Category Archives: Technology

The Free market destroys its creators – how the Free-market mindset is destroying the USA Economy

By Alan McCrindle

I constantly hear Americans and American politicians talking about how innovative the USA is. America is the home of “the free market”. This is something that Americans are incredibly proud of and a major reason that they site for the economic success of the USA.

Yet I predict that this very same fee market is paradoxically going to be the cause a  major economic decline in the USA.

This economic decline is already evident and has been occurring for some time now. However this trend was hidden by a ponzi scheme driven by cheap debt, low interest rates and lax lending standards combined with shonky Government economic Statistics.

Real Wages in the USA have been falling since the 70's - shonky CPI data has hidden the depth of the decine

While real wages from employment were falling for the majority of Americans,  households were bolstering their income with imaginary profits from unrealised gains in house prices . At one point almost  8% of annual USA GDP was coming from equity withdrawals predicated on unrealised profits from the housing boom.

Without the “false income” generated by home equity withdrawals the US economy would have looked very sick as illustrated by the chart below

There is a conceptual failure to understand that the free-market does not care about countries – competitive reality will force corporations to dump uncompetitive US businesses and labour for greener pastures

What most people forget about capitalism and the free market is that it is based on competition between companies and not countries. Companies have no loyalty to countries. If companies want to survive in a global market place against global competitors they need to think and act globally.

This is why manufacturing has been in decline in the USA and other parts of the developed world and why it is now taking place in places where labour costs are lowest – all other costs considered.

So far it has really only been blue collared jobs that have gone off-shore. The American’s feel that the highly skilled engineering jobs that have maintained their global leadership edge in new product innovation are safe. It is assumed that these high paid jobs will stay in the USA and countries like China and India will get the low skilled and low paid jobs.

This is a delusion. High-tech R&D is starting to shift out of the USA to China. Moreover this shift is set to continue and accelerate – competition and the free-market will drive it now that it has started.

Extremely cheap highly skilled staff in China

Take a look at the city of Xian, located about 1000 km south west of Beijing. According to a New York Times article titled China draws high-tech researcher from the USA it has 47 universities and other institutions of higher learning. Engineers with masters degrees can be hired for $730 per month.

And the result is that Applied Materials, one of Silicon Valley’s most prominent firms and the worlds biggest supplier of equipment used to make semiconductors, solar panels and flat-screen displays, has just built its newest and largest research lab in Xian. And, in addition, Mark Pinto, The chief technology officer of the company has relocated to China too.

High Health Care, Housing and tertiary Education Costs in the USA have created a structurally high wage economy that can’t compete with low Chinese wages

How can the USA compete? It cant. Thanks to the free-market almost 20 cents in every dollar in the US economy is spent on health. And when high health care costs are added to high house costs it is easy to see why someone on $760 a month in the USA would starve.

And besides, with the cost of a 4 year University degrees in the USA as high as $200,000, big salaries are required to justify this sort of cost. Moreover this is just the price of an undergraduate degree and apparently reflects only half the cost of delivering it.

The reality is that in a globalised free-market  expensive health care and expensive houses translates into wage needs that are globally uncompetitive.

And there are other reasons why the USA will find it difficult to compete against the likes of China – the free-market mindset is reluctant to see the government get involved in the market in any way. This doesn’t work when governments in other countries act differently.

For example, Western companies relocating to China not only get  local access to the worlds largest Auto, and desk top computer markets and cheap highly skilled labour – they are often also offered subsidies by many Chinese cities and regions, particularly for green energy projects.

For example, in the case of the new Applied Materials Lab,  the Xian city government sold a 75-year land lease to the company at a deep discount and is reimbursing the company for roughly a quarter of the lab complex’s operating costs for five years.

President Obama and American politicians talk about creating new Green Tech jobs in the USA but this is likely to be a pipe dream. Even if he could muster the political will to stand up to the Republican free-market right the competitive playing field is tilted against the USA.

The bitter irony is that the free-market is and has destroyed its inventor and greatest proponent. Even more surprising is that these proponents don’t seem to be able to either see this or understand it.

The same is true for democracy – it is a system that holds in it its own seeds of destruction. I will leave that for another day.

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The Con in Economics – how we are being fooled by shonky Government Economic data that is fooling even the experts – shortlink

By Alan McCrindle

It is amazingly easy to hoodwink economists using shonky government statistics – even in this age when there are easily accessible articles that can be found with a few simple internet searches that point to the errors in the data.

Shonky USA productivity Data fools the Economist Magazine

A current example is a piece in the Economist based on a report by a USA based organisation called the Conference Board. The Economist – Slash and earn Productivity has surged in America and slumped in Europe. Neither trend can last – rightly questions large differences in recent productivity growth between the USA and Europe. In the article they speculate as to the reasons for the large increases in productivity in the USA.

However no where in the article do they even question the validity of the data as a proxy for measuring productivity growth in the USA.

If the Economist had done an internet search they would have discovered the same article that I had read a few weeks earlier that explained the issue. The article – an op-ed piece on this in the New York Times titled – Trading Away Productivity: How American Trade Policy Relies on faulty measures of Productivity

To quote parts of the article

“But there’s a problem: labor productivity figures, which are calculated by the Labor Department, count only worker hours in America, even though American-owned factories and labs have been steadily transplanted overseas, and foreign workers have contributed significantly to the final products counted in productivity measures.”

“The result is an apparent drop in the number of worker hours required to produce goods — and thus increased productivity. But actually, the total number of worker hours does not necessarily change.

“This oversight is no secret: as Labor Department officials acknowledged at a 2004 conference, their statistical methods deem any reduction in the work that goes into creating a specific unit of output, whatever the cause, to be a productivity gain.

This continuing mismeasurement leads economists and all those who rely on them to assume that recorded productivity gains always signify greater efficiency, rather than simple offshoring-generated cost cuts — leaving the rest of us scratching our heads over stagnating wages.

“Above all, if offshoring has been driving much of our supposed productivity gains, then the case for complete free trade begins to erode. If often such policies simply increase corporate profits at the expense of American workers, with no gains in true productivity, then they don’t necessarily strengthen the national economy.

In this regard, the case for free trade as a stimulus for innovation weakens, too. Because productivity gains in part reflect job offshoring, not just the benefits of technology or better business practices, then the American economy has been much less innovative than widely assumed.”

Shonky Economic Data is widespread and Used by Governments of all political persuasions

Maybe it is time for the Economist to do an article on how governments of all persuasions around the world have changed how they measure statistics such as employment, inflation, productivity, debt levels and GDP to mask economic problems, dodge liabilities and justify damaging economic policies that help special interest groups at the expense of the general public.

Kevin Phillips has an excellent article on the subject in the MAy 2008 edition of Harpers Magazine. In the – Numbers racket: Why the economy is worse than we know

To quote his article:

“since the 1960s, Washington has been forced to gull its citizens and creditors by debasing official statistics: the vital instruments with which the vigor and muscle of the American economy are measured. The effect, over the past twenty-five years, has been to create a false sense of economic achievement and rectitude, allowing us to maintain artificially low interest rates, massive government borrowing, and a dangerous reliance on mortgage and financial debt even as real economic growth has been slower than claimed. If Washington’s harping on weapons of mass destruction was essential to buoy public support for the invasion of Iraq, the use of deceptive statistics has played its own vital role in convincing many Americans that the U.S. economy is stronger, fairer, more productive, more dominant, and richer with opportunity than it actually is”

The corruption has tainted the very measures that most shape public perception of the economy—the monthly Consumer Price Index (CPI), which serves as the chief bellwether of inflation; the quarterly Gross Domestic Product (GDP), which tracks the U.S. economy’s overall growth; and the monthly unemployment figure, which for the general public is perhaps the most vivid indicator of economic health or infirmity. Not only do governments, businesses, and individuals use these yardsticks in their decision-making but minor revisions in the data can mean major changes in household circumstances—inflation measurements help determine interest rates, federal interest payments on the national debt, and cost-of-living increases for wages, pensions, and Social Security benefits. And, of course, our statistics have political consequences too. An administration is helped when it can mouth banalities about price levels being “anchored” as food and energy costs begin to soar.

The truth, though it would not exactly set Americans free, would at least open a window to wider economic and political understanding. Readers should ask themselves how much angrier the electorate might be if the media, over the past five years, had been citing 8 percent unemployment (instead of 5 percent), 5 percent inflation (instead of 2 percent), and average annual growth in the 1 percent range (instead of the 3–4 percent range). We might ponder as well who profits from a low-growth U.S. economy hidden under statistical camouflage. Might it be Washington politicos and affluent elites, anxious to mislead voters, coddle the financial markets, and tamp down expensive cost-of-living increases for wages and pensions?“

Another interesting article written by Chris Martenson looks at USA economic data and attempts to divide it into 3 groups – Good Data, Murky Data and Unreliable Data.

Is the Internet setting us free or being used to delude us?

The commonly held idea is that the easy accessibility of data via the internet is making it harder for  governments and special interest groups to deceive us. The internet is supposed to be devolving power to the people.

But as I have attempted to show here it is surprisingly simple to delude even so called experts

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China’s Internet obsession

A new McKinsey report claims that People in the country’s 60 largest cities spend 70 percent of their leisure time online. In the smaller towns it 50%.

And there are more people hooked up to the internet than there are people living in the USA. Mindblowing.

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Bad news – 20 reasons why Depression 2 is just around the Corner – Good News from Carlota Parez is that it is part of a cycle which ends in a “golden age”

If you think we are going to escape another great depression I suggest you take a read of  Paul Farrell’s article at Market Watch titled “20 Reasons Global Debt Bomb explodes soon -which trigger will ignite Great Depression 11”

Yes, 20. And yes, any one can destroy your retirement because all 20 are inexorably linked, a house-of-cards, a circular firing squad destined to self-destruct, triggering the third great Wall Street meltdown of the 21st century, igniting the Great Depression II that George W. Bush, Ben Bernanke, Henry Paulson and now President Obama have simply delayed with their endless knee-jerk, debt-laden wars, stimulus bonanzas and bailouts.

So how do we make sense of this and what can we hope for after the meltdown?

One of the best pieces of analysis I have seen – and without a doubt the most positive – comes from Carlota Parez – Author of  Technological Revolutions and Financial Capital: The Dynamics of Bubbles and the Golden Age.

She has seen this all before – the financialisation of the economy, asset price inflation bubbles fuelled by speculative debt and ultimate crash – not once but 4 times since 1770. In her opinion we are half way through a 5th cycle that is following the same dynamics as the previous four cycles.

If she is right – and we have sufficient energy and an ecosystem to support us – we should emerge from this in what she calls a “golden age” of wealth redistribution off the fruits of the infrastructure investments made since 1971.

But we need the crash first and we will need to see re-regulation of finance and the end of the belief that the value of the stock market equates to economic growth. And by the by – for all of us in Australia who still believe that house prices will continue to go up for ever – and its somehow different here – she predicts that house prices will once again become affordable.

Apart from her though leadership interview, there is an excellent slide presentation of her ideas of the golden future of growth after the crisis at slideshare .

You can also listen to an mp3’s of her talks and videos – there are links to these at her website

Carlota Perez: The Thought Leader Interview

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