Thursday, July 21, 2011

Who is rich?

How do we determine which nation is richer? Normally, we use metrics like GDP, GDP per capita etc. By many metrics the west and developed countries are rich. But are they really rich? I am not sure.

We evaluate wealth or richness at a point in time. As a concept, we have create this utopian set of goods and services that the richest nation must ideally consume. This rich consumption basket includes high quality healthcare, regular electricity supply, cars and automobiles etc. In other words, this basket comprises necessities and comforts. We measure how much a nation needs to spend to achieve this utopian consumption basket, how much it earns and that difference gives us how rich it is.

I disagree.
Let us imagine a nation of chronically ill people. The median income in this nation is 100 units. However, their illness implies that they require 110 units for consumption - 10 units for their needs and 100 units for medications. Now since all the other nations earn a maximum of 20 units, we can say this nation is rich. But other nations are healthy and they only need 10 units - they save 10 units of their earnings. In this case, the other nations are actually richer. Very simply, a nation of savers should be richer than nation of borrowers.

I think at all times, we should be net savers, in high investment phase, the level may be low or nearly zero with positive bias. I think a nation of savers has the option to stop consuming comfort goods while those who borrow set in motion a negative spiral that reduces jobs, hence consumption potential of both comforts and necessities. Importantly, it impairs repayment potential. It is difficult to initiate a turn around.

Asset ownership and dispersion - median asset ownership
Another aspect of debate is asset ownership dispersion as against asset ownership alone. This works just like employment intensity. The more dispersed the asset ownership within the country richer the country. Ideally, median household asset ownership makes more sense. If we look at asset ownership of household and find income generating assets then the country is definitely richer. These could be, saving deposits, equity shares (positive on MTM or yielding reasonable dividends), house that can be rented (fully paid up or rent greater than mortgage payment), vehicles for hire, etc. The consumption goods are TV, computer (used as consumption good rather than income generating asset), vehicle (personal use - not for hire), etc. These consumption goods should be expensed rather than be treated as assets.

Thus, a nation that has higher net assets (total assets less debt) at a median level should be richer.

Tuesday, July 19, 2011

Challenges of Journalism (chapter from my book)


The recent News of the World scandal left me dejected. The rot in media has reached epidemic proportions. 

Amongst all the institutions in a democracy, media has the most powerful role. It is not a pillar of democracy without reason. It is an active observer of the world. It is, to a degree, omnipresent. Therefore, it often acts as eyes and ears of the law enforcement setup. Media is not impartial. It is partial to the public interest and public interest alone. But the foremost role of media is in its ability to view the world through the changing social lens. It has the power and knowledge to debate the changing values and, to a certain degree, influence the course of the society. It is unfortunate that media has failed us.

The revival of journalism must start with examination of its shortcomings. The very definition of journalist is no longer clear.

Who is a journalist?
Journalist clearly does not refer to employees of media institutions. It would be unfortunate to call celebrity experts as journalists. (The term celebrity expert refers to those people who specialise in affairs and the private life of celebrities. It does not refer to experts who are celebrities.) Neither should sports reporters be called journalists. In today’s context, some of the real journalists are simply bloggers. It was never more important to define journalists than today. Journalist should be defined as agent who furthers the principles of the democratic system we discussed earlier. Only journalists should be allowed the privileges embedded in the democratic setup. Thus, in my view, News of the World should not get journalistic priviledges. It should be treated differently. 

Social connectedness of journalists
The degree of separation between journalists and any individual should be as low as possible. It should be closer to one. Unfortunately, the journalists of today are no longer connected to individuals and their issues. That is why we need celebrities to further genuine causes like planting trees etc. It is imperative that journalists go closer to the individuals and communities.

Focus on speed
The other factor ailing journalism is the focus on speed. That takes away any opportunity for in-depth analysis. Top newspapers are shifting to a two-step approach, journalists usually report the facts on the ground and the section editor thereafter goes through with in-depth analysis.
This model is well developed in financial media. There, providers like Bloomberg, Reuters provide data at varying frequency while the teams of analysts from various brokerages analyze the data and provide the expert perspective.
While I understand the motivation behind this setup, I think it is inadequate. Journalists, in certain cases, operate more like detectives and there is nothing to replace real evidence. Even financial analysts regularly meet with companies and validate the information they receive from data sources.
Further, journalists are more than detectives. They have to sniff out stories where there is no report of a crime. This requires, what experts call, “nose for the job”. The depth of journalism, at least in such analytical stories, suffers to a great extent.

Journalists need an aggregator of facts
In the context of current problems, media should at least function as an aggregator of facts and data. Here we refer to media as separate from journalism. The journalists, even if external to such organisations, may be able to mine the data and evolve their analysis. These facts, once established, should be available in public domain. It should be possible to augment and improve them through subsequent fact-finding missions by other media employees.
Journalists, in such a scenario, are moving away from traditional media hierarchy. We need to create recognition for this new breed of journalists.

Problem of continuity
Journalism requires longer follow-ups, particularly for important issues like WTO negotiations, carbon emissions, financial crisis etc. As the events continue to unfold the scope, severity and depth of investigation and understanding changes. Journalists today, are not able to follow through with their stories. In a way, it is easy to follow the scandals of top sportsman or politicians. However, the important debates, related to US healthcare, foreign policies etc, are very difficult to follow.
Popular bloggers, with their subject focus, are able to do a better job at following stories with arguments as commentary. The quality of discussion is enriched. It is probably the reason why top journalists now have their own blogs.

Imperatives
It is critical to design a system where journalists are able to work for the democratic system and further its goal. The system should start by redefining what journalism is supposed to be at its core. Such a system may be actually evolving as a network of bloggers, but it needs to be nurtured and expanded. Further, the current model of subsidising journalists with revenues from corporates or entertainment will not be enough to sustain this key pillar of democracy.

From my book Subverting Capitalism and Democracy - chapter titled Challenges of Journalism


My book "Subverting Capitalism & Democracy" is available on Amazon and Kindle.

Friday, July 15, 2011

Global Realignment of Economic Power

Just days before I was thinking how this feels like pre-Bear Sterns days and today Yves Smith has a post titled Shades of 2007. It indeed does feel like it. In a way, there is nothing new. We know how it will end.

However, I fear there is more coming. Something more interesting that we haven't really thought about.

I believe, soon we should enter an era of realignment of economic power. We tend to believe the west is generally rich. But it may soon change. As the screws of austerity will tighten across EU and even the US, the developed world may realize that they are not so rich after all.

To say that such a realignment will be challenging will be an understatement. We will have to evaluate the correct value of each currency, rework the location of manufacturing capacities and realize that the savers of the world will be real demand drivers of global consumption. The process is likely to take 2-3 decades or more.

The question that consumes me, how should we preserve and increase our wealth?




My book "Subverting Capitalism & Democracy" is available on Amazon and Kindle.

Wednesday, July 06, 2011

Cartoon - PIIGS

All Rights Reserved - Rahul Deodhar


My book "Subverting Capitalism & Democracy" is available on Amazon and Kindle.

Efficiency of governance

Edward Harrison at nakedcapitalism points to Slovenia going the Greek route. Slovenia, it seems, needs to cut budgetary spending and undertake pension reforms. At the slightest of such references, the right-wingers jump into the fray stating "we need a smaller government". Now you know how I hate when government modifies its promises on healthcare and pension for the old. In this case, smaller government refers to government expenditure in line with the government revenues.

Often that is reduced to lesser people employed by the government. It means less police, less hospital staff, less departments to control something-that-should-not-be-controlled, etc. In other words, smaller government often boils down to lesser governance. But it need not be if we have higher productivity of government staff.

We need to improve the efficiency of governance. A lot of duties of government have been clarified in the constitution. One, I believe, is left behind. In the constitution, it must be made clear that government must strive to lower the cost of governance. It must increase the the deliverables (governance) and reduce the burden on the tax payer (cost of governance). We have seen companies reduce cost, why can't the government? There is a distinct lack of focus on government productivity. It is time to introduce such metrics and track them over time.

I think before we talk of smaller government, let us talk of efficient government. Let us talk of increasing governance and increasing efficiency of government.

Tuesday, July 05, 2011

The end of middle income trap

There is a lot of research about the middle income trap where the GDP of countries grows but stalls once it reaches the Middle Income group.

How the US kept its lead?
The US kept its lead by being at the frontiers of development. First it was the manufacturing productivity boom of the 1900s where Henry Ford found ways to deploy labour in a new way multiplying the productivity. The next few decades was more of no-competition-post-WW1-WW2 phase that created man-power shortage. The US kept its lead by bringing the women into workforce imitating the western Europeans. Over the next few decades, US deployed economies of scale to keep productivity high. This was the dawn of the technical age with new machines aiming for quality and speed. The next phase was information age. Again US companies leading the information era created unparalleled advantage using technology. 

What comes next, is the crucial question. It is not yet clear. However, what is clear is that it will definitely require more knowledge and technological input than previously. Can the silicon valley, which has delivered quite a few technological winners, give US the next advantage? The chances are getting smaller every day. But that is nothing to do with Silicon Valley itself, but the political climate in which it must operate. Stifling immigration laws that prevent talent from coming through, unfriendly tax regime that will definitely be a burden on small businesses, lack of science and math educated population and global reach of the VCs may thwart the leadership position of Silicon Valley. Further, technology now allows interactions across the globe allowing crucial connections between VCs and founders possible. There are two areas where size of investment could make a difference. These two areas would be renewal energy and water treatment.

The connection with Middle Income Trap
With the US and developed world acting as a source of demand, and simultaneously as a frontier of development, implied that middle income countries were reliant on currency valuations to ensure competitiveness. The currency strategy, it implies, were creating a ceiling for these countries in terms of incomes. Quite a few countries, like Malaysia, have little difference with US or other developed countries when it comes to actual productivity (as defined in engineering not economics). The lower economic productivity is a function on artificial factors.

I believe we are at a stage when technological edge of the developed countries is not substantial. It is possible that new developments will come from across the world and some other country, possibly China, will take a leadership role in the coming decades. As a corollary, it will escape the middle income trap. With this as an example, it will be possible for others to use similar strategy.

Developed world median-incomes may decline  
Concurrently, the median incomes in the developed world, may decline upsetting the conventional benchmarks for what is classified as a middle-income-group. The current crisis, is creating ample structural shifts to hasten this process. Soon, we will see a realignment of real wealth.

Monday, July 04, 2011

Does the US have enough manufacturing?

There is an interesting article on Huffington Post wherein David Henderson counters a series of posts from Ian Fletcher who argues US has less manufacturing that it needs. Overall, I am in Ian's camp but with differences. I wish to make some different argument about why US needs more manufacturing.

Manufacturing jobs vs. manufacturing output alone
Firstly, it is important to concern ourselves with manufacturing jobs rather than manufacturing output alone because jobs and employment determine the consumption level. 

Let us compare two polar opposites, an economy with 100 people employed in producing 100 units of GDP output vs. an economy where 100 units of GDP output is created by 1 person with 99 unemployed. We can imagine the difference in consumption patterns of the economies. 

That is why I believe, if consumption has to increase (reflecting on economy getting richer), not only does output have to increase but employment has to be high. 

Low cost capital reducing employment intensity of production
The reason why employment intensity of US manufacturing is reducing can be attributed to cheap capital. In most manufacturing activities, capital and labour are competitors. A higher capital intensity reduces labour intensity. 

The relative cheap capital flood of past two decades has come to haunt the US. The easy capital has reduced the employment intensity of its manufacturing and rendered thousands unemployed. Economists will argue that these unemployed are free to engage in other value-adding activity. But that is not easy.

Job and skill match
I have always believed that the job profile of the economy should match its skill profile. A nation of plumbers will need plumbing jobs, a nation of software programmers will need IT jobs. Each nations needs jobs that match its skill profile. I think US has lower manufacturing jobs than its skill profile requires.

Skill profile can be changed, but that takes time. Adaptability to different jobs itself is a skill, a very valued one at that. How adaptable is US workforce? This question must be answered relatively. Is US workforce easier to adapt than Chinese workforce? I have my doubts.

Hence, I believe, US needs more manufacturing jobs rather than simply manufacturing.


Selling rights as opposed to assets - FDI conundrum
The other argument often looks at the capital account surplus as a counterweight to current account deficit. I would not club all the in-bound investments into one. It matters what the US is selling. Is it selling rights as against assets? I refer to rights as rival assets (parallel to rival goods) while simple assets are those with non-rival quality.

[Note: Rival assets are those assets that can be duplicated. A building can be duplicated but not a port or a road. Technically assets are always rival but we need to make distinction to understand the quality of what is being sold. We can sell factories and recreate everything. But we cannot sell ports, roads, beaches, monuments etc. and expect to recreate it. Thus what is asked of Greece is selling rights not assets.]  

Thus, when we look at in-bound investments (FDI) we must look at what is being sold before we can comment if it is a fair deal.

In sum
I believe Us skill profile needs more manufacturing jobs rather than simply manufacturing output. So long as jobs are taken care of, it does not matter if US has enough manufacturing or not.