data points
that have been particularly alarming…."US house prices have fallen by more
than 5 percent year on year, pending home sales have collapsed and existing
home sales disappointed, the trend of improving jobless claims has arrested,
first quarter GDP wasn't revised upwards by the 0.4 percent forecast, durables
goods orders shrank, manufacturing surveys from Philadelphia Fed, Richmond Fed
and Chicago Fed were all very disappointing."
9. A whole lot of folks in the financial industry have been warning about the
next financial collapse lately. For example, economist Nouriel
Roubini recently made the following statement….
"I think right now we're on the tipping point of a market correction. Data
from the
10. According to a new CNN/Opinion Research Corporation poll, 48% of Americans
believe that it is either "very likely" or "somewhat
likely" that the United States will experience a "depression"
within the next 12 months. Needless to say, Wall Street is highly influenced by
the overall mood of the nation.
Once again, let's hope that
financial disaster can be averted for as long as possible. The last thing the