United States: Regional Economic Risk And Your Personal "Plan B"

Last Updated: June 15 2015

Lately I've been thinking a lot about what a "Corporate Event" at Humana might mean for Louisville. A rosy analysis I've heard suggests that Aetna might buy Humana, and then move its headquarters here.

We'd all love that outcome (sorry, Hartford).

Other Humana transactions may have collateral effects on our city that are to put it mildly, non-accretive.

But, if Tip O'Neill was correct when he famously observed that "all politics is local," then it's probably equally true that "all merger impacts are personal."

  • What would regional economic risk like a Humana event mean for you?
  • What are your particular exposures?
  • Most importantly, what can you do to get ahead of those risks?

Because I believe the right pictures help clarify things, I created an Economic Risk Quadrant to evaluate your personal impacts from regional economic risk (whether sudden, or gradual).

Locating yourself, your business, or your employer on the Economic Risk Quadrant suggests how you might be affected, what you can do to prepare, and how you can most effectively adapt and respond.

In the northwest "Local Income / Local Assets" quadrant of the grid, we have people and enterprises with income streams that are extremely anchored in local relationships, and balance sheets anchored in the same local geography.

The most extreme example of local income and local assets is a realtor with a side business flipping houses.

Other examples include a teacher or municipal government worker, because local tax revenues underpin their income and the health of their pension funds.

Similarly, a small business owner with local customers will see sales volume rise and fall with the health of the local economy, and the value of their business will fluctuate accordingly.

On the positive side of the ledger, this local/local strategy is resilient to economic shocks, because it usually has a diversified customer base. Income may be disrupted, but is unlikely to go to zero.

In extreme cases, however (such a as a realtor/flipper in a crashed real estate market), the local/local strategy can concentrate risk dangerously.

On the negative side of the ledger, individuals who optimize their careers for a local/local strategy usually lack geographic mobility. Most often, this isn't a problem, but in extreme instances, it's a hazard (e.g., New Orleans after Katrina, or pretty much anything in Detroit over the last 35 years).

To reduce risk, individuals in the local/local quadrant could shift their balance sheet on the margin away from local real estate and/or closely held business into a diversified portfolio of marketable securities.

In times of adversity (or, even better, before adversity strikes), the best adaptation strategy for the local/local niche is probably to find new or supplemental products to sell into the existing web of customer relationships.

Examples of this might include a realtor who expands into estate sales, or a municipal employee who develops a paid side income stream as a youth sports coach or referee.

Shifting to the northeast quadrant, we see "Local Income and National Assets." Individuals in this quadrant have income streams that are highly anchored in local relationships, but tend to build wealth in a diversified portfolio of national or global marketable securities (largely, inside qualified retirement plans).

Examples of this economic niche include financial advisors and regionally-focused attorneys and accountants.

Their skill set tends to be nationally deployable, so they can move if necessary, but moving will disrupt their locally-focused relationships, so it's an undesirable adaptation strategy.

In the local income / national assets quadrant, the best adaptation strategy when (or before) disruptive events happen is to find new service offerings to sell into preexisting relationships, or find new geographic territories in which to sell the same offering.

For instance, a regional law firm might develop an industry niche, and expand nationally within that niche. Alternatively, an insurance agency might expand into new lines of coverage.

To reduce risk, individuals in the local income / national assets quadrant could increase mobility options by participating in national trade associations, or becoming licensed in other jurisdictions.

In contrast, I think it's risk-multiplying for a regionally-anchored professional to invest in muti-family or commercial real estate in that same region. (In other words, be cautious about intentionally creating concentrated risks you don't already have.)

At the southwest quadrant of the grid, we see "National Income and Local Assets."

In most instances, this means that revenue arrives from outside the community, so events adversely affecting the home economy won't impair sales.

On the other hand, many "factors of production" such as a factory, warehouse, workforce, transportation infrastructure, and/or governmental regulation are influenced by local events.

Because disrupting factors of production is inconvenient, the short-term mobility of individuals or enterprises in this national income / local assets quadrant is somewhat low.

In the mid-to-longer term, however, it's easy for these individuals or enterprises to move if they need to, without impairing income streams.

Examples of these individuals and enterprises include manufacturers, college professors, physicians (their patient base is local, but revenues are very often sourced from the state and/or Federal government), large farmers, and business-to-business sales.

When economic disruption threatens, the adaptive response for the national income / local assets quadrant is to develop new sales relationships for the current product, or (possibly), new or different products to sell into the same relationships.

Finally, in the southeast quadrant of "National Income and National Assets", we see a situation like that many Humana employees might face soon.

For individuals and enterprises in this quadrant, income streams aren't anchored to a particular locality, and wealth tends to be invested in nationally and globally diversified portfolios.

Examples of this quadrant include executives of Fortune 500 companies, management consultants, attorneys with national or global practices, military families, and senior staff of Federal agencies.

This is a very mobile quadrant.

Sometimes, the mobility is by choice – better opportunities arise, and there is little opportunity cost for a move, particularly when one's employer picks up relocation costs.

Sometimes, the mobility is involuntary, when a transfer occurs, or when an alternative job in advance of or after a layoff or consolidation is located far away.

Adaptation strategies for this quadrant seem to me to be rather limited: find someone else who needs the same product you are selling.

I think the most effective risk reduction strategies for the national / national quadrant include intentional and sustained networking in your industry in other geographies (to assist mobility if needed), and developing a personal brand within your own industry that is independent of your current employer. (For a quick read with valuable advice along these lines, try The Start-up of You by Reid Hoffman.)

These investments aren't likely to be left "stranded" if your current employer transfers you, in the way community-focused investments of time and energy might be.

This brief overview doesn't claim to provide answers to some very difficult questions that may personally affect a lot of great friends and good people in Louisville in the months ahead.

Nonetheless, readers, I encourage you to carefully consider where your own income streams and balance sheet (both visible and invisible) place you on the Economic Risk Quadrant.

Intelligently assessing your current strengths and vulnerabilities helps you protect your human capital, and develop better options for mitigating career and income risk.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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