Tag Archives: economics

slowdown in entrepreneurialism

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I thought that high unemployment and downward pressure on wages was leading to more startup companies and entrepreneurs. Not so, according to Janet Yellen from the Federal Reserve:

With a good deal of justification, the United States has always viewed itself as an entrepreneurial country. Although most new businesses fail, founding a new company is still a key way for people to move up the income distribution, Yellen said. “However, it appears that it has become harder to start and build businesses,” she added. “The pace of new business creation has gradually declined over the past couple of decades.” This decline could serve to depress the growth of productivity, wages, and employment, Yellen went on, and it “may well threaten what I believe likely has been a significant source of economic opportunity for many families below the very top in income and wealth.”

world economic slowdown

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Here’s a laundry list of world economic problems from CBS News:

The focused has been on Germany over the past week, the weakly beating heart of the still-troubled eurozone, where industrial production, factory orders and export activity all posted the worst results since early 2009 amid chatter that the country is on the verge of falling back into a technical recession.

Separately, France is having budget woes. And the eurozone debt crisis threatens a comeback as credit rating agencies issue new warnings and the market starts to realize that the European Central Bank can no longer bluff its way out of trouble. It now must step up with a bona fide sovereign bond-buying stimulus program (which could be illegal according to its charter and is unpopular idea with the Germans) after playing at one for more than two years.

Japan is also at risk of falling back into technical recession (GDP growth already contracted last quarter) as a recent sales tax hike and the negative impact of a very weak yen (higher food, fuel and import costs) pinches consumers.

Japan has been held together by the idea that the Bank of Japan would issue more cheap money stimulus and further slam the yen if the economy faltered. But economists are realizing that a weak yen is hurting more than it’s helping at this point. And given Japan’s massive 227% national debt-to-GDP ratio (vs. around 100% for the U.S.) time is running out.

And in China, the People’s Bank of China is watching as electricity production contracts outright for the first time since early 2009, an anecdotal sign that China’s economy has hit a wall.

The second reason is that the U.S. Federal Reserve is watching as its efforts to merely return monetary policy to a more neutral footing — by bringing to an end the QE3 bond-buying program and looking ahead to the first interest rate hike since 2006 — has resulted in a volatile corporate bond market and a massive rally in the U.S. dollar.

This has crushed commodity prices, tightened credit to foreign economies (many of which have grown dependent on borrowing at low rates in cheap dollars) and threatens to slow U.S. GDP growth by pinching American exports.

It goes on after that…

No mention of root causes here. I keep repeating myself all the time redundantly but some potential root causes, which are not mutually exclusive are (1) the world is still feeling effects of the 2007-8 financial crisis, in a classic depression and loss of demand and confidence scenario, (2) rich people and corporations are driving government policy in their favor to the point that inequality has gotten so bad it has broken our economic system, with the middle class and working class not having enough incentive (i.e. income) to be productive, (3) technology and automation are putting strong downward pressure on middle class and working class wages, (4) climate change and natural capital depletion are starting to be felt in energy and food prices, putting a head wind on economic growth, with “green” technological progress not enough to lessen or reverse environmental impacts, or (5) innovation and technological progress in general have slowed down and are not driving economic growth like they have over the past century or so.

a rambling post on oil prices, France, and U.S. health care

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I said recently that I didn’t think oil prices would continue to decline much below $100 a barrel. Well, today (October 10 as I write) West Texas Intermediate is at $85.82 and Brent Crude at $90.21. An article I linked to recently said that fracking is cost-effective right now when oil stays above about $60.

In other economic news, U.S. health care cost growth is significantly down and it seems like that trend might continue. And France’s economy might be in trouble.

What do all these trends mean taken together? I have no idea, but I can speculate as well as anyone. Europe has been stagnant and is staying that way. Growth and energy demand are slowing in Asia too, exactly when U.S. oil and gas production are booming. Maybe solar panels are starting to take a bite out of the natural gas market? Probably not yet, but that will happen.

The U.S. health care system is an extraordinarily complex and inefficient market that nobody truly understands. There are some signs it may finally be getting a little more efficient. I think this may be one reason the U.S. looks like a bright spot in the overall lackluster world economy right now.

 

slavery

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What happens when an economic system is designed to support the profit-seeking of a small class of immoral people? Well, that sort of thing might have happened somewhere in the world in the past, but certainly not in the United States. Oh wait…

The domestic slave trade was highly organized and economically efficient, relying on such modern technologies as the steamboat, railroad and telegraph…

The sellers of slaves, Baptist insists, were not generally paternalistic owners who fell on hard times and parted reluctantly with members of their metaphorical plantation “families,” but entrepreneurs who knew an opportunity for gain when they saw one. As for the slave traders — the middlemen — they excelled at maximizing profits…

Planters called their method of labor control the “pushing system.” Each slave was assigned a daily picking quota, which increased steadily over time. Baptist, who feels that historians too often employ circumlocutions that obscure the horrors of slavery, prefers to call it “the ‘whipping-machine’ system.” In fact, the word we should really use, he insists, is “torture.” To make slaves work harder and harder, planters utilized not only incessant beating but forms of discipline familiar in our own time — sexual humiliation, bodily mutilation, even waterboarding. In the cotton kingdom, “white people inflicted torture far more often than in almost any human society that ever existed.”

These are quotes from a New York Times review of The Half Has Never Been Told: Slavery and the Making of American Capitalism by Edward E. Baptist.

Ryan Avent on Automation

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In this Economist podcast, Ryan Avent talks about how automation is leading to a “hollowing out” of the workforce. Basically, the concept is that as computers and machines get better at performing more and more skilled jobs (book-keeping is one example given), there is gradually less demand for the medium-skilled workers who used to do those jobs. High-skilled workers like computer programmers are doing very well, although I presume the automation will gradually creep higher and higher up the chain, so today’s safer jobs will be less safe tomorrow.

At the same time these medium-skilled workers in developed countries are getting squeezed out, developing countries are not benefiting like they used to from their large pools of low-skilled workers as manufacturing becomes more and more automated, and can be done cost-effectively closer to consumers in richer countries.

the shifts and the shocks

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The Shifts and the Shocks: What We’’ve Learned —and Have Still to Learn— from the Financial Crisis

Felix Salmon in the New York Times has this to say:

Martin Wolf is as grand and important as an economic journalist can ever become… His is the loudest and foremost voice saying that the global policy response to the crisis was far too timid; that it all but ensures we will have an even worse crisis down the road; and that unless we start implementing extreme measures today, we will be running headlong into catastrophe.

According to Salmon, his (Wolf’s) solution to the problem is the following:

  1. “central banks should target a much higher rate of inflation”
  2. “abolishing ­fractional-reserve banking, which would give governments the job of directly creating all the money in the economy”
  3. “attempts to prevent corporations from accumulating cash”
  4. “an end to the tax-deductibility of interest payments”
  5. “a scaling back of international banks”
  6. “a mass refinancing of European sovereign debt into eurobonds”
  7. “a radical change in debt contracts to make them much more equitylike”

Okay. I don’t know. I don’t really have the expertise to agree or disagree. All this seems aimed at giving the government and/or central bankers more direct control over the money supply. But do the experts really know exactly what the money supply should be? If we give the keys to the printing press over to the politicians, I think we know what will happen. If we give them to a handful of “experts”, I’m not sure we know what will happen, except that the world economy will be at the mercy of whatever theories they happen to believe in. That leaves the ebb and flow of individual banks setting interest rates based on supply, demand, and greed, with the government trying to nudge the system back toward balance if it starts to get out of balance.

It doesn’t seem like a great system, but if we experiment with something different and it causes the masses to lose our faith that money is a real thing (because it is only because we think it is), that would be hard to recover from. So I don’t know, maybe higher capital requirements but short of 100%, complete transparency in trading of derivatives and other weird forms of risk trading, and a constitutional amendment (in the U.S. anyway) to ban campaign contributions or political speech of any kind by financial corporations. The individual human persons who work for those corporations could still engage in political speech, of course, but only as private citizens using their own time and money.

“help consumers become more irrational”

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This Tedx Talk says the idea of “leading with green” in marketing is dying. If we want to scale up green consumer behavior, it says, we have to appeal to people’s irrational interests, like desire for wealth, status, novelty, and sense of altruism.

I instinctively recoil from the marketing-driven view of human beings as brainless consumer robots. And yet, there is no denying that marketing must exist because it works. It bothers me for few reasons. First is the idea that it is necessarily “irrational” to consider emotions in decision making. What is so irrational about trying to experience more pleasure and less pain? Does the fact that it is mental pleasure or pain make it irrational? I don’t think so – trying to improve status because you think it will lead to pleasurable social ties or avoid shame seems perfectly rational to me, as does helping someone so you can avoid feelings of guilt later on.

Another thing that bothers me is the idea that marketers are appealing to people to make choices based on their sense of right and wrong, while not making choices based on their own sense of right and wrong. Sure, it’s true that corporations are amoral piles of paper, but the people inside them do not have to be. We shouldn’t let a pile of paper trying to make a profit remake us flesh and blood humans in its own image.

Clearly a certain segment of the population will make decisions based on their sense of right and wrong. But in order to make the correct choices about right and wrong, they need to correctly predict the consequences of their actions. And to do that, they need to understand the social, economic, and environmental systems we find ourselves embedded in, and we need to look at these systems not just under a microscope and in the short term, but at a larger scale and over long time frames.

So what we need is an education system that teaches ethics and system thinking effectively. Our education system does not do either right now, so we have a situation where even formally educated people have not been given the mental tools to understand the consequences of their choices. A certain segment of the population is willing the make ethical choices, but their sense of right and wrong is easily manipulated by other segments of the population, who themselves have no sense of right and wrong.

If more children were challenged more often to think about right and wrong, as they were also being educated in system thinking, perhaps we could begin to inoculate the population against this madness that is otherwise going to destroy us. I don’t know what fraction of the population has to be ethical system thinkers before our civilization is successful. I think it is much less than 10% now, and it is not working. I don’t think it has to be 100% though. Maybe we should aim for a majority and go from there.

statistical proof that the United States is not a democracy

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Here it is at last – from Princeton and Northwestern Universities, statistical proof that the United States is not a democracy:

Each of four theoretical traditions in the study of American politics – which can be characterized as theories of Majoritarian Electoral Democracy, Economic Elite Domination, and two types of interest group pluralism, Majoritarian Pluralism and Biased Pluralism – offers different predictions about which sets of actors have how much influence over public policy: average citizens; economic elites; and organized interest groups, mass-based or business-oriented. A great deal of empirical research speaks to the policy influence of one or another set of actors, but until recently it has not been possible to test these contrasting theoretical predictions against each other within a single statistical model. This paper reports on an effort to do so, using a unique data set that includes measures of the key variables for 1,779 policy issues. Multivariate analysis indicates that economic elites and organized groups representing business interests have substantial independent impacts on U.S. government policy, while average citizens and mass-based interest groups have little or no independent influence. The results provide substantial support for theories of Economic Elite Domination and for theories of Biased Pluralism, but not for theories of Majoritarian Electoral Democracy or Majoritarian Pluralism.

I admit, I didn’t dig in and try to thoroughly understand all the statistics. They took a large data set where people have stated their preferences on various issues over long periods of time. The data set also has information on the incomes of the people responding, so they can do regressions of what various segments of society prefer. Then they look at actual laws that have been passed and compare the two. The results unfortunately but not too surprisingly, show that the preferences of the elite drive actual policy.

Their definition of “elite” was an income of “only” $146,000 a year. Sure, a lot of us would love to have an income of “only” that much. But the point is that is a household of two white collar professionals, not exactly the corporate jet set. So you could say policy seems to represent the preferences of the moderately affluent, upper middle class, or whatever you want to call it. But certainly not the preferences of the median household, the majority, or any sense of broad consensus. I think there is an important distinction to be made between the latter two – the truest democracy, I think, would not be one where 51% of people get their first choice of policy even if the policy is unacceptable to the other 49%. It would be one where the policies chosen are ones almost everyone can accept, even if they are the preferred by almost no one. So it would be a vision of the ideal democracy as diverse people living together in only mildly pissed off tolerance and harmony.

oil prices

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It’s interesting that oil prices have slipped back below $100 a barrel ($92.92 for West Texas Intermediate, $96.65 for Brent Crude as I write this on September 15). An NPR article blames this mostly on weak demand, but also maybe on unexpectedly higher supply from North America. Some people are predicting this trend will actually continue:

The International Energy Agency made that point last week, when it said a weaker economic outlook in China and Europe is causing a remarkable slowdown in global demand growth. And demand is declining, West says, as global supplies surge due to the energy boom in North America — including shale oil production from North Dakota and Texas.

“There’s another 3 billion barrels a day that’s coming into the market and staying in the market,” he says. “This has really changed the global supply-demand balance very substantially” — and helped bring more stability to the market…

Fadel Gheit, managing partner and head of oil and gas research at Oppenheimer & Co., says oil prices will still spike higher when severe disruptions occur. But he thinks global supply will continue to grow and keep prices in check.

He predicts that will happen as fracking technology improves, reducing the costs of production.

“The break-even point continues to decline. Yes, we needed $80 [per barrel] oil for the North Dakota Bakken oil development to continue,” he says. “Now, it’s about $65. Five years from now, it could be $50, or even $40.”

In the quote above, I skipped over plenty of dissenting voices in this fair and balanced coverage. Nobody really knows why markets do what they do in the short term, and anything can be rationalized. Then when you go back and look at the data later, often the longer-term trend is staring you in the face. Over the past 10 years or so, the longer-term trend is oil hanging out around $100 or so, whereas it used to be $20-40 for decades and decades before that (this is all adjusted for inflation.) So we’ll see, but I’m not ready to pronounce $100+ oil dead yet just because we’ve been at $96 for a few weeks.

The Moral Consequences of Economic Growth

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The Moral Consequences of Economic Growth

There’s a free excerpt of this 2006 book posted here. Basically, Benjamin Friedman argues that there is a moral argument to strive for as much economic growth as possible. Not only does it increase material wellbeing, it improves health, adds years to people’s lives, and allows people to have more leisure time. He also believes that it tends to support development of peace, tolerance, and stable, democratic institutions over time.

The value of a rising standard of living lies not just in the concrete improvements it brings to how individuals live but in how it shapes the social, political and, ultimately, the moral character of a people.

Economic growth—meaning a rising standard of living for the clear majority of citizens—more often than not fosters greater opportunity, tolerance of diversity,
social mobility, commitment to fairness, and dedication to democracy. Ever since the Enlightenment, Western thinking has regarded each of these tendencies positively, and in explicitly moral terms.

This is a different definition than just increasing GDP, which makes no implicit moral judgment about equity or fairness. If we define economic growth as growing a more equal (or at least, truly equal opportunity), just, sustainable society, then no rational person will have any objection to it. But I don’t think that is the most common definition in daily use today.