Archive for the ‘Economy and Business’ Category

The passing scene: Links & comments 6/30/14

June 30, 2014

What If Banks, Not Abortion Clinics, Needed Buffer Zones? by Barbara O’Brien for Open Salon.

What if people doing business with the “too big to fail” banks had to run a gantlet of yelling protestors just to enter the bank.  Suppose the banks were vandalized, and their employees subject to harassing and threatening telephone calls.  Suppose bankers had actually been murdered.  Is there any doubt that the bank protestors would be classified as terrorists?  Yet all these things have happened with abortion clinics, and it is accepted as normal.

The Unkindest Cut by Elias Vlanton for The Washington Monthly.

Joshua Steckel, a high school guidance counselor, worked hard with students from poor families to convince them it was both possible and worthwhile to qualify for college by studying hard.   But at the end of the road, his students found that college was unaffordable.   Financial aid packages only covered part of the cost of college, and what was left was more than poor families can pay.

Antibiotic scientist must push discovery to market by Kelly Crowe for CBC News.

The emergence of antibiotic-resistant bacteria is a big threat to public health.  Yet few if any drug companies are interested in developing new antibiotics.  Profits on new antibiotics are small and risky because developing new antibiotics is difficult and expensive, regulatory approvals take time and money and antibiotics soon become obsolete as bacteria develop new resistance.

Peru now has a ‘license to kill’ environmental protestors by David Hill for The Guardian.

Under a new law, Peruvian police can escape criminal responsibility for killing civilians while on duty without having to show they are acting according to police regulations.

Big business loves desperate, overqualified, underpaid workers by David Atkins for The Washington Monthly.

Today’s South is boldly moving backwards by labor historian Nelson Lichtenstein for Reuters.

Historically Southern business leaders have sought to compete with the North by means of cheap labor.  This is still true.

Obama Admin’s TPP Trade Officials Received Hefty Bonuses From Big Banks by Lee Fang for Republic Report.

 

The real problem is monopoly

June 29, 2014

Jeff Bezos

Monopoly power is the real enemy of both free enterprise and economic justice in the USA today.

In industry after industry, a single company or handful of companies dominates the market, and they act like little miniature governments, determining who can participate and how much they are paid.

Barry C. Lynn, a senior fellow at the New America Foundation, and author of Cornered, a new book about monopoly, wrote that the cause is simple.

Starting with the Reagan administration in the 1980s, the government decided to stop enforcing the anti-trust laws when it was argued that monopoly offered greater economic efficiency.

The solution also is simple (although, Lynn admitted, extremely difficult politically to do).

Resume interpreting the anti-trust laws as they were understood prior to 1980.

LINKS

Free markets killed capitalism: Ayn Rand, Ronald Reagan, Wal-Mart, Amazon and the 1 percent’s sick triumph over us all, an interview of Barry C. Lynn, author of Cornered: The New Monopoly Capitalism and the Economics of Destruction. Strongly recommended.

Printing controversy:  Amazon’s latest plan to harm publishers and consumers under the guise of customer satisfaction by Nathaniel Mott for PandoDaily.

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The argument for monopoly is the same as the argument for state socialism, which is that it offers greater economic efficiency and less duplication than a competitive free enterprise system.

It is true that Amazon, like Wal-Mart, achieved its domination of its markets through a superior business model in which costs were passed on to the consumer.  Once dominance was achieved, however, Amazon, like Wal-Mart, was in a position to use its position to drive down wages, drive down prices of suppliers and deny customers any alternative by squeezing out competition.

Under business monopoly, the only competition is between individuals and localities as to how much they are willing to give up.

 

How did U.S. courts get to rule on Argentina?

June 27, 2014

A financial speculator won a decision in U.S. courts against the government of Argentina which could mean years of unemployment, high taxes, cutbacks in public services in that court.

I am mystified about a number of things in this case, including why the U.S. courts have jurisdiction over Argentina, a sovereign country, and how this decision is to be enforced.

Agentina's economic recovery.  Click to enlarge.

Double click to enlarge.

The background is that Argentina defaulted on its government bonds back in 2001.  Between 2005 and 2010, it worked out a deal with bondholders for them to write off about two-thirds of the debt in return for payment of the rest.

This was a good decision from the standpoint of the people of Argentina and, for the bondholders, better than nothing.

But the U.S. courts have negated that deal by ruling that a speculator who bought some of the original bonds for 20 cents on the dollar is entitled to be paid in full.

Default is a serious matter for nations, just as bankruptcy is a serious matter for individuals and corporations, but sometimes it is necessary.

For a head of state or a head of family, it is better to refuse to pay your creditors than to let people who depend on you go hungry.

Government defaults should, like individual bankruptcy, destroy or greatly harm the credit rating of the defaulter or bankrupt.   In practice, this rarely happens as often as it perhaps should.   Banks have so much more money than good ideas for investing it that they soon start lending again to defaulters and bankrupts.

Click to enlarge

Source: New York Times.  Click to enlarge

But how is it that U.S. courts have jurisdiction over a dispute between sovereign country and its creditors, who are based in many countries?  Is it because the payments go through the Bank of New York Mellon, which is in New York City?

How do U.S. courts propose to enforce their decision on a sovereign country.   Does their jurisdiction over New York City banks give them leverage over the whole world banking system?

It seems to me that this decision is a good reason for Argentina and other countries—including the BRIC group, Brazil, Russia, India and China—to create their own payments system outside U.S. jurisdiction.   Another thing I do not understand is why they have not done this already.  Is it because they fear being locked out of the old system in retaliation, before the new system is in place?

What’s needed is an international bankruptcy court, not under control of any government nor of banks, that could.  Its mission would be to resolve disputes between governments and their creditors when national leaders say they are unable to pay in full, in a way that was fair to the lenders without imposing undue hardships on peoples.

Such a court would have authority to free democratic governments of “odious” debts incurred by previous dictatorships.   Yes, that would make lending to dictatorships risky for banks.  It should be.

LINKS

Supreme Court Dismisses Case Between Argentina and U.S. Vulture Funds by Mark Weisbrot, co-director of the Center for Economic and Policy Research, for US News.  Hat tip for the link to Bill Harvey.

Paul Singer v. Argentina: A Thriller Reaches Its Climax by Ignacio Portes, a Buenos Aires journalist, for Naked Capitalism.

US vulture fund ruling pushes Argentina towards a second bankruptcy by Philip Inman for The Guardian.   [Added 6/28/14]

Non-moral arguments for humane goals

June 26, 2014

History professor Eric Rauchway pointed out how progressives advocate humane policies based on strictly economic criteria.

Back in the early 1900s, Charles Beard noted that merely to tell Americans that their factories were injuring workers more wantonly than those of any other country would fail to move a nation so fixated on profit.

You had, he said and I’m paraphrasing, because I’m not able to look it up at the moment, to tell the American people that it was inefficient to keep killing workers – that it was a waste of human capital, an unproductive use of resources.

This rhetorical tactic aims at moral ends by appealing to a venal calculus.  Like the commuter who rescued his fellow-citizen from a train track because he didn’t want to be late to work, maybe we will rescue our public goods from disruption – not because it’s the right thing to do, but because we won’t profit if we don’t.

via Crooked Timber.

I hear this kind of rhetoric  liberals today.  They concede the moral high ground to their opponents and then argue that their policies would be a better way of achieving non-liberal goals – for example, that health care reform would be a good way to help balance the federal budget.

One problem is that this type of argument is not always valid.   The larger problem is that when it is, it is not convincing to people committed to the view that the harshest policies are always the most realistic

The financial markets on automatic pilot

June 24, 2014

flash-boys-jkt_1In a well-ordered economic system, financial markets provide a means for business enterprises to obtain financing and for investors to judge the worth of a business.

Flash Boys, the latest book by Michael Lewis, tells how far the financial markets have gotten away from that purpose.

His subject was high frequency trading, a method of skimming money from other peoples’ financial transactions.  Enormous expense and ingenuity has gone into perfecting high frequency trading.  But from the standpoint of social good, the only question is to what degree it is extremely dangerous, moderately harmful or  merely useless.

High frequency trading is done by computers, because human beings are too slow.  Computer trading accounts for about two-thirds of transactions on U.S. stock exchanges.  There is even a venture capital company that has a computer algorithm on its board of directors.

The science fiction writer Charles Stross wrote about futures in which artificial intelligences incorporate themselves in order to gain legal standing as persons, and in which computers and robots have created a fully functioning society while human beings die out or are sidelined.

I don’t expect this to happen, of course, but it is a good metaphor for what is going on.   Putting such a large part of the financial system on automatic pilot is reckless, especially in an economic recovery that is fragile to begin with.

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Click on Scalpers Inc. for a review of Flash Boys by John Lancaster in the London Review of Books.  Hat tip to Steve Badrich for the link.  I haven’t read the book myself.

Formulas for success

June 19, 2014
Clayton Christiansen

Clayton Christensen

If there ever was an undiscovered formula for business success, it would be sure to work only for the first person who tried it.  By the time the 10th or the 100th person adopted it, it would be at best a minimum requirement and at worst a waste of time because it would have been superseded by a new formula.

I may have been over-hasty in dismissing Jill Lepore’s article in the New Yorker about the flaws in Clayton Christensen’s theory of “disruptive innovation.”  To the extent that Christensen and others make this idea a one-size-fits-all formula for success, they are foolish.

What I got from Clayton Christensen’s writings is a warning not to be blindsided through neglect of basic skills and low-end activities.  I think his warning is true and important, and is as valuable for individuals as for organizations.

But Christensen’s ideas are being treated as a magic formula, and “disruptive innovation” is being used as a buzzword to justify mere disruption.  Lepore is absolutely right in her harsh criticism of “disruptive innovation” as the latest business fad.

[Update 6/20/14].  Here’s another critique of Christensen.

[Update 6/21/14]  Christensen’s reply to Jill Lepore.

[Update 6/24/14]  Here’s a balanced assessment of Christensen.

Reflections on Piketty’s inequality argument

June 14, 2014

 

The novels of Jane Austen, Honore de Balzac or Henry James, in which civilized life was confined to a small percentage of the population and the only way most people could acquire significant wealth was to inherit it or marry it.

According to Thomas Piketty’s Capital in the Twenty-First Century, there is nothing to stop that kind of world from coming back.

1_percent_decomposed_2.png.CROP.promovar-mediumlargePiketty’s basic argument goes as follows:
•    If the rate of return on investment is a higher percentage than the rate of economic growth, which he expresses as r > g,  the owners of investment property will get an ever-larger share of national income.
•    R > g is the normal state of affairs.
•    Ownership of wealth is distributed even more unequally than income.   The higher the share of income that comes from wealth, the more unequal it will be.
•    The larger the amount of wealth you own, the faster it is likely to compound.   So not only do the rich become richer at a faster rate than ordinary people, the super-rich become richer at a faster rate than the ordinary rich.
•    At some point the process levels off, but the leveling-off point may not come until inequality reaches a point that we associate with 18th century Europe or the Third World

The economic prosperity and relative equality during 1945-1975 were made possible by the destruction of capital during the Great Depression and the two World Wars, according to Piketty.   Of course war and depression left everybody worse off, not just rich people, but when economic growth resumed, a lesser share went to the economic elite.

Piketty’s conclusions are backed up by archival research that traces income and wealth distribution in France, Britain and the USA for two centuries and many other countries for shorter periods of time.  That research shows that r > g is the typical state of affairs in most countries and most periods of history for which information is available.

One striking finding is that there is just as much inequality among the elite as there is among the public at large.  In the USA, the top 10 percent have about half the wealth, the top 1 percent have about half the wealth of the top 10 percent, and the top 0.1 percent have about half the wealth of the top 1 percent.

Another finding, based on comparisons of American university endowment funds, is that the larger the amount of wealth you have to invest, the higher your rate of return is likely to be.   This is probably because the richer you are, the better financial managers you can hire, the better able you are to diversify your investments and the better cushion you have when you make high-risk, high-return investments.

chart_2.png.CROP.promovar-mediumlargePiketty proposes to deal with inequality by means of a graduated tax on wealth to go along with graduated taxes on inheritance and income.  But there are other ways.

You could figure out ways to increase the rate of economic growth, for example.  Or you could figure out ways to achieve a wider distribution of wealth, such as through employee stock-ownership plans or worker-owned enterprises.   Or you could strengthen labor unions, increase minimum wage or take other measures to increase the incomes of the middle class, working people and the poor.

It’s important to keep in mind that Piketty only deals with one specific issue, the concentration of income and wealth in a small elite—an important issue, but not the only one.   Piketty does not tell us how to raise people out of dire poverty, nor how to achieve better productivity, or economic growth, or better education, or a cleaner environment, or any other goal.

And taking money away from the economic elite will not in and of itself make anyone any better off.   A lot of financial wealth was destroyed during the Great Depression and and a lot of tangible wealth was destroyed during World War Two, but this did help anybody at the bottom of the economic scale.  Piketty thinks that destruction of wealth cleared the way for the prosperity of the 1950s and 1960s, but I don’t think anybody who lived through the 1930s and 1940s would have said it was worth it.

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Tesla’s electric car patents are opened to all

June 13, 2014

Elon Musk, the CEO of Tesla Motors, announced that Tesla is making its electric car patents available to all free of charge—a decision that, as Tyler Cowen remarked on his Marginal Revolution blog, could be as important as Henry Ford’s 1914 decision to pay auto workers the hitherto-unheard-of wage of $5 a day.

Elon Musk

Elon Musk

Musk decided that it is more important to grow the market for electric cars than to use Tesla’s patents to dominate that market.   I hope that decision pays off for Tesla as Henry Ford’s decision did for Ford, because it removes an obstacle to technological progress.

The original purpose of patents was to give inventors an incentive to share their secrets, in return for temporary monopolies on their inventions.  But in recent years, the scope of patent protection has been extended by law to the extent that it stifles competition and economic growth.   Maybe Musk’s business model will change that.  I hope so.   Good for him for trying!

LINKS

All Our Patents Are Belong to You,” the announcement by Tesla Motors CEO Elon Musk.

Tesla Making Patents ‘Open Source’ to Boost Electric Cars by Alan Ohsman for Bloomberg.

Amazon is bad for writers and book lovers

June 12, 2014

 Amazon’s tactics against the book publisher Hachette are not just bad for publishers.  They are bad for writers.   And, in the long run, they are bad for lovers of books.

What’s going on is part of a familiar pattern.   A powerful company uses its power to squeeze the profit margins of weaker companies.   This means the weaker companies can’t afford decent pay for the people who produce the work.   But the producers can’t get at the powerful company because it is buffered by the intermediaries.

That is how it works with fast-food franchisers such as McConald’s, their franchisees and low-wage fast-food workers.   That is how it works with electronics companies such as Apple and Sony, their sub-contractors in Asia, and the low-paid sweatshop workers.  That is how it works with Walmart, its suppliers and their low-paid employees (aside from what Walmart pays its own employees)

Hachette Amazon LogoAnd this is how, apparently, it is going to work with Amazon, book publishers and authors.

Jeff Bezos of Amazon refuses to provide good service to buyers of Hachette books unless the publisher submits to his terms for distributing their books.  In an earlier dispute with the publisher Macmillian, he simply deleted the “buy” button from all Macmillan books listed on Amazon.

One of my favorite authors, Charles Stross, who is published by Hachette, explained what is at stake.

Amazon’s strategy … is to squat on the distribution channel, artificially subsidize the price of e-books “dumping” or predatory pricing to get consumers hooked, rely on DRM on the walled garden of the Kindle store to lock consumers onto their platform, and then to use their monopsony buying power to grab the publishers’ share of the profits.  If you’re a consumer, in the short term this is good news: it means you get cheap books.

But if you’re a reader, you probably like to read new books.  By driving down the unit revenue, Amazon makes it really hard for publishers—who are a proxy for authors—to turn a profit.  Eventually they go out of business, leaving just Amazon as a monopoly distribution channel retailing the output of an atomized cloud of highly vulnerable self-employed piece-workers like myself.

At which point the screws can be tightened indefinitely.  And after a while, there will be no more Charlie Stross novels because I will be unable to earn a living and will have to go find a paying job.

via Charlie’s Diary.

There is an old tradeoff:  Speed.  Price.  Quality.  Pick any two.  The business model being pushed by Jeff Bezos would pressure publishers into signing up authors who are prolific and cheap.  That literature has a value in and of itself doesn’t enter into his thinking.  As Stross said:

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David Cay Johnson on the roots of U.S. inequality

June 7, 2014

Half an hour is a long time to watch anything on a computer screen, but David Cay Johnson is an interesting talker and a clear explainer, and his interview is a good survey of what’s wrong with the U.S. economy.


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