Sunday, April 26, 2009

Economic Outlook

There is something really interesting going on in the media. There has been an increase in the number of “economic bright spot” stories. This can be thought of as the equivalent to the “r-word” (recession) index often complied by the Economist magazine.

The increase in the number of positively spun stories is a pretty good indicator that the economy has at least reached or is close to the bottom of the trough. This is a good thing. It means we might be able to focus some attention on some of the fundamental flaws in the economy, rather than panicking about the “end of the world”.

This of course doesn’t mean we’re going to return to the unemployment levels and GDP growth we saw in 2006&2007. We’re more likely to see unemployment in the US and Canada stabilization around 7% to 9%. A significant portion of the drop in unemployment rates will be driven by “discouraged” workers. These are the people that give up looking for work as they don’t believe they will find a job to their liking. A decade or more of “zombism” as seen in Japan will likely have significant cultural effects. But that’s an issue for another blog.

The underlying problem of the global economy will have to be address if unemployment and GDP growth rates are to improve in North America. It can be argued that these problems were major contributing factors to the credit crunch and the ensuing panic. There are a couple of major problems that will have to be addressed.

First, the growth in the American standard of living has far out paced the growth rate of productivity. The lack of productivity growth can clearly be seen in incomes outside the financial sector for the last 10 or so years. US median incomes have generally not changed over that period of time. The productivity measures (generally for manufacturing) tell pretty much the same story. The only way standard of living can increase faster than productivity is borrowing. The flood of cheap credit from the Federal Reserve and abroad made this borrowing possible. When the flow of loanable funds becomes unstable, the system collapses.

The second issue is the real cause for concern. North American economies have seen exceptionally low productivity growth for an extended period of time. This is clearly going to limit the sustainable level of GDP growth. It may be that North American economies have improved productivity as far as they can given current technology. This would indicate low future growth. It might also explain why the average income in the US has been stagnant. The average likely reflects (to a greater degree than the extremes) the overall productivity growth of an economy.

Overall, it looks like we’ve fallen as close to as far as we’re going to for now, but that doesn’t we’re going to return to the growth rates we saw in 2006/2007. We’re likely to be limping for a while yet.

Sunday, April 12, 2009

Commitment Not to Learn

It’s really starting to feel like the Americans want another depression. I’m not talking about a small fringe group hoping for the opportunity to bring down “the evil capitalist system, man”. Or at least I hope I’m not. I’m talking about the political leadership, up to and including the president. I just hope some better thinkers prevail.

Here’s what I’m talking about. An asset price bubble burst in 1929. In 1930 the US passed a law that most economists (not only now but at the time) believe made a significant recession into a depression. It’s generally known as the Smoot-Holly Act. This act erected significant tariff barriers around US markets. Virtually all countries, including Canada, responded in kind. The result was a massive drop in world trade, causing massive drops in employment, and finally incomes. Thus began the Depression.

Now, almost 80 years later, the world is facing the bursting of another asset price bubble and an American economy well into a recession. This time the stupidity started with the so called Buy American clauses in the stimulus package. Next came the reneging on the agreement to allow Mexican trucks to operate in the US (the Mexicans responded with strategically placed tariffs on US produced goods). The most recent step on the slippery slope is the extra red tape and labeling laws imposed on Canadian meat by the US. And this is only the American goofiness. The Europeans are at it too.

Here are a couple of simple examples of where the idea of protectionism really falls short. A lot of people who argue in favour of protectionism also cite end of Apartheid as one of the great successes of the UN. The end of apartheid was caused, in large part, by the economic sanctions enacted by the UN. The elimination of trade with the rest of the world forced the end of a political system that other countries found objectionable.

The other extreme example of what happens when foreign interaction is limited is North Korea. North Korea has been largely cut off from international trade for a long time. North Korea is one of the poorest countries in the world right now. It’s really hard to believe that international trade is bad for economies when you consider those haven’t had any.

In short trade creates wealth. A lack of trade creates poverty. It’s pretty clear unless you have a ideological commitment not to learn.

Tuesday, April 7, 2009

Protesting Success

I figure I need to write something about the G20 summit in Britain this past week. One cannot listen to news coverage of such a gathering without hearing about the protests that occur at the same time. These protests have generally intrigued me. As you may have guessed, I generally fall on the side of mixed market capitalism as the way to prosperity.

There seems to have been a change in either the way the protests are being conducted, the way in which they’re being policed, or both. There has been a dramatic drop in the violence and destruction associated with these protests. The worst we heard out of the London summit was a few bank windows being smashed. This is pretty minor compared to Genoa in 2001. The estimated number of protesters (always unreliable) has also been falling. This could also be a change in the organization, policing, or both. It could also be there is less to protest about.

The oft cited statistic of those protesting “capitalism” is concerns the unequal distribution of wealth. True enough, those at the extreme upper end of the wealth distribution had done extremely well over the last 20 years, with the gap between the filthy stinking rich and those of us claiming to be middle class growing. There has been an increase in relative poverty. The gap between rich and not so rich in the developed world has grown. There’s no point in debating this, it’s a fact of the data. But a part of me (remembering what my mother always said) wonders why I should care if other people have more, so long as I have what I need (want)?

There is another, more important, statistic. This concerns absolute poverty. Absolute poverty is the number of people for whom simple survival from one day to the next is in doubt. A commonly agreed on definition (at least agreed on by researchers) is trying to live on less than about two dollars (nominal US funds at PPP) a day. This number has been falling pretty steadily. Whole countries are suddenly developing middle classes, where virtually none existed before. This is pretty exciting stuff for an economist. This strange idea called capitalism was actually creating and distributing wealth in a pretty neat way.

Many point to our current troubles as grounds of abandoning capitalism. It’s clear that the previous incarnation of the system had big flaws. We should be, and many are, working to fix them in an intelligent way. But giving up on the only system that has consistently produced wealth for such a large number of people? Ask the newly middle class in Brazil, China, and India if they think this is a good idea.

Next time I’ll try and tackle why of the current talk about protectionism worries me.

Monday, April 6, 2009

Where Have All The Young Men Gone?

There are a number of interesting stats floating around about universities lately. A lot of these have to do with the demographics of various regions and enrollment projections. The demographic cohort from which university students have traditionally been drawn is shrinking. Given that the majority of a university’s expenditures are based on personnel on long term contracts any drop in revenues will have significant budgetary impacts, particularly if universities aren’t allowed to run deficits.

There have also been a lot of different stats about the current make up of student bodies floating around. These stats started to catch my interest. There’s something really interesting going on in our educational institutions that nobody is talking about. According to the CAUT Almanac only 41.9% of the 692, 374 undergraduate (FTE) students are male. The Canadian population from ages 18 to 24, the age bracket from which most university students are drawn, is 51.17% male. There are 3,141,406 people in this age group. So what are the odds that the university proportion is a random sample of the broader population? Effectively zero. The test statistic doesn’t even appear on standard tables. In fact it’s way off the charts.

So what does this tell us? In the most neutral possible terms, university population is not a random sample of the broader population in terms of sex. Or less neutrally, but equally accurate, something happens in the selection of the university population that favours females. I’m left wondering what that something is, or as Pete Seger put it, where have all the young men gone?

Saturday, April 4, 2009

That Huge Sucking Sound

If you’re on a university campus and listen carefully, you can hear a sucking sound. It sounds kind of like an industrial toilet flushing. That sound is the sound of hundreds of thousands of dollars being spent. This spending does nothing to increase the quality or quality of a university’s “output”, research and education.

Don’t get me wrong, universities will never be cheap to run. This is particularly true if the quality of education experienced by students is a concern. It gets even worse if academics actually have outside options. Education requires intensive personal interaction once one passes beyond the basics. If a low student/faculty ratio is required there is no way universities are going to be cheap.

There are a number of things that are making universities much more expensive than they need to be. There is a lot of money being spent on personnel who do little or nothing to support either of a university’s true functions, teaching and research. Moreover, the salaries these people receive are increasing. Consider this story in the national post. More and more university dollars are being spent on administration. This article doesn’t even consider all the other forms of “administration” taking place at university. I’m talking about all the PR, HR, and whatnot.

It is not a question of whether or not it is happening, the real question is why. I’ll suggest a few – feel free to contribute your own.

The first and most simple reason is the “Peter Principle”. This is the idea that it is the incompetent who get promoted. Who is likely to pursue administrative positions with the most vigor? If you are really interested in your research or running classes, you are unlikely to campaign for extra time in administration. Put a slightly less cynical way, if a group is truly interested in instruction and research, optimal allocation of administrative duties is to the individual with the lowest output in these areas. If this is correct, those with the least understanding of what drives research and education end up as the ones making the “strategic” decisions for the institution.

Another possibility is those who pursue and succeed in administration are those who are driven by a need to climb. These are the individuals in every organization that seek power, be it the title of CEO or the membership on the church council. These people might also have become the top researchers or instructors in their field. One of the measures of power in any bureaucracy is the number of people under you in the org chart. Thus, to improve one’s position, one needs more underlings. We then observe an increase in the number of people at a university that do not teach or perform research. We also see an increase in the number of retreats, strategic planning exercises, and whatnot. Such activities are a method of proving the usefulness of administrators. These also cost a lot of money. For a classic telling of the tale consider Yes Minister’s “The Compassionate Society Episode”.

There has also been a “professionalization” of university administrators. No longer is the university president a professor who sets aside their regular duties for a period of time for the greater good of the institution. At one time administration could have been seen as a noble sacrifice. Administration is now seen by many as being a separate career path. A career path that is clearly better paid than the being a standard faculty member. We further see evidence of this with the rise of university administration referring to itself as management or *shudder* executive management. The last link in the logic chain is that executives need executive pay.

These are just a few possible explanations. There are a lot of others, many of which are not as hard on administration as I’m being here. I don’t admire most administrators their jobs. Dealing with large numbers of academics is like trying to herd arrogant cats (more arrogant than normal that is). Maybe I’m jealous of the pay. Still, I hear a sucking sound.