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Monthly Archives: May 2010

A young man became the 10th worker to jump to his death at a Foxconn Technology Group factory in southern China, just hours after the company’s chairman toured the plant that makes iPods and other top-selling gadgets, state-run media said.

How does one apply cost-benefit analysis to something like this? It would seem the cost of one’s own death would outweigh any possible benefit, but maybe that is a reflection of my western culture and ideas.

Labor activists have long said that Foxconn’s problem was a rigid management style on factory floors, where the assembly line moved too fast and workers were forced to log too much overtime. Foxconn has repeatedly denied the allegations.

Stephen Palmer, director of the London Center for Stress Management, said it was difficult to know how unusually high the suicide rates were at a factory as big as the one in Shenzhen. He said suicide rates in China tend to be higher than normal, and that on a population level, there are about 13 suicides per 100,000 men and 14 per 100,000 women.

If it is true that the working conditions are so bad, and you consider that a young worker from western China may feel like there is no way out, perhaps with family pride and well-being resting on the young man’s shoulders, it gets only a tiny bit more reasonable.

Whatever, it is clear that the company and its management policies need to be scrutenized by not-too-sympathetic officials.

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Robert Kuttner has a new article, Austerity Does Not Produce Prosperity. It is a strong statement that current thinking on the need to limit government debt is likely to extend the recession in Europe and the US. Kuttner makes it clear that he believes in Keynesian policy, and does not want to see the west succumb to concerns over debt.

The budget deficit here and overseas does need to return to a more moderate level — after we get an economic recovery. But the problem with the austerity treatment during a recession is that if everyone tightens their belts at once, there is nobody to buy the products; the economy shrinks and repayment of debt is even more arduous. As John Maynard Keynes famously wrote, “The patient does not need rest. He needs exercise.”

Kuttner goes on to review the recovery of the Great Depression, when the US experienced a debt/GDP ratio of 120%. Of course, they went on to pay-off debt with rapidly expanding incomes through the 1950’s and 60’s.  Kuttner claims the situation today is different because the spending came in the 40’s because of the war, and common folk were helping finance the debt buying war bonds.

I am not so sure the US debt has not been helped along with spending in the military activity in Afghanistan and Iraq. Rather, the difference might be that these wars are not creating new industry and new training for workers.

But all of the war spending recapitalized industry, re-employed and trained jobless workers; and after the war pent up consumer demand powered a record boom and rising revenues paid down the debt.

There was plenty of wartime sacrifice, but it was shared. Citizens bought war bonds and used ration books. There were wage and price controls. Surtaxes on high incomes were over 90 percent. Interest rates were administered through a deal between the Treasury and the Fed, and the war debt was financed with cheap money.

It seems to me that Kuttner is pointing out enough differences that there may be room to disagree with his main point, that we should follow history’s example.

Sure it’s big. But is that bad? This story is about a new anti-trust suit being filed against Google, inc. The story gives a good, balanced view of the issue, pointing out that Google’s ability to dominate the search engine market may be because they are good at what they do.

Google executives acknowledge the scrutiny. “We’re getting larger, and we have been very disruptive within some industries,” says Alan Davidson, head of United States public policy at Google. “We know we have a giant bull’s-eye on our backs.”

IN Washington, there is significant disagreement over the proper scope of competition regulation and what the future should hold for Google — and both sides have big financial stakes.

On one side are companies like AT&T and Microsoft, which vociferously lobby against Google in the policy arena.

AT&T is Google’s staunchest foe in the battle over “net neutrality,” a term used by Google and others who fear that telecommunications providers might throttle bandwidth for certain Internet services, discouraging innovation. Microsoft provides e-mail and other services in competition with Google and has a rival search engine, Bing, which controls 11.8 percent of the market in the United States. (Google has 64.4 percent, and Yahoo 17.7 percent, according to comScore.)

Of course, the real reason for anti-trust is to encourage competitive practice in markets where lower prices will encourage more efficient production levels. It seems here that, with 64% of the market, Google might be vulnerable to more aggressive services from other firms, but they don’t seem able to do that.

On the other hand, if Google is using their power to undermine the efforts of other firms, they might face fines or restrictions on their activities.

Their goal was to air the Foundem couple’s complaint that in 2006, Google’s supposedly objective algorithms suddenly dropped Foundem into the netherworld of Google search results. They say Google also raised the rates Foundem had to pay to advertise alongside search results. These moves, the couple say, pushed their comparison shopping site out of view, and Google later put the spotlight on its own shopping listings.

Again, the US is trying to convince China to increase the value of the Yuan against the dollar. As some of the comments to this article attest, the cost of the change would be to American consumers. There are also many US companies that do not like the idea, because they have operations in China, based on taking advantage of the cheap labor and resources.

Not all American companies favor pushing for a stronger yuan. Executives of multinationals with big operations in China tend to favor keeping currency rates steady.

“The stable yuan is obviously easier for managers to cope with,” says Kevin Wale, president and managing director for General Motors China Group, which sources 85 percent of its parts locally.

The political pressure in the US is based on job creation, and some economists–not all–argue that maybe a million jobs could be created in the US if the dollar were cheaper.

China, meanwhile, argues that a revaluation would not have a significant effect on trade balances, and the drop in the Euro has already put pressure on Chinese manufacturers.

Chinese policymakers insist that adjustments in the yuan’s value will have little direct impact on the trade balance with the United States, and some fret that the yuan’s nearly 15 percent gain against the euro is already too great a burden.

“A revaluation would not bring any good to our economy, as our exporters already are under heavy cost pressures. It would be dangerous to revalue,” said Yi Xianrong, an economist at the government-run Chinese Academy of Social Sciences in Beijing.

I agree with Treasury Secretary Timothy Geithner, who said that China will do what they think is best for themselves, and that will probably include a revaluation sometime in the future.

“I think it is, of course, China’s decision about what to do with the exchange rate — they’re a sovereign country,” Geithner said. “But I think it’s enormously in their interest to move, over time, to let the exchange rate reflect market forces, and I’m confident that they will do what’s in their interest,” he said while visiting Boeing and other exporters in Washington state.

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The Battle Over Taxing Soda is a rare glimpse at politicians applying legitimate economic concepts to real world problems. Taxing goods with negative externalities can improve social welfare and raise tax revenues all at the same time. Now that it is pretty well established that Cokes and Pepsi and lots of other drinks carry negative externalities, let’s tax soda-pop.

Cities and counties, desperate to find money to pay for schools and roads, are starting to see a soda tax as a way to raise revenue. The tax also appears to be one of the most promising ways to attack obesity, given the huge role sugary drinks play in the epidemic.

“It’s wrong for the government to stand idle in the face of an epidemic of obesity that’s hurting the quality of life and the health of our residents,” says Mary Cheh, the Council member who has proposed the tax, “when we have policy choices in front of us that can materially affect the problem.”

Of course the drink manufacturers are not going sit on their hands and wait to see what happens. Industry lobbyists have already defeated soda tax proposals in New York and Philadelphia, now working their magic in Washington.

The soda industry, of course, is fighting back with newspaper and radio advertisements, among other things. It says a tax would most hurt “hard-working, low- and middle-income families, elderly residents and those living on fixed incomes” and would destroy jobs. Ellen Valentino, an industry official, recently told The Washington Post that companies would spend “whatever it takes” to make their case.

It is true that a soda tax would probably be extremely regressive, but–like with taxes on alcohol and tobacco–people still have the choice to pay or not.

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The United Nations Environment Group has announced that global fish populations are endangered, and by 2050 we may see world fish stocks disappear.

“If the various estimates we have received… come true, then we are in the situation where 40 years down the line we, effectively, are out of fish,” Pavan Sukhdev, head of the UN Environment Program’s green economy initiative, told journalists in New York.

A Green Economy report due later this year by UNEP and outside experts argues this disaster can be avoided if subsidies to fishing fleets are slashed and fish are given protected zones — ultimately resulting in a thriving industry.

Some fishing grounds are already being protected by quota systems, as we discussed in our post last September 6. Of course subsidies should be eliminated,  but how to enforce protected zones? Not all fish are migratory, but those that are will not be helped by a zone where fishing is not allowed.

One policy that may be more enforceable is to restrict the technology allowed on the boats. Drag-nets and the huge fishing ships lower the cost of catching huge harvests, and I would think that inspections of boats would be easier than policing huge fishing grounds. Of course, countries can also limit the size of their fishing fleets by simply resticting the number of boats registered.

This is a giant and tragic example of Tragedy of the Commons, where the lack of effective property rights leads to over exploitation of resources. Without being able to establish property rights for the open ocean, the UN may have trouble seeing positive response to their warnings.

Meanwhile, is there a futures market for tuna?

crowding-out on a global scale

Fears of a hand-cuffed financial industry have driven the value of the Euro to 18 month lows, and markets world-wide are dropping in value because of fears for the European economy.

The president of the European Central Bank, Jean-Claude Trichet, in an interview published Saturday, warned that Europe was facing “severe tensions” and that the markets were fragile.

For Europe’s banks, the problems are twofold. Short-term borrowing costs are rising, which could lead institutions to cut back on new loans and call in old ones, crimping economic growth.

At the same time, seemingly safe institutions in more solid economies like France and Germany hold vast amounts of bonds from their more shaky neighbors, like Spain, Portugal and Greece.

Investors fear that with many governments groaning under the weight of huge deficits, the debt of weaker nations that use the euro currency will have to be restructured, deeply lowering the value of their bonds. That would hit European financial institutions hard, and may ricochet through the global banking system.

At the same time, some European producers are happy with the Euro devaluation, as export revenues have already increased and export demand should increase. World-wide, one fear stems from the big increase in government deficit levels.

The world’s budget deficit as a percentage of gross domestic product now stands at 6 percent, up from just 0.3 percent before the financial crisis. If public debt is not lowered back to precrisis levels, the I.M.F. report said, growth in advanced economies could decline by half a percentage point annually.

If the fears turn-out to be justified, this seems a classic example of crowding out, where government deficit spending raises interest rate to levels that discourage private investment.

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Fears of a hand-cuffed financial industry have driven the value of the Euro to 18 month lows, and markets world-wide are dropping in value because of fears for the European economy.

The president of the European Central Bank, Jean-Claude Trichet, in an interview published Saturday, warned that Europe was facing “severe tensions” and that the markets were fragile.

For Europe’s banks, the problems are twofold. Short-term borrowing costs are rising, which could lead institutions to cut back on new loans and call in old ones, crimping economic growth.

At the same time, seemingly safe institutions in more solid economies like France and Germany hold vast amounts of bonds from their more shaky neighbors, like Spain, Portugal and Greece.

Investors fear that with many governments groaning under the weight of huge deficits, the debt of weaker nations that use the euro currency will have to be restructured, deeply lowering the value of their bonds. That would hit European financial institutions hard, and may ricochet through the global banking system.

At the same time, some European producers are happy with the Euro devaluation, as export revenues have already increased and export demand should increase. World-wide, one fear stems from the big increase in government deficit levels.

The world’s budget deficit as a percentage of gross domestic product now stands at 6 percent, up from just 0.3 percent before the financial crisis. If public debt is not lowered back to precrisis levels, the I.M.F. report said, growth in advanced economies could decline by half a percentage point annually.

If the fears turn-out to be justified, this seems a classic example of crowding out, where government deficit spending raises interest rate to levels that discourage private investment.

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Tough to justify this article as an economics story, but it should serve as inspiration for our students, if not for all of us. Jessica Watson, an Australian 16 year-old, has completed a circumnavigation of the globe, non-stop and all by herself.

Congratulations to her, but I am also impressed with the trust her parents showed in encouraging her to take the trip, a seven month journey. I am still proud of captaining a relatively short sail across the Atlantic ten years ago, and–even at 43 years old–I still had to battle parents and friends’ discouraging words.

One lesson to take from this story is what we can expect from young people if we give them the opportunity.

“People don’t think you’re capable of these things — they don’t realize what young people, what 16-year-olds and girls are capable of,” Watson told the raucous crowd. “It’s amazing when you take away those expectations what you can do.”

It was not that long ago that most 16 year-olds were treated as adults. Now we keep them home and protected, and we keep them in school often treated as children that must be convinced to study and strive for success. Jessica has clearly matured to a level where she is capable of making her own decisions.

Cheers to her parents, who clearly must have shown great trust in their daughter long before the sailing trip was imagined.

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Sex, Lies and Oil Spills is about the Bush administration’s deregulation of the oil industry and–particularly–removing the requirement for an acoustical regulator, a sort of dead-man’s switch that probably would have prevented the huge oil spill in the Gulf of Mexico.

Acoustic switches are required by law for all offshore rigs off Brazil and in Norway’s North Sea operations. BP uses the devise voluntarily in Britain’s North Sea and elsewhere in the world as do other big players like Holland’s Shell and France’s Total. In 2000, the Minerals Management Service while weighing a comprehensive rulemaking for drilling safety, deemed the acoustic mechanism “essential” and proposed to mandate the mechanism on all gulf rigs.Then, between January and March of 2001, incoming Vice President Dick Cheney conducted secret meetings with over 100 oil industry officials allowing them to draft a wish list of industry demands to be implemented by the oil friendly administration. Cheney also used that time to re-staff the Minerals Management Service with oil industry toadies including a cabal of his Wyoming carbon cronies. In 2003, newly reconstituted Minerals Management Service genuflected to the oil cartel by recommending the removal of the proposed requirement for acoustic switches. The Minerals Management Service’s 2003 study concluded that “acoustic systems are not recommended because they tend to be very costly.”

The trigger costs about 500,000 USD. The cost, even multiplied by all the rigs in the gulf, will probably not come close to the costs–both to business and the environment–of the big spill.  

Then Vice President Dick Cheney is accused of restaffing the Minerals Management Service with oil industry cronies who were wined and dined (and more) by industry execs, leading to illegal contracts and corrupt acceptance of compromised scientific studies.

The Inspector General characterized this orgy of wheeling and dealing as “a culture of ethical failure” that cost taxpayers millions in royalty fees and produced reams of bad science to justify unregulated deep water drilling in the gulf.

Halliburton is suspect in all of this too, because–

The blow out occurred shortly after Halliburton completed an operation to reinforce drilling hole casing with concrete slurry. This is a sensitive process that, according to government experts, can trigger catastrophic blowouts if not performed attentively. According to the Minerals Management Service, 18 of 39 blowouts in the Gulf of Mexico since 1996 were attributed to poor workmanship injecting cement around the metal pipe.

The deregulation encouraged by Bush and Cheney have left a lasting impression of irresponsible action in both industry and the financial world. History books will not be kind.

I used to teach a course that required reading The Tyranny of the Status Quo. Milton Friedman made the claim there that government regulation of industry was not required because unsafe production is bad for business and managers will naturally reject unsafe practice. Otherwise a fan of Friedman, I was happy to read that, late in life, Friedman changed his mind about that, perhaps faced with overwhelming evidence that the drive for profit often overwhelms the risk of long term costs.

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The merger of United and Continental Airlines provides a great case study for understanding how oligopolistic markets work. This article focuses on the New York market, especially for long distance flights.

Its airports — Kennedy International, La Guardia and Newark — play a critical role in both domestic and international travel. Combined, they account for four of the top five domestic routes and constitute the biggest hub in the country for international flights.

“It’s the most contested market there is,” said Gail Grimmett, the senior vice president at Delta Air Lines in charge of New York. “That’s because it’s the largest revenue pool.”

The merger gives the new company a dominant position with these markets, allowing them to upgrade facilities with the promise of higher ticket prices.

All the competition for the New York market has kept air fares relatively low so far. But analysts cautioned that if an airline becomes too dominant at any one airport, there would be less pressure to keep the lid on prices. Such concerns could raise antitrust issues for United and Continental’s planned merger.

While higher ticket prices are a negative signal for antitrust regulators, there are advantages to allowing decent profits for more dominant firms. The obvious advantage here is the better facilities and service for the long distance flights. Of course, with airlines, you don’t want competition to be so severe that airlines feel pressure to reduce expenditures on maintenance and safety.

For the economics student, the real interest here is in watching how the market reacts to the new shift of power in this market.

William S. Swelbar, a research engineer at the International Center for Air Transportation at the Massachusetts Institute of Technology, said New York was a major laboratory for the alliances.

“New York is vital for each of the three alliances,” he said. “It’s a global game, and it is playing right in front of us.”

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