Yesterday's NY Times had several things worth reading. A front-page article details bribery by Wal-mart in Mexico. If accurate, there can be serious repurcussions for the company and its executives. The company has faced criticisms from many for labor practices and for driving out of business smaller, local firms before, but this will inflame sentiment against the company even more. Another concern may be the company's actions in China. I am unaware of any legal issues, but the Chinese system is pretty corrupt and the opportunity to gain market share through favors to key bureaucrats exists there as well. Hopefully, the problem Wal-mart had was with the Mexican leadership and not company wide.
A column by Frank Bruni shows the effects of austerity in Portugal through grafitti on buildings there. The use of debt to prosper for awhile comes back to haunt both people and countries in many ways. It is a sobering examination of the aftershocks of prosperity through debt.
Finally, an op-ed piece that brings us to China. Nicholas Kriftof discusses the scandal in China around Bo Xilai. He suggests, and I find it likely to be true, that it is an indication of more widespread problems in China. American firms face a quandry--the market is so big it cannot be ignored but the potential problems are also huge.
Monday, April 23, 2012
Friday, April 20, 2012
Pressures in the European Union
There has always been a tension in the European Union between forces that want more integration of the member states and forces that want to maintain sovereignty. Some want integration to be primarily economic while others want more political integration. Politicians in Germany and France have tended to support further integration, including policial integration, but there are signs that may be changing.
According to news reports, Germany and France senta joint letter to the Denmark, which currently holds the rotating presidency of the European Union. Germany and France want a reform of the Schengen Treaty, which is the legal structure that facilitates the free movement of people within the EU. They call for the right of a nation to re-impose border controls unilaterally for 30 days if the national authorities believe other countries are not keeping their borders secure. The concerns are primarily member nations in the eastern and southern parts of Europe. If someone is able to enter Greece illegally, they can then move to Germany without any border controls. Currently, the member governments can impose border controls for five days and that period can be extended only with approval from the EU.
I argued in a previous post that the Euro-zone is not an optimum currency area, and that the push for monetary union was actually a political more than an economic move. Monetary integration cannot work well without more political integration and the move was, at least in part, to force more political integration. But right now, most of Europe is facing economic difficulties with some in crisis. Countries in such situations often look for ways to protect their labor markets. Given very high unemployment rates in Spain and Greece, there has been a large exodus of people from the countries looking for employment elsewhere. France's Sarkozy faces an election Sunday and has been making the EU borders an issue in his campaign.
Will the EU hold together and someday become the United States of Europe, or will it gradually fall apart from nationalistic pressures among the member nations? I still think it will hang together, but I am less sure of the belief now.
According to news reports, Germany and France senta joint letter to the Denmark, which currently holds the rotating presidency of the European Union. Germany and France want a reform of the Schengen Treaty, which is the legal structure that facilitates the free movement of people within the EU. They call for the right of a nation to re-impose border controls unilaterally for 30 days if the national authorities believe other countries are not keeping their borders secure. The concerns are primarily member nations in the eastern and southern parts of Europe. If someone is able to enter Greece illegally, they can then move to Germany without any border controls. Currently, the member governments can impose border controls for five days and that period can be extended only with approval from the EU.
I argued in a previous post that the Euro-zone is not an optimum currency area, and that the push for monetary union was actually a political more than an economic move. Monetary integration cannot work well without more political integration and the move was, at least in part, to force more political integration. But right now, most of Europe is facing economic difficulties with some in crisis. Countries in such situations often look for ways to protect their labor markets. Given very high unemployment rates in Spain and Greece, there has been a large exodus of people from the countries looking for employment elsewhere. France's Sarkozy faces an election Sunday and has been making the EU borders an issue in his campaign.
Will the EU hold together and someday become the United States of Europe, or will it gradually fall apart from nationalistic pressures among the member nations? I still think it will hang together, but I am less sure of the belief now.
Thursday, April 19, 2012
Two Interesting Articles
Two interesting articles in today's Wall Street Journal include one on how states are able to use federal money allocated for coal mine cleanup to other uses, such as refurbishing the University of Wyoming's football stadium. It appears most of the clean up of old mines was accomplished many years ago but the money continues to come. This is one reason why cutting federal spending turns out to be so difficult.
The second article is more fun--about Doener Kebabs. I look forward to eating these when I go to Germany to teach a short course for a college there. Turkish immigrants brought the food with them to Germany when they came as guest workers in the 1950s. Es schmeckt!
The second article is more fun--about Doener Kebabs. I look forward to eating these when I go to Germany to teach a short course for a college there. Turkish immigrants brought the food with them to Germany when they came as guest workers in the 1950s. Es schmeckt!
China Still Relies on Connections
An interesting article in today's Financial Times concerns the fall of Bo Xilai and his relationships while still party head in Chongqing. He relied heavily on recommendations from friends and family matters rather than following the party bureaucracy or other channels. This is always a problem in political rather than business settings, although big business often likes working with politicians in this way. Competing for access to an important political figure may be better than competing in marketplace. It happens here too, but fortunately not as often as in much of the world.
Tuesday, April 17, 2012
Happy Tax Day
Today is the last day for filing 2011 taxes with the IRS. Sunday's New York Times had an interesting article on taxes, including post-war history of taxes, tax rates and the economy. It can be found here. It also deals with the impending increase in taxes set for January 1 and what the effects might be. One could hope that Congress and the president would deal with the issue prior to the end of the year, but given this is an election year, that is unlikely.
It would also be nice if our elected officials would think about the tax system as a way to raise revenue needed by the federal government to operate rather than as a way to do favors for some and to denigrate others. I can dream, can't I?
It would also be nice if our elected officials would think about the tax system as a way to raise revenue needed by the federal government to operate rather than as a way to do favors for some and to denigrate others. I can dream, can't I?
Monday, April 16, 2012
On Re-reading The General Theory
I read Keynes' GENERAL THEORY for the history of economic thought I am now teaching. This was the first time I read the book since graduate school. Given the resurgence in interest in Keynes and his work, it was interesting to read it with fresh eyes. I think that some of what he emphasized is important and should be emphasized, but have to disagree with much else.
First, the good: Keynes emphasized strongly the importance of uncertainty when business people are deciding on investment projects. This emphasis was not the result of the Great Depression, but was part of his dissertation on probability. (His doctorate was in mathematics). His discussion of uncertainty is similar to that of Frank Knight, who distinguished between risk and uncertainty, where risk can be calculated such as with actuarial tables but uncertainty cannot be calculated. The future is inherently uncertain. Keynes goes so far to suggest that based on pure calculation, no one would make the investments that business people make. It is the fact that we humans like to be doing something that brings investment about--his notion of animal spirits. He then notes that when business people get pessimistic, they will not invest. It is the lack of investment that causes aggregate demand to be ineffective in bringing about full employment.
The rest of his arguments fall short, in my view. He denies the equilibrating of investment and saving via changes in the interest rate, putting much more focus on propensity to consume, and therefore the propensity to save, than on responses to interest rates. He saw the economy as inherently unstable and called for a socialization of investment. We could not leave investment in the hands of the private sector and public investment would have to ready and willing to make up for inadequate private investment to bring about full employment. Further, he argued, we have seldom had full employment. Hence the government needs to consistently spend on infrastructure to provide full employment. It is unclear what the government would do once the entire country is paved over.
Reading the book again made me appreciate Axel Leijonhufvud's interpretation of Keynes and the Keynesians. It is clear that what came to be Keynesianism after World War II differed substantially from Keynes own writings. For example, Keynes did not aggregate output; he aggregated either labor or things measured in money prices. I tend to think Axel's interpretation of Keynes' contributions are incorrect as Keynes' views, but make sense anyway. In particular, the idea that the economy is normally self-regulating, but if buffers are eliminated, the self-regulating mechanisms can break down. To me, it explains the depth and severity of the Great Depression and helps explain the Great Recession as well.
First, the good: Keynes emphasized strongly the importance of uncertainty when business people are deciding on investment projects. This emphasis was not the result of the Great Depression, but was part of his dissertation on probability. (His doctorate was in mathematics). His discussion of uncertainty is similar to that of Frank Knight, who distinguished between risk and uncertainty, where risk can be calculated such as with actuarial tables but uncertainty cannot be calculated. The future is inherently uncertain. Keynes goes so far to suggest that based on pure calculation, no one would make the investments that business people make. It is the fact that we humans like to be doing something that brings investment about--his notion of animal spirits. He then notes that when business people get pessimistic, they will not invest. It is the lack of investment that causes aggregate demand to be ineffective in bringing about full employment.
The rest of his arguments fall short, in my view. He denies the equilibrating of investment and saving via changes in the interest rate, putting much more focus on propensity to consume, and therefore the propensity to save, than on responses to interest rates. He saw the economy as inherently unstable and called for a socialization of investment. We could not leave investment in the hands of the private sector and public investment would have to ready and willing to make up for inadequate private investment to bring about full employment. Further, he argued, we have seldom had full employment. Hence the government needs to consistently spend on infrastructure to provide full employment. It is unclear what the government would do once the entire country is paved over.
Reading the book again made me appreciate Axel Leijonhufvud's interpretation of Keynes and the Keynesians. It is clear that what came to be Keynesianism after World War II differed substantially from Keynes own writings. For example, Keynes did not aggregate output; he aggregated either labor or things measured in money prices. I tend to think Axel's interpretation of Keynes' contributions are incorrect as Keynes' views, but make sense anyway. In particular, the idea that the economy is normally self-regulating, but if buffers are eliminated, the self-regulating mechanisms can break down. To me, it explains the depth and severity of the Great Depression and helps explain the Great Recession as well.
Saturday, April 14, 2012
Visit to China
I visited China with a group of Hope College students during spring break. We visited a number of businesses while there, learning a lot about business in China. In Beijing, we visited Amway Asia, Super8, Motorola, and Sinochem, a state-owned enterprise. In Shanghai, we visited Dow Chemical, GM Asia, Gentex, TRW, and JCI. Some lessons learned:
China's perspective on their history over the last 150 years is that they experienced several "humiliations" at the hands of western powers, including two Opium Wars, the Boxer Rebellion, and the Japanese invasion during World War II. China can use a "nationalistic card" at almost any time. China wants to be treated with respect and not as one subjhgated to the West. Face matters.
China is trying to develop faster than any country has ever done. This involves several strategies. The process began thirty years ago when China opened up to trade. They had about one billon people, but 900 million were farmers. Today they have about 1.3 billion with about 600 million farmers. Urbanization has taken place by cities expanding geographically some amout each year.
According to a historian we met, many service workers in Beijing are "illegals", i.e. they are from rural areas and do not have the documentation needed to live in Beijing. There is a huge disparity between rural and urban areas in terms of income and education.
China sets goals, involving a series of five-year plans. The want to achieve urbanization of 70% of the population by 2020 and are trying to achieve this at the rate of 1 percent a year. They set goals for economic growth, extending development to the western provinces, industrialization, and so on. They acknowledge that pollution is a problem but have the strategy of grow first and then clean up.
Many American businesses there are part of joint ventures. In some industries, a foreign firm cannot operate in China except as part of a joint venture. An important example is automobile production. An American firm has to be in a joint venture and the Chinese firm has majority control. Joint ventures are not required in auto parts so Gentex is not a joint venture, although TRW and JCI are involved in joint ventures.
I suspect much of the data coming from China is inaccuate. They set growth rates and always make them or surpass them slightly. On the train from Beijing to Shanghai we passed some cities that appeared to be largely empty of people. A lot of construction has been done that appears to be unnecessary. Still, great economic gains are clearly evident, especially in the number of autos on the roads. We were informed that about 2000 new cars are on the roads in Beijing every day. The scary thing is that most of the drivers are new drivers and don't have much experience. Rules of the road seem to be suggestions at best.
I lived in Los Angeles for four years, and the pollutoin in Beijing is much worse than any I experineced in LA. Shanghai was a breath of fresh air--literally and figuratively. It would have been intersting to get into a more rural part of the country, but we didn't have time. It was a fascinating trip, and one that impacted our students greatly.
China's perspective on their history over the last 150 years is that they experienced several "humiliations" at the hands of western powers, including two Opium Wars, the Boxer Rebellion, and the Japanese invasion during World War II. China can use a "nationalistic card" at almost any time. China wants to be treated with respect and not as one subjhgated to the West. Face matters.
China is trying to develop faster than any country has ever done. This involves several strategies. The process began thirty years ago when China opened up to trade. They had about one billon people, but 900 million were farmers. Today they have about 1.3 billion with about 600 million farmers. Urbanization has taken place by cities expanding geographically some amout each year.
According to a historian we met, many service workers in Beijing are "illegals", i.e. they are from rural areas and do not have the documentation needed to live in Beijing. There is a huge disparity between rural and urban areas in terms of income and education.
China sets goals, involving a series of five-year plans. The want to achieve urbanization of 70% of the population by 2020 and are trying to achieve this at the rate of 1 percent a year. They set goals for economic growth, extending development to the western provinces, industrialization, and so on. They acknowledge that pollution is a problem but have the strategy of grow first and then clean up.
Many American businesses there are part of joint ventures. In some industries, a foreign firm cannot operate in China except as part of a joint venture. An important example is automobile production. An American firm has to be in a joint venture and the Chinese firm has majority control. Joint ventures are not required in auto parts so Gentex is not a joint venture, although TRW and JCI are involved in joint ventures.
I suspect much of the data coming from China is inaccuate. They set growth rates and always make them or surpass them slightly. On the train from Beijing to Shanghai we passed some cities that appeared to be largely empty of people. A lot of construction has been done that appears to be unnecessary. Still, great economic gains are clearly evident, especially in the number of autos on the roads. We were informed that about 2000 new cars are on the roads in Beijing every day. The scary thing is that most of the drivers are new drivers and don't have much experience. Rules of the road seem to be suggestions at best.
I lived in Los Angeles for four years, and the pollutoin in Beijing is much worse than any I experineced in LA. Shanghai was a breath of fresh air--literally and figuratively. It would have been intersting to get into a more rural part of the country, but we didn't have time. It was a fascinating trip, and one that impacted our students greatly.
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