Economic Crisis – artdiamondblog.com

Innovative Entrepreneurs Bring Prosperity to the Poor

(p. A17) As the economist Joseph Schumpeter observed: “The capitalist process, not by coincidence but by virtue of its mechanism, progressively raises the standard of life of the masses.”
For Schumpeter, entrepreneurs and the companies they found are the engines of wealth creation. This is what distinguishes capitalism from all previous forms of economic society and turned Marxism on its head, the parasitic capitalist becoming the innovative and beneficent entrepreneur. Since the 2008 crash, Schumpeter’s lessons have been overshadowed by Keynesian macroeconomics, in which the entrepreneurial function is reduced to a ghostly presence. As Schumpeter commented on John Maynard Keynes’s “General Theory” (1936), change–the outstanding feature of capitalism–was, in Keynes’s analysis, “assumed away.”
Progressive, ameliorative change is what poor people in poor countries need most of all. In “The Prosperity Paradox: How Innovation Can Lift Nations Out of Poverty,” Harvard Business School’s Clayton Christensen and co-authors Efosa Ojomo and Karen Dillon return the entrepreneur and innovation to the center stage of economic development and prosperity. The authors overturn the current foreign-aid development paradigm of externally imposed, predominantly government funded capital- and institution-building programs and replace it with a model of entrepreneur-led innovation. “It may sound counterintuitive,” the authors write, but “enduring prosperity for many countries will not come from fixing poverty. It will come from investing in innovations that create new markets within these countries.” This is the paradox of the book’s title.
. . .
One example that the authors cite is Tolaram Group, a Singapore-based conglomerate that created the instant-noodle market in Nigeria, pushing out 4.5 billion packets annually and generating revenue of almost $1 billion a year. Sourcing, manufacturing, distributing and selling its Indomie-branded noodles required that Tolaram invest in a broad and deep logistics and distribution chain; create a retail network; develop specialized training; acquire its own electricity generation; build a water and sewage-treatment plant; and construct a deep-water port in the city of Lekki. Had Tolaram waited for the Nigerian government to address these infrastructure and institutional challenges before investing in the country, the company would still be waiting. Other examples include British businessman Mo Ibrahim’s pan-African Celtel, which built a cellphone network across 13 African countries and gained 5.2 million customers in six years, and India’s Narayana Health, which has brought the cost of open-heart surgery down to $1,000.
. . .
Instead of a book of glib answers, they present something much more powerful–a work of creative destruction for today’s failed development-policy paradigm.

For the full review, see:
Rupert Darwall. “BOOKSHELF; A Better Way to Fight Poverty; The current foreign-development paradigm of government-funded programs should be replaced by an entrepreneurial model.” The Wall Street Journal (Thursday, January 31, 2019): A17.
(Note: ellipses added.)
(Note: the online version of the review has the date Jan. 30, 2019, and has the title “BOOKSHELF; ‘The Prosperity Paradox’ Review: A Better Way to Fight Poverty; The current foreign-development paradigm of government-funded programs should be replaced by an entrepreneurial model.”)

The book under review, is:
Christensen, Clayton M., Efosa Ojomo, and Karen Dillon. The Prosperity Paradox: How Innovation Can Lift Nations Out of Poverty. New York: HarperBusiness Press, 2019.

Government Fiscal Stimulus Does Not Speed Job Growth

Source of graph: online version of the WSJ article quoted and cited below.

(p. A17) . . . is there evidence that stimulus was behind America’s recovery–or, for that matter, the recoveries in Germany, Switzerland, Sweden, Britain and Ireland? And is there evidence that the absence of stimulus–a tight rein on public spending known as “fiscal austerity”–is to blame for the lack of a full recovery in Portugal, Italy, France and Spain?
A simple test occurred to me: The stimulus story suggests that, in the years after they hit bottom, the countries that adopted relatively large fiscal deficits–measured by the average increase in public debt from 2011-17 as a percentage of gross domestic product–would have a relatively speedy recovery to show for it. Did they?
As the accompanying chart shows, the evidence does not support the stimulus story. Big deficits did not speed up recoveries. In fact, the relationship is negative, suggesting fiscal profligacy led to contraction and fiscal responsibility would have been better.

For the full commentary, see:
Phelps, Edmund. “The Fantasy of Fiscal Stimulus; It turns out Keynesian policies are correlated with slower, not faster, economic growth.” The Wall Street Journal (Tuesday, Oct. 30, 2018): A17.
(Note: ellipsis added.)
(Note: the online version of the commentary has the date Oct. 29, 2018.)

Politicians and Special Interests “Are Joined at the Hip”

(p. A15) In August 1979, when Paul Volcker began what would prove to be an eight-year stint as chairman of the Federal Reserve, inflation was running at a rate of more than 11% a year.
. . .
Before Jay Powell and Janet Yellen, before Ben Bernanke and Alan Greenspan, there was “tall Paul,” the thrifty, 6-foot-7 career civil servant who smoked cheap cigars and fished for trout with a fly rod. His policy, announced in an extraordinary Saturday press conference just two months after he took office, was the polar opposite of the radical “stimulus” imposed after the downfall of Lehman Brothers in 2008.
. . .
“Good government” and “sound” money are Mr. Volcker’s themes, in life as in print.
. . .
Washington in the early 1960s was a “comfortable, convenient medium-sized city,” he writes; its law firms were “entirely local and small, occupying maybe a floor or two in a K Street office building.” Today the capital is “a very different, unpleasant, place, dominated by wealth and lobbyists who are joined at the hip with the Congress and too many officials. I stay away.”
Humility is one of the charms of both the man and his book (written with Christine Harper, editor in chief of Bloomberg Markets). Though his kindergarten teacher, Miss Palmer, saw in young Paul a worrying lack of self-confidence, the grown man stuck to his anti-inflationary guns, let joblessness mount, bankruptcies climb and brickbats rain down. Refusing to flinch, he made the paper dollar, if not actually sound, then respectable. Tall Paul, indeed.

For the full review, see:
James Grant. “BOOKSHELF; The Last Monetary Hero; The Fed under Ben Bernanke opened the monetary spigots; the Fed under Paul Volcker shut them off–and ended an inflation crisis.” The Wall Street Journal (Monday, Nov. 26, 2018): A15.
(Note: ellipses added.)
(Note: the online version of the review has the date Nov. 25, 2018, and has the title “BOOKSHELF; ‘Keeping At It’ Review: The Last Monetary Hero; The Fed under Ben Bernanke opened the monetary spigots; the Fed under Paul Volcker shut them off–and ended an inflation crisis.”)

The book under review, is:
Volcker, Paul. Keeping at It: The Quest for Sound Money and Good Government. New York: PublicAffairs, 2018.

Low Interest Rates Increased Zombie Firms After Economic Crisis of 2008

Source of graph: online version of the WSJ article quoted and cited below.

(p. A1) Italian clothing maker and retailer Stefanel SpA became famous for its knitted coats and cardigans.

Many economists, investors and bankers know Stefanel as something starkly different: a zombie company. It has posted an annual loss for nine of the last 10 years and restructured its bank debt at least six times, including several grace periods when Stefanel only had to pay interest on what it owed.
After booming during Italy’s post-World War II expansion, Stefanel and its lumbering factories were overwhelmed by Spanish fast-fashion giant Zara and then battered by the economic slowdown that hit Italy in 2008.
Stefanel is still alive but staggering. So are hundreds of other chronically unprofitable, highly indebted companies being kept afloat with new infusions from lenders and shareholders, especially in Southern Europe.
Economists and central bankers say zombies undercut prices charged by healthier competitors, create artificial barriers to entry and prevent the flushing out of (p. A10) weak companies and bad loans that typically happens after downturns.
Now that the European economy is in growth mode, those zombies and their related debt problems could become a drag on the entire continent.
“The zombification of the corporate sector and banks [is] a risk for future living standards,” Klaas Knot, a European Central Bank governor and the head of the Dutch central bank, said in an interview.
. . .
In some ways, zombie firms are an unintended side effect of years of easy money from the ECB, which rolled out aggressive stimulus policies, including negative interest rates, to support lending and growth. Those policies have been sharply criticized in some richer eurozone countries for making it easier for banks to keep struggling corporate borrowers alive.

For the full story, see:
Eric Sylvers and Tom Fairless. “Zombie Companies Haunt Europe’s Economic Recovery.” The Wall Street Journal (Thursday, November 16, 2017): A1 & A10.
(Note: ellipsis added.)
(Note: the online version of the article has the date Nov. 15, 2017, and the title “A Specter Is Haunting Europe’s Recovery: Zombie Companies.”)

Central Banks Epitomize the Administrative State

(p. A15) The promise of the modern central bank is that it will make its corner of the economic-policy world technocratic and academic–in a word, boring.
The lesson of the past decade is that this promise is a lie. The developed world’s four major central banks–the Fed, the Banks of England and Japan, and the European Central Bank–have executed a series of extraordinary policy maneuvers to rescue us from the 2008 financial panic, with debatable success. These include ultralow or negative interest rates; the purchase of sovereign debt in mind-boggling quantities; forays into commercial debt, equity and real-estate markets; and ventures into mortgages, small-business loans and other similar instruments. Central banks have also taken on vast new supervisory powers over the financial system. Each of these measures has had profound effects on our economies: debtors win, savers lose; large, bond-issuing companies get credit, smaller firms don’t; owners of assets accumulate wealth, wage earners see their salaries endangered by inflation. Such distributional choices are normally left to elected leaders, but no one elects a central bank.
Mr. Tucker reminds us how this happened. He places the development of modern central banking firmly within the wider story of administrative governance in the 20th century and its expansion at the expense of electoral accountability. “Central banks might well be the current epitome of unelected power,” he writes, “but they are part of broader forces that have been reshaping the structure of modern governance.” His brief account of the Fed’s history starts not at the usual spot–the 1907 panic and its aftermath–but with the creation of the Interstate Commerce Commission, in 1887, taken by some as the first step in the development of America’s modern bureaucracy.

For the full review, see:
Joseph C. Sternberg. “BOOKSHELF; ‘Unelected Power’ Review: Monetary Mavericks; The question is not whether recent interventions by central banks were effective, but whether they were legitimate.” The Wall Street Journal (Thursday, June 28, 2018): A15.
(Note: the online version of the review has the date June 27, 2018, and has the title “BOOKSHELF; ‘Unelected Power’ Review: Monetary Mavericks; The question is not whether recent interventions by central banks were effective, but whether they were legitimate.”)

The book under review, is:
Tucker, Paul. Unelected Power: The Quest for Legitimacy in Central Banking and the Regulatory State. Princeton, NJ: Princeton University Press, 2018.

China Fears It Can Only Walk Forward by Using Keynes

(p. B1) HONG KONG — Wang Shidong and his two partners were still finishing graduate school two years ago when they raised $45 million in less than two months to start a venture capital fund. His wife, an elementary-school teacher in their home village, was “terrified” that he got to manage so much money, Mr. Wang said.
Things are different this year. After three months and visits with more than 90 potential investors all over China, Mr. Wang and his partners raised only $3 million for a second fund. In June, they shut down the firm.
Their fund, East Zhang Hangzhou Investment Management Ltd., was one of nearly 10,000 founded over the past three years amid a technology gold rush powered in part by China’s government-guided economic growth engine. Now they have become the latest sign (p. B2) that China’s engine is slowing down.
“All industries, institutions and individuals are running short of cash,” said Zhang Kaixing, founder and chief executive of an online asset management company in Shenzhen called Jinfuzi, which means “golden ax.” Jinfuzi, which manages over $4.5 billion in assets, is the type of investor that technology funds court.
“Many investors in private equity and venture capital funds want to take their money back,” Mr. Zhang said.
. . .
“In China we believe in Keynesian economics,” said Mr. Zhang, the Jinfuzi chief executive, referring to the economic theory that favors a bigger role for government. “If what’s going on in China were happening in the U.S., it would have been called a recession. But in China, the government will step in to interfere in significant ways.”
Under President Xi, even economics has become a delicate topic. Many people in China are not willing to speak publicly because even economists aren’t allowed to make downward forecasts.
Yet in private conversations, investors, entrepreneurs and economists admit that with the high debt level and a trade war with the United States, the room for government maneuvering is shrinking. The degrees of pessimism vary, but many of them are bracing for a tough ride ahead.
. . .
Venture funds like East Zhang came into existence in part because, starting in 2014, Beijing made innovation and entrepreneurship top priorities. Leaders hoped that start-ups would help elevate China from a manufacturing power to a technology power. Corporations, banks and wealthy individuals fought to give money to venture funds to invest in start-ups.
“We ended up with a lot of dumb money, managed by inexperienced investors,” said Ran Wang, chief executive of the investment bank CEC Capital Group in Beijing.

For the full story, see:
Li Yuan. “Latest Sign of China’s Slowdown: A Technology Cash Crunch.” The New York Times (Tuesday, July 17, 2018): B1 & B2.
(Note: ellipses added.)
(Note: the online version of the story has the date July 16, 2018.)

Plenty of Good Blue-Collar Jobs

(p. A1) ELKHART, Ind.–The self-proclaimed RV capital of the world gives a glimpse of what the American economy looks like when operating at full tilt.
High-school students around here skip college for factory jobs that offer great pay and benefits. For-hire signs sprout like roadside weeds. And workers are so flush that car dealers can’t keep new pickups on the lot.
At the same time, the strains are showing. Employers can’t hang on to employees, and house prices are zooming. The worker shortage prompted a local Kentucky Fried Chicken restaurant to offer $150 signing bonuses. A McDonald’s failed to open for lunch last fall because managers couldn’t corral enough hands at $8 an hour to serve the lines waiting at the door.
No place in the U.S. has seen a labor-market turnaround like this metropolitan region of 110,000 workers, a mix of blue-collar whites, Mexican immigrants and Amish. “It’s like 1955,” said Michael Hicks, a Ball State University economist. “If you show up and have minimal literacy skills, you can find a job here.”

For the full story, see:
Bob Davis. “Economy’s Future Plays Out in Rust Belt.” The Wall Street Journal (Friday, April 6, 2018): A1 & A9.
(Note: the online version of the story was updated April 13 [sic], 2018, and has the title “The Future of America’s Economy Looks a Lot Like Elkhart, Indiana.”)

Chinese Economy “on the Brink of a Precipitous Downturn?”

(p. A15) Reporters in China often run up against Potemkin projects–gleaming science parks sitting half empty, new districts with eerily few residents, solar-powered cities where most of the panels are disconnected. These wasteful investments, designed to fulfill local-government ambitions to boost construction and drive short-term growth, can be a nuisance when researching stories about innovation or environmental foresight. But what if such projects are not a distraction but the story itself? What if China’s economy is, in fact, on the brink of a precipitous downturn? That is the question Dinny McMahon asks in “China’s Great Wall of Debt.”
Mr. McMahon, a former Beijing-based correspondent for this newspaper, suggests that China has powered ahead for as long as it has not because it is immune to crises but because its government has so far managed to intervene to stave them off. When China’s stock market plunged in 2015, the central government directed fund managers to buy instead of sell and pressured journalists to write only optimistic reports. One reporter who strayed from the official line was trotted out on state television to apologize.
Such intervention has created a false sense of confidence, Mr. McMahon argues, which in turn has led to a bad case of economic bloating.

For the full review, see:
Mara Hvistendahl. “”BOOKSHELF; The Chinese Growth Charade; Ghost cities, shadow banks, white-elephant state projects: The country’s pursuit of growth at all costs may come at a high price.” The Wall Street Journal (Wednesday, March 14, 2018): A15.
(Note: the online version of the review has the date March 13, 2018, and has the title “BOOKSHELF; ‘China’s Great Wall of Debt’ Review: The Chinese Growth Charade; Ghost cities, shadow banks, white-elephant state projects: The country’s pursuit of growth at all costs may come at a high price.”)

The book under review, is:
McMahon, Dinny. China’s Great Wall of Debt: Shadow Banks, Ghost Cities, Massive Loans and the End of the Chinese Miracle. New York: Houghton Mifflin Harcourt, 2018.

Stronger Labor Market May Increase Productivity

(p. B3) . . . the provocative conclusion of new research from the McKinsey Global Institute, the in-house think tank of the consulting giant, . . . suggests we should change how we think about the advancements that make society richer over time. It implies that as the economy returns to full employment, an outburst of faster growth in productivity — and hence economic growth — is a real possibility.
. . .
For years, McKinsey researchers have tried to understand what drives productivity growth from the ground up. They’ve studied how innovations that enable a company to make more goods and services per hour of labor spread across the economy.
The latest wrinkle is that the researchers now believe that productivity growth depends not just on the supply side of the economy — what companies produce and what technologies they use to do it — but also significantly on the demand side. That is to say, productivity advancements don’t happen in a vacuum just because technology is available. They also happen because companies need to increase production to match demand for their goods, and a shortage, either of workers or of materials, forces them to think creatively about how to do so.
. . .
. . . consider how this dynamic might apply in the restaurant industry (or retail, or tourism).
The basic technology for self-serve kiosks has been around for years. But when the unemployment rate was at its post-crisis highs, employers could have their pick of good workers at relatively low prices. Now, with the jobless rate at 4.1 percent, good workers are harder to find. And, perhaps unsurprisingly, companies have been more open to installing technology that may have a significant upfront cost and require reworking how a restaurant is organized, but allow more sales without hiring more workers.

For the full commentary, see:
Neil Irwin. “Why Researchers Believe a Productivity Boom Is Now a Real Possibility.” The New York Times (Thursday, Feb. 22, 2018): B3.
(Note: ellipses added.)
(Note: the online version of the commentary has a date of Feb. 21, 2018, and has the title “The Economy Is Getting Hotter. Is a Productivity Boom Next?”)

The McKinsey report discussed above, is:
Remes, Jaana, James Manyika, Jacques Bughin, Jonathan Woetzel, Jan Mischke, and Mekala Krishnan. “Solving the Productivity Puzzle.” Report McKinsey Global Institute, Feb. 2018.

Is a Michelin Star the Best Metric of Good Food?

(p. A4) MONTCEAU-LES-MINES, France — It is like giving up your Nobel, rejecting your Oscar, pushing back on your Pulitzer: Jérôme Brochot, a renowned and refined chef, decided to turn in his Michelin star.
He is renouncing the uniquely French distinction that separates his restaurant from thousands of others, the lifetime dream of hundreds. But Mr. Brochot’s decision was not a rash one, born of arrogance, ingratitude or spite. Rather, it was for a prosaic, but still important, reason: he could no longer afford it.
. . .
Even in a region famed for its culinary traditions, this declining old mining town deep in lower Burgundy could not sustain a one-star Michelin restaurant. Mr. Brochot, a youthful-looking 46, had gambled on high-end cuisine in a working-class town and lost.
. . .
Already Mr. Brochot’s strategy appears to be working. He has cut his prices and is offering a more down-to-earth cuisine of stews, including the classic blanquette de veau, and serving cod instead of the more expensive sea bass.
It had depressed him deeply, he said, to have to throw away costly bass and turbot, like gold even in France’s street markets, at the end of every sitting because his customers couldn’t afford it. “There was a lot of waste,” he said.
“Since we changed the formula, we’ve gotten a lot more people,” Mr. Brochot said. Above all, the effect has been psychological. “In the heads of people, a one-star, it’s the price,” he said.
On a recent Friday afternoon, most of the tables had diners, including Didier Mathus, the longtime former mayor, a Socialist.
. . .
“Maybe the star scared people,” Mr. Mathus said. “I understand. He’s saying, ‘Don’t be scared to come here.’ Here, it’s simple people, with modest incomes.”

For the full story, see:
ADAM NOSSITER. “Rejected Honor Reflects Hardships of ‘the Other France’.” The New York Times (Thurs., December 28, 2017): A4.
(Note: ellipses added.)
(Note: the online version of the story has the date DEC. 27, 2017, and has the title “Chef Gives Up a Star, Reflecting Hardship of ‘the Other France’.”)