The slowdown in productivity appears more and more to be a global feature of advanced capitalist economies. China is still engaged in a rapid industrialization restructuring and the slowdown has not showed up there yet. I see it has reached the top of the IMF's list of concerns....
Consider, for example, the impact of the credit crunch on advanced economy firms that had entered the crisis with high levels of debt. These companies were often forced into fire sales of assets and deep cuts in investment, including in innovation—with lasting effects on their own and aggregate productivity.
Subdued productivity is a cause for concern, according to a new IMF paper. Another decade of weak productivity growth could seriously threaten progress in raising global living standards. Slower growth would also make it more difficult to sustain existing private and public debt levels in some countries—which could jeopardize their financial stability.
Moving the productivity needle should be a policy priority.
For advanced economies, this starts with boosting demand and investment where it remains weak; helping firms restructure debt and strengthen bank balance sheets; and giving clear signals about future economic policy, in particular fiscal, regulatory, and trade policies.
Structural reforms are also needed to tackle the structural headwinds that will constrain productivity growth—aging, the global trade slowdown, and slowing improvements in educational attainment.
Read about slowing productivity and what can be done about it in this new IMF paper.
You can also read the speech by the IMF Managing Director Christine Lagarde on "Reinvigorating Productivity Growth."
An earlier post reiterated my reasons for doubting that the social sciences can in principle give rise to general theories that serve to organize and predict the domain of social phenomena. The causes of social events are too heterogeneous and conjunctural to permit this kind of systematic representation.
That said, social behavior and social processes give rise to very interesting patterns at the macro scale. And it is always legitimate to ask what the causes are that produce these patterns. Consider the following graphs. They are drawn very miscellaneously from a range of social science disciplines.
These graphs represent many different kinds of social behavior and processes. A few are synchronic -- snapshots of a variable at a moment in time. The graph of India's population age structure falls in this category, as do the graphs of India's literacy rates. Most are diachronic, representing change over time. The majority show an apparent pattern of stochastic change, even in cases where there is also a measurable direction of change indicating underlying persistent causes. Graphs of stock market activity fall in this category, with random variations of prices even during a consistent period of rising or falling prices.
The graph representing the evolution of China's agricultural economy tells an interesting and complicated story. It shows rising productivity in agriculture and (since 1984) a sharp decline in the proportion of the labor force involved in agriculture -- an important cause of China's urban growth and the growth of its internal migrant population. And it shows a long-term decline in the share of the national economy played by agricultural production overall, from about 40% in 1969 to less than 15% in 2005. What these statistics convey is a period of fundamental change in China, in economy, urbanization, and ultimately in politics.
The graph of the composition of the US population is a time series graph that tells a complicated story as well -- a smooth rise in total national population composed of shifting shares of population across the regions of the country. These shifts of population shares across the region's of the country demand historical and causal explanation.
The graph of India's literacy rates over age warrants comment. It appears to give a valid indication of several important social realities -- a persistent gap between men and women of all ages, and lower literacy among older men and women. But the graph also displays variation that can only reflect some sort of artifact from the data collection: literacy rates plummet at the decade and half decade, for both men and women. Plainly there is a problem with the data represented in this graph; nothing could explain a 15% discrepancy in literacy rates between 57-year-old men and 60-year-old men. The same anomalous pattern is evident in the female graph as well. Essentially there are two distinct data series represented here: the decade and half-decade series (low) and the by-year series (high). There is no way of telling from the graph which series should be given greater credibility. The other chart representing state literacy rates is of interest as well. It allows us to see that there are substantial gaps across states in terms of literacy -- Kerala's literacy rate in 1981 is 2.5 times higher than that of Bihar in that year. And some states have made striking progress in literacy between 1981 and 2001 (Arunachal Pradhesh) while other states have shown less proportional increases (Kerala). Here though we can ask whether the order of states on the graph makes sense. The states are ranked from high to low literacy rates. Perhaps it would be more illuminating to group states by regions so it is possible to draw some inferences and comparisons about similarly situated states.
The graph representing grain price correlations across commodities in Qing China demands a different kind of explanation. We need to be able to identify a mechanism that causes prices in different places to converge to a common market price separated by the cost of transport between these places and the relative utilities of wheat, sorghum, and millet. The mechanism is that of mobile price-sensitive traders responding to information about prices in different locations. The map demonstrates the existence of these mechanisms of communication and transportation on the ground. This is a paradigm example of a mechanism-based explanation. (This example comes from Rawski and Li, eds., Chinese History in Economic Perspective (Studies on China).)
The graph representing the rank order of city sizes is perhaps the most intriguing among all of these. There is nothing inherently implausible about a population distributed across five cities of comparable size and a hundred towns of comparable size -- and yet this hypothetical case would display a size distribution radically different from the Zipf law. So what explanation is available to account for the empirical pattern almost universally observed? Various scholars have argued that the regularity is the result of very simple conditions that apply to city growth rates over time, and that the cities in a growing population will come to conform to the Zipf regularity over time as a simple statistical consequence of size and growth (link). It is an example, perhaps, of what Schelling calls "the inescapable mathematics of musical chairs" (Micromotives and Macrobehavior).
What these examples have in common is that they illustrate two of the key tasks of the social sciences: to measure important social variables over time and space, and to identify the social mechanisms that lead to variation in these variables. There are large problems of methodology and conceptual clarification that need to be addressed in both parts of this agenda. On the side of measurement, we have the problems of arriving at consistent and revealing definitions of economic wellbeing, using incomplete historical sources to reconstruct estimates of prices and wages, and using a range of statistical methods to validate and interpret the results. And on the explanatory side, we are faced with the difficult task of reconstructing social processes and forces in the past that may have powered the changes we are able to document, and with the task of validating the hypotheses we have put forward on the basis of historical evidence.
NEW YORK – Today, a quarter-century after the Cold War's end, the West and Russia are again at odds. This time, though, at least on one side, the dispute is more transparently about geopolitical power, not ideology. The West has supported in a variety of ways democratic movements in the post-Soviet region, hardly hiding its enthusiasm for the various "color" revolutions that have replaced long-standing dictators with more responsive leaders – though not all have turned out to be the committed democrats they pretended to be.
Too many countries of the former Soviet bloc remain under the control of authoritarian leaders, including some, like Russian President Vladimir Putin, who have learned how to maintain a more convincing façade of elections than their communist predecessors. They sell their system of "illiberal democracy" on the basis of pragmatism, not some universal theory of history. These leaders claim that they are simply more effective at getting things done.
In terms of per capita income, Russia now ranks 73rd (in terms of purchasing power parity) – well below the Soviet Union's former satellites in Central and Eastern Europe. The country has deindustrialized: the vast majority of its exports now come from natural resources. It has not evolved into a "normal" market economy, but rather into a peculiar form of crony-state capitalism.That is certainly true when it comes to stirring nationalist sentiment and stifling dissent. They have been less effective, however, in nurturing long-term economic growth. Once one of the world's two superpowers, Russia's GDP is now about 40% of Germany's and just over 50% of France's. Life expectancy at birth ranks 153rd in the world, just behind Honduras and Kazakhstan.
Yes, Russia still punches above its weight in some areas, like nuclear weapons. And it retains veto power at the United Nations. As the recent hacking of the Democratic Party in the United States shows, it has cyber capacities that enable it to be enormously meddlesome in Western elections.
There is every reason to believe that such intrusions will continue. Given US President Donald Trump's deep ties with unsavory Russian characters (themselves closely linked to Putin), Americans are deeply concerned about potential Russian influences in the US – matters that may be clarified by ongoing investigations.
Many had much higher hopes for Russia, and the former Soviet Union more broadly, when the Iron Curtain fell. After seven decades of Communism, the transition to a democratic market economy would not be easy. But, given the obvious advantages of democratic market capitalism to the system that had just fallen apart, it was assumed that the economy would flourish and citizens would demand a greater voice.
What went wrong? Who, if anyone, is to blame? Could Russia's post-communist transition have been managed better?
We can never answer such questions definitively: history cannot be re-run. But I believe what we are confronting is partly the legacy of the flawed Washington Consensus that shaped Russia's transition. This framework's influences was reflected in the tremendous emphasis reformers placed on privatization, no matter how it was done, with speed taking precedence over everything else, including creating the institutional infrastructure needed to make a market economy work.
Fifteen years ago, when I wrote Globalization and its Discontents, I argued that this "shock therapy" approach to economic reform was a dismal failure. But defenders of that doctrine cautioned patience: one could make such judgments only with a longer-run perspective.
Today, more than a quarter-century since the onset of transition, those earlier results have been confirmed, and those who argued that private property rights, once created, would give rise to broader demands for the rule of law have been proven wrong. Russia and many of the other transition countries are lagging further behind the advanced economies than ever. GDP in some transition countries is below its level at the beginning of the transition.
Many in Russia believe that the US Treasury pushed Washington Consensus policies to weaken their country. The deep corruption of the Harvard University team chosen to "help" Russia in its transition, described in a detailed account published in 2006 by Institutional Investor, reinforced these beliefs.
I believe the explanation was less sinister: flawed ideas, even with the best of intentions, can have serious consequences. And the opportunities for self-interested greed offered by Russia were simply too great for some to resist. Clearly, democratization in Russia required efforts aimed at ensuring shared prosperity, not policies that led to the creation of an oligarchy.
The West's failures then should not undermine its resolve now to work to create democratic states respecting human rights and international law. The US is struggling to prevent the Trump administration's extremism – whether it's a travel ban aimed at Muslims, science-denying environmental policies, or threats to ignore international trade commitments – from being normalized. But other countries' violations of international law, such as Russia's actions in Ukraine, cannot be "normalized" either.
On César Chávez Day, lost in all the news about the Trump administration's criminalization and scapegoating of immigrants and attempts to withhold federal funds from cities with policies that protect immigrants, are the 450,000 low-wage-earning migrant workers employed in the United States through the H-2A, H-2B, and J-1 visa temporary foreign worker programs. Many of the workers in these temporary visa programs are in a precarious situation and vulnerable to abuse and retaliation at the hands of employers and their agents.
These "guestworkers" often arrive in the United States in debt, and are tied to and controlled by their employers. Research shows guestworkers are often paid lower wagesthan similarly situated U.S. workers, and earn wages similar to those of undocumented immigrant workers. This is reminiscent of the Bracero Program—a large guestworker program in the 1940s, 50s, and 60s that admitted hundreds of thousands of Mexican workers to work temporarily on U.S. farms and in other low-wage occupations—and which César Chávez fought against. Chávez knew that exploited, indentured, and underpaid workers would degrade labor standards for all workers in the United States, including immigrants. After scandals, political pressure, and President John F. Kennedy campaigning against it, the program was terminated in 1964.
Sadly, America has not learned its lesson. The United States is repeating an historical mistake, once again admitting large numbers of guestworkers in low-wage occupations. With the possibility looming that the Trump administration will reduce enforcement and oversight in guestworker programs—which will be further exacerbated if Trump's proposed 21 percent budget cuts to the Department of Labor (DOL) are enacted—the United States may once again face scandals like the one where the bodies of guestworkers who died in a traffic accident were not immediately claimed, because farm labor contractors and agricultural growers argued over who their employer was.
The administration has also repeatedly placed corporate interests ahead of workers. In addition to this week's announcement of a proposed delay of a rule to enhance workplace safety standards for miners, the administration has proposed delaying the implementation of the "fiduciary rule," which would require financial professionals to act in their clients' best interests when recommending investment products or strategies to people saving for retirement. The Trump administration's proposed delay of 60 days will cost workers saving for retirement $3.7 billion.
The Trump administration and congressional Republicans have already taken a number of actions that hurt workers and stack the deck for corporate interests. The Perkins Project Policy Watch will continue to track what they do and provide information on how their actions impact our nation's workers.
Technology policy has been a low priority for most voters in presidential elections in the post-war era. The most recent contest was no exception. Arguments about technology policy never made it into campaign commercials, to say the least, nor even a minute of the televised presidential debates.
So it goes.
Many denizens of the high-tech world did not expect Donald Trump to win, woke up to his triumph, and suddenly wondered what impact his new policies might have on their business. Needless to say to anybody who paid attention, his campaign was not much help answering those queries, since he was not very specific about his technology policy.
This column considers two nonpartisan questions. How will his (likely) technology policies affect the value of US firms in information technology markets? Details about policy should become known in the first half of 2017, and they suggest a second question: What details should an investor care about, as the new administration hashes out the details?
Let's start with trade, which was a visible aspect of Trump's campaign. He expressed dissatisfaction with the position of the US in the world trade system. He focused on the exit of jobs in footloose manufacturing industries, the North American Free Trade Agreement (NAFTA), and China's mercantilist actions. What can changes in trade policy do to IT firms? At a general level, every large US tech firm is integrated into the world framework for trade, so tearing up the system could cause considerable damage.
Generally speaking, every large US firm sources inputs from outside the US and sells final products outside the US. Every major software firm uses programmers in the US and outsources some amount of work to programmers outside the US, and, again, sells their products to buyers outside the US. That goes for Apple, Cisco, IBM, Microsoft, HP, Oracle, Google, Facebook, and on and on. These firms will lose market share and profits if the costs of inputs and labor increase, or if the number of the potential buyers declines.
Since Trump's populist antitrade tirades conflict with his generally pro-business attitudes, we should expect quite a fight inside the administration over the practical details of trade policies. Whether input and labor costs will increase, and how much, and whether market buyers will decline, and how much, cannot be determined until those details get set.
As for Trump's dissatisfaction with Chinese mercantilism, most experts predict that his confrontational policy will go nowhere. I find these experts so persuasive that I'll take a bet—$100 to your favorite charity or mine. You win if a major US IT firm improves its mainland Chinese market share in the next four years.
Beyond that, one additional trade question is worth watching. Several US firms, including Cisco, IBM, Google, Apple, and Facebook, have a large foreign presence and would like to repatriate their foreign earnings as US dollars without paying taxes. The Obama administration refused to initiate such a tax holiday, and Trump might think differently. That would move stock prices if implemented.
That adds up to a big unknown for firm values. The value of virtually every US-based IT firm depends on the outcomes of these policy debates. That supports an approach for investors: expect volatility across the entire sector and adopt investment strategies to hedge against it.
During the campaign Mr. Trump focused hostility toward immigration. Attention was directed at unskilled immigrants from south of the US border, as well as those from nations with Muslim majorities. Quite frankly, if immigration from Mexico slows, then industries other than high technology—such as agriculture, service work, and construction—will be most affected. It is hard to see any direct effect for IT firms arising from that type of policy.
What if the US (deliberately) started processing visas from Muslim-majority countries with more laborious delays? It would affect the visits of foreign executives from countries such as Dubai, Saudi Arabia, and Malaysia. That might affect boutique tourist and consulting businesses, but that touches only the edge of US IT firms.
Investors should focus on policies for high-skill immigrants. Every major high-tech firm employs high-skill immigrants, and this group comprises founders for many venture firms. Many high-skill immigrants have master's degrees or PhDs from US universities. The present system works reasonably well for those with degrees.
Drastic changes—such as slowing the granting of visas and green cards to those with degrees—will slow down innovation in the commercial IT sector. That holds for virtually all US IT firms, so any slowdown hurts investments across the sector.
One aspect of high-skill immigration is difficult to forecast—namely, changes to the system for H1-B visas. The H1-B system is already rather constrained, and nobody expects that the Trump administration will try to reform it. More to the point, any tighter limits would hit a few firms hard. Will that happen? It is hard to say right now. Investors have to watch and wait.
Research and Development
A new administration also can change policy for R&D. Although it's less visible to the average voter, the US government is the single largest funder of basic science and also a large funder of experiments in applied science.
This matters to US IT firms, who have benefited from this funding in the past. For example, new network engineering, search engines, AI, and robotics can trace their invention to federal funding. In addition, many computer scientists got their first experiences on projects funded by this federal money, which effectively subsidized US technology workforce training.
There is no reason to expect the emergence of additional technologies to be any less sensitive to federal funding, so changes to the funding level at DARPA and the National Science Foundation are key budgets to watch. The same goes for R&D funding at the National Institutes of Health, NASA, and the Department of Energy, which also support R&D that works its way into commercial IT products.
That adds up to a straightforward forecast: If the budget for R&D at these agencies declines, that is bad for the whole sector. Drastic cuts slow down innovation, whereas growth speeds it up across the entire portfolio.
The administration can have immediate impact through staff and personnel appointments to agencies that make commercial policy for high tech. For example, most observers expect the administration to appoint directors to the Securities and Exchange Commission who oppose government actions. Expect government regulators not to stop Wall Street banks from returning to the kind of self-serving (and sometimes unethical) actions observed in the 1990s during the IPO boom. Frankly, I think this will be bad for the US startup economy.
Investors also should expect the Federal Communications Commission (FCC) to appoint decision makers who will not intervene in Internet markets. Net neutrality will not be enforced, and many other recent initiatives will be reversed, such as those aimed at opening up the set-top box for cable television.
That will raise the value of big cable firms, such as Comcast, and other carriers, such as Verizon, because it will give them the upper hand in negotiations on a range of issues, such as zero rating, interconnection fees for moving data into ISP networks, and collocation fees for content delivery networks. Again, frankly, I think this will be bad for the value of content firms with big data applications, such as Netflix, YouTube, Facebook, and venture capitalists backing new streaming entrants.
Antitrust is a more ambiguous area. The Obama administration let 99 percent of mergers go through, and that will continue. The only open questions concern big mergers.
Watch the early test cases for clues about the general approach of the new administration. On the campaign trail, Trump expressed dismay about the proposed merger of AT&T and Time Warner, but most of his circle of advisors are hostile to blocking mergers. So, the outcome to that merger proposal will show a lot. Another test case could be a proposed merger between T-Mobile and Sprint, which the Obama administration's appointees talked down before it was formally proposed. Will management attempt to resurrect it? We'll have to watch and wait.
Also watch the administration policy in privacy, which the FTC took a lead on in the last few years. The issues are varied, subtle, and difficult. The policy outcomes make an enormous difference to product design and the operations of many firms, especially those in online advertising and healthcare. Again, investors will have to wait and see.
Similarly, Apple faced a quandary protecting privacy when it negotiated with the FBI about breaking into an old iPhone. The FBI learned of another way into the phone, so the broad issues never got resolved. The Obama administration sided with law enforcement, and Trump did too (even calling for a boycott of Apple). Expect more volatility from these issues. It is a wild card for values at many firms.
Overall, Trump's policies look like a mixed bag for the value of many US IT firms, and contain many dangers. This much I can forecast: most savvy tech firms woke up the day after the election and added staff to their Washington lobby organizations. The cynic in me also expects the Trump administration to try a quid pro quo, such as offering a tax holiday as a bribe to gain silence on other issues.
That suggests a somewhat partisan forecast. I do not expect that most CEOs want their issues to be invisible in the next election. I also expect their stance next time to depend on their experience in the next few years.