Economics of customer service

Two great stories in last week's WSJ about management decisions regarding customer service.  One focuses on decisions in the private sector regarding "how far customers can be pushed before their heads explode."  This is a classic case of optimization using economic logic: reduce spending on customer service up until the point that the savings are offset by lost revenue from angry customers.

Specific examples: How many registers are open?  How many branches and nodes to put in the automated phone answering service?  How long does it take to talk to a real person?  Will the real person be empathetic and speak English well?  Firms are using the data they collect in real time to answer these questions.  One thing I learned is that companies are now using artificial intelligence to match the angriest customers (based on voice tone, syllables per second) with the agents who have the best conflict management skills.

The other story focuses on an institution where customer service has gone from poor to horrific: the Internal Revenue Service.  This year only 33% of calls dealing with compliance penalties got through.  The IRS budget has been cut and one of the responses under Presidents of both major political parties has been to degrade customer service.  Of course the IRS only looks at the situation from a cost standpoint; they do not have to worry about their customers going elsewhere.

Will the Fed's rate cut matter?

Yesterday the Federal Reserve cut the federal funds rate from 2.50 to 2.25 percent.  Financial markets reacted adversely, perhaps because they anticipated a larger cut or the prospect of more cuts in the future.

But what economic impact will this cut in interest rate have?  Chicago Booth economist Austan Goolsbee questions whether it will do much at all.  Lower interest rates historically stimulate household purchases of durables (furniture, appliances, cars, homes) and corporate spending on investment.  Goolsbee points out that interest rates have been at historically low levels for 10 years, so there is not likely to be much pent-up demand for durable goods.  Also, rates cannot fall much further from their current rates; zero is a lower bound!  Banks are not going to pay borrowers interest.  

Long term rates are just as low as short term rates, indicating the market expects interest rates to remain quite low.  Proponents of the rate cut argue that slower growth in Europe and China dictates stimulus in the US.  However, the rate cut also led to the dollar raising in value to its highest level in two years (not what we would have expected, by the way; lower interest rates usually imply a declining currency value).  If this holds up, expect net exports to decline which will further slow growth.  Also the interest rate cut is bad news for savers.

Two members of the Fed's Open Market Committee voted to not make any change in interest rates, believing that an economy with 3.5 percent unemployment does not need any more stimulus.  If Goolsbee is right and the rate cut does not offset the drag from trade wars and slower growth in other countries, it will be interesting to see if the Fed doubles down on yesterday's action.