Is Restructuring the Silver Bullet for US Car Makers?

President Obama has responded to the request for assistance by most of the car manufacturing firms in the Us by demanding a set of rigorous responses from both Chrysler and General Motors. In particular, one of the preconditions for further financial assistance has been the requirement that the CEO of GM to step to be promptly replaced. I consider this degree of involvement in the affairs of a firm unacceptable for two reasons.

Firstly, a government that intends to spend public money has no business demanding that a specific person be replaced in a firm. That degree of involvement would only be acceptable for share holders and would only be acceptable in the situation of an outright purchase of the firm. Secondly, as I stated in an a number of early posts here and here, I am not sure that either of these firms will survive the economic crisis for the reason that their problems are not directly a result of the same. Instead, these two are corporations that have over time failed to compete and who should perhaps be left to the devices of their shareholders and managers.

Ad David Brooks of the NYT states, not only has GM especially been under restructuring in several disguises over decades, but the insertion of the Obama administration deeply into this problem merely makes it more difficult that the plug will be pulled should that be necessary. In my view, there's not much else that the US government can do for these corporations that would be in the public interest. therefore the tough talk by the Obama administration that the restructuring plans do not go far enough betrays the fact that there is a preferred plan.

As the article states, it is clear that the consideration here is entirely about protecting interests of unions but that could still be done in a more transparent way. It may require putting up vouchers for the workers and asking them either to use that as their severance pay or infuse the same into the corporations if they will. It would then be up to the management of Chrysler and GM to convince their employees that they are still worth investing in. My deep suspicion is that a substantial proportion of these employees would prefer to take the money. that would solve Obama's problem quite easily but it is not a solution that is politically feasible as it would amount to a direct bribe to future voters. Still, it is far better and more efficient that the complex corporate welfare schemes that are being tried out.

What's the Value of a National Currency?

In the last week, the statement reported here by the governor of China's Central Bank called for the establishment of an alternative currency for international transactions. Predictably, many have sen this call for the replacement of the dollar as necessarily portending a poor outlook of the prospects f the economy of the US. Frankly stated, I think that given its size, it would not only be difficult to replace the US$ as a major currency but that the world ought to be more careful about why.

To start with, students of economics are encouraged to view any currency as a commodity and this then leads to the realization that the there's nothing special about a national currency in and of itself. For an economy as large as that of the US, I surmise that the creation of an alternative could not easily be created without some measure of the expectation of US participation, China's enthusiasm for a new currency notwithstanding. Viewed as a commodity, the value of any currency would emerge from the demand for it in the international markets.

Secondly, as stated in an interview of Desmond Lachman in the American, governments can sustainably influence the value of currencies by maintaining good economic fundamentals and keeping an attractive investment field. In that sense therefore, what is called a strong currency is in itself the result and not the cause of a vibrant economy. Added to this would be a stable financial industry and low levels of inflation. To think that a strong currency is an end in itself is a political statement that has little basis in economic thinking. As reported by the statement in the daily Telegraph, Timothy Geithner should be more concerned with hastening the recovery of the US economy. The absence of clear alternative suggests that the willful creation of a strong alternative to the US$ is perhaps harder than is imagined.

Africa Finds that Looking East is not Enough

In the area of international trade and cooperation, the language in Africa is heavily accented with the phrase, "Looking East" meaning that many African nations consider that China is a better trade partner in comparison to high incomer countries of the West. Apart from the slogans, a proper investigation of Chinese involvement in Africa revealed that this was majorly concentrated in nations with huge natural resource endowments. Seeing in this a strategy, it is clear that China's quest was to ensure that its rapid growth rates are not slowed down or halted by the huge demand for petroleum and other commodities that selected African countries have had in abundance.

Thus it appears that African countries and China had found a perfect diplomatic and commercial fir for their relations as China eschewed demands for democratic reforms and high standards of public sector management. In the last decade, the total volume of growth between China and countries in Africa grew phenomenally. In general terms, the structure of this trade represented commodity imports for China with development assistance to facilitate infrastructure construction coming with ,manufactured exports flowing into Africa.

This issue was addressed in this blog post in response to the assumption that China was emerging as Africa's new colonial power. That post is now vindicated as it is clear from this article in the NYT that Guinea, the Democratic Republic of Congo and other resource rich countries from Africa are facing a pull-back from China due to the instability of these countries and the collapse of the commodity prices worldwide. More than ever, it is evident that China's engagement was not a special bond but was driven by pragmatic concerns to construct infrastructure that allows for the extraction of petroleum, bauxite or Iron ore. To its chagrin, Africa will realize that it is not special at all and must conduct its international affairs more rationally than to try and play China against the Us and Europe. For as the referenced blog post states, China definitely needs the US and Europe more than it needs Africa.

Defending Open Markets

Amidst the banks bailout and the stimulus package being managed by president Obama's administration, there are the arguments about whether the unqualified stupidity shown by some firms on Wall Street 's imply that a market driven society is doomed. In the eyes of many, there's the thinking that to argue for the superiority of markets over government planning is an argument that cannot be won today. I must state that with the superficial analysis out there, it is obvious that few people are arguing persuasively for the immense power of markets as a superior form of organizing economic activity.

Granted that the ideologues on either side are rehashing the main arguments again and again, I have found two pieces by academics which are not only very coherent but are not intended to defend the indefensible. Kevin Murphy and Gary Becker here, acknowledge that capitalism is under strain and has demonstrated weaknesses. Among the important points of this well-argued piece is that proper cognizance must be taken for the entire record of the market mechanism. Consistent with my view is that the broad conception of the problem and the prescriptions offered lead to the risk that there will be overreach that would forestall growth in many countries.

A shared finding by the two professors and Alan Meltzer in this summary of the Bradley Lecture 2009 is that the conventional wisdom is wrong in ascribing the cause of the crisis to insufficient regulation. I am in agreement with the argument here because it is clear that banking institutions are among the most regulated commercial industries world over. That there are calls for more regulation is insufficient and my view is that it is easy to hide behind a claim for more regulation without specifying what ought to be regulated. I understand that very high leverage was indeed risky and the degree of internal risk assessment was completely underdeveloped.

Meltzer not only gives a forceful defense of capitalism but also makes the subtle point about the difficulty in arguing for it as a moral philosophy. Instead, he takes the correct view that while capitalism has weaknesses, its flexibility and dynamism makes it eschew the use of private or public coercion and that explains its suitability for democratic capitalism. While I am in disagreement with Meltzer in the suggestion that the failure of one candidate to accept funding from the public has weakened political party democracy, I am impressed by the lecture as it ties capitalism to freedom. In conclusion, the results of capitalism can be subjected to critique but it is gratifying to see dispassionate professors putting the record straight and stating that human nature and vices are not a creation or preserve of capitalist societies. Indeed, given its proven ability to inspire growth and material development, capitalism probably allows for society to have resources that enable these vices to be responded to.

Even without agreeing with everything stated in both articles, it is clear that they respond adequately to developing countries that may be tempted to fashion economic policy based on an inaccurate rendition of what the causes of the crisis are and therefore that capitalism and open market systems are not appropriate for them.

Fraser Institute Contest on Measurement

I received the communication below from the Fraser Institute and have considered that it is approrpiate for placing on this weblog. It speaks for itself but I find it interesting as it calls for identification of a major public policy issue that does not find good measurement.

The Fraser Institute is launching a new contest to identify economic and public policy issues which still require proper measurement in order to facilitate meaningful analysis and public discourse. We hope you can help promote this contest by posting it on your weblog, Bookish Posts.


The Essay Contest for Excellence in the Pursuit of Measurement is an opportunity for the public to comment on an economic or public policy issue that they feel is important and deserves to be properly measured.

A top prize of $1,000 and other cash prizes can be won by identifying a vital issue that is either not being measured, or is being measured inappropriately. Acceptable entry formats include a short 500-600 word essay, or a short one-minute video essay.

Complete details and a promotional flyer are available at:
http://www.fraserinstitute.org/programsandinitiatives/measurement_center.htm

Entry deadline is Friday, May 15th, 2009.

Sponsored by the R.J. Addington Center for the Study of Measurement.

An Author's Estimate of Piracy of Books

The importance of intellectual property generally and copyright protection for authors in particular remains a question in debate. In rehashing the arguments given for the need to extend copyright protection periods in the US, it is often stated that piracy robs authors and other creative artists of a substantial income by curtailing sales of legitimate copies of works.

While it is understandable that authors on the one side and publishing firms have an interest in selling as high a number of copies of any work as is possible, one cannot help feeling that the estimates of the extent copyright infringement is based on guess work. My skepticism is oftentimes inspired by the argument that every pirated copy of books or music for that matter, reflects a displacement of another copy. I do not think that it is correct to estimate that for every pirated copy of music or publication displaces the another exact copy hence a 100% loss of income for the publishers and the authors. And despite this hunch, it is difficult to conduct an estimate as no experiment or survey has been conducted to resolve this question. indeed, most publishing corporations would be opposed entirely to such an experiment.

With this difficulty in mind, I am quite surprised that Paul Coelho has an estimate of pirated copies of books relative to total legitimate sales. In an interview appearing in the Guardian here on a an upcoming book, the author who has sold a total of 150 million books estimates that perhaps another 20% are available in pirated copies. Being cognizant of the fact that this is definitely an estimate, the figure is in stark contrast to what aggressive promoters of stringent intellectual property rights may argue for. In all, it suggests that the proportion of pirated works for this high-selling author is about 16%.

Taking this figure to advance this argument, I am aware that this may not apply to every author and every genre. In my view, the estimate is important to the extent that it confirms my suspicion that piracy of copyrighted book may be localized in certain places but is definitely not as high as is claimed by those with an interest in maintaining stringent standards. I also assume that degree of piracy may differ with the popularity of each book. For instance, would a popular book have more pirated copies as well or is that a book is popular in spite of piracy?

India's Malnutrition Problem

I have stated before that one of the most fascinating self-executing experiments in economic development is that between India and China. Both countries have had economic growth rates that are well above the global norms and are large countries with sizable populations. Indeed, I have stated that India's ingenuity, added to its long experience with democratic, if chaotic government may give it an advantage over China in the long term.

Having stated that bold wager, I still have to concede that some facts about this fascinating country provide reasons for self-doubt. Somini Sengupta, writing in the NYT here, reports a set of strange facts regarding India's human development conditions. One of those that i have been aware of is that India has the largest number of malnourished people in the whole world. The story highlights the far more subtle problem of child malnutrition and the fact that the subsidy programme is poorly designed and ill-targetted.

While I concede that development is essentially a difficult slog and a chaotic process, it is still a paradox that a country that has a high tech software industry is incapable of designing an acceptable subsidy programme.

Why are Banks Bribing Some Credit Card Holders?

Banks and financial institutions which issue credit cards to their customers make money in two ways. The first is through the subscription charges paid annually for one to own a card while the second is by charging interest on the balance on the card itself. As competition got more intense, the banks wiped away the subscription charges and came to rely primarily on the interest income. This situation led to the often stated fact that most working US citizens were being bombarded with credit cards for which they had not made applications but which a significant number took up to maintain the consumption that characterized recent years.

James Surowiecki's piece in the New Yorker states that banks are now faced with the real chance of defaults on credit card debt on account of the state of the economy. In this instance then, the financial institutions find that it is important to identify the customer who is most likely to default on a loan and cut him off and reduce that risk of default. As the story states, that is not so easy because the profit model for the banks is to find a spendthrift who uses the cards intensely while paying only the minimum payment on the balance. This category of customer is difficult to shed without affecting profits because a majority of interest income is gained from the rolling over of debt. This presents a dilemma because shedding off this customer could affect future profits because the safer category of customer would probably pay the entire balance on time and thereby earn the bank little or no interest fees.

So it appears that the economic crisis and the recession is not only leading to the questioning of the models of profits that were designed by hedge funds but it is also asking for the re-examination of the structure of the credit card markets. This is especially poignant for me because I just finished reading Dan Ariely's book, Predictably Irrational a couple of months ago. One of the best chapters in there was the solution that he designed in the quest to assist banks to reduce credit card misuse but which was rejected or ignored at a meeting with one bank. To my mind, while I found the proposals slightly paternalistic hence objectionable, that the bank dismissed it off-hand was a manifestation of short sightedness. It is even more surprising now that one bank is having to provide a US$ 300 inducement for clients to close their accounts. This realization makes the title of the article quite apt in reference to some of the banks.

Why the US Needs Comparative Effectiveness Research for Medical Care

Reading this well-written piece by Sharon Begley got me thinking. One of the mysteries of the practice of medicine in high income countries is the fact that US spends a substantially larger proportion of GDP on medical care and yet the conventional outcomes place it below France and Canada. Both these countries have some form of publicly-funded medical care through a national health insurance plan.

One of the planks of president Obama's campaign promises was not only to enact legislation to provide health insurance for all US citizens, but to also institute a the Comparative Effectiveness Research (CER) mechanism which Begley argues for in the article. Understandably, the failure or reluctance of doctors to monitor the relative effects of treatments results in too much treatment with the incentives being misaligned with patient interests. She suggests strongly that doctors are driven by a cultural tendency that is not itself informed by any science and that this results in regional disparities in approaches that are evidently wasteful.

The need for the Comparative Effectiveness Research to compare the relative merits of treatment options makes both economic and medical sense. However, while the article suggests that there is no comparable mechanism, this Kevinmd blog post refers to a study carried out on a similar system that measures the summary of a study that compared hospitals with different electronic clinical knowledge databases. The result of that study is that there is better performance on the part of hospitals that use the electronic reference facility uptoDate.

Since all I have read is the summary, which also has a number of caveats, I cannot tell to what extent uptoDate is a comprehensive CER mechanism. still, i am glad that one exists and perhaps the review of its performance should be made with a view to expanding its use as an alternative to the CER that will be set. Unlike Dr. Kevin Pho MD, I have no problem with establishing competing mechanisms for ensuring CER provided it is capable of ensuring that the expensive tests are not called for in vain.

Don't Forget Economic Growth

With very few exceptions, the ongoing debate among macro-economists falls squarely within the spectrum of ideological differences. Each side is concerned primarily with isolating facts that would support the main contention. For instance, the big argument is whether president Obama’s stimulus package will be useful or whether it will merely deepen the crisis. To my mind, the argument between monetarists and Keynesians will probably not be resolved irrespective of the outcomes of the stimulus packages that the US, European, Japanese and the Chinese governments adopt. Just like many people, many macroeconomists have invested life’s work in supporting either side of that divide hence are unlikely to abandon that in spite of the outcomes.

However, the point that has been conspicuously absent is how any nation and the US in particular would maintain the growth that it needs irrespective of that outcome. Darron Acemoglu seems to be in the minority who are engaged in this. In this extremely balanced and perceptive piece, he reminds me that the purpose of economic policy should be about promoting growth. This growth imperative is not only undeniable but introduces an issue on which the contending parties cannot easily brush aside. He states a chastening idea that the imperative of growth implies that attempts to sacrifice growth in dealing with the crisis is a poor trade off.

Stressing that the three main mechanisms for maintaining growth are technological advancement, reallocation of resources and institutional quality, the piece suggests to me that winning the ideological argument between the Keynesians and the neo-classical economists without growth would be a pyrrhic victory.

The standing developments of New Growth theory by Paul Romer argues that long term economic growth is primarily and directed by innovation and technology. Innovation is not only tied to the development of physical technologies as the internet and machines but even financial products that are now so despised. He states that, “Even the financial innovations, which are somewhat in disrepute in the recent crisis, are in most cases socially valuable and have contributed to growth”.

The implications of the reallocation mechanism as a driver alludes to the Schumpeterian idea of creative destruction and the US government should be cautious about protecting all firms by all means. It is clear that a number of firms will be built upon the ashes of the firms that are presently unable to provide value. In essence, the automobile manufacturers of the US are probably not worth trying to save by all means. Reallocation of that labour, skill and capital away from the big three Detroit firms is an imperative for growth and for renewal that may be politically difficult but is essential for the US. I am in agreement here.

Institutional foundations to support a markets economy are also argued for. These include property rights, a level playing field and regulations to support free markets. The most encouraging comment is the need to free market economics and capitalism from the rhetoric that it is bereft of regulation. In the midst of the ideological fight, it is right to see a competent economist driven by the desire not to lose the quest for growth.

ECIPE's Blog

There are thousands of blogs that discuss issues of economic theory, policy and public policy. It would seem as if the blogs that should be established are already established. However, this is an area where in spite of the existence of mediocre blogs, there's no loss from the establishment of one that stands above the rest. The blog roll here is representative of some of the best and most popular blogs that i know of too.

European Centre for International Political Economy (ECIPE) has established a new blog on which there will be regular posting from Razeen Sally and Frederik Erixon. So I am glad that there a new blog out there that's worth reading and which I will shortly add to the blog roll for bookish posts. Judging from its name, Trade Matters, one can tell that it is primarily concerned with trade policy and other matters of international goods and services exchange. having encountered Razeen Sally's writings on the WTO and international trade architecture, i am sure that this is one that is worthy of regular reading. the blog is also established at the right time because of the apparent push back in reforms coming from the misinformed view that the financial crisis and subsequent recession is a manifestation of the failure of open markets and liberalized economy.

In my view, the blog is very aptly named for trade really matters and I find it curious that the phrase has two possible meanings. the first is the sense that the subject matter will be trade while the alternative is that trade is essential. Both are true and that's all that matters.

Is the Kindle 2 Leading Towards a Monopoly?

Judging from this earlier post, I leave no doubt that I consider the Amazon Kindle 2 to be a fascinating piece of equipment that may yet change the broad economics of book production and distribution. In that same post, I argued that the traditional paper publishers should be more circumspect in their views about the Kindle 2 for the reason that reason that it will disrupt their business and pricing models.

It is therefore fair to consider what the success of a proprietary model like the Kindle 2 would have on the competition landscape. To start with, this piece by Farhad Manjoo on Slate has addressed the immediate concerns regarding the possibility that the success of Amazon's e-book reader may lead to substantial market power.

The first point is that Amazon has established an exclusive standard and locked in Kindle 2 buyers into purchasing exclusively from Amazon. This means that buyers of the Kindle 2 are bound to be locked into purchasing products from the Amazon stores, a situation that closely mirrors the lock down which Apple maintained with the original sale of tracks from its iTunes stores. In fairness, this is a legitimate concern in the sense that the Kindle 2 is not only an expensive gadget but one that limits the choices of the sources of the material that could be used with it. If this business model is maintained, then it is possible that the success of the Kindle 2 would allow Amazon to wield substantial market power with both the producers of content on the one side and its customers on the other.

Secondly, Farhad Manjoo claims that buyers of books have grown accustomed to sharing their books with others and that this will be impossible with the Kindle 2. I am unsure that this is true because the sharing is still possible only to the extent that one would have to lend out one's kindle together with the entire library for the duration of the lending. What I see as a distinct possibility is that while it may not be possible to transfer the e-books, many people who are avid readers will lend out their machines in exchange for others. I am not that sympathetic to this view because two Kindle 2 owners may soon buy different titles and merely exchange the gadgets to allow each to read the other book. Indeed, if the Kindle 2 was to be so successful that it reached a critical mass, then this would control the extent to which Amazon would use it power to raise prices. Sharing will still happen in the same way that people shared the physical CDs.

The third point follows from the fixed nature of the E-book and the restrictions to copying that come with its purchase. here too, I think that Amazon would be completely naive to think that there would be a perfect electronic format that would preclude copying. It is just not possible that if the Amazon became as successful as I expect it will be, that there would be no software programmer out there who would not breach the DRM system. In a short while, it will be possible to copy the e-book without much problem even if that were illegal. I see no reason why DRM would be useful here when it was not with music. Following Steve Jobs eloquent argument on which this post was based, I am less inclined to believe that no software programmers out there would not be equal o the task. Indeed, the problem would be whether there's a mechanism t transfer it from one machine to the other. But that it would eventually be copied is something that i would wager a reasonable bet on.

To my mind, the real issue that concerns competition policy here is to actively watch the markets for Kindle 2 and ensure that Amazon does not retain exclusive arrangements to sell all e-books that are compatible with the Kindle to itself. To democratize that part by allowing Kindle 2 buyers to buy the books from other competing stores would be sufficiently welfare enhancing. The competition at that level would ensure that the publishers reexamine the folly of charging similar prices for the electronic books as they do for paper versions. The Kindle 2 should bust that part. Then the e-books market should be open to competition.