Monday, January 20, 2020

End of central banking as we have known it?

Greg Ip has a very nice article on the emerging world of constrained central banking and monetary policy.
Since World War II, every recovery was ushered in with lower rates as the Fed moved to stimulate growth. Every recession was preceded by higher interest rates as the Fed sought to contain inflation. But with interest rates now stuck around zero, central banks are left without their principal lever over the business cycle... The Fed typically cuts short-term interest rates by 5 percentage points in a recession... yet that is impossible now with rates below 2%. Workers, companies, investors and politicians might need to prepare for a world where the business cycle rises and falls largely without the influence of central banks... In November, Fed Chairman Jerome Powell warned Congress that “the new normal now is lower interest rates, lower inflation, probably lower growth…all over the world.”... Central banks are calling on elected officials to employ taxes, spending and deficits to combat recessions. “It’s high time I think for fiscal policy to take charge,” Mario Draghi said in September, shortly before stepping down as ECB president.
This description of the causes of business cycles,
The causes of business cycles were diverse, Wesley Clair Mitchell, an NBER founder, wrote in 1927. They included “the weather, the uncertainty which beclouds all plans that stretch into the future, the emotional aberrations to which business decisions are subject, the innovations characteristic of modern society, the ‘progressive’ character of our age, the magnitude of savings, the construction of industrial equipment, ‘generalized overproduction,’ the operations of banks, the flow of money incomes, and the conduct of business for profits.” He didn’t mention monetary or fiscal policy because, for all practical purposes, they didn’t exist. Until 1913, the U.S. hadn’t had a central bank, except for two brief periods. As for fiscal policy, U.S. federal spending and taxation were too small to matter.
On the nature of business cycles,
From 1854 to 1913, the U.S. had 15 recessions, according to the National Bureau of Economic Research, the academic research group that dates business cycles. Many were severe. One slump lasted from 1873 to 1879, and some historians argue it lingered until 1896... U.S. recessions were more frequent before the Federal Reserve took control over interest rates, using them as a lever to slow inflation or boost the economy.
On the origins of monetary and fiscal policies,
When central banks were established, they didn’t engage in monetary policy, which means adjusting interest rates to counter recession or rein in inflation. Many countries were on the gold standard which, by tying the supply of currency to the stock of gold, prevented sustained inflation. The Fed was established in 1913 to act as lender of last resort, supplying funds to commercial banks that were short of cash, not to manage inflation or unemployment. Not until the Great Depression did that change. In 1933, Franklin D. Roosevelt took the U.S. off the gold standard, giving the Fed much more discretion over interest rates and the money supply. Two years later, Congress centralized Fed decision-making in Washington, better equipping it to manage the broader economy... John Maynard Keynes... showed how individuals and firms, acting rationally, could together spend too little to keep everyone employed. In those circumstances, monetary or fiscal policy could generate more demand for a nation’s goods and services, Mr. Keynes argued... The Employment Act of 1946 committed the U.S. to the idea of using fiscal and monetary policy to maintain full employment and low rates of inflation.
This is a nice summary of the history of monetary policy,
The next quarter-century followed a textbook script. In postwar America, rapid economic growth and falling unemployment yielded rising inflation. The Fed responded by raising interest rates, reducing investment in buildings, equipment and houses. The economy would slide into recession, and inflation would fall. The Fed then lowered interest rates, investment would recover, and growth would resume. The textbook model began to fray at the end of the 1960s. Economists thought low interest rates and budget deficits could permanently reduce unemployment in exchange for only a modest uptick in inflation. Instead, inflation accelerated, and the Fed induced several deep and painful recessions to get it back down.


By the late 1990s, new challenges emerged. One was at first a good thing. Inflation became both low and unusually stable, barely fluctuating in response to economic growth and unemployment. The second change was less beneficial. Regular prices were more stable, but asset prices became less so. The recessions of 2001 and 2008 weren’t caused by the Fed raising rates. They resulted from a boom and bust in asset prices, first in technology stocks, then in house prices and mortgage debt.

After the last bust, the Fed kept interest rates near zero from 2008 until 2015. The central bank also purchased government bonds with newly created money—a new monetary tool dubbed quantitative easing—to push down long-term interest rates. Despite such aggressive stimulus, economic growth has been slow. Unemployment has fallen to a 50-year low, but inflation has persistently run below the 2% target the Fed set. A similar situation prevails abroad. In Japan, Britain and Germany, unemployment is down to historic lows. But despite short-and long-term interest rates near and sometimes below zero, growth has been muted. Since 2009, inflation has averaged 0.3% in Japan and 1.3% in the eurozone. The textbook model of monetary policy is barely operating, and economists have spent the last decade puzzling why.

This about the asymmetric nature of monetary policy effectiveness,
A central bank can always raise rates enough to slow growth in pursuit of lower inflation; but it can’t always lower them enough to ensure faster growth and higher inflation.
On why interest rates transmission in the US may be weaker today,
The economy has changed in ways that weaken its response to interest-rate cuts, they wrote. The economy’s two most interest-sensitive sectors, durable goods manufacturing, such as autos, and construction, fell to 10% of national output in 2018 from 20% in 1967, in part because America’s aging population spends less on houses and cars. Over the same period, financial and professional services, education and health care, all far less interest sensitive, grew to 47% from 26%... the response of employment to interest rates has fallen by a third, meaning it is harder for the Fed to generate a boom.

My one quibble with this narrative is on an issue of attribution. How do we know that monetary policy was responsible for all these trends being attributed to it? How much role did central banking play in ushering in the Great Moderation and sustaining it for nearly a quarter century? How do we separate monetary policy's impact from the numerous other forces that converged at the same time? How do we know that the quantitative easing monetary policy since the crisis has been more beneficial than costly? In fact, how do we refute the criticism that the extended monetary accommodation has entrenched the existing elite power, widened economic inequality, and ripened popular discontent? In other words, how can we claim that the positives associated with monetary policy are causation and not mere correlation?

Saturday, January 18, 2020

Weekend reading links

1. This summary of sectors of activity for India's start-ups indicates where the priorities lie.
Clearly copy-cat 'innovations'.

2. Very insightful graphic about the traffic challenge facing cities, this case Mumbai.
Quite apart from the doubling of vehicle numbers over the decade with pretty much the same road space, there is also the disproportionate share of road space occupied by private cars.

3. Fascinating profile from 2013 of Qassem Suleimani in the New Yorker by Dexter Filkins. Clearly, this is no ordinary "terrorist", not even ordinary general. Is this likely the most influential political assassination of our times?

4. MR points to the Economist on state capacity facts in some African countries,
Government revenues average about 17% of gdp in sub-Saharan Africa, according to the IMF. Nigeria has more than 300 times as many people as Luxembourg, but collects less tax. If Ethiopia shared out its tax revenues equally, each citizen would get around $80 a year. The government of the Democratic Republic of Congo is so penurious that its annual health spending per person could not buy a copy of this newspaper.
How much can these countries realistically collect?
The best estimates are that they lose revenues worth 2% of gdp through corporate-tax avoidance, of all kinds, and perhaps another 1-2% through individual wealth stashed offshore. The revenue forgone through tax expenditures is roughly 5% of gdp. It is neither feasible nor desirable to close all those gaps, so the realistic gains are smaller. Other measures, such as increasing compliance or expanding property taxes, could also add a few percentage points.
5. The landslide election victory in Taiwan of anti-mainland and formal independence advocating Democratic Progressive Party of incumbent President Tsai Ing-wen presents an intriguing challenge to China.

6. This WSJ summary of the residential real estate crisis in India is spot on,

The housing crisis reflects the sea change that has taken place in India’s financial industry amid liberalization efforts to meet the needs of a fast-growing economy. Two decades ago it was close to impossible for most people to get a mortgage, and red-tape made it difficult and unprofitable for developers to attempt large projects. Even the best-paid usually had to save until near retirement before they could afford a home.

When market liberalizations in the early 2000s made it easier to raise money on the stock market and with loans, as well as to obtain home mortgages, buyers and builders went overboard. Across the country there was an explosion in new apartment construction. Complexes with a total of five million apartments and villas were launched between 2009 and 2019 according to PropEquity, a real-estate research company. Real-estate loans at India’s banks, as well as at nonbanking finance companies known as shadow banks, quadrupled to more than $70 billion.

The developers, though, quickly ran into problems getting government clearances and finding enough workers to build their projects. Apartments that were supposed to be built in three years ended up taking five years or more. Then, funding for projects dried up, as banks and shadow banks cut back amid growing piles of soured real-estate and infrastructure loans. This forced more delays and even the mothballing of many projects. More than 450,000 apartments have been delayed for more than three years, according to a recent government survey. The value of all the delayed projects is more than $50 billion, 10 times the number five years ago and still half of what it will be in the next few years, according to PropEquity.
As has been written in Can India Grow?, the country clearly does not have the capital accumulation or customer base to support such rapid growth.




8. Investigative reporting on the sorry state of correctional facilities in Mississippi and the pervasive use of mobile phones sneaked in by inmates. Indian jails are no worse than these.

9. A very balanced assessment by David Leonhardt of China's progress over the last decade and its comparison with US's stagnation or even decline. This conclusion is very appropriate
China has now exceeded the world’s expectations for three decades in a row — which, of course, does not guarantee that the streak will continue in this new decade.
10. WSJ writes that the bilateral US-China trade deal, which keeps aside the WTO's dispute resolution system, may be trendsetter in the global settlement of trade disputes, thereby raising the possibility of the unravelling of the existing world trade order.

11. Thomas Philippon argues that "US only pretends to have free markets", whereas the real freer markets are in Europe,
Internet service, cellphone plans, and plane tickets are now much cheaper in Europe and Asia than in the United States, and the price differences are staggering. In 2018, according to data gathered by the comparison site Cable, the average monthly cost of a broadband internet connection was $29 in Italy, $31 in France, $32 in South Korea, and $37 in Germany and Japan. The same connection cost $68 in the United States, putting the country on par with Madagascar, Honduras, and Swaziland. American households spend about $100 a month on cellphone services, the Consumer Expenditure Survey from the U.S. Bureau of Labor Statistics indicates. Households in France and Germany pay less than half of that, according to the economists Mara Faccio and Luigi Zingales. None of this has happened by chance. In 1999, the United States had free and competitive markets in many industries that, in Europe, were dominated by oligopolies. Today the opposite is true. French households can typically choose among five or more internet-service providers; American households are lucky if they have a choice between two, and many have only one. The American airline industry has become fully oligopolistic; profits per passenger mile are now about twice as high as in Europe, where low-cost airlines compete aggressively with incumbents.
He argues that the European integration project ended up favouring the forces of competition, with countries wary of allowing other country domestic champions being promoted by their regulators. This led to a consensus on strong regulators.
Politicians were more worried about the regulator being captured by the other country than they were attracted by the opportunity to capture the regulator themselves. French (or German) politicians might not like a strong and independent antitrust regulator within their own borders, but they like even less the idea of Germany (or France) exerting political influence over the EU’s antitrust regulator. As a result, if they are to agree on any supranational institution, it will have a bias toward more independence. The case of the industrial giants Alstom and Siemens provided an almost perfect test of my theory. After Germany’s Siemens and France’s Alstom decided in 2017 to merge their rail activities, the EU’s two largest and most influential member states both wanted the merger approved. But the EU’s powerful competition commissioner, Margrethe Vestager, stood her ground. She and her team concluded that the merger “would have significantly reduced competition” in signaling equipment and high-speed trains, “depriving customers, including train operators and rail-infrastructure managers, of a choice of suppliers and products.” The European Commission blocked the merger in February 2019.
And on the costs of business concentration and lack of competition,
What the middle class may not fully understand, however, is that much of its stagnation is due to the money that monopolists and oligopolists can squeeze out of consumers. Telecoms and airlines are some of the worst offenders, but barriers to entry also drive up the prices of legal, financial, and professional services. Anticompetitive behavior among hospitals and pharmaceutical companies is a significant contributor to the exorbitant cost of health care in the United States. In my research on monopolization in the American economy, I estimate that the basket of goods and services consumed by a typical household in 2018 cost 5 to 10 percent more than it would have had competition remained as healthy as it was in 2000. Competitive prices would directly save at least $300 a month per household, translating to a nationwide annual household savings of about $600 billion. 
And this figure captures only half of the benefits that increased competition would bring. Competition boosts production, employment, and wages. When firms face competition in the marketplace, they also invest more, which drives up productivity and further increases wages. Indeed, my research indicates that private investment—broadly defined to include plants and equipment, as well as software, research and development, and intellectual property—has been surprisingly weak in recent years, despite low interest rates and record profits and stock prices. Monopoly profits do not translate into increased investment. Instead, just as economic theory predicts, they flow into dividends and share buybacks.  
Taking into account these indirect effects, I estimate that the gross domestic product of the United States would increase by almost $1 trillion and labor income by about $1.25 trillion if we could return to the levels of competition that prevailed circa 2000. Profits, on the other hand, would decrease by about $250 billion. Crucially, these figures combine large efficiency gains shared by all citizens with significant redistribution toward wage earners. The median household would earn a lot more in labor income and a bit less in dividends.

Thursday, January 16, 2020

Capitalism, market failures, and regulation

Free market supporters claim that markets are largely self-organising and self-regulating, and governments should step in only when there is a market failure. They talk about the disciplining powers of the financial markets in facilitating efficient intermediation from savers to borrowers.

Take three recent examples of economic sectors from India which are fairly deregulated and which are very competitive - airlines, telecommunications, and renewables. All the three have witnessed very strong market growth and have had long durations of cheap and plentiful credit inflows. All three have been characterised by very aggressive competition, leading to ultra-low tariffs and prices. The problem is that all the three sectors and their creditors are today entrapped in a bad equilibrium, struggling to clean up the mess and restore profitability.

In all the three cases, the much vaunted dynamics of the market mechanism went missing. Businesses invested or bid without concern for sustainability, outbid each other to lower prices without regard for margins, and lenders recklessly opened up their credit taps.

Livemint reports that the aviation sector may be following the telecoms and renewables sectors into a crisis. Even the opportunity presented by the collapse of Jet Airways (the reduction of supply and attendant boost to pricing power) has not helped. Sample this,
In their quest to capture the capacity vacuum left by Jet Airways, airlines had cut fares and added capacity, but nearly every incumbent is now facing a profit squeeze. They had also bet on ordering the latest and most fuel-efficient engines and aircraft to squeeze out a profit wherever they could. But that strategy appears to have spectacularly backfired... Indian airlines are expected to lose over $600 million in FY20 as compared to a previous estimate of a full-year profit of $500-700 million, consultancy Centre for Asia Pacific Aviation (CAPA) India said in a recent report. The cash position of the industry remains under pressure, with corresponding risks. Most airlines other than IndiGo are precariously placed, with cash balances available—in some cases—to cover only a few days or weeks of expenses, it added... With no airline willing to raise fares, ballooning costs mean that the sector has entered into a worrying unsustainable cycle, prompting aviation minister Hardeep Singh Puri to warn industry participants to stop “predatory pricing".
This is a telling point about the so-called market discipline,
“We are all held captive to the actions of the stupidest competitors, whoever they may be on a given day. They set the price and other airlines have no option but to follow," said a third senior airline executive on condition of anonymity. “This has been causing a lot of financial distress in the sector." “All it takes is one discount, and the entire pricing discipline collapses like a pack of cards," said the executive. “And, of late, the pricing discipline in the period of a week to a fortnight before departure has vanished." Previously, this booking period was considered a prime time slot where discounts offered would be minimal, but the country’s sluggish economy has prompted airlines to offer lower fares, said the second airline official mentioned above. “This is not a feasible model. Casualties in terms of closure of airlines are bound to happen," the executive added.
Any sudden increase in oil prices could be a body blow to the sector. 

In all three sectors, the competitive market mechanism and disciplining powers of finance could not prevent reckless investment decisions. Further, not only could it not help the market arrive at sustainable pricing (the so-called Econ 101-speak, "market clearing" price), market competition actually forced the sellers into a destructive race to the bottom with pricing. 

Not to mention, this is only the latest example of such bad outcomes in the same three and other sectors, arising from unbridled market competition. 

None of this should be a reason to junk the market mechanism, which for all its flaws is superior to its alternatives, but be aware of its serious limitations. It is a cautionary note against the typical blind and naive faith that supporters exhibit. 

This is also not an argument for direct price regulation by a public agency. It is about being nuanced with resource allocation decisions (as against the blind faith in auctions), encouraging industry-wide principles of restraint and safeguards against race to the bottom, regulators being even-handed in protecting interests of both consumers and providers, carefully calibrating and phasing reforms (the removal of interconnect charges in telecoms), vigilance on sectoral credit flows and exposures. 

It is a reminder about the important role of the state. One, there are several major areas where state has to be the dominant provider - education at all levels, primary and secondary health, many infrastructure services. There is no country in the world which has ever developed by following the market-will-deliver approach in these areas. Two, there is the role of state in creating the market itself and constantly monitoring to keep markets honest (and not merely stepping in where market fails) - finance is the best example. It is now widely acknowledged by even those on the right (except those ideologically blind and evidence-immune kinds) that financial markets have to be regulated. Fairly active regulation is necessary to create and sustain the market itself, and not merely address market failures. This is true of many sectors, including wherever private sector delivers infrastructure services.

The argument that government is anyways doing things badly, so why not deregulate and let markets do the job is alluring. But it can end up doing more harm and entrap the system in even worse equilibrium from which getting out is really hard. For example, since public health care system has broken down, we are chasing the market God of health insurance (with strategic purchasing etc), and in the process neglecting primary and secondary care, thereby worsening the problem. Or, since public schools are delivering abysmal outcomes, we are talking about vouchers and private schools, little realising that our experience with private education is even worse (witness the mess that privately run professional colleges and market competition has ended up creating).

In the context of increased private participation (public provisioning of privately produced goods and services), two things assume importance. One, markets and private participation demand regulation and contract management, which becomes daunting challenges for a weakly capacitated state. The attendant capture and corruption is likely to leave us with an even worse equilibrium than now. Second, Indian capitalism, at all levels, is still deeply infused with a corrosive culture of cutting corners, cronyism, and rent-seeking. This makes abuse of the market mechanism and contracts a most likely scenario.

Wednesday, January 15, 2020

America transportation graphics of the day

The intensity of personal vehicle usage has been declining in the US. Average annual number of vehicle trips has been declining since 1995.
And the per capita vehicle miles driven too has been falling, diverging from income growth.
The reasons,
Among the reasons for the national decline are migration to dense urban areas; young adults’ preference to live close to their jobs or to use alternate modes of transportation; more online working, shopping and streaming; and a growing population of retirees who don’t commute to jobs anymore.
And this is interesting,
Evolving travel patterns have prodded urban planners to take steps that would have been unthinkable just a few years ago. They are reducing the number of lanes on city streets, intentionally slowing down traffic and making room for bicycles, pedestrians and public transit. They are eliminating parking requirements for new construction. And they are welcoming the proliferation of shared bicycle and scooter services.
But despite all this, the car remains the preferred choice, with slightly more than three-fourths of Americans still driving to work.  

Tuesday, January 14, 2020

Six decadal stories

1. On the outsourcing industry from the WSJ,
The number of active Uber drivers in the U.S. grew from a base of almost zero in 2012 to more than 460,000 at the end of 2015, according to a paper by Uber’s economist Jonathan Hall and the late Princeton University economist Alan Krueger... In addition, the researchers found, most online-platform workers earned less than $2,500 in 2016 from their gigs. That suggests workers on the whole use gigs to supplement income or tide them over between jobs, not as a replacement for traditional work with stable pay and in many cases benefits...
Experts say it’s typical for contractors—who usually get paid less than workers hired directly by corporations—to make up 20% to 50% of a large company’s total workforce. Google parent Alphabet Inc. has more outsourced workers than full-time employees. These 100,000-plus TVCs—an abbreviation for temps, vendors and contractors—test Google’s self-driving cars, review legal documents and manage data projects, among other jobs. They wear red badges at work, while Alphabet employees wear white ones.
Ten years ago, the U.S. ranked third in global oil production, trailing Saudi Arabia and Russia. A decade later, it leads the world in oil as well as natural-gas output, having more than doubled the amount of crude it pumps while raising gas production by roughly two-thirds, according to federal data. There is a simple reason for the surge: fracking. Horizontal drilling and hydraulic fracturing techniques spurred a historic U.S. production boom during the decade that has driven down consumer prices, buoyed the national economy and reshaped geopolitics... A decade ago, drilling and fracking in tight rock formations such as shale produced less than one million barrels of oil a day in the U.S., according to data from the Energy Information Administration. Today that figure is roughly eight million barrels a day.
This is perhaps one of the most important geo-political graphics of the last decade,
But its sustainability is called to question by the commercial viability of shale gas for its investors. This has reduced the flow of capital, and forced companies to pull-back on investments and even production.
3. The rise of big technology companies has been among the most definitive trends of the last decade.
Over the past decade, five big technology companies morphed into five great technology empires. The stock market values this group— Apple Inc, Microsoft Corp, Amazon.com Inc, Google parent Alphabet Inc and Facebook Inc — at more than $4 trillion, while the six surviving men behind four of those companies are together worth nearly $450 billion, according to Forbes... Such an accumulation of wealth is unparalleled perhaps since Standard Oil... As the five tech superstars blazed, they changed practically everything they touched. They vacuumed up data, hired so many top engineers and bought out so many rivals, the breadth of their powers not only kept expanding but reshaped and redefined the technology universe... As successful as the tech giants have been, however, such concentration of power, both in computing and in the marketplace, has also come at a cost. As the decade ends, our dependency on these platforms is feeding a backlash over privacy, screen addiction, software algorithms that mislead users, the spread of misinformation and online mobs that pollute political discourse, and more... Facebook, Google’s YouTube and Amazon have allowed unfettered growth on their platforms for so long, they are difficult to police.
Aside from network effects, there are also other entry barriers,
Over the past decade-plus, Amazon turned the computing infrastructure that supports its own operations into a juggernaut new business, Amazon Web Services, powering other companies’ systems in its cloud. AWS is on pace for $35 billion in revenue this year, up 20 times since 2012, the first year Amazon reported the entity’s stand-alone results. It also carries the fattest profit margin among Amazon’s businesses. Microsoft and Google are trying to catch up in providing their own cloud services. The three companies have such vast computing infrastructure, it’s hard for others to compete, another example of how scale spins the flywheel powering the companies’ momentum.
These types of regulatory arbitrages have been at the heart of big-tech's rise,
To date, the giants have grown mostly unfettered because a powerful if little-known law lets them avoid responsibility for what is posted on their platforms, from hate speech to third-party sales of dangerous products. If the “techlash” ever pushes politicians to rewrite that rule, it could change the internet as we know it.
Another example of regulatory arbitraging has been the legal status of the 'employees' of internet companies as independent contractors,
California passed a law in 2019, going into effect Jan. 1, that would classify some independent contractors as employees. The result could be improved wages and benefits for gig workers, but also higher costs and liabilities to gig companies. Uber, Lyft and DoorDash, which argue that they offer flexible hours and low-commitment work, and address consumer demands that would otherwise be economically unfeasible, were among those that opposed the law. Meanwhile, other states including New York and New Jersey are also looking at ways to classify gig workers as employees. 
4. The financial market trend of the decade was the avalanche of capital flowing into startups, inflating valuation bubbles everywhere. A Bloomberg opinion piece calls it the flow of "other people's money".
In 2009, $27.2 billion was invested in U.S. tech startups, according to figures from the National Venture Capital Association. In the 12 months ended in September, that figure was more than $143 billion... There is more money than good ideas, which provides incentives to rationalize bad businesses and bad behavior.
Ananth draws attention to this very good article by Anand Sridharan highlighting how the era of plentiful, cheap, and recklessly deployed capital has had a corrosive effect on entrepreneurship and capitalism. A generation or more of entrepreneurs will struggle to shake off its adverse legacy.

5. The scorecard of American Unicorns which had IPOs this year,
This, despite the soaring equity markets.

6. One of the most transformational developments has been the rapid emergence of the smart phone as the ultimate personal device. Over this decade, the smart phone has come to render obsolete the camera, satellite navigation system, camcorder, music devices like iPods, and messaging devices like Blackberry.

Monday, January 13, 2020

The return of the "managerial elite"?

James Burnham's prophecy of a managerial elites tyrannising the working class appears to have arrived, albeit late by a few decades. Michael Lind has a very good article in WSJ which seeks to explain the rise of populism in the developed countries, especially the US.
A few decades ago, corporate managers, politicians and university professors had distinct subcultures. No longer. What we might call “woke capitalism” represents a fusion of the three elites at the commanding heights of the economy, the culture and politics; they increasingly constitute a single conformist caste. This newly consolidated ruling class is best described as “liberaltarian,” combining moderately libertarian views in economics with cultural progressivism in values. From its citadels in a few big cities, this oligarchy periodically notifies the working-class majority what values and opinions about sex, immigration and other topics it must immediately adopt without debate, on pain of being blacklisted by the private sector, prosecuted by the government or censored or erased by the media.
Many elites in history have justified their largely hereditary privileges by a doctrine of noblesse oblige, which imposes special military or economic obligations on members of the ruling class. But today’s managerial elite is different. The pretense that it springs solely from “merit”—from individual talent and hard work—creates a false sense of superiority for its members, stoking resentment among their fellow citizens, who are defined as failures in fair competition. The managerial overclasses of the West understand that the policies they prefer on trade, immigration, entitlements and other issues are unpopular and can be threatened by voter rebellions. That is why for the last few generations they have sought to remove decision-making authority from legislatures, which are somewhat accountable to working-class majorities, and deliver it to administrative agencies, courts and transnational institutions such as the European Union. This transfer of power permits establishment politicians pressed by working-class voters to claim that they can do nothing because their hands are tied by courts and treaties. As a result, casting votes is like putting coins into a broken vending machine. When there is no response, frustrated people tend to kick the machine.
This about what has changed is very compelling,
In the U.S. and Western Europe after World War II, the power of the managerial minority in the economy, the culture and politics was limited by a variety of extragovernmental checks and balances. Unions checked the power of private sector managers. Influential churches and civic organizations, through mass organizations like the National Legion of Decency, limited the cultural power of the commercial mass media. And parties accountable to ordinary voters through local political machines checked the power of national politicians and elite bureaucrats. No longer. Today, private sector unions have been weakened and, in the U.S., driven into virtual extinction. In the culture, the elite university has replaced the church or synagogue as the source of moral ideas and moral authority for a growing number of Westerners, particularly in the elite. And the urban political machines and county courthouse gangs are long gone, replaced by parties that are little more than marketing labels fought for by politicians and their billionaire donors...
Having lost the tribunes who once represented them—the political machine bosses, the union officials and, yes, the censorious church ladies—and seeing their traditional values stigmatized by metropolitan elites, many in the working classes of the West have grown alienated from politics. Some have lost interest in voting. Others, however, have rallied behind populist tribunes of the people, themselves often members of the elite, like Donald Trump and Boris Johnson.
In terms of what is the way forward, Lind does not think that the usual suggestions about policy reforms (on trade, migration, taxation, subsidies etc) and political realignment away from the technocracy will suffice. He calls for democratic pluralism through the emergence of a new category of bottom-up institutions to exercise countervailing power, 
In the political realm, ending the new class war will require strengthening national, state and local legislatures. The executive and judiciary branches tend to be staffed by the social elite and are responsive to its interests and values. Ordinary people are most likely to have influence in legislative assemblies, which to some degree reflect the actual diversity of the U.S., Britain, France and other western nations, rather than mirroring the graduating classes of the Ivy League, Oxbridge or the Grandes Ecoles.
In addition to restoring powerful legislatures, renewing federalism can empower working-class citizens. Basic civil rights should be the same for all, but many decisions that are now made at the national level, where elite influence is greatest, can be made just as well at the regional, state, urban and even neighborhood level, with more opportunities for popular input. But it is not enough for the non-college-educated majority of all races to regain lost influence in government if the managerial elite can pursue its narrow interests and impose its particular vision by exerting its power in the economy and culture. In the 20th century, trade unions balanced the power of corporate managers in the workplace while religious institutions checked the domination of the culture by secular progressives. As a rule, conservatives do not like organized labor, and progressives do not like organized religion. But the decline of these institutions means the decline of popular power, because most citizens are employees, and the working class is more likely to be religious than the college-educated elite.
To reduce the sense of powerlessness that populist demagogues exploit, conservatives must acknowledge the legitimacy of collective bargaining, in the private sector if not in the public sector, while progressives must accept that religious diversity requires respect for fellow citizens who belong to traditional religious and moral subcultures. In a modern economy that is naturally dominated by large firms, it is absurd to pretend that working-class employees have any bargaining power as individuals. It is just as absurd to pretend that devout Christians, Jews and Muslims can find alternatives to social media platforms and public school monopolies that stigmatize their creeds and mock their values.
All in all, one of the best articles on the issue that I have come across. 

Thursday, January 9, 2020

Politics of monopoly capitalism

Matt Stoller has a nice blog about the politics of monopoly, which shines light at, among other things, financialisation and other excesses of modern capitalism.

This piece on management consulting talks about how federal government agencies hire consulting organisations at insanely expensive rates, 
The Boston Consulting Group, charges the government $33,063.75/week for the time of a recent college grad to work as a contractor. Not to be outdone, McKinsey’s pricing is much much higher, with one McKinsey “business analyst” - someone with an undergraduate degree and no experience - lent to the government priced out at $56,707/week, or $2,948,764/year.
This just about sums up the typical consultant's work,
Does McKinsey do a good job? The answer is that it’s probably no better or worse than anyone else. I’m sure there are times when McKinsey is quite helpful, but it’s in all probability vastly overpriced for what it is, which is basically a group of smart people who know how to use powerpoint presentations and speak in soothing tones.
This trend with management consulting is representative of outsourcing industry itself,
In 2011, an antitrust attorney did a report on how we overpay for government contracting. In service of ‘shrinking government,’ policymakers chose to set up a system where instead of hiring an engineer as a government employee for, say, $120,000 a year, they paid a consulting firm like Booz Allen $500,000 a year for a similar engineer. The resulting system is both more expensive and more bureaucratic.
This description of private equity is very apt,
On a deeper level, private equity is the ultimate example of the collapse of the enlightenment concept of what ownership means. Ownership used to mean dominion over a resource, and responsibility for caretaking that resource. PE is a political movement whose goal is extend deep managerial controls from a small group of financiers over the producers in the economy. Private equity transforms corporations from institutions that house people and capital for the purpose of production into extractive institutions designed solely to shift cash to owners and leave the rest behind as trash. 
And this about its emergence,
In 1982, William Simon turned into a leader of the financial revolution. He pulled off the first large scale leveraged buyout, of a company called Gibson Greeting cards, a deal that shocked Wall Street. He and his partner paid $80 million for Gibson, buying the company from the struggling conglomerate RCA. The key was that they didn’t use their own money to buy the company, instead using Simon’s political credibility and connections to borrow much of the necessary $79 million from Barclays Bank and General Electric, only putting down $330,000 apiece. They immediately paid themselves a $900,000 special dividend from Gibson, made $4 million selling the company’s real estate assets, and gave 20% of the shares to the managers of the company as an incentive to keep the stock price in mind. Eighteen months later, they took Gibson public in a bull market, selling the company at $270 million. Simon cleared $70 million personally in a year and a half off an investment of $330,000, an insanely great return on such a small investment. Eyes popped all over Wall Street, and Gibson became the starting gun for the mergers and acquisitions PE craze of the 1980s...

PE firms serve as transmitters of information across businesses, sort of disease vectors for price gouging and legal arbitrage. If a certain kind of price gouging strategy works in a pharmaceutical company, a private equity company can roll through the industry, buying up every possible candidate and quickly forcing the price gouging everywhere. In the defense sector, Transdigm serves this role, buying up aerospace spare parts makers with pricing power and jacking up prices, in effect spreading corrupt contracting arbitrage against the Pentagon much more rapidly than it would have spread otherwise. 
More fundamentally, private equity was about getting rid of the slack that American managers had to look out for the long-term, slack that allowed them to fund research and experiment with productive techniques. PE replaced slack with brutal debt schedules and massive upside for higher stock prices, and no downside for the owner-financiers should the company fail. The goal is to eliminate production in favor of scalable profitable things like brands, patents, and tax loopholes, because producers - engineers, artists, workers - are cost centers. Production can also be eliminated by fissuring the workplace, such as the mass move to offshore production to lower cost countries in the 1980s onward... this paper by Brian Ayash and Mahdi Rastad... noted that companies bought by private equity are ten times more likely than comparable companies to go bankrupt. And this makes sense. The goal in PE isn’t to create or to make a company more efficient, it is to find legal loopholes that allow the organizers of the fund to maximize their return and shift the risk to someone else, as quickly as possible. Bankruptcies are a natural result if you load up on risk, and because the bankruptcy code is complex, bankruptcy can even be an opportunity for the financier to restructure his/her investment and push the cost onto employees by seizing the pension.
This is particularly corrosive,
PE funds are job sinecures for out of power elite Democrats and Republicans, a sort of shadow government of financiers who actually do the managing of American corporations while the government futzes around, paralyzed by the corruption PE barons organize.
As Stoller describes, PE is indeed "legal arbitrage", using debt to juice up equity's returns, shifting assets (especially real estate) around to maximise returns, and leveraging the differential tax rate between capital gains and corporate tax rates.

In another article (HT: Ananth), Stoller and Lucas Kunce describe how private equity and monopoly capitalism is fleecing the US military,
When Wall Street targeted the commercial industrial base in the 1990s, the same financial trends shifted the defense industry. Well before any of the more recent conflicts, financial pressure led to a change in focus for many in the defense industry—from technological engineering to balance sheet engineering. The result is that some of the biggest names in the industry have never created any defense product. Instead of innovating new technology to support our national security, they innovate new ways of creating monopolies to take advantage of it.  
A good example is a company called TransDigm. While TransDigm presents itself as a designer and producer of aerospace products, it can more accurately be described as a designer of monopolies. TransDigm began as a private equity firm, a type of investment business, in 1993... It achieves these returns for its shareholders by buying up companies that are sole or single-source suppliers of obscure airplane parts that the government needs, and then increasing prices by as much as eight times the original amount. If the government balks at paying, TransDigm has no qualms daring the military to risk its mission and its crew by not buying the parts. The military, held hostage, often pays the ransom. TransDigm’s gross profit margins using this model to gouge the U.S. government are a robust 54.5 percent. To put that into perspective, Boeing and Lockheed’s profit margins are listed at 13.6 percent and 10.91 percent. In many ways, TransDigm is like the pharmaceutical company run by Martin Shkreli, which bought rare treatments and then price gouged those who could not do without the product. Earlier this year, TransDigm recently bought the remaining supplier of chaff and one of two suppliers of flares, products identified in the Defense Department’s supply chain fragility report... 
The company is now the sole supplier for 80% of the end markets it serves. And 90% of the items in the supply chain are proprietary to TransDigm. In other words, the company is operating a monopoly for parts needed to operate aircraft that will typically be in service for 30 years…. Managers are uniquely motivated to increase shareholder value and they have an enviable record, with shares up 2,503% since 2009. Fleecing the Defense Department is big business. Its executive chairman W. Nicholas Howley, skewered by Democrats and Republicans alike in a May 2019 House Oversight hearing for making up to 4,000 percent excess profit on some parts and stealing from the American taxpayer, received total compensation of over $64 million in 2013, the fifth most among all CEOs, and over $13 million in 2018, making him one of the most highly compensated CEOs no one has ever heard of. Shortly after May’s hearing, the company agreed to voluntarily return $16 million in overcharges to the Pentagon, but the share price is at near record highs.
Finally, there is the story about how Google abuses its monopoly position to cow down national governments, no less. Last month Google announced a decision to cut-off Turkey's access to Android phones. 
Google has told its Turkish business partners it will not be able to work with them on new Android phones to be released in Turkey, after the Turkish competition board ruled that changes Google made to its contracts were not acceptable… The regulator had asked Google to change all its software distribution agreements to allow consumers to choose different search engines in its Android mobile operating system. The probe was triggered by a filing by Russian competitor Yandex.
The article points out how the most robust anti-trust regulator has been the Russian, motivated by the desire to provide a level-playing field for competitive local companies, especially Yandex, a search engine which is superior to Google in indexing Russian language searches. The regulator had made Google stop tying its Android mobile OS to its search engine, a move which stemmed Yandex's loss of market share and plateauing of Google's own search engine market share. 
Google tried to kill Yandex using an explicit strategy to leverage desktop search dominance into mobile search dominance... What’s interesting is that Yandex isn’t just good at indexing Russian language content, it can also index the Turkish language. This means it could be a strong competitor in the Turkish market. And what do you know, Yandex filed a complaint with the Turkish antitrust authorities over anti-competitive tactics. Google’s response wasn’t just to use the legal system to fight for its rights, but then ultimately obey the law. Instead, Google said it was willing to ‘work with’ Turkey, but as a partner and not as a corporation working within a sovereign nation. It simply said it doesn’t like Turkey’s law, and so it will stop providing Android phones for an entire country. In other words, Google has a private sanctions regime against smaller countries. There’s something of a parallel to what Google is doing to Turkey, and it’s in China...


Google is making a call to use leverage that should only be resolved for very serious foreign policy disputes by the U.S. government, and doing so to protect itself from having to obey an antitrust law in a foreign country. Pulling this kind of stunt is like using financial sanctions recklessly. It works if you’re the dominant network, but every time you use sanctions you create the incentive to build an alternative. To put it differently, it’s like overusing antibiotics. Turkey’s response will in the long-term mean leaning more on China, or Russia, or both. Or the EU and the U.S. could step in, and find ways of demanding that Google obey Turkish law.