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The Optimistic Case for the US Economy

April 11, 2010 Leave a comment

Daniel Gross waxes optimistic about the state of the American economy:

But the long-term decline of the U.S. economy has been greatly exaggerated. America is coming back stronger, better, and faster than nearly anyone expected—and faster than most of its international rivals. The Dow Jones industrial average, hovering near 11,000, is up 70 percent in the past year, and auto sales in the first quarter were up 16 percent from 2009. The economy added 162,000 jobs in March, including 17,000 in manufacturing. The dollar has gained strength, and the United States is back to its familiar position of lapping Europe and Japan in growth. Among large economies, only China, India, and Brazil are growing more rapidly than the United States—and they’re doing so off a much smaller base. If the U.S. economy grows at a 3.6 percent rate this year, as Macroeconomic Advisers projects, it’ll create $513 billion in new economic activity—equal to the GDP of Indonesia.

This is all well and good, and it would be nice if it comes to pass. But here’s the thing: Gross is essentially being a contrarian here. He looks good if the economy turns out to perform better than the consensus opinion suggests, and, well, if the economy crashes, none of us are exactly going to be looking to him for guidance anyway.

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Bad Business Models and the Consequences of Union Labor

April 8, 2010 Leave a comment

Megan McArdle has an incisive post about the problems that have driven US Airways and United into each others’ arms:

The airline industry is not a particularly attractive market. You’re selling a perishable commodity–once the doors close, any unfilled seats are worthless–to an audience that stubbornly resists treating your product as much other than a commodity. Attempts by the airlines to resist this, with their byzantine pricing rules and frequent flier programs, have by and large not succeeded particularly well; business travelers tend to have multiple frequent flier accounts unless they live near a single airline’s home airport, and economy fliers don’t care. Meanwhile, software is steadily eroding their ability to thwart bargain-hunting consumers through pricing power.

Clearly, the airlines have plenty of reasons for their current parlous state. But it is interesting to consider that, given the blame intransigent labor unions have in this state of affairs, how few people make the connection between rigid labor rules and poorly managed companies. Companies with a history of rancor between labor and management–which describes most unionized workforces–spend a lot of time and energy managing that fractious relationship and so spend less time on operational goals such as product innovation and revenue growth. Compare and contrast Apple and Google with the airlines.

Offshoring Jobs and the Myth of a Static Economy

April 6, 2010 1 comment

It has become a commonplace that American jobs have been eliminated in favor of cheaper labor overseas. To some extent, this is true, but it misses the real story. Most of the jobs that have moved overseas, and which are not coming back to the United States, are jobs for which educational requirements are minimal. The poorly trained and uneducated are the victims of structural changes in America’s economy.

(Other victims of structural changes in the American economy are the overeducated who pursue education in fields for which there is very little demand, such as humanities PhDs. But there is little sympathy for naive academics who find themselves unemployable.)

But, there’s nothing new about this. When elevators went from manual to automated, the people who lost out were elevator operators, who, of course, did not need much in the way of education to do their jobs. Likewise, when sock or textile manufacturers move their operations from, say, the Midwest, to China, it is the employees of American textile mills, who, by and large are relatively uneducated, who lose. Other Americans gain.

Now, to a very large extent, this is blaming the victim for economic forces beyond his control. That is true. However, it is also true that if the American economy wants to continue to grow over the coming decades, there will be winners and losers in it. Egalitarianism is a false ideal upon which Stalin murdered tens of millions of people. That is what social safety nets are supposed to account for (in part). It is also incumbent upon people to realize the precariousness of their current employment and pursue opportunities to develop skills that are transferable. The United States’ deplorable educational system does not help in this regard.

But we can’t conclude from any of this, as some do, that the overall number of jobs in the United States has decreased because a lot of those jobs have been moved overseas. Neither the economy nor the number of jobs is a static thing. Buggy whip manufacturers were driven out of business by the development of the internal combustion engine, but in the decades since the internal combustion engine was invented, many more jobs than were ever lost by buggy whip manufacturers have been created.

Productivity, Debt, and Taxes

March 31, 2010 Leave a comment

A Reuters blogger, James Pethokoukis, claims that the United States is about to enter into a 20-year period of slow growth. He cites as evidence for his claim a paper written by Robert Gordon, an economist at Northwestern University. However, Pethokoukis doesn’t provide a link to the original paper; therefore, it’s hard to judge how much of this is an accurate interpretation of the economist’s conclusions.

But the argument presented is a rather stark one:

Gordon’s argument is simple: The productivity surge starting in the 1990s was driven primarily by the Internet, though drastic corporate cost-cutting in the early 2000s helped, too. Going forward, though, Gordon thinks the IT revolution will be marked by diminishing returns. He concludes, for instance, that most of the product innovations since 2000, like flat screen TVs and iPods, have been directed at consumer enjoyment rather than business productivity. (Also not helping are a more protectionist trade policy and a tax code where the penalties on savings and investment are about to skyrocket with rates soaring 60 percent on capital gains and 200 percent on dividends.)

All this dovetails nicely with research showing financial crises are followed by negative, long-term side-effects such as slow economic growth and higher interest rates. Lots of debt, too. Indeed, researchers Carmen Reinhart and Kenneth Rogoff find advanced economies with debt-to-GDP ratios above 90 percent grow more slowly than less-indebted ones. (Japan is the classic example.) America is on track to hit that level in 2020, according to the Congressional Budget Office.

Categories: Current Affairs, Debt, Economy, Jobs

Miscellaneous Good Links, 3.29.10

March 29, 2010 Leave a comment

On Immigration and Economic Growth

March 27, 2010 Leave a comment

This country will exit its current existential funk only once the economy is creating tens of thousands of jobs per month. While a few large companies can easily cover that for a few months, it is the creation of new companies–the entrepreneurial spirit–which will really create jobs in the coming years. Unfortunately, many entrepreneurs are also immigrants, and immigrants are not exactly encouraged to come to the United States:

Overall, some of the country’s highest rates of entrepreneurship are found among immigrants from the Middle East, Cuba, South Korea and countries of the former Soviet Union. These recent arrivals regularly build new businesses — from street-level bodegas to the most sophisticated technology firms.

Immigrants started one-quarter of all venture-backed public companies between 1990 and 2005. In addition, large U.S. firms are increasingly led by executives with roots in foreign countries, including 14 CEOs of the 2007 Fortune 100.

A good proxy for predicting the future performance of the US economy would be to see how seriously comprehensive immigration reform is taken by Congress.

Venture capitalists have an obvious interest in this effort; here is a particularly interesting take on the issue from the VC Fred Wilson.