Category Archives: economics
Sometimes insight and inspiration come from an unlikely place. Recently, I was invited to join the Facebook page for my high school’s 50th reunion, which is next year. As expected, it was fun hearing from those voices from the past, though I believe the Facebook connections were only a small fraction of the 1100 graduates in our class. My high school, Brooklyn Technical High School, or Tech, as, we called it, was a specialized high school that drew its students citywide and required a test to get in. I guess Tech was one of the forerunners of today’s magnet schools. Tech’s curriculum was designed to prepare us for entry into the technical industries with course majors in aerospace, electronics, chemical engineering, etc. It was rigorous and it was tough. And, hell, I was one of those geeks running around with a pocket protector with a six-inch steel ruler clipped to it, and a slide rule clipped to my belt (and I wasn’t teased for it because that was the norm).
One of my classmates made a comment that he noticed during a visit to the school that the foundry classroom had been converted into a storeroom. Foundry was one of those classes that was supposed to prepare us for a technical career. It was a shop class on how sand molds were made to cast steel parts. We also took another class called Industrial Processes that covered how metals, wood, and plastics were processed in industry. This was all part our training to ready us for a technical career in the 1960s. One highlight of the Industrial Processes class was a road trip to a Bethlehem Steel plant in Pennsylvania to view in operation the open hearth and electric arc furnaces that fabricated steel and steel parts. Even though low-cost imports were just beginning to come in from Japan, the plant was still a thriving, busy facility. My classmate’s comment about the Foundry class struck me immediately as a metaphor for what has happened in the US in the last three or four decades. I wondered about that Bethlehem steel plant and did a quick Google search, only to learn that the company had gone bankrupt in 2001. The plant that I had visited is now a Sands Casino (according to Wikipedia).
I’m now living in a Buffalo suburb. There are many old red-brick buildings in Buffalo and Lackawanna that reminded me of the buildings at that Bethlehem steel plant. These, too, used to be factories and manufacturing facilities employing thousands of people in well-paying jobs. They are now apartment lofts and museums. Yes, SolarCity is building a new plant here that will supposedly hire 1460 workers, but that is a shadow of what industry used to employ here. There is an effort to fund biomedical startups, but no one is under the illusion that we’ll be able to match the employment of my parents’ generation. Too many of the grandkids of the workers from those old plants now have far fewer opportunities and good paying jobs in manufacturing. Maybe they can get jobs at some of the local call centers (if the centers haven’t all moved to India) and as healthcare workers taking care of their grandparents. Unfortunately, many of those jobs don’t involve benefits. So, do you think this isn’t part of what’s powering the churn and disruptions in this year’s election?
While browsing Tech’s website, I discovered the method for students to choose their majors had been changed. In the sixties, you simply chose your major. Today’s it’s a process that involves something called the Power Index (PI), where each student is ranked according to his or her academic average, with some weighting on a couple of critical courses. Students then go online and list their choice of majors in order of preference. Those with the higher PI get their first choice, etc. Why is this process necessary? I think you can guess. I bet most of the students probably want to go into computer science. Well, why not? That’s where the money is these days. Unfortunately, the tech industry has not come close to filling all those abandoned red brick building with jobs. Not when they make their hardware, and even their software, overseas.
The method of major selection is also a metaphor for today’s data driven society. At one place I worked, I was forced to rank the engineers reporting to me. The bottom 10% were mandated to be graded as Needs Improvement, even if their work was satisfactory. This was in line with Jack Welch’s philosophy of ranking all workers and firing the bottom 10% every year. Today, workers are commodities that can be discarded. Yes, I know that to manage something you need to measure it first. At least that’s the theory. Problem is, people aren’t cogs.
I remember being told, “Don’t worry, even if the Japanese take over the steel and auto industries, we still have electronics.” Then a decade later, we were told, “Don’t worry about the electronics manufacturing plants that are being moved to Korea and Taiwan, because we still have the software and engineering.” Then a decade later we were informed of the research and engineering centers being opened in China by our transnational corporations. And, so it goes. Add the impact of automation on manufacturing and the future of those kind of jobs here looks rather bleak.
The rise of Trump and Sanders in this election season comes as no surprise to me. A century ago, William Jennings Bryan led a populist revolt against industrialization. He lost, but there was a future of industrial jobs created during the Industrial Revolution that helped mitigate the transition. The Information Revolution has not supplied the equivalent number of replacement jobs and is diligently working to eliminate more of them with automation. So what’s next? Tell me what the future will be for my grandkids?
This is the first in a series of blogs addressing this issue.
Note: A shortened version of this blog appeared in the Buffalo News “Another Voice” section on November 8, 2015
In one of those strange ironies of history, the automobile arrived as a response to an environmental issue of the time. In 1900, there were more than 100,000 horses in New York City and Brooklyn, creating about 4000 tons of manure and urine daily that had to be removed. Hundreds, if not thousands, of workers toiled daily to cart off that mess. Horse manure had become a significant health hazard for urban dwellers. There were even reports of a haze of manure and urine in the air in poor neighborhoods where the cleanup was not as effective.
A Rich Man’s Toy
Some saw the automobile as a potential solution to this problem. However, this was a time when automobiles were still in their infancy and could only be afforded by the wealthy. I bet those workers who mopped those city streets, along with buggy and buggy-whip makers, led those who derided these newfangled toys, with shouts of, “Get a horse!” when an early automobile drove by. Yet there was enough interest in the nascent automobile industry to spawn hundreds of automobile companies, each trying to build a better car and create a new market. Most of those companies came and went as they failed to find the magic elixir to excite the public. This is often the case with the introduction of new technologies. Witness what happened in the dot com mania of the nineteen-nineties when many of the companies touting a new business paradigm failed to succeed and create that paradigm. I bet the owners of the buggy whip makers probably pointed to failing early automobile companies as showing the folly of automobiles, just as the owners of brick and mortar establishments did during the rise of the Internet, and just as the fossil fuel companies and other opponents of global warming are pointing to the failure of solar energy companies like Solyandra as proof that renewable energy is doomed. In the first decade of the last century, the automobile seemed relegated as a toy, a plaything of the rich, much as the Tesla electric car is considered by some today.
Henry Ford: Game Changer
Then, in 1909, along came Henry Ford with his Model T automobile and everything changed. Ford touted the Model T as the “every man’s” automobile, while paying the highest wages to enable his workers to afford their own car. Sure, at the time, the Model T was probably more expensive to purchase than a horse, but what you could do with it! Suddenly the average worker could afford cars and the horse manure problem was solved. The automobile took off and became a huge industry employing thousands.
And what do you think happened to those workers who cleaned the manure off city streets when there was no more manure to remove? They probably ended up paving those streets for automobiles or they became automobile mechanics and gas station attendants. What about those workers at the buggy whip makers who lost their jobs? They found higher paying ones in automobile factories.
One man’s risk is another’s opportunity. Economists and historians have a term for this process of new industries and technologies replacing older ones: creative destruction. It’s happened time and time again in history. Prime examples include the supplanting of 19th century individual artisans with corporations driven by the Industrial Revolution-developed machinery and the aforementioned development of the Internet. In such instances there were winner and loser companies, but the winners always drove the economies to greater heights.
I’m reminded of that wonderful diatribe by Danny DeVito in the movie “Other People’s Money” (https://www.youtube.com/watch?v=62kxPyNZF3Q) where he played a 1980s style corporate raider, Larry the Liquidator, trying to take over a family-run wire-making manufacturing firm in New England. In his diatribe he talks about buggy whip makers. “You know, at one time there must’ve been dozens of companies makin’ buggy whips. And I’ll bet the last company around was the one that made the best goddamn buggy whip you ever saw.” Then came the zinger. “Now how would you have liked to have been a stockholder in that company?” Isn’t it time to replace the 20th century source of energy with a 21st century source?
Do You Want to Own a 21st Century Buggy Whip Company?
Yes, there will be some disruption as we switch to renewable energy and sustainable manufacturing. However, in the long run, new industries will be created along with new jobs, and the economy will grow based on those new industries. Germany already gets about forty per cent of its electricity from solar and other renewable sources, and still remains a competitive world industrial power. Today’s fossil fuel companies are the buggy whip makers of the 21st century.
And, yes, the automobile ultimately played a significant role in another environmental problem, but along the way it contributed to a huge leap in prosperity, helping to create the richest country in history. So now we’ll use technology to solve the problem created by automobiles and fossil fuel electricity generation. Along the way we’ll spawn whole new industries with new opportunities. That’s just how the world works. The whole arrow of human history points that way. Who knows if Solar City, Elon Musk’s and other’s bet on solar energy, is the next Ford Motor Company? Only time will tell, but it’s a step in the right direction.
More importantly, by adopting renewable energy, we may save the world for our children and grandchildren, but that’s a subject for another day.
To many, this recent stock market turndown as a hunker-down time. You know the markets will eventually recover, but you just have to ride it out. Others have sold or shorted stock on the hope of short term gains, though history shows that market timing is more difficult than it seems. To others this becomes an opportunity. Those with free cash available will also try to make a killing by timing the market and buying while prices are low. All of those represent standard “inside-the-box” thinking. I’ve always believed that one person’s downturn is another’s opportunity. During the recession that began in 1873, Andrew Carnegie used the downturn in prices and wages to build up his steel company by making investments in new equipment and hiring more workers. When the depression ended, his company was in position to take off, and the rest is history, as they say.
Now the world is facing a downturn in China’s growth. Add the stock market drop to the recent Chinese environmental and safety-related disasters, and the decrease in economic growth, and China isn’t looking like the path to riches it once did. To me China has always been a bubble waiting to burst. Well, it has. China may continue to grow but it will certainly mature at a much slower pace. Now we can decide what to do. We can hunker down and ride it out. The Federal Reserve will undoubtedly put off the expected increase in interest rates planned for the September time frame. The US economy will chug along at 2% growth or so. And a few rich people with free cash may make some more money by buying the temporarily depressed, cheaper stocks. Or we can take advantage of an opportunity here.
Sometimes an opportunity arises when two very divergent issues can be made to converge. Right now the US is faced with a deteriorating infrastructure and a lack of will to pay for it. (I’m being polite here). The highway trust fund is out of money and Congress isn’t willing to raise gas taxes to pay for it. For a Republican, voting to increase taxes can be likened to political suicide. So they voted a three month extension, kicking the can down the road.
At the same time more companies who took business offshore and now may be looking to return to solidity of the US economy and workers. The Chinese hare isn’t looking so fast any more, and the US tortoise may be looking more attractive right now. The problem is what to do with those profits that these multinationals have been stashing overseas. They certainly don’t want to pay what they consider the exorbitant 35% US taxes (though they hardly ever pay at that rate) on these profits. Bloomberg reported that these stockpiled offshore profits may be as high as $2.1 Trillion. So what to do?
Of course, Democrats certainly don’t want to lower the rates. It’s a matter of principle. Pay your fair share is their battle cry. The argument goes that the multinationals will invest any taxes saved. The democrats don’t buy that. They believe the funds saved in the reduced taxes will go the stockholders in share buybacks and not result in increased US investment. So here’s the solution. It requires people to bite down a bit on their ideological urges. Congress passes a law that reduces the tax rate to 25% on those “stashed” profits but requires all the money collected to be used only for capital improvements. In other words, use the “windfall” of taxes to fund the Highway Trust Fund and other capital improvements. To the multinationals: consider this as an investment. The capital improvements will not only enhance the nation’s efficiency, but it will provide a short-term stimulus. Construction jobs typically pay higher than minimum wage. More money in the pockets of consumers means more money to buy stuff – an opportunity for the corporations to sell stuff. The multi-nationals can also claim they are making an investment in America. Current low interest rates also provides the opportunity for lower cost investments by these multi-nationals to move manufacturing back to the US, while also providing an opportunity for the government to make more infrastructure investments through low interest bonds. The Republicans can claim this as a tax cut (35% vs 25%) and can claim they helped fix the nation’s infrastructure without raising taxes. The Democrats can declare this as a victory in gathering owed taxes and funding infrastructure. Both sides can claim they helped bring back manufacturing. (Let their spin doctors fight that one.) The ultimate winner is the American people.
We cannot solve our problems with the same thinking we used when we created them. — Albert Einstein
A few days ago I was doing my usual finger exercises with the cable remote when I stumbled on a Charlie Rose interview with Larry Summers, the former Clinton Treasury Secretary and former Head of Obama’s Economic Council. I listened for a few moments and was about to continue with my finger exercise when something Summers said caught my attention. If you were to look at income distribution (i.e., how income is divided among the population) in the United States, and compare the division now to what it was in 1979 you would find something very troubling. If the distribution today was the same as it was in 1979, 80% of the population (mainly the middle classes) would have $1trillion dollars more than it currently has, and the top 1% would have $1trillion less. This comes to about $11,000 per family for the 80%. In discussing the causes of a slow-growth economy and income inequality, Dr. Summers pointed to the lack of demand as the cause, not lack of supply. And, yet, since the time of Ronald Raegan, the emphasis on the government’ response to the economy and its problems has increasingly been on the supply side of the economic equation, with neglect of the demand side.
A prominent economic theory in politics today seems to be that tax cuts for the rich and for corporations are the only way to stimulate the economy. The old concept of the so-called law of supply and demand seems to have been displaced by new schools of economics discounting the demand side as being unimportant. In fact, it is argued that anything done to help the demand side will negatively impact the economy. For example, think about the arguments against increasing the minimum wage. Today the focus is on supply side of economy, i.e., the rich and corporations, to the neglect of the demand side. We do this in spite of the acknowledged fact that the economy is 73% consumer driven. Where does consumer spending fall? On the demand side of the equation.
Why the focus on one side? How did this situation arise? Part of it, has to do with taxes. Everyone hates them. So a theory that purports to improve everyone’s wealth by cutting taxes is very appealing. In other words, it appears elegant. What does it mean for a theory to be elegant? In the vernacular, it means it’s “cool.” It also means it’s simple.
In physics there was an argument over the duality of a physical entity. Is light a wave or a particle? Big names in physics were divided on each side of the argument. Isaac Newton was the biggest proponent of the particle approach with his so-called corpuscle theory. On the other side were Rene Descartes, Robert Hooke, and Christiaan Huygens, all well-known physicists and mathematicians in their own right.
The apparent nail in the coffin to the particle theory came in the mid-19th century, when in 1865, James Clerk Maxwell, the brilliant Sottish mathematician and physicist published a series of equations known, not surprisingly, as Maxwell’s equations. These equations described light as a wave made up of electric and magnetic fields, the so-called electromagnetic waves. Not only were the equations extremely elegant, but they seemed to explain all the aspects of light, such as refraction, diffraction, reflection, etc. Within a decade or so Maxwell’s equations had been anointed as the as the answer to the centuries-old argument by virtually every physicist. Elegance and simplicity (at least to a physicist or mathematician), just like supply side economics.
Then a strange thing happened. While conducting experiments to further verify Maxwell’s laws, Heinrich Hertz accidentally discovered that light can stimulate metals to emit electrons, the so-called photoelectric effect. A seemingly small and unimportant discovery that was to change the world. Solar cells are a prime example of the application of the photoelectric effect. They produce electricity when exposed to sunlight. Not only did Maxwell’s Equations not predict the effect, but when applied in the right manner, they predicted the wrong answer. According to Maxwell’s Equations, varying both the wavelength (we see it as color) and the intensity of the light would change the rate of electron emission. In other words, shine a brighter light on the metal and more electrons should be emitted. Only that isn’t what occurs. Instead, the electrons only respond to the frequency of the light, not the intensity. There was a threshold frequency for each metal below which electrons were not emitted.
So the Maxwell slam dunk was suddenly derailed. His equations no longer described every aspect of light. For the next two decades, physicists searched for an explanation. It took Albert Einstein to provide the solution. His solution required light to act as a particle with a discrete energy based on the light’s frequency (color). But Einstein went a step further. He argued that light was both a wave and a particle and could act in either sense depending on the application. In other words, light consisted of photons that also acted as a wave. Einstein was awarded the Nobel Prize in 1921 for the photoelectric effect. His 1905 paper on the photoelectric effect started a revolution in physics that eventually led to the Quantum Theory (which, in turn, led to inventions such as lasers and electronic semiconductors.) So, in reality, both sides of the argument of the nature of light were right. In some cases you could use the Maxwell’s wave equations and would be correct. In other instances, you needed to use the particle aspect and Quantum Theory.
I think there’s a lesson here that applies to economics. There are two sides to economics, supply and demand. Ignore either side at your own risk. Ignore the fact that the US economy is 73% consumer driven and let the middle class fade away, and then see what happens. Let income inequality continue to expand, and then tell me who’s left to purchase the supply? The laws governing economics are two-sided. Nature tends to prefer equilibrium, i.e., a balance between two forces. For example, our sun operates as a balance, as an equilibrium between the heat generated by nuclear fusion in its core, and its massive gravity, which compresses the hydrogen in the core sufficiently to create the high temperatures required for fusion. When equilibrium is broken in nature, the effect is usually catastrophic. For the sun, when the hydrogen is expended, the equilibrium will break down and the sun will expand into a red giant, ultimately engulfing the Earth. (Don’t worry, that won’t happen for another four billion years.)
For the last three years US corporate profits have been the highest they’ve been in a long time but with minimal job creation (when compared to the increase in profits) and certainly no wage growth for the middle class. One company reported its highest profit in history and still continued to lay people off. We hear the same old arguments. Cut taxes and cut the budget. Forgo investments in our infrastructure. Keep wages suppressed. We’ve seen some recovery but not nearly what should expect at this time after a deep recession/mild depression.
We have a couple of on-going experiments now occurring that should shed some light on this (please excuse the pun). Kansas and Wisconsin. In Kansas we’ve had an extreme case of tax cuts for the wealthy. State budget deficits abound and the economy is lagging the nationwide in its recovery. In Wisconsin, we’ve had a less extreme but still an energetic application of the supply side-only application. When both are compared to Minnesota, which had a more balanced approach, they are significantly lagging Minnesota’s growth numbers. Are these the equivalent in economics to the photoelectric effect? Is it time for a more balanced theory and approach?
As Einstein said, “We cannot solve our problems with the same thinking we used when we created them.” I also think of another more-known Einstein quote: “Insanity: doing the same thing over and over again and expecting different results.”
We need a more balanced approach, one that accounts for both supply and demand. We need a change in thinking. Albert, where are you when we need you?