Archive for the ‘Economy and Business’ Category

An ebbing tide lowers most boats

September 23, 2014

casselman-feature-income-3

Most Americans today are poorer than their counterparts 15 years ago, no matter what their race, marital status, educational credentials or region of residence.

LINK

The American Middle Class Hasn’t Gotten a Raise in 15 Years by Ben Casselman for FiveThirtyEight

Forgetful mutual fund investors perform best

September 15, 2014

c-75Proponents of Social Security privatization say that the average investor will do better investing the money that goes to Social Security taxes in the stock market.  The chart above, which is from Business Insider, shows the problem with this.

It is true enough that, over a long period of time, stock market averages, such as the Russell 2000 or the Standard & Poor’s 500, do better than Treasury bonds.  But most of us don’t do that.

We get overoptimistic when stock prices are going up and panic when stock prices are going down.  So we buy high and sell low—the opposite of what a smart investor should do.

The following is from an exchange between Barry Rithotz, a financial adviser and blogger, and James O’Shaughessy, of O’Shaughessy Asset Management, on Bloomberg Radio.

O’Shaughnessy: “Fidelity had done a study as to which accounts had done the best at Fidelity.  And what they found was…”

Ritholtz: “They were dead.”

O’Shaughnessy: “…No, that’s close though! They were the accounts of people who forgot they had an account at Fidelity.”

via Business Insider.

Ritholtz told about some of his experiences in estate planning, where a family fought over inherited assets for 10 or 20 years, didn’t touch them in the meantime and found those 10 or 20 years were the best period of performance.

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Why it made business sense to make bad loans

September 8, 2014
subprime

Click to enlarge

The subprime mortgage crisis was caused by bankers intentionally lending money to people without good incomes, sold assets or good credit records.

This is hard for a lot of people to understand.  As a friend of mine said, why would a bank lend her money unless they had good reason to believe that she would pay them back?

The answer is that what’s financially destructive for a bank as a corporation can be profitable for a banker as an individual.

Irresponsible-Borrowers-Cartoon4During the run-up to the subprime mortgage crisis, bankers got big bonuses for making high-interest loans, without regard to how risky those loans were.  In many cases, they were able to package financial instruments based on these mortgages, get high ratings for them from credit agencies and unload them on suckers.

There’s name for this practice.   It is “control fraud“.

But the Obama administration has chosen not to prosecute bankers.  Instead it is going after the small fry who put incorrect or incomplete information on their applications.   Thomas Frank wrote an article in Salon about how a California jury refused to convict a bunch of “liar’s loan” applicants on the grounds that you can’t mislead someone who isn’t interested in knowing the truth in the first place.

The article is worth reading for its clear explanation of how control fraud works, but I think Thomas Frank is over-optimistic about how much of a precedent the California jury’s verdict will create.  It depends on how many judges will allow this kind of defense to be made.  Many of them rule that the only issue is whether the form is filled out correctly, and that the largest context is irrelevant.

Alternatively the government could allow the banks to face the consequences of making bad loans.  This would provide an incentive for boards of directors to think about long-term consequences as well as short-term profit.  But the Obama administration, like administrations before it, has chosen to bail out the banks on the grounds that their failure would disrupt the economy.

The problem with bailouts is twofold.   Bailouts give recklessly-managed banks an advantage over prudently-managed banks.   And at some point the too-big-to-fail banks become too big to save.

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‘Drill, tovarich, drill': Putin’s economic dilemma

September 4, 2014

russia.exports

Vladimir Putin’s Russia is a great military power with a backward economy.

Without a strong manufacturing base, Russia’s economy depends sale of oil and natural gas, which are non-renewable.   This means that, unless Russia changes direction, it is fated to become a resource colony of China or the European Union.

Economic sanctions promoted by the USA could be an opportunity for Russia to develop its domestic industries and its internal market, much as the infant USA did when it was cut off from trade with Europe prior to and during the War of 1812.  But according to this article by Mikhail Matveev for Inter-Press Service, Russia is going in the opposite direction.

The recent call from Russian Prime Minister Dmitry Medvedev for “tightening belts” has convinced even optimists that something is deeply wrong with the Russian economy.

No doubt the planned tax increases introduction of a sales tax and increases in VAT [1] and income tax will inflict severe damage on most businesses and their employees, if last year’s example of what happened when taxes were raised for individual entrepreneurs is anything to go by – 650,000 of them were forced to close their businesses.

Nevertheless, it looks like some lucky people are not only going to escape the “belt-tightening” but are also about to receive some dream tax vacations and the lucky few are not farmers, nor are they in technological, educational, scientific or professional fields – it is the Russian and international oil giants involved in oil and gas projects in the Arctic and in Eastern Siberia that stand to gain.

“In October [2013], Vladimir Putin signed a bill under which oil extraction at sea deposits will be exempt from severance tax.  Moreover, VAT will not need to be paid for the sales, transportation and utilization of the oil extracted from the sea shelf,” noted Russian newspaper Rossiiskie Nedra.

[snip]

In fact, the line of thinking adopted by Russian officials responsible for tax policy is very simple. Faced with the predicament of an economy dependent on oil and gas half of the state budget comes from oil and gas revenue, while two-thirds of exports come from the fossil fuel industry, they decided to act as usual – by stimulating more drilling and charging the rest of the economy with the additional tax burden.

Matveev wrote that Russia, like other countries, suffers the bad effects of global climate change caused by fossil fuel emissions.  The Russian economy is at risk, he wrote, if the USA or European Union ever achieve their announced goals for shifting to renewable energy sources.   I don’t think the latter is as likely as Matveev seems to think.

The fact that economic sanctions cause serious problems to Russia does not mean that they are a good idea.  Weaker nations than Russia have survived U.S.-led economic sanctions, and the economic war with Russia hurts European Union countries as much or more than Russia.

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Rise of the machines: Links & comments 8/19/14

August 19, 2014

The Internet’s Original Sin by Ethan Zuckerman for The Atlantic.

The basic problem with the commercial Internet, according to this writer, is the use of advertising to finance Internet services.

Because an individual advertisement on the Internet has little impact, the value of advertising is based on the ability of the firm to target individuals who are interested in this particular product.  And the only way to do this is to gather data and use it to profile individuals.

Invasion of privacy is not a bug.  It is a necessary feature.  The reason it is necessary is that most people would rather give up their privacy than pay for Internet services.

Zuckerman thinks this is the reason that NSA surveillance is no big deal for most Americans.  We’re already accustomed to giving up our privacy.

He doesn’t have a good answer as to what to do about all this, and neither do I.

How We Imprison the Poor for Crimes That Haven’t Happened Yet by Hamilton Nolan for Gawker.

The science-fiction movie Minority Report imagined a world in which it was possible to predict when people would commit crimes and to arrest them before the crime occurred.  A predictive science of human behavior does not exist, but that does not stop people in authority from acting as if it did.

American courts are increasingly using what’s called “evidence-based sentencing” on which the severity of the sentence is based on a computer algorithm’s determination of the likelihood that the person will commit another crime.

In practice, what this means that that poor youth who grew up in a family without a father will get a worse sentence than a middle-class youth with access to psychiatrists and good job opportunities.

This is contrary to the basic principle of equal justice under law.   If you commit a crime, you should be punished for what you did, not for what somebody thinks you may do.

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The passing scene: Links & comments 8/7/14

August 7, 2014

New Snowden? Leaks indicate more than one hole in American national security community by Ben Mathis-Lilly for Slate.

The Intercept is reporting new information about the National Security Agency that apparently comes from someone still on the inside.   The huge U.S. national security apparatus has too many secrets and too many people with access to those secrets for those secrets to be truly secure.

My guess is that for every Edward Snowden who patriotically tells the American public what their government is doing behind their backs, there are one or more people who really are spies and are selling information to Russia, China or other foreign governments.

The economics of a McDonalds franchise by Cathy O’Neil as Mathbabe.

The terms and conditions under which McDonalds grants restaurant franchises make it impossible for the restaurant owner to pay a living wage and still make a profit.  That’s why it was both just and important that the National Labor Relations Board decided to allow restaurant employees against McDonalds as a joint employer.

While I am disappointed in President Obama’s record overall, I have to say that such a decision would not have been made under a McCain or Romney administration.  Whether the decision will be upheld in the courts is another question.

Flight MH17 – What You’re Not Being Told by SCG News.

There are many unanswered questions about the downing of Flight MH17 over Ukrainian rebel-held territory, and circumstantial evidence that it was a false-flag attack by conspirators.  All I am willing to say is that we the public don’t know the facts, and that the tragedy should not be used as an excuse to start a new cold war with Russia.

Data Mining Your Children by Stephanie Simon for Politico.

Book review: To Save Everything, Click Here by Evgeny Mozorov. (Daniel Brandt)

Facebook’s Gateway Drug by Evgeny Mozorov for the New York Times Book Review (Daniel Brandt)

Technology is a good servant but a fearful master.

 

The interdependence of Russia and Europe

July 28, 2014

Europe Russia oil gas pipelines map chart

More Signs of Doubt in Europe About the Costs of Siding With Ukraine by Yves Smith for Naked Capitalism.

The Beginning of an End of the Trans-Atlantic Alliance by Mark from Ireland for Ian Welsh.

Hat tip for the map to Vox.

What worked and what didn’t

July 17, 2014

The logic of modern monetary theory

July 10, 2014

Modern monetary theory seems wacky to me.

But try as I might, I can’t find any logical flaw in the basic idea.

Governments create money.  Why, then, do governments ever have to borrow money?  Why can’t they simply print the money they need to cover deficits.

One answer:  It would be inflationary.   But inflation is too much money chasing too few goods and services.   To the extent that government spending would generate goods and services that otherwise would not exist, new fiat money would not be inflationary.  And to the extent that there was a danger of inflation, the excess money could be soaked up through taxation.

MMT supporters said last year’s debt crisis and government shutdown were unnecessary.   The government should simply have created a trillion-dollar platinum coin (which is supposedly authorized by an obscure law), deposited the coin in a Federal Reserve Bank and used the new money to buy up the excess government bonds.

Again, I can’t see any logical flaw.  If the Federal Reserve has authority to create money to buy up bonds, why can’t it buy up Treasury bonds, liquidate them and reduce the national debt?

But the whole idea makes me uneasy.  I do think the U.S. government ought to be spending more money than it is for infrastructure, education, scientific research and other things needed to the nation’s future.   That’s not the same thing as thinking there should be no limits at all.

I fear MMT would remove a sense of limits.   I willingly pay taxes to support police, firefighters, schools, public roads, water and sewerage service and so on.  I’m not so sure I would willingly pay taxes just to reduce the money supply.

When profits and productivity aren’t enough

July 9, 2014

Losing Sparta by Esther Kaplan on VQR tells the following story.

A Philips lighting fixtures plant in Sparta, Tenn., was named by Industry Week in 2009 as one of the 10 best factories in the USA.

Workers and managers had worked together to increase output on some lines by 60 percent, lower changeover time between small orders by 90 percent, and reduce defective parts by 95 percent.  As a result the plant generated a good profit.

Yet in 2010 an executive showed up from corporate headquarters in the Netherlands and announced that the plant was closing, and its operations moved to Monterey, Mexico.

To people in Sparta, this didn’t make sense.  Local business leaders did a study that showed that any savings on wages (which generally are no more than 10 to 15 percent of manufacturing costs) would be offset by increased transportation costs of Philips’ markets in the Northeast and Midwest.  They were unable to make contact with anyone in Philips who was willing to listen or who had authority to make the decision.

Esther Kaplan thinks that the decision probably was based not on study of the Sparta plant specifically, but on an overall policy of centralizing manufacturing in low-wage countries.

I know from reporting on business years ago that there are fashions in management.  In one era, the fashion was diversification, so that your business is not dependent on any one market; in another, it was divestment and concentration on core competency.  And I know there are managers who think that willingness to cause human suffering is a sign of realism and tough-mindedness.

I also know from my own experience that when managers tell employees it is necessary to do X in order to keep their operation going, they almost always will do everything humanly possible to achieve X—provided that they think the statement is being made in good faith.

Workers in Sparta did everything management asked of them, but to no avail.  Kaplan wrote that this is the story of American workers as a whole.   Americans by many measures are the most productive workers in the world, and U.S. productivity continues to increase, but this does not keep manufacturing jobs in the USA.


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