Economics – Page 180 – artdiamondblog.com

How “El Loco” Cut Argentine Inflation in Half

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

(p. A1) BUENOS AIRES — Argentina has had plenty of anti-inflation plans over the years. The current one may be the first that rests heavily on a public servant whom some executives and politicians have nicknamed "El Loco," or the Crazy Man.

The official, Guillermo Moreno, is Argentina’s Secretary of Internal Commerce, the government’s price policeman. His mission is limiting price markups in the red-hot economy — at least until the leftist Cristina Kirchner, the wife of the current president, Néstor Kirchner, can win her own bid for president. Elections are scheduled for this Sunday, and she’s heavily favored to win.

With the Kirchners’ blessing, Mr. Moreno has hammered out price-control agreements with industry, doled out subsidies and imposed export restrictions to keep the domestic market awash in goods. He has also threatened uncooperative businesses with prosecution under a recently resurrected 33-year law against hoarding goods. When none of that worked to restrain prices, a prosecutor has alleged, Mr. Moreno ousted the government statisticians who prepared the consumer price index and installed his own people to massage the numbers. Mr. Moreno denies that; a judge is reviewing the case.

. . .

(p. A18) As Argentina’s governing faction tries to prolong the country’s roaring economic recovery — and maintain its grip on power — it is waging an increasingly desperate battle to contain inflation. The government’s tainted figures put the annual figure at 8%, while most independent economists peg it around twice that high.

For the full story, see:

MATT MOFFETT. "POWER TRANSFER; Economic Reckoning Looms In Argentina’s Election; ‘El Loco’ Price Controls Help First Lady Lead, But Inflation Still Rises." The Wall Street Journal (Thurs., October 25, 2007): A1 & A18.

(Note: eillipsis added.)

USDA Sugar Allocations and Tariff System “Keeps the Price at a Fairly High Level”

Sugar beats unloaded in Scottsbluff, Nebraska at Western Sugar in 1999. Source of photo: online version of the Omaha World-Herald article cited below.

In the article excerpted below, why does Chet Mullin of the Omaha World-Herald care only about beat growers, but not about sugar consumers?

The International Sugar Organization predicts a sizable global surplus of the sweet stuff this year. If the prediction comes true, will it hurt sugar beet growers like those in Nebraska’s Panhandle?

The answer is no, according to Paul Burgener, agricultural economic research analyst at the University of Nebraska’s Panhandle Research and Extension Center in Scottsbluff.

"We have allocations (for sugar production) and we also have a tariff system for imports, and between the two, the USDA manages supply and keeps the price at a fairly high level," Burgener said.

For the full story, see:

CHET MULLIN. "Sugar surplus won’t harm beet growers." Omaha World-Herald (Tuesday, July 17, 2007): 1D & 2D.

77,000 Die from Lack of Tort Reform

Source of report cover image: http://www.pacificresearch.org/pub/sab/entrep/2007/Jackpot_Justice/index.html

(p. A18) How does the legal system extract such an astounding amount from our economy? We applied the rent-seeking theory of transfers from economic science to pick up where past studies — including the highly regarded Tillinghast-Towers Perrin study — leave off. We began by examining the static costs of litigation — including annual damage awards, plaintiff attorneys’ fees, defense costs, administrative costs and deadweight costs from torts such as product liability cases, medical malpractice litigation and class action lawsuits. The annual static costs, $328 billion per year, are well in excess of previous Tillinghast estimates.

But $328 billion is only the beginning. After all, litigation doesn’t just transfer wealth, it also changes behavior, and often in economically unproductive ways. Any true estimate of the costs of America’s tort system must also include these dynamic costs of litigation — the impact on research and development spending, the costs of defensive medicine and the related rise in health-care spending and reduced access to health care, and the loss of output from deaths due to excess liability.

. . .

Based on data from previous studies, we determined that more than 77,000 people would have been alive today and contributing to the workforce, but are not because of a failure to enact comprehensive tort reforms in the states. The cost of foregone output from these lost workers is more than $7 billion each year.

What we’re left with, then, are annual dynamic costs of $537 billion resulting from our litigation system. Add that to the static costs of $328 billion and you arrive at the total of over $865 billion per year.

For the full commentary, see:

LAWRENCE J. MCQUILLAN and HOVANNES ABRAMYA. "The Tort Tax." The Wall Street Journal (Tues., March 27, 2007): A18.

(Note: ellipsis added.)

McQuillan, Abryamyan, along with Anthony P. Archie, have co-authored a report entitled Jackpot Justice: The True Cost of America’s Tort System that elaborates on many of the issues sketched in the commentary excerpted above. You can download a free PDF copy at: http://www.pacificresearch.org/pub/sab/entrep/2007/Jackpot_Justice/Jackpot_Justice.pdf

Motorola Hurt By Failing to Leapfrog Itself

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

Clayton Christensen, in a series of books, has highlighted why it is difficult for a successful incumbent to prepare a successor for its own winning product. The Motorola case below is another example.

Note, though, that Motorola’s failure is not the understandable one of failing to prepare what Christensen calls a "disruptive innovation." If the story below is right, it is a case of the less understandable failure to continue to deliver with what Christensen calls "sustaining innovation."

(p. A1) A year ago, Motorola Inc. appeared headed for a third straight year of rich profits under Chief Executive Ed Zander, driven by its hit cellphone the Razr. "A lot of you are always asking what is after the Razr," Mr. Zander said in an April 2006 conference call after another quarter of 30%-plus growth. "I say more Razrs."

But behind the scenes, Motorola was working furiously to get a successor phone to market by the second half of 2006, according to people familiar with the matter. When it failed to do so, profit margins on handsets narrowed and the company swung to a loss. Key executives left. And as the stock slid, activist investor Carl Icahn built up a position and began campaigning for a board seat to address what he called Motorola’s "operational problems."

Motorola’s travails illustrate the risks for a company that rides high with a big consumer hit. Amid its success with the Razr, it fell behind on developing a phone with the next generation of technology. Missing a beat is especially hazardous in cellphones, where it can take two to three years to develop a new line.

. . .

(p. A14) As the Razr grew hot, some former designers and engineers say Motorola repeated mistakes it had made a decade earlier with another big hit, the compact flip-top phone known as the StarTAC. That phone was a huge seller, but it also was an analog phone, and its popularity blinded the company to an industry shift to digital technology. Similarly, while Motorola was selling countless Razrs, competitors were hard at work on more sophisticated products for 3G networks.

Motorola put engineers and designers who could have been working on new products on the Razr and its derivatives, some former executives say. "All resources went to feeding the beast," says a former Motorola designer. "Suddenly, you created this thing that requires a lot of energy and attention." Other former executives dispute that the focus on the Razr diverted work from other products and contend Motorola was right to ride the still-popular Razr as long as possible.

For the full story, see:

CHRISTOPHER RHOADS and LI YUAN. "DROPPED CALL; How Motorola Fell A Giant Step Behind; As It Milked Thin Phone, Rivals Sneaked Ahead On the Next Generation." The Wall Street Journal (Fri., April 27, 2007): A1 & A14.

(Note: ellipsis added.)

The most complete source of Christensen’s theory and examples is:

Christensen, Clayton M., and Michael E. Raynor. The Innovator’s Solution: Creating and Sustaining Successful Growth. Boston, MA: Harvard Business School Press, 2003.

Motorola CEO. Source of image: online version of the WSJ article cited above.

“India is Outsourcing Outsourcing”

"Infosys employs workers in Brno, Czech Republic." Source of caption and photo: online version of the NYT article quoted, and cited, below.

(p. A1) MYSORE, India — Thousands of Indians report to Infosys Technologies’ campus here to learn the finer points of programming. Lately, though, packs of foreigners have been roaming the manicured lawns, too.

Many of them are recent American college graduates, and some have even turned down job offers from coveted employers like Google. Instead, they accepted a novel assignment from Infosys, the Indian technology giant: fly here for six months of training, then return home to work in the company’s American back offices.

India is outsourcing outsourcing.

One of the constants of the global economy has been companies moving their tasks — and jobs — to India. But rising wages and a stronger currency here, demands for workers who speak languages other than English, and competition from countries looking to emulate India’s success as a back office — including China, Morocco and Mexico — are challenging that model.

Many executives here acknowledge that outsourcing, having rained most heavily on India, will increasingly sprinkle tasks around the globe. Or, as Ashok Vemuri, an Infosys senior vice president, put it, the future of outsourcing is “to take the work from any part of the world and do it in any part of the world.”

. . .

(p. A14) Such is the new outsourcing: A company in the United States pays an Indian vendor 7,000 miles away to supply it with Mexican engineers working 150 miles south of the United States border.

In Europe, too, companies now hire Infosys to manage back offices in their own backyards. When an American manufacturer, for instance, needed a system to handle bills from multiple vendors supplying its factories in different European countries, it turned to the Indian company. The manufacturer’s different locations scan the invoices and send them to an office of Infosys, where each bill is passed to the right language team. The teams verify the orders and send the payment to the suppliers while logged in to the client’s computer system.

More than a dozen languages are spoken at the Infosys office, which is in Brno, Czech Republic.

For the full story, see:

ANAND GIRIDHARADAS. "Outsourcing Comes Full Circle As India Starts to Export Jobs." The New York Times (Tues., September 25, 2007): A1 & A14.

(Note: the somewhat different title of the online version was: "Outsourcing Works So Well, India Is Sending Jobs Abroad.")

Strong Global Support for Free Markets

Source of table: "World Publics Welcome Global Trade — But Not Immigration." Pew Global Attitudes Project, a project of the PewResearchCenter. Released: 10.04.07 dowloaded from: http://pewglobal.org/reports/display.php?ReportID=258

(p. A10) WASHINGTON, Oct. 4 — Buoyed and battered by globalization, people around the world strongly view international trade as a good thing but harbor growing concerns about its side effects: threats to their cultures, damage to the environment and the challenges posed by immigration, a new survey indicates.

In the Pew Global Attitudes Project survey of people in 46 countries and the Palestinian territories, large majorities everywhere said that trade was a good thing. In countries like Argentina, which recently experienced trade-based growth, the attitude toward trade has become more positive.

But support for trade has decreased in recent years in advanced Western countries, including Germany, Britain, France and Italy — and most sharply in the United States. The number of Americans saying trade is good for the country has dropped by 19 percentage points since 2002, to 59 percent.

“G.D.P. growth hasn’t been as dramatic in these places as in Latin America or Eastern Europe,” said Andrew Kohut, president of the Pew Research Center, referring to gross domestic product, the total value of the goods and services produced in a country. “But worldwide, even though some people are rich and some are poor, support for the basic tenet of capitalism is pretty strong.”

For the full story, see:

BRIAN KNOWLTON. "Globalization, According to the World, Is a Good Thing. Sort Of." The New York Times (Fri., October 5, 2007): A10.

Pulling Teeth Slowly

Source of book image: http://mitpress.mit.edu/images/products/books/0262113023-f30.jpg

Many years ago, I read János Kornai’s The Road to the Free Market, which gave Kornai’s advice on how Eastern Europe could best make the transition from communism to the free market. What I remember most from the book, is his discussion of whether it is more humane for the transition to be quick or gradual. He answers the question by asking another: if you need to have a tooth pulled, is it more humane for it to be pulled quickly or gradually?

(p. B15) . . ., Mr. Kornai’s books and lectures in Europe, North America and Asia established him as one of the leading scholars of socialist economics and an expert on the difficult transitions that many countries face when they move from socialism to a more democratic and capitalist system. . . .

At one point in 1974, under the more relaxed rule of János Kádár, when Hungary was the "most cheerful barrack in the camp," Mr. Kornai and his wife decided to build their own home. Over the course of several months, they personally confronted the corruption, endemic shortages and shoddy construction materials that were so common in Eastern Europe. A year later, on a trip to India, Mr. Kornai was faced by idealistic young Maoists whose concern for the desperately poor reinforced their support for socialism. Mr. Kornai responded to them by arguing, as he puts it here, that "rationing systems that spread misery equally may assuage feelings of injustice for a while, but they will not solve anything."

For the full review, see:

JOSHUA RUBENSTEIN. "BOOKS; Critic Behind the Curtain." The Wall Street Journal (Tues., January 30, 2007): B15.

(Note: ellipses added.)

The book reviewed, is:

János Kornai. By Force of Thought. (MIT Press, 461 pages, $40)

The earlier book by Kornai, that I read and liked, is:

Kornai, Janos. The Road to a Free Economy: Shifting from a Socialist System, the Example of Hungary. New York: W.W. Norton, 1990.

United States Cotton Subsidies Hurt Poor African Farmers

Dan Sumner did his dissertation many years ago under T.W. Schultz, a great economist, and a great human being. (Dan was a friend of mine in grad school–we were members of a club that gathered once a month to discuss the works of Bertrand Russell.)

Eliminating billions of dollars in federal subsidies to American cotton growers each year would reduce American cotton production and exports, raise world prices by about 10 percent and modestly improve the incomes of millions of poor cotton farmers in Africa, according to a new study by Oxfam, the aid group.

Agricultural economists at the University of California, Davis, who conducted the study for Oxfam, found that a typical farm family of 10 in Chad, Benin, Burkina Faso or Mali — Africa’s major cotton producers — that now earns $2,000 a year would have an extra $46 to $114 a year to spend if American subsidies were removed.

“Fifty to a hundred bucks is a lot of money to these people,” said Daniel Sumner, chairman of the Department of Agricultural and Resource Economics at the university. “It’s not right to think that changing U.S. subsidies will turn very poor people into middle-class households by our standards. That’s a generational process. But it’s money in their pocket.”

. . .

Dani Rodrik, an economist at Harvard who is skeptical of the importance of reduced agricultural subsidies, said he found Oxfam’s new estimates credible, but said the gains forecast were relatively small. . . .

. . .

But the authors of the report said that removing American subsidies would permanently shift the price of cotton upward, with prices subsequently fluctuating around a higher average.

For the full story, see:

CELIA W. DUGGER. "Oxfam Suggests Benefit in Africa if U.S. Cuts Cotton Subsidies." The New York Times (Thurs., June 21, 2007): A12.

(Note: ellipses added.)

A Nuts and Bolts Example of Economies of Scale (or the Lack Thereof)

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

Mr. Bair said Boeing is working closely with its primary fastener supplier, Alcoa Inc., to get enough high-quality titanium bolts to put the plane together in a logical fashion. Nevertheless, major components, such as the wings, arrived from Japan and other locations such as Italy and South Carolina held together by thousands of temporary fasteners.

The unexpected lack of fasteners marks the sort of test Boeing will face in coming years as it moves to fill a press of orders for the 787 and other aircraft amid an aerospace boom. . . .

. . .

Unlike previous airplanes, the Dreamliner is made largely of futuristic composites, which can’t be held together with traditional aluminum rivets. Instead, the major sections are bolted together with specially coated bolts that fit into brackets at each joint. Each bolt must be individually made on a lathe — a process that can’t be hurried. Because it takes time to set up the lathe, Alcoa would prefer to make thousands of one type of fastener before breaking the machine down and resetting it.

"Problem is, we don’t need thousands of bolts right now. We might need 10 of one kind," Mr. Bair said.

For the full story, see:

J. LYNN LUNSFORD and PAUL GLADER. "Boeing’s Nuts-and-Bolts Problem Shortage of Fasteners Tests Ability to Finish Dreamliners." The Wall Street Journal (Tues., June 19, 2007): A8.

(Note: ellipses added.)

UNO Protects Students from Cupcakes (Whether They Want to Be Protected, or Not)

Many years ago, I went along with a group of Exec MBA students to Germany. Among them was Bill Swanson. Bill had a sense of humor.

At some point in the trip, I spilled ketchup on my tie. Bill’s response was that normally a ruined tie would be sad, but given my tie, the ketchup was an improvement.

Yes, Bill has a sense of humor; so I’m hoping the story below is a joke.

That’s what I hope, but what I fear is that the story below is one more example of the inefficient, sometimes painful (like when an 8th grader can’t take aspirin to middle school), and sometimes funny, things that we are driven to do to protect ourselves from being sued, in an economy where congress has empowered personal injury lawyers to frequently sue for huge and unpredictable compensatory and punitive damages. (When Joe Ricketts, Ameritrade founder, spoke to my Exec MBA class a few years ago, he said that the biggest threat facing the U.S. economy was the proliferation of tort law suits.)

So it’s either a bad joke; or (most likely) it’s UNO protecting itself against every potential law suit; or it’s a third, and worse, alternative—which would be if the story below is to be taken at face value.

In that case we would have to conclude that some UNO staff have nothing better to do with their time than to paternalistically ‘protect’ young adults from a minuscule risk of illness from freely choosing to purchase and eat cupcakes being sold by fellow students to raise money for good causes.

Here is an excerpt from the page one, lead story, of the Sat., Oct. 6, 2007, Omaha World-Herald:

(p. 1A) Guns. Drugs. Bake sales.

What do these things have in common?

All have been banned at the University of Nebraska at Omaha campus.

Citing safety and health concerns, UNO last week prohibited selling homemade food items at campus fundraisers.

Officials said the prevalence of serious food allergies and the potential for contaminated food — either by accident or deliberately — led UNO to adopt the policy, which then drew complaints from student groups.

"The primary issue is the health of the students and the safety of the students," said Bill Swanson, assistant to the vice chancellor in the Career Exploration and Outreach Office.

No one on the UNO campus has reported problems with contaminated food purchased at a bake sale, Swanson said.

But there have been incidents around the country, he said, and those were enough to prompt a discussion among officials.

The decision has come under fire from students who say the restriction cuts off small student (p. 2A) groups from their primary fundraising source.

The Public Relations Student Society of America traditionally held bake sales once a month to raise money for national conferences, local business luncheons and volunteer work, said the group’s president, Katie Dowd.

The group raised about $1,500 a year hawking homemade baked goods donated by members.

"It’s a big blow to us," said Dowd, who called the potential for food contamination from her group’s offerings "very unlikely."

For the full story, see:

ELIZABETH AHLIN. "Goodies ban half-baked, UNO students say." Omaha World-Herald (Saturday, October 6, 2007): 1A & 2A.