Share the Best Interest











Slack. Margin. Room for error. A safety net.

Insurance. A parachute. Risk reduction. Bench depth.

So many phrases, but they all represent the biggest lesson from COVID-19.

And if we don’t pay attention, we might be doomed to repeat our mistakes.

What do you mean… “slack?”

In it’s simplest form, slack (or any of the other terms above) represents an extra resource that we build into our systems, even if we think our probability of using that resource is low.

Slack is your spare tire. For the first 100,000 miles, your spare tire is dead weight. All is does is drag your car down and reduce your gas mileage. But when you pop a flat in the middle of nowhere, something magical happens. In an instant, that dead weight becomes the most important feature on your car. Slack feels wasteful, until suddenly it doesn’t.

In the past few weeks, we’ve seen these lessons everywhere we look. Some of them are sad and painful. Others are funny, though probably annoying. They all share a common wake-up call, a shared reminder: if you don’t give yourself some cushion, a sudden impact could jar you to your core.

For me, at least, it’s obvious: this it the lesson from COVID-19.

Margin in the pantry

Quick reminder: President Trump banned flights from Europe on Wednesday, March 11. The next day, March 12, schools started closing. That’s when reality hit most Americans square in the forehead.

But I feel like I had a fortune teller in my corner. A full two weeks earlier, on February 26, I got the following message:

We’re making common sense preparations for a 4-6 week “don’t go to the grocery store because coronavirus is here.” Rice, pasta, canned goods, coffee, TP, bleach… We don’t think this is paranoia. Not overkill. Here’s my real concern: IF…and it may happen…IF gov’t orders the schools closed, then poop will hit the fan. THAT will drive home the seriousness to the masses, and masses will flock to the grocery stores. It’s still weeks away, but some really bright folks at the CDC say, “expect substantial disruption” to daily routines. Food for thought. -A Fortune Teller

Whoa. Is it just me, or was every aspect of that prediction correct?

Now, my dad fortune teller wasn’t the only person who saw the writing on the wall. But this prediction made me go down in my basement and take a hard look at my pantry. Were there enough calories to support two of us at home for a multi-week lockdown? (The answer was no)

I consider myself pretty lucky that I was able to go to the grocery store in late February and stock up on some non-perishables (don’t worry, I made zero dent in the store’s supply at that point). When things got crazy in mid-March, I was able to stay at home and essentially ignore the outside world.

Sometimes, slack has no downside

But what’s the worst that would have happened if my fortune teller was wrong? What’s the big deal with having a shelf full of non-perishables in the basement? In this case, the cost of slack is very small.

But when half the population realizes–simultaneously–that they don’t have slack, you get this at your local Wegmans.

And the chain reaction that occurs from empty store shelves is even more interesting. One of my readers shared this story with me (I’ll paraphrase).

Initially, she felt no compulsion to rush to a grocery store. But on March 13, she happened to stop by Wegmans before work–just to grab a coffee. When she saw the state of the store (i.e. bare shelves) she realized, “If I wait to do my ‘normal shopping’ this weekend, there might not be anything for me to buy.”

So she changed plans, grabbed a cart, and picked up some essentials right then and there. It’s a perfectly normal reaction. It’s what I would have done.

The first wave of fear induces a second wave. The second wave induces a third. The feedback loop grows stronger. People who initially remained calm realize that there might not be anything left for them. It’s reminiscent of the FOMO/FUD cycles that occur during booms and busts in investment markets. This week’s episode of Freakonomics talks about that very idea.

When we realize there isn’t enough slack in the system, our “what if?” monkey brains do what is needed to survive. That’s why building slack into our lives has to be the lesson from COVID-19 that we take to heart.

But slack usually has a cost

Some of you might be thinking right now, “This is an incomplete story. Slack is inherently wasteful, and you need to do a cost-benefit analysis to figure out if slack is worthwhile.”

I completly agree.

As an example, let’s look at two frequent flyers. Ernie is always early and shows up two hours before his scheduled departures. But Conrad cuts it closer, only showing up one hour before departure.

So let’s say that their airport’s security gets “jammed up” about 10% of the time, and that’s when Conrad finds himself in trouble. On those days, he misses his flight and loses six hours getting re-routed to his final destination.

Ernie, meanwhile, makes his flight every time. He builds more slack into his schedule, and certainly seems better off for it. But is that actually true?

“If you never miss a plane, you’re spending too much time at the airport.” George Stigler

The math here is simple. Ernie wastes an hour on 90% of his flights, or 0.9 hours per flight. Conrad wastes six hours on 10% of his flights, or 0.6 hours per flight.

Slack is hurting Ernie more than it helps.

Of course, this has some strawman elements to it. I built this argument, I chose the numbers, and who says Ernie can’t be perfectly productive while waiting at at an airport gate?

But there is an underlying truth that you should keep in mind throughout the rest of this article. Slack can be a double-edged sword. It will waste one resource (typically time or money) in order to preserve another resource (like our ability to make 100% of our flights, or to drive after getting a flat tire).

Slack is rarely free.

Tragedy of the common-ers

Early data and predictions of COVID-19 suggest that it will disproportionately affect the poor.

Low-income workers tend to work in closer quarters. Lower class populations tend to live in denser neighborhoods. Viruses spread better in those situations.

Whereas middle- or upper-income workers might be able to work from home, low-income workers tend to work jobs that cannot be done from home. Manufacturing can’t be done via a Zoom call. Store shelves cannot be stocked using group chat.

And while middle- or upper-income workers might be able to weather the storm of a furlough or lay-off, lower-income workers are more likely to be operating on a paycheck-to-paycheck basis. That is, their personal finances tend to have significantly less slack, less cushion.

Do you go to work, interact with other people, and greatly increase your risk of COVID-19? Or do you stay home and find a way to survive without a paycheck?

How do you reconcile public pleas for “social distancing” and “flattening the curve” when you can’t make ends meet?

The stimulus package is a good start, but I fear the lack of safety nets that exist in our socioeconomic systems.

In the hospitals

The world’s medical systems are learning about slack in the most painful way. Typically common supplies–like N95 masks and ventilators–are now the limiting reagents preventing safe and effective treatment of COVID-19. The is the sad side of the lesson from COVID-19.

In fact, the entire “social distancing” movement is purely about buying the our healthcare systems more slack.

If social distancing is successful, it will be viewed by most people as unnecessary in retrospect. This is the essence of risk management, and why so few manage risk. Adam Butler

The medical system is capable of handling sudden shocks when they come from one specific area. For example, hospitals all over the Tri-State area were able to respond and assist on 9/11. That is useful slack.

But COVID-19 is widespread. It’s attacking the medical system everywhere at once. The normal method of slack–hospitals helping hospitals–is no longer effective.

So now we face a hard question: “Should these hospitals have built up more margin as individual organizations?“ Should each hospital system have a warehouse in the suburbs with 100,000 masks and 1000 extra ventilators?

My instinct is no, we can’t expect every organization to have a contingency for every situation. Just like our airport travelers, there would be a tremendous inefficiency for these hospitals to build that amount of slack into their systems.

Materials and drugs would expire. Machines would require maintenance and certification. And 99% of the time, they’d collect dust in that warehouse.

What about a ‘central stockpile’?

But there is a reasonable solution. It’s what the U.S. already does with annual influenza vaccines. As explained in this episode of Planet Money podcast, the U.S. government provides funding to private pharmaceutical companies to create influenza vaccines. This, in effect, is the government’s way of injecting slack into the system, guaranteeing that there will be a vaccine for next winter’s seasonal flu.

In the same vein, the U.S. government uses taxpayer dollars to fund and supply the National Medical Supply Stockpile. These supplies exist for times exactly like this COVID-19 pandemic. Or it did, at least, until the charter language of the NMSS suddenly changed this past week.

P.S. Thousands of the ventilators that the government does have in storage do not work, because the Federal Government got in a contract dispute in 2018/2019 with their maintenance company. No maintenance = broken ventilators. The slack that one administration created has been wasted by another administration. Why? To bicker over price.

In the business community

Our economy is reeling. But some businesses are handling the pandemic better than others, and slack is the differentiator.

Take a look at the airline industry. Specific, the following data will pertain to Southwest Airlines, Alaska Air, Delta, United, American, and JetBlue. These six companies have had a whopping $49 billion in free cashflow (“free” means available) over the past ten years.

Right now, airline revenues are way down. Nobody is flying. To keep businesses operating, that free cash needs to be used. The airlines can use that cash to pay their pilots and mechanics and stewardesses. They can keep their fleets maintained, and pay their recent debts to their suppliers. That cash flow gives the airlines slack.

But I’ve kept one important fact from you. Out of the $49 billion in free cash over the past decade, those six airlines have already spent $47 billion of it to buyback their own stocks. As a result, they now find themselves cash-poor in the face of mounting bills. And they’re looking to the federal government for a bailout.

The mistake happens when we over-index on the easily measured short-term wins and forget to account for the costs of system failure. -Seth Godin

It’s easy to measure the short-term stock price increase that these airlines were aiming for. They weren’t trying to help you, the flyer. The executives wanted to pad their own stock portfolios. And it seems like they neglected to account for the cost of system failure.

While capitalism demands that companies use their free capital to pursue profits (e.g. what these airlines did), it also punishes companies for acting stupidly. When a multi-billion dollar company knowlingly burns its own slack in pursuit of more profit, why is it up to Joe and Jane Taxpayer to bail them out?

This lesson was ripe during the 2008 crisis, and it looks like it’s a lesson from COVID-19 as well.

What about small businesses and startups?

Ma and Pa’s Bakery works a little bit differently than Delta Airlines.

Ma and Pa never got to decide what to do with their billions of dollars in free cashflow. Smaller companies typically operate on small margins. Perhaps they have a few thousand dollars of free cash per year.

And if the Ma and Pa choose to re-invest that cash into their business, can you blame them? What’s wrong with buying a new oven or hiring a helping hand when need arises (knead rises?…bread puns).

Unlike with the airlines’ stock buy-backs, the bakery’s re-investments directly lead to improvements for the consumer. More bread, better cookies, cheaper prices, etc. This is the good side of capitalism. Ma and Pa win. You and I win.

Small businesses have to choose between growth and slack. And you can’t blame them if they lean towards growth. It means that Ma and Pa might now be 30 days from insolvency because they bought a new oven last autumn. They did that to make better bread with you in mind.

I think we owe them a helping hand. I’m glad to see my local government stepping up to the plate. This is a good lesson from COVID-19.

On a mountain, in the woods

Have you ever been on a day hike, spending 10+ hours in the woods?

If not, you might not know that you’ve got to pack a ton of stuff for these trips. When you’re miles away from civilization, you need to prepare for the possibility that nobody can come save you. Therefore, every “what if…?” question needs to be answered by something in your backpack.

When the hike is done, you get to take off your backpack and realize that you carried 20 pounds up and down a mountain for nothing. You didn’t use any of it. This happens over and over again.

But then one day, a friend’s dad might slip and land knee-first on a rock. “What’s his knee-cap doing in the middle of his quadriceps?” Oh….

And that’s the day I realized the importance of carrying that heavy gear up and down the mountain. When emergency hits, you can either build a splint or you can’t. You’ve got a satellite phone or you don’t. Slack is there to help–or it’s not. There’s no in-between.

It’s scary. But this level of preparedness is a lesson from COVID-19 that we’d do well to reinforce in our lives. A few easy questions that come to mind:

What scenarios in life call for slack?

How often might that scenario arise?

What would happen if you didn’t have slack when you needed it? Catastrophic failure or a minor annoyance?

How much would it cost you–money, time, energy on a mountain-side–to maintain that slack?

(P.S. The knee-cap incident is a true story from my first real hike in the Adirondacks. If you like hiking, check out my friends over at FootStuff Podcast)

Lesson from COVID-19 learned

What will we do when the pandemic is over? How will we reevaluate our systems? What will we do with this lesson from COVID-19?

On a personal level, perhaps you’ll keep a few more dry goods in the cupboard. Maybe you’ll make a personal finance goal of building up your emergency fund.

But as a community, we need to rethink how much room for error we build into our systems. We need to plan for the fact that similar events might happen in the future–pandemics, natural disasters, alien invasions (?!). Our systems will need to endure similar shocks again.

We can keep to status quo and get in fist fights over Charmin. Or we can learn, build some slack into our lives, and be better next time around.

Thanks for reading.

-Jesse

P.S. – You can build some slack into your Best Interest reading regiment by subscribing to the blog’s mailing list. You’ll get new articles sent straight to your inbox every week, no spam.