There are some interesting things to think about and perspectives to ponder.

• If I were a policymaker in a competing state I would probably want to take a close look at my home state and how it compares to to Texas.  I would be interested in finding ways to attract more employers and job hunters.

 

• Which came first? The chicken or the egg?  Did these employers setup shop here because of a good stock of skilled talent or whas the initial move a cost-benefit one where taxes and state provided incentives were offered?

 

• Forbes did not publish (or at least I did not see it) their data tables but I would be interested to see how each city in their list ranked in terms of transportation options.

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Just last week the U.S. Department of Justice and the I.R.S reached a deal with Switzerland to get the names of 4,450 U.S. account holders who may be suspect of hiding income and assets from Uncle Sam.

And the week before that Britain and Liechtenstein inked a new tax cooperation agreement to allow British account holders the opportunity to disclose their hidden accounts.  British citizens must disclose their accounts to get some leniency for tax evasion and those who do not will be forced to move their money out of Liechtenstein and face the full consequences – back taxes, penalties and possible legal action.

These three events are not coincidental and clearly indicate a growing trend among nations to shore up badly needed tax revenues.  The question is what will happen when the global economy picks up again.  There are hundreds of millions, if not billions, of dollars at stake for countries like the United States, Britain, France, Germany and Italy.

Once the tax coffers begin to rely on an increased taxpayer participation rate it would be hard to notice any dramatic reduction.  But that is where I think we could see an eventual pullback to the traditional tax evasion scheme.  It is always that slow and gradual change that proves to be the hardest to see.  A slow but sustained effort to chip away at these new rules and agreements could be just what the banks ordered.

The motivations behind hiding assets from tax authorities can vary from the outright criminal to well justified.  For those parties that use offshore havens to sustain their criminal activities I share no sentiment with you.  Those activities include money laundering, tax evasion and fraud.

In the case of tax evasion I take additional exception, as I liken it to you living under my roof and refusing to help pay the rent.    Regardless of the extent to which one may agree or disagree with the tax code, the fact should not be lost that citizenship has its privileges AND responsibilities.  One of those responsibilities being that of helping to pay for the government that protects you, defends your way of life and makes it possible for you to create any wealth in the first place.  Grievances with tax rules should be funneled through the appropriate channels – call your senator not your offshore banker. 

If you are one of those 4,450 lucky winners on that UBS list then you might want to call your local I.R.S agent too, as the Sep. 23 deadline for disclosing those secret accounts is getting close.

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The game starts you off with the fed funds rate set at 4.50%, unemployment at 4.75% and inflation at 2.14%.  I played a few times and got hit with events like energy price spikes and stimulus programs.  I lost the first two tries but on the third go-round I decided to keep the fed funds rate around 3% ahead of inflation while also keeping an eye on th unemployment rate.  I am happy to say that I got to keep my job at the end of the game.

Give it a go and see how you do.  Click here to access the game.

Fed Chairmain Game

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They don’t mention any details as to how the ’smart routing algorithim’ works but my guess is that they are using decision tree learning with a heuristic algorithm like ID3 or C4.5.  Their model would probably need some way to factor in arbitrage opportunities within the electricity markets on a real time basis while simultaneously tracking data-center loads.  One of the problems they mention that holds this technology back is that most data-centers today lack the ability to throttle power usage with loads – in other words, the servers need to be able to consume a fraction of their full load power when idle.

What are some potential implications for the future?

New market opportunities for those firms that can offer the hardware solutions to make servers ‘energy elastic’.

This could be a boon for the software cloud, as network computing could take advantage of these routing systems to find the least costly resource.  Remember back in college when you had to use one of the computer labs?  It was basically a room full of computer stations made available for everything from creating presentations to developing software applications.  Now imagine if each of the computers in that room costs a different amount to use.  The ideal thing to do would be to walk around the room to find the cheapest one – of course making sure that it has the needed capabilities.  I can imagine a situation where cloud software would locate the least costly computing resource for a given task anywhere around the country or world just as I would walk around that computer lab searching for the cheapest available station.

I’m speculating here but could this lead to a normalization of electricity prices across the country as data centers compete for locating and using lower cost centers?  I was only able to find one 2005 article mentioning that data centers consumer about 1.5% of all U.S. electricity.  I think it would be a fair guess that today’s number might be closer to 2% or higher.  If so then how would that impact states that currently have lower electricity rates?  Lots of potential externalities here to contemplate.

The article also mentions that energy companies could negotiate with large internet firms in advance of expected peak loads to mitigate potential outages or problems.  Energy companies could essentially ’shape’ their loads to prevent failures or outages.

A problem I see with this technology is that if it is used extensively in a decentralized manner then most of the cost savings could evaporate quickly.  I know what you are thinking here, “but that is to be expected.  Its simple supply and demand here – increase the use of product x over product y until the marginal cost reaches marginal benefit”. 

Here is my problem:
If every party acted independently and outside of a central market or clearinghouse then the anticipated savings would be lost to transactions costs.  These transactions costs being those associated with moving data from one place to another and doing so with incomplete information. Take for example if an underutilized data center pops up on the radar of ten or so Internet companies.  They each, independently and unbeknownst to the others, make the move to the new data center.  This surge in load may lead to an increase in costs and therefore mute any cost savings.  There could even be a potential for some Internet companies to have to move yet again - further increasing the cost of the move.

I think that a centralized market or clearinghouse for this type of transaction would facilitate this form of intelligent routing.  Of course, I am no expert in data center economics or how or if some of these problems or opportunities are realistic.  But with my limited knowledge they would be questions I would ask.

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Big business, big risks
For decades we have talked about the impact globalization has had on society, political affairs and economics around the globe.  The range of opinions about this phenomenon are as varied and numbered as the impacts.  Often Globalization gets tied to outsourcing and, depending on whether you are a savvy business person or an ambitious politician, it signifies the creation of competitive advantage or the loss of many jobs. 

It has also found itself as the centerpiece of a merger or acquisition strategy for a large business that needs to ‘compete on a global scale’.  Globalization also receives credit, rightfully so, for the creation of a new more advanced global economy where integration and a shared sense of fate are its underpinning.  But there is something else that Globalization has done which may bring with it a new set of risks.

Only as strong as the weakest link
Globalization has, at least in the public discussion, subordinated the importance of the local economy and small business to macroeconomic initiatives and large enterprises.  I have no intention of meaning this as a blanket statement but only to describe the extent to which we have operationalized globalization into our social, political and economic models.  The risk of glazing over the details and focusing on the forest is that we are unable to see if the trees are rotting from within.

Take our current situation, where one large institution after another has failed, gone under or is in the process of going under.  We can also ponder over the real estate crisis and whether California, Florida and Nevada where signs of a distressed forest.  The inherent risk of this flawed perspective is that risk itself is magnified.  Whereas mergers and consolidations were viewed as positives for the customer and business the unintended consequence and therefore risk to society was that a failure would sting that much more. 

All economics is local
I think ‘Tip’ O’Neill was onto something when he said that “all politics is local”.  That statement could easily be tweaked to say the same for economics and evolution – I will get back to the evolution part later.  There are some products and services that just have no business being brought in from anywhere other than the local community. 

Take for example food from the grocery store.  With the exception of those foods that require specific geographic characteristics most fresh foods could be produced within close proximity to its customer base.  There are several advantages to the customer, business and economy from maintaining a close relationship between the food we eat and our community.  This form of food patriotism is among other ways to achieve better sustainability. 

Another trend that is becoming prevalent in today’s economic climate and ties back to the local economy is community banking.  Local banks are benefiting directly from the lack of confidence in large banking institutions.  In fact many are seeing double digit increases in new deposit accounts as a result.  Local banks, which tend to have more established and personal relationships with their customers, have the advantage of knowing their customer and what their needs are.  The risk of lending can be further reduced because the banker has a more intimate knowledge of the business, its risks and, most importantly, the principal asking for the money. 

Survival of the fittest
This is an aside but I mentioned evolution earlier and wanted to take this opportunity to throw organized labor under the bus.  The fundamental idea behind organized labor has always irked me, as it seems to fly in the face of evolution.  There are some things in life that we simply cannot control and must either adapt to or die from it.  Organized labor, for the most part, has fought progress only to stave off the inevitable.  Not only does this intransigence make it difficult for a business to operate competitively but it poses a significant risk to a community when this mentality pervades its labor force.

Some communities in Michigan are looking how to offset the effect of job lossess as a result of failing auto companies.  In deed some of these small cities face serious problems as their largest employer is on the brink of failure.  Their precarious situation presents an opportunity for adaptation to the reality of the marketplace for labor.  While some communities are working to bring other major employers to the area they will face a major obstacle.  Until the business community sees a fundamental capitulation in the trend for labor to organize these communities will face an uphill battle – let me rephrase that, they will have to scale a near vertical mountain on a rainy day with only a tattered old 1/4 inch nylon rope.  Good luck, I am sure that you all can organize into a tall human chain with the prospect of getting at least one of you to the top, but then you will spend an eternity arguing why YOU should not be the one on the bottom.

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It has always been my opinion that GM is the embodiment of poor management, lack of vision and a stubborn proclivity to rely on excuses in the face of adversity.  The public apprehension towards bailing out the Big 3 seems to be a manifestation of the same sentiment.

What I find unfortunate is that Ford, while equally responsible for its current situation, has been more responsive to the realities of the marketplace and yet seems to be getting dragged down with GM’s bad reputation.  Ford has brought in a new CEO, it has been in the process of painful but necessary steps to restructure and it has quickly begun to adapt.  If any of these firms should be bailed out it should be Ford.  GM should be forced to restructure under Chapter 11.

What many do not seem to understand is that allowing GM to fail could be a blessing in disguise.  With the anticipated growth of the alternative energy industry (wind, solar, etc…) we will need workers to man these jobs.  Where will they come from???  Look at the unemployment rate as it stands in the midst of a considerable economic  downturn – 6.5%.

Let’s look past the trees for a moment and see the forest.  The next decade will see baby boomers leaving the job market en masse – creating an industry that caters to them in the process.  Energy will be an ever increasingly important industry that will require imagination, talent and huge amounts of capital.  There is opportunity on the horizon, but we need to recognize it and prepare ourselves for it.  Americans have always shown their ability to take a bad situation and thrive on it.  Let’s keep that tradition alive.

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What I find interesting even now is how banks continue to make poor decisions that only seem to aggravate the current situation.  Only now are banks beginning to mobilize to keep families in their homes instead of putting them on the street.  Where was the foresight? Now of course we will get excuses about how much red tape must be navigated in order to take those steps, but I consider them just that – excuses.  Action requires only one real ingredient – a desire to make it so.

This ‘credit crisis’ is also a function of banks choosing to hide under a rock instead of taking a leadership role and managing the situation.  They are choosing to hoard their cash and refusing to lend it out and keep those ‘gears’ turning.  This morning I read another article showing banks’ counterproductive efforts, this time dealing with public transportation.  Banks are using technical legal language in their financial dealings with mass transit companies to require lump sum repayments – hundreds of millions of dollars – within weeks!

It feels like we are all stuck in a canoe paddling furiously against a current that is taking us directly towards a deadly waterfall.  The strongest and most capable paddlers are the banks, but unfortunately they are jumping ship en masse and forcing us to work ever harder.

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Two overarching themes in this book are the need for a balance between free markets and government intervention and the need for a fundamental change in governance of international agents of globalization. Stiglitz does a great job of showing how important both of these are and what can happen, or has happened, as a result of not meeting these needs. This is a book to be taken seriously and one that should compel its readers to watch more closely the process of globalization as well as the international organizations entrusted to facilitate it.

Balance between Free Markets and Government Intervention

“I tried to forge an economic policy and philosophy that viewed the relationship between government and markets as complimentary, both working in partnership, and recognized that while markets were at the center of the economy, there was an important, if limited, role for government to play.“

Stiglitz did a superb job of illustrating where markets rely on government to function efficiently. For example, a clear prerequisite for a market system to operate is the establishment of a rule of law that protects property rights as well as the courts to enforce them. Well established property rights create an incentive in society to build wealth. Competition is another area of the market that requires some form of government intervention. U.S. experience is a testament to this with the age of the robber barons, U.S. Steel, and Standard Oil, where restrictions were put into place to keep a small number of firms from controlling output and thereby maximizing the price at which those products could be sold.

Sometimes governments are required to serve an area of the market that is underserved or not served at all. Some forms of insurance, for example, are provided by the government in the U.S. because of an inadequate or nonexistent supply by private firms. The IMF made some mistakes in its programs by pushing for rapid privatization; simply because it “assumed that markets arise quickly to meet every need, when in fact, many government activities arise because markets have failed to provide essential services.”

The Dangers of Financial and Capital Market Liberalization

The East Asia Crisis

Stiglitz comments that, “excessively rapid financial and capital market liberalization was probably the single most important cause of the [East Asia] crisis.” Before the crisis hit, the East Asia countries were outperforming most of the world’s developed nations. They were experiencing phenomenal growth. One important factor that led to this growth was the level of saving in those countries. He shows how speculative attacks on currencies can cause pandemic problems for the world economies. The collapse of the Thai Baht induced a domino effect on the East Asia economies that created a regional exchange rate emergency and threatened entire world economies.

The IMF’s reaction and strategy towards the crisis not only exacerbated the problem, but as Stiglitz points out, it was “partially responsible for the onset”.  It pushed for rapid capital market liberalization which would open the door to outside investment.  In the case of the countries in East Asia, there was no need for additional capital, precisely because of their high savings rate. The IMF, however, continued to push for liberalization. After the crisis hit, the IMF agitated the problem by not allowing the East Asia countries to control capital flows.

Malaysia, the only country that did institute capital controls, was able to outperform all of the other countries hit in terms of recovering from the crisis. Stiglitz makes it clear that although there is little evidence that liberalization policies promote growth, there is “ample evidence that they [impose] huge risks on developing countries.  Even a developed nation would be hurt by a considerable speculative attack or sudden change in investor sentiment that could create a sudden vacuum of capital from one country into another.

Russia and the 1998 Bailout

“There was one important difference between the transition from war to peace, and from communism to a market economy: Before World War II, the United Sates had the basic market institutions in place, even though during the war many of these were suspended and superceded by a ‘command and control’ approach. In contrast, Russia needed both resource redeployment and the wholesale creation of market institutions.”

 Stiglitz illustrates how Russia provides another case study where rapid financial and capital market liberalization was the impetus for declining real wages, corruption, and a blatant robbery of the national stock of Russia’s assets by the rich.

Perhaps of all the IMF’s blunders, it is the mistakes in sequencing and pacing, and the failure to be sensitive to the broader social context, that have received the most attention forcing liberalization before safety nets were put into place, before there was an adequate regulatory framework, before the countries could withstand the adverse consequences of the sudden changes in market sentiment that are part and parcel of modern capitalism; forcing policies that led to job destruction before the essentials for job creation were in place; forcing privatization before there were adequate competition and regulatory frameworks.

As Russia began to convert itself into a more democratic country it also began to reestablish its economy. As Stiglitz points out, there were crucial elements that were needed for Russia to obtain before it could effectively begin a transition. One was the establishment of the appropriate market institutions needed to provide protections, through regulations and statutes, as well as the mechanisms to enforce them. The IMF pushed for rapid privatization of national industries while there were no effective mechanisms to allow for an equitable redistribution of resources. As Stiglitz points out, privatization done the wrong way had not let to increased efficiency or growth but to asset stripping and decline.  He gives a vivid account of how the rich oligarchs and political leaders were enabled to strip Russia of crucially needed resources and international aid; [capital] market liberalization and privatization made it easier to take money out of the country; privatization before a legal infrastructure was in place enhanced the ability and incentive for asset stripping rather than reinvesting in the country’s future.

The Need for a Change in Governance

Stiglitz makes it clear, through his exhaustive accounts of policy failures, that there is a need for fundamental change in the governance of the international agents of globalization. He shows how the International Monetary Fund, the World Bank and the World Trade Organization all have consistently failed to deliver on their mandates. He cites among other reasons the lack of transparency, the inclination for these institutions to assume a larger role than that of their mandates, and the insufficient, if not inexistent, level accountability.

Because so much of its decision making was done behind closed doors… the IMF left itself open to suspicions that power politics, special interests, or other hidden reasons not related to the IMF’s mandate and stated objectives were influencing its institutional policies and conduct.  As Stiglitz points out, not only did this lack of transparency preclude these institutions from obtaining the international support that it should have bolstered, but it engendered a level of distrust and perhaps even animosity towards their existence.

The IMF was supposed to limit itself to matters of macroeconomics in dealing with a country, to the government’s budget deficit, its monetary policy, its inflation, its trade deficit, its borrowing from abroad; and the World Bank was supposed to be in charge of structural issues – what the country’s government spent money on, the country’s financial institutions, its labor markets, its trade policies.  Stiglitz provides clear examples of how these institutions assumed roles that did not fall within their stated mandate.

The institutions [the IMF and the World Bank] are not representative of the nations they serve.  Perhaps the most important feature Stiglitz mentions is the need for accountability. Many of the mistakes made by the IMF, the World Bank, and the WTO could have been corrected with the appropriate levels of accountability in place. Unfortunately, however, this was not the case and therefore allowed mistakes of regional and global economic, social, and political proportions to take place. The lack of accountability has sponsored a new wave of distrust, animosity, and opposition to the international institutions of change that are crucial to developed as well as developing nations.

What I Have Learned from this Book

Globalization and Its Discontents offers a different perspective of globalization from what I have learned in the classroom. It has shown me what globalization, in terms of global economic policy and the role of international institutions, can do for developed and developing countries when good as well as bad policies are instituted. It has taken me out of the realm of possibility and exposed me to actual results of what economic theories imply. I learn by example, and the examples I have read from Stiglitz have allowed me to understand how important the material I learned is.

Some of the accounts Stiglitz gives are appalling and embarrassing. It allows me to understand how important it is to hold political leaders accountable for their actions. I am embarrassed of how U.S. special interests, whether originating in Wall Street or coming from the Treasury, took a disregard for their responsibilities. Paul O’Neil’s proposal and the U.S.’s proceeding adoption of an aluminum cartel is an outright and blatant show of unilateral policy and susceptibility to special interest. The 1998 bailout for Russia, and the subsequent theft of over $20 billion by a small group of people was nothing less than appalling.

The implications of actions such as these do not bode well for the credibility of globalization and the international institutions put into place to facilitate it. If credibility becomes a problem, support for the institutions themselves as well as the policies they implement will dwindle. Although these institutions have made mistakes, it is important to continue their existence and compel a change in their governance. Their mandates were established to provide the international forum for participation and cooperation needed for a truly global society. Globalization is not a force we can stop, but is one we can use to our advantage. These institutions must, among other responsibilities, respond to emerging threats of political, social and economic hegemony and special interests.

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Ok, let’s start with the basics:

Blowing Bubbles
Home prices on average across the U.S. have risen too fast over the last decade.  There are many factors that are attributed to this unsustainable rise.  Some include banks offering easy money to anyone with a heartbeat (or credit report), the Media portraying real estate as an easy low-risk and high reward endeavor, the Federal Reserve doling out low interest rates to banks like water, oh and lets not forget the average Jane and John Doe making poor, irresponsible and sometimes downright stupid financial decisions.

Thanks to Careless & Company mentioned above there was too much purchasing activity going on with little regard or consideration for actual value.  The end result being a market that has strayed far from its sustainable position.

What Goes Up Must Come Down
Perhaps some people are not familiar with the concept of what the media and others call a “market correction” but let me shed some light on this.  When you hear one of these talking heads or news reporters talk about a market correction they are referencing the notion that when the price of a good gets away from reality (what the market is willing to bear for that product) then the inevitable result is that price will make its way back to reality.

The reason for this is that if something gets too expensive then buyers will stop buying.  When that happens the only way to move additional product is to lower the price to make it attractive for buyers again.  Going back to the housing situation there is an apparent need for a market correction.

Home prices have departed from reality.  So what am I getting at?  Why am I complaining about these news reports?  See examples below:

From the New York Times, Click to read the article
“There were some signs that the decline has started to abate. Prices in seven regions, including Boston, Dallas and Charlotte, improved in May, some for the second straight month. Boston, for example, was up 1.05 percent in May, though values are still 6.2 percent below where they were a year prior.”

It almost sounds like the author is disappointed that prices are 6.2 percent below last year’s.  What do you expect?

From the USA Today, Click to read the article
“The steepest decline in the index is in Las Vegas, where prices were down 28.4% from a year ago. Miami is a close second, with prices down 28.3% from last year.”

Wow, now that is something I did not know; no wait, the A/C repair man told me how Las Vegas and Florida are getting hit the hardest several months ago.

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I’m expecting the rates to be held while the market is doing otherwise.  Have you ever seen a spoiled child react when they get that rare rejection?  We might be seeing a market ‘fit’ sooner that later.

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