Economics – Page 170 – artdiamondblog.com

Google and Lessig Finally See that So-Called “Network Neutrality” Delays Progress

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

(p. A1) The celebrated openness of the Internet — network providers are not supposed to give preferential treatment to any traffic — is quietly losing powerful defenders.

Google Inc. has approached major cable and phone companies that carry Internet traffic with a proposal to create a fast lane for its own content, according to documents reviewed by The Wall Street Journal. Google has traditionally been one of the loudest advocates of equal network access for all content providers.
At risk is a principle known as network neutrality: Cable and phone companies that operate the data pipelines are supposed to treat all traffic the same — nobody is supposed to jump the line.
But phone and cable companies argue that Internet content providers should share in their network costs, particularly with Internet traffic growing by more than 50% annually, according to estimates. Carriers say that to keep up with surging traffic, driven mainly by the proliferation of online video, they need to boost revenue to upgrade their networks. Charging companies for fast lanes is one option.
One major cable operator in talks with Google says it has been reluctant so far to strike a deal because of concern it might violate Federal Communications Commission guidelines on network neutrality.
“If we did this, Washington would be on fire,” says one execu-(p. A6)tive at the cable company who is familiar with the talks, referring to the likely reaction of regulators and lawmakers.
(p. A6) Separately, Microsoft Corp. and Yahoo Inc. have withdrawn quietly from a coalition formed two years ago to protect network neutrality. Each company has forged partnerships with the phone and cable companies. In addition, prominent Internet scholars, some of whom have advised President-elect Barack Obama on technology issues, have softened their views on the subject.
. . .
. . . Lawrence Lessig, an Internet law professor at Stanford University and an influential proponent of network neutrality, recently shifted gears by saying at a conference that content providers should be able to pay for faster service. Mr. Lessig, who has known President-elect Barack Obama since their days teaching law at the University of Chicago, has been mentioned as a candidate to head the Federal Communications Commission, which regulates the telecommunications industry.

For the full story, see:
VISHESH KUMAR and CHRISTOPHER RHOADS. “Google Wants Its Own Fast Track on the Web.” Wall Street Journal (Mon., DECEMBER 15, 2008): A1 & A6.
(Note: ellipses added.)

A Toast to Schumpeter on His Birthday (February 8, 1883)

Source: scan (and crop) of the cover of the May 23, 1983 issue of Forbes .

In the May 23, 1983 issue of Forbes there appeared a now-famous essay by the late and great management guru Peter Drucker in which he pointed out that 1983 was the centennial of the birth of both John Maynard Keynes and Joseph A. Schumpeter. He noted that in the decades since the great economists’ passing, the academic and policy worlds worshiped at the feet of Keynes, and all but ignored Schumpeter (hence the many candles in front of the Keynes portrait on the cover, and the single, small candle in front of the Schumpeter portrait).

But Drucker argued that the world had gotten it wrong. Schumpeter was more important because he had understood a crucial truth: the process of creative destruction is indeed the essential fact about capitalism.

The reference for the original Drucker essay is:
Drucker, Peter F. “Modern Prophets: Schumpeter or Keynes?” Forbes, May 23, 1983, 124-28.

The reference to the reprint of the Drucker essay is:
Drucker, Peter F. “Modern Prophets: Schumpeter or Keynes?” In The Frontiers of Management New York: Penguin Putnam, Inc., 1999, 104-15.

A typo-laden version of the essay has been posted on the web at:
http://www.peterdrucker.at/en/texts/proph_01.html

(Note: I thank Aaron Brown for alerting me to the neat cover that appears at the top of this entry).

Economic Freedom Correlated with “Every Indicator of Well-Being”

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

(p. A17) For 15 years, The Wall Street Journal and The Heritage Foundation have been measuring countries’ commitment to free-market capitalism in the “Index of Economic Freedom.” The 2009 Index, published this week, provides strong evidence that the countries that maintain the freest economies do the best job of promoting prosperity for all citizens.

The positive correlation between economic freedom and national income is confirmed yet again by this year’s data. The freest countries enjoy per capita incomes over 10 times higher than those in countries ranked as “repressed.” This year, for the first time, the Index also correlates economic freedom with important societal values like poverty reduction, human development, political freedom and environmental protection. The linkages are robust, with economically freer countries performing significantly better on every indicator of well-being.
. . .
In a special chapter in this year’s Index, the Journal’s Stephen Moore chronicles the critical role that tax cuts, particularly cuts in corporate taxes, have played in economic growth in Eastern European countries and others like Ireland. The citizens of those countries lived for decades with state-directed economic planning and regulation, which many now advocate for the U.S. and other advanced economies. They remember the clumsiness of socialism and the government missteps that fostered economic disaster. To switch dance partners now that they have adapted to the quick step of capitalism and are enjoying its many benefits would be a tragic mistake.
It would be ironic indeed if the world’s advanced economies, in seeking to address current woes, abandoned the system that has brought them and others around the world the amazing levels of prosperity experienced over the last half century. The “Index of Economic Freedom” provides a record of that progress. It charts the path to economic advancement and proves that the best way forward is to hang onto our partner and step to the music of the market.

For the full commentary, see:
TERRY MILLER. “Freedom Is Still the Winning Formula.” The Wall Street Journal (Tues., January 13, 2009): A17.
(Note: ellipsis added.)

Entrepreneurs, Investors, and Consumers Will Delay Decisions If Government Policies Are Uncertain

(p. A15) . . . , the new administration needs to be clearer on its long-run goals and policies. Mr. Obama deserves time to lay out his longer-term agenda, but he must reassure those who would put capital at risk that we are not headed toward a European-style social welfare state. Will he push for financial reform with better intelligence, the centerpiece being that any firm that is or could quickly become too big to fail must be subject to real-time capital adequacy and risk disclosure and monitoring? Or will he just push for more punitive regulation?

Mr. Obama has pledged to go through the budget and shut down ineffective programs, but how much shorter is his list than mine or yours? Is he capable of a “Nixon goes to China” on Social Security, as President Bill Clinton once hoped to do? Or will he push for tax reform and simplification with a broader base and lower rates?
One thing is certain: Investors, workers and employers need to have a sense of where tax, spending and regulatory policy are headed, or they will postpone decisions and further weaken the economy.

For the full commentary, see:
MICHAEL BOSKIN. “OPINION; Investors Want Clarity Before They Take Risks.” The Wall Street Journal (Fri., JANUARY 23, 2009): A15.
(Note: ellipsis added.)

Inventors Move from Declining Industries to New, Expanding Industries

Petra Moser’s comments (see below) about inventors applying similar ideas to different industries seem complementary to Burke’s emphasis on the importance of serendipitous “connections.” An inventor exposing herself to many industries’ problems and products, would be more likely to see additional applications for inventions originally developed for another industry.

(p. 3) By some logic, there is no earthly reason why bicycles should still exist.

They are a quaint, 19th-century invention, originally designed to get someone from point A to point B. Today there are much faster, far less labor-intensive modes of transportation. And yet hopeful children still beg for them for Christmas, healthful adults still ride them to work, and daring teenagers still vault them down courthouse steps. The bicycle industry has faced its share of disruptive technologies, and it has repeatedly risen from the ashes.
. . .
“Much of the history of the ‘American system of manufacturing’ is the story of inventors moving from a declining industry to a new expanding industry,” says Petra Moser, an economic historian at Stanford who studies innovation. “Inventors take their skills with them.”
Gun makers learned to make revolvers with interchangeable parts in the mid-19th century, Ms. Moser says. Then those companies (and some former employees, striking out on their own) applied those techniques to sewing machines when demand for guns slackened. Later, sewing machine manufacturers began making woodworking machinery, bicycles, cars and finally trucks.
. . .
Meanwhile, we’ve already seen some of the “destruction” half of Joseph Schumpeter’s famous “creative destruction” paradigm, with many newspapers cutting staff and other production costs. Unfortunately for newspapers, historians say, the survivors in previous industries facing major technological challenges were usually individual companies that adapted, rather than an entire industry. So a bigger shakeout may yet come.
But perhaps the destruction will lead to more creativity. Perhaps the people we now know as journalists — or, for that matter, autoworkers — will find ways to innovate elsewhere, just as, over a century ago, gun makers laid down their weapons and broke out the needle and thread. That is, after all, the American creative legacy: making innovation seem as easy as, well, riding a bike.

For the full commentary, see:
CATHERINE RAMPELL. “Ideas & Trends; How Industries Survive Change. If They Do.” The New York Times, Week in Review Section (Sun., November 15, 2008): 3.
(Note: ellipses added.)

Taxpayers Pay $91 Million for Surplus Milk Powder

“Millions of pounds of government-owned milk powder stored in a warehouse in Fowler, Calif.” Source of caption and photo: online version of the NYT article quoted and cited below.

(p. B1) FOWLER, Calif. — The long economic boom, fueled by easy credit that allowed people to spend money they did not have, led to a huge oversupply of cars, houses and shopping malls, as recent months have made clear. Now, add one more item to the list: an oversupply of cows.
And it turns out that shutting down the milk supply is not as easy as closing an automobile assembly line.
As a breakneck expansion in the global dairy industry turns to bust, Roger Van Groningen must deal with the consequences. In a warehouse that his company runs here, 8 to 20 trucks pull up every day to unload milk powder. Bags of the stuff — surplus that nobody will buy, at least not at a price the dairy industry regards as acceptable — are unloaded and stacked into towering rows that nearly fill the warehouse.
Mr. Van Groningen’s company does not own the surplus milk powder, but merely stores it for the new owners: the taxpayers of the United States. To date, the government has agreed to buy about $91 million worth of milk powder.
. . .
(p. B5) Government price supports provide a price floor for agricultural products as a way of keeping farmers afloat during hard times and ensuring an adequate food supply.
The Agriculture Department has committed to buying 111.6 million pounds of milk powder at 80 cents a pound, for roughly $91 million, which includes some handling fees. . . .
. . .
. . . the agency has not decided what to do with the cache of milk powder in California.
Some critics of farm subsidies argue that price support programs are antiquated and allow farmers to continue producing even when the economics make no sense, as taxpayers will always buy up the excess production.
“They don’t want to downsize or respond to the market signal. They want to keep producing,” said Kenneth Cook, president of the Environmental Working Group, a Washington research organization that has long been critical of the government’s farm policy. “Once you get in a jam like this, it becomes our collective problem.”

For the full story, see:
ANDREW MARTIN. “Awash in Milk and Headaches; Cows Keep Producing Despite Drop in Demand.” The New York Times (Fri., January 1, 2009): B1 & B5.
(Note: ellipses added.)
(Note: the online version of the article is dated January 1, 2009, and is entitled “As Recession Deepens, So Does Milk Surplus.”)

“Arthur Machado, a dairy farmer in Fresno, Calif., has to keep feeding his herd of more than 300 cows. He plans to sell them and take up a more stable commodity.” Source of caption and photo: online version of the NYT article quoted and cited above.

Car Bailout Destroys Dynamism of Process of Creative Destruction

(p. A29) Not so long ago, corporate giants with names like PanAm, ITT and Montgomery Ward roamed the earth. They faded and were replaced by new companies with names like Microsoft, Southwest Airlines and Target. The U.S. became famous for this pattern of decay and new growth. Over time, American government built a bigger safety net so workers could survive the vicissitudes of this creative destruction — with unemployment insurance and soon, one hopes, health care security. But the government has generally not interfered in the dynamic process itself, which is the source of the country’s prosperity.

But this, apparently, is about to change. Democrats from Barack Obama to Nancy Pelosi want to grant immortality to General Motors, Chrysler and Ford. They have decided to follow an earlier $25 billion loan with a $50 billion bailout, which would inevitably be followed by more billions later, because if these companies are not permitted to go bankrupt now, they never will be.
This is a different sort of endeavor than the $750 billion bailout of Wall Street. That money was used to save the financial system itself. It was used to save the capital markets on which the process of creative destruction depends.
Granting immortality to Detroit’s Big Three does not enhance creative destruction. It retards it. . . .
. . .
But the larger principle is over the nature of America’s political system. Is this country going to slide into progressive corporatism, a merger of corporate and federal power that will inevitably stifle competition, empower corporate and federal bureaucrats and protect entrenched interests? Or is the U.S. going to stick with its historic model: Helping workers weather the storms of a dynamic economy, but preserving the dynamism that is the core of the country’s success.

For the full commentary, see:
DAVID BROOKS. “Bailout to Nowhere.” The New York Times (Fri., November 18, 2008): A29.
(Note: ellipses added.)

“Atlas Shrugged is a Celebration of the Entrepreneur”

“The art for a 1999 postage stamp.” Source of image: online version of the WSJ article quoted and cited below.

(p. W11) Many of us who know Rand’s work have noticed that with each passing week, and with each successive bailout plan and economic-stimulus scheme out of Washington, our current politicians are committing the very acts of economic lunacy that “Atlas Shrugged” parodied in 1957, when this 1,000-page novel was first published and became an instant hit.
Rand, who had come to America from Soviet Russia with striking insights into totalitarianism and the destructiveness of socialism, was already a celebrity. The left, naturally, hated her. But as recently as 1991, a survey by the Library of Congress and the Book of the Month Club found that readers rated “Atlas” as the second-most influential book in their lives, behind only the Bible.
For the uninitiated, the moral of the story is simply this: Politicians invariably respond to crises — that in most cases they themselves created — by spawning new government programs, laws and regulations. These, in turn, generate more havoc and poverty, which inspires the politicians to create more programs . . . and the downward spiral repeats itself until the productive sectors of the economy collapse under the collective weight of taxes and other burdens imposed in the name of fairness, equality and do-goodism.
. . .
Ultimately, “Atlas Shrugged” is a celebration of the entrepreneur, the risk taker and the cultivator of wealth through human intellect. Critics dismissed the novel as simple-minded, and even some of Rand’s political admirers complained that she lacked compassion. Yet one pertinent warning resounds throughout the book: When profits and wealth and creativity are denigrated in society, they start to disappear — leaving everyone the poorer.

For the full commentary, see:
STEPHEN MOORE. “DE GUSTIBUS; ‘Atlas Shrugged’: From Fiction to Fact in 52 Years.” Wall Street Journal (Fri., JANUARY 9, 2009): W11.
(Note: ellipses added.)

Multiplier: Is it 1.5 as Team Obama Hopes; or Zero, as Barro Estimates?

(p. A17) Now we have the extreme demand-side view that the so-called “multiplier” effect of government spending on economic output is greater than one — Team Obama is reportedly using a number around 1.5.

To think about what this means, first assume that the multiplier was 1.0. In this case, an increase by one unit in government purchases and, thereby, in the aggregate demand for goods would lead to an increase by one unit in real gross domestic product (GDP). Thus, the added public goods are essentially free to society. If the government buys another airplane or bridge, the economy’s total output expands by enough to create the airplane or bridge without requiring a cut in anyone’s consumption or investment.

The explanation for this magic is that idle resources — unemployed labor and capital — are put to work to produce the added goods and services.
. . .
What’s the flaw? The theory (a simple Keynesian macroeconomic model) implicitly assumes that the government is better than the private market at marshaling idle resources to produce useful stuff. Unemployed labor and capital can be utilized at essentially zero social cost, but the private market is somehow unable to figure any of this out. In other words, there is something wrong with the price system.

John Maynard Keynes thought that the problem lay with wages and prices that were stuck at excessive levels. But this problem could be readily fixed by expansionary monetary policy, enough of which will mean that wages and prices do not have to fall. So, something deeper must be involved — but economists have not come up with explanations, such as incomplete information, for multipliers above one.
. . .
There are reasons to believe that the war-based multiplier of 0.8 substantially overstates the multiplier that applies to peacetime government purchases. For one thing, people would expect the added wartime outlays to be partly temporary (so that consumer demand would not fall a lot). Second, the use of the military draft in wartime has a direct, coercive effect on total employment. Finally, the U.S. economy was already growing rapidly after 1933 (aside from the 1938 recession), and it is probably unfair to ascribe all of the rapid GDP growth from 1941 to 1945 to the added military outlays. In any event, when I attempted to estimate directly the multiplier associated with peacetime government purchases, I got a number insignificantly different from zero.

For the full commentary, see:
ROBERT J. BARRO. “Government Spending Is No Free Lunch.” Wall Street Journal (Thurs, JANUARY 22, 2009): A17.
(Note: ellipses added.)

Bernanke Praised FDR’s “Willingness to Be Aggressive and to Experiment”

Bernanke apparently endorsed FDR’s policy volatility. To the contrary, Amity Shlaes has persuasively argued that the policy volatility increased uncertainty, and discouraged entrepreneurial ventures, thereby lengthening and deepening the Great Depression.
Bernanke taking FDR as a mentor, is deeply disturbing. (And I regret an earlier entry in which I placed trust in Bernanke’s judgment.)

(p. A2) While Ben Bernanke was teaching economics at Princeton University in late 1999, he admonished officials in Japan for doing too little to get their country out of its economic funk. Their model, he said, should be Franklin D. Roosevelt.

“Roosevelt’s specific actions were, I think, less important than his willingness to be aggressive and to experiment — in short, to do whatever was necessary to get the country moving again,” Mr. Bernanke said in a paper on Japan’s paralysis.

Nearly a decade later, Mr. Bernanke, now the Federal Reserve chairman, is trying to follow his own advice.
. . .
Mr. Bernanke’s choices could damage several objectives that the Fed holds sacrosanct. Low interest rates and an exploding balance sheet could some day cause inflation. With so much slack in the economy and commodities prices tumbling, that looks like a far-fetched risk today. But the Fed’s novel new lending programs could be difficult to unwind quickly if the economy turns around unexpectedly, potentially leaving the financial system with more stimulus than it needs — along with inflation.
Mr. Reinhart notes that Mr. Bernanke’s approach also could open the Fed to political intrusion, something central bankers have fought for decades to avoid.
The recent debate about an auto-industry bailout was one example of the risk. Earlier this month, Sen. Christopher Dodd wrote to Mr. Bernanke asking if the central bank could help Detroit. Mr. Bernanke politely responded that he wanted to stay out of industrial policy. But after Senate action failed, the Connecticut Democrat raised the prospect of Fed involvement again at a news conference Friday.
“When the Federal Reserve is involved in more markets, more instruments and is seen to have an unlimited balance sheet and flexibility to use that balance sheet, it will be subject to political pressure,” Mr. Reinhart said.
. . .
Then there’s the biggest risk of all: the economy might not turn around. History was kind to Mr. Roosevelt because the economy got moving again on his watch, though of course it didn’t really turn around until the U.S. became enmeshed in a world war. Mr. Bernanke will be a hero if the economy rebounds. But if it doesn’t, the judgment is certain to be much tougher.

For the full commentary, see:

JON HILSENRATH. “THE OUTLOOK; Bernanke’s Fed, Echoing FDR, Pursues Ideas and Action.” Wall Street Journal (Mon., DECEMBER 15, 2008): A2.
(Note: ellipses added.)

Amity Shlaes’ wonderful book, is:
Shlaes, Amity. The Forgotten Man: A New History of the Great Depression. New York: HarperCollins, 2007.