You are currently browsing the category archive for the ‘Economics’ category.
I know there are a lot of smart people in Kansas. It’s just that they tend not to end up in elective office there. The latest examples of Kansas-being-Kansas are staggering. Take for example the matter of Gov. Brownback’s massive tax cut on business profits. From what I understand by reading news material from the corporate controlled news media, Kansas, under Brownback and the GOP controlled legislature, have managed to end taxes on business income. The fact that Koch Industries is based in Wichita is more than a little coincidental, I’m guessing.
Evidently the GOP “leaders” in the KS legislature have been dueling it out with Missouri, awarding tax incentives for companies to move across the border to the Kansas side. This kind of fratricidal fiduciary hijinks is not uncommon. All states are eager to raid other states for businesses. Tax concessions are the pieces-of-eight in this interstate piracy. Our states are in a race to the bottom in their pursuit of business transplants.
Of interest relating to Kansas is this little nugget. AMC Entertainment Inc. announced that it is moving to Leawood, KS, from the Missouri side. But, about the same time it was announced that the Dalian Wanda Group would buy AMC Entertainment. Dalian Wanda Group is about to reap the benefits of Brownback’s tax policy by operating in KS. A Chinese company makes one of the largest buyouts of a US company and lands just in time in the Kansas tax haven.
Let me speak plainly. A Chinese company owns a largish US company headquartered in Kansas will be taking advantage of infrastructure put in place over generations by hard working Kansans and US citizen taxpayers. All have contributed in many ways to Kansas infrastructure by way of grants for electrification, roads & highways, universities, military bases, as well as protection by all of the branches of the US military. This Chinese company will enjoy greatly reduced tax liabilities by operating in Kansas. The controlling stockholders are Chinese and will benefit from operation within US borders at the expense of Kansans as a result of the Kansas GOP. These foreign owners will instead allow their employees to contribute to the public coffers.
The burden for expenses related to responsibilites previously administered by the state will be unpooled and relocalized. The purpose and benefit of taxation has been that pooling funds can bring the benefits of civilization to the state without having to rely on the Darwinistic forces of the market. It is ironic that a state so rabidly against evolution has embraced such a Darwinistic approach to social policy.
The stated intent of GOP leaders (like Dick Army, etc.) cloaked behind the curtain has been to “drown the beast”. That is, kill federal and state government by unfunding it. You do that by electing serial government haters like Gov. Brownback and possibly by having the Koch boys behind the scenes pulling strings. Not only has Kansas stuffed a dagger in the chest of civic administration of government services, they have opened the pipeline for profits to stream out of the US from a state tax haven from the operation of a corporation by a Chinese conglomerate.
The Kansas GOP has accelerated the transition of power from a constitutionally backed system with structural transparency to the private concentration of power with no transparency and no civic obligation. Way to go boys. The full import of this should be evident in a generation when most of the GOP legislators who enacted this shit sandwich will be long gone.
Make no mistake. The GOP euphamism of “drowning the beast” is really about the transfer of power from the many to the few. The slogans about liberty and freedom are a plush teddy bear for the masses of low information voters to embrace. Power is in the ability to allocate resources. As the public loses its ability to allocate resources, it loses power. As private or corporate interests accumulate resources, their ability to exercise power rises. There is nothing new here. Power always concentrates.
[Note: A copy of this essay appears in the Daily Kos.]
The IPO of Facebook stock on friday was a bad business day on two accounts. Most obviously, the anticipated share price “pop” didn’t happen by the end of the trading day. FB shares opened at $38.00 per share and ended the day at $38.23 per share. According to Andrew Bary at Barron’s, early investors paid an average of $1 per share. With lockup provisions on 1.8 billion shares expiring in the August to November time-frame, large scale selling could drive down share prices later in the year.
The Barron’s article quoted a tech trader who said
“Like most IPOs in tech land, Facebook is geared toward enriching early investors and employees while sticking public investors with shares burdened with poor voting rights and high growth expectations.”
There is nothing new in this statement of condition. Cashing in one’s shares in a risky investment of time and money in a startup is a commonly executed means of capturing reward. Risk takers are entitled to a payoff when a venture achieves success.
But this trader’s sentiment reveals something deeper about business and it’s role in our culture. This was a public offering of fractional ownership whose sole means of income is advertising. It is clearly designed to transfer future risk to public investors who have precious little voice in corporate governance.
Facebook has offered public investors a kind of sh*t sandwich: A chance to buy into a public corporation that is structurally configured to retain controlling interest by one of the founders.
Has Facebook created wealth or is it just capturing the market share of other advertisers? Facebook, like Google, is a creature of advertising. And, like Google, it is a magic version of the Yellow Pages that automatially anticipates or finds the listings you may want. But it is more than that. It is a directory that supplies the listings it wants you to have. Instead of the full page ads of the advertising print period where trees were actually pulped to provide something called “paper”, today’s ads are hot links to the advertisers website.
Facebook and Google are really just newer versions of the old circus of broadcasting. Broadcasters supply eyeballs and ears to adverisers who then have tens of seconds to mesmerize viewers and listeners with their magic. It is like rattling a stick in a bucket of swill. Facebook supplies amusement as a so-called social network and Google supplies entertainment as well as utilitarian services.
It was also a bad business day for broadcasters covering the FB IPO. All of the cable television business progamming was set on this blessed and much anticipated initial public offering. Regrettably, the event was delayed for technical reasons until mid day EDT. When the stock was finally released, “experts” were standing by to render their opinion on the last 20 seconds of market activity. Like all stock market data, it is marked by a jittery, noisy curve, sometimes trending upwards and then downwards. Over one minute anything looks like a trend.
Faced with the possibility of hours of air time to fill before something exciting happens, the CNBC talking heads natter on and on with a variety of experts who natter on and on. All-the-while stock footage of the NYSE floor and the post-pubescent hoodie-boy CEO of FB loop cycles endlessly. For this we allocate broadcast spectrum?
In the end, there was no excitement. FB closed the day pennies above to where it started. I like to think this is because investors aren’t as foolish as the cynical people who are behind the offering believe on the opening day, at least.
An excellent analysis of Facebook valuation has been posted by Aswath Damodaran, Professor of Finance at NYU.
Thanks to Bill in Michigan for the link on how the US lost out on manufacturing the iPhone. The article is well worth the read. A few of us have been beating this drum for a while. Economics is not a theory of physics. It is entirely about choices people make. But to some, economics has become a mathematical and philosophical validation of greed and a metric of mortal value.
Interestingly, Robert Reich has a parallel and broader editorial on the same general topic. Reich points out that US corporations are becoming increasingly globalized with “less and less stake in America.”
Reich quotes an Apple executive –
‘An Apple executive says “We don’t have an obligation to solve America’s problems. Our only obligation is making the best product possible.” He might have added “and showing a big enough profits to continually increase our share price.”’
Reich goes on to say that US business investment in R&D is in general decline but…
“… According to the NSF, American firms nearly doubled their R&D investment in Asia over these years, to over $7.5 billion.
GE recently announced a $500 million expansion of its R&D facilities in China. The firm has already invested $2 billion.”
If you read history and understand something of how the industrial revolution has been the deus ex machina of social revolution since the invention of smelting, then unavoidably you must ask what happens if we change the sign of the revolution? Does the sign of social revolution become negative as well in a nation of negative- or de-industrialization? What happens in a nation when a minority of shareholders absorb value from the stakeholders via tranplantation of the economic engine to another nation? What happens to society when the population grows but the per capita availability of jobs is in decline? A trip to the Congo or to Gaza might give some useful hints.
Deindustrialization is not nearly the sole culprit. Automation is much to blame for the obsolescence of job descriptions. Automation actually facilitates the export of jobs because the key expertise may be in the design of automated equipment, not its operation.
What made America “great” was not simply its freedom. There was a substantial contribution from a vast continent pregnant with animal, vegetable and mineral resources for the taking. The early allotment of land and mineral resources by the government to settlers, railroads, and mine operators kick started the American economic engine in the mid 19th century.
I am uncomfortable with this strident American exceptionalism viewpoint. Maybe it is the midwesterner in me, but I would prefer to see Americans roll up their sleeves and get busy making things again. Leave the boastful and prideful stuff for the comics. A little more humility and thoughtfulness will get us further and in better condition.
Here is a great catch phrase- Locust Capitalism. The article by David Waldman, describing the past business practices of one of our corporate persons, Bain Capital, uses this catchy phrase to characterize said corporate person. Of course, the irony of it all is plastered on the face of biological person Willard “Mitt” Romney who makes a show of being a job creator.
There is something that locusts do create- it is called frass.
I do not doubt Romney’s sincerity when he speaks. Like other candidates, he seems to live in the “eternal now” much like a dog. He wags his tail at the public hoping to curry favor for the treat of being president. If wagging his tail doesn’t work, he rolls over and puts up a paw hoping to win over the public. It is in the nature of these creatures to do this and while we cannot hold them blameless for their transgressions, we can at least understand them.
People who are able to think about business in an abstract way, that is, unencumbered by sloppy sentimentality for the fate of individuals, are well suited to become the captains and oligarchs of business. Romney seems to have been a captain. If the practices described by Waldman did in fact happen, then the locust analogy is very suitable and it says a lot about the character of the persons involved.
Waldman writes that Romney and cohorts bought companies holding ample commercial credit, charged them substantial management fees, and tapped out the credit lines while pocketing operating cash, driving the company into bankruptcy. They walk away from the remaining husk of what was a functioning organization with their neatly stacked pile of lucre.
If a real person did this, he/she might be described as a kind of sociopath. But somehow in the context of business there is no descriptor for such antisocial behavior.
Since we are now in the habit of referring to corporate personhood, perhaps we need to be a bit more analytical about it and characterize pathological behavior such as this.
When you look for science news at news aggegation sites like Google News or popular publications like, well, any given magazine or newspaper, or (yawn) any given non-fiction television program, what you are likely to find are fluff pieces on topics related to medicine, automobiles, and telecommunications. To people in the news business, scientific progress means new kinds of medicines, better cars, and the latest (n+1)G cell phone or iPad.
It is possible for even successful people to apply pop-culture metrics to economic theory. For instance, the founder of PayPal, Peter Thiel, has written an essay for The National Review in which he questions the motives of scientists as well as their ability to maintain the growth of scientific progress.
The state of true science is the key to knowing whether something is truly rotten in the United States. But any such assessment encounters an immediate and almost insuperable challenge. Who can speak about the true health of the ever-expanding universe of human knowledge, given how complex, esoteric, and specialized the many scientific and technological fields have become? When any given field takes half a lifetime of study to master, who can compare and contrast and properly weight the rate of progress in nanotechnology and cryptography and superstring theory and 610 other disciplines? Indeed, how do we even know whether the so-called scientists are not just lawmakers and politicians in disguise (italics mine), as some conservatives suspect in fields as disparate as climate change, evolutionary biology, and embryonic-stem-cell research, and as I have come to suspect in almost all fields?
The article goes on to paint a picture of failure on the part of the scientific community for not coming up with a Moore’s law style of continuous bounty for the consumer.
Here is where I greatly disagree with Thiel. He cites the stagnation of wages as an indicator of economic progress which, in turn, is an indicator of tepid technological progress.
Let us now try to tackle this very thorny measurement problem from a very different angle. If meaningful scientific and technological progress occurs, then we reasonably would expect greater economic prosperity (though this may be offset by other factors). And also in reverse: If economic gains, as measured by certain key indicators, have been limited or nonexistent, then perhaps so has scientific and technological progress. Therefore, to the extent that economic growth is easier to quantify than scientific or technological progress, economic numbers will contain indirect but important clues to our larger investigation.
… Taken at face value, the economic numbers suggest that the notion of breathtaking and across-the-board progress is far from the mark. If one believes the economic data, then one must reject the optimism of the scientific establishment (italics mine). Peter Thiel, National Review.
This is where Thiel drives into the weeds. He conflates stagnant wages in the post Viet Nam era with a failure of science and technology to produce the kinds of advances he would recognize as worthy.
What is lost on Thiel is the fact that stagnant wages are a kind of benefit to employers and investors as the result of technology. Over this so-called period of stagnation in wages is a complementary increase in productivity. If anything the improvements in technology unseen by Thiel and his ilk have been applied to render human labor obsolete, thereby sustaining profits. China hasn’t gotten all American jobs. Machines have taken over much ot it.
The fact that Thiel scans the horizon from his perch and fails to see this is indicative of a kind of blindness of prosperity. In his world, technology is the internet. Apparently, people like Thiel only register scientific progress as a stream of shiny new consumer electronics, supersonic transport, or brain transplants. The advances in science and technology from the last 20 years are everywhere, not necessarily just in internet technology, cell phones, and Viagra.
Semiconductor technology is now well below the micron scale and heading to the tens of nanometers. Bits of data are heading toward tens to hundreds of electrons per bit. Lithographic fabrication at this scale allows for rules of thumb like Moore’s Law. Growth in component density can multiply parabolically or more as greater acreage of chip surface is consumed in 3 dimensions. Many doublings are possible in this domain.
But parabolic growth in aircraft or land vehicle speed is limited by other physics. A dynamic range of only a few factors of ten in vehicle speed are economically feasible. Fossil fuels are fantastically well suited for use in transportation owing to their high energy density, low cost per kiloJoule, and ability to flow through pipes. Fundamentally new forms of energy storage are hard to find and are expensive. All energy usage is consumption. Science can only go so far in facilitating better forms of consumption for the profligate. Doing work against gravity also consumes lots of energy, so the world of George Jetson never became feasible.
Ordinary automobiles that comprise a part of the stagnancy that Thiel bemoans are coated in highly advanced polymer coatings made from specialty monomers, catalysts, and initiators. The polymeric mechanical assemblies are highly engineered as well as is the robotic assembly of the vehicle. The implementation of automation in the manufacture of plain old cars is just a part of the overall issue of low job growth. In this case, technological advancement => stagnant growth in wages and employment.
Here is an iChallenge for the iPeople who are developing the telecommunications wonders we have today. You designers of the Kindle, Nook, iPhone, iPad, iWidget, and all of the variants spreading away from the core technology. I know you are clever and hard working people. There is no doubt.
What about developing or just relocating manufacturing processes that can be run in the USA? Shouldn’t the fabrication technology be lined out and automated to the point where it can be operated nearly anywhere? One of the things that the advance of technology brings is reduced headcount per unit of production. How do we justify off-shoring manufacturing that is highly automated? What is the advantage if inexpensive labor is not needed? It must be something else.
If taxes are the issue, then let’s look at the numbers. Quit the handwaving. We need a company like Apple to pony up some actual numbers. Make your case like you did in B-school. Manufacturing doesn’t have to start up in the expensive SF Bay area. Plants can be built anywhere the public infrastructure already supplies utilities and transportation. Could it be that many of the arguments for off-shore manufacturing are related to a deficit in imagination rather than rigorous calculation?
And to the iConsumers out there. By demanding these wonderphones, you are only making the trade deficit worse. Public corporations are people, or so the thinking goes. What is with these people? Do they not have any sense of loyalty? Are they even trying to manufacture in the USA anymore?
I’m trying hard not to be gloomy, but I’ve just been over at the The Oil Drum reading a post written by Jeremy Grantham, Chief Investment Officer at GMO Capital. This essay is notable in that it is written by someone in Grantham’s position. What I find so gloomy is the sense that our modern world is like a runaway train in terms of resource consumption.
People have been talking about peak oil and the importance of petroleum in nearly every material aspect of our lives since the Arab oil embaro of the 1970’s. What free market enthusiasts and libertarians fail to emphasize is that the market is a social phenomenon; it is not physics. It is a phenomenon that is driven by desire.
The market is like a stomach- it has no brain. It only knows that it wants more.
The idea that you remove all elected government oversight and allow this stomach to reign free across the world is just another type of politics. Inevitably and always, money aggregates into the hands of a few percent of the human population and into the wire-transfer hands of synthetic people called corporations.
In a world of increasing scarcity the prospect of reduced consumption confounds political and business practices devoted to growth, since growth typically means increased consumption.
The key psychological barrier is this- How do we feel like we’re improving as we’re making do with less?
As the cost of manufacturing increases due to increased raw material costs, unit prices will rise. The invisible hand of price elasticity of demand will inevitably partition out the elastic from the inelastic goods on the market. Whole industries relying on discretionary income will feel exposed.
The challenge for our leaders is to maintain a vibrant economy even though natural resources are becoming ever more scarce. Power is manifested in the allocation of resources. China has pointedly focused on Africa as a source of raw materials for its growing economy. The act of power is the fact of power. By throwing a lot of money around, and by controlling the flow of resources, China is exercising power. You don’t need to march an army around to demonstrate your power.
China is executing industrial policy by forging alliances and allocating resources to global sourcing action. The USA dithers with self-destructive party politics, foreign military adventures, and a narcissistic indulgence in “greatness”. Instead of wearing our hearts on our sleeves, we should roll them up and get to work building a robust and healthy culture.
Having been a part of several startups that failed, I think I can speak credibly about aspects of the startup phenomenon. My friend Bill who lives in a state shaped like an oven mit sent a link to a blog written by a venture capitalist (VC). The long and short of it is that, according to this VC, too many discoveries reported in the biotech literature are based on very slender threads of experimental evidence and often have been performed by a limited number of people. He ges on to lament that the nature of grant funding may contribute to an R&D style that focuses on reporting only the best looking data that supports the hypothesis forming the basis of the grant. The basis of his commentary is his experience funding biotechstartups.
Based on my life experiences I have no doubt that his comments are reasonable.
The unspoken rule is that at least 50% of the studies published even in top tier academic journals – Science, Nature, Cell, PNAS, etc… – can’t be repeated with the same conclusions by an industrial lab. In particular, key animal models often don’t reproduce. This 50% failure rate isn’t a data free assertion: it’s backed up by dozens of experienced R&D professionals who’ve participated in the (re)testing of academic findings. This is a huge problem for translational research and one that won’t go away until we address it head on. –Bruce Booth, Life Sci VC.
The thing is, this phenomenon doesn’t have to be based on dishonesty, though sometimes it is. It is in the nature of entrepreneurs to be extremely (or rabidly) optimistic about the value of their ideas. Entrepeneurs who are specialists with some kind of standing in their field, ie., minimally having tenure or a tenure track slot at a reputable institution, can produce very convincing PowerPoint presentations and handwaving arguments to support their assertions. Especially in front of viewers and investors who are desperate to find the “next big thing”. Finding investors is a numbers game. You simply have to go out in the big, big world and talk to a great many people. Eventually you will find people who want to invest in a startup. It is a form of enchantment. And charismatic entrepreneurs learn early on that they can do this.
If you thought that this is limited to biotech or to academic entrepreneurs, you’d be wrong. I’ve seen this kind of thing up close in other areas of technology. I can say that the prospect of riches just over the horizon can move otherwise sober individuals to commit significant resources to the startup wagon train.
Especially dangerous is the entrepreneur with a patent or even a portfolio of them. Having a patent amounts to an endorsement by the US government, or so it would appear to the unwary. I’ve witnessed entrepreneurs collect and spend millions of dollars of investors money on nothing more than a patent based on handwaving. Remember, patent examiners do not require that you trot out a working model and run it for a while. Before you invest, I would recommend that you demand to be shown a working model or some other hard evidence of proof of concept.
There are several ways to set up shop in the world economy. One is to steal market share. This is the better mousetrap world of “market pull”. You develop a product or service that is superior in some way and compels customers to abandon their loyalties. You depend on taking someone else’s share of the pie.
The other way to set up shop is a bit harder. And riskier. It is the “technology push” domain and consists of introducing new capability through goods and services. It is more than taking a share of the pie- it is baking a new kind of pie. This is the realm of the paradigm shift. Examples are the introduction of petroleum, electricity, vacuum tube electronics, synthetic chemistry, semiconductors, and the internet to name some of the really big ones.
But not all technology push history is so grand. Most technology push is incremental. Marketing products that create new capability requires early investors and early adopters. And not everyone wants to be an early to the show. The trick for purveyors of technology push is to get the cash flow going by selling to early adopters.
I would offer this to those who want to be involved in a startup. Demand results from a marketing study and examine them as closely as you might the technology. If the entrepreneurs are hazy on how the sales part will look, then watch out. If they have not included money people and marketing people early in their adventure, then the investor or employee should beware. It’s not all about the technology in the startup. The entrepreneurs should be as focused on sales and marketing as the tech package. This is where academic entrepreneurs can be extremely weak.