Zero Sum
How wonderful that we have met with a paradox. Now we have some hope of making progress. — Neils Bohr
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Posted Mar 23rd, 2017 by ravi    / Permalink /

The South used to be a slave economy, in which a few lived off the unpaid labour of others. Now it’s leading the way to an economy where all of us can be low-paid slaves. This is also known as “Right to Work”.

Peter Waldman, Bloomberg BusinessWeek:

Allen took a $9-an-hour job on the overnight shift as a janitor. He passed up higher-paying positions on the assembly line, because “the machines scared him,” says Adam Wolfsberger, the former manager at Surge Staffing who hired Allen. The only training he received was where to find the mop and broom, Wolfsberger says.

On April 2, 2013, after Allen had been on the job for about six weeks, a plant supervisor ordered him to put down his broom. He assigned him to work the rest of the shift on one of the metal-stamping presses instead and admonished him not to tell anyone about the job switch.

At about 4 a.m., Allen, wiry and 5 feet 9 inches, was leaning inside the machine with his arms extended upward, loading metal bolts. Suddenly the die, which stamps the metal parts, slammed onto his arms. “It felt like the whole world was coming down on me,” he says. The press operator hadnt noticed him working inside the machine, and Allen’s frame was so slight that the safety beam missed him.

He stood there for an hour, his flesh burning inside the heated press. Someone brought a fan to cool him off. “I was just talking to myself about what my daddy had told me,” Allen says. When emergency crews finally freed him, his left hand was “flat like a pancake,” Allen says, and parts of three fingers were gone.

Posted Mar 15th, 2017 by ravi    / Permalink /

Brian Alexander writing in The Atlantic:

There were other glass companies in Lancaster, drawn there by cheap natural gas. But following a 1937 merger with the New York-based Anchor Cap and Closure, The Hockin, now Anchor Hocking, grew into the world’s largest manufacturer of glass tableware and the second-largest maker of glass containers such as beer bottles and peanut-butter jars. It even played a role in the invention of late-night TV, in 1950, by sponsoring the pioneering NBC show Broadway Open House. Anchor Hocking became Lancaster’s largest employer by far, the rare Fortune 500 company based in a small town. At its peak, it employed roughly 5,000 people there, including executives in the headquarters, and many more in plants around the country.

But then came the 1980s.

Posted Sep 10th, 2010 by ravi    / Permalink /

The world of polling is a murky one. Outside of psychology and economics, it may be the only proclaimed mathematical/scientific enterprise where participants can arrive at wildly variant conclusions, and not have their predictions subject to validation by reality. FiveThirtyEight is a political blog (now part of the New York Times) that has of late shed some long overdue light (in the form of analytical rigour) into these turbid waters and withstood the test of empirical validation.

It is therefore odd that they step into one of the other two suspect areas aforementioned, namely economics, with an opinion that seems shoddily reasoned. The opinion is expressed in the title of a recent post on their blog Potential for Double-Dip Recession Seems Small; an opinion in need of significant substantiation, considering it runs counter to that of Nobel laureate economist Paul Krugman who has been calling things fairly accurately these past few years:

Paul Krugman said he sees about a one-third chance the U.S. economy will slide into a recession during the second half of the year as fiscal and monetary stimulus fade.

“It is not a low probability event, 30 to 40 percent chance,” Krugman said today in an interview in Atlanta, where he was attending an economics conference. “The chance that we will have growth slowing enough that unemployment ticks up again I would say is better than even.”

FiveThirtyEight thinks otherwise. And the author of the post, Hale Stewart, starts out commendably:

[A] key element lacking in the talk of double-dip recessions is what actually caused past recessions – that is, what are the primary reasons an economy slows to the point where its growth contracts for at least two quarters – followed by an analysis of whether those conditions exist in the current economic environment.

But in the very next paragraph, Stewart jumps to “indicators” rather than meditating on “causes” and “conditions”:

Perhaps the most obvious economic indicator of a coming recession is rising interest rates, one of the primary policy tools available to the Federal Reserve. According to generally accepted wisdom, the Fed is supposed to lower interest rates during a recession to spur lending and loan demand, and then raise interest rates after the economy expands to prevent inflation from getting out of hand.

Stewart backs up this idea with a chart that demonstrates that rise in the Federal Reserve’s short-term interest rates exhibit a strong correlation with the onset of a recession. He draws attention the obverse scenario as well:

Finally, the chart shows that short-term interest rates are the lowest they’ve been in over 50 years, an event that typically occurs as the economy is exiting a recession, not entering one.

To summarise, if the Fed’s interest rates are going up, that indicates a recession is on its way, and if the interest rates are at historic lows, that indicates the economy is exiting a recession.

Recall, at this point, that Stewart’s stated desire is to shift the conversation to causes, reasons and conditions that lead to a recession. This is poorly served by launching his analysis with talk of “indicators”, in particular the correlation of Fed interest rates with GDP change. Indicators are, after all, not causes. Unless Stewart believes that Fed jacking up of the rate is a cause of recessions! In fact, there is some reason to suspect that he might indeed believe that interest rate hikes lead to recession: when he does embark on examining causes, he starts out “Another leading cause of recession is some type of financial crisis” (emphasis mine).

But the idea that Fed interest rate variations is the first [listed] cause of recessions is hardly established by charting its behaviour in relation to the state of the economy. After all, one of the first rules of statistics is, as I am sure Stewart knows: correlation does not imply causation. This is made only worse that Stewart can call upon only one data point — the recessions during the 1980s — that pertain to a double-dip recession.

As Stewart himself tells us, interest rates are used by the Fed as a corrective measure to temper an over-heating economy (“irrational exuberance” as one Fed chairman in recent history put it). In that sense, rising interest rates can be more legitimately interpreted as a trailing indicator of an economy heading deeper into unsustainable territory.

All through the growth of the Internet bubble starting from about 1995 all the way to the turn of the millennium, interest rates held steady, gaining about a modest percent between 1999 and 2001. Stewart could appeal to this small rise as being a cause, or even an indicator of a coming recession; but that ignores the majority of the mischief that had occurred by the time this hike was put in place: the eToys IPO, which closed on opening day at three times the start price, occurred in May 1999. The Netscape IPO which made millionaires out of early employees and investors, and paupers of the rest, pushed the infant software vendor up to a total valuation of around $2 billion in 1995. Any number of examples of such speculative excess that preceded the rate hike (and subsequent recession) can be obtained by looking up relevant data for familiar “.com” darlings from the era.

For a different picture of interest rates and recessions, one can take a look at Japan from 1990 onwards (when the country entered an economic slump that it has been unable to shake off). The two charts below (obtained from TradingEconomics) show the annual GDP growth rate and the change in the interest rate (in that order):

Japan experienced recessions in mid-1993, mid-1997 and early 1998 (a double dip!), most of 2001 and 2008-2009. In line with Stewart’s expectations an interest rate peak in 1990-1991 coincides with the economy’s slide into recession. However, things turn less predictable thereafter. Apart from rare fractional upticks, the interest rate takes a controlled descent to zero, but with no significant impact on the economy, which has since that fateful event remained in the doldrums with intermittent recessions to add salt to the wound.

Stewart does get to other considerations shortly after the section on interest rates. In particular, he lists three “causes” for recessions (the bullet list below quotes text from his post):

  • some type of financial crisis that paralyzes a significant portion of the financial intermediary system (e.g: Great Depression, S&L crisis, housing bubble in 2007-08)
  • Commodity price increases (e.g: oil prices, which have an important psychological impact on consumer sentiment)
  • [“A final cause”] bursting of some financial bubble (leading to depressed consumer sentiment)

Two out of the three listed causes reveal the consumer driven nature of the current US economy. That should be worthy of some attention when we attempt to understand the cause of recessions. Be that as it may, at least two (the first and last) are themselves outcomes rather than causes. Financial crises and bubbles, being the result of untrammelled speculation and/or lack of responsibility or accountability, can be symptomatic of the underlying nature of the market in which they arise.

Uncoupled from the base realities of need, feasibility, sustainability, profitability and so on (often achieved through mere word play: “the new economy”), and unhindered by government regulation, the question that remains about the economy is not whether we have put the particular crises of the current episode behind us (a point made by Stewart) but whether the system will regain sufficient amnesia to enter the next boom-bust cycle. As Paul Krugman and Robin Wells point out in the New York Review of Books:

Whatever the precise causes of the housing bubble, it’s important to realize that bubbles in general aren’t at all unusual. On the contrary, as Yale’s Robert Shiller explained at length in his justly celebrated book, Irrational Exuberance, they are a recurring feature of financial markets.

By stating the above, Krugman and Wells are not avoiding the questions that are central to Stewart: what are the root causes of recessions and what do they say about the chances of a double dip? To the contrary, the Krugman/Wells piece, a review of three books that also address these issues, is titled “The Slump Goes On: Why?”, and digs deeper into “the financial crisis that paralyzes” that Stewart considers a cause of recessions: “The … answer”, they write, “is that by 2007 the financial system had evolved to a point where both traditional bank regulation and its associated safety net were full of holes.”. And they point to Minsky:

Minsky’s theory, in brief, was that eras of financial stability set the stage for future crisis, because they encourage a wide variety of economic actors to take on ever-larger quantities of debt and engage in ever-more-risky speculation.

Stewart, in his blog post, mostly eschews such fundamental considerations, taking comfort instead in numbers that indicate that the current set of crises, measured by the criteria of bank earnings and commodity prices, are under control, to conclude that the economy is on the mend — or at the least not facing another recession.

But there are base realities about the economic state of affairs, not captured by bank profitability, that Krugman restores to centrality:

Let’s be clear: a recovery that involves growth so slow that unemployment and excess capacity rise, not fall, isn’t really a recovery. If we have only have 1 1/2 percent growth, that will amount to a double dip in all the senses that matter.

(Federal Fund Rate image courtesy of Wikipedia)

Posted Sep 8th, 2008 by ravi    / Permalink /

Thomas MalthusApropos the name of this blog, some comments from Jeffrey Sach in SciAm:

Are Malthus’s Predicted 1798 Food Shortages Coming True? (Extended version)


Indeed, when I trained in economics, Malthusian reasoning was a target of mockery, held up by my professors as an example of a naïve forecast gone wildly wrong. After all, since Malthus’s time, incomes per person averaged around the world have increased at least an order of magnitude according to economic historians, despite a population increase from around 800 million in 1798 to 6.7 billion today. Some economists have gone so far as to argue that high and rising populations have been a major cause of increased living standards, rather than an impediment. In that interpretation, the eightfold increase in population since 1798 has also raised the number of geniuses in similar proportion, and it is genius above all that propels global human advance. A large human population, so it is argued, is just what is needed to propel progress.

Yet the Malthusian specter is not truly banished—indeed far from it. Our increase in know-how has not only been about getting more outputs for the same inputs, but also about our ability to mine the Earth for more inputs. The first Industrial Revolution began with the use of fossil fuel, specifically coal, through Watt’s steam engine. Humanity harnessed geological deposits of ancient solar energy, stored as coal, oil, and gas, to do our modern bidding. We learned to dig deeper for minerals, fish the oceans with larger nets, divert rivers with greater dams and canals, appropriate more habitats of other species and cut down forests with more powerful land-clearing equipment. In countless ways, we have not gotten more for less but rather more for more, as we’ve converted rich stores of natural capital into high flows of current consumption. Much of what we call “income,” in the true sense of adding value from economic activity, is actually depletion instead, or the running down of natural capital.


Posted Aug 16th, 2008 by ravi    / Permalink /

With regard to the recent unsuccessful culmination of the WTO talks in Geneva, there are, as can be expected, alternate accounts on the causes and culprits. The International Herald Tribune quotes French opinion that blame lies with India and China:

France’s agriculture minister said Wednesday that “big emerging countries” were to blame for the collapse of World Trade Organization talks on opening up the global economy.

Meanwhile, the Hindu Business Line writes:

The United States is to be solely blamed for the flopped WTO mini-Ministerial talks as it was not ready to “sew up a deal” in view of the impending presidential elections and it is unlikely that the Doha Development Round will conclude before 201 1-12, a trade expert said today.

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