The message to bank executives today is simple: build your bank to be as big as possible – and then keep growing. If you manage to become big enough, you and your employees are not just too big to fail, but also too big to jail.
The Obama administration has just made everyone else the sucker.
Category Archives: Economics
Markets determine price
The New York Times reports that rising gas prices in the U.S. may harm Obama’s re-election chances. So Obama emphasized increased oil production in the U.S., which has recently, and likely temporarily, become a net exporter of oil.
But economist Dean Baker brings us all down to earth with his post today. With a bit of churlishness, Baker tells his readers:
It is the world market that determines prices, not domestic production. We’re going to say that a few more times just in case any reporters are reading this.
It is the world market that determines prices, not domestic production. It is the world market that determines prices, not domestic production. It is the world market that determines prices, not domestic production.
The U.S., Baker reminds us, produces 6 million barrels of oil a day. The world demand for oil is a bit under 90 million barrels a day. Do the math, and you discover that our domestic production is about seven percent. Adding a million barrels here or there will not affect the price of oil. By the way, Americans consume 22 percent of the world’s oil, or about three times what we produce.(Chart below from CIA World Factbook)
Next, I want to rank GDP.
Now let’s look at energy intensity (oil consumed and GDP).
The UK, we see, uses oil more efficiently than we do, as does the European Union as a whole. India and China, not so much.
One way to reduce oil consumption is to raise the price. We should expect to see that happening as gasoline prices continue rising.
QED.
Why the U.S. is not Greece
We often hear that America could suffer the same fate as the Greek’s if we don’t cut spending and reduce the federal debt. It’s an argument, however false, that just won’t go away.
So, why is the U.S. not like Greece? I invite you to read this, then pass it along to those who insist otherwise. I’ll quote this brief summary:
What follows is a self-defense lesson on why the United States is not Greece—or Europe. The U.S. economy is far larger and more productive than Greece. The United States has many more tools in its macro-economic policy box than countries in the eurozone. And while calls for austerity have kept the United States from undertaking government spending and investment large enough to support a robust economic recovery, at least thus far, the United States hasn’t undertaken the same self-defeating austerity measures Europe has. If we learn the right lessons from what is happening in the eurozone now, we never will.
The GOP and debt
Though Dick Cheney, invoking Ronald Reagan, declared that deficits don’t matter, you wouldn’t think that by listening to the Republicans, especially those running for the White House. Nevertheless, their proposed tax policies, with perhaps one exception, would send the federal debt into the stratosphere.
That’s because all of the candidates, save Ron Paul, champion more tax cuts. With lower tax rates, the federal government faces reduced revenues. If there are no corresponding reductions in spending, the annual deficits and the accumulated debt skyrocket.
That’s the judgment of U.S. Budget Watch, which released its analysis of the GOP candidates’ tax plans. You can view the report here (pdf). Here’s a chart from the report.
From the report’s executive summary:
Historically, debt held by the public has averaged less than 40 percent of GDP since 1970. Today’s debt is roughly 70 percent of GDP and rising fast, particularly due to the retirement of the baby boom population and rapid health care cost growth. The United States is currently at a crossroads, where fundamental but thoughtful changes can be made now, or else far more painful ones can be forced upon us down the road.
You’ll note that by 2021, Gingrich’s proposals, if enacted, would boost the nation’s debt to more than 110% of GDP. Santorum’s plan would be slightly less, at nearly 105% of GDP. Only Paul’s proposal would yield a debt-to-GDP ratio of less than 80% in the out-year.
Did you pick up on “thoughtful changes”? It has never occurred to me to associate ‘thoughtful’ with any one of the GOP candidates.
Why Social Security is important
I just saw this chart from Paul Krugman’s class notes.
All the Republican candidates for president essentially want to make older people poorer.
Only in America.
If economic policy were the result of democratic choices
A recent poll of real economists found that 80 percent believe that the 2009 stimulus act created jobs. Put in other terms, without the stimulus the unemployment rate would be higher.
See for yourself, via Brad DeLong. DeLong writes:
At the time, back at the start of 2009, arguments that the Recovery Act would not push the unemployment rate down over the two years after its enactment took one of three lines:
- Unemployment is really not cyclical but structural, so whatever boost to spending it might generate would show up in higher prices and wages as businesses trying to satisfy demand bid against each other for a fixed pool of non-zero-marginal-product workers.
- Government purchases must be financed by issuing government debt, and debt issues would push up interest rates and so would discourage private investment spending.
- Government purchases must be financed by issuing government debt, and the future taxes needed to amortize the extra debt would frighten businesses and investors, so we would see equity prices tank as this fear would discourage private investment.
None of those things happened.
So there.
Whither democratic markets?
Thomas B. Edsall, writing for the New York Times, asks a provocative question: “Is this the end of market democracy?” While he stops short of providing an answer, he surveys the political and economic landscape to reveal sharp divisions in both the cause of and the cure for what ails us. He quotes Lawrence Summers, now back at Harvard:
Serious questions about the fairness of capitalism are being raised. These are driven by sharp increases in unemployment beyond the business cycle – one in six of American men between 25 and 54 is likely to be out of work even after the economy recovers – combined with dramatic rises in the share of income going to the top 1 percent (and even the top 0.01 percent) of the population and declining social mobility. The problem is real and profound and seems very unlikely to correct itself untended.
Focus on that last line. The problem “seems very unlikely to correct itself untended.” This suggests more of the same, rising wealth amidst a shrinking middle class marked by high unemployment—unless someone tends.
How shall we tend?
Edsall cites Jeffrey Sachs, who advocates: “a social democracy — capitalism plus a hefty dose of state support for families, education, early childhood development, higher education, and active labor market policies — can still do the job. The performance of northern Europe, around 120 million people including Germany, Austria, the Netherlands, Denmark, Sweden and Norway, provides a good illustration of this success.”
Readers of this blog will surely recognize that theme. But, as Edsall quickly points out, the Republicans, especially this current crop of presidential hopefuls, rebuke such a perceived turn toward “socialism,” exposing their ignorance, their cynicism, or both. If they are aware of the Nordic exception, they refuse to admit its lessons for fear of denigrating the U.S.A., which at all times and under all circumstances must be forever praised as the “shining beacon on a hill.”
Is the Great Divergence a sign of market failure? Not so, according to a couple of economists cited in Edsall’s piece.
In a paper published by the Council on Foreign Relations, Spence and co-author Sandile Hlatshwayo argue that the employment problems of the United States do not result from market failure. Just the opposite: the problems arise from an exceptionally efficient global marketplace. Instead of benefiting from the market, many in the United States, particularly those holding mid-level skill jobs that can be performed at lower cost overseas, are paying the costs of efficiency — the victims, in effect, of creative destruction.
All of which begs the question: What about the Nordic experience? Why doesn’t “an exceptionally efficient global marketplace” adversely impact Finland, or Sweden, or Norway as it allegedly does here? Why is “creative destruction” operating in the U.S. and not Germany and Denmark?
Edsall concludes his article thusly:
The debate over the workings of democracy, the market, technology and globalization remains unresolved. The political system instinctively avoids this debate, despite its salience and centrality, because the political costs of engagement are likely to substantially outweigh any potential gains. At an undetermined point in the not too distant future, however, as the “gale of creative destruction” blows through the heartland, the debate will become inescapable.
For better or worse, and I think it’s the latter, our political mechanisms, however defined or originated, thwart genuine tending. Edsall suggests that there are high “political costs of engagement.” I believe he’s correct. Neither side of the debate dares to address the fundamental problems of our economy, which is clearly not working for the Rest of Us. Instead the politicians appeal narrowly to their wealthy beneficiaries as they also stoke the fires of ideological hate.
In a previous post I mentioned an op-ed that appeared in the New York Times. Eric X. Li, a self-described “venture capitalist,” offered this gloomy assessment:
History does not bode well for the American way. Indeed, faith-based ideological hubris may soon drive democracy over the cliff.
I suspect that the very wealthy shrug off such premonitions. Regardless of what happens in America they will surely benefit, because their wealth allows them to exploit opportunities on a truly global scale. They are not, strictly speaking, Americans. Nor are they democratic in any meaningful sense. Rather, they are nation-neutral, just like the international economy; and they don’t give a damn about the Rest of Us, because they don’t have to. Indeed, we are a mere nuisance, at best, invisible, at least.
What I find truly pathetic is that the Rest of Us don’t seem to give a damn either. We’re as likely to chalk up our struggles to the natural order of things or the efficient operation of markets as to believe that all of this is deliberate, the continuing result of unopposed machinations funded and orchestrated by the One-percenters.
We are therefore right to condemn Congress and its corrupt politicians.* Yet, our political system was devised to give the people voice—”we the people” established a written constitution. As it turns out we are a representative democracy. Thus, we are supposed to rely on the people we elect to carry out our preferences. Therein lies the fatal flaw.
What we would prefer gains no traction, because our voice can hardly be heard over the din of unbridled capital. The folks we send to Washington elevate remaining in place to the highest priority. While they will need our votes to stay in office, how we vote is largely determined by campaign rhetoric, bought and paid for by monied interests. To assume that none of the propaganda makes a difference is to ignore what has happened in the Republican primaries. Candidates’s fortunes have risen and fallen in the minds of the voters by one slew of attack ads or another. This expensive negative shit matters.
Insofar as our “representatives” cotton to the well-heeled with impunity, there seems little prospect of crafting an alternative economy that benefits the Rest of Us—unless we dare think outside the political box. If the status quo isn’t working, we might consider something else.
All options are on the table. The debate is “inescapable.”
____________
* Corrupt, def.: “having or showing a willingness to act dishonestly in return for money or personal gain.”
Conway’s law
A long-time friend posted this comment in response to my brief essay on “building things“:
Boeing hardly deserves praise for a pro US jobs position. If it could bust the unions, it would. The 787 was one of the most ‘distributed’ projects to ever make the roadmap, creating a logistics nightmare for its project managers. Consequently, it was late and one can only hope the Sr. Management team understands the root cause. They might do well to read up on Conway’s law.
I admit to never having heard of Conway’s law, so I did the usual thing—checked Wikipedia. Here’s the link. I’ll give my layman’s summary, which may be terribly wrong.
The type of product producible by a firm is determined by both the architecture of that firm and its intra-architectural communications.
An example of Conway’s law in action is provided by Wikipedia:
A real life example: NASA’s Mars Climate Orbiter crashed because one team used United States customary units (e.g., inches, feet and pounds) while the other used metric units for a key spacecraft operation. This information was critical to the maneuvers required to place the spacecraft in the proper Mars orbit. “People sometimes make errors,” said Dr. Edward Weiler, NASA’s Associate Administrator for Space Science. “The problem here was not the error, it was the failure of NASA’s systems engineering, and the checks and balances in our processes to detect the error. That’s why we lost the spacecraft.”
I’m not sure that this example really explains my limited understanding of the “law.” My friend, who used to work at Boeing, so he knows a bit about the company from the inside, faulted management for farming out the various components of its new 787, which Obama found “cool” on his recent visit. Those of us who live in Puget Sound can attest to the many-monthed delay in getting the plane up to snuff. There was, indeed, a “logistics nightmare” for project managers attempting to coordinate globe-based manufacturing, transportation, and assembly. This “distributed” network proved to be a horribly conceived and poorly executed strategy.
This got me thinking about Apple, the world’s most valuable company. However Apple is structured and whatever its processes, it continues to put out amazing products that customers can’t wait to snap up. Why Apple and not, say, Microsoft or Samsung, or any one of dozens of other would-be competitors? Could Conway’s law help explain?
Apple is a notoriously secret company, but there have been glimpses into its operations from Walter Isaacsons’s biography of Steve Jobs and Inside Apple, by Adam Lachinsky. Both emphasize Jobs’s propensity to say no. The key to success is not only having the best available people but also identifying core competencies and focusing intently on just a few products.
There are only four major product lines at Cupertino: iPod, iPhone, iPad, and the Mac. In turn, these products use the best software, and all of the products are integrated via just two online ecosystems: iTunes Store and the App Store. We can now add a third, iCloud, which is emerging as the wireless ligament connecting everything.
Jobs told Isaacson that Sony, which had controlled most of the mobile music market with its Walkman, couldn’t produce the iPhone or even the iPod-cum-iTunes. Why not? There were too many divisions in Sony and each was jealous of and competitive with the other. By contrast, Apple was more like a series of concentric circles with Jobs at the hub. (source)
Here’s Isaacson:
Indeed, Sony provided a clear counterexample to Apple. It had a consumer electronics division that made sleek products and a music division with beloved artists (including Bob Dylan). But because each division tried to protect its own interests, the company as a whole never got its act together to produce an end-to-end service.
During Jobs’s years in the wilderness, tending to Pixar and NeXT, many outsiders urged Apple to license its operating system to hardware vendors, just as Microsoft does with Windows. For a while Apple did just that, under Gil Amelio, its then-CEO. When Jobs returned to the company he co-founded one of his first moves was to cancel the licensing deals. He also aborted the Newton, John Sculley’s favorite device, but widely lampooned in the press and in Doonesbury. Jobs realized before, then, and forever that the key to producing “insanely great products” is to carefully wed both hardware design and operating systems, and he would preside over the weddings.
Microsoft can’t do this, because the company is all about software; it has no hardware experience. Likewise Google develops the Android operating system, which it gives away to dozens of original equipment manufacturers, including Amazon, Samsung, and HTC. Each of these companies’ devices vary, often in significant ways, from screen size to the placement and use of buttons. I pity third-party developers who must figure out a way to get their applications to run satisfactorily on a myriad of different units.
There’s a link to an academic paper in the Wikipedia entry on Conway’s law. Three professors at the Harvard Business school sought to look more carefully at how products might “mirror” the organizations that produce them. They came up with this table to differentiate between organizations.
I’d say that Apple fits comfortably under “tightly-coupled.” But it could have become a different company altogether had Steve Wozniak had his way. Apple would have been “loosely-coupled,” “decentralized,” and “emergent.” It would also be a much, much poorer company and probably would not have survived the “Homebrew Computer Club” populated by geeks and nerds, Wozniak’s kind of people.
I suspect that Apple’s competitors are not so easily pigeonholed. They likely share more of the “tightly-coupled” traits, though Google and Facebook, at least in their beginnings, could be described as “loosely-coupled,” encouraging their employees to informally collaborate on “emergent” products. Lachinsky tells us that Apple, by contrast, is a very serious place; employees are expected to work long and hard once they enter the front door, and they have to pay for their own lunches.
When Isaacson asked Jobs to name his proudest achievement, Jobs didn’t mention the iPhone or the iPad. No, his proudest achievement was Apple, the company. He was so certain that this was so that he quietly established Apple University, internal to the organization.
In 2008 Jobs hired Joel Podolny, the dean of the Yale School of Management to build then superintend the “university.” Podolyny developed case studies of Apple’s product development, the great, the so-so, and the ugly. They are taught by members of Apple’s senior management. It was clearly Jobs’s intention to create a lasting legacy for people who “think different.”
When it was becoming clear that Jobs was not long for this world pundits and analysts wondered aloud if Apple would continue its success. How much of Apple was Steve Jobs himself? Or had he really succeeded in building a lasting legacy, comfortable that his successors would keep the Apple ball rolling?
While it’s still early, there appear to be no signs of the company’s abating. It’s stock price is now over $500. The new iPad 3 is expected within weeks. Apple will release a new Mac operating system every year just as it does now with iOS. This fall the company will reveal the iPhone 5. There are rumors of a new television that will function much differently than current examples, though how differently is presently the stuff of rumors.
Meanwhile, Apple’s would-be competitors, which could be the entire electronics industry, are busy copying Cupertino’s products in look and feel—Exhibit A, Samsung, the shameless target of numerous patent violations filed by Apple’s lawyers. But I doubt that they will produce devices and software and ecosystems that will threaten Apple’s juggernaut. The reason may indeed have something to do with Conway’s law.
You can’t do Apple unless you are Apple. And there’s only one Apple.
Another Great Divergence indicator
Republicans excoriate Obama for runaway spending and mounting debt. They conveniently forget the fiscal disaster under G.W. Bush. Nor do they remember the mess wrought under their ideological hero, Ronald Reagan. So let’s take a look at this chart from the 2011 Economic Report of the President.
Once again, after relative fiscal calm during the Truman, Eisenhower, Kennedy, and Johnson administrations, deficits became the norm under the administrations of Nixon, Ford, Carter, Reagan, and the first Bush—and thus coinciding with the Great Divergence. It was only under the Clinton administration that the government produced a surplus, reaching a high of $236.2 billion in Clinton’s last year. Then came G.W.
Over his two terms the core conservative principle of balanced budgets took a hike. Huge tax cuts, mostly for the wealthy, sharply reduced revenues. Meanwhile, G.W. had an bone to pick with the man who tried to kill his daddy. His wars in Iraq and Afghanistan cost upwards of three trillion dollars by some estimates. Yet, there were no corresponding revenues. Spending more than you take in is the very definition of deficit. No matter—Bush was a Republican and thus deserving of praise and honor. Besides, “deficits don’t matter,” proclaimed Darth Vader.
But that’s surely not the mantra among today’s GOP. Why, if we don’t chop spending we’ll become the next Greece. We just can’t afford to put people back to work, fix roads, pay teachers, or support seniors.
So, let’s raise taxes.
Fie!—exclaim the Republicans. Are you crazy? You’ll undermine the “job creators.”
Deficits, it seems, matter only when a Democrat occupies the Oval Office.
Building things
President Obama, during his visit to Boeing yesterday, emphasized manufacturing, as he did in his State of the Union address.
President Barack Obama toured Boeing’s factory in Everett on Friday and praised the company and its workers for helping to bring “jobs and manufacturing back to America.”
Boeing, of course, manufactures airplanes (and lethal toys for the Pentagon, but that’s another story). Many of the planes rolling out of Everett and Renton are destined for foreign companies and potentates, as in Qatar and Saudi Arabia. Indeed, Boeing exports represent a large percentage of Washington state exports, despite depressed economies.
As a nation, however, exports lag significantly behind imports, which does not bode well for the manufacturing sector. Here’s a look at exports and imports since 2000.
Imports have consistently trumped exports. The gap between them (the area graphic at the bottom) was highest in 2006, then narrowed over the next three years, only to expand in 2011.
If you look back in our history you’ll discover that the U.S. has not always been a net importer. From 1929 to the mid-70s, there was a balance between exports and imports.
Here we find evidence that yet another indicator changed dramatically at the start of the Great Divergence, marked by: increasing inequality, eroding union participation rates, declining manufacturing, increasing financialization, and stagnating wages for the Rest of Us. Our growing trade deficit coincided with the emergence of winner-take-all-politics. These tectonic shifts were not the result of “natural market forces.” Rather, they are the consequence of deliberate and concerted action by the One-percenters and their minions, otherwise known as members of Congress.
The above chart (based on data from Economic Report to the President, 2011) shows that manufacturing has steadily decline in the U.S., at least in terms of profits. Meanwhile, the financial sector has steadily increased its share, reaching a maximum in 2002, with 44 percent of domestic profits, the same year that manufacturing profits reached their lowest point, at a mere eight percent of the total.
When too few people have too much accumulated wealth mischief happens. First of all, they expect to maximize returns on their investments. Building things and exporting them are evidently ho-hum businesses, yielding too little bang for the buck. So they look elsewhere to put their money. As we saw in a previous post, over half of the income earned by the top 400 tax filers was in the form of net capital gains, what Obama told a Boeing crowd yesterday were “phony financial profits.” These are Mitt Romney’s people. Like Romney, the very wealthy invest in hedge funds and private equity firms, where the minimum deposit may be $10 million or more.
The point is, the rich aren’t investing in productive activities like manufacturing. They are extracting billions of dollars from the economy to play Wall Street casino.
We really do need to put people to work making durable goods that can be consumed here and abroad. One way to start diverting capital from the financial sector is to make it less worthwhile to gamble. Raising the capital gains tax would help. After all, the rich are hardly the “job creators” beloved by the Republicans.
