On Freedom in China

They seemed genuinely baffled by my insistence that the ultimate freedom is the freedom to throw out the people in power if you don’t like them.

“You do that in your country all the time,” one of them pointed out to me, “and it doesn’t seem, to make much difference. What we want is stability – and that’s what we’ve got.”

You can find more of that and the change in China over the course of 30 years, here.

Are unions the reason for Germany’s success?

The sixth part of Timothy Noah’s piece on Slate entitled “United States of Inequality: The Great Divergence and the Death of Organized Labor” gives a historical account for the decline of union membership in the United States. The decline of labor in the United States was a function of the lack of political support at a time when the U.S. was facing an economic crisis of falling wages and rising prices. Reagan deregulation was the proposed fix which included diminished support for labor in America. The political climate at the time expected that in order to compete in world markets, high wages demanded by union members placed high cost burdens on U.S. companies, therefore shifting demand towards cheaper, foreign goods.

The American auto-industry became the symbolic example of union labor’s disastrous effect on the U.S. economy: high priced domestic goods of low quality could not compete with low priced foreign goods from Japan that were of higher quality. In effect, the American auto-industry is now desperately trying to survive, begging for help from the U.S. government. Whatever the reason of the U.S. auto industries demise was; that’s not of concern. The union, mismanagement, lack of early political support, deregulation, etc…, these could all have been factors and could be weighted appropriately as the downfall.

Germany approached this situation differently.  At the same time Reagan decided to withdraw its support for labor in the U.S., Germany did the opposite and now, not only stands as one of the chief auto exporters in the world, but also has union membership and all the alleged devastating associations with it like high wages, expensive benefits, etc… Now Germany’s export led growth is helping it stay out of it’s recession. A healthy fiscal balance sheet and mild stimulus helped too, but why is German exports booming while all others are importing? Take a look at the top German exports for 2009:

  1. # Passenger cars … US$11.2 billion (15.7% of exports, down 39% from 2008)
  2. # Pharmaceutical preparations … $8.7 billion (12.2%, down 6%)
  3. # Other scientific, medical and hospital equipment … $3.7 billion (5.2%, down 13.3%)
  4. # Other industrial machinery … $3.4 billion (4.8%, down 26.7%)
  5. # Other automotive parts and accessories … $3 billion (4.2%, down 23.8%)
  6. # Industrial engines … $1.8 billion (2.6%, down 32.5%)
  7. # Automotive engines and engine parts … $1.75 billion (2.5%, down 40.7%)
  8. # Electric apparatus … $1.7 billion (2.3%, down 27.5%)
  9. # Measuring, testing and control instruments … $1.48 billion (2.1%, down 26.7%)
  10. # Industrial organic chemicals … $1.47 billion (2.1%, down 25.5%).

Focus on the makeup, rather than the direction. (German exports are moving back up in 2010) The top exports are all high value-added goods that are high in demand.  Moreover, these goods demand high prices. These high prices translate into a large markup that give enough cushion within the margins to allow union labor.

Is union labor the cause or the benefactor of this success? The perfect comparison between American and German automobiles can help illustrate the answer. Both were union labor, demanded high wages and benefits, and usually sold near the same price given relatively similar models. The difference? German automobiles had the quality to demand higher prices, American automobiles did not.  German car manufacturers had strong brand positing such as BMW, Mercedes and Porche that was associated with the quality.  Germany even had nationalistic branding for quality centering around the concept of “German engineering.”    Marketing is the success here and the reasons for why nations demand German luxury automobile products is more indicative of the products themselves, not how labor is organized.

Germany was successful in becoming a high export nation because it greatly benefited from manufacturing high value added products of high quality.  What this story tells is that, Germany’s success story is mostly in part to the products themselves.  While there are many contributing factors to the quality of those products, you can’t assume that because Germany has unions and that it is a success, that one should assume that unions will lead to success.  One also can’t assume that because of the rise of foreign competition, unions must be abolished, in order to create a cost structure that can compete.  The real lesson here is that the burden of competition will always be placed on the companies who bear it, whether or not a government plan’s on helping those who participate in it.

Stay skilled my friends. The economy so far…

These four graphs help illuminate where the economy is moving…

Employment graph from Econbrowser:

Employment isn’t trending anywhere near a high growth trajectory.  The econ blogosphere blames either the lack of AD (demand) or structural unemployment.  I say structural for several reasons.  First, the unemployment rate has edged lower, not because of the slight increases in employment levels, but because workers are leaving the labor force. Although the total amount of discouraged workers are low, it could also include stay at home parents, resorting to an underground economy, going back to school, etc…  Second, job openings are outpacing the employment growth rate, which means that there are jobs out there but employers are not finding people skilled enough for the job.  Anecdotal evidence from the news such as the lack of well-trained computer engineers and medical technicians help illustrate the point that these high-growth fields are having a tough time finding skilled hires.  Third, rising capacity utilization rates and business investment growth, both of which are indicators of an increase in AD, are on the rise. (see graphs below)

Capacity utilization rate, from Calculated Risk:

Gross Private Domestic Investment, from St. Lois Fed:

Aggregate demand is actually beginning to increase, without the lift from employment. Businesses are starting to take advantage of low interest rates in order to build more productive capital.

This leaves me to my last reason: Housing is providing most of the drag for the recovery in employment because construction workers have no where else to go.

Housing starts, from Calculated Risk:

As you can see, there is a huge gap from the peak of home building and its present level. A large share of construction employment was lost during that drop and the home buyer tax credit failed to bump housing starts any higher. There is no expectation for housing starts to rise back up to pre-recession levels. Those who were employed in the construction industry are pretty much screwed.

A recovery in employment is going to be terribly slow. Hiring skilled workers is going to be a slow process. Many of those who were employed in construction will have to face the decision of leaving the labor force, which is a decision that is even slower than the hiring process. Structural unemployment is exactly what is ailing the economy right now, but demand will continue upward as the economy reorients itself toward services.

Taking a Shot at WA’s New Liquor Privatisation Proposition

Had the pleasure to find this in my reader today: (here)

State and local governments stand to lose hundreds of millions of dollars if voters pass either of two initiatives on the November ballot putting Washington state out of the liquor business, according to analyses by the state’s Office of Financial Management (OFM).

The reports, released on Wednesday, paint a far different picture from most of the scenarios analyzed in a state auditor’s report earlier this year, which predicted revenue boosts if the liquor business were privatized.

The OFM reports also conclude that consumption of hard liquor would go up.

Initiative 1100, which is backed by Costco Wholesale and other large retailers, would reduce state and local revenues by up to $277 million over the next five years, OFM said.

Initiative 1105, which is funded by large distributors, would decrease revenues by as much as $730 million — a bigger bite because that proposal also would eliminate the state’s liquor tax.

Backers of both initiatives say the state Legislature could raise taxes to make up for any deficit. Initiative 1105 recommends a new, simplified liquor tax that — along with other aspects of the measure — it says would increase revenue by $100 million beyond what the liquor board now projects.

The OFM reports conclude both measures would increase liquor sales in Washington by 5 percent, based on sales growth experienced in Alberta, after the Canadian province privatized its liquor stores.

Liquor sales would increase partly because the number of sales outlets would multiply as grocery and convenience stores that currently sell only beer and wine put liquor on their shelves. Both the state auditor and the new OFM reports estimate that 3,357 outlets would sell liquor, compared to 315 liquor stores now.

Given my research on this,  I feel I must comment.

  • Eliminating taxes would be a bad idea, as liquor taxes can be a boon to state coffers helping to fund many state programs and alleviate damages caused by drinking.  The benefits outweigh the costs on this one.
  • The demand for liquor is inelastic, meaning the state has more flexibility in keeping taxes and revenues high.  Moreover, the tax burden would be placed more on the consumer.  Any drastic drops in the tax rates for liquor won’t increase liquor demand by much (I calculated around .5% drop in consumption for ever 1% drop in the price relative to the tax rate) and the same in reverse, increasing taxes won’t do much to decrease the amount of liquor bought.
  • The OFM is underestimating the increase in revenues that will happen when the number of outlets selling liquor will increase by 965%. One thing I found with my research is that liquor licenses have a very strong positive correlation with liquor consumption.  So, the increased availability will increase sales.  By how much? While it is still an inelastic change, (b=+.187) a 965% change in liquor outlets will actually yield an increase in consumption of 1.8%.  Alcohol sales in 2008 was $825 million.  A 1.80% increase in consumption would translate into an increase in sales by $14 million.  Combined with anticipated sales growth from recent trends, liquor sales would increase by $85 million dollars for 2009.
  • While the change in consumption is underestimated, it isn’t a large share for revenue.  With a 965% increase in licenses  to sell liquor, WA should auction them off.  It provided West Virgina with realized revenues of 38.7% of net sales in the auction as evidenced in this paper.

Why can’t economic forecasters act like weather forecasters?

If economic forecasting is more akin to weather forecasting, (in accuracy) why wouldn’t economic forecasters practice the same presentation styles as weather forecasters? That is, given any usual business news (or even national and local news), economic forecasters present economic forecasts that resemble the presentation styles of weather forecasters.  It would include clear and concise explanations from a relatively attractive, well-spoken  person (don’t think actual economists like that exist) who can dictate changes in forecast trends for the economy who is aided by a green screen, supplying graphical information to aide in making their point. I could see this being viable on a business news network, where viewers are more economically literate.

How much credence would viewers give towards economic forecasters than weather forecasters? Much like climatologists who are a huge step away from meteorologists, are traditional economists a huge step away from forecasting economists? Both disciplines may be a few and far between in practice, but actual consumers of forecasts don’t let the difference phase them. As much as most still watch the weather, many still pay attention to economic forecasts. (For one, clients pay attention to mine.)

Would this ruin the perceived legitimacy of economic forecasting? In other words, is the ramification of being wrong more costly? Betting on good weather may result in the unfortunate situation in which one is with wet clothes, but much like the housing crisis, betting on economic forecasts may leave one underwater.

HT: Chartporn (for Picture above)

Will EV Batteries achieve economies of scale?

So says the Department of Energy. (PDF Warning) This graph shows it all:

After reading the report, it seems the trajectory of this forecast was demand driven.  I have no doubt that economies of scale and innovation manufacturing processes can help bring the cost down but I am skeptical of the cost of lithium inputs.  It is not that abundant as oil, as there is only two regions I can think of (China and Bolivia) that have substantial sums of it.  But this does bode well for Intercon’s idea for reusing batteries for alternative power sources, as this will push prices downward for aftermarket batteries.  See, I said that economies of scale was possible! (or at least the DoE confirms it…)

HT: Engadget

What a Higgs Boson Sounds like

More from LHCsound.

HT: Engadget