Tuesday, February 28, 2012

Environmental Regulations and Jobs

Imposing new regulations on an industry will generally cause some costs to be incurred by the affected organizations. These costs are usually labeled as job-killing, anticompetitive outrages against our free enterprise system. The government responds by pointing out that not all costs are being considered, and if they were, the net cost to the nation would demonstrate that the regulations are, on the whole, beneficial.

It is generally the Environmental Protection Agency (EPA) that is involved in regulatory disputes. Costing issues were discussed in Costing Environmental Regulation. Rules designed to provide better health outcomes have compelling advantages, but it is difficult to turn them into compelling cost savings mechanisms. A lost job in hand is much more easily visualized than the financial benefit to the nation from a person who one day might not get sick or die because of pollution.

An article in Businessweek by Elizabeth Dwoskin and Mark Drajem provides us with another way to view this conflict. They remind us that one organization’s cost is often another organization’s stimulus package.

"When the Obama Administration announced tough new pollution regulations for power plants last year, the industry loudly protested. The rules, which among other things will require coal-fired plants to make deep reductions in mercury and sulphur dioxide emissions by 2015, will cost utilities at least $12 billion, the Environmental Protection Agency estimates. Coal producers put the price tag at $21 billion. They say electricity prices will spike 12 percent, dozens of plants will close, and thousands of workers will lose their jobs."

That is the view we are fed by our mainstream news outlets. But this is what the makers of the equipment required to meet the environmental standards have to say.

"The Institute of Clean Air Companies, a trade association representing businesses that make products to reduce industrial emissions, forecasts the industry will add 300,000 jobs a year through 2017 as a result of the EPA rules."

This balancing of job losses and gains seems to be a persistent phenomenon.

"In 2002, Morgenstern and his colleagues published a landmark study detailing the effects of regulations on jobs in four polluting industries: paper, plastics, petroleum, and iron and steel....Between 1984 and 1994, a busy period for the EPA, the agency issued hundreds of clean air and water rules, which cost the four industries Morgenstern measured a total of $4.9 billion. In all, about 14,000 workers lost jobs. As the industries spent money to comply with the laws, they innovated. Steel companies hired workers to clean up and retrofit equipment. Plastics makers brought on engineers to develop safer products. Morgenstern estimates that in the end, the spending spurred by the government’s rules put 21,000 to 29,000 people to work. And that does not take into account other economic benefits that are overlooked in the political debate over jobs. Numerous studies across many years show that lower levels of pollutants in the air and water around power plants led to a decrease in illness, medical tests, missed days of work, and hospitalizations."

Anything that drives the development of new technologies will usually have spin-off developments that will be beneficial in other areas—and if large numbers of jobs are created—so much the better.

There are at least two sides to every argument, we must be careful to avoid listening to just one side.

Sunday, February 26, 2012

Corporate Income Tax Changes: Why Revenue Neutral?

The Administration has proposed a lowering of the nominal corporate income tax rate from 35% to 28%. The lost revenue would be recouped by eliminating tax credits and loopholes. The stated intention is to produce modifications that will lead to revenue neutrality. The goal of revenue neutrality clearly has some political benefit, but does it make sense for a country in desperate need of additional income?

Our corporate tax rate is often described as though it is way out of alignment with the rest of the world—"second highest rate in the world." But is that really an accurate representation?

Our rate is not much different from that of other countries. Lowering it to 28% is a reasonable way of making it even more consistent with comparable nations.

If we have a higher tax rate than other countries then we must benefit from increased revenue—right? Chuck Marr has produced an article for the Center on Budget and Policy Priorities that argues the need to increase revenue from corporate taxes. He provides this chart (2007 data) that indicates that our supposedly high rate does not translate into high revenue.

Then there is also this chart that indicates that revenue from corporate income taxes has been falling for many years, and it continues to fall.

It is occasionally argued that taxing corporations is counterproductive, or ineffective, or even unfair. We have addressed that issue previously in Corporate Income Tax: Does It Make Sense? It was argued that corporations take advantage of the infrastructure and protections of society just like citizens do, so let them pay their share of taxes. Particularly, now that they have been given permission to purchase senators and congressmen, just like any other wealthy citizen, let them pay taxes like any other wealthy citizen. If they threaten to move outside the country to avoid paying, tell them goodbye and don’t plan on ever returning; if they wish to create product outside the country and bring it back into our domestic market, tell them that like any other hostile foreign entity they will have significant import duties imposed. If they complain about double taxation, tell them "too bad, everyone gets double taxed." End of vent.

One way or another, revenue from corporate income taxes must increase.

Saturday, February 25, 2012

American Nations: How Puritans Turned the Left Coast Blue

We continue to mine Colin Woodard’s fine book, American Nations: A History of the Eleven Rival Regional Cultures of North America, for interesting facts about our national heritage. His main point is that the North American continent is divided into cultural regions that are defined by the characteristics of the original settlers who arrived and proceeded to spread throughout the continent. The figure below details the pattern, and the discrete nations, created by this migration.

The association of Woodard’s "Yankeedom" with New England is easily understood. Less well known is the immigration pattern that spread Yankeedom characteristics to other parts of the continent.

These original settlers of New England had a unique view of society, and considered it a religious duty to propagate this view (or impose it if you wish) on the remainder of the continent.

"Yankeedom was founded on the shores of Massachusetts Bay by radical Calvinists as a new Zion, a religious utopia in the New England wilderness. From the outset it was a culture that put great emphasis on education, local political control, and the pursuit of the ‘greater good’ of the community....Yankees have the greatest faith in the potential of government to improve people’s lives, tending to see it as an extension of the citizenry, and a vital bulwark against the schemes of grasping aristocrats, corporations, or outside powers....Yankeedom has always had a middle-class ethos and considerable respect for intellectual achievement. Its religious zeal has waned over time, but not its underlying drive to improve the world and the set of moral and social values that scholars have sometimes described as ‘secular Puritanism’."

In other words these people were, politically, what we would call progressives today. Since the Tidewater and Deep South sections were controlled by aristocrats, there was a north-south tension from the earliest days of our nation.

"It has been locked in nearly perpetual combat with the Deep South for control of the federal government since the moment such a thing existed."

So how did it happen that these Yankees could play a role in defining the culture of the far away Left Coast?

The Yankees were seafarers and businessmen. One place where both pursuits came together was in the fur trade on the northern section of the Pacific coast. Their competitors there were the inland French traders coming out of what is now Canada. To the south they encountered the established Spanish/Mexican culture that Woodard refers to as El Norte. They concluded that the land was being overrun by—horror of horrors—Papists! Clearly this was a challenge that could not be ignored.

"Not surprisingly, their intellectual and religious leaders soon added this new ‘wilderness’ to the list of places in need of Yankee salvation. In the 1830s Lyman Beecher was calling on his followers to save the West from the cruel machinations of the Pope and his obedient Catholic immigrant followers."

This mission of salvation began slowly in the 1820s. "Missionaries" began landing on the Pacific coast from San Francisco north to Vancouver in present-day Canada. The Oregon towns of Salem and Portland are evidence of their efforts. Curiously, the Yankees did not fare well in Southern California where the gentle climate and the easy going ways of El Norte tempted too many to go native.

It was the discovery of gold in California that created urgency for the mission.

"In what was one of the largest spontaneous migrations in human history to that point, 300,000 arrived in California in just five years, increasing the new American territory’s non-Indian population twentyfold. Within twenty-four months San Francisco grew from a village of 800 to a city of 20,000."

Needless to say, the lure of gold and the accumulation of rootless young men led to an environment that the New England Puritans found both offensive and challenging.

"All of this deeply offended Yankees on both coasts, prompting yet another moral crusade, this time to save California. The reverend Joseph Bendon....proclaimed the Gold Rush a challenge to Protestants to complete the civilizing effort that had been begun by the Franciscan missions....seeing an opportunity not just to save California but to create a Protestant beachhead for taking on the ‘strong holds of Paganism’ in Asia."

The Yankees came in large numbers, mostly by sea, and set about their task as best they could. They would establish schools and take control of civic institutions, mostly on the coast, but the goal of setting up a "Protestant beachhead" was beyond their reach. There were too many people arriving with different sets of values. On the other hand, the civic contributions and attitudes did stick and became part of the coastal culture.

"The coast blended the moral, intellectual, and utopian impulses of a Yankee elite with the self-sufficient individualism of its Appalachian and immigrant majority. The culture that formed—idealistic but individualistic—was unlike that of the gold-digging lands in the interior but very similar to those in western Oregon and Washington. It would take nearly a century for its people to recognize it, but it was a new regional culture, one that would ally with Yankeedom to change the federation."

Woodard’s Nations do not align with state boundaries. This leads to states where the political environment is suggestive of a form of bipolar disorder. The political attitudes of the people of inland California are closer to those of Greater Appalachia than to those of their neighbors just a few miles to the west. Similar regional contrasts exist in many states. The context provided by Woodard’s book allows for our incomprehensible political environment to become just a bit more comprehensible.

Friday, February 24, 2012

The United States, Germany, and Unemployment Remedies

Most of the press has been focused on the effort to extend the temporary payroll tax cut and unemployment benefits. Little attention has been paid to some other features included in that legislation. Annie Lowrey provided a New York Times article, Tax-Cut Bill Includes Updates to Jobless Benefits System, that informs us of some significant changes in the way unemployment will be addressed. 

Why might we need to make some changes? Consider a tale of two countries, the US and Germany.

Germany had been moving towards a lower unemployment rate and continued on through the Great Recession with hardly any noticeable effect. Its unemployment rate continued to fall. The US on the other hand saw its rate double and remain distressingly high. What is the difference between the two countries?

We have recently compared vocational training approaches in Job Training Programs: Here and in Germany. The US devotes few resources to job training, whereas Germany builds it directly into its basic education system, and receives considerable cooperation from industry in providing the type of training that industry actually needs. This may explain why Germany can maintain a lower unemployment rate, but it does not fully explain how it could respond to the rapid downturn in business when the Great Recession hit.

Christian Vits and Jana Randow provide us with some insight in a Businessweek article: The Price of Saving Jobs in Germany.

"Under the short-work, or Kurzarbeit, plan, companies can temporarily move employees onto shorter work schedules when demand is weak. The companies pay only for the hours worked, while the government provides up to 67 percent of the workers' remaining wages. The program supported up to 1.5 million employees at some 63,000 companies, according to the Federal Labor Agency."

The best way to control unemployment is by not letting it happen. A system that encourages companies to let workers go and then attempt to hire them back later is inefficient and expensive for both the employers and the employees.

The German’s also have available something called a "work-time account." With the acquiescence of the German unions, employers can have workers put in longer hours at the normal hourly rate in good times. This creates a work-time credit that employers can use in a downturn by eliminating those hours from the current work schedule. This protects the workers’ targeted earnings, and provides employers with considerable flexibility. For example:

"Trumpf, a maker of machine tools, electronics, and lasers, has such an agreement with its unions: Employees work up to 250 hours more than contractually agreed when business soars and up to 250 hours less when demand is low. When orders collapsed in November 2008, the Ditzingen-based manufacturer exhausted this 500-hour buffer, then switched about 3,200 of its 4,500 workers in Germany onto the government's short-work program."

It would seem that effective measures can be put in place when industry, workers, and legislators are willing to collaborate on finding solutions to long-term measures. Consider this comment:

"’It was our top priority to keep our core workforce and preserve knowledge and experience,’ says Trumpf Executive Vice-President Gerhard Rübling."

In the US a CEO would be criticized for carrying excess workers for any length of time. The rule here is to announce large employment cuts and watch the stock price go up.

So what changes are being made in the way unemployment is addressed in the US? Annie Lowrey provides this information.

"The bill, which passed Congress on Friday and President Obama has said he will sign, allows states to use unemployment insurance money for programs that help move the jobless back into the work force. Such programs, like Georgia Works, often offer employers wage subsidies for taking on and retraining jobless workers."

"The bill also requires states to reassess the eligibility of workers for their unemployment insurance — confirming, for instance, that a person receiving long-term benefits is actively searching for a job. That reassessment provides an opportunity to tailor career counseling and other re-employment services to the long-term jobless."

And most important of all:

"The bill additionally expands "work sharing" programs that can help reduce layoffs at big businesses. In effect, businesses would have the option of cutting the hours of five workers by 20 percent each, say, rather than laying off one worker. The business could then use unemployment insurance money to help supplement the workers’ wages to make up for the lost hours."

That sure looks a lot like the German program. Who says we can’t learn from others?

These changes are not likely to have dramatic immediate effects. The train has already left the station. They will be more important the next time we have a downturn. The sad thing is that they could have been put into effect years ago.

Wednesday, February 22, 2012

The American Nation of Greater Appalachia: A Persistent Culture

Colin Woodard has produced a must-read book: American Nations: A History of the Eleven Rival Regional Cultures of North America. The theme of Woodard’s book can be summarized simply: the original population of the North American continent was by discrete immigrations that installed distinct regional cultures. These populations then spread out across the country installing their unique beliefs and lifestyles wherever they settled. Woodard tells us that these original worldviews survived subsequent waves of immigrants with only minor modifications. Thus, they persist to this day, and if we wish to understand the political state we are in we must understand how we got here and with whom we are dealing.

Woodard’s narrative is convincing in support of his contention of cultural persistence. Given that it is an election year and politics is in the air, it might be efficacious to provide a relevant example that Woodard did not utilize to prove his point.

One of Woodard’s nations is referred to as Greater Appalachia, and its original settlers are referred to as Borderlanders.

"Greater Appalachia was founded in the early eighteenth century by wave upon wave of rough, bellicose settlers from the war-ravaged borderlands of Northern Ireland, northern England, and the Scottish lowlands....these clannish Scots-Irish, Scots, and north English frontiersmen spread across the highland South and on into the southern tiers of Ohio, Indiana, and Illinois; the Arkansas and Missouri Ozarks; the eastern two-thirds of Oklahoma; and the hill country of Texas, clashing with Indians, Mexicans and Yankees as they migrated."

This is Woodard’s description of the culture they installed in their habitat.

"Their ancestors had weathered 800 years of nearly constant warfare....Living amid constant upheaval, many Borderlanders embraced a Calvinist religious tradition—Presbyterianism—that held that they were God’s chosen people, members of a biblical nation sanctified in blood and watched over by a wrathful Old Testament deity. Suspicious of outside authority of any kind, the Borderlanders valued individual liberty and personal honor above all else, and were happy to take up arms to defend either."

Virginia Senator Jim Webb has described this population, his ancestors, in his book: Born Fighting. His account is more detailed, but the description of these people was generally similar. Whereas Webb viewed them as the backbone of our nation, his tale left one wondering if the Borderlanders were not more likely to be the backbone of the Tea Party. This notion was examined in Born Fighting by Jim Webb and found to be compelling.

If Woodard’s contention of cultural persistence is correct, then one would expect voting patterns and political philosophies to persist. One of the hallmarks of the 2008 presidential campaign was the emergence of a vocal group demanding smaller government, and a government cognizant of a specific religious value system. The proponents of this view let it be known that their worldview included a bit of racism and a hint of violent intent. This description would seem to be consistent with that of the Borderlanders and the history of the areas in which they settled. One might then expect to see evidence of an exceptionally anti-Democrat, anti-Obama regional trend in the election results.

John McCain did not fare as well as George W. Bush as a Republican candidate except in a few locations. This source provides us with a plot of the counties in which John McCain outperformed Bush.

Now compare that distribution with Woodard’s footprint of Greater Appalachia.

The correlation is uncanny. It would seem to support, if not prove, Woodard’s thesis.

Woodard’s book teaches much and explains much. Check it out.

Sunday, February 19, 2012

Red vs. Blue: Private Protestants vs. Public Protestants

Cultural conflicts arise in a number of social areas. Generally the disputes are easily categorized as a red/Republican viewpoint opposed by a blue/Democratic position. Religious beliefs are generally at the core of the conflict. While today it is easy to fall into the habit of associating Democrats with a secular approach and Republicans with an evangelical approach, Collin Woodard provides us with background information that indicates the division originated long ago from differing Protestant beliefs. 

Woodard has produced a must-read book: American Nations: A History of the Eleven Rival Regional Cultures of North America.

The theme of Woodard’s book can be summarized simply: the original population of the North American continent was by discrete immigrations that installed distinct regional cultures which persist to this day. The two regions/populations that where most influential in setting up the cultural/religious battlefield we live in today are what Woodard refers to as Yankeedom (New England and the upper Midwest) and Borderlanders (Greater Appalachia). Interestingly, both groups of immigrants were disciples of John Calvin, but each took his teachings in very different directions.

Woodard describes the Puritan Yankees as extreme examples of Public Protestantism. Recall that Calvin preached predestination: the fate of everyone’s soul, redemption or damnation, was determined before birth.

"From the time of the Puritans, the Yankee religious ethos focused on the salvation of society, not of the individual. Indeed, the Puritans believed every soul’s status had already been determined. All that was left to do was to carry out God’s work and try to make the world a more perfect and less sinful place....this led Yankees to embrace all sorts of utopian missions, from building a ‘City on the Hill’ in Massachusetts to creating a model society in Utah based on the Book of Mormon to ‘saving’ other parts of the continent by assimilating them into enlightened Yankee culture."

The settlers of Greater Appalachia are the extreme example of Private Protestantism. They brought with them a strong dependence on individual responsibility, with respect to both society and religion, and a fierce distrust of anyone who might try to tell them what to do—particularly governments.

"Whereas Private Protestants emphasized individual responsibility for one’s lot in life, Public Protestants tried to harness government to improve society and the quality of life. These conflicting worldviews put the two blocs on a political collision course."

It would be the Civil War that would set the stage for the coalescing of multiple viewpoints into the two opposing camps we have today. The war itself forced groups with quite different philosophies into sharing one of two common plans of action and one of two fates, but it was the aftermath that cemented the alliances.

The victorious North, led by the Yankees, tried to impose their culture and views on the defeated South after the war. This led only to resistance and an increase in animosity between the two cultures. After the "occupiers" pulled out the region reverted back to its own ways, with the exception that diverse Southern populations had grown tightly knit in social, religious, and political views.

The dominant Southern religions were all now in agreement.

"....[they] believed the world was inherently corrupt and sinful, particularly after the shocks of the Civil War. Their emphasis wasn’t on the social gospel—an effort to transform the world in preparation for Christ’s coming—but rather on personal salvation, pulling individual souls into the lifeboat of right thinking before the Rapture swept the damned away. Private Protestants had no interest in changing society but rather emphasized the need to maintain order and obedience."

This attitude fit perfectly the needs of the political cast that had always controlled the region and wished to continue to do so.

"Slavery, aristocratic rule, and the grinding poverty of most ordinary people....weren’t evils to be confronted but rather the reflection of a divinely sanctioned hierarchy to be maintained at all costs against the Yankee heretics."

The two sides evolved quite differently since the Civil War. The Yankee interest in education and social progress inevitably led to a weakening of the ties between social and religious beliefs. Scientific progress would also diminish religious fervor, but the belief in the ties between community, government, and social progress persisted.

Social and scientific progress was encouraged and lauded by one group, contested and rejected by the other. Woodard suggests the Scopes trial in 1925 was an inflection point in the history of the two camps.

"The Public Protestant majorities....assumed the fire-and-brimstone crowd was ruined, their irrational beliefs exposed as superstition, their authoritarian tactics as violations of American values."

Having declared victory, the mainline Protestant churches continued to decline in membership and the advocacy of the secularists also diminished. Atheism and agnosticism are not beliefs that are consistent with militancy. Most people were happy to keep the state free from religion and let individuals follow whatever path they chose.

Meanwhile, something quite different was going on in the other camp.

"But the fundamentalists spent the thirties and forties organizing themselves, building Bible fellowships, Christian colleges, and a network of gospel radio stations. Unnoticed by North America’s opinion elite, their numbers grew through the 1950s....Behind the veneer of a prosperous and content postwar United States, a full-scale cultural war was quietly brewing. In the 1960s it would finally explode."

How delightful to learn that the supposedly godless social agenda of the Democrats is actually derived from the communitarian philosophy of the Calvinist Puritans.

Woodard’s book is chock full with insights. He even explains how the Yankees turned the West Coast into Democratic blue. But that is a tale for another day.

Friday, February 17, 2012

The World’s Gini Coefficient: It Grows

There is an interesting book on the history and the future of migration: Exceptional People: How Migration Shaped Our World and Will Define Our Future by Ian Goldin, Geoffrey Cameron, and Meera Balarajan. These authors tell us just about anything we might wish to know on the subject of migration. In the process they provided some interesting data on income inequality between countries. There has been much discussion of the effect income inequality can have within a society. The authors remind us that wage differentials between countries have provided powerful motivations to migrate.
"Millions of Europeans left for the Americas in the late nineteenth century to seek, among other things, wages that were two to four times higher than those at home. Today, migrants stand to earn as much as fifteen times more by moving to another country to work."

Given the sensitivity to immigration in wealthy countries, it would seem to be a good thing if this wage inequality was trending downward. But it isn’t.

"Today the wage disparities between countries are larger than ever before, and the processes of globalization appear to be exacerbating inter-country inequality....The income gap between the richest country and the poorest country in the world about 250 years ago was about 5 to 1, whereas today it is about 400 to 1."

How are we doing in recent times, particularly in the age of globalization? Branko Milanovic, a World Bank economist, computed the GDP per capita over time for 144 countries, and applied the standard formulation to determine a Gini coefficient for the world. In this formulation, all countries, no matter the size, are a single data point. His results are presented below.

What might have been a slight downward trend reversed course and was followed by a rapid rise that coincided with the growth of globalization in the world economy.

So globalization not only leads to income inequality within countries, it apparently leads to income inequality between countries. We are told that globalization is good for us, but sometimes it is hard to remember why.

The authors of the migration book use this data to issue a warning. The wealthy countries need to come to grips with the issue of migration. History has shown that people will move in great numbers to find higher wages and a better life, and it will not be possible to stop them.

Thursday, February 16, 2012

Germany and Ordoliberalism

Germany has by far the healthiest economy in Europe. It has been claimed that Germany could have chosen to avoid the current economic crisis in the Eurozone by simply buying up the outstanding Greek debt. It chose to not do that. Since that time the euro-countries have been careening from one crisis stage to another. Is this a sign of collective inadequacy? Or is it a stubbornly orchestrated plan by Germany to force other countries to play by its rules or suffer the consequences?

Jan-Werner Müller has attempted to explain Germany’s intentions in an article in the London Review of Books: What Do Germans Think About When They Think of Europe? He provides this summary of Germany’s perspective:

"There is a new German ambivalence about Europe, but that’s because, after paying dearly for unification and suffering a decade of wage restraint and benefit cuts, the last thing Germans want is a ‘transfer union’ in which they have to finance a load of supposedly lazy southerners. The Germans also worry about inflation: selective memory no doubt, but not completely irrational."

There is not much new to be learned from that statement, but Müller then adds:

"Germany differs from the other member states of the EU in the particular economic ideology that holds sway there, and is supported by the country’s elites – not just those on the right. Ordoliberalism isn’t exactly the same as Anglo-American neoliberalism – it sees more of a role for the state. Many Germans believe it was responsible for the economic miracle of the 1950s (as well as the mini-miracle of the last two years). Ordoliberalism is what Angela Merkel wants for the Eurozone as a whole: rigid rules and legal frameworks beyond the reach of democratic decision-making."

There is this comment on the differences between ordoliberalism and neoliberalism:

"The German establishment – not just on the right – has long subscribed to the theory of ordoliberalism, which was first elaborated in the 1930s and 1940s and underpinned Germany’s ‘social market economy’ in the 1950s. Ordoliberals thought of themselves as the true neoliberals: they alone had learned from the failures of laissez-faire in the 1920s; they alone had formulated a new vision of liberalism in which a strong state provided the framework for economic competition (and price stability), as well as a social safety net (to prevent socialism). In their eyes, other so-called neoliberals, from the Austrian School or the Chicago School, were really ‘paleoliberals’ stuck in 19th-century orthodoxies about self-correcting markets."

Paleoliberals! One should save that term to have it available the next time one gets into an argument about economics. But what exactly is ordoliberalism?

Lawrence H. White has provided The Postwar German "Wonder Economy" and Ordoliberalism. This is a chapter from a book: The Clash of Economic Ideas. White provides historical background and insight into the philosophy behind ordoliberalism.

This economic philosophy developed in Germany in the 1930s as an attempt to derive a free market concept that could compete with Hitler’s National Socialism. One of the students of this evolving philosophy was Ludwig Erhard. It was Erhard who was in a position to implement free market ideas under the allied occupation after the war. Against all advice, he removed price controls, allocation decrees, rationing directives, and wage controls. The result was an economy that bloomed and grew faster than any other in Europe, thus the term "wonder economy." It is not surprising that Erhard’s concepts acquired a considerable amount of credibility within the German community.

The term "ordoliberalism" become popular with the founding in 1948 of a journal of economics named Ordo.

Ordoliberals fashioned their beliefs in observing the collapse of the Weimar Republic in 1933. They blamed the collapse on the hyperinflation that occurred, and on the "prevalence of industrial cartels, legally sanctioned confederations among major firms that quashed competition." This explains why Germany has been rather obsessive on the subject of inflation over the years. But more importantly, they learned the lesson, first hand, that a perfectly free market will eventually cause economic disaster unless it is controlled.

White quotes one of the economists of the period:

"[Our program] consists of measures and institutions which impart to competition the framework, rules, and machinery of impartial supervision which a competitive system needs as much as any game or match if it is not to degenerate into a vulgar brawl. A genuine, equitable, and smoothly functioning competitive system can not in fact survive without a judicious moral and legal framework and without regular supervision of the conditions under which competition can take place pursuant to real efficiency principles. This presupposes mature economic discernment on the part of all responsible bodies and individuals and a strong impartial state."

Imagine, an economic philosophy that demands a "judicious moral....framework." This is rather interesting.

The ordoliberals favored a strong central bank to deal with monetary matters, and sought an aggressive antitrust policy. The critical theme of their agenda was the need for government to play the role of the referee in the economic scrum, and the considerate parent for society as a whole.

"Like earlier classical liberals, they supported free trade as a means to promote competition. But in monetary and antitrust policy they assigned a larger economic roll to the government than laissez-faire classical liberals did. They also supported a more extensive government safety net (state pensions, unemployment insurance, and other transfer payments). Erhard campaigned for the entire bundle of policies under the label of the ‘Social Market Economy" and the slogan ‘Prosperity for All’."

Ordoliberals also feared the corruption of the government by what we would refer to as lobbyists for special interests. They emphasized the need for the constraints to be exercised on the free market economy to be canonized as a part of the constitution so that they could not be subverted by easily-influenced legislators. This explains Müller’s comment:

"Ordoliberalism is what Angela Merkel wants for the Eurozone as a whole: rigid rules and legal frameworks beyond the reach of democratic decision-making."

So if the Germans sometimes appear a little self-righteous and arrogant, it is because they believe they have demonstrated that they occupy the moral high ground. And they may be right. History would seem to justify their approach. It is hard to argue with success.

Tuesday, February 14, 2012

Social Security and Medicare: Collected Taxes, Benefits Received

One grows weary of hearing all the lies told about the status of our entitlement programs—and then one becomes angry. C. Eugene Steuerle and Stephanie Rennane of the Urban Institute have provided us with some data that brings needed perspective to any discussion: Social Security and Medicare Taxes and Benefits Over a Lifetime.

These authors provide an extremely useful set of tables.

"These tables provide estimates of the lifetime value of Social Security and Medicare benefits and taxes for typical workers in different generations at various earning levels. The tables are updated to reflect assumptions and projections in the 2011 OASDI and Medicare Trustees reports. The "lifetime value of taxes" is based upon the value of
accumulated taxes, as if those taxes were put into an account that earned a 2 percent real rate of return (that is, 2 percent plus inflation). The "lifetime value of benefits" represents the amount needed in an account (also earning a 2 percent real interest rate) to pay for those benefits."

The assumption is made that taxes collected are invested and earn interest. This is a reasonable approach to take, but what actually happens is more complicated. This will be discussed below. The important thing is that the authors have put benefits and taxes paid on the same footing so that they can be compared.

The extent to which the financing of Social security and Medicare have changed over the years is indicated by this chart.

Early retirees clearly received much more in the way of benefits than could be covered by the taxes they had paid. But over time, the situation changed dramatically for Social Security benefits, and, as the chart indicates, there will be ever more people who are paying more into the system than they receive in return. Medicare is a different issue entirely.

Since our focus here is on the immediate future of these programs, we will examine the data provided for 2011 retirees at age 65. The authors consider several income situations. The following table summarizes the relevant data.

This table tallies the ratios of benefits received to taxes paid for Social Security.

What is clear from these tables is the fact that Social Security, after its last modification, is quite close to a self-supporting program. The higher income participants are actually paying in more than they will receive in benefits. The program would be healthy today if incomes, and income distributions, had trended as expected. It is the fall in real wages for many workers that has contributed to the projected Social Security shortfall. We did not promise more than we could deliver; we chose policies that caused us to deliver less than we promised.

What, exactly, is the state of Social Security today? The Congressional Budget Office (CBO) provided projections in a 2010 report. These estimates will bobble around in time as economic conditions change, but the conclusions are inexorable. Sometime around 2017 the current income from levied payroll taxes will begin to be insufficient to cover required benefit payments to retirees. After that it will be necessary to draw down the "Reserve."

"CBO projects that beginning in 2039 the Social Security Administration will not be able to pay those scheduled benefits, however. If revenues were not increased, benefits would need to be cut by about 20 percent in 2040 to equalize outlays and revenues. Those proportionately lower payments, which would be made to all Social Security recipients once the trust funds were exhausted, are known as payable benefits."

It is not until around 2039 that the funds "owed" to retirees run out. At that point, the worst thing that can happen is that a net 20% reduction in benefits is required. If that should happen the reduction could be made progressive so that the most in need are least affected. Does that equate to bankruptcy? The CBO lists a few dozen tweaks that could be made to the system to improve its outlook. There are many options as we move forward.

Social Security is not a Ponzi scheme, and it is not going bankrupt, and it will be there for our children.

A word about the Social Security "Trust Fund" is in order. There is a nice discussion here. The funds collected in taxes do not go into a separate bank account where they sit and earn income until needed. They are required by law to be invested in government securities. What this means in practice is that they purchase nonnegotiable debt obligations that would otherwise have to be sold in the marketplace. The tax money effectively disappears into the general federal budget, but by offsetting the need to issue interest bearing securities, it can be claimed to be saving the government those interest charges, and it can be claimed that the tax revenue is "earning" that saved interest charge. That is why the authors chose to describe the funds the way they did in the very first quote. As a practical matter, around 2017 the federal budget will have to include funds to cover the program’s current revenue deficit.

Consider this table that provides a ratio of benefits to taxes for Medicare.

The situation here is quite different. By any measure of reckoning healthcare costs are too high. One could envisage reductions as high as 30-40%. That would still not be enough.

What to do? Well, place yourself in the shoes of a 65 year-old who is planning to retire and will have no employer-provided health coverage. What would it cost the 65 year-old cohort to go out on the open market and purchase insurance? The only viable option for senior citizens is based on the existence of Medicare. All employer-provided plans ride on top of Medicare. If Medicare was not there, no employer would provide healthcare to retirees. So as senior citizens, a healthy Medicare Program is a matter of life and death for most of us. Let us pay some more in taxes and be thankful for the opportunity to do so. But let us also demand that the waste, fraud, and excessive greed are expunged from the system.

Monday, February 13, 2012

On the Origins of Language

David Bellos has produced an interesting book on languages and translation: Is That a Fish in Your Ear? Translation and the Meaning of Everything. We discussed some of his topics in an earlier article: Words Matter: Christopher Columbus, the Bergman Effect, and Google Translate. Bellos finishes his work with a discussion of the origins of speech and language that provided a rather different perspective than is normally encountered.

Bellos begins by reminding us that the way a faculty, such as language, is used today, does not necessarily relate to how or why it originated. Those who study language tend to forget this fact, and, starting at the present, try to extrapolate back in time. That can be misleading. Bellos indicates the Biblical tale of the Tower of Babel where "the whole earth was of one language and of one speech" as a misleading point of departure for early studies.

Much research seems to focus on the demonstration of a single origin for human speech. As an example, consider an article in The Economist.

"It has been known for a while that the less widely spoken a language is, the fewer the phonemes it has. So, as groups of people ventured ever farther from their African homeland, their phonemic repertoires should have dwindled, just as their genetic ones did."

"To check whether this is the case, Dr Atkinson took 504 languages and plotted the number of phonemes in each (corrected for recent population growth, when significant) against the distance between the place where the language is spoken and 2,500 putative points of origin, scattered across the world. The relationship that emerges suggests the actual point of origin is in central or southern Africa (see chart), and that all modern languages do, indeed, have a common root."

This is the data presented to justify that conclusion.

One can draw a line through any set of points, but that does not prove a correlation. What this data seems to prove is that researchers will work very hard to reach the conclusions they set out to reach.

Belos would be dubious.

"But behind these scholarly (and often schoolmasterly) pursuits lay a single barely questioned assumption—that all languages are, at bottom, the same kind of thing, because, at the start, they were the same thing. In fact, there is rather better evidence of the contrary."

The article goes on to make this claim:

"That fits nicely with the idea that being able to speak and be spoken to is a specific adaptation—a virtual organ, if you like—that is humanity’s killer app in the struggle for biological dominance. Once it arose, Homo sapiens really could go forth and multiply and fill the Earth."

While it is true that mankind has made great use of language skills, this suggests a Darwinian explanation for the origin and development of language. But there is no organ, virtual or otherwise, for language. It is an adaptation of more fundamental attributes.

"There is no form of language in the world that is ever spoken aloud without accompanying hand movements. Indeed, the greater the effort of concentration on live speech, the more the speaker needs to move his or her hands....Hand movement is profound, unconscious, inseparable part of natural speech."

Natural speech does not include reading from a sheet of paper or from a teleprompter.

There is also a correlation between manual activities and the lips and mouth.

"Conversely, delicate fingerwork of a nonlinguistic kind almost always prompts a movement of the lips. Have you watched anyone threading a needle? Few people can do it without pursing or twisting their mouths."

The most fundamental activity of man has always required coordination of activities between hand and mouth: eating.

"Speaking can be seen in this light as a parasitic use of organs whose primary function is to ensure survival. But what, then, was the original function of this wonderful, additional, alternative use of lips and tongue and of the muscles that control breathing and swallowing? In what way did it correlate with other uses of hands and arms?"

The notion that speech and language took such hold in human societies because it was fundamentally associated with survival does not seem to follow.

"The plain fact of linguistic diversity suggests very strongly that speech did not arise to communicate with members of other groups of like beings. If that was what it was for, our ancestors got it badly wrong."

"Similarly, there is no particular reason to think that language first arose in order to allow members of the same group to communicate with one another. They did that already—with their hands, arms, bodies and faces. Many species clearly do. You can watch them at it in the zoo."

In fact, humans, military and civilian, when they are hunting prey, revert back to simple signaling and sign language, in ways that would be familiar to any of the other apes.

So what then drove the development of speech? Bellos provides this suggestion.

"Language is a human way of relating to other humans"

"Among the larger primates such functions are carried out through the much studied practice of grooming. Grooming bonds mother and child, it bonds males in hierarchical rank (the pecking order, it establishes bonds between males and females prior to copulation, and it generally binds together the entire clan or group of cohabiting animals."

There are limits to the size of such a society, with fifty-five being an estimate of the maximum. Above this the group splits up and the bond is broken.

"When it does, no cross-grooming is possible: you belong to either the old group or the new one. You do not pick fleas off the fur of chimps that are not of ‘your kind’."

While speech can certainly be used to communicate information, the original intent of language was not the transfer of data, it was for the

"....establishment, reinforcement, and modification of immediate interpersonal relations."

A means of transmitting socially useful information, beyond grooming, would allow for groups to grow much larger.  The means of vocal communication would likely be unique to a group, and would be a part of the identity of the group—a means of differentiating itself from all other groups.

"To put this broad understanding in a nutshell: language is ethnicity."

"Ethnicity in this sense has nothing to do with lineage, heredity, race, blood group, or DNA. It means how a social group constitutes and identifies itself."

Bellos uses Britain as an example of how this group-dialect tendency persists today.

"The bewildering variety of diction that can be heard among the inhabitants of the British Isles gives a spectacular demonstration of the fine-grained group-membership function of the way people speak....In Britain, you just can’t escape the messages about region and class that come from anyone who opens his or her mouth."

Bellos view of the functions of language might explain why regional dialects continue to persist even when a common dialect is imposed through schooling. People choose to communicate with other groups using the "national language," but continue to use their own dialect to communicate with each other.

The unifying ties of a unique group language could be viewed as a societal benefit. But the same forces would also tend to accentuate the "otherness" of members of a different group—that is another ethnic group. This later effect could have contributed to some of the less savory chapters of human history.

Thursday, February 9, 2012

In Defense of Manufacturing—Again: National Security

Christina D. Romer produced an opinion piece for the New York Times: Do Manufacturers Need Special Treatment? She argues that the answer is "no." Her conclusion is that effort placed on general benefits to the economy would be a better investment. Some of the statements made about manufacturing in the US demand a response. We have previously discussed one of her contentions here: In Defense of Manufacturing: Industrial Clusters. Now we will focus on her elimination of national security as an argument for investing in our manufacturing capabilities. 

Romer raises the issue of national security, but then dismisses it with this statement:

"The possible externality of greatest concern may be national defense. The argument that we need a strong manufacturing base in case of war must be taken seriously. But it still doesn’t follow that all manufacturing deserves special treatment. Which industries are truly essential in a war effort? And might normal production in military industries, as well as existing supply arrangements with allies, provide adequate protection?"

Romer misses the point again! The issue with manufacturing is not to support selected industries. What is required is the maintenance of the type of environments in which manufacturing can thrive. Paul Krugman refers to this as an industrial ecology.

Manufacturing firms often stand or fall not just on their own merits, but because they do or don’t have a surrounding cluster of related firms that are suppliers or customers, provide a ready pool of suitable labor, and so on."

"This, in turn, makes a case for policy to promote or preserve such clusters."

Krugman indicates the rebirth of the US auto industry and the plummeting unemployment rates in Michigan as evidence that the auto bailout salvaged not just the auto companies themselves, but also the industrial ecology that supported and was sustained by them.

Romer questions whether or not we will be able to manufacture what we need during a time of war. That is the wrong question to ask. The purpose of our national defense posture is not so much to wage war as to ensure that we do not have to wage war. The functionality of the US manufacturing capability must be evaluated within that context.

Maintaining a world-wide national security presence is tremendously expensive. It can only be accomplished with the backing of a healthy economy. Historians like to argue that military powers fail because they have first failed economically. To claim that one is maintaining a strong economy while letting the manufacturing sector be hollowed out is absurd.

The US was able to provision a multinational two-front war seventy years ago because it had a huge and broad-based industrial sector that could be rapidly converted to military production. We had a self-sufficient economy that depended little on other nations. The situation our defense planners face today is quite different. Rather than turning to the domestic economy for assistance when needed, the Pentagon must support its own defense economy.

The Pentagon requires specialized products like fighter aircraft. At one time there were several producers of commercial aircraft who could bid on military contracts. Now we have only Boeing. In order to avoid having to depend on a single contractor, the military is forced to provide enough work to keep at least two companies in "competition" for its programs. It does not have enough business to support multiple companies on a single product line, so the big companies gobble up other companies and maintain their cash flow by competing on multiple products. What one ends up with are a few conglomerates who compete on just about everything. In a variation on the "too big to fail" theme, the Pentagon needs to distribute its business in such a way that it ensures multiple bidders will continue to exist. A contractor who loses on one bid is more likely to win the next. This system has the appearance of competition, but it does not lead to the efficiencies one would expect from market forces.

It is not clear whether the contractors are captives of the Pentagon, or the Pentagon is a captive of the contractors.

The chosen defense contractors will then create their own needs for specialized products that will be necessary to fulfill their contractual requirements. This is where weakness in the domestic manufacturing sector begins to impact cost and efficiency. If the contractors cannot find a domestic vendor for a component, then they either have to go overseas or create the manufacturing capability on their own. Subcontracting defense needs to another country is often acceptable, but usually not desirable. When the components have sensitivities associated with design or materials that option is not available. In that case the contractor has the option of a lengthy—and risky—development effort, or modifying the design so that it can be produced by an existing vendor. One option degrades efficiency, the other degrades capability. Neither serves our national security interests.

We need a robust industrial ecology to serve our national security needs. That industrial base must have an even more robust domestic manufacturing base to feed from.

A recent article announced that Sandia National Laboratories had designed and tested a self-guided bullet. It was suggested that the concept had demonstrated sufficient capability to correct its trajectory that military effectiveness was a given. All they had to do now is figure out a way to manufacture it in large numbers and at low cost. If such a capability was available today it would be a life saver for troops in combat. If deemed effective, the military would want large numbers, and they would want them immediately.

In addition to some sort of propulsion mechanism this new type of bullet is likely to include an array of sensors and microprocessors. Who has most experience in how to quickly and efficiently build millions of electronic gadgets? This article explains why Apple felt compelled to move its assembly operations to China. While the labor costs are much lower there, that was not the principal reason.

"....building the iPhone in the United States would demand much more than hiring Americans — it would require transforming the national and global economies. Apple executives believe there simply aren’t enough American workers with the skills the company needs or factories with sufficient speed and flexibility."

In other words, we have let our industrial ecology decay away. It is not just a matter of building a plant to manufacture such a bullet, one would have to train workers and develop a network of suppliers with "sufficient speed and flexibility." The alternatives are to dummy down the design to make it cheaper but less accurate, spend an awful lot of money in developing a slow and expensive manufacturing path—or we could just ship our defense work to China.

So, yes, our lack of manufacturing infrastructure can impact our national security. And it is time to focus on regaining lost capabilities.

Tuesday, February 7, 2012

Words Matter: Christopher Columbus, the Bergman Effect, and Google Translate

David Bellos is the director of the Program in Translation and Intercultural Communication at Princeton University. He is also an award-winning translator. He has written an interesting book on language and translation that is recommended to anyone with an abiding interest in those topics. It is titled: Is That a Fish in Your Ear? Translation and the Meaning of Everything. No attempt will be made to explain the title, nor will the subtitle be defended. You will have to read the book.

Bellos covers a lot of ground. Some topics are worthy of a longer discussion and may appear here at a later date. For now we will have to be satisfied with a few brief notes on topics that seemed both interesting and well-bounded.

Christopher Columbus

For the English speakers who are currently able to go almost anywhere in the world and survive without having to learn a native language, Bellos reminds us that learning to communicate in multiple tongues was, and will continue to be required of most people of the world..

Bellos uses Christopher Columbus to illustrate the language skills required for those of his time who would travel the world.

"The great explorer Christopher Columbus provides an unusually well-documented case of the intercomprehensibility and interchangeability of European tongues in the late Middle Ages. He wrote notes in the margins of his copy of Pliny in what we now recognize as an early form of Italian, but he used typically Portuguese place-names—such as Cuba—to label his discoveries in the New World. He wrote his official correspondence in Castilian Spanish but used Latin for the precious journal he kept of his voyages. He made a ‘secret’ copy of the journal in Greek, however, and he also must have known enough Hebrew to use the astronomical tables of Abraham Zacuto, which allowed him to predict a lunar eclipse and impress the indigenous people he encountered in the Caribbean."

Just how many languages did Columbus know?

"It’s unlikely Columbus even conceptualized Italian, Castilian, or Portuguese as distinct languages, for they did not yet have any grammar books. He was a learned man in being able to read and write the three ancient tongues. But beyond that, he was just a Mediterranean sailor, speaking whatever variety of language he needed to do his job."

Most people of the world live in multicultural environments where many different languages are encountered. Most manage to become polyglots.

"Five to ten languages seem to represent the effective limit in all cultures, however multilingual they may be."

Luckily, our children are not distracted by such irrelevancies. It allows them to spend more time honing their video-game skills.

The Bergman Effect

Bellos introduces us to the art of subtitling films.

"It has become conventional to regard average moviegoers as capable of reading only about fifteen characters per second; and in order to be legible on a screen as small as a television set, no more than thirty-two alphabetic characters can be displayed in a line. In addition, no more than two lines can be displayed at a time without obscuring significant parts of the image, so the subtitler has around sixty-four characters, including spaces, that can be displayed for a few seconds at most to express the key meanings of a shot or sequence in which characters may speak many more words than that....A further constraint on subtitling is the convention that a subtitle may not bleed across a cut."

It follows that the viewer is often seeing not only a translation of what is actually being said, but a significant amount of compression. Some directors have not been thrilled at the notion that some unknown person is going to, in effect, rewrite their dialogue.

"Filmmakers dependent on foreign-language markets are well aware of how little spoken language can actually be represented in on-screen writing. Sometimes they choose to limit the volubility of their characters to make it easier for foreign-language versions to fit all the dialogue on the screen. Ingmar Bergman made two quite different kinds of films—jolly comedies with lots of words for Swedish consumption, and tight-lipped, moody dramas for the rest of the world. Our standard vision of Swedes as verbally challenged depressives is in some degree a by-product of Bergman’s success in building subtitling constraints into the composition of his more ambitious international films. It’s called the ‘Bergman effect’...."

Consider a most skillful author who labors away writing wonderful novels in Albanian. Who will ever know, other than a few fellow Albanians? But if he can get his work translated into English, or one of the other major languages (Spanish, French, German, Russian, Arabic, for example) then there is a translation path to the readers of almost any country of the world. The need or desire to reach a worldwide audience using English, predominantly, as a pivot is beginning to affect the manner in which artists construct their works. A "Bergman effect" is beginning to be recognized in other areas.

"Steven Owen has argued that some contemporary poets from China, for example, write in a way that presupposes the translation of their work into English—and that all writing in foreign languages that now aspires to belong to ‘world literature’ is built on writers’ effective internationalization of translation constraints."

Google Translate

Anyone who has used Google Translate (GT) will have been both awed at its apparent power, and left dumbfounded by some of the silly mistakes it makes. Bellos explains what is going on.

"At present it offers two-way translation between fifty-eight languages, that is to say, 3,306 separate translation services, more than have ever existed in all human history to date. Most of these translation relations—Icelandic—>Farsi, Yiddish—>Vietnamese, and dozens more—are the newborn offspring of GT: there is no history of translation between them...."

So how does Google do it?

"It doesn’t deal with meaning at all. Instead of taking a linguistic expression as something that requires decoding, GT takes it as something that has probably been said before. It uses vast computing power to scour the internet in the blink of an eye looking for the expression in some text that exists alongside its paired translation....GT uses statistical methods to pick out the most probable acceptable version of what’s been submitted to it. Much of the time it works. It’s quite stunning."

There is a vast amount of material for GT to search through, and the more that exists, the more accurate it will be. GT also has the option of using intermediate languages as pivots in those cases such as Icelandic—>Farsi where there is likely little data. Icelandic—>English and English—>Farsi is likely to be a more productive means of connecting those two languages.

"When the only tool you have is a hammer, then every problem begins to look like a nail."

Hats off to Google for creating such a revolutionary tool! Although it may not be what it appears to be, it is powerful, and will only improve as the body of translations available to it continues to grow.

And thanks go to David Bellos for providing some interesting insights.

Monday, February 6, 2012

In Defense of Manufacturing—Again: Industrial Clusters

Christina D. Romer produced an opinion piece for the New York Times: Do Manufacturers Need Special Treatment? She argues that the answer is "no." Her conclusion is that effort placed on general benefits to the economy would be a better investment. Some of the statements made about manufacturing in the US demand a response. For now we will focus on her conclusion that clustering of manufacturing resources is not of sufficient benefit to be worth a policy initiative.

Romer admits that synergistic effects are possible.

"In manufacturing, the market can malfunction if there are positive externalities across companies. That means that some benefits of a manufacturing plant go to companies other than the one deciding whether to build it. Clusters of manufacturing businesses can be more productive than an individual one. As a result, when an entrepreneur sets up a plant, some of the benefits accrue to other businesses in the area."

She then uses this argument to shoot down the possibility.

"This argument could justify government subsidies or tax breaks. But large clustering effects have been hard to find. A study by Professors Glenn Ellison of M.I.T. and Edward Glaeser of Harvard showed that in many industries, businesses were only modestly more clustered than if they were allocated randomly — suggesting that the benefits, while real, may often be small."

She has not really addressed the issue. To state that there is little evidence of clustering, does not allow one to conclude that clustering is not of significant value.

Perhaps Romer should spend more time reading the New York Times. A recent pair of articles devoted to Apple and its manufacturing methods were discussed here in Apple and Manufacturing. This NYT article explains why Apple chose to center its manufacturing in China. It was because policy makers in China decided to encourage the type of capability clustering that Romer concludes is unimportant. And what does Apple think about their situation in China?

"’The entire supply chain is in China now,’ said another former high-ranking Apple executive. ‘You need a thousand rubber gaskets? That’s the factory next door. You need a million screws? That factory is a block away. You need that screw made a little bit different? It will take three hours’."

Paul Krugman, renowned economist, points out, on his New York Times blog, the benefits of clustering in Chinese Manufacturing and the Auto Bailout. In referring to yet another NYT report on Chinese manufacturing, he provides these comments:

"A lot of what that report is saying amounts to the fact that the classic logic of industrial clusters still applies very strongly — which is music to my professional ears, since that’s the sort of thing that was a central theme of my own research for many years. Manufacturing firms often stand or fall not just on their own merits, but because they do or don’t have a surrounding cluster of related firms that are suppliers or customers, provide a ready pool of suitable labor, and so on."
"This, in turn, makes a case for policy to promote or preserve such clusters."

Krugman then goes on to provide us with a relevant US example.

"But can we think of a recent example in the United States where helping to preserve an industrial cluster was an important policy consideration? Indeed we can: the auto bailout. A key argument for the bailout was that if the major US firms were allowed to go bankrupt, a whole industrial ecology would be lost with them. And the auto bailout has been a huge success, not least because it did preserve that ecology."

Krugman refers to the dramatic improvements in unemployment in Michigan as evidence that this "industrial ecology" is real and it is important. This source provides a plot over time of unemployment rate in Michigan. Michigan went from a peak of 14.1% in August 2009 to 9.3% in December 2011, a fall of 4.8%.

Not all economists are created equal. Chose wisely when you decide to pay attention to one.

Sunday, February 5, 2012

Demographics and Child Dependency: What It Costs to Raise a Child

In developed countries such as the US and other OECD countries the subject of demographics generally centers on birth rates (fertility) and the fraction of the population that is aged and no longer working. Most of the concern is focused on the growing fraction of the aged, and the economic burden anticipated in continuing to provide benefits to these people at the level they currently enjoy. To quantify this issue analysts often refer to an "aged dependency" which is just the ratio of the aged (greater than 65 years) to the working age population (20-64 years) multiplied by one hundred. In an earlier analysis, Population Management: Aging Societies, Total Dependencies, and Fertilities, we argued that a society that comes into equilibrium and maintains a constant population would have an aged dependency of 39. Right now the US has a value of only 22. It would seem that our society should begin some serious planning, not on how to save expenses, but on how to allocate resources in order to support a much higher fraction of senior citizens.

Considerations of senior benefits cannot be considered in isolation. There is a child dependency that must also be considered. Children are another segment of the population that requires a high level of support while contributing nothing to the tax base. As we shall see, children are becoming increasingly expensive to maintain, yet little thought seems to go into how many the society needs and how many it can support. At present, the child dependency ratio is consistent with the equilibrium value and fertility is at the level where the population will just replace itself.

The Department of Agriculture has the responsibility for tracking the costs of raising children. It has provided a detailed report: Expenditures on Children by Families, 2010. Note that the numbers they provide only track children up to age 17. College age expenses are not included.

The first thing to recognize is that the amount of resources devoted to children varies widely with income.

For a middle income family the total costs break out as follows.

In 1960 dollars the cost would have been $25,229 versus $185,856 in 2010 dollars, a constant dollar rise of 22%.

The report also provides estimates of the average expenditures in multiple child families.

Estimates of college costs are also included.

"The College Board (2011) estimated that in 2010-2011, annual average (enrollment-weighted) tuition and fees were $7,605 at 4-year public colleges (in-State tuition) and $27,293 at 4-year private (non-profit) colleges; annual room and board was $8,535 at 4-year public colleges and $9,700 at 4-year private colleges. For 2-year colleges in 2010-2011, annual average tuition and fees were $2,713 at public colleges."

Using these numbers, an average four year college education would cost $64,560 at a public school, and $147,972 at a private (non-profit), college. One can spend much more, or much less depending on circumstances.

There are also expenses that the government incurs in supporting childrearing.

"The estimates do not include all government expenditures on children. Examples of excluded expenses would be public education, Medicaid, and subsidized school meals. The actual expenditures on children (by parents and the government), therefore, would be higher than reported in this study, especially for children in the lowest income group."

One could also include the nation’s expenditures on Food Stamps and the Earned Income Tax Credit (EITC) as a cost.

A report here provides a number for the US’s annual education spending per school-aged child as $7,743, the highest in the world by far. This covers ages 6-23 so it includes college expenses. The integrated educational cost per child, ignoring inflation, is then $139,374.

These costs to society will be compared with what must be spent to support senior citizens in a subsequent article.

Children have traditionally been viewed as an economic asset. They grow up to be wage earners and tax payers. If society has an increasing fraction of senior citizens, then one might argue that an increasing number of tax payers are required to support them as they age. If society runs at near full employment, then an ever increasing population is required to chase after the ever increasing number of seniors—clearly not a sustainable situation.

A more pertinent assessment of the employment situation can be derived from this view from the Economic Policy Institute.

"The labor force participation rate was 63.7 percent in January, its lowest point since the downturn began. Remarkably, the labor force has grown by less than half a million workers since the recession started in December 2007, though the working-age population has grown by nearly 10 million in that time. There are currently 2.8 million "marginally attached" workers—workers who want a job, are available to work, but have given up actively seeking work. If these workers were in the labor force and counted as unemployed, the unemployment rate would be 9.9 percent right now instead of 8.3 percent."

"At a time like this, with the labor force not growing at a steady pace, arguably the cleanest measure for assessing labor market trends is the employment-to-population ratio, which is simply the share of working-age people who have a job. The ratio was 58.5 percent in January, also not far from its low of 58.2 percent last summer. The labor market still has substantial ground to make up: The employment-to-population ratio was 63.3 percent five years ago, in January 2007, before the recession started."

Some do not participate in the work force by choice, but the bottom line is that the economy has not been creating enough jobs for all those who want and need one. This is not a phenomenon caused by the Great Recession. It has been going on for at least the last decade. High unemployment rates seem to be associated with developed economies, and result in ever increasing employment difficulties for the young. We may be reaching a point where society must bear the cost of supporting 10% or more of the children we raise not just through age 17, or age 23, but for their entire lives.

One can argue that better education would solve the employment problem, but the data does not support that claim. A better education certainly helps, but wages and opportunities for a four-year college graduate have stagnated. The positions with the potential for high earnings seem to go now to those with postgraduate education or a professional degree. This entails spending ever more money on our children as they chase ever fewer desirable positions. This is not a sustainable situation either.

Demographic trends are leading to a situation in which society will have to expend more resources in supporting an aging population. Economic trends may be moving us in the direction where a lower birthrate will be necessary. Fewer, better-prepared children may provide the best path forward. It is at least time to consider that notion. There are economic solutions that allow for more seniors and fewer working age adults; society just has to select them.

Friday, February 3, 2012

Apple and Manufacturing

When one considers the closing of domestic factories and the moving of production to Asia, thought usually turns to labor rates and how difficult it is to compete with the cheaper labor available there. Several recent articles have focused on Apple and its overseas manufacturing. When it comes to consumer electronics, the picture presented is much more complex, and much more disturbing.

An article in The Economist provides us with this fiscal breakdown of iPad manufacturing.

"iPads are assembled in Chinese factories owned by Foxconn, a Taiwanese firm, largely from parts produced outside China. According to a study by the Personal Computing Industry Centre, each iPad sold in America adds $275, the total production cost, to America’s trade deficit with China, yet the value of the actual work performed in China accounts for only $10."

So the actual labor intensive-assembly costs are about 2% of the total—negligible compared to Apple’s incredible 30% profit margin. Would assembly costs in the US be so much greater than in China that the offshoring was required? Or is something else in play here?

Two fascinating articles in the New York Times provide us insight into Apple’s motives and methods: How U.S. Lost Out on iPhone Work by Charles Duhigg and Keith Bradsher, and In China, Human Costs Are Built Into an iPad by Charles Duhigg and David Barboza. The first article is focused on Apple’s economic motives and desires, the second concentrates on how Apple’s methods impact the Chinese workers who provide its products.

To evaluate the importance of labor costs in assembly of products, consider this quote detailing the experience of an Apple employee who had worked in a US Apple facility.

"A few years after Mr. Saragoza started his job, his bosses explained how the California plant stacked up against overseas factories: the cost, excluding the materials, of building a $1,500 computer in Elk Grove was $22 a machine. In Singapore, it was $6. In Taiwan, $4.85."

Those numbers, in themselves, would not justify shutting a facility and moving everything to China. Then comes this remark from Mr. Sargoza which provides the key.

"‘We were told we would have to do 12-hour days, and come in on Saturdays,’ Mr. Saragoza said. ‘I had a family. I wanted to see my kids play soccer’."

Apple’s goal was not to just become more efficient in its final assembly process, it wanted to create greater efficiency in its entire component supply chain. It apparently concluded that while it could increase productivity by driving domestic workers harder, there were regulations against what they wanted to do, and the workers would not stand for it. They also wanted to be able to extract these same "efficiencies" throughout their supply chain, but domestic suppliers would also run into the same problems. Walmart and others had already demonstrated that enormous profits could be made by taking advantage of both cheaper Asian labor and the ability to bypass the human decency regulations that have accumulated in developed economies. Another bonus was the option of ignoring environmental regulations.

So Apple moved to China with the intent of making their entire manufacturing process cheaper and more efficient. What has this meant for Apple and the Chinese people?

Much of Apple’s assembly is performed at what is referred to as Foxconn City.

"The facility has 230,000 employees, many working six days a week, often spending up to 12 hours a day at the plant. Over a quarter of Foxconn’s work force lives in company barracks and many workers earn less than $17 a day. When one Apple executive arrived during a shift change, his car was stuck in a river of employees streaming past. ‘The scale is unimaginable,’ he said.

"Foxconn employs nearly 300 guards to direct foot traffic so workers are not crushed in doorway bottlenecks."

The article provides an example of the benefits that accrue to Apple from this type of regimentation.

"Apple had redesigned the iPhone’s screen at the last minute, forcing an assembly line overhaul. New screens began arriving at the plant near midnight."

"A foreman immediately roused 8,000 workers inside the company’s dormitories, according to the executive. Each employee was given a biscuit and a cup of tea, guided to a workstation and within half an hour started a 12-hour shift fitting glass screens into beveled frames. Within 96 hours, the plant was producing over 10,000 iPhones a day."

 If one wishes to build on this scale, then one must be able to supply on this scale.

"’The entire supply chain is in China now,’ said another former high-ranking Apple executive. ‘You need a thousand rubber gaskets? That’s the factory next door. You need a million screws? That factory is a block away. You need that screw made a little bit different? It will take three hours’."

Apple learned from Walmart how to use its power. Once you make a supplier dependent upon your business, then you own that supplier. You use your power to control costs. If the supplier meets your specifications then you come back and demand even lower costs. Eventually, the supplier must exceed work rules, cut back on safety, and abuse environmental laws in order to continue to meet demands. This non-virtuous cycle is only limited when injuries, sicknesses and deaths become noticed by Chinese officials and US consumers.

These events occur at facilities working for Apple. Foxconn was in the news recently due to a distressing rise in suicides among its workers. Riots and work stoppages are common occurrences in China. While companies like Gap, Nike, and even Walmart have responded to public criticism by their consumers, there is little pressure on Apple to change its ways.

"Given Apple’s prominence and leadership in global manufacturing, if the company were to radically change its ways, it could overhaul how business is done. ‘Every company wants to be Apple,’ said Sasha Lezhnev at the Enough Project, a group focused on corporate accountability. ‘If they committed to building a conflict-free iPhone, it would transform technology’."

Walmart had the power to transform the retail industry. It forced lower prices and lower wages on the world. It has suffered criticism for its methods and its impact on society. Some think Apple wields the same influence. It has been granted a free ride.

"But ultimately, say former Apple executives, there are few real outside pressures for change. Apple is one of the most admired brands. In a national survey conducted by The New York Times in November, 56 percent of respondents said they couldn’t think of anything negative about Apple. Fourteen percent said the worst thing about the company was that its products were too expensive. Just 2 percent mentioned overseas labor practices."

Apple is said to be sitting on almost $100 billion in unused profits. People are beginning to wonder what they could possibly do with all that cash. Walmart at least had the decency to share some of its massive profits with its customers in the form of lower prices. It would seem that Apple has no such intentions. Why should they?

Some see another dark side to Apple’s success, leading to an additional non-virtuous cycle.

"In the last decade, technological leaps in solar and wind energy, semiconductor fabrication and display technologies have created thousands of jobs. But while many of those industries started in America, much of the employment has occurred abroad. Companies have closed major facilities in the United States to reopen in China. By way of explanation, executives say they are competing with Apple for shareholders. If they cannot rival Apple’s growth and profit margins, they won’t survive."

Why worry about the hollowing out of our economy and suffering in far-off China when one is experiencing the joy of yet another gadget that he suddenly discovered that he could not live without?
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