Tuesday, January 15, 2019

How BRI poses risks to 21st-century geopolitical landscape [feedly]


By ANU ANWAR 

Moderator:

Union organizers are used to having insufficient information to reach a 'scientific' conclusion  about what a company can afford, and what it cannot. As Walt Pellish, a industrial relations manager with years of (anti) Union experience admitted to me: "Of course we lie!" 

Consequently they are compelled to resort to pressure tactics whose principle goal is to find out how deep the lies told to employees go.  Always start by testing the positions toward which the company shows the most animus, or where the lies appear the fattest. The truth is often hidden there. 

This is how I approach the Chinese Belt and Road Initiative, an alternative to both the colonial, and neo-colonial global development approaches of the UK in pre, and the US in post, WWII eras. The Brits set up colonies and a fairly effective administrative apparatus to primarily extract natural resources. But they drank too much gin (as Gandhi commented). After WWII tore up the UK empire, Roosevelt declined Churchill's request to use US troops to protect British colonies. 

But Roosevelt died. Subsequently, the US bought anti-communist, anti-socialist, anti-democratic dictators with guns (to kill opponents) and cash (to keep them 'loyal') for the same extractive objectives, to which was added the call to destroy the USSR, socialism, and social-democracy too. The anti-colonial, and anti-neo-colonial revolutions of the post war era crushed neo-colonialism in Vietnam --  as the most powerful military in history was defeated by a 'peoples army' of a backward country. We have been in decline ever since. And now we are lost, and have forgotten who we are.

I assume, first, that Trump is a liar and an enemy of MY interests. Therefore if he hates something, it might be a good thing, or, at least, some leverage to put him and his fascist ilk back to his Russian or Saudi lenders for good -- or the gallows, if he can ever be made to stand trial for his capital crimes.

The essential differences in the Chinese approach, as far as I have been able to discern, is in the KIND of aid, its financing, and political stance toward countries brought into the BRI orbit. China focuses on infrastructure projects that raise a nation's capital assets and infrastructure -- a foundation of independent development; it uses its own excess labor supply to build the ports, airports, bridges, rail and roads underdeveloped countries direly need to sell and deliver what they can  produce. In exchange they get to extract resources from, and (lately) also sell into the local markets. The developing nations end up in debt, but with something to show for it. Further, the Chinese BRI approach differs strikingly from US neo-colonialism in its political stance: by contrast, it advocates, and appears to practice, non-interference in the politics of the developing nation.

I say give it a chance to work. It is not OUR enemy. You want to compete with it -- come up with a better development plan. But who is going to welcome a friend who calls them "a shithole"?

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How BRI poses risks to 21st-century geopolitical landscape
http://www.atimes.com/how-bri-poses-risks-to-21st-century-geopolitical-landscape/

On the same day Donald Trump and Xi Jinping struck a trade-war truce in Argentina, some 11,000 kilometers away Canadian authorities made an arrest on suspicion of violating US sanctions on Iran. Conversely, a Chinese court order instructed Apple to stop sales of its iPhones, which observers believe was a cautionary signal to Washington.

All these escalations threaten to make the US-China conflict much worse. This latest development highlights the fact that fundamental disagreements between the US and China are intensifying fast and furious. Indeed, Beijing and Washington face geopolitical fissures that may persist in the coming decades.Such disagreements have become increasingly evident since 2013 when Xi launched his trillion-dollar Belt and Road Initiative to dominate Eurasia and thereby the world beyond. Donald Trump's White House, in turn, is wielding tariffs along with its Indo-Pacific Strategy as weapons to try to beat recalcitrant allies back into line and cripple the mammoth BRI.

However different these approaches may seem, they share one strikingly similar feature: a reliance on the concept of "geopolitics" to guide their bids for global power.

At the end of the 19th century, an American naval historian argued that sea power was the key to national security and international influence. A decade later, a British geographer observed that railroads had shifted the locus of global power landward into the interior of the vast Eurasian continent.

In the succeeding century, a succession of scholars would draw on these two basic ideas to inspire bold geopolitical gambits by Nazi Germany, by Cold War Washington, and more successfully by China's mega-project Belt and Road Initiative, which primarily focuses on all forms of physical infrastructure (road, airport, maritime and energy).

China envisages a vast global network of trade, investment and infrastructure that will reshape financial and geopolitical ties – and bring the rest of the world closer to Beijing. Since its inception, the BRI has financed infrastructure projects in 112 countries. It is a modern-day version of the Marshall Plan, America's reconstruction effort after World War II, which created a foundation for enduring military and diplomatic alliances. China's strategy is bolder, more expensive and far riskier.

In the West, it is feared that the BRI is an extension of efforts by the Communist Party of China (CPC) to undermine the security and economic architecture of the international order. China's growing largesse, Western countries worry, comes largely at the expense of international institutions and American influence.

As the BRI is only five years old (and many of its main members have been involved for a far shorter time), its full results cannot yet be judged. However, a preliminary assessment can be offered for BRI projects in South and Southeast Asia, the region described by Chinese leaders as the "main axis" of the project. Large ports in Pakistan, Sri Lanka and Myanmar – three countries along a major oil and commerce route from the Middle East and Africa – could someday double as naval logistics hubs. These three BRI countries play key roles in achieving China's core geopolitical strategic goal called the "String of Pearls."

That term as a geopolitical concept was first used in an internal US Department of Defense report titled "Energy Futures in Asia." The term is also widely used in India's geopolitical and foreign-policy narratives to highlight its concerns over massive BRI projects across southern Asia.

Through this geopolitical strategy, Beijing aims to build a network for Chinese military and commercial facilities and relationships along with its sea lines of communication, which extend from the Chinese mainland to Port Sudan. The sea lines run through several major maritime chokepoints such as the Bab-el-Mandeb strait, the Strait of Malacca, the Strait of Hormuz, and the Lombok Strait as well as other strategic maritime centers in Pakistan, Sri Lanka, Bangladesh, Maldives and Somalia.

All these straits, countries and chokepoints are crucial for international energy and trade supply lanes, which makes them of interest to the US Navy. Consequently, the Chinese military presence in these regions will undoubtedly escalate tensions that could turn into an unexpected incident, as has already occurred in the South China Sea.

A 2016 report by the Center for Strategic and International Studies judged that none of the Indian Ocean port projects funded through the BRI have much hope of financial success. They were likely prioritized for their geopolitical utility. Projects less clearly connected to China's security needs have more difficulty getting off the ground: the research firm RWR Advisory Group notes that 270 BRI infrastructure projects in the region (or 32% of the total value of the whole initiative) have been put on hold because of problems with practicality or financial viability. There is a vast gap between what the Chinese have declared they will spend and what they have actually spent.

In addition, prolonged exposure to the BRI process has driven opposition to Chinese investment and geopolitical influence across the region. In Maldives, the pro-Beijing Progressive Party of Maldives was unseated last year by the Maldivian Democratic Party, which ran on an explicitly anti-BRI platform. Maldives' new president, Ibrahim Mohamed Solih, calls the BRI "a big cheat" and a "debt trap" that must be abandoned or renegotiated.

Beijing is heavily focused on its neighbors, lending them money for extensive road-building projects. Pakistan is running out of money to repay the loans, part of a broader pattern of what critics call China's "debt trap" diplomacy. The New York Times examined nearly 600 projects that China helped finance in the past decade, through billions of dollars in grants, loans and investments. Taken together, they show the scope and motivation of China's strategy.

The China-Pakistan Economic Corridor (CPEC) is a classic example of China's aggressive geopolitical outreach through its Belt and Road Initiative, aptly analyzed by the conservative National Review:

"The heart of the BRI is debt-trap diplomacy: China oversells the benefits of these infrastructure projects, offers credit for them on onerous terms, and when the bill comes due and its debtors aren't able to pay, demands control over the infrastructure and influence in the region to compensate. The attempt to turn these countries into satellite states via the strategic construction of infrastructure is pure geopolitics. China has eyed a westward turn for years, and its desire to advance in Southeast Asia is no secret."

Elsewhere in the Pacific the democratic Quad – Australia, India, Japan, and the US – and several European countries have begun to signal major reservations about the BRI.

Jeff Smith, a research fellow at the Heritage Foundation, says in an article, "Chinese investments in sensitive infrastructure and the outgrowth of Chinese 'sharp power' and the ways it is using its economic influence as an extension of its foreign policy to punish, coerce, or incentivize regional states to align with its agenda."

Now, America and its partners have begun exploring how best to cope with the consequences of the BRI, offer alternatives to developing countries, and defend the rules-based order against new challenges from China and the BRI. Consequently, as the existing geopolitical landscape becomes bumpier and in the coming days, we may see a riskier contest between East and West.

As the head of America's Indo-Pacific Command, Admiral Philip Davidson, put it in testimony to a US Senate committee, the BRI now represents Beijing's bid to "shape a world aligned with its own authoritarian model while undermining international norms such as the free flow of commerce and ideas."

Yet it is also undeniable that China is accumulating substantial – at times decisive – financial and political leverage across the geopolitical map, acquiring new stakes in key ports, new political allies, new resupply points for the Chinese navy, and new destinations to export elements of its authoritarian model and censorship regime. Even if the BRI fails to meet its lofty ambitions or ends up generating as much resentment as fealty, it is extending China's reach and altering the geopolitical balance of the Indo-Pacific region in the process.

Therefore, the BRI has drawn extensive attention from academics and policymakers. The range of opinion varies from economic cooperation and win-win initiative to Chinese grand strategy, which allows China to use its sharp power across the region. Initially through trade, finance, and infrastructural tools that open an avenue to use for multiple purposes such as security in the long run to counter the US dominance in the Euro Asian region.

However, Washington's new aggressive stance poses a challenge to Xi, a princeling who has promoted a more assertive foreign policy, in sharp contrast with Deng Xiaoping's cautious approach of "hide your strength, bide your time, never take the lead."
 

-- via my feedly newsfeed

Saturday, January 12, 2019

Jared Bernstein: There’s heightened nervousness about the next recession and there are signs pointing in both directions. [feedly]

A deeper dive into a 2019 recession likelihood.....

There's heightened nervousness about the next recession and there are signs pointing in both directions.

http://jaredbernsteinblog.com/is-heightened-nervousness-about-recessions-a-recessionary-indicator-there-are-signs-pointing-in-both-directions/

I can't turn around without seeing or hearing people worrying more about the next recession.

Google Trends: Web search for "next recession"

Source: Google Trends

My peeps at the Indicator have a nice podcast on the topic. The WSJ points out that more than half of economists they surveyed expect a downturn by 2020, which, in case you live under a rock, the article helpfully notes is an election year.

The reasons for the heightened anxiety are:
–Slower global growth, particularly in China (also Europe and Japan). Remember how Apple's market cap fell 10 percent in one day a couple of weeks ago. That was on the news that their China sales were down. We're all connected, man…also, trade war.

–Higher interest rates and the flat yield curve. Interest rates are up, which acts like a brake on growth and they're up more for short- than long-term rates, meaning the yield curve is flat, though not inverted (inversions provide reliable recession warnings, though they don't say precisely when).

–High levels of US sovereign and corporate debt could provoke a credit crisis. High private sector debt levels can proceed a deep and sudden credit contraction, and high government debt can lead to the perception of diminished fiscal space, discussed below.

–Overheating risk and the Fed. This has maybe faded in recent weeks as the Fed has sounded pretty dovish of late, while inflation–actual and expected–looks decidedly nonthreatening. But with historically low unemployment and bigger-than-expected job gains, there's always some nervousness of the return of that 70s show, with inflation taking off and the Fed having to slam on the brakes.

–Trumpian cray-cray. I mentioned the trade war. Then there's the shutdown. And…how can I say this?…our current leadership fails to inspire confidence in this (or any other) space.

These are all real things, but here's a realer thing: economists can't tell you with any authority when the next recession is coming. If you forced me to take a stand, I'd stand with Powell. Heather Long reports the following:

"I don't see a recession" in 2019, Powell said Thursday in an interview at the Economic Club of Washington, D.C. "The U.S. economy is solid. It has good momentum coming into this year."

To be clear, the "solid U.S. economy" still leaves too many people and places behind, and real middle-wages, incomes and earnings haven't been nearly as strong as, say, corporate profitability.

Just to be a contrarian, let me tell you about a few indicators that underscore Powell's near-term optimism.

First, economist Jan Hatzius from Goldman Sachs has long emphasized the private sector balance sheet (those of us of a certain age recall that the great Keynesian economist Wynne Godley emphasized this metric).  Jan writes that: "…a financial deficit in the private sector—i.e., an excess of private sector spending over private sector income—…makes aggregate demand highly vulnerable to disruptions in asset prices or the supply of credit."

Well, private balance sheets look pretty good–they're around their historical average. Hatzius calls this "an unusually benign reading this deep into an expansion" and adds that "it is not only the household sector that runs a surplus but also the nonfinancial corporate sector, which is reassuring given the concerns around leveraged loans and corporate credit more broadly."

I agree. However, the figure does show that this balance can spike pretty quickly, so here's some positive indicators to which I'd give more weight: the strong labor market, rising real wages, and their correlation with real consumer spending. The figure below plots the yearly change in real aggregate earnings–real wage*jobs*hrs/wk–for middle-wage workers against consumer spending, which, ftr, is just under 70 percent of US GDP. To be fair, this is a much less forward looking indicator than say, the yield curve, but here's the punchline: unless you have a story about the US job market heading south in a big way this year, I don't think you have much of a near-term recession story.

Sources: BEA, BLS

Moreover, my labor market story goes the other way. I suspect unemployment–a lagging indicator–falls further this year and that the combination of strong labor markets and low energy prices leads to decent real wage gains. In fact, just this AM, we learned the real, mid-level hourly wages rose 1.3 percent in 2018, its strongest showing since August 2016.

To be clear, in much of my analysis, I have emphasized the expected slowing of growth later this year as fiscal stimulus fades. But, again, it's not obvious that this doesn't mean a return to the pre-stimulus trend growth rate of around 2 percent as opposed to a recession.

Finally, while we just can't know when and why the next downturn will hit, we can get a sense of whether we're ready for it (listen to the Indicator link above on this question). I say we're not (though if we did the stuff in here, we could be). Monetary space may be constrained by an historically low federal funds rate, and if the debt/GDP level is =>80 percent, which may well be the case, history shows that the fiscal authorities, politically constrained by this higher-than-average debt level, tend to do less by way of discretionary, counter-cyclical offsets.

Such austerity would be a terrible mistake, for a lot of reasons. Depending on the depth of the downturn, it's a great way to consign millions of people and families to unnecessary job and income losses. And such losses, depending on how deep they are, have been shown to leave lasting scars on people well into their post-recession lives. Also, as I wrote yesterday, Blanchard's new work shows the fiscal and welfare costs of public debt to be far below where the convention debate places them (and in my framework, countercyclical offsets in recession are definitely GD–read the piece).

I'll continue to heed all the warnings of my fellow tradesmen and women–no question, there are headwinds now that were not upon the land a year ago. But I'll be more guided by the fact that nobody can time a recession, while anyone who's paying attention can raise trenchant warnings about whether we're ready for it, wherever it is.


 -- via my feedly newsfeed

The Greatest Anticompetitive Threat of Our Time: Fixing the Horizontal Shareholding Problem

An interesting anti-monopoly reform...not sure it works in IT however.


The Greatest Anticompetitive Threat of Our Time: Fixing the Horizontal Shareholding Problem


Undisputed empirical studies confirm that horizontal shareholding poses a great anticompetitive threat. What can antitrust enforcers do about it? Quite a lot, in fact.

 

 


Editors' note: In the last few weeks, the Federal Trade Commission has been holding a series of public hearings to discuss whether competition enforcement policies should be updated to better reflect changes in the US economy, namely market concentration and the proliferation of new technologies. The FTC hearings, which will be held throughout the fall and winter, cover topics as varied as privacy and big data, the consumer welfare standard in antitrust and labor market monopsonies. In order to provide ProMarket readers with a better understanding of the debates, we have asked a number of selected participants to share their thoughts on the topics at hand.

 

You can read all previous installments here


 

 

Horizontal shareholding poses the greatest anticompetitive threat of our time, mainly because it is the one anticompetitive problem we are doing nothing about. As I show in my new article, "How Horizontal Shareholding Harms Our Economy—And Why Antitrust Law Can Fix It," this enforcement passivity is unwarranted. 

 

Horizontal shareholding exists when the leading shareholders of horizontal competitors overlap. (Although often called "common shareholding", that terminology is imprecise because common shareholding often exists between noncompeting companies.) Such overlaps used to be relatively rare, but has become common because of the growth of institutional investors and index funds. Moreover, their influence is even higher than their shareholdings because they are far more likely to vote than individual investors. Today, institutional investors own 70 percent of shares and cast 88 percent of votes in publicly-traded firms, and those figures rise to 80 percent of shares and 93 percent of votes at S&P 500 firms. The big three index fund families (BlackRock, Vanguard, and State Street) alone own 18 percent of shares and cast an estimated 24 percent of votes in publicly-traded firms, and own 20 percent of shares and cast an estimated 26 percent of votes at S&P 500 firms.

 

The result is that today the leading shareholders of large competing firms often comprise the same set of institutional investors. Common sense and economic theory indicates that firms with the same leading shareholders are less likely to compete vigorously against each other.

 

As I detail in my article, a series of empirical studies have confirmed that horizontal shareholding has anticompetitive effects in concentrated markets. Although one of those studies has been disputed, the others largely have not.

 

One of the undisputed studies is a cross-industry regression analysis by GutiĆ©rrez and Philippon which found that the gap (now historically high) between corporate profits and investment is mainly driven by the level of horizontal shareholder ownership in concentrated markets. Further, this new study found that, within any industry, the investment-profit gap is mainly driven by those firms with high horizontal shareholding levels.

 

GutiĆ©rrez and Philippon's undisputed study establishes a link between anticompetitive horizontal shareholding and the economy-wide lack of corporate investment that has contributed to low economic growth in recent decades. Indeed, it suggests that horizontal shareholding is a more important cause than other causes (like general macroeconomic, technological, or policy trends) that would operate similarly across industries and certainly across all firms within any industry. 

 

Another recent cross-industry empirical study by Anton, Ederer, Gine and Schmalz shows that horizontal shareholding makes changes in executive wealth less sensitive to firm performance. This study is undisputed as well. To be sure, critics like to focus on an old dispute that existed about the empirical effect of horizontal shareholding on executive annual pay, but such annual pay captured only 22 percent of executive wealth changes. The natural effect of making changes in executive wealth less sensitive to firm performance is obviously to blunt executive incentives to compete.

 

Recent industry studies have likewise confirmed anticompetitive effects from horizontal shareholding. Two empirical studies by Jin Xie and Joseph Gerakosz and by Newham et. al show that horizontal shareholding delays and prevents entry into pharmaceutical markets. These studies are undisputed too.

 

Another empirical study by Azar, Raina, and Schmalz shows that horizontal shareholding harms bank fees and rates. Although critics argue that this study has been disputed by another study that found more mixed results, there is not much of a real dispute yet—the "contrary" study stresses that its results are preliminary because it relies on a data source with known irregularities that they have not yet investigated and corrected. Moreover, this contrary study tries to measure the effects of horizontal shareholding while excluding any information about bank market shares and concentration, which naturally makes the results more mixed. After all, economic theory indicates that even absolute horizontal mergers between some firms in an unconcentrated market are unlikely to affect prices.

 

If a study of all horizontal mergers (whether or not in concentrated markets) found mixed effects on prices, no one would conclude that it proves that horizontal mergers in concentrated markets have no anticompetitive effect. Likewise, no one should conclude that a study of all horizontal shareholding (whether or not in concentrated markets) that finds mixed effects on prices proves that horizontal shareholdings in concentrated markets have no anticompetitive effect.

 

The empirical dispute has focused on a study by Azar, Schmalz and Tecu showing that horizontal shareholding harms airline prices. But this finding has been replicated by critics even using their own re-construction of the data and measures of horizontal shareholding. Critics have negated airline price effects only by incorrectly altering the regression, such as by using an instrumental variable that is actually negatively correlated with horizontal shareholding or by incorrectly setting many shareholding rights equal to zero. Accounting for other critiques, like claims of endogeneity, imprecise market definition, or the effects of changing fuel costs, turn out to actually increase the estimated price effects.

 

The empirical literature is thus not too uncertain to take action against horizontal shareholding. In any event, empirical uncertainty could not support current enforcement practices, which rely on metrics like HHIs that affirmatively assume that horizontal shareholding has zero effect—an assumption that clearly lacks any theoretical or empirical basis.

 

Critics argue that we need clearer proof of the precise causal mechanisms. But the causal mechanisms are the same as the ones that law and economics scholars have always cited to explain how agency slack is limited: board elections, executive compensation, control contests, the stock market, and the labor market. As I detail in my article, each of those mechanisms is supported by copious evidence.

 

Critics also argue that three contra-mechanisms will prevent horizontal shareholding from having anticompetitive effects. But those contra-mechanisms are all unpersuasive. First, critics argue that anticompetitive effects will be prevented by accountability to non-horizontal shareholders. But when horizontal shareholding has anticompetitive effects, it affirmatively benefits non-horizontal shareholders because it increases profits at their firm by simultaneously lessening competition at both their firm and rival firms. Thus, non-horizontal shareholders have no more incentive to object to anticompetitive horizontal shareholding than they would to the corporation entering into a legally-permitted cartel. 

 

Second, critics argue that index funds who are horizontal shareholders in the airline industry also own stock in firms that buy from or sell to that industry (such as airplane makers and business travelers), which, they argue, should negate any anticompetitive incentives. But even the large index funds stressed by this argument externalize the lion's share of anticompetitive effects onto buyers outside the index. Indeed, in the airline example favored by critics, the S&P 500 externalizes 95 percent of the anticompetitive effect outside of firms in the index. 

 

Third, critics argue that index fund families lack incentives to exert the effort needed to influence corporate behavior in anticompetitive ways to increase portfolio value. But those critics are mistaken, because the anticompetitive gains are vast and the incremental effort costs are generally zero or negative, given that the index fund families have to decide what position to take on votes or management interactions either way and taking a position that does not pressure managers to compete more vigorously is likely to please them.

 

Index fund families also have strong incentives to compete with active funds for investment flow, and index fund families have many active funds of their own. The critics also ignore the fact that what matters is relative effort, and however much index fund incentives to exert effort may fall short of the optimal, the incentives of other shareholders with smaller shareholdings are even less. In any event, any theoretical claim that index fund families lack sufficient incentives to influence corporations is clearly disproven by empirical study after empirical study showing that, in fact, index fund families are hugely influential in influencing corporate behavior.

 

Moreover, index fund families are not the only or main horizontal shareholders. Claims that horizontal shareholders lack incentives to influence corporate behavior conflict not only with the above-noted empirical studies showing anticompetitive effects, but with dozens of other empirical studies showing that common shareholders influence corporate behavior on many other dimensions. At some point, theoretical claims that it is implausible that common shareholding could affect corporate behavior must give way to the dozens of empirical studies showing that it does just that.

 

What can antitrust law do about horizontal shareholding? Quite a lot, in fact. The Clayton Act bans any stock acquisition that may substantially lessen competition, and Supreme Court case law makes clear that continuing to hold stock is an "acquisition." Even critics acknowledge that the plain meaning of the Clayton Act would ban horizontal shareholding—if they were convinced that it empirically had anticompetitive effects. Indeed, the Clayton Act has one provision for cross-shareholding between commercial entities and another, separate provision that expressly extends the Act to stock acquisitions by any entity in commercial entities: i.e., to horizontal shareholding.

 

To be sure, the Clayton Act has a solely-for-investment exemption, but it exempts a stock acquisition from liability only if it both (1) confers no influence over the corporation and (2) fails to actually create anticompetitive effects. The exemption thus does not apply if anticompetitive effects are actually proven. Contrary claims that the Clayton Act applies only if a stock acquisition confers control or influence conflict not only with the statutory text, but also with six federal court opinions and the agency guidelines on cross-shareholding.

 

In any event, horizontal shareholding necessarily involves contractual agreements, so when those agreements have anticompetitive effects, they necessarily constitute agreements in restraint of trade. Thus, the Sherman Act bans any horizontal shareholding that has anticompetitive effects. Indeed, the historic trusts attacked by the Sherman Anti-Trust Act were horizontal shareholders.

 

EU merger law cannot remedy all anticompetitive horizontal stock acquisitions, but it could remedy the subset of those acquisitions that potentially give horizontal shareholders decisive joint influence over corporate activities. In any event, EU Article 101 on agreements and concerted practices is at least as broad as the Sherman Act and can thus condemn any horizontal shareholdings that have anticompetitive effects. EU Article 102 also bans anticompetitive horizontal shareholdings because such shareholdings create a collective dominant position and abuse that position with excessive pricing.

 

Anticompetitive horizontal shareholding is thus also illegal in all the other nations (including China) that ban anticompetitive concerted practices and/or abusing a collective dominant position via excessive pricing.

 

Even if we fail to directly tackle horizontal shareholding, its effects have important implications for traditional merger analysis. In particular, it lowers the concentration levels that traditional merger analysis can tolerate. Continuing to allow unimpeded horizontal shareholding would thus provide strong support for those who currently argue that antitrust law should be far more aggressive about preventing market concentration.

 

Horizontal shareholding can also mean that what now look like non-horizontal mergers should be treated as horizontal. Horizontal shareholding thus turns out to also support current antitrust movements that decry our increasing levels of national industrial concentration, even if those concentration figures do not correspond to relevant antitrust markets.


--
John Case
Harpers Ferry, WV
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Dani Rodrik: The Left's Choice

The Left's Choice

Jan 8, 2019 

In the face of resurgent right-wing populism, the left's relative weakness partly reflects the decline of unions and organized labor groups, which have historically formed the backbone of leftist and socialist movements. But four decades of ideological abdication has also played an important role.

CAMBRIDGE – The main political beneficiaries of the social and economic fractures wrought by globalization and technological change, it is fair to say, have so far been right-wing populists. Politicians like Donald Trump in the United States, Viktor OrbĆ”n in Hungary, and Jair Bolsonaro in Brazil have ridden to power by capitalizing on the growing animus against established political elites and exploiting latent nativist sentiment.1



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The left and progressive groups have been largely missing in action. The left's relative weakness partly reflects the decline of unions and organized labor groups, which have historically formed the backbone of leftist and socialist movements. But ideological abdication has also played an important role. As parties of the left became more dependent on educated elites instead of the working class, their policy ideas aligned more closely with financial and corporate interests.

The remedies on offer from mainstream leftist parties remained correspondingly limited: more spending on education, improved social-welfare policies, a bit more progressivity in taxation, and little else. The left's program was more about sugarcoating the prevailing system than addressing the fundamental sources of economic, social, and political inequities.

There is now growing recognition that tax-and-transfer policies can go only so far. While there is much room for improving social insurance and tax regimes, especially in the US, deeper reforms are needed to help level playing fields in favor of ordinary workers and families across a broad range of domains. That means focusing on product, labor, and financial markets, on technology policies, and on the rules of the political game.

Inclusive prosperity cannot be achieved by simply redistributing income from the rich to the poor, or from the most productive parts of the economy to less productive sectors. It requires less-skilled workers, smaller firms, and lagging regions to be more fully integrated with the most advanced parts of the economy.

In other words, we must start with productive re-integration of the domestic economy. Large and productive firms have a critical role to play here. They must recognize that their success depends on the public goods that their national and sub-national governments supply – everything from law and order and intellectual property rules to infrastructure and public investment in skills and research and development. In exchange, they must invest in their local communities, suppliers, and workforce – not as corporate social responsibility, but as a mainline activity.


In an earlier age, governments engaged in agricultural extension activities to spread new techniques to small farmers. There is a similar role today for what Timothy Bartik of the W.E. Upjohn Institute for Employment Research calls "manufacturing extension services," though the ideas apply to productive services as well. Governments that collaborate with businesses to encourage the dissemination of frontier technologies and management techniques to the rest of the economy can avail themselves of a well-established repertoire of such initiatives.

A second area of public action concerns the direction of technological change. New technologies such as automation and artificial intelligence (AI) have typically been labor-replacing, adversely affecting low-skill workers in particular. But this need not be the case in the future. Instead of policies (such as capital subsidies) that inadvertently promote labor-replacing technologies, governments could promote technologies that augment labor-market opportunities for less-skilled workers.

The late economist Tony Atkinson, in his magisterial book Inequality, questioned the wisdom of governments supporting the development of autonomous vehicles, without due consideration for the effects on taxi and truck drivers. More recently, the economists Daron Acemoğlu, Anton Korinek, and Pascual Restrepo have written about how AI can be deployed in new ways to increase labor demand, for example by allowing ordinary workers to engage in activities that were previously out of reach for them. But moving in this direction will require a conscious effort by governments to review their innovation policies and to put the appropriate private-sector incentives in place.

Labor markets, too, need rebalancing. The weakening of unions and protections for workers has eroded traditional sources of countervailing power. Recent research has shown that firms retain significant bargaining leverage over employees, depressing wages and working conditions. Reversing these trends will require a range of pro-labor policies, including the promotion of unionization, higher minimum wages, and adequate regulatory standards for workers in the "gig economy."

Finance is yet another area requiring significant surgery. Most advanced economies' financial sectors remain bloated. They pose continuing risks to economic stability without providing compensating benefits in terms of increased investment in productive activities. As Stanford's Anat Admati and others have long argued, banks require, at a minimum, higher capital requirements and tighter regulatory scrutiny. The fact that financial institutions have escaped relatively unscathed from the crisis of 2008-2009 speaks volumes about their political power.

As the failures of financial regulation suggest, important as such economic reforms are, they need to be complemented with measures that remedy the asymmetry of political access. In the US, holding elections on workdays, rather than weekends or holidays – together with restrictive registration rules, gerrymandering, and myriad other electoral rules – places ordinary workers at a significant disadvantage. This is on top of campaign finance rules that have enabled corporations and society's wealthiest members to exert inordinate influence on legislation.

The Democratic Party will face a critical test in the next US presidential election, less than two years away. In the meantime, it has a choice to make. Will it remain the party of merely adding sweeteners to an unjust economic system? Or does it have the courage to address unfair inequality by attacking it at its roots?


The Euro Turns 20

Jan 7, 2019 DANIEL GROS

Why Is Immigration Different from Trade?

Jan 11, 2019 AMAR BHIDƉ

DANI RODRIK

Writing for PS since 1998
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Dani Rodrik is Professor of International Political Economy at Harvard University's John F. Kennedy School of Government. He is the author of The Globalization Paradox: Democracy and the Future of the World Economy, Economics Rules: The Rights and Wrongs of the Dismal Science, and, most recently, Straight Talk on Trade: Ideas for a Sane World Economy.

--
John Case
Harpers Ferry, WV
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Global Inequality: What is Just Pay

What is the just pay? Capitalists, John Roemer and the Cultural Revolution


In the 1990s and in his 1999 book "Equality of opportunity", John Roemer set the stage for what has since been a flourishing area of inequality studies—inequality of opportunity. Roemer's key insight was to divide the factors that influence one's income into three parts: circumstances or factors that are exogenous to the individual, that is over which he has no control (gender, race, parental income and education etc.), those that are the product of his effort, and finally those that are the result of what Roemer called "episodic luck" (I got a good  job because I just happened to be available at the time when the job was advertised).

Roemer's approach has led him also to propose a very radical way to reward (pay) people. Consider two groups of individuals, defined by an exogeneous marker like gender. One group (men) tends to be physically stronger and produces on average 10 widgets per day. Another group, women, is physically weaker and produces only 5. Should everybody be paid according to the number of widgets he/she produces (which a simple-minded "meritocratic" approach would suggest)? No, Roemer says, the reward should be proportional to our contribution compared to the average of our group. So, if I produce 12 widgets, why is 20% above men's average, I should be paid the same as the woman who produces 6 widgets, which is also 20% above the average of her group. The reason is that we are both paid according to our (differential) effort—and the attempt is made to control (abstract from) our innate characteristics which may privilege or punish some of us.

Consider the radicalness of this proposal as applied in another context. Students' grades should also follow the same rule. If say rich parents' kids do better than poor parents' kids on average, then a rich kid who has scored 12 points on a test should get the same grade as the poorer kid who has scored only 6 points. And so on.

But recently as I was rereading Phelps  Brown's book "The Inequality of Pay", published in 1977, I ran across a different scheme of rewards applied in Beijing in the 1960s, around the time of the Cultural Revolution. All men were paid according to the average number of widgets produced by men, and all women were paid according to the average  number of widgets produced by women. Here is the quote from Phelps Brown:

This story brings out what to Western observers may seem a contradiction in Chinese pay structure: if it is right and proper to pay a man more than a woman because the man being stronger produces more, why should not a man who exerts himself and produces more than another man likewise be paid more? To the Chinese the answer is simply that the latter differential appeals to self-interest whereas the former cannot. Strangely but intelligibly, the Chinese treat payment in proportion to the amount of work done as a self-evident principle of natural justice while differences  in that amount arenot within the worker's own control, but as mischievous when they are. (p. 53; emphasis mine)


The reader, probably having thought how radical and left-wing is Roemer's proposal, is now suddenly thrown into this most radical left-wing experiment ever where—the very opposite principles rule! It seems that there is no continuity: a more left-wing approach is not just slightly more to the left than the less leftist approach—it is the very opposite of it!

To see that, recall that in Roemer's case we do not want to pay somebody for his or her circumstances, but only for his or her effort. In the Chinese case, it is the reverse: we pay somebody only for his or her circumstances, but not for his or her effort. Why is that? The philosophy is entirely different. Circumstances are viewed  as "natural" and one should be paid according to them. But payment according to effort is viewed as corrosive of moral norms since it means that people respond to economic incentives. People should work either because they want to contribute to the community (without expecting anything in return) or because they like to work. "Incentivizing" --appealing to self-interest--in such a setting is considered as bad, as in a different setting paying somebody for an exogenous advantage that he or she does not deserve.

The ultimate outcome of the Chinese system is an equal pay for everybody, both men and women, and regardless of individual productivity. It would be at the polar extreme of the "meritocratic" pay where everybody is paid simply according to the number of widgets he or she produces.

What is the best way? Meritocratic pay responds to out feeling of justice that everybody should be paid according to their contribution. Presumably it would lead to the highest output. Roemer redefines justice so as to extract only differential effort according to which people should be paid. They will be paid the same amount  for different number of widgets produced. Empirically, it will be always very difficult to determine what are the factors that should fall under the heading of circumstances and hence should not affect the reward. The Chinese system has a moralistic element in it: it is bad to be incentivized by pay. The downside is that it is likely to lead to very low effort of most participants.

When we design systems of rewards, we are obviously always led by some principles of justice or ethics. The problem is that these principles do not all come up with the same solution. In many cases, as we have seen here, depending on what our guiding principle is, the reward structure will be very different. On top of that we need, in principle, to take into account the effects on the overall output—unless of course our philosophical principle Is such that the quantity of that output is immaterial.



This post is a bit abstract, but it highlights an important distinction between labor for pay, and labor for a public good.  Microsoft vs Open Source software, for example. (Although the former is being partly eaten by the latter!)


It also asks measurement questions about effort and productivity, but skirts the elemental (to me) matter of how services and intangibles -- most of the future 'economy' and 'jobs' -- which are not very amenable to 'productivity' me


What is the just pay? Capitalists, John Roemer and the Cultural Revolution


Note:

John Roemer who kindly commented on the text asked me to make clear that he never advocated  direct application of the principles explained here (nor thought that this would be possible to do in a market economy), but argued that policies like affirmative action should be designed with the objective of reducing or eliminating the impact of circumstances on one's income.

--
John Case
Harpers Ferry, WV
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Friday, January 11, 2019

The research university [feedly] - Whence cometh innovation

The research university
http://understandingsociety.blogspot.com/2019/01/the-research-university.html

Where do new ideas, new technologies, and new ways of thinking about the world come from in a modern society? Since World War II the answer to this question has largely been found in research universities. Research universities are doctoral institutions that employ professors who are advanced academic experts in a variety of fields and that expend significant amounts of external funds in support of ongoing research. Given the importance of innovation and new ideas in the knowledge economy of the twenty-first century, it is very important to understand the dynamics of research universities, and to understand factors that make them more or less productive in achieving new knowledge. And, crucially, we need to understand how public policy can enhance the effectiveness of the university research enterprise for the benefit of the whole of society.

Jason Owen-Smith's recent Research Universities and the Public Good: Discovery for an Uncertain Future is a very welcome and insightful contribution to better understanding this topic. Owen-Smith is a sociology professor at the University of Michigan (itself a major research university with over 1.5 billion dollars in annual research funding), and he brings to his task some of the most insightful ideas currently transforming the field of organizational studies.

Owen-Smith analyzes research universities (RU) in terms of three fundamental ideas. RUs serves as sourceanchor, and hub for the generation of innovations and new ideas in a vast range of fields, from the humanities to basic science to engineering and medicine. And he believes that this triple function makes research universities virtually unique among American (or global) knowledge-producing organizations, including corporate and government laboratories (33).

The idea of the university as a source is fairly obvious: it is the idea that universities create and disseminate new knowledge in a very wide range of fields. Sometimes that knowledge is of interest to a hundred people worldwide; and sometimes it results in the creation of genuinely transformative technologies and methods. The idea of the university as "anchor" refers largely to the stability that research universities offer the knowledge enterprise. Another aspect of the idea of the university as an anchor is the fact that it helps to create a public infrastructure that encourages other kinds of innovation in the region that it serves -- much as an anchor tenant helps to bring potential customers to smaller stores in a shopping mall. Unlike other knowledge-centered organizations like private research labs or federal laboratories, universities have a diverse portfolio of activity that confers a very high level of stability over time. This is a large asset for the country as a whole. It is also frequently an asset for the city or region in which it is located.

The idea of the university as a hub is perhaps the most innovative perspective offered here. The idea of a hub is a network concept. A hub is a node that links individuals and centers to each other in ways that transcend local organizational charts. And the power of a hub, and the networks that it joins, is that it facilitates the exchange of information and ideas and creates the possibility of new forms of cooperation and collaboration. Here the idea is that a research university is a place where researchers form working relationships, both on campus and in national networks of affiliation. And the density and configuration of these relationships serve to facilitate communication and diffusion of new ideas and approaches to a given problem, with the result that progress is more rapid. O-S makes use of Peter Galison's treatment of the simultaneous discovery of the relativity of time measurement by Einstein and PoincarĆ© in Einstein's Clocks and PoincarĆ©'s Maps: Empires of Time.  Galison shows that Einstein and PoincarĆ© were both involved in extensive intellectual networks that were quite relevant to their discoveries; but that their innovations had substantially different effects because of differences in those networks. Owen-Smith believes that these differences are very relevant in the workings of modern RUs in the United States as well. (See also Galison's Image and Logic: A Material Culture of Microphysics.)

Radical discoveries like the theory of special relativity are exceptionally rare, but the conditions that gave rise to them should also enable less radical insights. Imagining universities as organizational scaffolds for a complex collaboration networks and focal point where flows of ideas, people, and problems come together offers a systematic way to assess the potential for innovation and novelty as well as for multiple discoveries. (p. 15)

Treating a complex and interdependent social process that occurs across relatively long time scales as if it had certain needs, short time frames, and clear returns is not just incorrect, it's destructive. The kinds of simple rules I suggested earlier represent what organizational theorist James March called "superstitious learning." They were akin to arguing that because many successful Silicon Valley firms were founded in garages, economic growth is a simple matter of building more garages. (25)
Rather, O-S demonstrates in the case of the development of the key discoveries that led to the establishment of Google, the pathway was long, complex, and heavily dependent on social networks of scientists, funders, entrepreneurs, graduate students, and federal agencies.

A key observation in O-S's narrative at numerous points is the futility -- perhaps even harmfulness -- of attempting to harness university research to specific, quantifiable economic or political goals. The idea of selecting university research and teaching programs on the basis of their ROI relative to economic goals is, according to O-S, deeply futile. The extended example he offers of the research that led to the establishment of Google as a company and a search engine illustrates this point very compellingly: much of the foundational research that made the search algorithms possible had the look of entirely non-pragmatic or utilitarian knowledge production at the time it was funded (chapter 1). (The development of the smart phone has a similar history; 63.) Philosophy, art history, and social theory can be as important to the overall success of the research enterprise as more intentionally directed areas of research (electrical engineering, genetic research, autonomous vehicle design). His discussion of Wisconsin Governor Scott Walker's effort to revise the mission statement of the University of Wisconsin is exemplary (45 ff.).

Contra Governor Walker, the value of the university is found not in its ability to respond to immediate needs but in an expectation that joining systematic inquiry and education will result in people and ideas that reach beyond local, sometimes parochial, concerns. (46-47)
Also interesting is O-S's discussion of the functionality of the extreme decentralization that is typical of most large research universities. In general O-S regards this decentralization as a positive thing, leading to greater independence for researchers and research teams and permitting higher levels of innovation and productive collaboration. In fact, O-S appears to believe that decentralization is a critical factor in the success of the research university as source, anchor, and hub in the creation of new knowledge.

The competition and collaboration enabled by decentralized organization, the pluralism and tension created when missions and fields collide, and the complex networks that emerge from knowledge work make universities sources by enabling them to produce new things on an ongoing basis. Their institutional and physical stability prevents them from succumbing to either internal strife or the kinds of 'creative destruction' that economist Joseph Schumpeter took to be a fundamental result of innovation under capitalism. (61)
O-S's discussion of the micro-processes of discovery is particularly interesting (chapter 3). He makes a sustained attempt to dissect the interactive, networked ways in which multiple problems, methods, and perspectives occasionally come together to solve an important problem or develop a novel idea or technology. In O'S's telling of the story, the existence of intellectual and scientific networks is crucial to the fecundity of these processes in and around research universities.

This is an important book and one that merits close reading. Nothing could be more critical to our future than the steady discovery of new ideas and solutions. Research universities have shown themselves to be uniquely powerful engines for discovery and dissemination of new knowledge. But the rapid decline of public appreciation of universities presents a serious risk to the continued vitality of the university-based knowledge sector. The most important contribution O-S has made here, in my reading, is the detailed work he has done to give exposition to the "micro-processes" of the research university -- the collaborations, the networks, the unexpected contiguities of problems, and the high level of decentralization that American research universities embody. As O-S documents, these processes are difficult to present to the public in a compelling way, and the vitality of the research university itself is vulnerable to destructive interference in the current political environment. Providing a clear, well-documented account of how research universities work is a major and valuable contribution.  

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Trump’s Big Libertarian Experiment [feedly]

PKs prescience on the real agenda behind the shutdown (and Trump's so-called policies) is the stuff of fascist nightmares....but this is not sleep.

Trump's Big Libertarian Experiment
https://www.nytimes.com/2019/01/10/opinion/trump-shutdown.html
"Government," declared Ronald Reagan in his first Inaugural Address, "is not the solution to our problem, government is the problem." Republicans have echoed his rhetoric ever since. Somehow, though, they've never followed through on the radical downsizing of government their ideology calls for.

But now Donald Trump is, in effect, implementing at least part of the drastic reduction in government's role his party has long claimed to favor. If the shutdown drags on for months — which seems quite possible — we'll get a chance to see what America looks like without a number of public programs the right has long insisted we don't need. Never mind the wall; think of what's going on as a big, beautiful libertarian experiment.

Seriously, it's striking how many of the payments the federal government is or soon will be failing to make are for things libertarians insist we shouldn't have been spending taxpayer dollars on anyway.

For example, federal checks to farmers aren't going out ­— but libertarian organizations like the Cato Institute have long denounced farm subsidies as just another form of crony capitalism.

Businesspeople are furious that the Small Business Administration isn't making loans — but libertarians want to see the whole agency abolished.

If the shutdown extends into March — which, again, seems entirely possible — money for food stamps will dry up. But Republicans have long been deeply hostile to the food stamp program. Mitch McConnell, the Senate majority leader, has denounced the program for "making it excessively easy to be nonproductive."

The shutdown has drastically curtailed work at the Food and Drug Administration, which among other things tries to prevent food contamination: Routine inspections of seafood, vegetables, fruits and other foods have stopped. But there's a long conservative tradition, going back to Milton Friedman, that condemns the F.D.A.'s existence as an unwarranted interference in the free market.

Strange to say, however, neither the Trump administration nor its congressional allies are celebrating the actual or prospective termination of government services their ideology says shouldn't exist. Instead, they're engaged in frantic administrative and legal maneuvering in an attempt to mitigate those program cuts. Why?

O.K., we shouldn't be completely cynical (cynical, yes, but not completely so). Even where there's a government-free solution to a problem, you might worry that it would take time to set up. Maybe you believe that private companies could take over the F.D.A.'s role in keeping food safe, but such companies don't exist now and can't be conjured up in a matter of weeks. So even true libertarians wouldn't necessarily celebrate a sudden government shutdown.


That said, the truth is that libertarian ideology isn't a real force within the G.O.P.; it's more of a cover story for the party's actual agenda.

In the case of the party establishment, that agenda is about redistributing income up the scale, and in particular helping important donor interests. Republican politicians may invoke the rhetoric of free markets to justify cutting taxes for the rich and benefits for the poor, or removing environmental regulations that hurt polluters' profits, but they don't really care about free markets per se. After all, the party had little problem lining up behind Trump's embrace of tariffs.

Meanwhile, the philosophy of the party's base is, in essence, big government for me but not for thee. Stick it to the bums on welfare, but don't touch those farm subsidies. Tellingly, the centerpiece of the long G.O.P. jihad against Obamacare was the false claim that it would hurt Medicare.

And as it happens, many of the spending cuts being forced by the shutdown fall heavily and obviously on base voters. Small business owners are much more conservative than the nation as a whole, but they really miss those government loans. Rural voterswent Republican during a Democratic midterm blowout, but they want those checks. McConnell may have trash-talked food stamps in the past, but a sudden cutoff would have a catastrophic effect on the most Republican parts of his home state.

The one piece of the shutdown that Republicans seem fairly calm about is the nonpayment of federal workers. Maybe the party believes, like Trump, that these workers are mainly Democrats. But when the effects of nonpayment start to bite, even that indifference may disappear.

In any case, while the gap between Republicans' supposed ideology and their actual reaction to the shutdown is understandable, that doesn't make it innocent. If a party is going to claim, year after year, to believe that government is the problem, not the solution, then complain bitterly when the government stops handing out checks, attention should be paid.

And if you have libertarian leanings yourself, you should ask whether you're happy with what's happening with government partially out of the picture. Knowing that the food you're eating is now more likely than before to be contaminated, does that potential contamination smell to you like freedom?



Paul Krugman has been an Opinion columnist since 2000 and is also a Distinguished Professor at the City University of New York Graduate Center. He won the 2008 Nobel Memorial Prize in Economic Sciences for his work on international trade and economic geography. @PaulKrugman

A version of this article appears in print on Jan. 11, 2019, on Page A22 of the New York edition with the headline: Trump's Big Libertarian Experiment. Order Reprints | Today's Paper | Subscribe
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