How to revise GDP and other links

(1) American economy is now USD20.0 trillion and change. The personal savings rate is 6.8%. It was 3.2% before revision. Just like that. Investments in Cloud technology were allegedly under-reported. India was one of the few countries or is it the only country that revised its GDP calculations and the base year from 2004-05 to 2011-12 and reported a lower number.

See for yourself:

India GDP

(2) I liked this article that appeared in Wall Street Journal – by one Donald Luskin. He now writes as to why China will lose the trade war. That is a far cry from what many thought when the trade war began. It is not over yet. But, clearly, people are revising their odds.

(3) China is issuing dollar denominated bonds in record amounts. Nine years ago, they called for the end of US dollar hegemony. [Link]

(4) Mark Mobius says that the bottom is not in for China stocks. I leave it to you to decide on how to play it. [Link]

(5) China’s old economy is back [Link]

(6) Which means leveraging is back too [Link]

(7) FT Editors think China will listen to their advice on how to conduct Belt and Road initiatives. I am just wondering how will they have written the Edit had Trump launched OBOR and it is courting the controversies that China is courting now. [Link]

(7) Covenant-lite Leveraged loans (double whammy) are now 78% of all leveraged loans. They were 29% in 2007. [Link]

(8) Support for Merkel’s German Conservative coalition has dwindled to a 12-year low. Wait and wathc happens by the time she leaves office. [Link]

(9) That is a nice headline that explains everything that is happening in the world:

Australia executive pay hits record as workers’ wages stagnate [Link]

(10) This is what will happen in that case:

Royal Mail faces shareholders’ pay revolt [Link] AND

Nex shareholders’ punchy payday protest [Link]

(11) This may be three weeks old but Malaysia is abandoning white elephant infrastructure projects. I must confess to being pleasantly surprised so far with Malaysia’s new government [Link]

(12) This article offers a good assessment of Pakistan even as it wonders if OBOR projects have pushed the country into a debt trap.

(13) Good to know that Australian Parliament has passed two sweeping foreign interference and anti-spying  Bills [Link]

 

Who is a Liberal?

TIME magazine has the following cover in its July 2nd Edition.

TIME Cover_02072018

Sanctimonious hypocrisy.

The purpose of the cover is not better public policy. The purpose of the cover is not even to regain power in elections. That can happen only when one wins converts to one’s cause. This won’t or cannot win converts.

These are not liberals. They are D.A.D.D.I: Dangerous, Arrogant, Deluded, Double-standard Idiots.

Who is a liberal? See here. That is a covery story I wrote for the Dec. 2015 issue of ‘Swarajya’.

Also, it is a good time to recall John Gray’s article in July 2016 (a classic) in the aftermath of the Brexit vote. If you thought that the Brexit was narrow and lacked legitimacy, pl. check your facts again here. Take out Northern Ireland, Scotland and the Greater London Area. It was as clear as it could get.

As Tim Price reminds us in his latest note,

In recent debates, Quisling MPs and unelected peers have resorted to the purest sophistry, citing sources such as Edmund Burke’s speech to the electors of Bristol in their appeals to override the legitimate plebiscite held in the UK on 23 June 2016, in which 17.4 million people voted to leave the EU – more voters than have ever voted for anything, ever, in our country’s history. [Link]

By the way, Tim Price’ ‘Darkest hour’ is a very good read.

Back to John Gray:

As it is being used today, “populism” is a term of abuse applied by establishment thinkers to people whose lives they have not troubled to understand. A revolt of the masses is under way, but it is one in which those who have shaped policies over the past twenty years are more remote from reality than the ordinary men and women at whom they like to sneer. …

… The contradictions of the world-view shared by progressive thinkers and established elites are becoming acutely evident. There is constant talk about being in a time of unprecedented change. Globalisation is connecting the world as never before; our lives are being continuously transformed by disruptive technologies; old ways of life and hierarchies in society are fast dissolving . . . these are the ruling clichés of the age. What is striking is that they are deployed to prop up a failing ancien régime. …

… There is much that is ugly and threatening about Donald Trump – not least his divisive attacks on Muslims. But it is the parties that have been in power for the past thirty years that have created Trump’s main constituency. His appeal is to casualties of the American economy that mainstream politicians have chosen to ignore…

If Brexit has come as a great blow to many who think of themselves as progressive, it is because politics is undergoing a regime shift – several of them, in fact, at the same time – that they have not perceived….

…Like the financial elites shown to be so pitifully short-sighted in the early hours of Friday morning, politicians and pundits who bang on about adapting to change have been confounded by changes that they believed could not happen. [Link]

On ‘Bullshit’ jobs

Why are bullshit jobs created? The author of the book with the above title – David Graeber – offers this explanation:

The answer clearly isn’t economic: it’s moral and political. The ruling class has figured out that a happy and productive population with free time on their hands is a mortal danger (think of what started to happen when this even began to be approximated in the ‘60s). And, on the other hand, the feeling that work is a moral value in itself, and that anyone not willing to submit themselves to some kind of intense work discipline for most of their waking hours deserves nothing, is extraordinarily convenient for them. [Link]

Somewhere here, he has a point:

If someone had designed a work regime perfectly suited to maintaining the power of finance capital, it’s hard to see how they could have done a better job. Real, productive workers are relentlessly squeezed and exploited….

….This is one of the secret strengths of right-wing populism. You can see it when tabloids whip up resentment against tube workers for paralysing London during contract disputes: the very fact that tube workers can paralyse London shows that their work is actually necessary, but this seems to be precisely what annoys people.

He had written the above article in 2016 – little under two years ago. This is the cover of his new book.

His recent interviews are here and here. I get the impression that he has not figured out why bullshit jobs are created, even granting his pro-worker, ‘class revolution’ framework.

Clearly, he is focused on the possibilities of a working class revolution against capitalism of the day exept that he has not yet gone to the root cause.

This article in ‘The Economist’ in 2013 does better. The article talks about complexity of tasks being one of the factors for them to be broken up into ‘bullshit’ tasks. That is one step closer. But, how does complexity arise, in the first place? Is it only technology or is it something else? Rapacity has to be a factor.

The article goes on to predict a happy ending but the author is silent on how we would get there:

The issue is that too little of the recent gains from technological advance and economic growth have gone toward giving people the time and resources to enjoy their lives outside work. Early in the industrial era real wages soared and hours worked declined. In the past generation, by contrast, real wages have grown slowly and workweeks haven’t grown shorter.

The development of large-scale technological unemployment or underemployment, however, would force rich societies to revisit a system that primarily allocates purchasing power via earned wages. And that, in turn, could allow households to get by or even thrive while working many fewer hours than is now typically the case—albeit through a pretty hefty level of income redistribution.

This is how I see it:

Capitalist societies seem to want to pay only as little as possible to those who are not directly contributing to its bottomline. They are employed by the public sector who are paid out of the taxes that the well-heeled pay. Hence, the lower their pay, the better. Their tax dollars travel the most, in  that case.

If they are not in the public sector, they are then employed by contractors who pay even worse.

But, those who are employed by the capitalists (solely) for the purpose of catering to and furthering their greed are paid better. David Graber gives some examples of such professions:  private equity CEOs, lobbyists, PR researchers, actuaries, telemarketers, bailiffs or legal consultants.

It is mostly about greed and how modern capitalism is not satisfied. It is about ‘more is preferable to less’ and non-satiation being the building blocks of modern capitalism. That, to me, is the root cause of ‘bullshit’ jobs and that is what I had mentioned in my column last week.

Explicable silence

In this blog post, I had highlighted a forthcoming IMF working paper on global market power and its macroeconomic implications. That paper was flagged in a IMF blog post on the rise of the corporate giants. At the end of the blog post, there was a link to an enticing panel discussion at the IMF-World Bank Spring Meetings of April 2018. The title of the session was ‘Digitalisation and the new gilded age’. I was pleasantly surprised that IMF had arranged a panel discussion on a hot and crucial topic for our times.

This was the blurb for the session:

Are technological advances leading to greater market concentration in firms such as Google and Facebook and, in turn, creating what could be described as a New Gilded Age? [Link]

The blurb names two companies. Try catching their names in the panel discussion. I listened to the panel discussion which lasted a little over 70 minutes. To say that I was ‘underwhelmed’ would be an understatement.

More than that, I am trying to wrap my head around what the panel moderator was trying to achieve. The moderator was none other than Christine Lagarde, the President of the IMF!

The session was neither about technology and its enabling role (or not) in market concentration nor was it about market concentration in the technology sector itself and how both of them or either of them were leading to the new gilded age or not.

I still do not know what the session was about. There were a couple of leading questions to the panelist from IBM as to how good a work they were doing in Kenya enabling credit for small borrowers through Big Data and how ‘Watson’, their super-intelligent computer was helping with oncological treatment in India.

The moderator wanted all the panelists to answer the following question:

What one change would make the world competitive, equitable, inclusive and innovative?

The question pops up at 1h 05m 10s. Here is the video link.

//players.brightcove.net/45228659001/rkPdEdoaW_default/index.html?videoId=5772879577001

Listen to the answers and decide whether you wish to laugh or cry, be angry, be worried or simply throw up your hands.

When I mentioned this to a friend, he said that this was not a surprise and that there was a deliberate ‘conpsiracy of silence’ in liberal establishments on the key questions, challenges of the day and their perpetrators.

In February, there was this wonderful long-form essay in ‘The New York Times’ magazine titled, ‘The case against google’. That could well have been the specific case -study discussion for this topic.

There was a simple and well-written blog post at the Bank of France website in February on whether monopolies were a danger to the United States. That could have been discussed. Of course, that blog post does not mention technology as a factor in creating monopolies or market concentration but the panelists could have been asked to challenge it or defend it.

Somewhat more provocatively but importantly, the @facebookbreakup movement could have been discussed. The movement took out a full-page advt. in MIT student paper’s commencement edition with quotes from former Facebook employees – some of the founding ones. The quotes are worth reading.

Importantly and interestingly, the blog post cites Luigi Zingales to make the point that even if large firms with their rising monopoly power are not cutting back on investment spending, it is important to understand that these investments are about:

… investment can be misused to create barriers to entry, by using these resources to finance lobbying for example. The fact that the most profitable firms invest relatively little may corroborate this theory. Buying emerging startups to reduce competition is another example of the misuse of productive investment to maintain monopoly rents. [Link]

There are two brief but very useful blog posts in aei.org. They provide references that are staple for discussion for this session. The blog posts are here and here.

For those interested in digging deeper, two OECD papers mentioned in these posts are available here and here.

Also mentioned in these posts is a paper written by Nicolas Bloom paper for HBR titled, ‘Corporations in the age of inequality’. I just saw his policy prescriptions in the end.  Have not read the paper in full. He advocates use of tax policy to support those left behind:

Boost low incomes through tax policy. Governments should also consider measures that put more money into people’s pockets, such as negative income taxes — meaning that citizens earning below a certain threshold receive money directly from the government. For example, the U.S. should consider expanding the Earned Income Tax Credit, which is basically a negative income tax with a work requirement. Rather than constrain companies with more onerous rules around compensation, negative income taxes supplement the incomes for workers whose skills are in less demand while allowing economies to organize efficiently. [Link]

How will governments put more money into people’s pockets unless it takes money out of some people’s pockets?

Anyway, this blog post was supposed to be about the breathtaking obfuscation and dissembling that went on, in the name of discussing the new gilded age. Given that this is what liberal establishments and elites in poweful positions in such establishments do, we should not be surprised at all that populism is on the rise and that populists are popular and winning.

The important realisation for us, the ‘hoi polloi’ is that there is not much point in all of these discussions. They exist to keep up appearances. Power resides and rests with money. Those who have it want to have more and do not wish to part with it. They do so only reluctantly and only if there are no other options to avoid doing so. Democracy is a figleaf that pretends to give equal power to the ‘Have Nots’ as ‘Haves’. But, funding of candidates and political parties is in the hands of the money-ed. So, just a wee bit changes at the margin.

Those who are endowed start with an advantage and engage in expanding that advantage. They create systems that enable them to do so and hinder them only minimally, if at all.

The rest of us believe that we are working to make the world better. If we wake up from our denial, we will also wake up to realise that there is not much meaning left in our pursuits. Slumber is better.

Explaining charlatans with charlatanism

A good friend recommended that I read this piece by John Ganz on the ‘age of charlatans’ that are allegedly living in. I did so.

When people feel overwhelmed and disenfrachised, they fall for ‘snake oil’ solutions and false promises. They fall for charlatans. That is his simple message.

But, he sets it up somewhat too cleverly and in the process, practising a bit of charlatanism himself. He cites passages from his favourite author who wrote about this some sixty years ago and then writes about some contemporary politicians and scholars in the next pararaph, practising a bit of ‘post-hoc ergo procter hoc’ logic. No explanation as to why these characters exemplify the previous paragraph. Are we expected to accept that because he says so?

I suppose it is not entirely a coincidence that the characters he chooses to be critical of belong to the ‘Right’ in the United States. I had not read Jordan Peterson’s book but the way he handled a journalist in a TV interview without once losing patience with her aggressive questions was an abject lesson to many of us.

Critics usually don’t make a distinction between Trump’s personality and his policies. The latter to be called ‘charlatanism’ needs to be established. It will take time and outcomes could surprise or vindicate critics. Too early to say. Many in the West think globalisation and free trade were the false utopia promised by globalisers-charlatans and that is why they chose these ‘charlatans’ over them.

His last three sentences try to redeem the article but, by then, he had lost me.

Market Concentration, markups and profits

Srinivas Thiruvadanthai had queried in his Twitter handle if one could have good data on the distribution of US corporate profits between companies. I would be interested in that question too. So, I went looking. This is what I found:

slightly more than 100 firms earned about half of the total profit made by US public firms in 1975. By 2015, just 30 did. Zoom out a little and the trend is even more astonishing. The top 200 companies by earnings raked in more than all listed firms, combined. Indeed, the aggregate earnings of the 3,500 or so other listed companies is negative. [Link]

The article above has some nice charts and links to this paper too about the decline of the number of listed firms in the US.

Chicago Booth School’s promarket.org blog has a post on the 70-year history of corporate profits. It is a summary of a long paper:

Two notable policy changes point to the early 1980s as a possible break in the trends in competition. First, there was an increase in antitrust enforcement from the mid-1940s to the early 1980s, followed by a decline from the early 1980s to the present.3) Second, the Department of Justice adopted a more lenient merger guideline in 1982. As Peltzman (2014) shows, industry concentration began rising after this change to the merger guideline. [Link]

The promarket.org blog post links to some very interesting NBER papers:

(i) Labor Market Concentration [Link]

(ii) Declining Competition and Investment in the U.S. [Link]

(iii) Strong Employers and Weak Employees: How Does Employer Concentration Affect Wages? [Link]

(iv) Accounting for Rising Corporate Profits: Intangibles or Regulatory Rents? [Link]

(v) Are U.S. Industries Becoming More Concentrated? [Link] – this one is from 2015 and above others are more recent

Consistent with rising product and labour market concentration, the IMF Blog has an interesting chart on rising markups in advanced economies (not just in the USA) and its conclusion too is very instructive:

The paper also finds a negative association in firms between labor shares and markups, implying that the labor share of income declines in industries where market power rises. In other words, with higher market power, the share of firms’ revenue going to workers decreases, while the share of revenue going to profits increases. [Link]

The blog post is based on a working paper that is yet to be released.

The blog post has a link to the session on ‘Digitisation and the new gilded age’ held as part of the Spring IMF-World Bank meetings in April. Should be interesting.

What these posts and news make clear is that it is not just competition from Chinese imports, globalisation of work (outsourcing and offshoring of services)  and higher immigration that had reduced labour share of income in advanced economies but also higher market concentration that has increased profit share of income. Clearly, these are inter-dependent and inter-connected phenomenon. For example, to ward off external competition, firms merge and smaller firms disappear, leading to increased concentration. That leads to other consequences.

But, policymakers, commentators and journalists have been asleep at the wheel even though some of these papers had begun to appear from 2010 onwards. Now, they look askance at public rage and spout venom at populists who have tapped into this rage.

The Fed and stock prices

On May 2 when the Federal Reserve concluded its two-day meeting, the Dow-Jones Industrial Average was around 24100 points. Some five weeks later, it is up 4%. The Federal Reserve Open Market Committee (FOMC) emphasised the symmetric nature of its inflation target. In plain English, it will overlook an overshoot of the inflation rate above 2% for some time. How much of an overshoot will be overlooked and for how long have been left undefined.

This was their reassurance to bubble-investors and speculators even as their research staff warned off elevated vulnerabilities in two areas: asset prices and non-financial sector leverage.

As long as the Federal Reserve is obsessed with asset prices when they are on their way down and indifferent to them when they are rising, long booms and short but severe busts will be the feature of financial capitalism. Peering long into the future, it may well be the deathknell of modern capitalism.

This may sound over the top or too prescient or too late. Take your pick.