Tag Archives: Economic Growth

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.

More on the positives of the European Crisis

Via Mark Thoma, a more well written thorough (fact backed) perspective on the net positives for the European crisis: here.

Bottom Line:  The European crisis, by keeping US interest rates in check and oil prices low, may do more to help the US recovery than hurt it.  In the process, however, we would expect the flip side of the resulting capital inflows into the US to emerge – namely, a rising external imbalance.  Arguably, this simply shifts the ultimate adjustment to sometime in the future.  Again.

Same ideas, but I published first!

Seeing the Positives from the European Debacle

What happened in the stock market two weeks ago was scary: the Dow dropped 1,000 points in a matter of minutes.  Greece was on the brink of defaulting on it’s debt; a country I might add, that has it’s currency denominated in Euros.   Investors were worried that if Greece went down, it might drag down the Euro with it.  Luckily, the EU finally pushed politics aside and realized that in order to keep the EU from causing a European Lehman chain reaction, they had to bail out Greece.  If Greece went, so the saying goes, the rest of Portugal, Italy and Spain would go with it.  As the bail out was announced, U.S. stocks surged.  But the damage was done.

Stocks are still up since a year ago, but a lot of that equity was lost.  Some say it was a much needed market correction.  In a way, I agree.  Investors started to feel that they were being left out of the party (considering that stocks rallied considerably since March 2009) and wanted to get into the action, driving up valuations.    The market correction has left some worried that the lost momentum from the stock market and the teetering European situation means that the U.S. is going to lose steam in it’s recovery.  But it won’t; it will only make our recovery stronger.  There are several positive indications that Europe’s struggle is in America’s benefit.

  1. A stronger dollar against the Euro should help bring in an influx of investment.  While a weaker dollar sent investors over seas, most wealth generated outside of the U.S. will start seeking to invest here.*
  2. The Fed funds rate is still around 0% to .25%.  Inflation hawks are going to have to start rethinking their position as deflationary pressures continue to rear its ugly head.  Mean trimmed CPI is on a downward trend, and with energy and commodity prices pointing lower, it will only continue to send overall prices downward.   This type of environment will keep the Fed from raising rates, making borrowing cheap.  With mortgage rates continuing to be low, buying a house is still attractive.
  3. The potential benefit for having low interest rates is that foreign investors looking for returns will look towards equity markets.  This means more potential growth for U.S. companies and the stock market.
  4. The stock market wasn’t the only thing that experienced slides.  So did commodity prices, especially oil.  Oil was moving up to around $90 a barrel until the market correction happened.  Now, oil prices are down to $75 a barrel.   Any increase in gas prices is taxing on consumers, but so far, gas prices have stagnated and won’t be increasing any longer.  The cost of inputs are now lower across the board thanks to declines in commodity prices, providing cushy margins for companies that lowers the pressure to raise prices, resulting in an absence of pain for the consumer.

As you can see, there is upside to the European situation.  I agree that it is still a gloomy situation for Europe in general.  Greece (and the like) face long-term structural issues that will make resolving their situation an incredibly hard task and I won’t be surprised if in 6 months Greece begins to default on its debt again.  But will it really drag down the EU? The rest of the countries such as Portugal, Spain and Italy should benefit from a lower Euro, helping wages that outpace productivity come to parity.  So should Germany and the rest of Europe, as a lower Euro will stimulate exports.  What needed to happen was a devaluation of the Euro  to a value more inline of what it is worth.  Yes, it is unfortunate that these irresponsible countries are essentially a drag on the EU, but that doesn’t mean the U.S. will have to suffer for it.

While the EU is a major trading partner to the U.S., I doubt there will be significant drops in demand for U.S. goods. There are more, higher growth areas for the U.S. to consider.  In terms of the U.S. recovery, if exports were the upside to the U.S. downturn, then U.S. exports to Europe is going to be the downside to the U.S. recovery.  But there is going to be a recovery nonetheless.

*And in minutes, this pops into my RSS reader: China boosts holdings of US Treasury debt by 2 pct

Latest IMF World Economic Growth Predictions

The next growth area for the economy

The optimism is rushing in as the new cadre for the future of the American economy, most of which was given a lift thanks to the new employment numbers for March.  While many report on the green shoots that help point to the one, rosy conclusion there still remains the question of where our growth will come from. From Slate, an article on “Why the U.S. recovery will be bigger, faster, and stronger than economists and politicians expect” gives a clue as to what the next new growth area for the economy will be: infrastructural efficiency.

In the short term, the ruthless pursuit of efficiency translates into the uncomfortable—and unsustainable—dichotomy of rising profits and falling employment. But the focus on efficiency is creating new business opportunities for smart companies. At BigBelly Solar, a Needham, Mass.-based firm whose solar-powered trash compactors reduce the need for both labor and energy, sales doubled in both 2008 and 2009. “Cities and institutions like universities and park systems are eager to do more with less,” says CEO Jim Poss. Leasing 500 compacting units has allowed Philadelphia to cut weekly pickups from 17 to five and will save it $13 million over 10 years. BigBelly employs fewer than 50 people, but like many businesses in fast-growing markets it indirectly supports a much larger number of jobs. At Mack Molding, an Arlington, Vt., contract manufacturer, 35 workers are kept busy on two shifts producing compactors. “When you add the employees at the more than 50 component suppliers, this work is supporting another 180 jobs,” says Joan Magrath, vice president of sales and engineering at Mack Molding. BigBelly compactors, which are entirely made in the United States, have been exported to 25 countries. It’s a drop in the bucket. But thousands of start-ups and small businesses are trying to crack the markets developing at home and abroad.

The value added is obvious. More waste can be processed at a lesser cost.  In the case of Philadelphia, the $13 million dollar savings can now be allocated to provide more value regarding something else, providing more momentum for growth in either the public or private sector.  While traditional waste handlers may be out of a job, the article notes that much higher skilled, production jobs are created in order to produce the automated receptacles.

The short-coming of this article is that it doesn’t delve any deeper into the potential that efficiency systems like this can create for the economy.  This blog has detailed some incredible ideas at maximizing efficiency, either by finding value in waste or building economies of scale.  The author misses how important infrastructural efficiency will be for the economy, especially since a lot of this efficiency will result in energy savings, usually not propelled by cost, but towards providing a greener future.  The more value we can squeeze per unit of (insert labor or widget here), the higher productivity the U.S. will enjoy which will entail higher income per individual.

Where the U.S. stands on the Laffer Curve

From Greg Mankiw:

Taxes/GDP x GDP/Person = Taxes/Person

Here are the results for some of the largest developed nations:

.461 x 33,744 = 15,556

.406 x 34,219 = 13,893

.390 x 35,165 = 13,714

.282 x 46,443 = 13,097

.334 x 38,290 = 12,789

.426 x 29,290 = 12,478

.373 x 29,527 = 11,014

.274 x 32,817 = 8,992