Man Without Qualities

Saturday, December 06, 2003

Global Manufacturing Jobs Shrinkage II

In the post linked above, the Man Without Qualities expressed extensive skepticism over some aspects of reports that manufacturing jobs have declined recently in China:

With respect to China, for example, there are also reports that manufacturing in China often tends to substitute human labor for the technology employed in the country from which the jobs "come."

China also has some peculiar labor laws that one can imagine creating some very strong incentives for employers to report the "loss" of manufacturing jobs. ... This is just one peculiarity of Chinese employment law that might distort employment statistics.

There is also generally and worldwide a rather strong relationship between the number of employees an employer claims and the employer's tax obligations. The reader may wish to take a private moment to contemplate the traditional relationship between a Chinese business owner and the tax authorities.

I would be very skeptical of the reliability of Chinese employment statistics generally. This is a country that for decades officially denied that it suffered any unemployment at all!

Indeed, it is difficult in the extreme to ... accept easily the proposition that China saw a 15 percent drop in factory jobs...

Another report in the New York Times details yet more legal incentives for some Chinese manufacturers to suppress the number of employees reported to the government:

A more recent memo, issued to prepare for an inspection that took place on Nov. 26, urged workers to memorize false numbers for wages and working hours to reflect Shenzhen's regulations. The memo promised bonuses to workers who responded as directed when approached by inspectors.

Workers said the elaborate ruse had one happy result. Because few of the employees have legal work contracts on file, the factory must pretend that its work force is smaller than it is when inspectors visit. On such days most of the factory's 850 workers get a rare treat: a day off.

On Nov. 26, with an inspection under way inside the plant, workers congregated in their rented homes or food stalls to eat, chat, smoke and gossip.

"I thank the inspectors for one thing," said a Kin Ki worker from rural Sichuan. She was crouching over a bucket of cold water in the warm afternoon sun, washing her hair. "I needed a rest," she said.

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Approval Rating

FOX News/Opinion Dynamics Poll. Dec. 3-4, 2003. N=900 registered voters nationwide. MoE ± 3.

"Do you approve or disapprove of the job George W. Bush is doing as president?"

......................................Approve...................Disapprove...........................Don't Know

It's curious that the "approve" number remains unchanged while the "disapprove" number declines by 7% in about two weeks.

Maybe that's what MoE's are for.

The FOX News/Opinion Dynamics Poll for General Election results shows a similar curious pattern.
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Another Gray Lady Waddle

The New York Times, in the form of a Floyd Norris article, waddles in, falls down and can't get up, in its very-late-breaking report on the divergence between the payroll survey and the household survey of the nation's employment. The significance of this divergence has been emphasized repeatedly by various bloggers (including the Man Without Qualities) for many months. The trajectory of the Gray Lady waddle is predictable, as Don Luskin points out quite effectively. At his nadir, Mr. Norris comes close to dismissing the self-employed as at-home spammers.

Specifically, the Times reports:

The self-employed are a group that statisticians have a hard time dealing with, and the apparent growth in that group may or may not be a good sign for the economy. Some people who say they are self-employed may really be out of work and trying to bring in money as consultants or freelance workers. Others may be doing very well, living a dream of boss-free success. In any case, the government reported that the number of self-employed workers rose by 156,000 last month, to 9.2 million. That gain was a primary reason that the unemployment rate dropped to 5.9 percent.

But there are other government statistics that squarely address - although not fully resolve - the supposed gap in understanding of the typical self employed, as Mr. Norris could have read in an excellent Wall Street Journal article by Jon E. Hilsenrath about a week ago:

Self-employment has increased by 400,000 in the past year alone, according to a monthly survey of American households conducted by the Labor Department. But it has been hard to tell whether these new self-employed workers were really profiting from their ventures, or whether they were just biding their time during a period of painful unemployment.

Now, investment strategist Kenneth Safian says he has found evidence that small enterprises really are playing an important role in the recovery. The evidence is buried in the government's monthly personal-income report, which was released last week. Proprietors' income, which is the income earned by individuals from running their own businesses and from partnerships, is surging. The Commerce Department reported Wednesday that proprietor's income, excluding the farm sector, was up 8.6% from a year earlier. By contrast, the wages and salaries of individuals on corporate payrolls were up just 2.3%.

Proprietor's income covers a broad swath of the economy -- everything from larger law firms to one-person construction companies or tech consultants operating out of a home office. Mr. Safian, who is president of Safian Investment Research Inc., based in White Plains, N.Y., says the upshot of the latest trend is that more workers are striking out on their own and earning money doing it. The economy, he says, "is becoming more entrepreneurial."

If that is the case, it would say a lot about the dynamism of an economy that has been through series of shocks in the past three years. It might also help explain why official payroll employment levels have been so depressed in recent months. If more people are striking out on their own, then their job status in some cases wouldn't show up in the government's measure of employment levels at established businesses, which is down 2.4 million since the recession started in March 2001.

Unfortunately, there are no official statistics for business formations across the $10 trillion economy. And there are other explanations for the recent pop in proprietor's income. .... Today, proprietor's income is taking on a rising share of total national income. ...It is possible that the latest burst of income will be revised Dec. 10, when the government updates its estimates of national income and output using fuller data sets from the IRS.

That release in early December might also provide a glimpse of which industries account for the apparent rise in business formations. Right now, the government's data break down proprietor's income into only two sets -- farms and everything else.

Who knows, maybe the December 10 data will confirm Mr. Norris suggestion that most of those proprietorships are just at-home spammer, not dignified wage-slaves like Mr. Norris.

It could happen. But I wouldn't bet on it.

MORE: Interesting alternative universes from Steve Antler.

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Friday, December 05, 2003

And, Of Course, These Polls Are Taken Before A Lot Of People Figure Out That The Economy Is Recovering ...

... the polls eleven months from now will likely reflect a much larger dose of prosperity:

People are increasingly comfortable about job security for themselves and for those they know - 44 percent now, compared with 35 percent in early October.

And more approve of the way Bush is handling the economy - 50 percent compared with 45 percent earlier, according to the poll conducted for the AP by Ipsos-Public Affairs. Support for his handling of other domestic issues like education, health care and the economy, at 47 percent, has not shifted significantly.

The president's re-election numbers have slightly improved, with 41 percent saying they will definitely vote for him and 36 percent definitely against him. One in five is considering voting for someone else. In mid-November, people were evenly split, 37 percent for and against.

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The Third Tweedle

During the 1968 presidential campaign, Walt Kelly portrayed Richard Nixon and Hubert Humphrey as Tweedle-Dee and Tweedle-Dum, each with a "secret plan" to end the Vietnam War. Kelly had his two Tweedles sing in unison - or at least close harmony - this song or one like it (if memory serves):

I have a very seec-er-et plan,
For ending the war like a pol-i-ty sham.
I'd say "no, no" once,
And "hey-watch-it" twice!
After appeasing the hearts of bi-partisan moms,
I'd launch a chain letter of monogrammed BOMBS!

Wesley Clark seems to be vying for position as the Third Tweedle:

Gen. Wesley K. Clark assured a crowd at a college campus here on Thursday that he had a strategy to secure Iraq and bring American soldiers home, criticizing the Bush administration for not producing a timeline to withdraw troops. But General Clark later refused to specify when he would bring troops home or how many more soldiers might be needed to stabilize Iraq.

MORE: From Maguire.
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Herr Doktorprofessor Loots Trade Theory

Herr Doktorprofessor Paul Von Krugman's column today is a rich compost pile of leftovers from many of his Bush-bashings past, including - just un peu, mind you - from what is supposedly his specialty dish, international trade:

Then there's international trade policy. Here's how the steel story looks from Europe: the administration imposed an illegal tariff for domestic political reasons, then changed its mind when threatened with retaliatory tariffs focused on likely swing states. So the U.S. has squandered its credibility: it is now seen as a nation that honors promises only when it's politically convenient.

Surely Herr Doktorprofessor is right on this one. Such White House behavior has got to go! And the new Democratic administration that begins its term in 2005 will see to it, right? Indeed, the Los Angeles Times reports that the Democratic contenders are speaking out:

Gephardt and former Vermont Gov. Howard Dean, who have won the most endorsements from organized labor, voiced the strongest support for keeping the tariffs. Connecticut Sen. Joe Lieberman is opposed to the tariffs, but argues that Bush could have done more to help the domestic steel industry. Retired Gen. Wesley K. Clark, who has not run for office before, avoided taking a specific stance on the tariffs. .... Clark said in a statement. "We need a real strategy to help our manufacturing communities."

But a spokesman would not say whether Clark supported or opposed steel tariffs.

Lieberman suggested that Bush should have done more to push foreign steel competitors into fairer trade practices, among other measures. .... Gephardt, who has been endorsed by United Steelworkers of America, argued that Bush should have asked the International Trade Commission to review whether the tariffs could be restructured in a way that would address objections raised by the World Trade Organization.

"The president's decision to prematurely lift the tariffs on steel imports severely undermines the recovery of the U.S. steel industry from decades of unfair trade practices that have jeopardized the viability of a vital domestic industry," he said in a statement.

Dean joined him in criticizing Bush's trade policies.

"Despite what President Bush may claim, the steel industry needs additional breathing room to get back on its feet," Dean said. "But the tariffs are a short-term solution to a larger problem: this administration's broken trade policy. Our trade agreements need to benefit workers, not just big multinational corporations." ....

Earlier this week, Kerry voiced support for maintaining the steel tariffs, saying, "Bush is cutting and running from his commitments to help working Americans."

Edwards did not specify his position on the steel tariffs, but took Bush to task for not protecting jobs.

"This president has done virtually nothing to protect American manufacturing jobs ?— not steel manufacturing jobs in Pennsylvania, not steel consuming jobs in Michigan, not textile jobs in North and South Carolina," he said.

A recap:

Gephardt, Dean and Kerry are squarely for extending the tariffs. Gephardt even suggests that they could be "restructured" to make them legal - although Herr Doktorprofessor elsewhere has implied that they are illegal in principle. His column does not address the point.

Clark and Edwards offer incoherent waffles, while arguing that jobs in the steel industry should be "protected" without any suggestion of how that might be done absent protectionism.

And while Lieberman at first seems to advocate ending the tariffs, he makes the weird, unsupported suggestion that American the steel industry has been the victim of "unfair trade practices" by foreign steel competitors - practices the foreigners should have been "pushed" more to end. That Senator Lieberman is bloviating (at best) here is clear from his failure to identify what those "unfair trade practices" might be, or why he hasn't exposed and crusaded against them expressly, or how the President is supposed to "push" for their end other than by imposing trade sanctions like the tariffs.

Much later in the column, Herr Doktorprofessor does allow that some of the general "looting" he ascribes to the Administration is "bipartisan" - but he does not mention trade policy.

It of course goes without saying that the Administration's intentions are sinister in Herr Doktorprofessor's mind, as where he notes: The prevailing theory among grown-up Republicans - yes, they still exist - seems to be that Mr. Bush is simply doing whatever it takes to win the next election.

But if the Administration's unprincipled craving to win the next election is what is driving trade policy, why does the Los Angeles Times report:

The Democratic candidates vying to unseat President Bush next year quickly seized on his decision Thursday to lift tariffs on steel imports, seeing it as an issue that will give them a political edge in key steel-producing states.

Party strategists said rescinding the tariffs had jeopardized Bush's standing in Pennsylvania, Ohio and West Virginia ?— the country's top steel-producing states and likely battlegrounds in the 2004 presidential election. Combined, the states account for 46 electoral votes.

In the 2000 election, Bush carried Ohio by about 4 percentage points and West Virginia by about 6 percentage points. He lost Pennsylvania by about 4 percentage points. His decision to end the 30% tariffs on some foreign steel products that he imposed in March 2002 is sure to rankle steelworkers in each of the states, Democrats say.

"The president, unfortunately for him, made a major blunder," said Bill Carrick, a strategist for Missouri Rep. Richard A. Gephardt's presidential campaign. "He didn't have the guts to stick with his original position. I think it's going to leave an awful bitter taste in people's mouths."

UPDATE: Don Evans, the Commerce Secretary, writes in today's Wall Street Journal:

Prior to March 2002, the U.S. steel industry was faced with surging imports of foreign made steel, high costs, inefficient excess steelmaking capacity at home and abroad, and the lack of demand for steel in foreign markets. Decades of government ownership and subsidization of foreign steel mills had greatly distorted this market, leading to an unlevel playing field that cost American jobs. After years of neglect, President Bush responded forcefully by announcing a three part plan that, in addition to launching negotiations to establish disciplines on government subsidies and working to reduce inefficient excess global steel capacity, included a temporary safeguard on steel imports, as authorized under U.S. trade law, to address these problems.

The president's plan has worked.

Are the "unfair trade practices" referred to by Senator Lieberman - the only Democratic contender for the presidency who seems remotely on Herr Doktorprofessor's page - the same ones Mr. Evans cites in this passage? Does the Senator disagree that the president's plan has worked? Why so coy? In any event, the WTO rejected the practices described by Mr. Evans as inadequate justification for the tariffs. Are there other practices and countermeasures that the Senator has in mind? What the heck is he talking about?

MORE: On Maguire. Don't overlook the comments - especially the hilariously disingenuous squib lobbed in by Brad DeLong!

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Thursday, December 04, 2003

Paying For Prescription Drugs

The new prescription drug benefit is to cost $400 Billion over ten years. There has been much hand wringing over how to pay for it.

At the same time, the Financial Times reports: Overall support to US agriculture is estimated by the OECD at $50bn, or about one fifth of the value of output. Exports such as wheat, maize and cotton are transferred to world markets at prices far below production costs.

Nowhere are the double standards applied to Chinese agriculture more evident than in relation to agricultural export dumping. Under its WTO accession treaty, China agreed to a prohibition on the use of export subsidies. Two months ago, the refusal of the US and the European Union to contemplate such a prohibition was one of the factors contributing to the collapse of the Cancun ministerial meeting of the Doha development round.

Fifty billion a year for ten years is Five Hundred Billion Dollars. That's a lot of prescription drugs. And, as a bonus, if it stopped subsidising agriculture, the United States would get to stop acting like a foolish hypocrite in international trade talks.

Gee, isn't international trade economics supposed to be the specialty of Herr Doktorprofessor Paul Von Krugman? And isn't he very concerned about that Medicare bill?

Does he ever suggest moving money out of anything in the federal budget other than the military? There must be an example of that.

UPDATE: In today's column Herr Doktorprofessor comes tanatlizing close to advocating a cut in agricultural subsidy spending:

Nothing in our national experience prepared us for the spectacle of a government launching a war, increasing farm subsidies and establishing an expensive new Medicare entitlement

But he pulls back from the brink just in time to explain that his real criticism of the Administration is its not only failing to come up with a plan to pay for all this spending in the face of budget deficits, but cutting taxes at the same time.

I know it's reading a bit between the lines, but it seems that the increasing farm subsidies and establishing an expensive new Medicare entitlement would have been much more acceptable to Herr Doktorprofessor if taxes had been raised to pay for all this spending.
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Corporate Governance In Disneyland: A Sad Chapter III

More rumors - these from the New York Post - that Michael Eisner will try to lure Steve Jobs onto the Disney board.

It certainly makes sense for Mr. Eisner to try to do that - for exactly the same reasons that make such a move so completely senseless for Mr. Jobs.

To begin, as the Post article notes: "For one thing, Eisner apparently doesn't much like Jobs, either."

From what I read, that is a massive understatement. Steven Paul Jobs heads both Apple Computer and Pixar - and the endlessly hostile Disney/Pixar negotiation of an extension to their distribution contract have come to resemble the talks to end the Vietnam War.

Jobs would be crazy to take the Disney seat. He would have no real influence on the Disney board beyond what he already has from Pixar, and would pick up a whole network of conflicting fiduciary duties to the public shareholders of three companies. Michael Eisner has already accused him of facilitating piracy of Disney's products - how would Mr. Jobs like to be on the receiving end of conflicting fiduciary obligations arising from his Disney, Apple and Pixar board seats on that account?

Life is too short. And Mr. Jobs is smart enough to know that.

Maybe this will happen, but I'll believe it when I see it.

On the other hand, I have heard that Jobs and other Pixar officials are pretty good buddies with Roy Disney - who seems to be pretty easy to like. Could Roy persuade Jobs to head Roy's alternative-director proxy-contest list? Or even a hostile takeover plan? Of course, Mr. Jobs can't do any of that if Mr. Eisner puts him on the Disney board.

If the Pixar/Disney talks go badly enough, maybe Jobs and Roy could set up a merger proposal between Disney and Pixar, with Pixar management taking over the combined entity and a business plan to get rid of Eisner and his lapdogs on the Disney board and ABC - or at least Peter Jennings?

Any sensible Disney shareholder should take that deal if it were reasonably structured. There's huge unexploited and misapplied value at Disney. Steve Jobs has made quite a respectable turn-around at Apple and he's got a long track record of brilliant, multi-faceted thinking in many areas. Pixar is hugely profitable.

Why not get rid of the superfluous Eisner and let Jobs have a turn running a combined Pixar/Disney? Why, the huge investment banking fees alone should be making scads of those young New York investment bankers and analysts toil through the night structuring proposed deals right now! Hey, boys, it's better than true - it's a GOOD STORY!

Go for it!

UPDATE: Jim Hill Media has lots more.
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Corporate Governance In Disneyland: A Sad Chapter II

Some of the odder comments that have emerged from the recent and ongoing Eisner/Disney kerfluffle are those suggesting that Roy Disney is off base because Disney stock and results have improved. Of course they've improved - the whole stock market and economy have improved. Disney's improvement proves very little.

Without getting into the specifics of the internal dispute, it is worth noting that Disney has slightly underperformed the NASDAQ and modestly outperformed the S&P.

Whether such performance is acceptable to a given institutional investor is a matter of investing style. But Disney's recent stock performance would be considered exceptional by very few fund managers.

But Disney is not the only large media company with serious stock performance issues. Viacom has been such a dud over the past twelve months that it makes Disney look positively inspired, although Viacom's performance over the past five years (a better indication of management's abiity to create value) has been much better than Disney's. Even the dreadful Time Warner has done far better than Viacom over the past twelve months. Disney has done just about as well as News Corp on a twelve month basis, although News Corp has also done far better than Disney on a five year basis. News Corp has also outperformed the major indicies on a five year basis.

Disney's problems seem an awful lot like big media's problems generally. A concentrated, too-regulated industry. Management more entrenched than WWI battlelines. Strategic patterns of monopolistic competition - but long term sluggish results.


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Wednesday, December 03, 2003

Priceless Kounter-Krugmania

At Luskin.
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Zogby: John Kerry Shrinks To Almost Nothing In New Hampshire

The Zogby poll results released today:

Former Vermont Governor Dr. Howard Dean, who enjoyed a 40% - 17% lead in October polling of New Hampshire Democratic primary likely voters over Massachusetts Senator John Kerry, has stretched that lead in December polling to 42% - 12%. Retired general Wesley Clark is third at 9%, followed by Connecticut Senator Joseph Lieberman with 7%.

Dr. Dean is also back on top in Iowa:

With less than seven weeks remaining until Iowa’s January 19 caucus vote, Former Vermont Governor Dr. Howard Dean has re-taken a slight lead in his quest for the Democratic presidential nomination. In December 1- 2 polling of 500 likely Iowa caucus voters by Zogby International, Dean jumped back ahead of Missouri Congressman Richard Gephardt, the earlier Iowa front-runner, 26% - 22%, yet within the poll’s margin of statistical error.

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Corporate Governance In Disneyland: A Sad Chapter

In addition to tendering his letter of resignation to the Walt Disney Company, Roy Disney is circulating the following letter addressed to Disney employees ("cast members"):


December 3, 2003

Dear Disney Cast Members,

It was nearly 20 years ago that a small group of us recognized that dramatic changes were necessary to reinvigorate and reenergize the Disney Company. We changed the composition of the Board and assembled a new leadership team headed by Frank Wells and Michael Eisner. I returned to the Disney cast and, working as a team, we planted the seeds that rekindled the spirit and creativity that is synonymous with Disney. Those efforts paid off handsomely in the late ‘80s and early ‘90s. Once again, Disney was admired for the wholesome family entertainment it brought to millions of people of all ages. Together we created the dreams and excitement that made Disney respected and beloved throughout the world. We succeeded in recapturing the dream born of Walt and my father and the heritage they left to us.

Sadly, times have changed. Michael Eisner has lost sight of the vision upon which this Company was founded. The focus has shifted to the chase for the quick buck instead of a dedication to new and high quality ideas, the development of enduring value. This has led to division within the Disney workforce, a revolving door of managers, and the exodus of too many of our most creative and inspired employees.

For the last several years, Michael Eisner has done his utmost to isolate me from the members of Disney’s Animation Department and exclude me from participation in decision making regarding the Department. Most recently, I was prevented from even attending the Animation Department screening of three pending feature animation projects. The collegiality and openness that once typified the Disney workplace has been destroyed.

It is against this backdrop that I had no choice but to resign as Chairman of Disney’s Animation Department and as a member of Disney’s Board of Directors. This has been a very painful decision. I am torn between my duties and loyalties to all of you who have made my journey so memorable and special, and the
need to preserve the Disney heritage for future generations. However, I cannot stand idle as the heart and soul of this Company is being systematically eliminated by senior management protected by an ineffective Board of Directors. This is a Board that seeks to avoid the constructive tension necessary to guide management through difficult times. Instead, it is a Board that seeks to stifle dissent and, to that end, has asked me to leave the Board of Directors.

Although this is not how and when I would have liked to leave the Disney Company, I assure you that I view it not as an isolated and sad event, but as part of a process. I hope it is not too late for the Disney Board of Directors to finally recognize that fundamental change is needed to restore the Disney luster, nurture and protect the wonderful characters that together we have developed and, most importantly, to create the environment within the workplace necessary to give life to new Disney icons for the generations to come.

As I now set off on a different course, I cannot fail to publicly and openly once again express to all of you my most heartfelt thanks. I am grateful that we have shared this journey. Without you, your contributions and camaraderie we would not have been able to make the magic and wonder that is Disney. I hope that one day soon the Disney Board gets the message.

Yours faithfully,

Roy E. Disney

UPDATE: The Los Angeles Times has its say.

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Patently Absurd

Writing in the New York Times, Stephen S. Roach, chief economist for Morgan Stanley, says all that you've been reading about US workers becoming more productive is probably poppycock. According to Mr. Roach, people are just working longer hours and the government isn't keeping track of it:

The denominator of the productivity equation - units of work time - is even more spurious. Government data on work schedules are woefully out of touch with reality - especially in America's largest occupational group, the professional and managerial segments, which together account for 35 percent of the total work force.

For example, in financial services, the Labor Department tells us that the average workweek has been unchanged, at 35.5 hours, since 1988. That's patently absurd. Courtesy of a profusion of portable information appliances (laptops, cell phones, personal digital assistants, etc.), along with near ubiquitous connectivity (hard-wired and now increasingly wireless), most information workers can toil around the clock. The official data don't come close to capturing this cultural shift.

It would be nicer if Mr. Roach could have presented even one tiny bit of evidence for his claim that the government statistics he knocks here are "patently absurd." That's especially true because the workers themselves don't seem to be reporting increased hours worked on a long term basis when they are polled (although they do report a modest rise in hours worked in the past year).

And while it is true that most information workers can toil around the clock courtesy of the new technology, many of those workers sell their labor by the hour, such as attorneys and accountants. It's therefore not likely that their hours are growing but going unreported. Also, it's not really that easy for many people to find quiet time and space to toil around the clock if they are parents of young children or expect to remain or become married. Is the image supposed to be of an office manager phoning in instructions from the freeway? If so, then how does one distinguish such a manager who leaves early because he or she can phone in from one who is actually working longer hours? And are hours spent phoning in from the freeway as effective as hours in the office? Mine never seem to be. Anecdotally, most employers I know who have allowed employees to work from home do not feel that those employees toil around the clock. Far from it. Young investment bankers sometimes toil around the clock. Is it possible that Mr. Roach, who works for an investment bank, has come to view investment bankers at Morgan Stanley as representative American workers? Why is it that thought is so terrifying?

In any event, it's impossible that Mr. Roach could have come to think that way. That would be patently absurd. In fact, it would be as patently absurd as a senior economist with a major investment bank asserting on the pages of the newspaper of record that the official data on a major economic variable is "patently absurd" even though it seems consistent with professional private polls - all without offering any evidence for his assertion whatsoever.

Now that's really patently absurd.
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The Bad Economist? II: Some Problems With Predictions

The sorrows are not new. That is, the sorrows of aging enfant terrible Herr Doktorprofessor Paul Von Krugman with economic forecasting that recently brought him to the absurd and humiliating position of writing in late July, almost one full month into the third quarter for which the GDP growth rate is now known to have been 8.2% and non-farm business productivity rose at 9.4% annual rate, that There is very little evidence in the data for a strong recovery ready to break out.

Richard Posner, one of the countries best federal judges and a leading light in the application of economics to law - wrote of Krugman in Posner's book Public Intellectuals: A Portrait of Decline:

He was not hired by the Times for his record as a prophet. In a book published in 1990 [The Age of Diminished Expectations: U.S. Economic Policy in the 1990s] he had offered as 'the most likely forecast for the U.S. domestic economy in the 1990s...fairly slow growth, modestly rising incomes for most Americans, generally good employment performance, [and] a gradual acceleration of inflation' to 7 percent. He predicted that by 2000 the United States would "have sunk to the number three economic power in the world," after Europe and Japan, and that the world economy would be less unified than it had been in the 1980s. He published a "revised and updated" edition four years later, but retained these predictions.

These dud predictions lie at or near the heart of Paul Krugman's main academic interests: international trade and growth and comparative economic performance. In other words, these duds are not just the rantings of Paul Krugman qua journalist - these are the rantings of Paul Krugman qua academic economist.

Another of Herr Doktorprofessor's central academic interests has been currency. So it's appropriate to take at least a preliminary review of his his prediction about the fate of the US dollar:

The crisis won't come immediately. For a few years, America will still be able to borrow freely, simply because lenders assume that things will somehow work out. But at a certain point we'll have a Wile E. Coyote moment. For those not familiar with the Road Runner cartoons, Mr. Coyote had a habit of running off cliffs and taking several steps on thin air before noticing that there was nothing underneath his feet. Only then would he plunge. What will that plunge look like? It will certainly involve a sharp fall in the dollar and a sharp rise in interest rates. In the worst-case scenario, the government's access to borrowing will be cut off, creating a cash crisis that throws the nation into chaos.

Keeping in mind that Herr Doktorprofessor was careful to locate this prediction several years in the future, it is still valuable to observe the recent movement of the dollar to see he is correct when he writes that during that period of years America will still be able to borrow freely, simply because lenders assume that things will somehow work out. After all, his prediction of a plunge at the end of that period depends on his prediction that lenders will make their adjustments more or less massively after ignoring the warnings in the mean time. Is that right? Failure of the market to absorb and reflect information - such as currency warnings - is something one more easily associates with small, illiquid instruments - like an under-covered stock or the currency of some minor trading nation. The US dollar is anything but that. So if what Herr Doktorprofessor is predicting is right - and he is essentially extrapolating from his third-world currency experience to say that the US dollar will act a lot like, say, Thai currency did in the Asian financial crisis - that could be another breathtaking, revolutionary revision of classical thinking!

But the US dollar has been in a long-term, gradual decline against the Euro and the Yen. That indicates that foreign lenders are doing anything but assuming that things will somehow work out. In fact, lenders and the world currency markets are digesting the very trade and budget deficit information that Herr Doktorprofessor predicted they would ignore - and those same lenders are imposing gradually rising costs on the ability of the United States to borrow and issue its own currency. That may or may not signal a long-term decline of the United States or its dollar (for example, the dollar declined by about 30% at one point under Reagan), but it certainly doesn't seem very consistent with some future Wile E. Coyote moment that Herr Doktorprofessor so confidently predicted in which the markets' long-overdue understanding of issues long understood by Herr Doktorprofessor comes rushing in.

The Economist reports: Mr Krugman's work on currency crises and international trade is widely admired by other economists. If that's true, perhaps it says more about the current state of the economics profession than about the sterling quality of Paul Krugman's central academic work.

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Tuesday, December 02, 2003

The Bad Economist?

A version of one fairly common - if not exactly standard - refrain concerning Herr Doktorprofessor Paul Von Krugman is found in the recent, curious Economist article that suggested that he is a gifted writer and economist, but ... these days his relentless partisanship is getting in the way of his argument.

It's a curious dichotomy. Herr Doktorprofessor qua journalist is widely admitted routinely to distort and even misrepresent the sources on which he relies for his columns. It is also almost universally acknowledged that a sensible reader of Herr Doktorprofessor's columns will not assume that representations of statistics, facts, figures or economic arguments one sees there are as Herr Doktorprofessor presents them to be without independent checking - and that the more difficult the checking and confident the assertion, the more a sensible reader with politely reserve belief until the fact checkers have had their say. The New York Times, of course, has no fact checkers for its columns. [UPDATE: Just by way of amusing example, in light of the recent uproar on the left over President Bush's successful drive to obtain adequate funding for reconstructing Iraq and Afghanistan, this column by Herr Doktorprofessor is worth re-reading to see just how justified his claims to understanding the "real" minds and hearts of the current Administration really are.]

Herr Doktorprofessor's most questionable columns often include what he says he considers to be harmless assumptions - or omit a complex, technical analysis that he asks the reader to trust him he has performed (it's his job and his expertise, isn't it?). The assumption or omission is just to render the column straightforward, you understand. “For simplicity.” In these columns he is, after all, engaged in the controversial and difficult art of popularizing economics. Today's near-paranoid rant (pinned wriggling to the wall by Don Luskin) accusing someone of fixing the new voting machines, for example, includes a typical "trust me, I have done the hard, scientific work" line: "The details are technical, but they add up to a picture of ..." In other columns, he assures us, he is making the kinds of simplifying assumption that theorists make all the time, abstracting somewhat from the real world in order to increase explanatory power—sacrificing some realism to gain tractability, he might say. Such assumptions, he comforts the reader, if slightly less than realistic, are basically innocuous: he has done the hard work, nothing vital hinges on it, anyway - and to relax the assumption would make for a messier argument that leads to the same place.

Of course, all of that isn't true in Herr Doktorprofessor's important academic writing - right?

Well, maybe that's not so clear. Herr Doktorprofessor's most shining credential is his John Bates Clark Medal, which he was awarded in 1991. The official American Economic Association summary of the work for which he was given that award makes clear that the so-called "new trade theory" was what caught the AEA's attention and admiration, beginning with his paper “Increasing Returns, Monopolistic Competition, and International Trade.” Journal of International Economics, 1979 9(4): 469-479.

What is the "new trade theory?" A Federal Reserve Bank paper on the topic dated late last year explains it this way:

Since the early 19th century, economists have used the theory of comparative advantage ... According to this classic theory, nations are made better off through trade by capitalizing on their inherent differences in natural resource or capital endowments. ...

But over the last 20 years, international trade economics has undergone what some have termed a “revolution” because of a new theory that gives very different answers to the same kinds of questions. This new trade theory is often summed up in the simple words “increasing returns”—shorthand for “increasing returns to scale,” a term synonymous with “economies of scale.”

The new theory, then, is the idea that trade arises to take advantage of economies of scale: Industries in each country can achieve lower unit costs by producing in large volume and spreading the high start-up expenses (for example, research and development, machinery purchases) over many, many units. If confined to the domestic market, an industry might not be able to achieve the highest level of scale economies, but by producing for both domestic and foreign markets, sufficient volumes can be produced to reap greater economies of scale.

According to this theory, two countries could both get cheaper cars and lamps, for instance, if one specialized in automobile manufacturing and the other devoted its resources to making lighting equipment, regardless of the inherent resource endowments of those countries. By taking advantage of increasing returns to scale, each country could produce its specialty at low unit costs and then trade with the other—both countries will gain through trade, but not because of comparative advantage.

What is the "new trade theory" good for? A key result of the theory is supposed to be the so-called "home market effect:" Countries will specialize in products for which there is large domestic demand. For example, the Introduction to Krugman’s (1990, p. 5) selected papers says: “The main additional insight from [my article “Scale Economies, Product Differentiation, and the Pattern of Trade,” American Economic Review, 70, 950-959] is the ‘home market effect,’ the tendency of countries to export goods for which they have a relatively large domestic market.” Krugman first considered questions asked by Staffan Burenstam Linder in 1961 in An Essay on Trade and Transformation. Krugman showed that in a world with increasing returns to scale and costs of trade, high demand for a locally produced product would result in a more than one-to-one response from local production, leading exports of the demanded product to rise. Such “home market effects” from demand to production structure, in the presence of trade costs and scale economies, are seen by some as defining characteristics of the "economic geography" later pursued by Krugman as one of his major interests.

But along the way something rather curious happened to the "new trade theory." As the Fed Bank article rather diplomatically puts it:

Harvard economist Donald Davis dealt this flourishing movement what seemed a damaging blow. Krugman had developed his increasing-returns trade theory by looking at a model with two sectors, one, alpha, with increasing returns to scale and the other, beta, with constant returns. To render the mathematics straightforward, he adopted what he considered a harmless assumption. “For simplicity,” Krugman wrote in his seminal 1980 paper, “also assume that beta goods can be transported costlessly.”

It was the kind of simplifying assumption that theorists make all the time, abstracting somewhat from the real world in order to increase explanatory power—“sacrificing some realism to gain tractability,” Krugman wrote. And he believed this assumption, if slightly less than realistic, was basically innocuous—nothing vital seemed to hinge on it. ...

Davis, now chair of Columbia University's economics department, examined the assumption more carefully. Reviewing data on trade costs (including costs of transportation, nontariff barriers, “border effects” and other costs inherent to trade), Davis concluded that Krugman's simplification was unrealistic: “There is little suggestion that total trade costs are higher” for increasing-returns goods, he wrote. If anything, the cost of trading constant-returns goods is likely to be higher than that for increasing-returns goods.

Even more crucially, Davis found that the simplification was far from innocuous; something crucial does hinge on it. In fact, if Krugman's model is duplicated with just one small change: Assume that both sectors—not just the increasing-returns sector—have positive transportation costs, then Krugman's striking finding about trade and industry location evaporates. When “the industries have identical trade costs, the home market effect disappears,” Davis concluded. “Industrial structure then does not depend on market size.”

Professor Davis has not had the last word, as the Fed Bank points out. A still more recent paper by other authors may salvage some of the "home market effect" under some assumptions - although not so much in the area of international trade as the rather curious zone of inter-regional trade.

A brief review of Professor Davis's paper reveals that it is not really all that much more complex than Herr Doktorprofessor's original effort. It does require that one do the work - but it's hard to imagine that someone of Paul Krugman's intensity of involvement in this field would not have at least seriously suspected that what he said he considered a basically innocuous assumption might completely undermine his most eye-catching results in many circumstances.

Of course, if Herr Doktorprofessor had explained all that, it would have made his work seem a lot more like a technical advance, quite possibly a mere curiosity, and less like the breathtaking, revolutionary revision of classical thinking he and his admirers have held it out to be. But would the John Bates Clark committee that evaluated the "new trade theory" in 1991 have the same high opinion of it after reading Professor Davis' article? [Note: Professor Davis is by no means dismissive or hostile towards Paul Krugman, as evidenced here and here.]

Somehow, in certain ways the more one looks at the trajectory of Herr Doktorprofessor's breathtaking, revolutionary academic accomplishments the more that trajectory resembles the trajectory of his breathtaking, revolutionary assessments of the Bush administration and its economic program - assessments that started out pretty hi-falutin, but so far have turned out to be just ludicrous.

No doubt all will be revealed and settled in the fullness of time.

POSTSCRIPT: Don Luskin and others have wondered why Herr Doktorprofessor doesn't really go after President Bush on trade restrictions. After all, he was on the right side with Bill Clinton aginst the rest of the Democratic Party, and otherwise Herr Doktorprofessor seems to get at least some trade matters right.

But maybe Herr Doktorprofessor doesn't think trade restrictions for a country like the US are any big deal, after all:

Yet there is a dirty little secret in international trade analysis. The measurable costs of protectionist policies--the reductions in real income that can be attributed to tariffs and import quotas--are not all that large. The costs of protection, according to the textbook models, come from the misallocation of resources: protectionist economies deploy their capital and labor in industries in which they are relatively inefficient, instead of concentrating on those industries in which they are relatively efficient, exporting those products in exchange for the rest. These costs are very real, but when you try to add them up, they are usually smaller than the rhetoric of free trade would suggest.

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Even Angrier

A growing public chorus laments the increasingly "incivil" American political discourse. At least some of that lament may be appropriate.

But political discourse in the United States has a long way to go to approach to the "incivility" common in the political discourse of countries such as Canada, Australia and Britain.

Just by way of example:

Australia's newly elected Labor Party leader, Mark Latham .... has called US President George W Bush the "most incompetent and dangerous president in living memory". .... Mr. Latham, who has broken a taxi driver's arm in a brawl, has also aimed his sharp tongue at [incumbent Australian Prime Minister John] Howard's government, calling it a "conga line of suckholes".

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Monday, December 01, 2003

Unk, Unk...

Who's there?

Well, when its an acknowledged good but rather conservatively anglophillic stylist such as George F. Will, the usage seems reasonably transparent and meaningful.

But when it's Donald Rumsfeld, the British Plain English Campaign and the BBC seem to have all kinds of patronizing criticisms.

The criticisms seem at bottom more political than linguistic.

I wonder if someone is going to gently reveal to these people that the terms "known unknowns" and "unknown unknowns" are common scientific and engineering argot, which has long been used in much defense thinking and almost everywhere serious consideration is given to the need to deal analytically with uncertainty, as in this Rand study:

At any point, there are "knowns" - things people know they know; "known unknowns" - things people know they do not know; and "unknown unknowns" - things people do not know they do not know. The deeper the reach into the future, the more the unknown unknowns dominate.

There. That should be easy and clear enough even for the rigid nitpickers at the British Plain English Campaign and the BBC, who seem a lot more interested in their posited dead linguistic past than any reach into the future.

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