What We Learnt From The Tianjin Tragedy

WASHINGTON – More bad economic news from China. Notwithstanding highly publicized official support for the stock market, after a few days of relative calm, the Shanghai Stock Exchange took another serious hit.

Shanghai Index takes another hit 

On August 18, the Shanghai Index lost more than 6%. this would be the equivalent of the US Down Jones index losing about 1000 points in just one day. (Analysts call losses of 200 points or more pretty bad. Losses above 300 really scary. Imagine 1,000). In early trading the following day the market extended its losses by another 3%.

Government actions ineffective 

This -6% (possibly -9%) hit is especially bad because the government is now officially committed to supporting share prices through a variety of interventions. Indeed, because of these well advertised actions, one would think that the smart investors should stay put, or may be buy some more stocks. “After all, these shares are guaranteed by the government. They must be a safe investment”.

Well, it seems that heavy government interventions are not enough. And this is bad. Apparently, average Chinese investors do not believe that the all-powerful government can deliver. Just think about for a moment of the possible political ramifications of this new belief, should it become entrenched. “The Chinese government cannot deliver on its promises”.  

The Tianjin tragedy

On a separate but related note, we have seen the catastrophic chemical explosion in the city of Tianjin. Hundreds of people dead. Many more wounded. Extensive damage to properties. Thousands of imported vehicles ready for final delivery destroyed. And now the danger of additional contamination brought about by the chemical reactions of the released compounds with rain.

Let’s be clear. The issue in Tianjin is not the accident itself. Sadly, there are plenty of major industrial accidents all over the world, including in the United States.

But here is the difference. Usually accidents are caused by human error, or negligence. In some cases they are caused by someone deliberately cutting corners in one particular instance.

Broken laws

Tianjin’s case is different. In Tianjin there are permanent warehouses containing extremely large quantities of hazardous, potentially flammable or explosive material located within populated areas. Both the location of the warehouses and the amount of hazardous material stored in them are in open contravention of existing Chinese laws that prescribe that such facilities must be at a safe distance from homes, businesses, or high traffic areas. The laws also prescribe how much material can be safely stored. Well, the laws are there, but they have been ignored, most likely because some public officials have been paid to ignore them.

So, here we are not talking about someone making a fatal error in a particular instance. This is about a practice of routinely  breaking or circumventing laws and regulations, thereby creating a systemic risk. Therefore this horrible accident is not about what someone did one day. This is about what many people conspired to do over many years, with full knowledge of the hazard they created. 

Not just in Tianjin

Where am I going with this? Very simple. It would be naive to believe that this deliberate circumvention of established safety procedures somehow is confined to some unscrupulous public officials and influential business people in the city of Tianjin. Bribing officials is common practice in China. Everybody who can will do it, if they think this is necessary in order to safeguard their economic interests.

And this means that warehouses that contain hazardous material are in the wrong places. Materials that do not meet safety specifications are used in buildings. Dangerous additives are illegally used in processed food. Toxic waste is dumped everywhere. Information about pollution levels in soil, water or air is unavailable or unreliable.

False data 

And, yes, talking about shady practices, economic data is routinely manipulated to make it look better. But, somehow, it is not polite to point out this practice of deception. When really bad economic news from China comes out, some Western analysts (at best) cautiously say that “May be the underlying situation is worse than what the more optimistic official data would indicate”. Well, let’s be real. What they really mean to say is that we have been fed false data. And now the facts prove it.

In the case of the illegal warehouses in Tianjin it took a massive tragedy to expose the ugly truth of routine violations of elementary safety rules.

What will it take to expose the deception of official economic statistics containing manipulated data?

 




China Is Slowing Down – Old Model Not Working Anymore

WASHINGTON – We all know that the Chinese economy is slowing down. But we do not know all the facts. The picture may be much darker than what we can get from official statistics. It would seem that recent growth has been financed by large debts. Much of this debt will not be paid back because the money went to pay for ill-conceived projects. Local governments created large liabilities in order to finance development projects for which there is no market.

The Chinese economy is losing altitude

In order to shed some more light on these issues I reproduce here excerpts from a longer article that appeared in the English language version of Caixin, a Chinese publication, (Will Slow and Steady Win China’s Economy Race? By Yu Hairong, Xing Yun, Wu Hongyuran, Zhang Yuzhe and Wang Liwei, March 18, 2015).

 “The government said the gross domestic product growth rate sank to a six-year low 6.8 percent in January and February. Figures for those months came in far short of the average 7.7 percent forecast by economists from 14 financial institutions previously surveyed by Caixin. Fixed-asset investment growth and lending growth slowed as well during the period.”

“Early-year GDP growth also came in below the 7 percent target for 2015 set by the government, as spelled out in an annual report on the government’s work delivered by Premier Li Keqiang on March 5 to the opening session of the National People’s Congress.”

“Officials have acknowledged this year’s slow start in the context of what Li and others have called the “new normal” for China’s economy. GDP growth for “the first quarter will be below 7 percent,” said Zhu Baoliang, director of the economic forecast department of the State Information Center (SIC), a government research agency. The government is pressing forward with transformational economic reforms, but pressure to modify the official approach to these long-term changes has been building as slowing growth affects banks, the overall business climate and local government finances.”

“Pressure is building as the real economy turns downward,” said Xu Gao, chief economist at Everbright Securities. Zhu said how quickly the government is able to strike a balance between the slowdown and economic stability will largely depend on the ability of policymakers to maneuver and adjust fiscal policies.”

“Only in recent months has the Chinese business sector started to feel the full impact of a reform-related campaign to reduce the economy’s heavy reliance on what used to be ever-higher levels of fresh investment.”

“One sign of this impact is reflected in industrial value-added output, a measure of industrial production, which increased 6.8 percent during the January-February period compared to 8.6 percent for the same period last year. Nationwide, fixed-asset investment growth also slowed, increasing just 13.9 percent, down 1.8 percentage points compared to the first two months of 2014. A macro-economic analyst at Haitong Securities, Jiang Chao, predicted industrial value-added growth would fall to 6.5 percent in March. Other recent indicators of a changing business climate since the beginning of the year include reports of declining consumption of coal by power plants and slipping prices for manufactured steel.”

 “A Shandong Province city official overseeing local business investment who asked not to be named said that many small and medium-sized companies decided to suspend or delay investment projects earlier this year. These companies, which contribute significantly to local economies, have had tight capital chains.”

“Banks, which finance four-fifths of the country’s economic growth, are lending more cautiously. Credit is still available, but more thought is going into credit-issuing decisions. “The most important questions revolve around finding assets with good prices and controllable risks,” said the president of a commercial bank who asked not to be named. Risk control has become increasingly important in light of increasing numbers of bad loans. The China Banking Regulatory Commission (CBRC) said that as of December 31, the nation’s commercial banks were saddled with 842.6 billion yuan worth of non-performing loans. That amount was up 42 percent from the beginning of 2014.”

“Bad loan ratios are higher in some regions than in others. Government data show that for banks in the coastal provinces of Zhejiang and Shandong and in the interior provinces of Sichuan and Henan the average bad loan ratios are around 2 percent. The figures for banks in Shanxi Province and the Inner Mongolia region, both in the north, are about 5 percent. A manager at China Merchant’s Bank said that its Sichuan branches are seeing an increasing number of bad loans. He blames the rise on the area’s private lending network, heavy investment climate and the government’s anti-corruption campaign. Yu Xuejun, chairman of the Supervisory Board for Key State-Owned Financial Institutions at the CBRC, said that bad loan rates are rising at a faster pace than in the past, “regardless of the region and bank.”

“Moreover, loans to businesses in the commodities sector have been drying up due to risks tied to slumping prices for a variety of basic commodities, said a source at a joint-stock bank.”

“Local governments are also facing credit pressure. Since last year, several governments, including those in Shanxi, Heilongjiang and Liaoning provinces, have reported declining revenues due to sluggish business for coal and steel companies crucial to their economies. Liaoning’s government reported a 4.6 percent decline in 2014 revenue from the previous year. A bond market source said that the Inner Mongolia government’s financial position is quickly deteriorating due to declining coal prices. In February, the local government in Yijinhuoluo Qi, near the city of Ordos, had to borrow 20 million yuan from the central government to pay employees working on government-backed projects.”

“A nationwide review of government debt ordered by the Ministry of Finance found that as of January 5 local governments had a combined 40 trillion yuan in liabilities. But that figure may be low because in late January the ministry found some data was falsified by local governments. [Bold added] A revised report was expected to be released in March. Local government platforms that borrowed money for infrastructure and other projects are a particular concern. In the eyes of a Shanghai bank executive who asked not to be named, the “local financing platforms’ default risks are much greater than imagined.” One reason, he said, is that “many governments repackaged old projects into new ones in order to obtain bank loans.”

“The Ministry of Finance also set a quota of 1 trillion yuan in debt that local governments are allowed to convert from expensive loans into low-interest rate municipal bonds. The move was designed to help the governments finance new projects.”

The glitter is gone

So, here is the picture. China’s GDP is growing less than official forecasts had predicted. Industrial production is down. In all this, many local governments need to be bailed out because of bad economic development decisions that led to “malinvestment” and high debt. That financial hole may be a lot bigger than early figures had indicated.

What do we make of all this?

A safe conclusion is that China’s golden moment is over, because much of it was fake. GDP growth was spurred by a construction boom that turned out to be a bubble, because there is no real demand for all this debt-financed development. In the meantime, the country created an absurd level of over capacity in all the industrial sectors that support construction and infrastructure development. Many local governments got into big debt to finance big projects that have no economic rationale.

Beijing will pay all the bad debts

As bad as this looks, China is not Greece. We can rest assured that Beijing can manage all this. The Chinese state has gigantic cash reserves that can and will cover all the existing bad debt. But this is a small consolation.

The bad news is that the current scenario indicates the end of an era. The old economic development strategy does not work anymore. A new model that will see a shift from capital investments to more consumer spending has been talked about, but is not operational.

The best I can think of is that, absent huge economic gains stemming from truly innovative sectors, China will go down to average emerging market growth rates of 4 to 5% a year. This is China’s “new normal”. And it does not look that great.

 

 




Impossible to Bring Back To the US Old Industries –Focus On New Technologies

WASHINGTON – An interesting story in the WSJ focused on how some US companies are looking at the prospect of bringing back to America the production of items that they outsourced to China. As the article explains, the advantage of lower Chinese labor costs is becoming less compelling. Wages for Chinese workers, while still substantially lower than prevailing US wages, are going up. Besides, the introduction of more and more automation in US manufacturing operations is making labor costs less important.

Cheap electricity

On top of that, the US natural gas revolution (thanks to shale gas) has created a new American competitive advantage when it comes to the cost of electricity. US factories now enjoy lower energy costs, thanks to relatively low electricity rates. Which is to say that America has become more competitive when it comes to establishing here at home new manufacturing operations.

We outsourced the supply chain

This being the case, why is it that most of what we buy is still made in China? Very simple. Over time, we did not just outsource to China the manufacturing of this or that item. We have outsourced all the supply chains.

Today, a Chinese manufacturer that has ben entrusted with making small domestic appliances for a US brand benefits from a complex, highly sophisticated network of suppliers and vendors, quite often located in the vicinity of his factory, who will provide the electric motors or circuitry –as needed– according to precise specifications. Furniture makers have their own networks of companies that will produce and deliver upholstery, paint or knobs. Within China, these suppliers networks operate quickly and efficiently.

Impossible to recreate sectors long gone

We do not have this in America any more. And this reality of a much diminished industrial eco-system illustrates the difficulty to bring back to America the production of specific manufactured items.

For example, if we are talking about small domestic appliances that require electric motors, well, nobody makes these motors in large quantities in the US any more. Recreating from almost zero an industrial base that could then supply new “insourced” manufacturing would be a really daunting effort. For this reason, the US brands will continue to have their blenders and hair dryers made in China, even if Chinese costs over time will keep going up.

So, here is the picture. Given low electricity costs and reduced reliance on manual labor, some outsourced manufacturing may be brought back to the US. But only some. China is now a reliable industrial products supplier, because the entire supply chain for most consumer products migrated to China long ago. It is now firmly established there; and it works. We cannot transplant it back to the US. This may be desirable; but it is impossible.

Focus on new technologies

What we can do instead, is to establish here in the US the solid foundations for brand new products that do not rely on established supply chains. New technologies, new products, a new industrial base. But let’s forget about yesterday’s consumer electronics or household appliances. They are gone –for good.

 




Hollande’s Poor Efforts At Attracting Foreign Investors To France

By Paolo von Schirach

February 18, 2014

WASHINGTON “France is not afraid to open itself up to the world. We realize that the mobility of investment is part of making a country successful”. This is what French president Francois Hollande recently said to an audience of high-caliber international corporations assembled in Paris to listen to his sales pitch. Well, if this quote indeed captures the substance of Hollande’s message, the picture is depressing, if not outright scary. You do not lure foreign investors by saying: “We are not afraid of you, really”.

Low taxes

Sure there is more. Hollande talked about tax advantages for investors and new measures aimed at making it is easier to set up shop in France. Well, thank God for that. But, guess what: any government worth anything, from Georgia to Vietnam, is already doing all this. Foreign investors expect a “one stop shop” investment promotion agency that will make it easy for them to get established. They expect quick registration of their business. They expect a competitive taxation regime. They expect labor legislation and norms that will make it easy to hire workers and dismiss them, if necessary.

This is a great country

What would make investors pay attention is a pitch that would focus on what a great place to do business France really is. “We have a highly educated, English-speaking, sophisticated work force. We have some of the best research  universities in the world. They nurture the best scientists, engineers and business managers. We have excellent vocational training facilities that will provide the best workers. We have state of the art telecommunications and infrastructure. Make France your hub, the center of your value chain and supply chain, and you will prosper because we offer you proximity to your markets and to your key suppliers. And, best of all, we can guarantee the best quality of life. Here you have safety, affordable housing and first class education for your children, and of course, superior culture, beautiful nature and entertainment.”

You are better than anybody else

Now, assuming all this were true, this would be a real sales pitch. You get investors to pay attention only by stressing how great you are, and not by telling them that, in truth, you are not afraid of them and that “France is going to become simple”. No, Mr. President. First you make France simple and extremely attractive; and then you advertise it as a great place to do business.

Only those who have needed high-value commodities do not need to promote themselves

The only countries that do not need to make a special effort to lure foreign investors are those that can produce scarce and valuable commodities desperately needed by international markets. They can rest assured that investors will come to them, no matter what. But if what you offer is a mostly a good location, it has to be really great. Or, at the very least, it has to be a lot better than what your neighbors or other potential competitors around the world can provide.

First you create a true investor-friendly environment, and then you advertise it

Getting rid of legal, immigration and administrative obstacles that discourage investors is a good start. But it is only a very modest start. The truth is that France is a sick country that grows only a little, while it contemplates the erosion of its past competitiveness. If president Hollande really believes that by saying “We are not afraid of you” investors will come in droves, he needs better advisers.

 




Matteo Renzi To Lead Italy Out Of The Swamp Of Terminal Decline?

By Paolo von Schirach

February 13, 2014

WASHINGTON – And so Italy is getting a new Prime Minister. Matteo Renzi, head of the Partito Democratico, will replace the incumbent, Enrico Letta, also of the same party, because now, as party leader, he believes that it is up to him to lead the nation as well.

Party Leader and now Prime Minister

In principle this sounds reasonable. Matteo Renzi went through an open and transparent primary process within the Partito Democratico just a few months ago (December 2013) from which he emerged as the clear winner, outdistancing other contenders by a large margin. Indeed, he got an impressive 67.6% of the votes cast.

Given Italian political practice, it is entirely reasonable that the triumphant leader of the biggest party within a ruling coalition would also aspire to become the Prime Minister. With some grumbling, Enrico Letta recognized this reality by resigning. And so, the boss of his party gets the top job, (even though he was not elected by the nation, but only by his fellow party members). Fair enough.

Modest chances of success

That said, the notion that an energetic, good-looking new party leader –Matteo Renzi– now Prime Minister, will engineer the radical transformation Italy badly needs is not just a dream, it is a laughable proposition. And this is not about Renzi’s leadership and vision. He may have it. This is about Italy.

Sadly, the country is semi-comatose. It takes a heroic level of optimism to believe that a clear-headed young leader –assuming Renzi is all this– will get the country out of the swamp, rekindle innovation, investments and enterprise and re-generate hope and enthusiasm.

Terminal decline

Italy has been losing ground for about 10 years. The global recession simply made things worse. The national debt is now at 133% of GDP. Its unemployment rate is at 12%. Youth unemployment is at 40%. Most alarmingly, the best and the brightest leave, or have already left the country, seeking better opportunities elsewhere.

Beyond fashion, wine, olive oil and Ferrari luxury vehicles, Italy has no leadership position in anything. No major players in high-tech and electronics, only a second or third tier player in aerospace. Worst of all, Italian companies do not invest much in R&D, nor are there any significant public sector funds allocated to this critical area. And, please, do not forget organized crime: Mafia, Camorra and ‘Ndrangheta being just the best known branches. Finally, in case this is not enough, Italy is one of the most corrupt countries in the western world, with dismal positions in the universally respected Doing Business rankings compiled each year by the World Bank.

Fertility crisis

Beyond that, consider the fertility rate collapse, (1.4 children per woman). This well consolidated trend indicates that Italy will soon be a geriatric ward. Lots of old people who get pensions and medical care, with very few active people supporting them.

You want more? Tens of thousands of desperate illegal immigrants land in Italy every year, coming mostly from the poor Maghreb and sub-Saharan Africa. And, with due respect, these are not the equivalent of the bright, highly educated PhD. holders coming to America from India and China who then create successful start-ups in Silicon Valley.

How can anyone do well trying to run Italy?

Newly minted Prime Minister Matteo Renzi may have vision, and he may turn out to be a passionate national leader. I wish him well. But at least on the basis of what we know, there is no reason for enthusiasm. Please note that, keeping up with a well established, if pernicious, Italian political tradition, Renzi is another full-time political operative.

In plain language: he never run anything in the real world. He never had a real private sector job. He rose fast from local politician to national leader. But this is all within a political party. This is not about his ability to run anything in the hard world of industry, competition and globalization. His current job is Mayor of Florence, a second or third tier Italian city of 370,000 people who stopped producing anything interesting about 500 years ago. Yes, it has been a long time since the days of Michelangelo.

Party functionary

So, who is Matteo Renzi? A party functionary who got to the top leadership because he is a good politician, at least within the context of his own party. Does this mean that he understands modern capitalism, supply chains, the role of IT, competitiveness and globalization? And what about the urgent need to drastically reform gigantic entitlements, invest in education and strategies to attract precious foreign investments?

Does he get all this? Do the people around him get all this? I hope he does. I hope they do. But I doubt it.

Mission Impossible

Look, governing a large post-industrial democracy is very difficult, even when things are going well. Trying to get Italy out of its historic decline will take more than speeches and bold slogans. It will take a credible, sustainable action plan that has the long-term and sincere buy-in of most key constituencies: capital, labor, the now dispirited young, public servants, retirees.

I wish Matteo Renzi best of luck. I mean it sincerely. But this is “Mission Impossible”.




3 D Printers Are Amazing; But They Also Tell Us That Factory Jobs Will Soon Disappear

By Paolo von Schirach

January 29, 2014

WASHINGTON – We know a lot about the dark side of globalization. Information technology, plus improved and low-cost logistics allowed a gigantic shift of most manufacturing activities from high labor cost Europe and America to low labor cost Asia, first and foremost China. And so, thanks to the new opportunities to outsource manufacturing created by globalization, Europe and America lost millions of jobs.

Old jobs are gone

Most of these jobs are gone –for good. And that’s the way it is. Some politicians try to gain points by blaming “evil” corporations that “choose” to export jobs to low-cost countries. This argument assumes that there is indeed a choice. Sure, how would you like to make T-shirts in North Carolina that would retail at $ 10 or 15 a piece when the same T-shirt made in China or Bangladesh retails for $ 5? Which company can stay in business with competitors selling essentially the same product at half the price or less?

More to come

Be that as it may, we have not seen the end of this tale. In fact, today’s Asian winners may be tomorrow’s losers. Picture this. If you are a Chinese migrant worker who left poverty in a rural village seeking a better life as a factory worker, your luck –such as it is, as working conditions in Chinese factories are grim– may end soon. In part it may be because your Chinese employer may want to relocate the factory to another country (Cambodia, Bangladesh) where labor is even cheaper. But most likely you may soon be unemployed because technology will cause your job to simply vanish.

Amazing 3 D printers

This is no exaggeration.  You may have read about 3 D printing. Well, at the moment this futuristic technology that allows you to literally “make” objects at home, without the support of a small factory or workshop, is still in its infancy. But it is getting better every year. Primitive 3 D printers could only make simple plastic parts. Now they can make metal parts. Soon enough they will be able to make fully functioning complex products.

Want a toaster?…

So, imagine this. Today here in the US, if you want to buy a toaster you go on-line and look for a good product at a good price. You find one on Amazon. In just a few minutes, you can place your order and complete your transaction. Your toaster will be delivered to your door by UPS or FedEx in just a few days. Low cost, simple, clean an efficient.

Your toaster was made in China by the migrant worker mentioned above who had left the village seeking a better life. It was shipped to America inside a container that had been loaded onto a mega container ship that landed in Los Angeles. Then the  container was moved by rail or truck to a large warehouse managed by Amazon. When you place your order on-line, the toaster you selected is placed on a plane or truck and delivered to you via UPS, FedEx or US Mail. The chain that begins in a factory in China and ends up at your door is long and complex. But it is lean and efficient.

…Make it at home

OK, fast forward to tomorrow. Tomorrow you will have at home a new generation 3 D printer that can actually “make” the toaster. You want a new toaster? You go on-line and you buy the specs for your toaster that are included in a  software package. You download the specs into your 3 D printer and the printer “makes” your toaster. Sounds far-fetched? Not really. We are not there yet. But we are getting there, probably sooner than we can all think.

No more jobs

If this is indeed the future, imagine all the implications. The implications are that the factory in China that makes the toasters is redundant, and so are all the people employed there: workers, supervisors, managers, janitors, you name it. Furthermore, the complex logistics network necessary to move the toaster from the Chinese factory into a container ship and then to the Amazon warehouse is also redundant. And that means that all the people who support it are redundant: from the shipyard workers who make the container ships to the truck drivers who move the container from port to its final destination. And this is not the end. FedEx and UPS, whose business is mostly about moving all these boxes with toasters, TVs and hair dryers in them, become redundant.

You get the picture. When your home is the factory, all the factory jobs and all the services jobs necessary to move products from A to B will vanish. We are not quite there yet. But this is the future.

Is the future really great?

The techno-enthusiasts claim that all this is great. They confidently predict that, while old jobs vanish, new jobs will be created to support the new amazing technologies of the future. May be. But what happens if there is a 10 year time lag between the vanishing of traditional manufacturing jobs and the opportunity to create new ones? For 10 years former factory workers will be unemployed or under employed. And, later on, many of them, (if not most of them), will lack the skills to work on the new technologies that have replaced the old factories.

The “Luddites” fight back; but they lose

And so a gigantic economic transformation brought about by truly disruptive technologies will become a social and political problem. Long ago, the “Luddites” in England fought against the mechanization of the textile industry by destroying the new machines that were displacing manual workers. But it was a losing proposition. The machines won. They always do.

Who takes care of the losers?

When the new machines will take over, what will happen to all the displaced workers? Who will take care of them? We better have  a plan, because very soon many societies will have to deal with this problem.




Cheap Energy Makes America More Competitive

By Paolo von Schirach

September 30, 2013

WASHINGTON – Does cheap energy make a difference when it comes to economic competitiveness? You bet it does. The Financial Times, (Eon chief warns Europe on energy gap with US, September 30, 2013), quotes Johannes Teyssen, CEO of  EON, a German energy company, saying that: “there is a  competitive advantage for America that we cannot prevent, at least for some time…It is a dream for politicians to suggest otherwise“. America’s energy edge is in part the fruit of geology (plenty of shale gas); and of Yankee ingenuity, (nobody thought it was possible to extract gas from shale and make money).

Germany’s electricity is too expensive

The funny thing here is that policy makers in Germany, using subsidies and other incentives, pushed hard to get more energy from solar, this way trying to be both modern and “green”. Well, this policy has driven up the cost of electricity, and so Germany’s energy intensive industries are looking for opportunities to relocate to the US because the shale gas boom has made American electricity very inexpensive. Meanwhile, “green” Europe does not have enough of its expensive renewable energy; and so it has to rely more on old-fashioned, dirty, high emission coal, this way increasing green house gases emissions.

Being “green” is not so good for the economy

The paradox here is that supposedly immoral America, the country where business people would do the worst things in pursuit of immediate gain, is actually reducing carbon emissions. Yes, abundant US shale gas has displaced coal, and this means more cleaner burning gas-fired power plants. “Green” Europe, the Continent where concerned citizens really think a lot about global warming, is actually increasing CO2 emissions because of misguided energy policies that subsidized expensive renewable energy, this way displacing natural gas.

 




Only 63.2% Of Americans In the Work Force, Lowest Figure Since 1978 – Fed Policies Cannot Change This Trend

By Paolo von Schirach

Related story:

http://schirachreport.com/index.php/2013/09/02/disruptive-technologies-like-3-d-printing-will-kill-millions-of-jobs-can-we-adjust-to-this-new-era/

September 8, 2013

WASHINGTON – Lacking any significant public policy initiative focusing on the never healed US economy, most analysts have become Fed watchers. The only game in town is guessing if and when the Fed will phase out QE3, (quantitative easing), and if so, how fast and what it will mean. Such a move will have an impact on interest rates. In fact,  belief that the Fed will soon stop the easing program as US employment slowly trends down has already caused long-term interest rate to go up.

 Fewer Americans are working

Still, whatever action the Fed will undertake on QE3, the most recent employment data underscore a negative historic trend; and I am not sure that Ben Bernanke and his Fed colleagues sitting in the policy making Federal Open Market Committee, (FOMC),  can reverse it just by manipulating interest rates. 

Simply stated, while unemployment is going down (we are at 7.3%) and more jobs have been created in August, (plus 169,000), the broader trend shows that fewer and fewer Americans are now in the work force. Even worse, fewer and fewer young adults have a job.

Indeed, the percentage of Americans now employed is the lowest it has been since 1978, when Jimmy Carter was in the White House, and far fewer women were in the labor market. Furthermore, looking at the data, we see that the percentage of Americans aged 16 to 24 now working is only 54.8%, down from almost 70% in the 1970s.

Young people without a job

Sure enough, there may be fewer young people in the work force today because more of them are in college. Still, many analysts conclude that this huge drop indicates that far too many young Americans cannot find a job. And the longer they are out of work, the harder for them to find employment in the future.

Likewise, it is clear now that the lower unemployment numbers (we are down to 7.3%) are deceptive,  because the drop is largely due to people who simply stopped looking for work and therefore are no longer counted. Add to this picture the large number of workers who have accepted part-time jobs while seeking full-time positions and we get a rather sad outlook.

People out of the job market

So, here is the future, for a large number of unskilled or semi-skilled  Americans. We have a large army of unemployable people, young and old, while many if not most openings are in low skills, low wage sectors. In simple language, for millions of Americans there is no longer an open road leading to the American Dream. No upward mobility. No career ladder. No comfortable, middle class life style.

Can the Fed, all by itself, change  any of this? I doubt it. Low interest rates may help stimulate economic activities; but they cannot become a substitute for fundamentals.

Well, if so, what is missing in America?

Jobs killed by globalization and automation

No easy answer. Still, I see at least two trends, both of them negative. The first one is a combination of the impact of globalization and automation. The net outcome is loss of employment due to the migration of jobs to low wage countries, (globalization), combined with employment lost due to increased deployment of computer controlled machines and more sophisticated and more affordable robots, (automation). In other words, especially in manufacturing, you lose your job because it went to China, or because a robot now can do what you used to do.

Inadequate public education

The second trend is the lowering of education standards in America, right when we would need a powerful national surge to boost the reach and the quality of public education. Indeed, precisely because everything is becoming more and more high-tech, whatever good jobs opening there will be in the immediate and long-term future, they do and will require sophisticated expertise. And there is no way to land one of them without command of math and science, and therefore the skills necessary to master complicated programs and state of the art computerized machines.

The automation trend is ongoing and unstoppable. As a result, while we may see a stronger US manufacturing sector –and this is of course good news– do not expect employment growth as a result. Factories do and will employ fewer and fewer people, even as they experience higher demand. In fact, in the not so distant future we shall have completely automated factories, with no workers.

Combine this historic trend with localized production thanks to 3 D printing (see link above to a related piece) and other innovation, and we can start predicting the eventual disappearance of factory jobs. Hard to say how long it will take, but we are headed that way.

Of course, we could do a lot more about improving public education, and indeed there are many initiatives. But it seems that we are still way behind, without any real sense of urgency backing new undertakings. Lacking significant progress in this crucial area of “human capital build up”, millions of young (and poorly educated) Americans will be left behind and unable to catch up in this fast-moving world.

The future belongs to the super skilled

Education is indeed most critical. Looking ahead, it is clear that the only way to get a piece of the future is to be highly skilled —in fact, make that super skilled.  The future belongs to the smart innovators, to those who will create new things, new services or new processes, and many others who will support these efforts.

The others will get the scraps. Sure, we can imagine that even in the future there will be a need for janitors, nursing home staff, store clerks and landscape workers. But those will be, as they are today, mostly dead-end jobs.

 

 

 




With A Slowing Economy, China Is On Its Way To Becoming A “Normal” Country

By Paolo von Schirach

July 15, 2013

WASHINGTON – If you listen to Beijing Government officials, everything in China’s economy is moving along according to plan. And the plan is to rely less on growth led by fixed investments and exports, while boosting domestic consumption. Turning things around in the second largest world economy may take a while and, understandably, there may be some small shock waves here and there. But China’s leadership will eventually manage to steer the country in a new direction, based on sound, self-sustaining foundations.

Extraordinary growth may be over

Well, this may very well be the intent. But it is not at all clear that the Chinese Communist Party leadership is in total control, while there are indications that the economic fundamentals may be far weaker than the official statistics would suggest.

China’s incredible rise was built essentially on two strong pillars. The first one was construction, including an incredible modernization of all key infrastructure, (ports, airports, highways, high speed rail). The second one was export-led manufacturing made possible by a few factors: public policies favorable to investments in new plant and equipment, ultra-cheap labor provided by migrant workers coming from the impoverished country side, and the vastly improved infrastructure backbone mentioned above. Chinese factories could produce cheaply and deliver fast to their overseas customers.

Construction sector and exporters

The fact is that these two basic ingredients may not work as well as before. Construction turned into overbuilding largely led by speculators. Now, there seems to be over supply. So, expect far less construction and therefore less business for the many sectors that supplied the construction sector.

The export led boom worked extremely well in its early stages of China’s take-off, when it was all about penetrating and conquering new markets. But all this has been done. Therefore it would be foolish to expect the same levels of export growth that Chinese toy or small domestic appliances manufacturers experienced in the 1990s. Besides, China’s cheap labor advantage is slowly but surely evaporating.

Besides, and this is a key new issue, in order to keep let alone grow their export markets, going forward China’s manufacturers will have to compete on quality as opposed to just price. And this promises to be a lot more complicated. Creating and nurturing innovative enterprises with cutting edge technologies is a lot more complicated than mass producing cheap coffee makers for Wal-Mart.

Shadow banking

On top of all this, we now know –even though only vaguely– that there is a huge Chinese shadow banking system, escaping regulations and controls, that is over exposed to a massive amount of bad loans. How much money is involved, nobody really knows. But it looks as if the Government will have to intervene in order to prevent major financial shocks.

The environment has to be fixed

Last but not least there is the urgent need to fix the environment. 30 years of growth, no matter at what cost, have caused enormous damage. Official studies now estimate that people living in the Northern part of China, on average are losing 5 years of life on account of maladies caused by pollution. This is a lot more than a nuisance. It is a crisis. And it will have to be addressed swiftly. The logical corollary is that large amounts of capital will have to go into cleaning up the mess. Therefore it will not be  available for other purposes. 

The real facts still unknown

Mind you, this assessment is an approximation based on partial and perhaps inaccurate data. We do not know how many construction firms in China have gone bust. We do not know how many state-owned corporations survive only because of easy credit provided essentially for free by state-owned banks. We have no idea how large the shadow banking system that provided credit to medium and small sized private sector companies really is. We have no idea how long and how much it will take to fix China’s environment, water and air.

But, if history is any guidance, I suspect that the real problems are much bigger than the authorities are willing to admit.

That said, by comparison with other struggling world economies, China’s 7.5% rate of growth is still astonishingly high. But trajectories in the long run matter more than yearly snapshots. China is still growing, but its rate of growth is steadily falling. 

All according to plan?

The notion that all this is according to plan, and that the Chinese consumer will soon pick up the slack and re-energize growth does not look credible. If the export and construction boom is over, millions of Chinese workers will become unemployed or under employed.  Beyond that, millions of rural Chinese trapped in the country side no longer have an open avenue (factory jobs in big cities) leading to improved economic opportunity. New growth led by consumer spending must be predicated on rising disposable income levels, and that assumes a buoyant economy. A so-so economy will not do it.

Assuming lower growth, I am not quite sure where all this new cash fueling consumer spending will be coming from. If this is indeed so, having exhausted its special –and in the end temporary– economic advantages, China may be well on its way to becoming “normal” again.




Obama Presented His State-Led Policy Agenda – Rubio Proposed The GOP Alternative – Good Message, But An Ill At Ease Messenger Who Seemed At Times Overwhelmed

[the-subtitle ]

By Paolo von Schirach

February 13, 2013

WASHINGTON – Only hubris can explain the obvious disconnect between Obama’s re-election by a decent but hardly overwhelming margin and the rather grandiose agenda of more federal programs involving various sectors that he outlined in the State of the Union message.

Divided America

It is true that Obama run for re-election as the champion of state intervention and as the defender of entitlements and benefits for the poor and retirees. And it is true that on this basis a majority of Americans voted for him. But it is also true that almost half the country did not agree. So much so that the Republicans, certainly opposed to this interventionist plan, kept control of the House.

Looking at what is clearly an America deeply in debt and politically divided almost in the middle, a wise re-elected leader would propose to stabilize public spending safeguarding the needs of the poor and most vulnerable, while pushing tax reforms aimed at reigniting growth. He would try to do all this by seeking genuine compromise with the other side.

Obama: a political agenda

But no, Obama is not doing any of this. Having observed that the House Republicans are quarreling with one another on what should be the best conservative, “small government” agenda, Obama seems to be bent on exploiting these internal divisions attempting to defeat the GOP politically by proposing taxes that some Republicans would accept and others would reject. In other words, Obama, a second term President not running for re-election, is still campaigning against an admittedly not so formidable GOP. Great strategy, revealing cunning and political dexterity; but a lousy way of governing.

Be that as it may, in the State of the Union message Obama dished out his partisan list with proposed new federal programs for almost anything, with predictable applause coming from all the Democrats in the audience and cool Republican reactions.

It is obvious that, without GOP participation, none of these Obama initiatives will become law. So why produce them? Well, for political reasons. As a way to create fissures among Republicans, just as Obama did with the tax issue.

Indeed, even though higher taxes will do very little in any effort to fix the deficit, the controversial issue divided the House Republicans, undermining the authority of House Speaker John Boehner. Again, lousy policy-making; but great politics.

GOP rebuttal

And what is the GOP alternative to all this? I am afraid the Republicans have a lot of work to do, and I mean a lot. They picked rather green Florida Senator Marco Rubio to deliver the rebuttal to the President’s Address.

Unfortunately on TV a polished delivery counts almost as much, if not more, than substance. Rubio’s delivery was not so great. Here and there he appeared uncomfortable if not overwhelmed. (Yes, I refer to his awkward reaching out for water in the middle of a solemn speech and to his obvious nervousness displayed in other moments). The indirect message that the public got from this man who appeared uncomfortable in his role as national GOP spokesman is that the GOP does not have a strong national leader. Marco Rubio did not appear ready for prime time.

Rubio as national GOP spokesman?

That said, it was not a disaster. Rubio did a good job explaining the fundamental philosophical differences between a Republican vision whereby in America the Government does little while enabling the private sector to unleash growth and the statist Obama vision whereby growth is good only if it is properly balanced via government action.

Rubio did propose a decent and credible GOP alternative. Even though he formulated it in his own words, with a lot (probably too many) of autobiographical references, it is the same vision of a private sector-led economy proposed by Mitt Romney last November.

Give or take a few details, there is nothing wrong with it. And quite frankly it is certainly more in line with American mainstream values and history. The problem is that a majority of Americans (although not a huge majority) today do not buy it, as Obama’s re-election proved.

Better messenger?

The GOP needs a good national spokesman to convince the public that its vision should become national policy. Many Republican Governors sold it successfully to state audiences. So, it can gain national traction. Still, given what I have seen so far, I am not so sure that Marco Rubio is the right man to sell it.