Wednesday, November 14, 2012

Fiscal Cliff

Obama fired the opening shot of the battle of the fiscal cliff by calling for more revenue increases than were included in the failed summer compromise. Perhaps the best spin on this strident approach is that Obama is giving the Reupublicans a way to save face and accept the summer compromise.

If Democrats and Republicans cannot reach agreement by January 1rst or shortly thereafter,  GDP will be 5% lower than it otherwise would have been over the next 12 months. Considering that the U.S. only grew by 2% last year, this implies a significant recession.

Even if a plan is passed in the next month that bridges the fiscal cliff, the long term budget problem will not be solved.  To get a feel for the challenge try this budget game:
NY Times (11-13-2010) Budget Puzzle: You Fix the Budget

 Two favorite recent articles:
1. Philadelphia Inquirer (11-11-2012) "Fiscal cliff' poses risks of another recession by Joel L. Naroff
2. The Economist (11-10-2012) The budget deficit; To the cliff, and beyond; Barack Obama and the Republicans have precious little time to act

For my students:
1. Complete the NY Times game and discuss your solution.
2. As the situation evolves daily, discuss your ideal solution and your expectations of the actual outcome of the battle of the fiscal cliff.

Tuesday, October 30, 2012


Questions for class:

1. Is QE3 (the third round of quantitative easing, i.e., the Fed printing $40 billion each month to buy mortgage backed securities) going to help the economy? If inflation returns, will the Fed be able to reverse it policies fast enough to soak up all the money it has injected into the economy?

2. Find another source to support your case.

For a good review of Fed basics (and changes in natural unemployment rate) watch this 40 min video:

Lecture at NY Fed's Symposium for College Professors (3-2012) by Robert Rich

The link to the slides for Robert Rich's lecture:
PowerPoint slides from Robert Rich's Fed lecture on Dual Mandate (3-2012)

Thursday, October 18, 2012

Update on Global Income Inequality

This global map of the gini coefficient (thanks to  Wikipedia Commons) show that South Africa has greater income inequality than almost any other country in the world. The gini coefficient ranges between 0 and 1, and a higher number indicates more income inequality.

The latest issue of The Economist features a special report on global income inequality. It includes a similar global map that show the changes in the gini coefficient in the past 20 years. This map reveals that Brazil has made great strides in reducing income inequality - primarily by focusing on improving education and implementing targeted transfer programs for the poor.  Brazil's Bolsa Familia program started in the 1990's and gives monthly payments to poor families if their children go to school. Several other countries in Latin America have created similar programs and have also lowered their income inequality.

The countries which have seen the largest increase in their income inequality in the last twenty years are: the United States, Nigeria, and China.

The Economist (10-13-2012) For richer, for poorer Growing inequality is one of the biggest social, economic and political challenges of our time. But it is not inevitable, says Zanny Minton Beddoes

If you follow links in the above article, you can read the other articles in The Economist's special report.

Questions for Students:
1. Which fact most surprised you?
2. What policies would you suggest to address this problem in the U.S. and in South Africa?

Tuesday, October 2, 2012

Update on South Africa

While South Africa has not been hit as hard by the financial crisis as its major trading partners in the EU, its expected annual GDP growth rate has been revised down to 2.5% for 2012. South Africa needs a growth rate closer to 7% to bring down its 25% unemployment rate.  Approximately half of its population still lives below the poverty line. According to estimates provided by the CIA World Factbook, South Africa has grown slower than all of it immediate neighbors:

                    2010 growth rate                2011 growth rate               2011 GDP/capita
Country           real GDP                             real GDP                      U.S. dollars PPP
Botswana           7.2%                                     4.6%                               $16,200
South Africa      2.9%                                     3.1%                                 11,100
Namibia             6.6%                                     3.6%                                  7,500
Mozambique      6.8%                                     7.1%                                  1,100
Zimbabwe          8.1%                                     9.3%                                     500

Concern over potential nationalization of mines may further discourage foreign direct investment (FDI).

For two good articles on the current state of Africa's largest economy read:

1.  The Economist (6-2-2012) South Africa: The gateway to Africa? South Africa’s business pre-eminence is being challenged

2. WSJ (7-24-2012) Growing Pains Strain South Africa: World Bank Cuts Outlook for Continent's Largest Economy, Citing Income Inequality, Jobless Rate, Commodity-Price Risks

Class, to prepare you for your trip to South Africa:
1. Why has growth in South Africa slowed?
2. What economic policies would you advise?

Saturday, September 15, 2012

Debate on Executive Pay

While Warren Buffett argues that CEO pay is inflated due to unchecked egos, a recent article in The Economist argues that CEO pay is a bargain.
The Economist (9-8-2012) "Bargain bosses: American chief executives are not overpaid''

For more evidence that CEO pay is not correlated with performance, read
The Economist (2-7-2012) "Executive pay and performance"

Thanks to Dodd-Frank financial reforms, firms are now required to disclose the gap between CEO pay and the median salary of employees.
WSJ (6-26-2012) "Firms Resist New Pay-Equity Rules"

Questions for Students:
1. What other sources can you find to contribute to the debate?
2. How do you think CEO salaries should be determined?

Sunday, August 26, 2012

Who should leave the eurozone?

In a recent issue of The Economist, a fictional "lost" memo to Angela Merkel is published which reveals contingency plans for the breakup of the euro.  The memo considers two possible exit groups: 1. Greece alone, and 2. Greece, Portugal, Ireland, Cyprus, and Spain.  The memo outlines how a currency exit could be accomplished and how much it would cost. The coffee mug stain is a nice touch.

The Economist (8-11-2012 ) "The Merkel memorandum"

This memo follows many of the suggestions presented in the winning submission for the 2012 Wolfson Economics Prize, "Leaving the Euro a Practical Guide" by lead author Roger Bootle. In the following interview, Bootle explains why he thinks the eurozone will break up. He goes a step further and argues that the eurozone should break up.

Bootle touches briefly on the possibility of France and Italy leaving the eurozone too, so that only northern countries are left. Many others have suggested that the northern countries in the eurozone (including Germany, Netherlands, and Finland) should form their own currency zone. Here is one such article.

NYT (6-26-2012) "To save the euro, (Germany should) leave it "

Discussion Questions for Students:
1. Which countries if any do you think should leave the eurozone?
2. How might a big devaluation of reinstated currencies in Greece, Portugal, Spain, and possibly Italy, affect your industry?

For the truly dedicated here is a link to the winner of the Wolfson Economics Prize MMXII:

"Leaving the Euro a Practical Guide" by Capital Economics, Lead author: Roger Bootle

Sunday, July 29, 2012

Entrepreneurs needed

According to a  recent article in The Economist, Europe's failure to nurture entrepreneurs is the ultimate source of its economic problems.

See Les misérables (

Even successful Germany is not immune from criticism. In Germany, one episode of bankruptcy may prevent an entrepreneur from ever holding another senior executive position in a big company. In addition, the entrepreneur may have to wait six years to discharge all bankruptcy debts. Given the high rates of failure of new business establishments, Germany's policies create a powerful disincentive to become an entrepreneur.  Limited venture capital and convoluted labor laws raise additional hurdles.

In the U.S., only about 50% of new businesses still exist after 5 years. This statistic is surprisingly stable across time and the business cycle. If you are interested in more fun facts on the survival rates of new business establishments in the U.S. go to:

 For a pep talk on the importance of entrepreneurs and how to get more of them, see Cameron Herold's TED talk (March 2010):

Questions for Students (pick one):
1. In the article in The Economist, WWII is presented as a pivot point. Before WWII entrepreneurship was a major force in Europe. What changed? Why? How could it be changed back? Show off as many facts as you can.

2. What did you think of Cameron Herold's talk? Take a stab at an entrepreneurial proposal - that you haven't done yet.

Monday, June 4, 2012

Greek austerity

The above clip (at the 7 minutes 35 second mark) features a debate between Paul Krugman (Nobel laureate) and George Papaconstantinou (Greek Minister of Finance).   Paul Krugman thinks Greece should leave the euro area in order to have a chance to grow.  Krugman acknowledges that leaving the euro would be very destructive for Greece, far worse than the current austerity package. Nonetheless he advocates exiting the euro so that Greece has a chance to grow (presumably by devaluing currency). George Papaconstantinou argues that Greece is better off staying in the euro area, assuming Greece can negotiate a growth package from the rest of the euro area. This is clearly a big assumption.

If the countries in the euro area could miraculously and quickly agree to trade sovereignty for financial security ( The Economist (5-26-2012)), perhaps a deal could be brokered in which Greece adopts more market oriented policies in exchange for a generous growth package. Greece would have to overcome political resistance to later retirement, fewer vacation days, smaller pensions, less guaranteed employment, and a smaller government sector.

Both Krugman and Papconstantinou agree that austerity alone (cutting government spending and raising taxes) is not going to get Greece growing.

The following Forbes article notes the parallels between the European Union and the early United States. Warren notes that in the early 1800's many states were unable to pay their debts and defaulted. As a result the U.S. economy plunged into severe recessions.  The U.S. relied on high import tariffs to promote domestic industry and to recover from the state debt crises.  Warren ponders whether high import tariffs could help Greece stay in the euro area.

Forbes (6-4-2012) "Looking For Euro-Saving Ideas In U.S. History" by Randy Warren

There is at least one major drawback with this suggestion. The high tariff strategy would require rewriting EU treaties and would likely lead to disputes with other members of the World Trade Organization (WTO).

Alternatives to high import tariffs that would also result in import substitution industrialization (ISI) include: cheap currency (i.e. exit euro and devalue the drachma), quotas on imports, and government investment in infant industries. The case for fiscal and regulatory ISI policies has grown less compelling. India started dismantling its ISI policies in the 1980's, leading to rapid growth. Many countries in Latin America have also abandoned ISI, at the urging of the IMF.  Corruption and inefficiency plague this strategy.

 If European politicians fail to act decisively and very soon, the cheap currency option grows more likely.

Tuesday, April 17, 2012

Why do U.S. politicians want to see the yuan appreciate and what does that mean?

Many U.S. politicians have accused China of keeping its exchange rate artificially low. These politicians are primarily concerned about U.S. jobs.  All else equal, if goods made in China became more expensive (due to currency appreciation) people in the U.S. would buy more domestically produced goods and fewer Chinese goods.  Factories in the U.S. then might hire more U.S. workers.

So that you can impress interviewers, make sure you use the right vocabulary when discussing Chinese currency. The official name of the Chinese currency is the Renminbi (RMB) and a unit of this currency is the yuan. Yuan should be pronounced something like U.N. (for an audio clip go here NPR audio clip). To further complicate matters, the symbol for the RMB is ¥ and it is quoted on currency exchanges as CNY, short for Chinese Yuan. 

This 3 minute news clip was made 6 months ago, when the U.S. Senate was considering a bill to punish China for an undervalued currency. Despite sympathy from President Obama, the bill did not make its way through the House and did not become law.  China warned that passage of the bill could cause a trade war.

In the intervening months, China has let its currency appreciate. China just recently announced that it would let its exchange rate fluctuate in a wider band, which potentially could lead to more appreciation.  See this WSJ article for details.
WSJ (4-16-2012) China Loosens Grip on Yuan by LINGLING WEI

In this recent 3 minute clip from the English language news channel of China Central Television (CCTV News), two Chinese economists argue that the main problem for U.S. workers is not an undervalued Chinese currency, but rather factory automation.

This screenshot was taken at on 4/16/2012. This table shows how many CNY (ChineseYuan) it would take to buy a unit of various foreign currencies (Other/CNY).  To learn how to read this table consider the USD/CNY exchange rate listed as 6.3199. This means $1 U.S. dollar costs 6.3199 Chinese yuan. Equivalently, the CNY/USD exchange rate = 1/6.3199 = .15823. This means that 1 Chinese yuan costs almost 16 cents in U.S. currency.

Self-quiz for students:
For extra motivation, questions like these will appear on your final exam.  Assume  1 yuan = .15823 USD or  equivalently, 1 USD =   6.3199 yuan.
1. What is the price in dollars of a coffee pot that costs 100 yuan?
2. What is the price in yuan of a coffee pot that costs $20?
3. What would be the new CNY/USD exchange rate if the RMB appreciates by 10%?
4. What would be the corresponding USD/CNY exchange rate?
5. After the RMB appreciates, what would be the new price in dollars of a coffee pot that costs 100 yuan?
6. After the RMB appreciates, what would be the new price in yuan of a coffee pot that costs $20?

          Post  Questions:
1. How might appreciation of the RMB affect employment for coffee makers in the U.S.?
2. How might appreciation of the RMB affect the trade balance, GDP, and unemployment rate of the U.S. (all else equal)?
3. Whose views on the CNY/USD exchange rate do you think are more valid, the U.S politicians or the Chinese economists?

Self-quiz key:
1. $15.82
2. 126.40 yuan
3. .174053
4.  5.7454
5. $17.41
6. 114.91 yuan 

Friday, April 13, 2012

TED Talks

In class, I was surprised to learn that some of you have never seen a TED talk. This week your assignment is to watch one and report back. In a TED talk, a major innovator in science, education, art, health, or anything creative is asked to talk. TED stands for Technology, Education and Design. It started out in 1984 as a conference in California and has grown to include projects, prizes, and the speaker series.

This is one is a good TED intro. It draws on several other recent TED talks.

My son's favorite:

Here are some of my other favorites:

Bill Gates on malaria:

Sugata Mitra on a education

Salman Khan on online learning

To find your own favorite TED talk, go here:

Wednesday, March 21, 2012

Bernanke's college lecture series

link to 1rst lecture
link to 2nd lecture

The PowerPoints for these lectures will eventually be available at the following link:

Link to Fed Board of Governors' web page on lecture series

A brief summary of this lecture can be found in the following articles (and many others)

WSJ (2-21-2012 Bernanke Goes Back to School by JON HILSENRATH and KRISTINA PETERSON


Washington Post (3-21-2012) Bernanke revisits college delivering first of 4 lectures on Federal Reserve at GW University

Despite having read quite a few books and articles about the Fed, I still learned something from Bernanke's lecture. Bernanke, after all, was an academic master of the economic history of the Great Depression and the Fed before assuming his current role as Chairman of the Fed. One tidbit that I learned was why Walter Bagehot (1826-1877) merits having a standing column in the Economist magazine named after him. In addition to an early being editor-in-chief of the magazine, Bagehot was one of the first to analyze and write about the benefits of a central bank. I also finally learned how to pronounce his name; it sounds like badge-it.

Class, your challenges are:
1. list the advantages of a central bank outlined by Bagehot.
2. list three reasons Bernanke is not in favor of a gold standard. He gave MANY reasons.

What do you think about the gold standard, and why do you think it periodically pops up in politicians' wish lists?

Friday, March 16, 2012

The case for corporate tax reform
In this video clip, Dr Madsen Pirie, President of the Adam Smith Institute, is attempting to prove that economics is fun. Even more challenging, he is trying to make the economics of taxation fun.

In addition to telling stories about the lengths to which people will go to avoid paying taxes, he summarizes Adam Smith's advice to the government official trying to design a good tax:

1. keep collection costs low
2. publicly announce rates and collection methods (minimize corruption)
3. make paying taxes convenient for tax payor (ex. taxes due on payday)
4. levy taxes according to ability to pay (that's where the money is)

Dr. Pirie suggests a 5th rule is needed if productive entities are mobile.

5. the tax should not kill the goose that lays the golden egg
 (ex. corporate tax rates should not be so high that corporations move abroad)

In the following WSJ opinion piece, Hassett and Hubbard discuss the nuts and bolts of various corporate tax reform proposals currently floating around Washington. They also emphasize that we can no longer consider the U.S. a closed economy, and that we must recognize that corporations are mobile. They discuss several recent studies that suggest the true burden of high corporate tax rates falls on workers, who garner lower wages and/or lose their jobs.

Thursday, March 1, 2012

Dow Jones Industrial Average Peaks Again
Short 2 min summary - one of many great intro videos from Investopedia

WSJ News Hub discussion on the importance of the Dow reaching 13,000 points again:

As in the videos, this post from correspondents from the Economist, , argues that there is nothing magical about a nice round number like 13,000.  It also lets finance newbies master a few facts to impress an interviewer:

1. The Dow Jones Industrial Average (DJIA) only tracks the stock prices of 30 stocks (which change over time).

2. The DJIA uses a silly method to compute the average stock price (with no weighting for market value), just to be consistent with how it was first computed back in the 1890's by WSJ editor Charles Dow and his business associate Edward Jones. To keep the index steady over time in spite of stock splits, dividends, and changes in composition, the DJIA is not simply the average of 30 stock prices.

3. The limitations of the DJIA aren't really important. The DJIA closely follows the trends of better stock price indexes (like the S&P 500). However the DJIA is widely followed by those who don't know as much as you do now, and therefore has a big impact on market psychology.

A quick search of the BLS website reveals that the CPI (all urban consumers, all goods) was 208.936 in October 2007 and 226.665 in January 2012. Using these CPI values to adjust for inflation, the Dow would have had to reach 15,366.44 = 14164.53x(226.665/208.936) by the end of Jan 2012 to be equivalent to 14164.53 in Oct 2007. As nice and round as 13,000 sounds, the market still has a long way to go to reach its previous heights.

In case you are curious, the current 30 companies represented in the DJIA are listed below. Note that many of these companies, such as Disney and Microsoft, are no longer heavy industrial companies.

Tuesday, February 21, 2012

The long-term unemployed and high school dropouts

This 60 Minutes episode focused on the "carnage" caused by long-term unemployment. It highlights one program, Platform to Employment, that has successfully helped the long-term unemployed reenter the workforce. This program starts by revamping its unemployed clients' confidence, and then finding internships for these mid-career professionals. It also helps them navigate discrimination against the long-term unemployed.;contentAux

Bernanke's 9-30-2011 speech at the Cleveland Fed is mentioned in the 60 minutes clip. In that speech, Bernanke notes that 45% of the unemployed have been unemployed for 6 months or longer, which is unprecedented in the post-WW II era. The long-term unemployed risk losing their skills, connections, and attachment to the workforce -  to the detriment of the whole economy  (click here to see 53 second excerpt from Bernanke speech).

The long-term unemployed are not the only group suffering especially hard; people with less education face much higher unemployment rates, as well as lower earnings. The following graph can be found at

For more on the challenges facing those without a high school degree see, WSJ (2-21-2012) "As Job Market Mends, Dropouts Fall Behind" by CLARE ANSBERRY.  You can find the numbers reported in this WSJ article in the Bureau of Labor Statistics' (BLS) archives of Employment Situation News Releases,

It should come as no surprise that high school dropouts are also more likely to stay unemployed a long time. According to a 2010 article in the Monthly Labor Review (,  in 2009 persons without a high school diploma accounted for only 11% of the labor force, but they accounted for 28.6% of the unemployed and 19% of the long-term unemployed (unemployed at least 27 weeks).

Monday, February 20, 2012

Productivity and U.S. Competitiveness

The link between competitiveness, productivity and regulation gets special focus in this issue of the Economist. For those of you who are new to the reading the Economist, Schumpeter is a weekly column about markets. It is named after an economist, Joseph Schumpeter, who championed the "creative destruction" of markets.

Economist (2-18-2012) United States' economy Over-regulated America

Economist (2-18-2012) Schumpeter: This times it's serious

In this interview (6 minutes), the Chief Economist for the Conference Board, Bart van Ark, explains how productivity is measured ( = real GDP/hours) and worrisome signs for the future. With real GDP growing slowly and hours finally increasing as more workers are hired, productivity growth is slowing. Productivity is pro-cyclical - it grows when real GDP grows.

Productivity in developed nations is still 4 times higher than in emerging nations. While productivity is growing faster in developing nation as they borrow technology, they still have along way to go to catch up.

Saturday, February 18, 2012

Reagan and Thatcher

To gain insight on the partnership of these world leaders, watch this fascinating 5 minute segment of interviews with each. Interestingly, Reagan saw her as a potential Prime Minister early in her career.

An opinion piece in this Friday's WSJ called for a new European revival of Reagan and Thatcher's free market approach.

WSJ (2-17-2012) "Europe's Supply-Side Revolution" by By DONALD L. LUSKIN AND LORCAN ROCHE KELLY

Luskin and Kelly suggest European governments should focus more on growing out of the crisis, i.e. focus on the supply side of the economy.

"In the 1970s, conventional wisdom held that the U.S. couldn't compete against Japan and, yes, Europe. But fear clarified our minds, and the supply-side revolution we dared to undertake in the 1980s restored America's growth and competitiveness. Conventional wisdom today holds that Europe is doomed. To the contrary. It is, bravely, starting its own supply-side revolution."

Wednesday, February 15, 2012

How much of a role should the government play in the national economy?

This special report in the Economist magazine addresses state capitalism, with a focus on China, Russia, and Brazil.

Economist (1-21-2012) "The Visible Hand"


List and discuss three pros and cons of state capitalism, a system in which the government plays a very large and direct role in the economy. State capitalism is on the rise in many countries, and some countries, such as China, claim it explains their recent success.

Is this a flash in the pan? What hazards are lurking in the future for this approach?

Monday, February 6, 2012

NYT (2-7-2012) "Data show Greece's debt ratio growing as economy-shrinks" by DAVID JOLLY

By treaty, countries in the euro zone are supposed to keep their debt/GDP ratio under 60%. Greece has never met that target since it joined the euro zone. In 2001, it had a debt/GDP ratio of around 100% (debt =  GDP). Due to raising debt and shrinking GDP, its debt/GDP ratio now is close to 160% (debt > GDP).  According to the CIA World Factbook, Greece's GDP shrunk 2% in 2009, 4% in 2010, and 5% in 2011.

To get its debt ratio back down to 60%, Greece will need to 
1. decrease debt (default)
2. increase GDP

Cutting current government spending to stop adding new debt ("austerity") has not helped much, because it has also negatively affected GDP.  If the EU really wanted to stave off default, it could  promote (and fund) new policies that increase Greece's GDP. Labor market reforms would be a promising area to start. 

Really good news clip about Greece's debt to GDP numbers

"As recently as Jan. 23, creditors wanted an average coupon of about 4.25 percent, two people familiar with the talks said then. That offer equated to a loss of about 69 percent on the net present value of Greek debt." from Bloomsberg (1-30-2012) "EU stumbles over Greek aid package as Merkel signals debt agreement delay" by By James G. Neuger and Jurjen van de Pol

Tuesday, January 31, 2012

The lasting impact of Ben Bernanke

WSJ (1-30-2012) "Bernanke's Imprint on Fed Not Easily Erased" by Jon Hilsenrath

This WSJ articles highlights the Fed chairman's initiatives to increase consensus building on the FOMC (the committee that makes monetary policy) and transparency of FOMC policy making.

Working conditions in China, what is fair?

1 minute video from Aug 2010

NYT (1-26-2012) Apples ipad and the human costs for workers in China by By Charles Duhigg and David Barboza

The above article describes working conditions in an ipad factory in China. The question for today is "How much should U.S. companies lower standards on working conditions and environmental protection in their factories abroad?"

Some viewpoints to consider,
1. At the turn of the 20th century, working conditions in factories in the U.S. were not so different from those described in the article. Should this phase be considered a right of passage that countries must  slog through on the way to an advanced economy?

2. Some companies are already bypassing China for cheaper labor in nearby places like Vietnam and Malaysia. In another 100 or so years, when all countries have reached a minimum level of wealth, perhaps this problem will resolve itself.

Another 3 minute video from June 2010 (embedding disabled):

Tuesday, January 24, 2012

Income Inequality

Poll: The Rich Just Know the Right People 1/12/2012

NYT ( 1-14-2012) Among the Wealthiest 1 Percent, Many Variations By Shaila Dewan and Robert Gebeloff

Some of my favorite points from this article are:

1. The national cutoff for a household to be in the top 1% of incomes is $380,000.
This cutoff varies greatly across cities. To be in the top 1% in New York City, a household must earn  at least $790,000. To be in the top 1% in Clarksville, TN, a household need only earn $200,000.

Needless to say the cost of living is much higher in New York City. Using CNN's cost of living adjustment tool for 2010 (see link below), $790,000 in Manhattan would buy the same amount of stuff as $339,510 in Clarksville, TN. This shows that the top 1% in Manhattan really are richer than the top 1% in Clarksville, even after controlling for the higher cost of living.

2. A majority of the 1% housholds report no inherited money.  However, as shown in the video, most do start out with significant advantages - including educated parents.

3. Education really does matter. In 27% of the 1% households, both spouses hold advanced degrees.

What 3 things did you find to be the most interesting or surprising in the article and video?

Sunday, January 22, 2012

iphones and jobs in China

Commerical about new iphone glass (less than 1 minute)

NYT (1-22-2012) Apple, America and a squeezed middle class by By Charles Duhigg and Keith Bradsher

An article in last Sunday's New York Times reveals how iphones are produced, and why jobs are going overseas. While everybody knows wages are lower in China, you might not be aware of two other  factors that are even more important: 1. Chinese workers are willing to live in dorms near the factories, to work longer hours, and to work overtime on short notice, and 2. costs are lowered dramatically by locating all production processes near each other.

This article also introduces the concept of the job multiplier. One new manufacturing job generates many other jobs (tools, inputs, equipment, infrastructure, management, energy, food services etc.), while one new service job does not generate nearly as many others jobs (management, food services etc.) The video link provided below does an even better job of making this point than the article .

Interactive video (5 minutes) on loss of jobs in the middle

Does anyone have any ideas on how the U.S. can get its job creation mojo back?

Wednesday, January 18, 2012

History of Corporations and Private Equity

An article in today's WSJ emphasizes that although private equity firms are recent creations, the work of private equity firms is "as old as capitalism itself".  The first private equity firms may have been created as recently as 1946, depending on your definition.

WSJ (1-18-2012) A Short (Sometimes Profitable) History of Private Equity by John Steele Gordon

For a primer on the history of corporations watch the following video (15 minutes - very well done):

Friday, January 13, 2012

Private Equity: Capitalism's savior or devil?

In light of Mitt Romney's success in the Republican primaries, and his former career running the private equity firm Bain Capital, private equity is again a hot topic. A private equity firm is a firm that buys equity in faltering firms and attempts to return them to profitability and then usually sells them. These efforts often involve layoffs and reductions in pensions and benefits. The critics of private equity include Romney's opponents and Warren Buffett.

The current top ranked video on WSJ currently shows a discussion of Warren Buffett's position (5 minutes).  Towards the end of the clip, valid complaints about private equity firms are raised. These mainly involve implementation and not the concept in general. The case is made that we need "business undertakers".

Jonathan Macey (Yale professor) wrote an article in today's WSJ opinion page that comes to the defense of private equity.  Macey relies on the classic argument first provided by the economist Joseph Schumpeter (8 February 1883 – 8 January 1950).  Schumpeter argued that "creative destruction" is necessary for economic growth. As firms get older, unwieldy, and unproductive they need to fail or be restructured. Economic super heroes, a.k.a. entrepreneurs or private equity, come to the rescue and, phoenix like, resurrect healthy firms from the ashes. 

WSJ (1-13-2012) How Private Equity Works by Jonathan Macey

Click on the video tab to see the associated video (8 minutes)

Hindsight is 20/20

Todays WSJ features an article highlighting how badly the Fed can read crystal balls. For my new macro students, the Fed is the entity in charge of monetary policy in the U.S.. Some of the main duties of the Fed are to set targets for a key interest rate (what banks charge each other for overnight lending) and to regulate some financial institutions.

WSJ (1-13-2012) Little Alarm Shown at Fed At Dawn of Housing Bust by Jon Hilsenrath, Luca Di Leo and Michael S. Derby

The Fed was certainly not alone in being blind to the coming crisis. They were part of a "mass delusion" according to Michael Lewis, author of  Big Short: Inside the Doomsday Machine. Lewis has written many other bestsellers, including Moneyball.  In the Big Short, Lewis focused not on Bernanke (chairman of the Fed) or CEOs of investment banks. He concluded these people had "no clue what was going on". Instead he focused on the "handful of characters who had seen it coming".

One of 10-20 or so investors in the world who saw it coming was Michael Burry, a doctor turned hedge fund investor.  Burry foresaw problems in the sub-prime markets by reading prospectuses of mortgage securities.

To learn more about who figured out what and when, watch this 15 minute video clip by 60 minutes (March 2010). Lewis concluded the main problem was improperly designed incentives - the short term focus of the bonus system for employees in the financial sector was the ultimate cause of the crisis.

March 2010