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Posts Tagged ‘economics

“Humanity’s 21st century challenge is to meet the needs of all within the means of the planet”*…

One evening in December, after a long day working from home, Jennifer Drouin, 30, headed out to buy groceries in central Amsterdam. Once inside, she noticed new price tags. The label by the zucchini said they cost a little more than normal: 6¢ extra per kilo for their carbon footprint, 5¢ for the toll the farming takes on the land, and 4¢ to fairly pay workers. “There are all these extra costs to our daily life that normally no one would pay for, or even be aware of,” she says.

The so-called true-price initiative, operating in the store since late 2020, is one of dozens of schemes that Amsterdammers have introduced in recent months as they reassess the impact of the existing economic system. By some accounts, that system, capitalism, has its origins just a mile from the grocery store. In 1602, in a house on a narrow alley, a merchant began selling shares in the nascent Dutch East India Company. In doing so, he paved the way for the creation of the first stock exchange—and the capitalist global economy that has transformed life on earth. “Now I think we’re one of the first cities in a while to start questioning this system,” Drouin says. “Is it actually making us healthy and happy? What do we want? Is it really just economic growth?”

In April 2020, during the first wave of COVID-19, Amsterdam’s city government announced it would recover from the crisis, and avoid future ones, by embracing the theory of “doughnut economics.” Laid out by British economist Kate Raworth in a 2017 book, the theory argues that 20th century economic thinking is not equipped to deal with the 21st century reality of a planet teetering on the edge of climate breakdown. Instead of equating a growing GDP with a successful society, our goal should be to fit all of human life into what Raworth calls the “sweet spot” between the “social foundation,” where everyone has what they need to live a good life, and the “environmental ceiling.” By and large, people in rich countries are living above the environmental ceiling. Those in poorer countries often fall below the social foundation. The space in between: that’s the doughnut.

Amsterdam’s ambition is to bring all 872,000 residents inside the doughnut, ensuring everyone has access to a good quality of life, but without putting more pressure on the planet than is sustainable. Guided by Raworth’s organization, the Doughnut Economics Action Lab (DEAL), the city is introducing massive infrastructure projects, employment schemes and new policies for government contracts to that end. Meanwhile, some 400 local people and organizations have set up a network called the Amsterdam Doughnut Coalition—managed by Drouin— to run their own programs at a grassroots level

You’ve heard about “doughnut economics,” a framework for sustainable development; now one city, spurred by the pandemic, is putting it to the test: “Amsterdam Is Embracing a Radical New Economic Theory to Help Save the Environment. Could It Also Replace Capitalism?

Kate Raworth, originator of the Doughnut Economics framework

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As we envisage equipoise, we might recall that it was on this date in 1791 that President George Washington signed the Congressional legislation creating the “The President, Directors and Company, or the Bank of the United States,” commonly known as the First Bank of the United States. While it effectively replaced the Bank of North America, the nation’s first de facto central bank, it was First Bank of the United States was the nation’s first official central bank.

The Bank was the cornerstone of a three-part expansion of federal fiscal and monetary power (along with a federal mint and excise taxes) championed by Alexander Hamilton, first Secretary of the Treasury– and strongly opposed by Thomas Jefferson and James Madison, who believed that the bank was unconstitutional, and that it would benefit merchants and investors at the expense of the majority of the population. Hamilton argued that a national bank was necessary to stabilize and improve the nation’s credit, and to improve handling of the financial business of the United States government under the newly enacted Constitution.

History might suggest that both sides were correct.

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“An imbalance between rich and poor is the oldest and most fatal ailment of all republics”*…

In a stark sign of the economic inequality that has marked the pandemic recession and recovery, Americans as a whole are now earning the same amount in wages and salaries that they did before the virus struck — even with nearly 9 million fewer people working. 

The turnaround in total wages underscores how disproportionately America’s job losses have afflicted workers in lower-income occupations rather than in higher-paying industries, where employees have actually gained jobs as well as income since early last year.

In February 2020, Americans earned $9.66 trillion in wages and salaries, at a seasonally adjusted annual rate, according to the Commerce Department data. By April, after the virus had flattened the U.S. economy, that figure had shrunk by 10%. It then gradually recovered before reaching $9.67 trillion in December, the latest period for which data is available. 

Those dollar figures include only wages and salaries that people earned from jobs. They don’t include money that tens of millions of Americans have received from unemployment benefits or the Social Security and other aid that goes to many other households. The figures also don’t include investment income… 

The figures document that the vanished earnings from 8.9 million Americans who have lost jobs to the pandemic remain less than the combined salaries of new hires and the pay raises that the 150 million Americans who have kept their jobs have received.

The job cuts resulting from the pandemic recession have fallen heavily on lower-income workers across the service sector— from restaurants and hotels to retail stores and entertainment venues. By contrast, tens of millions of higher-income Americans, especially those able to work from home, have managed to keep or acquire jobs and continue to receive pay increases.

“We’ve never seen anything like that before,” said Richard Deitz, a senior economist at the Federal Reserve Bank of New York, referring to the concentration of job losses. “It’s a totally different kind of downturn than we’ve experienced in modern times.”

The figures also underscore the unusually accelerated nature of this recession. As a whole, both the job losses that struck early last spring and the initial rebound in hiring that followed have happened much faster than they did in previous recessions and recoveries. After the Great Recession, for example, it took nearly 2 1/2 years for wages and salaries to regain their pre-recession levels…

One reason why the job losses have had relatively little impact on the nation’s total pay is that so many of the affected employees worked part time. The average work week in the industry that includes hotels, restaurants and bars is just below 26 hours. That’s the shortest such figure among 13 major industries tracked by the government. The next shortest is retail, at about 31 hours. The average for all industries is nearly 35 hours. 

The recovery in wages and salaries helps explain why some states haven’t suffered as sharp a drop in tax revenue as many had feared. That is especially true for states that rely on progressive taxes that fall more heavily on the rich. California, for example, said last month that it has a $15 billion budget surplus. Yet many cities are still struggling, and local transit agencies, such as New York City’s subway, have been hammered by the pandemic.

The wage and salary data also helps explain the steady gains in the stock market, which have been led by high-tech companies whose products are being heavily purchased and used by higher-income Americans, such as Apple iPads, Peloton bikes, or Amazon’s online shopping.

This week, the New York Fed released research that underscored how focused the job losses have been. For people making less than $30,000 a year, employment has fallen 14% as of December. For those earning more than $85,000, it has actually risen slightly. For those in-between, employment has fallen 4%… 

Some companies have cut wages in this recession, but on the whole the many millions of Americans fortunate enough to keep their jobs have generally received pay raises at largely pre-recession rates. Some of those income gains likely reflect cost-of-living raises; the Commerce Department’s wage and salary data isn’t adjusted for inflation…

Truman Bewley, a retired Yale University economist who wrote a book about the concept of sticky wages, said that most companies have a key core of workers they rely on through hard times and are reluctant to cut pay for them. 

And there’s another reason, Bewley said, why many companies cut jobs instead of pay. While researching his book, he said a factory manager told him why his company did so: “It gets the misery out the door.”  

More at: “Sign of inequality: US salaries recover even as jobs haven’t.”

See also “More Than 33 Million Americans Have Filed for Unemployment During Coronavirus Pandemic.” source of the image above.

And to compare the U.S. to other countries, try this nifty interactive visualization.

* Plutarch

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As we examine equity, we might send foundational birthday greetings to Pierre le Pesant, sieur de Boisguilbert; he was born on this date in 1646. A French lawmaker and a Jansenist, he is best remembered as one of the inventors of the notion of an economic market– he championed free trade in opposition to Colbert‘s mercantilist views (which generated government revenues through duties and tariffs).

But he is also noteworthy as the champion of a single tax on each citizen (in lieu of all tariffs, customs, and other trade-related fees) that in some ways presaged Henry George‘s proposals.

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“Create more value than you capture”*…

As Donald Trump’s presidency careened to its ignominious end, with a mob of his supporters storming of the US Capitol, Facebook and Twitter banned the US president for inciting the violence. With that act, the scope of the political power wielded by Big Tech became impossible to ignore.

Whether these platforms have too much political power is a debate that is just beginning. Their outsize economic power, though, is unquestionable. The combined market capitalization of the five largest US tech platforms – Alphabet (Google), Amazon, Apple, Facebook, and Microsoft – rose by $2.7 trillion in 2020. Following the addition of Tesla to the S&P 500, the Big Six tech firms now represent nearly one-quarter of the index’s valuation. And with the spread of COVID-19, the leading digital platforms have become de facto essential service providers, enabling a mass transition to remote and isolated living.

And yet the political pressure on Big Tech has continued to rise. There is a growing consensus that platforms have been abusing their power, driving profits by exploiting consumer privacy, crushing the competition, and buying up potential rivals.

The economics of platforms is different from the economics of traditional offline and one-sided markets. Policymakers therefore need to reconsider some of their most basic assumptions, asking themselves whether they are even focusing on the right things.

A key challenge is to determine how the value of data diverges from the value created by providing a data-generating service. Platforms have the power to shape how decisions are made, which in turn can alter the value of the data being amassed. The implication, as Google co-founders Larry Page and Sergey Brin foresaw in a 1998 paper, is that advertisers or any other third-party interest can embed mixed motives into the design of a digital service. In the case of internet search, the advertising imperative can distract from efforts to improve the core service, because the focus is on the value generated for advertisers rather than for users.

As this example shows, it is necessary to ask who benefits the most from the design of a given service. If a platform’s core mission is to maximize profits from advertising, that fact will shape how it pursues innovation, engages with the public, and designs its products and services.

Moreover, it is important to understand that even if antitrust authorities were empowered to break up companies like Google and Facebook, that would not eliminate the data extraction and monetization that lie at the heart of their business models. Creating competition among a bunch of mini-Facebooks would not weed out such practices, and may even entrench them further as companies race to the bottom to extract the most value for their paying customers…

Digital markets do not have to be extractive and exploitative. They could be quite different, but only if we ourselves start to think differently. We need to recognize, as Adam Smith did, that there is a difference between profits and rents – between the wealth generated by creating value and wealth that is amassed through extraction. The first is a reward for taking risks that improve the productive capacity of an economy; the second comes from seizing an undue share of the reward without providing comparable improvements to the economy’s productive capacity.

For the past half-century, corporate governance has rested on the notion of shareholder value. The result is an economy in which it is increasingly important to differentiate firms that are actually driving innovation from those that are not. There is no shortage of firms that are engaged merely in financial engineering, share buy-backs, and rent-seeking, extracting gains from actual risk takers while under-investing in the goods and services that generate value.

The digital economy has accelerated this conflation of wealth creation and rent extraction, making it all the more difficult to differentiate between the two. The issue is not just that financial intermediaries are shaping how value is created and distributed across firms, but that these extractive mechanisms are embedded within user interfaces; they are baked into digital markets by design…

The proliferation of such practices shows why we need to focus more on the “how” of wealth creation, and less on the “bottom line.” An economy that produces wealth from privacy-respecting innovations would not function anything like one that encourages the systematic exploitation of private data.

But building a new economic foundation will require a shift from the shareholder model to a stakeholder model that embodies a deeper appreciation of public value creation. Wealth and other desirable market outcomes are collectively co-created among public, private, and civic domains, and should be understood as such. Policy analysis and corporate decision-making can no longer be guided solely by concerns about maximizing efficiency. We now also must consider whether wealth generation is actually improving society and strengthening the ability to respond to social challenges.

After all, the fact that platforms are creating wealth does not mean they are creating public value. A firm with access to massive amounts of data and network effects could, in theory, use its position to improve social well-being. But it is unlikely to do so if it is operating under a framework that prizes the generation of advertising revenue over everything else, including the performance of products and services…

Today’s digital economy has grown up around a business model of data and wealth extraction, confounding traditional antitrust paradigms and undermining the public and social value that otherwise could be derived from technological innovation. An acute diagnosis of a fundamental structural challenge, and thoughts on steps to address it– Mariana Mazzucato (@MazzucatoM), Tim O’Reilly (@timoreilly), and colleagues: “Reimagining the Platform Economy.” Do click through to read piece read the entire piece.

* Tim O’Reilly

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As we dig deep, we might recall that it was on this date in 2005 that YouTube was founded and registered (though it didn’t launch until November of that year). The creation of three PayPal vets (Chad HurleySteve Chen, and Jawed Karim), it was bought by Google one year after launch (in November 2006) for $1.65 billion. Operating as one of Google’s subsidiaries, it is now (per Alexa Internet Rankings) the second most trafficked web site, after its parent’s search page.

YouTube logos over time

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Written by LW

February 14, 2021 at 1:01 am

“Consumption is the sole end and purpose of all production”*…

Television fueled the second stage of modern consumer culture, “democratizing” luxury on a scale previously unimagined

The notion of human beings as consumers first took shape before World War I, but became commonplace in America in the 1920s. Consumption is now frequently seen as our principal role in the world.

People, of course, have always “consumed” the necessities of life — food, shelter, clothing — and have always had to work to get them or have others work for them, but there was little economic motive for increased consumption among the mass of people before the 20th century.

Quite the reverse: Frugality and thrift were more appropriate to situations where survival rations were not guaranteed. Attempts to promote new fashions, harness the “propulsive power of envy,” and boost sales multiplied in Britain in the late 18th century. Here began the “slow unleashing of the acquisitive instincts,” write historians Neil McKendrick, John Brewer, and J.H. Plumb in their influential book on the commercialization of 18th-century England, when the pursuit of opulence and display first extended beyond the very rich.

But, while poorer people might have acquired a very few useful household items — a skillet, perhaps, or an iron pot — the sumptuous clothing, furniture, and pottery of the era were still confined to a very small population. In late 19th-century Britain a variety of foods became accessible to the average person, who would previously have lived on bread and potatoes — consumption beyond mere subsistence. This improvement in food variety did not extend durable items to the mass of people, however. The proliferating shops and department stores of that period served only a restricted population of urban middle-class people in Europe, but the display of tempting products in shops in daily public view was greatly extended — and display was a key element in the fostering of fashion and envy.

Although the period after World War II is often identified as the beginning of the immense eruption of consumption across the industrialized world, the historian William Leach locates its roots in the United States around the turn of the century.

In the United States, existing shops were rapidly extended through the 1890s, mail-order shopping surged, and the new century saw massive multistory department stores covering millions of acres of selling space. Retailing was already passing decisively from small shopkeepers to corporate giants who had access to investment bankers and drew on assembly-line production of commodities, powered by fossil fuels; the traditional objective of making products for their self-evident usefulness was displaced by the goal of profit and the need for a machinery of enticement.

“The cardinal features of this culture were acquisition and consumption as the means of achieving happiness; the cult of the new; the democratization of desire; and money value as the predominant measure of all value in society,” Leach writes in his 1993 book “Land of Desire: Merchants, Power, and the Rise of a New American Culture.” Significantly, it was individual desire that was democratized, rather than wealth or political and economic power…

From Freud’s nephew Edward Bernays (and his pioneering of modern propaganda and advertising), through Alfred P. Sloan and General Motors (and the proliferation of choice), David Sarnoff and radio (then television), and now the internet– over the course of the 20th century, capitalism preserved its momentum by molding the ordinary person into a consumer with an unquenchable thirst for more stuff: “A Brief History of Consumer Culture.”

[Your correspondent highly recommends Land of Desire, and as a video “chaser,” Adam Curtis’ remarkable Century of Self (on YouTube here).]

* Adan Smith, The Wealth of Nations

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As we consume consciously, we might spare a thought for Thomas Crapper; he died on this date in 1910.  Crapper popularized the one-piece pedestal flushing toilet that still bears his name in many parts of the English-speaking world.

The flushing toilet was invented by John Harrington in 1596; Joseph Bramah patented the first practical water closet in England in 1778; then in 1852, George Jennings received a patent for the flush-out toilet.  Crapper’s  contribution was promotional (though he did develop some important related inventions, such as the ballcock): in a time when bathroom fixtures were barely mentionable, Crapper, who was trained as a plumber, set himself up as a “sanitary engineer”; he heavily promoted “sanitary” plumbing and pioneered the concept of the bathroom fittings showroom.  His efforts were hugely successful; he scored a series of Royal Warrants (providing lavatories for Prince, then King Edward, and for George V) and enjoyed huge commercial success. To this day, manhole covers with Crapper’s company’s name on them in Westminster Abbey are among London’s minor tourist attractions.

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“Exorbitant privilege”*…

Economic history books will commemorate the era we currently live in as the second wave of financial globalization, following the first wave during the Classical Gold Standard period. Our era is characterized by an unprecedented expansion of global financial flows. Partly, these flows form the counterpart to global value chains and the globalization of trade in goods and services. In the last few decades, however, they have been increasingly decoupled from the real sector. The financial infrastructure that enables this expansion is the international monetary system…

In its current shape, [the international monetary system] has a hierarchical structure with the US-Dollar (USD) at the top and various other monetary areas forming a multilayered periphery to it. A key feature of the system is the creation of USD offshore – a feature that in the 1950s and 60s developed in co-evolution with the Bretton Woods System and in the 1970s replaced it. Since the 2007–9 Financial Crisis, this ‘Offshore US-Dollar System’ has been backstopped by the Federal Reserve’s network of swap lines which are extended to other key central banks. This systemic evolution may continue in the decades to come, but other systemic arrangements are possible as well and have historical precedents. This article discusses four trajectories that would lead to different setups of the international monetary system by 2040, taking into account how its hierarchical structure and the role of offshore credit money creation may evolve. In addition to a continuation of USD hegemony, we present the emergence of competing monetary blocs, the formation of an international monetary federation and the disintegration into an international monetary anarchy…

Americans tend to take the global primacy of the U.S. Dollar for granted (indeed, often complaining about the current account imbalances to which huge quantities of off-shore dollars lead). But there’s no mistaking that this system has been been hugely advantageous to the U.S. Yet, as Steffen Murau (@steffenmurau) explains, it may not last: “The evolution of the Offshore US-Dollar System: past, present and four possible futures.”

See also Mernau’s “International Monetary System” (from whence, the image above), and Ben Bernanke’s “The dollar’s international role: An ‘exorbitant privilege’?

* Valéry Giscard d’Estaing (then the French Minister of Finance; later French President), referring to the benefit that accrues to the U.S. as a result of the U.S. Dollar being the world’s reserve currency

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As we count our blessings, we might recall that it was on this date in 1890 that journalist Nellie Bly completed her 72-day trip around the world.

In 1888, Bly suggested to her editor at the New York World that she take a trip around the world, attempting to turn the fictional Around the World in Eighty Days into fact for the first time.  A year later, at 9:40 a.m. on November 14, 1889, with two days’ notice, she boarded the steamer Augusta Victoria, and began her 24,899-mile journey.

She brought with her the dress she was wearing, a sturdy overcoat, several changes of underwear, and a small travel bag carrying her toiletry essentials. She carried most of her money (£200 in English bank notes and gold in total as well as some American currency) in a bag tied around her neck.

Bly traveled through England, France (where she met Jules Verne in Amiens), Brindisi, the Suez Canal, Colombo (Ceylon), the Straits Settlements of Penang and Singapore, Hong Kong, and Japan.  Just over seventy-two days after her departure from Hoboken, having used steamships and existing railway lines, Bly was back in New York; she beat Phileas Fogg’s time by almost 8 days.

Nellie Bly, in a publicity photo for her around-the-world voyage. Caption on the original photo reads: “Nellie Bly, The New York World‘s correspondent who placed a girdle round the earth in 72 days, 6 hours, and 11 minutes.”

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