Administrative assistants did not do management, but managers did do administration

Thursday, April 15th, 2021

Has the economic clock started to run backwards?, Tim Harford asks:

As Philip Coggan writes in his epic history, More: The 10,000 Year Rise of the World Economy, Smith’s 1776 book was not the first to note the productivity gains that resulted from specialisation. Xenophon was making similar remarks in 370 BCE.

But why does the division of labour improve productivity? Smith pointed to three advantages: workers perfected specific skills; they avoided the delay and distraction of switching from one task to another; and they would use or even invent specialised equipment.

The modern knowledge worker fits uneasily into this picture. Most of us don’t use specialised equipment: we use computers capable of doing anything from accountancy and instant messaging to filming and editing video. And while some office jobs have a clear production flow, many do not: they are a watercolour blur of one activity bleeding into another.

[...]

In 1992 the economist Peter Sassone published a study of workflow in large US corporate offices. He found that the more senior a person was, the more likely they were to do a bit of everything. Administrative assistants did not do management, but managers did do administration. Sassone called this “the law of diminishing specialisation”.

This law of diminishing specialisation is surely stronger today. Computers have made it easier to create and circulate written messages, to book travel, to design web pages. Instead of increasing productivity, these tools tempt highly skilled, highly paid people to noodle around making bad slides.

[...]

Cal Newport’s new book, A World Without Email, is searing on this point. Examining scientific management studies from the early 20th century, Newport makes the case that manufacturers analysed and fixed their aimless processes a century ago. The gains were dramatic. For example: at the Pullman factory complex near Chicago, people from various departments would wander into the brass works and pester the metalworkers until they got what they needed. After a systematic overhaul, many clerks were hired as gatekeepers and to plan and schedule work. Productivity soared.

Newport argues that knowledge work is long overdue a similar rethink. How often is office work assigned and prioritised by random pestering? Certain disciplines, including producing a daily newspaper, have developed a clear workflow that doesn’t depend on long email chains. A lot of knowledge work, however, is still in the “wander in and pester” stage.

Posted in Business, Economics, Technology | 16 Comments »

This division of powers between the federal government and the central bank is what keeps the money supply relatively stable

Friday, April 9th, 2021

Printing money requires both nuclear keys:

The Federal Reserve can create new base money, but doesn’t have a mechanism to spend it into the real economy. The Treasury, on the other hand, can spend money on behalf of Congress, but has to issue bonds to do it, which sucks money out from somewhere else in the economy. In other words, the Treasury mostly just moves money around. This division of powers between the federal government and the central bank is what keeps the money supply relatively stable during most times in history, and leaves money creation mostly to the commercial bank system.

However, the combination of the Treasury and Federal Reserve working in concert results in a sharp rise in the broad money supply. With this approach, the Treasury spends money into the economy at a massive scale, and the bonds that are issued to pay for it are bought by the Federal Reserve with brand new base money, resulting in outright broad money creation. This close collaboration between the Treasury and the Federal Reserve occurred in the 1940s, and began occurring again in 2020.

[...]

During the subprime mortgage crisis, the Federal Reserve rapidly expanded the monetary base, but the Treasury’s response was more modest. If we continue with the nuclear key analogy for money-printing, only the Federal Reserve’s key was used. The Treasury did not use their key back then; little money was handed out to the broad economy.

[...]

Banks went into the 2008 crisis woefully under-capitalized, much like 1929. In response to a systemic failure of the banking system in 2008, the Federal Reserve created trillions of dollars of new base money to buy some of their assets, in a process referred to as quantitative easing. Additionally, fiscal bills removed troubled assets from bank balance sheets and provided very modest aid to the public. There was, however, no broad bailout of homeowners or other members of the general public other than for relatively small programs like “cash for clunkers”, and this dichotomy of bailing out Wall Street more than Main Street contributed to the rise of both left-leaning and right-leaning populist movements, ranging from Occupy Wall Street to the Tea Party.

All of this new base money in 2008, in other words, mostly remained in the banking system to recapitalize the banks and to decrease leverage ratios. As a result, the broad money supply didn’t spike at all, since people were not getting stimulus checks and there was no massive fiscal policy response.

Fast-forward to 2020, we went into this pandemic crisis with very different circumstances. Banks were well-capitalized this time from a combination of prior bailouts, leverage regulations, and more risk-averse lending behavior. Indeed, the banking system had plenty of excess reserves going into this crisis.

Instead, the economic shock came directly to consumers and businesses, and the fiscal response of providing stimulus checks, federal unemployment benefits, small business loans that mostly turn into grants, and a variety of other forms of aid, directly increased the broad money supply. Finishing with the analogy, both “keys” were initiated in 2020; the Federal Reserve created even more base money than before, and unlike 2008, the Treasury also sent out massive checks to inject it into the broad money supply, with massive fiscal deficit levels as a percentage of GDP that had not been seen since the 1940s.

Posted in Economics, Policy | 7 Comments »

Eliminating systemic racism should be a lucrative undertaking

Monday, April 5th, 2021

It would be in the profit-maximizing interest of firms to snatch up underpaid performers, Steve Sailer reminds us:

If there really is much discrimination, then eliminating systemic racism should be a lucrative undertaking, not one that requires constant paid sermonizing by innumerates about how handing privileges to the politically preferred will turn out to be in our own financial interest.

Of course, if you go far enough back into America’s past, it is easy to find a clear example of an employer who did flourish due to his diverse hiring: Branch Rickey, president of the Brooklyn Dodgers baseball team. By bringing Jackie Robinson up in 1947 to be the first black big-leaguer since the 19th century, Rickey got a lucrative jump on other teams.

[...]

The Brooklyn Dodgers’ example of the payoff from not discriminating is so vivid because:

(1) There really was systemic racism against black ballplayers: the Color Line.

(2) Blacks were as good as whites at baseball. (By the way, it’s often assumed today that whites were surprised in 1947 by how strong blacks were at baseball. In reality, though, black and white stars had often played together in barnstorming exhibition tours and in Caribbean winter ball, so white ballplayers had long publicly praised the talents of their black counterparts.)

(3) Some teams stubbornly resisted integration for up to a dozen years after 1947, highlighting the contrast.

Strikingly, it’s oddly hard to find more recent examples than this of firms that long earned outsize profits by first hiring blacks or women.

[...]

This should remind us that the Women’s Lib battle was quickly and almost painlessly won during the first half of the 1970s. For example, by the time I entered UCLA’s MBA program in 1980, conscious discrimination against women in corporate white-collar hiring was a thing of the past. The only employers I can recall being told were still bigoted against women were Los Angeles’ department-store chains, which, a professor explained, wouldn’t promote shiksas beyond Buyer.

Presumably, some companies took the lead in the early 1970s and outearned their rivals by hiring more women, which allowed them to pay lower wages than the industry standard. But, a half century later, it’s hard to identify these trailblazing corporations because their rivals responded so quickly to this now socially acceptable profit-maximizing scheme.

Before 1969, discrimination in white-collar hiring was less against women per se than against married women. (In contrast, blue-collar jobs that are today 95 percent male were often 100 percent male back then, and good-paying union jobs were usually reserved for men.)

Yet, there had always been a certain number of spinster career women in upscale jobs. For instance, in the 1940 movie His Girl Friday, newspaper editor Cary Grant is desperate to keep his ace reporter (and ex-wife) Rosalind Russell from marrying Ralph Bellamy and immediately quitting the newspaper to be a housewife and mother.

Why the feeling that married women shouldn’t work? The polite assumption had been that respectable women didn’t use contraception, so a married woman was likely to be a mother by the year after her wedding, after which she’d be too busy with child-rearing for paid employment.

But by 1969, The Pill had become socially accepted, plus the burdens of housework had declined due to advances in appliances such as dishwashers and dryers. As Goldin noted, women increasingly went back to paid work after their children were old enough, so it made sense for them to get the education when young that would enable them to hold better-paying jobs.

Hence, most genteel industries rapidly switched over to hiring large numbers of young women in the 1970s.

Posted in Business, Economics, Policy | 5 Comments »

But it’s not valuable, and it never has been

Sunday, March 28th, 2021

You can almost hear the quiver in their NPR voice as they ask, Is plastic recycling a lie?

Laura Leebrick, a manager at Rogue Disposal & Recycling in southern Oregon, is standing on the end of its landfill watching an avalanche of plastic trash pour out of a semitrailer: containers, bags, packaging, strawberry containers, yogurt cups.

None of this plastic will be turned into new plastic things. All of it is buried.

“To me that felt like it was a betrayal of the public trust,” she said. “I had been lying to people … unwittingly.”

Rogue, like most recycling companies, had been sending plastic trash to China, but when China shut its doors two years ago, Leebrick scoured the U.S. for buyers. She could find only someone who wanted white milk jugs. She sends the soda bottles to the state.

But when Leebrick tried to tell people the truth about burying all the other plastic, she says people didn’t want to hear it.

“I remember the first meeting where I actually told a city council that it was costing more to recycle than it was to dispose of the same material as garbage,” she says, “and it was like heresy had been spoken in the room: You’re lying. This is gold. We take the time to clean it, take the labels off, separate it and put it here. It’s gold. This is valuable.”

But it’s not valuable, and it never has been. And what’s more, the makers of plastic — the nation’s largest oil and gas companies — have known this all along, even as they spent millions of dollars telling the American public the opposite.

Posted in Economics, Policy | 7 Comments »

Affirmative action in higher education is supposed to be a free lunch

Wednesday, March 24th, 2021

Arnold Kling discusses the academic corruption from affirmative action:

Taking the pool of high school graduates as given, it is very hard to give African-Americans the comfort of being fully qualified for admission to a selective college as part of a large cohort of qualified African-American students. They can either be part of a small cohort or part of a large cohort that includes less-qualified students.

[...]

But my view is that college is not the place to try to fix racial inequalities. The attempt to fix these inequalities has to take place much earlier in young people’s lives, so that more black students graduate high school with strong educational backgrounds.

Affirmative action in higher education is supposed to be a free lunch. You can reduce social inequality and improve race relations without corrupting our standards. My guess is that you corrupt your standards without reducing social inequality, and you make race relations worse. If I am correct, then the unintended consequences of affirmative action have been severely adverse.

Posted in Arnold Kling, Economics, Education, Policy | 5 Comments »

The Korean War poured billions of American dollars into the Japanese economy

Tuesday, March 23rd, 2021

In Japan, the Korean War was always close, T. R. Fehrenbach says (in This Kind of War), but always far away:

While the Korean people were inevitably the real losers of the war, the Japanese became the true winner. The Korean War poured billions of American dollars into the Japanese economy.

Millions of Americans passed through Japan, moving to and from the combat zones. These had money in amounts unbelievable to the Nipponese — and the Japanese, among the world’s most industrious people, soon found Americans would spend it for almost anything, if given the opportunity.

[...]

All Americans, passing through, found that good Canadian whisky was $1.50 a fifth, and drinks a quarter U.S. a throw. As one officer said, happily, “At these prices I can’t afford to stay sober!”

[...]

The Japanese could not be blamed for turning their nation into a huge red-light district, for what the customer with money wants, he always gets.

The big money, and the prosperity that flushed the Japanese economy, however, came from American arms expenditures. American military procurement officers found Japanese industry — far more capable and efficient than it is generally given credit for — could produce almost anything needed at the front — and much cheaper than it could be made in the States and sent across the Pacific.

Thousand of American military vehicles, damaged or worn out in Korea, were rebuilt in Japanese shops, some as many as three times, far more cheaply than they could have been replaced. The Japanese, under contract, could manufacture ammunition, tools, equipment, almost anything. They could produce millions of tons of food for Koreans and Americans in FECOM. All in all, the Japanese economy hummed. They made big money.

The benefits did not all accrue to the Japanese, however.

Without its solid industrial base in Japan, in privileged sanctuary from the battles, the United States would have found it as difficult to fight the Korean War as it would have been to land on Normandy on D-Day, had Britain not been there.

(This Kind of War was originally published in 1963.)

Posted in Economics, Policy, War | 3 Comments »

Teaching is emotionally rewarding only if your students want to learn

Saturday, March 20th, 2021

Government money has played a role in the decline of quality in academia, Arnold Kling argues:

Programs like the GI bill and student loan programs have swelled the ranks of college students. Programs like the National Science Foundation and the National Endowment for the Humanities have dumped huge amounts of money into higher education. The net effect has been harmful.

The conventional wisdom, which comes from college professors, is the exact opposite. They argue that we should be putting more young people through higher education than we do. That funding for research produces great positive externalities and we should do more of it. The same with funding for the humanities.

Average returns to higher education have gone up. But some of this has been due to government-engineered regulations that require firms to be bureaucratized for compliance purposes. Both the regulators and the corporate bureaucrats have college degrees.

More important, at the margin, we are sending people to college who do not belong there. This is demonstrated by low graduation rates as well as a significant number of graduates working at jobs that do not use anything they learned in college. Credentialism is out of control. Somebody could learn to be a physical therapist as an apprentice, but instead many states require a Ph.D for new PT’s.

The expansion of higher education increased the demand for professors. In the 1960s and 1970s, graduate schools cranked up the volume of post-graduate degrees. The results were excessive, in two senses. A lot of mediocre intellects acquired advanced degrees. And a lot of people with advanced degrees could not obtain full-time academic positions.

Expansion also lowered the quality of classrooms at all but the very top colleges. Teaching is emotionally rewarding only if your students want to learn. But most of the students that we send to college these days are not highly motivated learners. Below the top tier in higher education (the best 150 colleges, plus or minus), a typical class has poorly motivated students in a class taught by disappointed professors.

If W. Bentley MacLeod and Miguel Urquiola are correct that the U.S. already had the leading research universities before World War II, then the postwar government programs were not necessarily responsible for the growth of research. Instead, it is plausible that government money bureaucratized and homogenized research. Of course, now that government provides so much of the funding for research, professors are loathe to bite the hand that feeds them.

Posted in Arnold Kling, Economics, Education, Policy | 4 Comments »

Social outcomes are substantially determined at birth

Tuesday, March 2nd, 2021

Gregory Clark’s latest (pre-print) paper, For Whom the Bell Curve Tolls, argues that a lineage of 400,000 English individuals 1750-2020 shows genetics determines most social outcomes:

It is generally assumed that the elements that define social status — occupational status, educational attainment, wealth, and even health — are transmitted across generations in important ways by the family environment. Above we show that the patterns of correlation of social status attributes in an extended lineage of 402,000 people in England are mainly those that would be predicted by simple additive genetic inheritance of social status in the presence of highly assortative mating around status genetics. Parent-child correlations for a trait equal those of siblings, and the patterns of correlation of relatives of different degrees of genetic affinity is mainly consistent with that predicted by additive genetics. Further family size and birth order, elements that would significantly affect the family environment for children, have modest effects on adult outcomes. The underlying persistence of traits is such that people who have likely never interacted socially, such as second to fifth cousins, remain surprisingly strongly correlated in terms of occupational status and wealth. The patterns observed imply that marital sorting must be strong in terms of the underlying genetics.

If this interpretation is correct then aspirations that by appropriate social design, rates of social mobility can be substantially increased will prove futile. We have to be resigned to living in a world where social outcomes are substantially determined at birth. Personally I would argue that this should push us towards compressing differences in income and wealth that are the product of such inherited characteristics. The Nordic model of the good society looks a lot more attractive than the Texan one.

Posted in Economics, Policy, Science | 8 Comments »

Venezuela has the world’s largest proven oil reserves and yet the country has run out of gasoline

Thursday, February 18th, 2021

Venezuela has the world’s largest proven oil reserves and yet the country has run out of gasoline:

The socialist government has lost the capacity to extract oil from the ground or refine it into a usable form. The industry’s gradual deterioration was 18 years in the making, tracing back to then-President Hugo Chávez’s 2003 decision to fire the oil industry’s most experienced engineers in an act of petty political retribution.

The near-total collapse in the nation’s oil output in the ensuing years is a stark reminder that the most valuable commodity isn’t a natural resource, but the human expertise to put it to productive use.

[...]

“Drivers who operate gas-powered busses prefer to keep them parked so that they can suck out the gas and later resell it,” says Andrés, a public bus operator in Caracas, who asked that we only use his first name.

“[My] bus runs on diesel. It uses 16 [or] 17 gallons daily. Nowadays, we have to wait in a long line to fill up,” he said. “The gas stations even have national guards who ask for bribes before they’ll fill up the tank because the 40 liters that the government gives us isn’t enough.”

Andrés is allowed special access to fill up his tank because he provides an essential city service. But earning the equivalent of just $200 a month, he struggles to make ends meet. So he keeps his bus parked and extracts gas from the tank to resell on the black market, earning about $8 per gallon. To put that into perspective, the average Venezuelan subsists on less than $10 per day.

The little gas that is still available comes via periodic shipments from Iran. But the Venezuelan government doesn’t officially charge at most gas stations. It uses a quota system, so filling a tank can mean waiting in line for days.

David is a mechanic living in Caracas. These days he’s making a living by waiting in line to fill up his tank and then extracting the gas to resell on the black market.

“My business isn’t selling gas,” David says. “It is meeting the needs of my customers.”

“A lot of the clients from my repair shop are elderly people — people who can’t be standing in line for eight hours, or two days, or three days, or a week. I am the person who is sacrificing my time. Clearly, I have to charge for my time. We all have to make a living.”

Posted in Economics, Policy | 25 Comments »

People may have extra cash to burn on big trips, fancy cocktails and Broadway shows

Friday, February 12th, 2021

Executives in industries devastated by COVID-19 clearly want investors to believe that they’re on the verge of a roaring comeback:

And some evidence suggests they may be right. According to data from the U.S. Bureau of Economic Analysis, the national savings rate has jumped during the pandemic, so people may have extra cash to burn on big trips, fancy cocktails and Broadway shows. And, man, do people miss going out.

According to a recent survey by the Harris Poll, 71% of Americans say they miss socializing in restaurants and bars, 61% say they miss shopping in stores and 52% say they miss movie theaters. Growing percentages of people say they’re planning on splurging on vacations, clothes, cars and sporting events when things return to normal. Fifty-nine percent say they would take a COVID-19 vaccine in order to fly again. After news broke that COVID-19 vaccines work, stocks for airlines, cruise lines and other industries that rely on being face-to-face surged.

Places that have gotten the virus under control have already seen some impressive rebounds in travel and leisure. For example, in China, domestic airline travel came roaring back after the country ended its shutdowns. When Shanghai Disneyland reopened, tickets sold out in minutes.

Posted in Business, Economics | 1 Comment »

Always make it clear that you are acting out of the goodness of your own heart, not under pressure from the opposition

Wednesday, February 10th, 2021

Commenter Dwarkesh proposes this hypothetical to Bryan Caplin:

If I’ve inherited control of a traumatized dictatorship, and I want to turn it into a capitalist liberal democracy, how should I go about reforming things without causing things to fall apart like they did in the Soviet Union or Iraq?

Caplin offers his best guess:

Consider it a recipe, not an endorsement.

Step 1: Purge known hard-liners en masse, without warning, Godfather style.

Step 2: Swiftly liberalize the economy and civil society from this position of strength, while unequivocally affirming your monopoly on political power.

Step 3: During the same period, open up your society to foreign business, tourism, media, NGOs, etc.

Step 4: Once you’ve had 4–6 years of strong economic growth and rising international prestige, slowly relax your monopoly on power. Always make it clear that you are acting out of the goodness of your own heart, not under pressure from the opposition.

Step 5: After 15–20 years, you’re ready for your first competitive national election. Put strong post-reform protection for your supporters into the constitution so they aren’t tempted to derail your plan.

Posted in Economics, Policy | 9 Comments »

A Plan which doesn’t rely on there being a greater fool to buy at a higher price

Friday, January 29th, 2021

If you’ve been following mainstream media coverage of /r/WallStreetBets and the wildly swinging Gamestop stock, Eliezer Yudkowsky notes, you may not be aware that /r/WallStreetBets has a Plan at all beyond “Let’s all buy the stock to pump it up, making all of us rich”:

But /r/WallStreetBets has a Plan — a Plan which doesn’t rely on there being a greater fool to buy at a higher price. I was quite surprised, when I first looked into the affair yesterday — surprised enough that I ended up writing this article despite having no specialist expertise or credentials. No, I’m not buying or selling Gamestop, and I won’t be recommending that you do so. I’m writing this because a certain feature of the affair is one I find interesting. On my home planet it would be front-page news, but the media here has other priorities; it hasn’t reported at all the interesting part, anywhere that I’ve read.

So what’s this Plan about? Roughly, it’s to engineer a short squeeze on Gamestop, but with a historically unprecedented twist. No, I can’t just tell you the twist right this minute and stop wasting your time. It legitimately takes some background to explain, unless you’re starting out understanding more than I did. In principle, one could deduce it just from having heard “/r/WallStreetBets has a plan to engineer a short squeeze on Gamestop”; but I had to be walked through several steps myself before I realized.

Sometimes, when you think you’re holding a stock in your account — say, GlomCo stock, for the sake of concreteness — your broker isn’t really holding all the shares of that stock. What your broker did instead, was charge somebody else to borrow some of the GlomCo shares it’s theoretically holding on behalf of end-consumers like you; then the borrower sells the GlomCo stock with intent to buy it back later and repay the loan. Key detail: whoever buys this stock may then have their broker quietly loan it out again in turn, behind the scenes.

Or more concretely, Alice buys 100 shares of GlomCo and holds them at Charles Schwab. Charles Schwab quietly loans those 100 shares to Bob, who short-sells them to Carol, who holds her shares at Fidelity, which quietly loans out 100 shares to Dennis, who sells them to Eileen. If you imagine that GlomCo only had 100 shares in the first place, then at the end of this operation there is “200% short interest outstanding” in GlomCo: Bob and Dennis have collectively borrowed-and-sold (and now owe back) 200 shares of GlomCo, or 2X as much as actually exists. That’s without “naked shorting” or selling synthetic copies of a stock.

[...]

The last I heard, Gamestop had 130% short interest outstanding. That is, short-sellers have collectively borrowed, and now collectively owe, 130% as much Gamestop stock as exists anywhere.
This happens, from time to time, in stock markets. When it does, it creates an opportunity for hedge funds to make a daring play. If a hedge fund can buy up enough of the company stock themselves, they can hold enough that the short-sellers have to go to the hedge fund to buy back the stock.

[...]

Cases surprisingly close to that have actually happened. In one of the legendary cases, Volkswagen was very heavily shorted, and Porsche announced it had bought up over 74% of Volkswagen… while around 55% of Volkswagen shares were held by index funds, effectively unavailable for trading at any price. That these two numbers sum to over 100% is not an error. Prices of Volkswagen shares spiked to where Volkswagen was briefly the most expensive company in the world. Or for another example, Martin Shkreli once engineered a 10,000% price rise via short squeeze on a small company called KalaBios. It’s not just a weird hypothetical theory; it has actually worked and people have collected huge profits on it.

This is what /r/WallStreetBets is trying to do with Gamestop — buy up enough of Gamestop themselves that there’s not enough other Gamestop shares left, on the broader market, to pay back the 130% outstanding shorts. If it works, it forces the short sellers to buy back some shares at whatever price /r/WallStreetBets decides to charge. The stock price is swinging as I revise this; when I wrote the first draft, as of Wednesday’s close the stock price was at $347, for a market cap of $24 billion. Gamestop was under $5 one year ago.

But so far as I know, this scheme has never before been successfully carried out by a large group of retail investors instead of a hedge fund. And there’s a fundamental reason for that! A group of retail investors face a technically interesting coordination problem in trying to engineer a short squeeze, a problem that one monolithic hedge fund does not face. So I will be really interested if /r/WallStreetBets pulls it off successfully, or even mostly successfully.

[...]

What most mainstream coverage I’ve seen, tries to insinuate is going on, is that /r/WallStreetBets is just a horde of suckers on the Internet, trying to buy up enough of some random company that the stock price skyrockets, hoping they’ll all get rich. From reading mainstream coverage, I didn’t realize there was a Plan beyond this; until I mentioned the issue on Twitter, and some more knowledgeable people graciously corrected me. But indeed, if that were all that was happening, it would be a classic “pump” scheme; which can’t generate net profits for all of the buyers, because the buyers are playing a zero-sum game among themselves.

[...]

If too many of them try to sell all their shares back, when the price goes astronomical— then the very very earliest sellers may make a vast profit. But the share price will start dropping fast, and only the earliest sellers will get Lambos.

[...]

If too many people defect and sell 100% right away, the scheme collapses. The stock price may drop precipitously if it looks like that might be starting to happen; and then the scheme is only repairable if that causes enough of /r/WallStreetBets to lock up, hunker down, and wait for the price to go back up again. If instead it panics a large-enough fraction of squeezers into selling 100%, the whole scheme is over.
This is why short squeezes are usually engineered by a monolithic hedge fund — it doesn’t face the same coordination problems internally.

For a hundred thousand people to do the same would be unprecedented! I don’t just mean that the particular scheme of short-squeezing is unprecedented; I mean that I’ve never heard of human beings successfully solving a coordination problem built out of thousands of strangers, with big financial payouts for early defection and zero ability to enforce against defection.

Posted in Business, Economics | 27 Comments »

Instead of realizing its own Sputnik moment, it is triggering one in China

Tuesday, January 19th, 2021

The US responded to the rise of the USSR and Japan by focusing on innovation, Dan Wang says, but so far the US is responding to the technological rise of China by kneecapping its leading firms:

So instead of realizing its own Sputnik moment, it is triggering one in China.

This year, the US doubled down. It produced two rounds of novel restrictions on Huawei, threatened wider restrictions on Tencent and ByteDance, forced the sale of TikTok to a US consortium, and limited technology exports on SMIC, DJI, and dozens of other companies. Aside from Alibaba, it’s hard to name many big Chinese tech firms that have not faced sanctions or the threat of one from the US.

The actual effects of these regulatory actions have been uneven. Designation to the entity list hasn’t always had a major impact on every company’s operations. Federal courts have tied up the bans on Tencent’s WeChat and ByteDance’s TikTok. At the same time, Huawei is trying to work through major difficulties, especially in its smartphone business. TikTok, China’s most successful tech export, still might be sold off. And more generally, Chinese firms are starting to be locked out of developed markets. Lack of access to the richest and most discerning consumers makes it more difficult to make the best products in the world.

The US can revel in Huawei’s pain. But its actions have not been costless to itself. By withholding components that Chinese companies have relied upon, the US government has turned American firms into unreliable suppliers. These restrictions can sometimes block non-American firms from making sales too. In an extraordinary assertion of extraterritoriality, the US declared in August that any company, anywhere in the world, needs to apply for a license to sell a product to Huawei if it is produced on the basis of US technologies.

Nothing can be easier to destroy than trust. Chinese companies have responded by de-Americanizing their supply chains because they have no choice. US politicians can observe the sometimes-devastating impacts of sanctions. What they don’t seem to realize — or want to believe — is that they’re simultaneously pummeling the American brand writ large. I’ve documented for Dragonomics the uncomfortable questions American companies tell me they’re starting to face on whether they can credibly be long-term suppliers. Elsewhere, the Economist has reported that even poultry farmers in China are wondering if they’ll be able to import baby chicks from the US. And there are now multiple reported instances of Japanese companies marketing themselves as more reliable than their American competitors. Moreover, I hear growing unease from companies in the rest of Asia and Europe on buying American. Can everyone really be sure that this denial campaign will be limited to a handful of bad Chinese actors? Or is a better model of the US government that once it has found a fun new toy, it will keep playing with it until it is no longer fun?

With these regulations, the US has initiated one of the greatest and strangest antitrust actions ever, against potentially all American exporters. The US Treasury has for years expressed worry about the potential decline of the dollar’s dominance following excessive use of blocking sanctions. This fear is turning into reality for the real economy. One might expect alarm bells to be going off in DC, but it doesn’t appear that there’s much pushback against these regulations, except for murmurs from trade associations. It’s possible to defend these moves as correct — for example by justifying that the costs on American firms are worth it for the chance to slow Huawei down right now — but the government does not appear to have had a vigorous debate about the tradeoffs. Instead, the strategy seems to be a result of bureaucratic kludges, pushed forward by whichever faction has the upper hand, made mostly because the financial sanctions office has resisted dealing a serious blow to Huawei in a single stroke.

For the most part, the control hawks faction of the government has had a run of the table, shown by the fact that US agencies have been more focused on taking down Chinese firms than extending US strengths. At a time when it’s more important than ever to advance its semiconductor companies, the government is crippling their sales to their largest or fastest-growing market. When research capabilities at US universities need to grow, the government is denying them students. And when the US should be attracting more talent to its shores, the government has made it more difficult for people to immigrate. Thus the US looks committed to a strategy to destroy the scientific and industrial establishment in order to save it.

Meanwhile in China, these actions have triggered a surge of interest in mastering technology. For the first time arguably since the industrial rise of Japan in the 1950s, a major country is committed to thinking deeply about the invention of its own tooling. A whole generation of scientists and engineers must examine foundational problems like to build leading tools (like lithography machines) and create the best materials (like wafers and chemicals). And the state is fully behind that effort. After steady calls from Xi throughout the year to master technology, the Central Economic Work Conference announced in December that science and technology work will be the top priority in 2021; the conference has never broken science and technology out as an independent item, never mind give it top spot.

Posted in Economics, Policy, Technology | 13 Comments »

China is the country with the most can-do spirit in the world

Sunday, January 17th, 2021

This convinced Dan Wang that China is the country with the most can-do spirit in the world:

Every segment of society mobilized to contain the pandemic. One manufacturer expressed astonishment to me at how slowly western counterparts moved. US companies had to ask whether making masks aligned with the company’s core competence. Chinese companies simply decided that making money is their core competence, and therefore they should be making masks. The State Council reported that between March and May, China exported 70 billion masks and nearly 100,000 ventilators. Some of these masks had problems early on, but the manufacturers learned and fixed them or were culled by regulatory action, and China’s exports were able to grow when no one else could restart production. Soon enough, masks were big enough to be seen in the export data.

It’s obvious that the authorities in Wuhan screwed up big, but it’s also the case that the central government organized an effective response to virus containment. It’s not just the manufacturers: the consumer internet companies leapt into action in a way that their US peers did not. Francis Fukuyama states that high-trust societies have “spontaneous sociability,” in which people are able to organize more quickly, initiate action, and sacrifice for the common good. On each of these metrics, I submit that China should receive high marks.

As every discussion on China grows more strident, and as every proposition about it has to be vested with sentiment, I submit that it’s all the more important to be able to see things as they are. That entails having coming to terms not just with a rise of its repressive capabilities, but also with its growing commercial and institutional strengths. US elites have abandoned the idea that China would liberalize nicely. They should put another idea to bed: that this authoritarian system, riddled with weaknesses, is on the brink of collapse. The country’s strengths are real and improving while the government becomes more nasty towards its critics and the rest of the world.

[...]

It’s difficult to draw a clear line from tighter speech restrictions to worse economic outcomes. Greater censorship over the last decade has coincided with still-impressive levels of economic growth as well as the growing competitiveness of many more companies. And I think it’s worth considering that the authoritarianism of the late-Prussian and early-German state coincided with the creation of the modern research university as well as fantastic advances in chemistry, physics, and electrical engineering.

But there’s more on-the-ground evidence that ordinary people are growing nervous. In so many settings, one has to tread on eggshells in a public discussion in China, with organizers taking pains to remind audience members of sensitivities. Sometimes even in private, people beg off with an embarrassed laugh that they can’t discuss a subject due to unspecified difficulties. WeChat blocks sensitive keywords, which today includes “decoupling” and “sanctions.” It’s now inconvenient to use the app for professional conversations, and I’ve been pretty insistent to my contacts to use Signal instead. And since I brought up Germany, I wonder if the right analogy for China today is as a successful East Germany.

Posted in Economics, Policy | 11 Comments »

We should avoid the nirvana fallacy

Monday, January 11th, 2021

We are nowhere close to utopia, Arnold Kling reminds us, and we cannot see how to get there:

A major reason for this is lack of knowledge. We know today much more than we knew one hundred years ago. It seems reasonable to expect that in another hundred years, today’s level of knowledge will seem low. If we look at all of the past beliefs that today seem wrong-headed, we should be hesitant to commit to what we believe now.

[...]

1. We should be humble about predicting the consequences of public policies. In an economics textbook, a single “market imperfection” is shown in isolation, with the implicit assumption that everything else is perfect. Under those assumptions, the right tax, subsidy, or regulation can reliably produce improvement.

Most economists are familiar with the “theory of the second best,” which points out that trying to fix one problem, when there are other problems or constraints, can make things worse. This is a useful concept, but it only scratches the surface of strong imperfection.

2. We should welcome trial-and-error learning. The economic and social progress we have made is largely due to trial and error, not central planning. Because of strong imperfection, we know that many flaws and problems still exist. It is likely that solutions will come from trial and error going forward, just as in the past.

3. We should try to limit the number of personal flaws that we see as inexcusable. Both as a society and as individuals we should try to extend tolerance and forgiveness. Given our current state, I do not think we can do away with prisons, but I think we should be aiming in the direction of limiting their use. I also think that we should be reducing the number of “firing offenses” in the work place, not adding to them. As individuals, we should aim to reduce the set of excuses for cutting people off as friends.

4. We should avoid the “nirvana fallacy,” which involves comparing the current state to a perfect state. The most realistic change is likely to be from an imperfect current state to another imperfect state.

5. We should resist becoming Manichean. The motives of opponents are usually not as bad as we are inclined to make them out to be.

Posted in Arnold Kling, Economics, Policy | 4 Comments »

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