Tag Archives: Growth

Economic Bullies Are Fattening Up: Where are the Monitors?

When at middle school, some few years ago now, monitors would troll the break-rooms, corridors and playgrounds. If a bully or bully-like behavior was observed, a faithful monitor (sometimes of a more diminutive size) would wade in to neutralize the issue. In industry, economic bullies are getting larger and more powerful and the monitors are missing in action.

What we knew was happening in America is now clearly happening in the UK. In this week’s Economist there is an article titled, “More money, more problems” in the business section. The article reports on new research that suggests industry concentration is well established and getting more pronounced; large, dominant firms are getting larger and more dominant. As a result, a greater proportion of economic profits are being hovered up by the bullies and the rest of each industry is sucking on less and less.

If the market was operating efficiently and freely, the opportunity for start-ups to innovate and create the ‘next big thing’ would help foster creative destruction. But public policy has played a key part in (over?) regulating how business start and operate; and lobbying is running rampant such that, more clearly in America, firms with deeper chests can invest in lobbyists to ensure their masters’ interests are protected; putting more pressure in the smaller guys. The monitors have become the employees of the bullies.

There are implications a-many, some reported in the Economist article, touching innovation and its diffusion (or lack thereof), wage rates, productivity and employment. Larger firms tend to achieve higher degrees of economy of scale; this is a large playground where automation can help drive productivity thus helping the bullies get stronger. Other data from the OECD and other sources suggest that diffusion of knowledge and ideas, needed to help firms share in productivity-inducing work, is slowing down between innovators and followers; in other words between those who already have, and those that already don’t. This reinforces industry concentration or the barriers around the OECD’s ‘frontier firms’.

Employment opportunities and where we collectively go to work changes; and who is able to pay a higher wage becomes self evident. So all in all the controlled environment we live in is a far cry from the free market that was operating 20 or more years ago.

It seems the pundits feel that we need more competition. Can we legislate for more competition or can we undo the constraints that put us where we are today? I think that what is needed is:

  • Less regulation overall and particularly on small and medium business, spanning financials, hiring practices, IP development, and so on
  • Increase investment in primary R&D
  • Increase vocational collaboration with education and industry
  • If you want more regulation, point it at the lobbyists: reduce their spend and power
  • Tinker with the tax code to help motivate investment in smaller firms and Tomory for it, tax larger firms more.

But these items are not even popular topics in politics today. It’s much more likely we will talk about fake news and Russians and Facebook, than economics, growth and hard work. Oh well.

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One small picture says it all

Standing about 2-3 inches tell and 1-2 inches across, a small chart in page A6 of this last weekend’s Wall Street Journal, sums up our economic predicament. The article, Japan Firms End Yearslong Price Freezes, reports that a growing number of businesses are reporting that labor shortages and increasing demand are leading to price increases. The chart shows a pleasing, gradual but clear rise in prices in Japan over the last year, now approaching 1%. This is important.

Though 1% inflation sounds measly for Japan it could be a short-term boon. The nation has been bedeviled for over 20 years with meager growth, stagnant wages, and tepid productivity growth. In fact some economist suggest that Japan’s fall from economic grace that preceded the West’s financial crisis of 2007, demonstrated early what would happen in a deflationary economy with massive quantitative easing. QE did not drive Japan’s economy to growth; it does not seem to have done so in the west, though it may have saved it from crashing and now we see how it’s persistence has led to financial and investment dislocation.

The news all around us is quite positive:

  • Most recent quarterly GDP in US was restated up to 3.3%, almost unimaginable a year ago.
  • EU economic growth rates are forecasted to grow above their recent meager levels in recent OECD reports
  • ‘Currency war’ reports appear in the press infrequently, even though global trade remains torn by the idea that the US wants a stronger negotiating position (for what is, essentially, a very small part of the US economy).

But inflation remains stubbornly low almost everywhere. If Japan soon demonstrates ongoing growth in inflation, and global commodity prices push up, the result will be a wave of input price increase around the world. Some months later the US and more clearly the EU will see producer price increase and so consumers may see pass-through increases. This will encourage central banks to continue their march toward normality.

The downside with a return to inflation: Debt servicing becomes more onerous as interest rates increase in response to inflation increases. As such, governments and businesses that stocked up on cheap debt during QE and the near-zero interest rate period will have to squirrel away more cash to pay their interest charges. This will reduce what’s available for investment, thus slowing down growth.

The cycle feeds on itself so it can sometimes stabilize or other events can kick it into maddening swings. We will just have to see what happens. It may depend on how fast inflation growth returns. But for now, that little picture on page A6 looks very nice in a chilly autumn morning.

Normalcy is Slowly Coming Back to our Economy

Love Trump or hate him, the one thing you have to say about the economy since around his election, it is starting to show signs of normality. That is, certain data suggest that firm behavior is slowly moving back toward what is more normally expected and widespread before the financial crisis.

Front page news in today’s US edition of the Wall Street Journal, “Firms cut buybacks as stocks become too expensive“, report that – as the title suggests, stock buybacks are falling again. This is a fall compared to recent record highs, so it is not that we are done with the mischievous side of Quantitative Easing. At a run rate of $500M spend by S&P 500 this year, 2017 will be fourth or fifth highest ever. The growth of which signaled that investors had noting better to do with their money then play with the earnings per share metric in order to pay out bonuses to executives. The negative to all this was the poorly performing capital investment side of the economy.

So here is where the other side of the story adds weight to the early sings of good behavior. The article continues on the inside front cover and there is a graph of capital expenditure. Running at near all time lows for a number of years, it is showing signs of increasing in 2017, This implies new plant, new equipment, new spend on IT and other productivity inducing and growth driving engines. This is what we want to see. It is not that our economy is well, really, it is just that it is a twisted monster. It is to a free market; it is a contorted, overly regulated morass of centrally guided actors. We need to get out from under QA and allow money and investment to find returns that are normal. If we were to couple this with the promised tax reform, we might unleash a new normal for 2018. Let’s see.

Open Letter to Mario Draghi: Wake Up!

December 6, 2016 

Sir,

I am in receipt of a copy of the transcript of your recent a speech, “The Productivity Challenge for Europe”. I have to report that your paper makes little sense and completely avoids the negative impact that your policies, as head of the ECB, have had in holding the EU’s economy back.

But before I identify the errors in your analysis I need to first highlight how your initial assumptions, outlined in the first part of the speech, are presented backwards. Here are several of your assumptions:

  • “Stronger potential output growth aids monetary policy by increasing the equilibrium real interest rate.”

Sir, this is self evident. However it is the interest rate policy of the ECB that has stifled risk and investment that can drive growth. It is not growth that aids policy; it is policy that should be creating opportunity for growth.  
Now the second backward facing assumption:

  • “And higher future growth helps monetary policy today. It encourages households to spend more and firms to invest, reducing the need for monetary policy to support current economic activity and bring inflation back towards 2%, and speeding up the return to more conventional monetary policy settings.”

This is similar to the first item; it is not growth that affords a monetary policy; it is monetary policy that should be assuring growth. You are clearly looking at the real world backwards. This will again become clear as we look and analyze your prescription to the problem of lack of growth.

The main body of your speech calls out correctly the cause of the stagnant euro productivity figure. You correctly call out capital investment and efficient allocation of resources (to the more productive) as the challenges facing us today. And supporting both of these is, ultimately, the diffusion of innovation across the region and non-frontier firms (I too read the OECD paper).

However sir, I see a weakness in your monetary policy. Firms are not sitting on their hands with a bunch of ‘shovel-ready-strategies’ waiting for the right interest rate level before launching one. Firms have strategies, first and foremost, independent of interest rate. Some of those strategies require funding and at that time, the firms’ treasurer or CFO will compare the range of funding options available.

You see sir, you have only to ask company treasurers and CFOs how they use interest rates to realize that perpetually low or even negative interest rates are anathema to growth. They are killing our economy.

As to resource allocation, well, since the capital markets are massively distorted is it any wonder that internal company allocation methods are screwed up too? With quantitative easing and the vast sums of money sloshing around the community, it turns out that companies were and are able to alter short-term ‘strategies’ to leverage it all. They simply launched non-natural M&A (at an all time high) and stock buy-backs that meet EPS targets more easily than riskier long term capital investments.

You do touch on several other polices that would positively impact rates of diffusion of innovation, namely:

  • Fostering more competition 
  • Well functioning capital, product and labor markets 

Alas the very polices you and your kind seek and set are preventing the realization of these polices:

  1. There is reduced competition due to excessive regulation and tax policies that favor established and larger firms over smaller and new
  2. Capital markets are being massively distorted as explained above
  3. Product markets are held hostage to, again, red tape and too much government involvement
  4. Labor markets are held back due to the same nanny-state efforts

Sir, I implore you to look at the data in front of you. Meet with twenty CFOs. Get out a little bit and talk to real people and put your books of theory away. I beseech you- before you bring the whole edifice of the EU down.

I have the pleasure of being, sir, your obedient servant.

A. White

When Connecting the Dots Disagrees with the Data: Something Fishy in the Housing Market

My original title for this blog was going to be just, “Something Fishy in the Housing Market”. But I changed the title once I realize that this blog was more about how conclusions, based on data change, once triangulation of that data is sustained.

First the good news from Economic News Alert from the World Bank yesterday:

“New U.S. single-family home sales rose 3.1 percent (m/m, saar) to 593,000 in September, from downwardly revised 8.6 percent decline to 575,000 sales in August, and above the market expectations of a 1 percent decline. On a yearly basis, new home sales jumped 29.8 percent in September, according to the Commerce Department. Demand for new homes remains strong, reflecting employment growth, wage gains, positive demographics and mortgage rates near all-time lows.”

So it seems good news. The economy is functioning well, yes? 

Now the bad news Bloomberg July 28, 2016: Homeownership Rate in the U.S. Drops to Lowest Since 1965.  

The U.S. homeownership rate fell to the lowest in more than 50 years as rising prices put buying out of reach for many renters.

The share of Americans who own their homes was 62.9 percent in the second quarter, the lowest since 1965, according to a Census Bureau report Thursday. It was the second straight quarterly decrease, down from 63.5 percent in the previous three months.

Now the analysis that emerges when you overlay the two data points.

Per the World Bank, it seems that demand for housing is up. But per Bloomberg, the new housing is not actually housing that is sold. It so happens that many new (and old) houses are being acquired – that’s true. But who is buying them? It turns out, according to Bloomberg, that large swathes of the housing sector are being snapped up by cash rich organizations that are then renting the property. 

Actual home ownership is down – which is caused by a number of factors. One is that many cannot afford the first-time costs, either through lack of a job, low wages, or a bad credit score. And as more and more housing is purchased and turned into rental property, the pricing for those houses increasing, making the challenge harder.

So the increased demand for new housing is not a sign of increased wages and strong employment, as the World Bank suggests. It’s very likely the investor class, flush with cash from quantitive easing and cheap loans (due to historic low interest rates), are snapping up property and then renting them.

The two articles, taken separately, lead to one conclusion. But when you link the two, a new analysis comes forth. What will happen next? I can foresee several items.

We should now expect socially progressive typesto suggest that the market is working against the middle-class, and that government should force mortgage firms to lower standards and let those with weaker credit scores and low paying jobs to obtain loans for these new houses. The problem is with QE and near-zero interest rates. It is ruining numerous markets and distorting all manner of normal investor practices, such as capital investment for future productivity and now the housing market. 

There is a possible silver lining to all this rental action going on. A third factor is dragging the US economic growth down. It is the reduction in the American worker’s willingness to move to where the jobs are.  The following is taken from an LA Times article in June:

“Census Bureau data show that the annual rate at which people relocated to a different state — which is often an indicator of job changes — fell to between 1.4% and 1.7% of the overall population since the Great Recession. That contrasts to interstate migration rates at or close to 3% from 1947 through the middle of the last decade, with only a few exceptions.”

If more and more people set up shop in a rental property, it might lead to an increased ability to move. It is possible this may happen and this should help the labor market and the economy – that is assuming there are jobs worth moving for.

But there is also a cloud related to the drop in home ownership. It will likely lead to more instability in the nuclear family, the so called bedrock of modern society. The nuclear family has been under attack since the 60’s as wave after wave of progressives have taken up power and decided they know what’s best for us, even more than we do ourselves. The declines in home ownership will likely undermine the nuclear family again. But we cannot afford, we must not, adjust policy to accommodate the need to encourage the proportion to middle class. We should focus on opportunity and growth instead and let the invisible hand do its work.

When Connecting the Dots Disagrees with the Data: Something Fishy in the Housing Market.

My original title for this blog was going to be just, “Something Fishy in the Housing Market”. But I changed the title once I realize that this blog was more about how conclusions, based on data change, once triangulation of that data is sustained.
First the good news from the Global Dailty Economic News alert from the World Bank’s Economic Prospects Group October 26, 2016:  Advanced Economies, US:

“New U.S. single-family home sales rose 3.1 percent (m/m, saar) to 593,000 in September, from downwardly revised 8.6 percent decline to 575,000 sales in August, and above the market expectations of a 1 percent decline. On a yearly basis, new home sales jumped 29.8 percent in September, according to the Commerce Department. Demand for new homes remains strong, reflecting employment growth, wage gains, positive demographics and mortgage rates near all-time lows.”

So it seems good news. The economy is functioning well, yes? 

Now the bad news Bloomberg July 28, 2016: Homeownership Rate in the U.S. Drops to Lowest Since 1965.  

The U.S. homeownership rate fell to the lowest in more than 50 years as rising prices put buying out of reach for many renters.

The share of Americans who own their homes was 62.9 percent in the second quarter, the lowest since 1965, according to a Census Bureau report Thursday. It was the second straight quarterly decrease, down from 63.5 percent in the previous three months.

Now the analysis that emerges when you overlay the two data points.

Per the World Bank, it seems that demand for housing is up. But per Bloomberg, the new housing is not actually housing that is sold. It so happens that many new (and old) houses are being acquired – that’s true. But who is buying them? It turns out, according to Bloomberg, that large swathes of the housing sector are being snapped up by cash rich organizations that are then renting the property. 

Actual home ownership is down – which is caused by a number of factors. One is that many cannot afford the first-time costs, either through lack of a job, low wages, or a bad credit score. And as more and more housing is purchased and turned into rental property, the pricing for those houses increasing, making the challenge harder.

So the increased demand for new housing is not a sign of increased wages and strong employment, as the World Bank suggests. It’s very likely the investor class, flush with cash from quantitive easing and cheap loans (due to historic low interest rates), are snapping up property and then renting them.

The two articles, taken separately, lead to one conclusion. But when you link the two, a new analysis comes forth. What will happen next? I can foresee several items.

We should now expect socially progressive typesto suggest that the market is working against the middle-class, and that government should force mortgage firms to lower standards and let those with weaker credit scores and low paying jobs to obtain loans for these new houses. The problem is with QE and near-zero interest rates. It is ruining numerous markets and distorting all manner of normal investor practices, such as capital investment for future productivity and now the housing market. 

There is a possible silver lining to all this rental action going on. A third factor is dragging the US economic growth down. It is the reduction in the American worker’s willingness to move to where the jobs are:

“Census Bureau data show that the annual rate at which people relocated to a different state — which is often an indicator of job changes — fell to between 1.4% and 1.7% of the overall population since the Great Recession. That contrasts to interstate migration rates at or close to 3% from 1947 through the middle of the last decade, with only a few exceptions.”  LA Times, June, 2016

If more and more people set up shop in a rental property, it might lead to an increased ability to move. It is possible this may happen and this should help the labor market and the economy – that is assuming there are jobs worth moving for.

But there is also a cloud related to the drop in home ownership. It will likely lead to more instability in the nuclear family, the so called bedrock of modern society. The nuclear family has been under attack since the 60’s as wave after wave of progressives have taken up power and decided they know what’s best for us, even more than we do ourselves. The declines in home ownership will likely undermine the nuclear family again. But we cannot afford, we must not, adjust policy to accommodate the need to encourage the proportion to middle class. We should focus on opportunity and growth instead and let the invisible hand do its work.

The Myth of the Rational Voter, and the Honest Economist

There is an excellent “Opinion” piece in today’s US print edition of the Wall Street Journal.  It is titled, “A Vote for Trump Is a Vote for Growth“.  It is written by Wilbur Ross, a private equity investor, and Peter Navarro, a business professor at the University of California, Irvine.  Both are senior policy advisors to the Trump Campain. So we can assume that they are in Trumps’ camp.  However, the article is not political per se and actually discusses the economic differences between Trump and Clinton.

As we have all heard via the initially exciting, then later boring, presidential debates, Trump is looking to lower taxes, cut regulation, and overall encourage enterprise.  Clinton wants to raise taxes (on the “rich”), increase regulation, and otherwise beat out of us all the desire and even natural need for enterprise.  Yet Clinton told us all that “economists have looked at both plans and Trump’s adds 3m unemployed and Clinton’s plan adds 10m new jobs.  For all the rhetoric, which is the right answer?  Does increasing taxes and regulation create more growth?  No, never in a million Sunday’s.  So why are these economists all in favor of Clinton’s plan?

First we have to ignore the temptation that such economists are in the Clinton camp and are therefore inclined to support the status quo.  We gave the same credit to Messers Ross and Navarro so we should do the same for the “other side”.  Second, perhaps there is some truth in data that we are missing?  And this is where the article comes in.  The authors suggest, with some credibility and some additional data, that the scope of the analysis is the key.  For example, if you only look at tax revenue as an indicator of fitness, a simple tax reduction will reduce receipts, and a tax increase will lead to an increase in receipts.  At least that’s the theory.  The scope of this point is the issue – it only looks at tax receipts.  What happens to the money? Where is it invested?  What returns does it get?  What kind of multiplier is involved?

Tax cuts tend to create, over the long term, increased tax receipts.  This is somewhat counter intuitive. It takes place since with more money in our pockets and business balance sheets, all other things being equal we tend to spend more.  Private industries multiplier effect, the knock-on spend that follows from an initial saving or investment, tends to be larger than that seen in the public sector’ not least since public sector tends to “pick winners” and investment based on ideology and policy, whereas the private sectors invests based on performance criteria and is more objective. 

Tax raises tends to reduce tax receipts over the long haul.  Again, this might seem counter intuitive.  As tax rates increase we are all motivated less to work harder and seek that promotion since more of what we earn will be taken by Uncle Sam (or Auntie Hilary). As such the marginal volume of work as a result of the tax hike tends to fall.  Overall then the tax receipts fall. 

So the key to the argument over which plan – Clinton’s or Trump’s – will actually grow the economy and lead to more jobs – depends on the scope of the analysis.  Some economists, noted in the article, take a long view and they argue convincingly that Trump’s plan is economically viable, and Clinton’s is not.  From experience in the UK where the same diametrically opposed plans have been promoted and tried, over and over, it is self evident that Trump’s plan is better.  Yet the mass population does not understand the details, and worse it is being fed a diatribe by so-called “experts”.

Alas the innocent vote is being hood winked.  And worse, the real experts, such as the Federal Researve, are complicit in this issue.  I can’t include “Treasurery” here as that is political role, not an economic or independent role.  If only we couldn’t the facts out; and if only we can get Trump to be a little more humane.