Archive for the ‘Economy and Business’ Category

General Motors pivots toward China

March 6, 2014

This video, which has been making the rounds of the Internet for nearly two years, is deeply flawed, as well as possibly out of date.  But the producer, whoever he is, makes a good point.  The managements of General Motors and other big corporations headquartered in the United States are not especially American in their orientation.  They go wherever profit takes them.

I remember reading about some Silicon Valley entrepreneurs, fantasizing about the possibility of creating their own nation on an uninhabited island, free of annoyance by the pesky U.S. government and American public.

This is not the case with the management of Chinese corporations.  They are closely aligned with the Chinese government and the goal of making China a rich and powerful nation.  This makes for an unbalanced relationship.

There are many economic reasons, including cheap labor, for U.S. companies to manufacture in China.  One of the reasons is that China is now the world’s largest market for automobiles, and no car manufacturer can afford to ignore the Chinese market.  And the Chinese government, like the governments of many other countries, does not allow foreign companies to sell products in their country unless they have local manufacturing content, and, more importantly, they share their manufacturing know-how.

When I reported on Eastman Kodak Co. and Xerox Corp. for the Rochester, N.Y., newspaper in the 1980s and 1990s, corporate executives explained that this was the reason they set up manufacturing plants in Mexico, Japan and other countries.

The government of the United States, which is the OPEC of consumption, was in a better position than any other to impose such requirements.  But this was not done.

The U.S. government operated under the theory that unrestricted free trade was best for everybody, and if other governments were so foolish as to hurt themselves by restricting trade, that was a problem for them, not for us.

The problem with such arguments is that when manufacturing goes away, the skills and knowledge needed to make things – the so-called human capital – goes away with them.

Instead of the U.S. government imposing domestic content requirements on foreign manufacturers, some of our state governments offer them economic incentives, tax abatements and an anti-union legislation.

To be clear, I don’t think government policy is the only reason, or even the main reason, why auto companies operate where they do, or whether they succeed or fail.  But it is a fact that the governments of most other industrial countries are pro-active in promoting domestic industry.  The U.S. government doesn’t take an interest in the success of its manufacturers until they are on the verge of bankruptcy.

Hat tip to Don Montana for the video.

Why the economic recovery is so slow

March 6, 2014
Current job losses compared with previous recessions

Current job losses and recovery compared with previous recessions

The chart shows how slow the current U.S. economic recovery is compared to recoveries from  previous recessions.  When and if the number of U.S. jobs returns to the pre-recession level (the 0.0% line on the chart), the jobs recovery will not be complete because the number of working-age Americans will have increased in the meantime.

Why is the current economic recovery so slow?  Here is what I think:

  • Almost all the benefits of economic growth during the past 20 or 30 years have been flowing to a tiny minority of the population — the upper 1% or 0.1% of the population.
  • These segment of the population spends less of their income than most Americans do.  Instead they save their money so that they can become even richer.
  • Contrary to what “supply-side” economists hoped in the 1980s, they have not been investing their money in enterprises that create American jobs.  People don’t invest money just because they have money or just in order to create jobs.  They invest money in a business because they have reason to think there is a market for that business’s products and services.
  • Prior to the 2008 crash, U.S. economic growth depended on the willingness and ability of the American middle class to take on debt in order to maintain their spending power.
  • Since the 2008 crash, banks, wisely, have tightened their requirements for lending.
  • Since the 2008 crash, middle class Americans, wisely, have been paying down their debts rather than taking on more.
  • These leaves us with the situation that John Maynard Keynes wrote about — an economy that does not grow because people have no money to spend, and people without money to spend because the economy is not growing.

I don’t believe in government spending money for the sake of spending money, but there are a lot of things that need to be done that in the long run will add to US economic strength, and this would be a good time to start.  One useful way to increase jobs is for governments at all levels to start to repair our deteriorating bridges, water mains and other physical infrastructure.

LINKS

FORGET THE 1% by J.D. Alt for New Economic Perspectives.

Inequality and the Weak Recovery by Joe Weisenthal for Business Insider.

Americans Shut Out of Home Market Threaten Recovery by Pashant Gopal and John Gittelsohn for Bloomberg Business News.

Inequality, austerity are enemies of meritocracy

February 27, 2014

A smart economist named Tyler Cowen has written a book entitled Average Is Over, in which he foresees a world of advanced technology in which maybe 15 percent of the population will have the ability to keep up and grow rich, while everybody else falls behind.

He said new technology will make the population more legible to the job creators, so that those who have merit will rise more quickly, but those who make bad choices early in their lives will be marked forever.  He has no problem with this because, like many economists, he thinks anything is all right if it is the result of market forces.

I don’t have standing to criticize Cowen’s book because I haven’t read it, but I think that, as a general principle, the greater the degree of inequality and the fewer the openings at the top, the less likely that these openings will be allocated on the basis of merit.  Rather the gatekeepers will first make sure that their families and loved ones are taken care of, and then will look to do favors for those who can do favors in return.

Equality of opportunity entails risk for those at the top, but that risk is minimized when prosperity is widely shared, and people who miss out on one thing have a fair shot at something else.

Supply, demand and minimum wage

February 24, 2014

One of the big arguments against raising the minimum wage is based on an over-simple understanding of the law of supply and demand  — that if employers have to pay higher wages, they’ll hire fewer workers.

If that were true, then the long-term decline in the minimum wage and in median workers’ wages (adjusted for inflation, which you should always do) would have resulted in full employment.  Obviously this hasn’t happened.

A rational employer will hire as many workers as necessary for the profitable operation of the business, and no more.  The law of supply and demand sets limits.  The employer will not pay so much that he can’t operate profitably, nor so little that nobody will work for him.  But, as is shown by the difference between Costco and Walmart, there is a broad range between those two limits.

Suppose I have a franchise to operate a McDonald’s restaurant.  I would not raise wages to the point where higher costs forced me to charge more for a hamburger than the Burger King restaurant across the street.  But if the minimum wage was raised for both of us, we could pay higher wages and still be on a level playing field.

In theory, minimum wage could be raised to the point where I charged more for hamburger than people were willing to pay.  But there is no evidence that this has ever happened with minimum wage in the United States.

One economist, for example, compared employment in adjoining counties of adjoining states with different state minimum wages.  There was no evidence of any difference in unemployment rates or job availability.

A higher minimum wage could have a positive effect on employment.  If low-wage workers have more money to spend, there is a greater demand for goods and services, and could result in new hiring.

   (more…)

Why you should always adjust for inflation

February 18, 2014

household-income-monthly-median-growth-since-2000

This chart shows why no economic statistic is valid unless an adjustment is made to allow for the effects of inflation.

If you just look at income in terms of dollars, the American middle class has not done all that badly in the 21st century.

If you look at what those dollars will buy (setting aside the question of whether the CPI underestimates the true cost of living), the figures tell a different story.

For the context of the chart, click on Rising Inequality: Recovery Driven Almost Entirely by the Rich by “Gaius Publius” for the Center for Media and Democracy

Amazon, the Walmart of the Internet

February 17, 2014

615_Bezos_Amazon_Kindle_Reuters

Amazon is well on its way to monopolizing book distribution.  Its strategy is like Walmart’s.

First you gain an initial advantage through economies of scale and introducing new efficiencies.  So far, so good.  That is how free enterprise is supposed to operate.

Then you leverage your initial advantage in the marketplace to squeeze suppliers and lower your costs.  This enables you to keep prices low so as to knock out small competitors and keep new competitors from emerging.

Meanwhile you treat your rank-and-file employees like dirt.

The parallel is not complete, because the current Walmart owners are destroying their company through their short-sighted greed and stupidity, while Jeff Bezos, the founder and CEO of Amazon, may be greedy but he is anything but short-sighted and stupid.

And he is just getting started.  According to one analyst, 93 percent of Amazon’s $75 billion in annual revenues come from products other than books.

George Packer, writing in the New Yorker, says that 50 to 60 percent of the price of a book sold through Amazon goes to Amazon itself.  Another 10 to 15 percent goes for sales, warehousing and shipping.  What’s left over covers printing, editing, publicity and, oh yes, royalties to the author and, oh yes, any profit the publisher may earn.

This is new.  Historically retailers got 30 to 40 percent of the price of a book.

It is illegal for retailers to demand special discounts from publishers, but, according to Packer, Amazon gets around that by charging “cooperative promotion fees.”   Amazon charges publishers this fee for placement of a book title on its page.  Most of the ranking of books on Amazon’s lists are determined by these fees.  The few publishers who have been brave enough to refuse to pay this fee have found there is no longer a “buy” button on Amazon’s page.

“The only point at which Bezos enters the chain is to take all the money and the e-mail address of the buyer,” Colin Robinson, a publisher, told Packer.  “There’s an entire community of people and Bezos stands in the middle and collects the money.”

While Amazon offers bargain prices, its squeeze on publishers is bad for literature in the long run.  Bezos seeks to transition from physical books to digital books, from which Amazon has 90 percent market share.  If traditional book publishing dies out, Amazon will step into the gap, with book selection based on focus groups, surveys and computer algorithms rather than editors’ judgments of literary value.

Packer reported that  Bezos doesn’t care about books as such.  He started Amazon (named for a river into which all things flow) in 1994 because he had vision enough to foresee the importance of Internet marketing, and he chose books as his entry point because they are “easy to ship and hard to break.”  Now he uses the information on customers he gained through book selling to market a wide array of products.

The saving grace of a well-ordered free enterprise system is that when big business executives overreach themselves, there is an opportunity for a smart entrepreneur to jump into the gap they leave.  Such is Colin Robinson, who has started a publishing firm called OR Books, which bypasses Amazon and sells directly to consumers.  OR Books gives up sales but earns a higher profit which, presumably, can be shared with the author.

Robinson is able to stay in business because of Net Neutrality—the law that says Internet service providers have to provide service to all customers on the same terms.  There’s currently a legislative drive to abolish Net Neutrality (and some say the proposed Trans Pacific Partnership Agreement has an anti-Net Neutrality provision).  If that were to happen, dominant businesses such as Amazon could squeeze out small competitors by demanding special terms from IPPs, just as Amazon does with publishers.

Another public policy favorable to Amazon is anti-trust policy.  Historically anti-trust laws were directed against “the curse of bigness.”  But in the Carter-Reagan years, policy-makers decided that it was all right for a company to dominate its market if there was some benefit to consumers.  The problem with this reasoning is that the benefit to consumers is likely to last only so long as the dominant company has effective competition.  Without competition, the benefits of efficiency and economies of scale don’t necessarily flow to consumers.

###

Click on Cheap Words: Is Amazon Bad for Books? to read the whole article by George Packer in the New Yorker.  It’s long, but packed with good information.

Click on a review of Brad Stone’s The Everything Store by Deborah Friedell for The London Review of Books for more.  Her review has additional good information that’s not in the Packer article.

151369543.jpg.CROP.rectangle3-large

Free enterprise and the failure of feedback

February 7, 2014

The advantage of a free market economy over a centrally planned one is the feedback provided by the law of supply and demand.  If the supply of something decreases, the price increases and demand (at the increased price) decreases until the increased price brings forth an increased supply.  This admittedly is a crude system, but it is superior to central planning because it is impersonal.  It does not require a genius to make it work.

Ian Welsh, in a recent post, pointed out that one of the main reasons for the collapse of the Soviet economy was lack of feedback.  In a command economy, the planners need correct information.  I question whether any relatively small group of people could assimilate the information needed to direct a large and complicated economy.  Welsh, on the contrary, said the Soviet economy actually was successful for a time, but broke down when the feedback system failed.  Too many people within the system found it to their advantage to manipulate information for their own advantage.

The present-day U.S. economy is not all that different.  Our big corporations and financial institutions have become little miniature Soviet Unions, in which feedback does not work, either internally or externally

The advantage of capitalism v. central planning, is that information is sent through prices, supply and demand.  This information feedback, however, is still game-able by power blocs.  The exact strategies are different than in a command economy, but the end result is the same.  The West and America are currently undergoing this exact problem.

The entire financial crisis was about inaccurate feedback, and broken feedback loops: it was about the financial and housing industries deliberately damaging the feedback system.   Then, when it finally went off a cliff, they destroyed the capitalistic feedback system, which when properly operating, makes companies go bankrupt, by obtaining bailouts due to owning western governments.

There are myriad other problems with feedback in the developed world right now, from massive subsidies of corn and oil, to oligopolistic practices rife through telecom and insurance, to the runaway printing of money by banks, to the concealment of losses by mark to fantasy on bank books, to the complete inability and unwillingness to price in the effects of pollution and climate change.

via Ian Welsh on The Fall of the USSR.

Here is how lack of feedback plays out in an individual firm.

This company is being managed by the quarter. We have executives who have no vested interest in Walmart. All they care about is their salary and bonus. So when they make poor decisions, for example this Christmas when they had a One Hour Guarantee for multiple items. This was a complete [financial] disaster but yet the executive praise what a big success it was. [...]

You know what direction us managers were given to do in January? Remember Walmart’s fiscal year ends January 31st. You guess it, cut hours. For the poor decision made by executives at Walmart who could care less where the company is at in 10 or 20 years, we had to cut hours. 

Not only that we had to cut all expenses. Home office put a hold on all our ordering of supplies and try explaining to customers you don’t have toilet paper for the rest rooms. We had to cut all our part-time associates from 32 hours to 25.5 hours. All our full-time associates had their hours cut too. [...]

Do you know how hard it is to go to someone that make $8.85 an hour and tell him, sorry but I have to cut you down to 25.5 hours. These people can barely pay their rent as it is and with no notice we cut their hours.

via Decades of Greed: Behind the Scenes With An Angry Walmart Manager.

I don’t have a good answer to this.  It is a moral problem as much as or more than it is a structural problem.  I don’t see how any complicated economic or political structure can function unless there is a critical mass of people who care about the truth, and care about the common good, especially but not only at the top.

Corporations don’t commit crimes

January 31, 2014

No, corporations do not commit crimes.  Corporate executives commit crimes.  There is a difference.

The U.S. Department of Justice charged JP Morgan Chase with various crimes, including fraudulent sale of mortgage-backed securities, covering up losses, rigging electricity prices and aiding and abetting Bernie Madoff’s Ponzi scheme.  Last September Attorney General Eric Holder announced a settlement of the case, in which JP Morgan Chase agreed to pay nearly $20 billion in fines.

The company responded by laying off 7,500 employees and freezing the pay of employees below the executive level.  But now the board of directors raised the pay of CEO Jamie Dimon, who had ultimate responsibility for the illegal actions, from $11.5 million a year to $20 million.

As Matt Taibbi of Rolling Stone pointed out in a recent post on his web log.

Eric Holder and Barack Obama … decided last year to make a big show of punishing JP Morgan Chase as a symbol of bank corruption, then forgot to punish the actual persons who oversaw the bank’s misdeeds.  This is a little like reining in a school bully by halving his school’s budget.  It doesn’t work.  Crimes are committed by people, and justice has to target people, too.  Otherwise the whole thing is a joke.

But from the board of directors’ point of view, the fine is less than the $25 billion in TARP funds that Dimon got from the federal government when the company was on the verge of collapse.

###

Click on Jamie Dimon’s Raise Proves U.S. Regulatory Strategy Is a Joke for the whole article by Matt Taibbi for Rolling Stone.

Click on JP Morgan Chase, Penance and Fines for an account of JP Morgan Chase’s misdeeds by Christopher Brauchli for Huffington Post.

Click on Dimon Does Davos, and His Board Gives Him a Raise for more by Bill Black.

Mondragon and the future of worker co-ops

January 27, 2014

Gar Alperovitz gave an interesting interview on the Real News Network on Spain’s worker-owned Mondragon Corp. and the future of worker-owned co-op businesses in a capitalist economy.  He advocated a 30-year effort to build up worker co-ops to the point where they can become a dominant force in the economy.  I think his ideas are good, but I don’t think that either the United States or the rest of the world can afford to wait 30 years before changing direction.

Steve Jobs was a real-life Ayn Rand hero

January 23, 2014

steve-jobs-book-covers

Steve Jobs comes as close as anyone I know to being an Ayn Rand hero in real life.  As depicted by Walter Isaacson in Steve Jobs, a semi-authorized biography, Jobs was utterly selfish and had no consideration of anyone or anything except his personal vision and obsessions.  At the same time he was a genius who created a great company and transformed the personal computer, digital animation, the telephone, photography and much else.

Many Occupy Wall Street protestors, who hated most of the “1 percent”, nevertheless mourned the death of Steve Jobs because, unlike crooked Wall Street financiers, he actually accomplished something.   Walter Isaacson wrote he was the most important American industrialist since Henry Ford and Thomas Edison.

I find it easy to mock those who, as Ann Richards, the former governor of Texas, once put it, were born on third base and thought they’d hit a triple.  A great many of our so-called meritocracy contribute little or nothing or mainly harmful things to society.  But it is more difficult to decide what I think a total egotist who accomplished great things.

This is nothing in Isaacson’s book to indicate that Steve Jobs ever read the works of Ayn Rand or gave a thought about her philosophy.  His intellectual interests, such as they were, were in Zen Buddhism, New Age teaching and rock and roll.

Buddhism contributed to his keen aesthetic sense, based on simplicity and elegance.  But he evidently did not take to heart the Buddhist teaching that the ego is an illusion and you should not make yourself unhappy if you don’t get your way.  Quite the contrary.

Steve Jobs’ great talent was in industrial design.   He brought art and technology together.  As has often been pointed out, all the basic features of the Macintosh computer – the mouse, clickable icons and so on – were developed at Xerox’s Palo Alto Research Laboratory, and hijacked by Jobs.  But it was Jobs, not Xerox management, who understood what to do with these concepts.  The Macintosh was historic.  Xerox’s own Star computer is forgotten.

As an artist, he was a perfectionist.  He made big changes at the last minute rather than allow a flawed (in his eyes) product go on the market.  I can easily imagine him, like Ayn Rand’s fictional architect Howard Roark, destroying something he created rather than let someone else spoil it.

He was not easy to work with.  He had no patience with the merely adequate.  He was quick to classify people as geniuses or bozos, based on hasty impressions.  But at the same time he respected people who stood up to him—provided they proved to be right.  He was a charismatic personality, famous for his “reality distortion field,” who was able to impose his ideas on other people almost in spite of themselves.  His insistence on getting his own way drove his people to achieve more than they ever thought they could.

stevejobs.reincarnationI use Apple products and I enjoy Pixar animation (which he did not create but fostered).  At the same time I am glad that I never met Steve Jobs, and I do not recommend him as a role model.  He treated those closest to him badly, including his loving and self-sacrificial foster parents, the mother of his first child and his loyal friend Steve Wozniak.  He cared little for anyone he did not regard as a fellow genius.  He did not practice nor believe in economic democracy.  When a visitor asked about working conditions in Apple factories, his reaction was anger and contempt.

I’m glad Steve Jobs lived.  I respect his achievement, and the passion that fueled his achievement.  I would not subtract anything from his wealth or honors.  At the same time I would not want to live in a society dominated by people like Steve Jobs or, worse still, people with Steve Jobs’ attitude toward life but not his talent.   The world benefits from obsessive hard-driving geniuses, but that does not mean that ordinary people, who do an honest day’s work for an honest day’s pay, count for nothing.

§§§

For more, click on Steve Jobs: An Inspiration or a Cautionary Tale by Ben Austen for Wired.


Follow

Get every new post delivered to your Inbox.

Join 500 other followers