Steven Pearlstein of the Washington Post comments on a new study out from an NYU prof that shows how globalization and so-called free trade have opened up a schism between two parts of the U.S. economy.
Michael Spence and Sandile Hlatshwayo divided the economy into tradable (manufactured goods, natural resources, financial services, etc.) and non-tradable spheres (teaching, health care, retail, etc.) and found:
One was that all the job growth came pretty much in the non-tradable activities, in particular government and health care, while across wide swaths of the tradable manufacturing sector, jobs declined significantly.
The other thing they noticed was that in terms of economic value-added - the “output” that is measured by GDP and generally correlates with income - the tradable sector experienced a slight edge.
Put the two together - the very unequal employment growth and nearly-equal output growth - and what you get is an economic tale of two cities, one that is growing in terms of jobs but not income, another that is growing income but not jobs. In short, a recipe for increasing inequality and social and political polarization.
Fascinating.
— One wonders what we’d know if the feds had tapped Wall Street’s phones during the crisis.
The Wall Street Journal (which has done a lot of great work on the Galleon story, by the way) reports that prosecutors allege that hedge fund manager Raj Rajaratnam tried to cover up the fact that he was trading on inside information.
Unfortunately for him, the feds were taping his calls:
In a taped phone call, Mr. Rajaratnam told two former Galleon employees to create an email “trail” that would make it seem as though a purchase of stock was based on price rather than information received from Anil Kumar, the former McKinsey consultant and a star witness for the government.
The alleged cover-up involves the purchase of shares of a company spun off by chip maker Advanced Micro Devices Inc. called Spansion.
“You just have to be careful, right?” Mr. Rajaratnam told the former Galleon employees, adding that he would send an email asking about a stock “so that we just protect ourselves.”
“We just have a[n] e-mail trail, right, that uh … I brought it up,” he said, after telling them about the deal described to him by Mr. Kumar.
Ouch.
And:
“What I would do is, I would buy a million shares and sell 500,000,” Mr. Rajaratnam advised her. “If you want to buy 500, I would buy a million and sell on Friday 500,000, you know?”They didn’t appear to suspect the FBI was listening. “I’m glad that we talk on a secure line,” Ms. Chiesi said. “Right. I never call you on my cellphone,” Mr. Rajaratnam responded.
How’d you like to be that guy’s lawyer?
— The Journal’s Katie Rosman has a terrific vignette on life at South by Southwest, the legendary Austin music festival that has been somewhat overtaken by the tech crowd.
She approaches SXSW like an anthropologist would an alien culture:
A unique social etiquette pervades the event. At the door of the bar or hotel, a PR neophyte searches an iPad for your name. Once you pass muster, you “check in” to the venue on your geo-location social network of choice. Next, via your preferred group text-messaging app, you text a core of friends alerting them to your whereabouts. You sidle up to the bar and order a Shiner Bock. (It’s a Texas beer and you’re here to enjoy the local culture, right?) You snap an arty photo of the scene with your iPhone camera and post it on Instagram and Twitter, affixing “#sxsw” to the end of your micro-message so all your followers know you are in-the-know and on the list.
Then, casually, you sip your drink, checking your device to see who has retweeted you, the warm glow of the screen casting you in the right light. The tech-obsessed indulge, free of judgment. Overheard (or, in Twitter parlance, “OH”): “Looking down is the new looking up.”
"Michael Spence and Sandile Hlatshwayo divided the economy into tradable (manufactured goods, natural resources, financial services, etc.) and non-tradable spheres (teaching, health care, retail, etc.) and found:
"One was that all the job growth came pretty much in the non-tradable activities, in particular government and health care, while across wide swaths of the tradable manufacturing sector, jobs declined significantly.""
Robert Reich has been writing about this for a while, but we have to be careful not to oversimplify it.
The production of manufactured goods is tradable and therefore work flows to the cheapest providers in the labor market.
Natural resources are tradable as long as multiple mines are producing those resources across the globe. Job growth and price will shrink so long as there's an excess of global supply to meet lax demand. The chinese and indian markets, by virtue of their economic growth in the cheap labor sectors, are putting stress on global supplies to meet their newly affordable demands.
One of the things the chinese and indians demand are good investments for their newly generated wealth. Financial services are tradable in that you can invest in an Indian firm/bank or an American firm/bank, but financial expertise is not tradable. If you want to invest in an indian market, you really want people familiar with indian laws, business climate / culture, and opportunities handling that money. Same goes for the American market. And the American market used to be very attractive to investment.
Thus you had large growth in the American financial sector because of their human capital - their expertise. Unfortunately, the inbalance between the expertise of the financial service provider and the investor became a source of fraud, along with the deregulation of the industry which legalized a lot of that profitable fraud.
As it says in this paper when explaining Volcker's Paradox "If Financial Market Competition is so Intense, Why are Financial Firm Profits so High?"
I discuss four over-lapping reasons why high profits and lowered barriers to competition have been able to coexist in this period.
First, the demand for financial products and services has grown exponentially. Competition is least corrosive of profitability in periods of strong demand.
Second, there has been a rapid rise in concentration in most wholesale and global financial markets as well as in several important domestic retail markets. Three to seven firm concentration ratios are now quite high. This has created an important precondition for what Schumpeter called “corespective” competition – an industry regime in which large firms compete in many ways, but avoid the kinds of competitive actions such as price wars that significantly undercut industry profit.
Third, there is substantial evidence that large financial institutions have raised their profit rates by taking on greater risk, risk that is partially hidden from view because much of it is located off-balance-sheet. To adequately assess this proposition requires an analysis of firm, industry and systemic risk. (A complete treatment of rising financial sector profit and risk should include an assessment of the increasing importance of hedge and private equity funds. I do not evaluate these institutions in any detail in this paper.)
Fourth, giant commercial and investment banks have turned innovation into a core business. They create and trade ever more complex derivative products in ever higher volume. They have been able to achieve high margins on much of this business by selling the bulk of their products over-the-counter (OTC) rather than on exchanges, thus insulating the profit margin from destructive competition.
#1 Posted by Thimbles, CJR on Wed 16 Mar 2011 at 11:38 AM
And here's where things get interesting. What happens to American labor when even the non-transferable experts get their job security threatened?
http://www.nytimes.com/2011/03/07/opinion/07krugman.html
The machines are getting smarter. Experts from other countries are getting better and are exploiting communications systems that are ever cheaper and more powerful. Person to to machine or avatar is coming. What is non-transferable today is quite easily gone tomorrow.
What then?
#2 Posted by Thimbles, CJR on Wed 16 Mar 2011 at 11:50 AM
"What then?" I asked earlier.
The answer for now seems to be this:
http://www.mcclatchydc.com/2011/03/27/111113/strong-corporate-profits-amid.html
U.S. corporations continue to post strong profits quarter after quarter, even as the unemployment rate remains high and the U.S. economic recovery plods along in fits and starts. What gives?
Corporate profits grew 36.8 percent in 2010, the biggest gain since 1950, according to Friday's latest report from the Bureau of Economic Analysis. No sign could be more clear that U.S. companies see the so-called Great Recession in the rearview mirror.
The strong profits, however, mask the continued difficult terrain for businesses. Yes, profits are high, but that doesn't mean business is strong.
"It's not that they're fake, it's that they're generated through a bunch of economic anomalies that are not the normal course or normal factors that generate profits," said Martin Regalia, chief economist for the U.S. Chamber of Commerce, America's premier business lobby...
hese factors include record low interest rates since late 2008, muted demand for borrowing by companies and a surge in productivity that has allowed companies to do more with the same number of workers or fewer.
Profits aren't rising solely because companies are making and selling more widgets to keep up with customer demand, which would be the case in a healthy, booming economy. Instead, they're more profitable because it now costs less to make the same widget, often because there are far fewer workers needed to make it.
"We've been able to generate record profits on very, very low volume and very weak economic growth," Regalia said...
"If you are looking at where profits are coming from ... cost control, strong capital discipline, strong control over the balance sheet, that's why you've seen this extraordinary recovery in profits, even though top-line growth hasn't been spectacular," said Aaron Smith, a senior economist at forecaster Moody's Analytics."
Welcome to the redundant society, where cheaply produced goods are marked up and sold to consumers who increasingly don't have jobs and don't make anything.
Long term, where's the healthy economic prospects in that?
#3 Posted by Thimbles, CJR on Mon 28 Mar 2011 at 12:43 PM