Economics – Page 256 – artdiamondblog.com

U.S. Economy Can Prosper, Even if G.M. Does Not

The fragility of success for large corporations is documented in the early chapters of the Foster and Kaplan book that is mentioned below.

(p. 1) THE announcement last week that General Motors would cut 25,000 jobs and close several factories is yet another blow to the Goliath of automakers and its workers. But only if you work for G.M. is the company’s decline a worry. For consumers, the decline can be seen as a symbol of healthy competition.

G.M.’s sales, market share and work force have all been falling for a generation, even as the quality of its vehicles has gone up. Why? Because its competitors’ products have improved even more. Today’s auto buyers enjoy an unprecedented array of well-built, well-equipped, reasonably priced vehicles offered by many manufacturers.

. . .

(p. 3) . . . even if a new generation is drawn to G.M.’s products, recovery of its former position seems unlikely.  Other brands have improved, too:  J.D. Power estimates that for the auto industry overall, manufacturing defects declined 32 percent since 1998 alone.

There is also great pressure to hold prices down, which is bad for companies like G.M. with vast amounts of overhead.  According to the consumer price index, new cars and light trucks today cost less in real-dollar terms than in 1982, despite having air bags, antilock brakes, CD players, power windows and other features either unavailable or considered luxury options back then.

This means that during the very period that General Motors has declined, American car buyers have become better off.  Competition can have the effect of ”creative destruction,” in the economist Joseph Schumpeter’s famous term, harming workers in some places, while everyone else comes out ahead.

. . .

As it continues to shrink, G.M. may serve as an exemplar of what the world economy will do in many arenas — knock off established leaders, while improving quality and cutting prices. In their 2001 book ”Creative Destruction,” Richard Foster and Sarah Kaplan, analysts at McKinsey & Company, documented how even powerhouse companies that are ”built to last” usually succumb to competition.

Competition can be a utilitarian force that brings the greatest good to the greatest number. Someday when the remaining divisions of General Motors are bought by some start-up company that doesn’t even exist yet, try to keep that in mind.

For the full commentary, see:

GREGG EASTERBROOK. "What’s Bad for G.M. Is . . ." The New York Times, Section 4 (Sunday, June 12, 2005): 1 & 3.

(Note: the ellipsis in the title is in the original title; the ellipses in the article, were added.)

The full reference to the Foster and Kaplan book, is:

Foster, Richard and Sarah Kaplan. Creative Destruction: Why Companies that Are Built to Last Underperform the Market—and How to Successfully Transform Them. New York: Currency Books, 2001.

Static Assumptions Undermine Economic Policy Analysis

Over 50 years ago, Schumpeter emphasized that static models of capitalism miss what is most important in capitalism. Yet static analysis still dominates most policy discussions. But there is hope:

(p. A14) A bit of background: Most official analysis of tax policy is based on what economists call "static assumptions." While many microeconomic behavioral responses are included, the future path of macroeconomic variables such as the capital stock and GNP are assumed to stay the same, regardless of tax policy. This approach is not realistic, but it has been the tradition in tax analysis mainly because it is simple and convenient.

In his 2007 budget, President Bush directed the Treasury staff to develop a dynamic analysis of tax policy, and we are now reaping the fruits of those efforts. The staff uses a model that does not consider the short-run effects of tax policy on the business cycle, but instead focuses on its longer run effects on economic growth through the incentives to work, save and invest, and to allocate capital among competing uses.

For the full story, see:

ROBERT CARROLL and N. GREGORY MANKIW. "Dynamic Analysis." The Wall Street Journal (Weds., July 26, 2006): A14.

Audacity and Scale of Hurricane Katrina Waste and Fraud Are Amazing

Photo scanned in from my paper copy of the NYT issue cited below. Compare the version above to the cropped version that appeared in to online version below–whether deliverate or innocent, the effect of the cropping is to reduce the visual magnitude of the scene (and hence reduce the evidence of the magnitude of the waste).

(p. A1) WASHINGTON, June 26 — Among the many superlatives associated with Hurricane Katrina can now be added this one: it produced one of the most extraordinary displays of scams, schemes and stupefying bureaucratic bungles in modern history, costing taxpayers up to $2 billion.

A hotel owner in Sugar Land, Tex., has been charged with submitting $232,000 in bills for phantom victims. And roughly 1,100 prison inmates across the Gulf Coast apparently collected more than $10 million in rental and disaster-relief assistance.

There are the bureaucrats who ordered nearly half a billion dollars worth of mobile homes that are still empty, and renovations for a shelter at a former Alabama Army base that cost about $416,000 per evacuee.

And there is the Illinois woman who tried to collect federal benefits by claiming she watched her two daughters drown in the rising New Orleans waters. In fact, prosecutors say, the children did not exist.

The tally of ignoble acts linked to Hurricane Katrina, pulled together by The New York Times from government audits, criminal prosecutions and Congressional investigations, could rise because the inquiries are under way. Even in Washington, a city accustomed to government bloat, the numbers are generating amazement.

"The blatant fraud, the audacity of the schemes, the scale of the waste — it is just breathtaking," said Senator Susan Collins, Republican of Maine, and chairwoman of the Homeland Security and Governmental Affairs Committee.

For the full story, see:

ERIC LIPTON. "’Breathtaking’ Waste and Fraud in Hurricane Aid." The New York Times (Tues., June 27, 2006): A1 & A13.

Cropped version of the photo run in the online version of the NYT article cited above.

Source of the graphic: the online version of the NYT article cited above.

Five More Hours Per Week of Leisure Time in 2003 Than in 1965

The easiest way to measure leisure is to take survey data on how many hours a week people spend at work and subtract. Since 1965, the number of hours the average American works for pay has not changed much. By this simple measure, then, leisure has also stayed the same.

But are we really working as much as ever?

”All time away from work is not equal,” Erik Hurst, an economist at the Graduate School of Business at the University of Chicago, said in an interview. Some time off is actually just more work.

To put it in economic terms, we spend some time off the job in consumption (watching TV, hanging out with our friends, reading for pleasure) and some in production (cooking dinner, cleaning the house, doing household repairs). Some activities, like sleeping and eating, fall somewhere in between, while others, including child care and gardening, combine pleasure and production.

The difference is not just that we enjoy some activities and dislike others. It is that we could, in theory, pay someone else to do the production for us. A cook or a restaurant can make dinner, but nobody else can play golf or watch TV for you.

. . .

Americans are not, in fact, working as much as they used to. They are just getting paid for more of the work they do. Using several different definitions of leisure, Professor Hurst and Mark A. Aguiar, an economist at the Federal Reserve Bank of Boston, analyzed time-use surveys done from 1965 to 2003. Whether they defined leisure narrowly or broadly, they got a consistent result.

”Leisure time — measured in a variety of ways — has increased significantly between 1965 and 2003,” they write in ”Measuring Trends in Leisure: The Allocation of Time Over Five Decades,” a Boston Fed working paper. . . . Using the most restrictive definition, which includes only ”entertainment/social activities/relaxing” and ”active recreation,” the economists found that leisure had increased 5.1 hours a week, holding demographics like age constant. (Without that control, leisure has grown 4.6 hours.) Assuming a 40-hour work week, that is like adding six weeks of vacation — an enormous increase.

”I was surprised by the magnitude,” Mr. Aguiar said in an interview, though the general trend agrees with earlier research.

For the full commentary, see:

VIRGINIA POSTREL. "ECONOMIC SCENE; The Work You Do When You’re Not at Work." The New York Times (Thursday, February 23, 2006): C3.

A PDF of the NBER draft of the Aguiar and Hurst paper can be found at:

http://faculty.chicagogsb.edu/erik.hurst/research/aguiar_hurst_leisure_nber_submit_final.pdf

Road Opens a Year Early: Contract Included Incentives

With monetary incentives to finish early, Hawkins Construction Company finishes westbound lanes a year ahead of schedule. Source of photo:
http://www.omaha.com/index.php?u_pg=1636&u_sid=2214442&u_rnd=7720251

The long delays, and lack of visible progress in expanding 132nd, near our house, became a running joke—but the wasted travel time was not funny. Similar road construction delays were occuring all over town, to the point where it looked as though the issue might threaten the mayor’s re-election. So he got serious, and in new road contracts, included substantial monetary incentives for finishing the job ontime, and even more incentives to finish it early. The expressway pictured above is one of those built under the new contract. Maybe incentives really do matter?

(p. 1A) An electronic sign above West Dodge lured drivers with a simple message: "Expressway Open."

The real draw was the quicker commute drivers encountered Thursday evening during the first rush hour after the opening of the West Dodge Road Expressway.

After two years of construction, the expressway’s westbound bridge opened to traffic at 10:35 a.m. Thursday, more than a year ahead of schedule.

A steady flow of traffic streamed across the bridge Thursday evening.

"It was wonderful," said commuter Jean Crouchley.

For the full article, see:

MICHAEL O’CONNOR AND RICK RUGGLES. "A Concrete Example of Progress; Motorists Expect Daily Drives to be Quicker with New Route." Omaha World-Herald (Friday, July 28, 2006): 1-2.

(Note: The online version of the article had the title: "Making quick work of commute on Expressway.")

“The More Sweatshops the Better”

JACQUELINE NOVOGRATZ, a veteran of the Rockefeller Foundation and a former consultant to the World Bank, talks enthusiastically about the development of a company in Africa where some 2,000 women earn, on average, $1.80 a day producing antimalarial bed netting. With the assistance of a $350,000 loan from an American investor, the business started making the nets nearly three years ago and is likely to add 1,000 more jobs within the next year.

”They’re in the process of building a real company town there,” Ms. Novogratz said.

Ms. Novogratz is not an outsourcing executive at a multinational company. Rather, she is the chief executive of the Acumen Fund, a philanthropic start-up based in New York that uses donations to make equity investments and loans in both for-profit and nonprofit companies in impoverished countries. One of the stars of her small portfolio is the bed-netting maker, A to Z Manufacturing, a family-owned company in Tanzania — a country where 80 percent of the population makes less than $2 a day.

. . .

”To put it in the baldest possible terms, the more sweatshops the better,” said William Easterly, professor of economics at New York University and author of ”The White Man’s Burden: Why the West’s Efforts to Aid the Rest Have Done So Much Ill and So Little Good.” Professor Easterly is not advocating the deliberate creation of workplaces with miserable conditions. ”As you increase the number of factories demanding labor, wages will be driven up,” he said, and eventually such factories will not be sweatshops.

Ms. Novogratz says it can be difficult to tell well-off, philanthropy-minded Westerners that what Africa really needs is more $2-a-day jobs. But when they understand the alternatives, she said, such concerns tend to melt away. Before they found work at the netting factory in Tanzania, for example, many of the women were street vendors or domestic workers and earned less than $1 a day. A to Z’s wages place the women in Tanzania’s top quartile of earners, Ms. Novogratz said.

For the full commentary, see:

DANIEL GROSS. "ECONOMIC VIEW; Fighting Poverty With $2-a-Day Jobs." The New York Times Section 3, (Sunday, July 16, 2006): 4.

Life Has Improved; And Can Continue to Improve

Source of graphic: online version of the NYT article cited below.

(p. 1) New research from around the world has begun to reveal a picture of humans today that is so different from what it was in the past that scientists say they are startled. Over the past 100 years, says one researcher, Robert W. Fogel of the University of Chicago, humans in the industrialized world have undergone “a form of evolution that is unique not only to humankind, but unique among the 7,000 or so generations of humans who have ever inhabited the earth.”

. . .

(p. 19) . . . stressful occupations added to the burden on the body.

People would work until they died or were so disabled that they could not continue, Dr. Fogel said. “In 1890, nearly everyone died on the job, and if they lived long enough not to die on the job, the average age of retirement was 85,” he said. Now the average age is 62.

A century ago, most people were farmers, laborers or artisans who were exposed constantly to dust and fumes, Dr. Costa said. “I think there is just this long-term scarring.”

For the full story, see:

Kolata, Gina. "The New Age; Older and Better; So Big and Healthy Grandpa Wouldn’t Even Know You." The New York Times, Section 1 (Sunday, July 30, 2006): 1 & 18-19.

Source of graphic: online version of the NYT article cited above.

Source of graphic: online version of the NYT article cited above. Source of book image: http://www.cambridge.org/us/catalogue/catalogue.asp?isbn=0521808782

Fogel’s book is a primary academic source for much of what is interesting in the New York Times article. Fogel predicts that if we don’t screw things up, half of today’s college students will live to be 100. He shows that academics in the past have consistently and significantly underestimated the maximum lifespans that would be attainable in the future.

The full reference for the Fogel book is:

Fogel, Robert William. The Escape from Hunger and Premature Death, 1700-2100, Cambridge Studies in Population, Economy and Society in Past Time. Cambridge, UK: Cambridge University Press, 2004.

Environmentalists Hurt Poor Quatemalans

Residents of El Estor, a small Q’eqchi community of 40,000 people located in northeast Guatemala, cheered when they heard that Vancouver-based Skye Resources was interested in reopening a local abandoned nickel mine. According to local press, the town’s mayor and several community leaders led a rally last September in favor of the mine with a banner that read, "El Estor says yes to responsible mining."

It’s easy to see why there was such excitement. Skye Resources estimates that it will employ 1,000 people and create four indirect jobs in the community for every new mining job. That plus an overall investment of at least $539 million is not irrelevant for an impoverished town with one of the highest illiteracy rates in the country — over 40% for indigenous men and 35% for indigenous women.

The festive mood didn’t last long. Within months, opposition to the project began to swell. Well-organized protesters were soon demanding that the Guatemalan government withdraw the mining license it had issued, alleging environmental risks and inadequate consultation with the community.

. . .

In a country with such dire needs for capital and technology to lessen the want of the poor, it is worth exploring whether such anti-mine activism truly expresses the will of the people. Looking behind the scenes, the funding and instigation of the activism appears heavily driven by international nongovernmental organizations that end up discouraging development while trying to fulfill their own mission.

Boston-based Oxfam America and Toronto’s Rights Action are two anti-development NGOs active in Guatemala. Oxfam has partnered with MadreSelva (Mother Jungle), a Guatemala City environmental group headed by affluent urbanites, to block mining projects.

For the full commentary, see:

ANDREA TUNAROSA. "AMERICAS; What Do NGOs Have Against Poor Guatemalans?" The Wall Street Journal (Fri., July 21, 2006): A15.

“Capitalism has Not Corrupted Our Souls; It has Improved Them”

Source of book image: http://www.amazon.com/gp/product/0226556638/sr=8-1/qid=1153708722/ref=pd_bbs_1/104-2835260-2878345?ie=UTF8

Deirdre McCloskey’s unfashionable, contrarian and compelling manifesto in favor of what she calls the bourgeois virtues starts with an uncompromising "apology" for how private property, free labor, free trade and prudent calculation are the fount of most ethical good in modern society, not a moral threat to it.

The intelligentsia — in thrall for centuries to religion and now to socialism — has for a long time snobbishly despised the bourgeoisie that practices capitalism. Ms. McCloskey calls such people the "clerisy." Their values and virtues, like those of the proletariat and the aristocracy, are widely admired. But almost nobody admires the bourgeoisie. Yet it was for anti-bourgeois ideologies, she notes, that "the twentieth century paid the butcher’s bill."

As Ms. McCloskey explains: "Anyone who after the twentieth century still thinks that thoroughgoing socialism, nationalism, imperialism, mobilization, central planning, regulation, zoning, price controls, tax policy, labor unions, business cartels, government spending, intrusive policing, adventurism in foreign policy, faith in entangling religion and politics, or most of the other thoroughgoing nineteenth-century proposals for government action are still neat, harmless ideas for improving our lives is not paying attention." By contrast, she argues, "capitalism has not corrupted our souls. It has improved them."

For the full review, see:

MATT RIDLEY. "Capitalism Without Tears; Fashionable thinkers sneer at the free market and its practitioners, but economic liberty may actually be a force for personal goodness." The Wall Street Journal (Sat., July 22, 2006): P10.

(Note: in the passage above, I took the liberty of correcting a misspelling of "Deirdre.")

The full citation to the McCloskey book is:

McCloskey, Deirdre N. The Bourgeois Virtues: Ethics for an Age of Commerce. Chicago: University of Chicago Press, 2006. (616 pages, $32.50)

Beware of a Snapshot of a Moment in Time

Source of photo: http://www.nytimes.com/2006/07/27/world/middleeast/27mideast.html?pagewanted=2

The photo of Condi Rice touching her forehead ran on the top of the front page of the New York Times on Thurs., July 27, 2006. It ran big: filling over a third of the length of the paper, and over half of the width. It ran right next to the main headline of the front page: "CEASE-FIRE TALKS STALL AS FIGHTING RAGES ON 2 FRONTS."

It appears that Condi Rice is discouraged, or has a headache, or is overcome.

But a great CNN report by Jeanne Moos run on Sat., July 29, shows a dynamic version of the minute during which this snapshot was taken. It shows that this photo is a split-second moment of Condi Rice brushing hair off of her forehead.

Our usual view of competition is to look at how many competitors there are at a moment in time. We look at a snapshot. But to really judge competition we must take Schumpeter seriously and look dynamically at whether there is the possibility of leapfrog competition over time.

In an earlier blog entry, I noted that Ronald Reagan resisted sitting for still photos because he thought that still photos could easily be manipulated to mislead. Ronald Reagan was right.

(Jeanne Moos’s report was entitled "Hairy Talks or Hair in Eyes?" on the CNN web site. I believe it first ran on 7/28/06, though I saw it replayed in the afternoon of 7/29/06.)

Current Workplace Revolution Benefits Labor

(p. 8) Would you change places with your grandfather? Would you want to work 11 brutal hours a day… in yesterday’s Bethlehem Steel mill, a Ford Motor Company factory circa 1935? Not me. Nor would I change places with my father … who labored in a whilte-collar sweatshop, at the same company, in the same building, for 41 l-o-n-g years.

A workplace revolution is under way. No sensible person expects to spend a lifetime in a single corporation anymore. Some call this shift the "end of corporate responsibility." I call it … the Beginning of Renewed Individual Responsibility. An extraordinary opportunity to take charge of our own lives.

Source of passage:

Peters, Tom. Re-imagine! London: DK, 2003.

(Note: all of the ellipses in the above passage, appear in the original.)