It was the best of times; it was the worst of times…
March 7, 2013
As the stock market hits new all-time highs, the AP reports today on the state of household wealth in the U.S…
It took 5 1/2 years.
Surging stock prices and steady home-price increases have finally allowed Americans to regain the $16 trillion in wealth they lost to the Great Recession. The gains are helping support the economy and could lead to further spending and growth.
The Federal Reserve says household wealth amounted to $66.1 trillion at the end of 2012. That was $1.2 trillion more than three months earlier. And it was 98 percent of the pre-recession peak.
Private economists calculate that further increases in stock and home prices this year mean that Americans’ net worth has since topped the pre-recession peak of $67.3 trillion. Wealth had bottomed at $51.2 trillion in early 2009.
Some economists caution that the regained wealth might spur less consumer spending than it did before the recession.
Caution, indeed. While the total figures look terrific, the details are a little more troubling. And more troubling, as it turns out, than we think…
In a 2011 study, economists Dan Ariely and Michael Norton asked Americans what their ideal distribution of wealth would be. Then they asked what the respondents thought the actual distribution of wealth was. Less equal than their ideal, came the answer. The reality…
Here are the implication for wealth of that reality animated in a short justly-viral video:
So that increase in wealth– it’s up in that top 20% quartile, most of it, in the top 10% The balance of folks? Well, the other breaking news this week is that “household deleveraging” may be over– that”s to say, American households are borrowing again… this reality is much more democratically-spread. And it’s frighteningly-scaled…
The same NY Fed report that brings those tidings– ostensibly good for the economy, as more borrowing means more spending– breaks down that debt, paying special attention to student loans– which have effectively tripled over the last eight years, to nearly $1 Trillion. Note that “Student Loan” is the relatively small red section of each bar in the chart above. Still, as the Fed notes:
Deferrals and forbearance [borrowers given temporary "grace"]… mask the true delinquency rates on student loans. Overall, about 17 percent of borrowers are at least ninety days past due on their educational debt, but when we remove the estimated 44 percent of all borrowers for whom no payment is due or the payment is too small to offset the accrued interest, the delinquency rate rises to over 30 percent. These student loan delinquencies and overall large student debt burdens could limit borrowers’ access to (and demand for) other credit, such as mortgages and auto loans. In fact, our data show that the growth in student loan balances and delinquencies was accompanied by a sharp reduction in mortgage and auto loan borrowing and other debt accumulation among younger age groups, with the decline being greater for student loan borrowers and especially so for those with larger student loan balances. In addition, we find delinquent student borrowers much more likely to be late on other debts.
(Why have student loans grown so quickly? Here’s an explanation.)
But surely the fact that most household debt is mortgage debt is an encouraging sign– after all, mortgages are a route to building home ownership equity. Well, for some they surely are. But while the numbers have improved a bit since the post 2008 trough, there are still over 27% of all mortgage holder “underwater” in the U.S.– with mortgage obligations that exceed the value of their homes. There’s no equity there.
Which is all simply to observe that, while the aggregated “good news” that we’ve been hearing this week is better than hearing that everything is down, it’s no cause to celebrate an end to our concerns. As Ariely and Norton demonstrate, most of believe that income and wealth should be more evenly distributed than it is. And given that we live in a consumer economy– as or more dependent on “consumptivity,” the ability of the population to purchase, as on productivity– our economic future demands it.
Stocks are up; aggregate household wealth is up– but for way too many, the American Dream is a nightmare.
Time for Goldman Sachs to coin a new acronym?…
December 6, 2012
In 2001, Jim O’Neil of Goldman Sachs coined the term “BRICs” to designate the leaders among developing economies: Brazil, Russia, India, and China. And for a decade the moniker served, as these four countries grew hell bent for leather.
But two of the BRICs have hit the skids…
One notes that the two decelerating economies are those of the two more democratic states in the quartet… which raises the question: are Russia and China pulling away from Brazil and India in a fundamental way, or is it simply easier for more authoritarian governments to create the illusion of continued real growth when in fact the fundamentals are weakening?
FWIW, my bet is on the latter. See, for instance, The Moscow Times‘ “How Putin is Turning Russia into One Big Enron” and Michael Pettis’ “A fat guy starts a marathon and injects himself with crystal meth a few miles in. That’s China right now.“
Obeying the Law of Irony…
November 26, 2012
Recently, the Head of the US Patent and Trademark Office resorted to Orwellian Newspeak: “The explosion of litigation we are seeing is a reflection of how the patent system wires us for innovation.” One character in Nineteen Eighty-Four, Syme, says admiringly of the diminishing scope of the new language: “It’s a beautiful thing, the destruction of words.”
Not so much.
Readers will know that I have argued for a more measured, balanced approach to Intellectual Property than has accrued over the last couple of decades, largely out of concern that the oligopolistic practices of incumbent rights holders will frustrate innovation and slow economic growth. (See, e.g., “To promote the Progress of Science and useful Arts?…,” “Patently Absurd…,,” ”Caution! Pile up ahead…,” or “I was aiming for my foot, but I seem to have shot myself in the thigh…,”)
There’s new evidence that this imperial behavior is bad for the for the very industry it’s meant to protect… if not necessarily for the oligarchs who are behind it… at least in the short run.
Emil Protalinski, writing in The Next Web, explains:
We’ve heard this one before, over and over again: pirates are the biggest spenders. It therefore shouldn’t surprise too many people to learn that shutting down Megaupload earlier this year had a negative effect on box office revenues.
The latest finding comes from a paper titled “Piracy and Movie Revenues: Evidence from Megaupload” (via TorrentFreak) from last month, conducted by from Munich School of Management (LMU) and the Copenhagen Business School (CBS). Here’s the abstract:
In this paper we make use of a quasi-experiment in the market for illegal downloading to study movie box office revenues. Exogenous variation comes from the unexpected shutdown of the popular file hosting platform Megaupload.com on January 19, 2012. The estimation strategy is based on a quasi difference-in-differences approach. We compare box office revenues before and after the shutdown to a matched control group of movies unaffected by the shutdown.
The study analyzed weekly data from 1,344 movies in 49 countries over a five-year period. Here’s the crux of the results: “In all specifications we find that the shutdown had a negative, yet in some cases insignificant effect on box office revenues.” Not all movies were negatively affected: “For blockbusters (shown on more than 500 screens) the sign is positive (and significant, depending on the specification).”
The researchers try to explain how big blockbusters gained but overall revenues dropped:
Our counterintuitive finding may suggest support for the theoretical perspective of (social) network effects where file-sharing acts as a mechanism to spread information about a good from consumers with zero or low willingness to pay to users with high willingness to pay. The information-spreading effect of illegal downloads seems to be especially important for movies with smaller audiences. ‘Traditional’ theories that predict substitution may be more applicable to blockbusters
Unsurprisingly, the dip in revenues was most visible for average size and smaller films, as people are most likely to see big blockbusters with their friends regardless of what happens on the Internet. Those flicks are less likely to require word-of-mouth promotion by people who used Megaupload to share movies.
Of course this is just one paper, and I’m sure more studies will be done that will dive deeper into the data. By then though, Megaupload’s successor, Mega, will have launched.
The emphasis is mine: while smaller producers suffer, the biggest studios, the purveyors of franchise blockbusters, are less affected… Competition recedes; a smaller and smaller number of larger and larger players have bigger and bigger shares of (what’s left of) the market– an altogether recognizable pattern of oligopolies. One concerned solely with shareholder value in those surviving behemoths can argue over whether, in the long run, this is a good thing. In the short run, some argue (from a shareholder value point-of-view), this is a good thing for the behemoths. But in the longer run, it is deadly: it chokes off the competitive innovation that keeps the entire industry relevant and attractive. In the not-too-distant future, the market will begin to shrink faster than an incumbent’s share can grow.
And for the “civilian,” the movie goer, it’s just plain bad: more massive sequels, less diversity. More Tron: Legacy and RoboCop 3; less Little Miss Sunshine and Precious. It’s no wonder that cable is eating the movies’ lunch.
For your reference (currency)…
October 26, 2012
As U.S. presidential candidates are arguing over how vociferously to blame China for “currency manipulations,” the Chinese renminbi is replacing the dollar as the reference currency, the monetary standard, in much of Asia (which is to say, exchange rates with those emerging markets move most closely with the renminbi).
Recent research by Arvind Subramanian and Martin Kessler, which they summarize in the Financial Times, suggests that
…since June 2010 when the renminbi resumed floating, the number of currencies tracking it has increased compared with the earlier period of flexibility between July 2005 and 2008. Over the same period, the number tracking the euro and the dollar declined… East Asia is now a renminbi bloc because the currencies of seven out of 10 countries in the region – including South Korea, Indonesia, Taiwan, Malaysia, Singapore and Thailand – track the renminbi more closely than the US dollar. For example, since the middle of 2010, the Korean won and the renminbi have appreciated by similar amounts against the dollar. Only three economies in the group – Hong Kong, Vietnam and Mongolia – still have currencies following the dollar more closely than the renminbi.This shift stems from China’s rise as a trader; its share of east Asian countries’ manufacturing trade has risen from 2 per cent in 1991 to about 22 per cent today. Countries that sell to the growing Chinese market or are locked in supply chains centred on China see the advantages of maintaining a stable exchange rate against the renminbi…
The impact is being felt elsewhere as well:
Trade is also propelling the rise of the renminbi outside east Asia. For example, the currencies of India, Chile, Israel, South Africa and Turkey all now follow the renminbi closely; in some cases, more so than the dollar. If China were to liberalise its financial and currency markets, the lure of the renminbi would broaden and quicken.
This is noteworthy– and surely worthy of serious discussion in the presidential election context– as an indicator both of the continuing global influence of China’s economy (arguably, in PPP terms, already the world’s largest), and of the erosion of the global reference currency advantage that, for the last several decades that U.S. has enjoyed. America’s status as “reserve currency of choice” seems, at least for now, intact; but as Subramanian and Kessler note, being “the reference” matters too: “The symbolism and its historic significance cannot be understated because east Asia, despite physical distance, has always been part of the dollar backyard.”
At the same time, the shift underlines the complexity of the political situation in Asia. Even as China’s military posturing and imperial grabs for territory are driving its neighbors under the umbrella of U.S. “protection,” growing trade is enmeshing them ever more deeply with China. In the short term, this makes for a confused (and probably unbalanced) situation; but as Subramanian and Kessler observe, “politics trumps in the short run but economics wins in the long run.”
So perhaps instead of righteously demanding that China increase the value of its currency (the impacts of which in the U.S. would be many and complex– but on balance, simply inflationary), our prospective leaders should be focusing on how to rehabilitate and reenergize the sort of innovation that can make the U.S. a more competitive trading partner for developing economies– and indeed, the world at large.
ADDENDUM: I should note, though it’s probably obvious, that the waxing Chinese currency dominion could wane, if China’s economy and trade are severely troubled– as, for example, the insightful Michael Pettis suggests they are… And, as Mohamed El-Erian and Michael Spence argue, let’s not forget India.
To promote the Progress of Science and useful Arts?…
October 22, 2012
The intellectual-property clause of the United States Constitution (Art. I, Sect. 8, Clause 8):
“The Congress shall have Power . . . [t]o Promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.”
Readers of this blog will know that I am concerned about rapacious and reactionary corporate attitudes to intellectual property rights– see, e.g., “Patently Absurd…,,” ”Caution! Pile up ahead…,” or “I was aiming for my foot, but I seem to have shot myself in the thigh…,” all posts that focus on the dangers of (and to) incumbents who substitute extended rights for innovation; enforcement, for service. It’s cold comfort to read confirmation of that concern in Simon Phipps’ report on the economic impact of patent trolls– the logical extension of the problem: corporations that exists only to exploit patents– in Infoworld…
…Among the other measures in the America Invents Act, passed by Congress about a year ago, section 34 requires the nonpartisan Government Accountability Office (GAO) to conduct a study on the effects of patent trolls on the economy. The GAO in turn went to a group of academics associated with the Stanford IP Clearinghouse (now called Lex Machina) to gather the data required. Those academics have now supplied the data to the GAO and published their own assessment of the research. Covering a five-year period from 2007 to 2011, it rigorously identifies and classifies patent activities across all industries and uses a statistically significant sample to draw conclusions.
The findings should concern us all. Coining the useful term “patent monetization entity” (as a replacement for “patent troll,” “nonpracticing entity,” and “patent assertion entity” — all terms with either social or technical issues), the scholars have concluded that “lawsuits filed by patent monetizers have increased significantly over the five-year period.” Not only has the number of cases increased, but so has the proportion of these non-product-related litigants, from 22 percent to 40 percent of cases filed. They found that four of the top five patent litigants in America exist solely to file lawsuits.
This is the tip of the iceberg. Among their findings, the academics analyzing the Lex Machina data observed that many cases never reached court, and the main impact of patent monetization entities was probably in the costs they impose way before litigation commences. This is supported by a paper from the Congressional Research Service [pdf], which observes that the main goal of patent monetizers is to extract money from their victims without ever going to court.
The vast majority of defendants settle because patent litigation is risky, disruptive, and expensive, regardless of the merits; and many PAEs set royalty demands strategically well below litigation costs to make the business decision to settle an obvious one.
What’s going on here? One clue comes from the Lex Machina research. They found that technology industry cases constitute 50 percent of all patent suits; in the software industry, Internet-related patents were litigated 7.5 to 9.5 times more frequently than non-Internet patents. When cases actually go to court, they are often unsuccessful, but most lawsuits from patent assertion entities are settled out of court.
Combine that with the evidence that the unseen menace, when threats lead to payments under nondisclosure terms so as to avoid expensive litigation, and the implication grows that this is an abuse of an out-of-date system manifesting itself. It will then come as no surprise that 1 in 6 patents today covers smartphones. Guess what those patent monetization entities want to monetize?…
Just last week, speaking to the London paper Metro, Amazon’s Jeff Bezos (a man who has been known himself to use intellectual property as a weapon) lamented,
Patents are supposed to encourage innovation and we’re starting to be in a world where they might start to stifle innovation. Governments may need to look at the patent system and see if those laws need to be modified because I don’t think some of these battles are healthy for society.
Amen.
Does economic growth make you happy?
October 16, 2012
From the estimable Robert Skidelsky‘s review of the equally-estimable Adair Turner‘s Economics After the Crisis:
Adair Turner… is one of a tiny minority in public life [he chairs both the Financial Services Authority and the Committee on Climate Change in Britain] today capable of thinking and acting at the highest level. Economics after the Crisis, based on three lectures he delivered at the London School of Economics in 2010, is a thinking person’s delight, not least for the clear and lucid way in which Turner sets out his arguments. His book challenges the three main planks of what he calls the “instrumental conventional wisdom”. The first is that the object of policy should be to maximize Gross Domestic Product per head; the second, that the primary means of doing this is to create freer markets; the third, that increased inequality is acceptable as long as it delivers superior growth. The attack is devastating, leaving little of the policy edifice of the past thirty years standing…
Read the full review in the TLS; find the book– it’s well worth finding– here.
Missing the Point: The Chimera of “Full Participation”
October 9, 2012
Much ink has been spilled of late over employment rates– job creation, unemployment, and “participation.” While the first two are the most frequently cited as indicators, it’s the latter-most– the percent of Americans who are working– that, it is implicitly argued, speaks to the actual presence or absence of a recovery. If percentage participation returns to historical levels, our personal-income-converted-into consumption economy will recover.
But as the ever-illuminating Calculated Risk explains here and here, there are fundamental demographic reasons why participations rates won’t– can’t– return to their historic heights.
Some of the recent decline in the participation rate has been to due to cyclical issues (severe recession), but MOST of the decline in the overall participation rate over the last decade has been due to the aging of the population. There are also some long term trends toward lower participation for younger workers pushing down the overall participation rate.
This decline has been visible in prospect for years– demographic dynamics are very slow to change– and it’s going to continue, as this chart (based on BLS economist Mitra Toossi’s projections) illustrates:
click here for larger image
To put those rates into demographic prospective, this plot (from The Census Bureau) illustrates the “Baby-Boom-rabbit-passing through the snake” demographic dynamic that defines the U.S. today and into the future:
click here for larger image
The argument over employment these days is over how to increase participation; there’s implicit agreement that a) this is the right thing to do, because, b) it will create the conditions for a recovery. The problem is that, past a relatively minor point, we can’t. While the U.S. isn’t in nearly the demographic straight-jacket that binds most of Europe and Japan and China, there is a very real ceiling on participation… and that ceiling is falling.
So if we are to make a material dent in the problems that ail us, we’re going to have to respond differently than we have been.
For a start, we might note that the primary reason that we have are in a somewhat better demographic position than– that’s to say, not quite so aged as– other developed countries is that we’ve enjoyed strong immigration of relatively young (working and child-bearing aged) folks from countries/cultures that value family. That’s dropped off in the xenophobic wake of 9/11– and that’s aggravated our problem. There are myriad reasons that immigration reform is important; for the purposes of this argument, suffice it to say that it could go a long way toward replenishing and reinvigorating our work force– and generating the income on which our economy and the society it supports depend.
And we’re going to going to have to re-focus our efforts on creating new, higher-value-added kinds of jobs– and on creating the populace that can fill them. Even if there weren’t a falling ceiling on participation, it wouldn’t be enough simply to stamp out thousands of new low/minimum-wage service, retail, and health care jobs. If employees don’t earn enough to be viable consumers, the consumer economy– and the social services that depend on it– will continue to shrink.
At the same time, we need to be less concerned with recovering what we’ve lost; more, with trying to invent the new jobs– in alternative energy, biotech, nanotech. et al.– that can create enough value to allow for reasonable wages. And that of course means that we have also to be making the social and physical infrastructure investments– education/training, health care, transport, telecoms, et al.– that those emerging fields require… and that other countries are already making.
Of course, the devil is in the details of observations as over-arching (and, one hopes, obvious) as these; they are complex challenges, surely difficult to meet. But it’s the direction– and the commitment to that direction– that matters: if we are not, as a nation, even trying to meet them– and at the moment we are not– there’s no real chance that we will.
Auguste Comte may have over-reached when he said that “demography is destiny”; but demography is certainly a defining dynamic of the reality that we have, as a nation, to navigate. And so we’d do well to recognize demographic reality for what it is– and to stop arguing, as politicians on all sides have lately been doing, over the right ways to do the wrong things.
Fitting the crime?…
September 9, 2012
A guest post from (Roughly) Daily…
Recently, The Economist took a look at the fines being levied against corporations found guilty of crimes. Their assessment was rather bleak:
The economics of crime prevention starts with a depressing assumption: executives simply weigh up all their options, including the illegal ones. Given a risk-free opportunity to mis-sell a product, or form a cartel, they will grab it. Most businesspeople are not this calculating, of course, but the assumption of harsh rationality is a useful way to work out how to deter rule-breakers.
In an influential 1968 paper on the economics of crime, Gary Becker of the University of Chicago set out a framework in which criminals weigh up the expected costs and benefits of breaking the law. The expected cost of lawless behaviour is the product of two things: the chance of being caught and the severity of the punishment if caught*…
The always-amazing David McCandliss at Information is Beautiful has put the issue into graphic perspective.
We’ve gathered and visualized the biggest corporate fines of the last seven years, not just as raw amounts, but also as a percentage of each company’s profits. That way you can see for yourself if the punishment was painful or puny…
See the full graphic (full size) here, and see the underlying data here.
*Becker had created the model as a framework for considering appropriately-discouraging penalties for malfeasance. He was horrified later to learn that it was being taught by business school colleagues as a decision aid.
###
As we contemplate crime and punishment, we might recall that it was on this date in 1950 that the first television show with a recorded “laugh track” (The Harry McCune Show) aired in the U.S.
CBS TV engineer Charlie Douglass, the “father of the laugh track”
Princeton vs. Prison
November 17, 2011
Created by: Public Administration
I’m a poet, and I didn’t know it…
November 1, 2011
A guest post from (Roughly) Daily…
The Economist‘s Free Exchange blog report’s on the Kauffman Foundation‘s most recent quarterly survey:
THE KAUFFMAN FOUNDATION conducts a quarterly survey of economics bloggers (you can see the third quarter results here). It tends to focus on current economic conditions and policy questions, but the fourth-quarter questionnaire contained something a little different: a challenge to capture the state of the economy in haiku. The results are sublime…
Indeed. Consider the stylings of Reuters’ Felix Salmon:
No one has a job
Except econobloggers
And they’re not paid much
Or the musings of Professor Stephen Karlson:
Intermodal loadings increase
Trade conflict looms without cease
Occupy Wall Street
Or this, from Robert Cringely:
Econ guys, gentle souls
Think policies guide markets
Jail time is better
Or the only-too-culturally-appropriate contribution of Amol Agrawal:
When Japan fell in 1990s
They were lectured by the world economists
Time for Japanese to smile
… more at “The economy in haiku .”
As we think in seventeen syllables, we might recall that it was on this date in 1993 that the Maastricht Treaty came into effect, formally establishing the European Union (EU)… and laying the groundwork for the Eurozone– the European Monetary Union and the creation of the Euro– and thus for the painful pecuniary pageant that is playing out on the Continent today…
