Business & Economics: January 2004 Archives

My brother sent me an article about this year's World Economic Forum, and here are some quotes from some attendees that interest me.

"I do not see much hope in the political domain, but a lot of hope in the technological domain," said [former Israeli Prime Minister] Shimon Peres....

This seems to be a common meme, but it's entirely baseless. Technology itself is a tool, and politics will always determine how that tool is wielded. No matter how advanced your hammer, if your building plans are flawed your house will turn our poorly. Likewise, technology alone does nothing to guarantee the future prosperity of mankind. Only those who worship technology as a religion can think otherwise.

Peres was one of many speakers who made the very Davosian point that in a world of six billion people, 80 percent of the economic activity is coming from a mere one billion, while another billion lives on less than $1 a day.

That's a meaningless statistic. There certainly are desperately poor people in the world, but $1 can buy a lot more in Zimbabwe than it can in America.

And there was energetic interest among many in Davos about using technology to improve the lot of the poor.

The thing holding poor nations down isn't a lack of technology, it's a lack of democratic institutions. As I said above, technology won't save people if they're still oppressed by politics. Actually, there is one technological advance that could be of assistance: guns. Give every person in the world an M16 and a thousand rounds and I bet things would change pretty quick.

Giving poor nations money and technology is like giving them fish, whereas giving them a democratic government is like teaching them to fish.

Another prediction: "Life expectancy will go to 150 in the next half-century."

I think that's conservative. We'll see.

There is some attention paid to the political aspect of technology, but unsurprisingly it takes the wrong tack.

Scary though it sounds, over time we will have a hard time keeping the most powerful weapons and tools out of the hands of anyone. We have to somehow create a world where that is not a threat. ...

Microsoft chief Bill Gates spoke privately to the press late Friday night, and he was full of notable thoughts that were generally as optimistic as those of Peres. ...

He also made a statement of the kind one doesn't hear often enough from global leaders: "If you ask what's the greatest divide in terms of rights and equities," he said, "it's national borders. That doesn't seem to bother people as much as I think it will."

The reason we need national borders seems blatantly obvious to me, but let me explain anyway. Despite Mr. Gate's praise for the "breakthtaking" economic situation in China ("it's capitalism at full speed"), that nation is still a Communist dictatorship, and its people are still horribly repressed. As long as the Communists want to maintain power (i.e., forever) they're never going to open their borders or allow truly free trade. Likewise, America can't afford to open its borders because the oppression in the rest of the world keeps most people poor and uneducated and unable to contribute to our modern society except as manual labor (and thugs). Until there's economic and political similarity -- even if not equality -- opening borders would be suicide.

What Gates and many at Davos realize is that it's not only charity to help the world's poor improve their lot. It's an issue of security. As Peres put it at breakfast, "Terror is the war of poor people, and suicide bombs are the weapons of poor people."

Absurd. Terror is the war of Islamic fascists. The September 11th hijackers all came from wealthy families. Most Palestinian bombers are poor, but then almost everyone in Palestine is poor because of Arafat and his cronies. Further, there are plenty of poor people in the world who don't go around committing terrorism. Basically, the only terrorists are Islamic fascists. (Some people will then point out the Irish Republican Army, but they seem to have quit, and they aren't poor; name another non-Islamofascist terrorist group.)

And then the World Economic Forum turned to more serious issues, like fighting spam.

It looks like the grocery workers' strike is ending with a wimper instead of a bang.

The grocery workers say they can't make ends meet on $20 to $25 a day in strike pay. That's an 84% drop in income since the work stoppage started. Some union members have crossed picket lines and returned to their own jobs. Others have taken part time or full time work elsewhere.

One checker says that their strike pay was slashed in half after Christmas. Many lost their health benefits at the start of the new year. Those two developments forced people to give up and move on with their lives.

We may hear more about this story when the union and the stores reach an official agreement, but the strike's really been over for weeks.

Joshua Livestro reports that the Swiss canton of Schaffhausen has instituted a regressive tax structure in which marginal tax rates go down as residents earn more money -- they pay less in taxes on each dollar earned than they paid on the one before it.

I think it's a great experiment, and the canton's government is hoping that rich folks will pour in in response to the new system. That sounds like a reasonable expectation. The real question is whether or not such a system will increase net tax revenue across the entire country, or simply move revenue around. Either way, assuming the Swiss have an American-like competitive state/canton government structure, Schaffhausen will benefit and others may soon follow suit. I've written before that I don't want to maximize government revenue, but I am in favor of tax cuts even if they do end up giving the government more money. Hopefully we'll see positive results from Schaffhausen's experiment in a few years.

Mr. Livestro also makes the argument that regressive tax systems are more moral than progressive systems because they encourage people to be productive.

The morality of it is easy enough to explain. It is after all fairly widely accepted that working hard and saving for a rainy day both constitute morally good behavior. Any tax system that claims to have its basis in morality would therefore have to encourage precisely those activities. Whatever else they might like to say about it, the taxaholics would have to admit that the Schaffhausen income tax does exactly that -- and does it in spades. Who wouldn't want to go out and work, work, work, if every extra Swiss Franc earned will be taxed less than the previous one?

That makes sense, and the morality he espouses is one I agree with, but I still don't think the government has any business using the tax system to coerce people. I think that a flat income tax or a consumption tax would be best, and least intrusive. I don't think the government or the public should how much money I make or treat me any differently because of it.

As Bill Hobbs is quick to point out, employment is increasing even though payroll surveys aren't showing it yet -- a lot of people are reporting that they're working for themselves, and those jobs won't show up on surveys of corporate employers. That's the good news.

The bad news -- if you believe the Los Angeles Times, which I'm nervous about doing -- is that many of the jobs being created are in low-pay sectors of the economy.

California is being hit hard by a recent nationwide shift of jobs from high-paying industries to lower-paying sectors such as retail sales and tourism, a trend that doesn't bode well for the economy, according to a report released Wednesday.

The report by the Washington-based Economic Policy Institute paints a picture of a state and national economy in which employment growth is being driven largely by low-skilled service jobs.

In Los Angeles, according to the preliminary results of another study, the shift is particularly pronounced because so many new jobs are in the "underground" cash economy of laborers who aren't counted in government statistics. These very low-wage workers — people who do yardwork or clean houses or wash dishes — might account for as much as 15% of all jobs in the metropolitan area, said Dan Flaming of the Economic Round Table, which is conducting its study for the city.

This sounds like exactly the types of jobs Mr. Hobbs is talking about, but they aren't glamorous work-from-home/telecommute jobs, they're manual labor.

Chapman said California lost 127,000 manufacturing jobs and 55,000 jobs in the information sector from November 2001 to November 2003. Meanwhile, the leisure and hospitality sector gained 48,000 jobs, retail trade grew by 32,000 and health and education, which includes day-care teachers and low-wage hospital crews, grew by 65,000.

Of course, there's another interpretation, which the Times generously provides:

Ron Bird, an economist with the Employment Policy Foundation, an employer-funded research group in Washington, offered a different assessment of the numbers. He divides job growth by broad categories of occupation — such as manager or production worker — instead of by sector, as the Economic Policy Institute did.

By his measure, Bird said, the growth appeared to favor higher-paying jobs. He said the highest growth was in office and administrative jobs and in installation, maintenance and repair jobs, both of which pay higher-than-average wages.

"The jobs where the growth was had higher average earnings," said Bird, whose analysis looked only at full-time jobs and did not break down the data by state. "It's a matter of looking at the glass as half empty or more than half full."

I'm not sure how these two perspectives can be reconciled, so it's hard to say what the truth is. Still, I don't doubt that California is having more problems than the rest of the country, what with our oppressive workers' compensation laws and high tax rates.

My brother passes along this bizarre/alarming New York Times article[Update: here it is in the IHT; the Times link costs money now.]about a French court ruling that a stock analyst who predicted an increase in the price of a particular company's stock owes the company money because her predicted increase wasn't as large as the company wanted it to be.

IN the fall of 2002, Morgan Stanley's luxury goods analyst, Claire Kent, issued a report saying that LVMH Moët Hennessy Louis Vuitton's financial results had been surprisingly good and predicting that the company's share price would rise 24 percent within 18 months.

The report became a crucial part of the evidence that persuaded a French court this week to order Morgan Stanley to pay LVMH at least 30 million euros, or $38 million.

How could that be? Ms. Kent's valuation models called for a higher stock price, but she reduced it by 10 percent because "management has destroyed value'' in the past.

Still, she forecast a big gain. But that essential fact was ignored. Since LVMH's market value was 27 billion euros, the judges found, "the discount of 10 percent recommended by Morgan Stanley represents 2.7 billion euros.''

The judgment for 30 million euros is only the beginning. The court appointed an examiner to recommend further damages and told him to determine what part of LVMH's spending from 1999 through 2002 - on everything from advertising to borrowing - was paid "to maintain its image and to thwart the denigration of which it was the victim because of the actions'' of Morgan Stanley.

[Insert grumbling about the idiotic French here.] Punishing financial analysts for negative predictions is totally absurd, and certainly going to do no good for France's ailing economy.

This should also serve as an example of why no sane person would ever want America to be a part of the International Criminal Court.

I got an email about City Journal's new winter issue, and a couple articles caught my eye. Both relate to my city-of-love, Los Angeles, so I figured I'd post them together.

The first is a piece by Heather Mac Donald, "The Illegal-Alien Crime Wave". I love her use of hyphens in the headline (if she wrote it herself; although she could have also hyphenated "Crime-Wave"; then again, you can over-use them; anyway...), and the article discusses a major problem in Southern California.

Some of the most violent criminals at large today are illegal aliens. Yet in cities where the crime these aliens commit is highest, the police cannot use the most obvious tool to apprehend them: their immigration status. In Los Angeles, for example, dozens of members of a ruthless Salvadoran prison gang have sneaked back into town after having been deported for such crimes as murder, assault with a deadly weapon, and drug trafficking. Police officers know who they are and know that their mere presence in the country is a felony. Yet should a cop arrest an illegal gangbanger for felonious reentry, it is he who will be treated as a criminal, for violating the LAPD’s rule against enforcing immigration law.

As Ms. Mac Donald notes, city prohibitions against local enforcement of federal immigration laws is the ultimate reflection of our nation's failed immigration controls. She has more details:

In Los Angeles, 95 percent of all outstanding warrants for homicide (which total 1,200 to 1,500) target illegal aliens. Up to two-thirds of all fugitive felony warrants (17,000) are for illegal aliens.

Ms. Mac Donald has a lot more, and I recommend reading the whole thing. There are two things she doesn't mention, however. First, how President Bush's recent policy proposal addresses the problems she discusses (if it does at all), and second how we can convince Mexico to extradite the hundreds of murderers who kill in the US and then flee across the border.

The next article is a bit lighter, "The Curse of the Creative Class" by Steven Malanga. He writes about cities implementing "hip" policies to lure younger, richer, more "creative" workers.

If you think these efforts represent some fringe of economic development, think again. All of these cities have been inspired by the theories of Richard Florida, a Carnegie Mellon professor whose notion that cities must become trendy, happening places in order to compete in the twenty-first-century economy is sweeping urban America. In his popular book The Rise of the Creative Class, which just appeared in paperback after going through multiple hardcover editions, Florida argues that cities that attract gays, bohemians, and ethnic minorities are the new economic powerhouses because they are also the places where creative workers—the kind who start and staff innovative, fast-growing companies—want to live. To lure this workforce, Florida argues, cities must dispense with stuffy old theories of economic development—like the notion that low taxes are what draw in companies and workers—and instead must spend heavily on cultural amenities and pursue progressive social legislation. ...

While much of The Creative Class is little more than Florida’s depiction of the Internet bubble’s go-go culture, the last third of the book offers urban policymakers a seemingly dazzling new economic-development agenda derived from these observations. To capitalize on the hot new economy, Florida tells policymakers, they must reach out to the creative class, whose interests are different from those of the buttoned-down families that cities traditionally try to attract through good schools and low taxes. The new creative class craves a vibrant nightlife, outdoor sports facilities, and neighborhoods vibrant with street performers, unique shops, and chic cafés. In Florida’s universe, the number of local bands on the pop charts becomes more important to the economy than tax codes. “It is hard to think of a major high-tech region that doesn’t have a distinct audio identity,” Florida writes, sounding more like a rock critic than an economics prof. Creative workers want to live and work in “authentic” neighborhoods of historic buildings, not areas that are “full of chain stores, chain restaurants and nightclubs,” he asserts. Accordingly, cities should stop approving expansive new condo developments on their outer boundaries and instead focus on retooling former warehouse and factory districts.

If this sounds like a bunch of nonsense, that's because it is. Mr. Malanga goes on to show (with actual numbers) that many of the cities Dr. Florida lauds as creative meccas are, in fact, not performing exceptionally well economically, and are actually doing worse than the cities he rates least creative.

... Yet since 1993, cities that score the best on Florida’s analysis have actually grown no faster than the overall U.S. jobs economy ... Led by big percentage gains in Las Vegas (the fastest-growing local economy in the nation) as well as in Oklahoma City and Memphis, Florida’s ten least creative cities turn out to be jobs powerhouses, adding more than 19 percent to their job totals since 1993 ... Florida’s ten most creative mid-sized cities are even less impressive economic engines. Since 1993, these cities, which include such underperformers as Albany, New York, and Dayton, Ohio, have increased their job totals by about 16 percent ... Jobs data going back 20 years, to 1983, show that Florida’s top ten cities as a group actually do worse, lagging behind the national economy by several percentage points, while his so-called least creative cities continue to look like jobs powerhouses, expanding 60 percent faster than his most creative cities during that same period.

And so forth. Read the whole thing before commenting on other factors, please. What is obvious to me is that the artsy, diverse, culturally vibrant atmosphere Florida advocates is an effect of wealth, not a cause.

Phil speculates on the future of wealth, and says that with sufficiently advanced technology (like nano-assemblers and perfect virtual reality) the concept of wealth will cease to exist.

Two (hypothetical) future developments promise to flatten the delta virtually out of existence. One of these is the universal assembler (third item), which uses nanotechnology to allow anybody to make — literally — anything they want, including their own univeral assembler. In addition to closing the gap between the rich and the average, this device will eliminate any remaining gap between the average and the poor. Poverty won't exist any more.

The other development is full-immersion virtual reality, which will enable anyone to experience anything. Think of that scene in the first Matrix where they arm themselves by selecting weapons from an inexhaustable warehouse containing every firearm ever conceived. Now map that capability over to things like cars and vacations and (yes) romantic partners.

Who's richer, a guy with one real Porsche or a guy with a virtual collection of every Porsche model ever built? Assuming the VR is flawless and the experience of driving the virtual cars is identical to the real thing, I'm going to say the second guy. If this capability is ever realized, the day people generally agree with my answer is the day the concept of "wealth" ceases to exist.

He and Glenn Reynolds also say that (democratic!) political influence is getting harder to buy, considering that Americans watch less TV and are influenced and enthused more by websites than by political ads. That's all true... but there will always be the power of physical force, and there will always be people with more physical power than others. Even if nano-assemblers give us all armies of wicked wizard robots, someone's assembler is going to be faster than yours -- or sitting on a more powerful black-hole-engine -- and they're going to be able to kill you and smash your virtual Porsches. And then there will always be the people who are more convincing than you are, and able to gather armies and followers and whatnot.

Even aside from raw physical power, forms of wealth may change but the concepts of wealth and possession are built into human nature and won't ever disappear. Look at the kinds of distinctions we make between objects of varying levels of wealth right now: my hypothetical house is more expensive than yours because I have copper plumbing and live in a school district with 5% higher test scores! To a person 100 years ago, those value differences would be meaningless relative to the vast wealth differential between his time and ours. The man from the past would see both you and I as fantastically rich -- and that's how Phil is looking towards the future -- whereas we may see clear and important differences between our hypothetical houses. In the future, wealth distinctions will probably become more subtle (my Space Bugatti has seventeen cupholders and was assembled from the core of a neutron star, you plebian!), but they're never going to go away.

President Bush has released some details of his proposed immigration reform package (here's my reaction to the initial announcement), and maybe I'm obtuse but I don't see how these reforms would be any different than current work-visa programs. Except, of course, that currently-illegal aliens would be able to apply, whereas they can't apply for visas.

I'm not sure how much of an effect these changes would even have (which is good enough reason to oppose them -- pointless laws are bad). Illegal aliens who register would then be subject to deportation after a few years, and we'd know they're here, so how many do you really think will sign up?

One of the biggest flaws I can see is that the system would require employers to "show no Americans wanted the jobs being applied for" -- this requirement belies a staggering ignorance of basic economics. Americans will do any job, for the right price. If no one wants a job, that means you aren't offering enough money. This new rule sounds like it would allow companies to offer jobs for unrealistically low wages, and then import workers from other countries to fill the purposefully vacant positions.

Foreigners would obviously leap at the opportunity to come to America legally, no matter what job they're offered or what the pay is. No nuclear engineers are willing to work for minimum wage? Just get on the phone with India or Pakistan and bring 'em over by the boatload.

Mr. Bowen at No Watermelons Allowed has a nifty post up about private-sector standards, specifically mentioning one company he used to work for.

I've written before that some non-zero level of regulation is beneficial to society -- and I think that's true -- but much of the regulatory burden imposed by the government could be privatized and handled by companies such as ASTM International.

What's with ASTM, anyway? It is the acronym for the organization's original name, the American Society for Testing and Materials. Libertarians should love these guys, because they implement voluntary standards for materials that can be adopted in contracts and laws. The standards themselves are created primarily by subject matter exports who are familiar with the state of the art, not a pack of bureaucrats whose major consideration is self-perpetuation.

So what do they provide standards for? Just about anything. Soils for instance - wouldn't you like to know if your house is likely to go sliding off a cliff? ASTM has a test for the so-called "liquid limit" of soils, which can be used by civil engineers to measure soil stability.

And so forth. Companies could offer standards and testing at competitive prices, and then customers could listen to their recommendations and make their own decisions. Insurance companies could underwrite projects based on the evaluations of the standards companies, and everyone involved would have an economic interest in developing adequate standards. Unlike government standards, it would be easy to pin the blame when things don't turn out well. People could be fired, heads could roll, and reimbursements could be made from private funds. If criminal negligence was involved, people could be jailed; try sending a failed civil servant to jail when they screw up!

Standards companies would build reputations, giving weight to their seals of approval. Their business would be directly tied to the success of their standards, and their insurance company clients would have a great incentive to minimize costly disasters. The only required government involvement would be ensuring that the companies provide truthful and accurate information to their customers.

Ravenwood is quick to cut the RIAA off at the pass, anticipating that the music organization may attribute recently rising sales to their legal campaign against file traders. As many have pointed out in the past, music sales fell along with sales of other merchandise over the past few years, and so it shouldn't be a surprise that as the economy improves music sales are going up.

Aside from piracy, Ravenwood points out one possible alternative explanation for weak music sales:

The Big Easy Movie on DVD -- $5.99
The Big Easy Soundtrack on CD -- $15.99