Friday, February 29, 2008
The Economics of the Macropocalypse
Sometimes, econ can be like crack. Look at a few numbers - hey, all's well with the world.
But it's not the numbers that matter. It's the relationships between the numbers that matter.
The Economist, for example, says:
"There is no denying that for some middle-class Americans, the past few years have indeed been a struggle. What is missing from Mr Obama's speeches is any hint that this is not the whole story: that globalisation brings down prices and increases consumer choice; that unemployment is low by historical standards; that American companies are still the world's most dynamic and creative; and that Americans still, on the whole, live lives of astonishing affluence."
This is yesterday's orthodox argument. And most serious economists take this story less and less seriously.
Why not? Because...ummm...the global economy is in a state of shock. If this story was true, we wouldn't be melting down.
A much more plausible story is this - one that forward-thinking economists are beginning to take very, very seriously.
Real wages have stagnated for decades. But corporate profits are at their highest. That means the net effect of global price competition is just to transfer wealth from the poorest to the richest.
China's exchange rate manipulation has flooded the US with artificially cheap goods. The real price of those goods is the ongoing implosion of the dollar, which, combined with the lack of growth in real wages, is, for most of the country, like being punched in the face - and then kicked in the gut.
Oh yeah - the other price of accepting China's gaming of exchange rates is a country of underemployment and gray market pseudo-employment.
Hey - welcome to your new McJob! We don't give a damn about you, we won't help you learn any productive skills - we just want to use you and throw you away. We all lose in the end, because innovation and productivity die, but at least we win for now (sucker).
Unemployment is also low because it's become chronic, and so a huge number of unemployed aren't counted at all - they've become invisible. We can only measure many of these guys indirectly - ie, 1% of the population spends time in prison, and is effectively excluded from making a productive contribution to the economy.
And that's not even getting into Chinese social costs - which is basically massive underinvestment in any kind of basic institution necessary for a nice life.
Meanwhile, because we've been loooking at superficial numbers that don't mean much - CPI, for example - while ignoring the obvious fact that exploding global demand is going to spike asset and commodity prices to levels never actually seen before.
The flipside of looking at superficial numbers is that we've been fooled by the boardroom into thinking that profit is a number that's economically meaningful. It 's not. And that means we're going to have to spend years trying to make sense of, well, the entire edifice of business of itself: another massive set of costs that we will all have to jointly bear.
That's mostly why America rarely still launches the world's most dynamic and interesting companies - it's just that many of the world's most interesting companies still choose to list in the States.
Ok. Deep breath. What does all that mean?
The economic equivalent of Freddy Krueger standing in the shadows: stagflation. It's just a word to many of you - but from an economic point of view, stagflation is a diagnosis just one step shy of terminal disease.
The Street has (finally) cottoned on to it now, we've been talking about it for months, it's almost inevitable at this point.
And it will probably feed back to our biggest creditor, China, probably cause them to revalue their currency, since their economy will break anyways - and then the real fireworks will begin.
Probably been asked and answered before - but do you think the damage can be limited?
good question - i think the problems are structural and deeply embedded. even limiting the damage is going to cause severe pain at this point.
it *can* be done, but who is gonna tackle all of these challenges at once?
you should swing by next weds sometime dude :)
thx for the comment.
Umair, I know you've talked about this speech before, but how does it fit in w/ the context of what you just said..?
Nothing is un-fixable )says the system engineer). I always find a good kick in the right place always works ;)
Radical transparency comes to mind. Which I've been posting on. I know this touches the sides but providing information on things like insurance premiums http://simoncast.blogspot.com/2008/02/using-transparency-to-regulate-business.html for H&S give a proxy measure of the value the company puts on employees safety. Forced publication of employee salaries would also improve the market for labour.
The other one I think needs to be fixed before pretty much else is incentive systems. I've come to believe the current incentive systems made the problems as the reward for things that can be gamed or are for things beyond the control of the person. In fact I think the assumption that an agents interests must be aligned to the owners interest is incorrect. http://simoncast.blogspot.com/2008/02/incentives-cause-financial-rot.html
Yeah keep trying to get to a Next Wednesday. I'm a little tied up with a project at the moment ;) Which, BTW, I want to run by you at some time.
I have a slightly different view on this topic.
Let me put it like this: yes, there is a discrepancy between the increase in wages of the average worker and the increase in overall revenue/profits that companies generate or indeed the increases in income that senior executives take home.
Here is why I think this is: technology. I have a very simplistic view of this that says: person * technology leverage * capital leverage = value
The situation is that the only individuals who benefit from the technology leverage (which is ever increasing) and the capital leverage are the people who own the equity in the companies. The workers still only derive the value from their work, but they miss out on the value generated by the technology and the capital leverage.
So, yes, those that don't own the equity loose out and there will be a continuing increase of value in which they don't participate.
I am sure you can package this much more elegantly and economically correct: The value increase is in the technology and capital leverage (benefiting the equity holders), not just in the sweat.
Why else do you think VCs are investing in technology companies?
So, the question as I see it is how we can let workers participate in the value that technology and capital bring. Maybe this is the question unions should be asking themselves, every time they agree to a pay freeze? Maybe they should be looking at getting share options when companies can't afford to increase workers' wages or cannot guarantee their continued employement?
tech is certainly important.
but the economic data on the contribution of technology to productivity + gdp is mixed.
why? because the relationship is mediated through dna.
if the dna isn't right, the wonderful effects of tech can never be realized.
that's why dna is so important.
your recommendations are spot on - unions should be thinking about exactly such kind of radical restructuring.
thx for the comment.
gates get some of the effects/problems right.
but the deeper cause is dna.
his understanding of dna is limited. no company cares enough about the poor to help them for reasons recognition.
we need to hack the dna of the firm so there are good reasons for firms to solve real problems again - because in the edgeconomy, firms (and the rest of us) can't survive otherwise.
thx for the comment.
Equity is everything. Jens is right on...
On a more practical level, it's just insanely hard to motivate CREATIVE people to perform within a firm when that person has no ownership of their creation.
It's like having a fuckin record deal...but you don't even get to play music. You're just working.
As Umair might say, that doesn't just suck; it blows!
gosh, why limit the change, or ameliorate it???? it is the best thing happening on the planet!!hasten
the change! speed it up! increase it! it is our friend!
(and just as dna is really just the surface of the orange of reality, an effect of something and cause of nothing, says nothing about the fruit or the seeds inside the will make infinitely more fruit... dna is not actually worth paying attention to, restructuring concepts is everything, and doing it again forever)
hasten the change to arrive at the changeless, an eternal becoming
It's rare to see so many unsupported conclusions in a single article. I really wish you would articulate the detail and logical steps that lead to your conclusions. Without those steps, your article fails to persuade, at least for the critical thinkers out there.
Not sure what "artificially low prices" means? That the Chinese don't really make things for a lower cost, and, between currency exchange and the balance of trade, they can sell them in the U.S. for less?
Others have commented, but I will repeat -- where are the facts to substantiate you thesis that prices are higher, unemployment is out of whack, or that Americans don't live lives a whole lot more comfortably than in the past, or compared to the lion's share of the world?
What's the answer? Collectivism? Socialism? Communism?
I think one thing we've learned, from the death of millions, is that life and economics are MORE complex than the government or any individual can get their heads around. News bulletin: state-controlled economies FAIL, often with the collateral damage of dictatorship, oppression and death of innocents.
The lessons of the crash are clear -- don't give loans to people who can't pay them back; don't hide the fact by making derivatives opaque, and don't take control of companies out of the hands of the owners (the shareholders). Corporate democracy, like political democracy (someone tell the previous administration), needs transparency.
When a company applies innovative technology, it becomes more efficient and starts cutting jobs. So, I wouldn't expect technology to help those at the bottom of the corporate pyramid. On the other hand, small businesses create more jobs than corporations. And, this country has the best legal, economic, and business culture environment to start a new company. This is the reason so many entrepreneurs come to the US.