March 2010 - Global Economic Watch

The Economic Benefits of Catchy Paint Jobs for Haitian Bus Owners

03-31-2010 4:35 PM with no comments

Planet Money's Adam Davidson has been traveling to Haiti since January's devastating earthquake and asking some key questions about what it will take to rebuild (or even build) that nation's economy.  And in true Planet Money fashion, he has been marrying the micro and the macro, to give us vivid radio pieces.  Now he is teaming up with Frontline on a series of reports.  Here's one that benefits from video.  It is about the standard mode of transportation for many Haitians: "tap-taps."  Tap-taps are small, wildly decorated buses.  These privately owned buses are essential in a place where just 3 percent of the population owns cars.  Davidson was struck by the artistry he saw in the murals painted on the buses.  And he found that the bold paint-jobs are simply good business:

For more of Planet Money's coverage from Haiti, click here.

Posted by Graham Griffith

OECD Study on Intergenerational Mobility

03-31-2010 7:50 AM with no comments

The OECD has released a new study on intergenerational mobility.  The pretense: in healthier, growing economies, a person's social status is less dependent on that of their parents.  There are many factors that explain levels of mobility in OECD countries, but the key piece of the equation appears to be education, and how much your parents' education affects your education:

Intergenerational mobility depends on a host of factors that determine individual economic success, some related to the inheritability of traits (such as innate abilities), others related to the family and social environment in which individuals develop. Among environmental factors, some are only loosely related to public policy (such as social norms, work ethics, attitude towards risk and social networks), while others can be heavily affected by policies. Typical examples are policies that shape access to human capital formation, such as public support for early childhood, primary, secondary and tertiary education, as well as redistributive policies (e.g. tax and transfer schemes) that may reduce or raise financial and other barriers to accessing higher education. Indeed, in an economic sense, intergenerational social mobility is generally defined in terms of the possibility to move up (or down) the income or wage scale relative to one’s parents. Such mobility is closely related to educational achievement, given the direct link between human capital and labour productivity.

Here is a look at the link between earnings of fathers and sons in some selected countries.  The height of the bar measures the "extent to which sons’ earnings levels reflect those of their fathers."  

Read the study, A Family Affair: Intergenerational Social Mobility across OECD Countries, here.  

Posted by Graham Griffith

Who Is On Your List of the Most Innovative Companies?

03-30-2010 2:58 PM with no comments

Michael Arndt, the writer of Business Week's online NEXT: Innovation Tools & Trends column, is asking for comments on the most innovative companies.  Business Week will publish the 2010 rankings next week.  Arndt has posted the 2009 top 25.  Here's the top 5:

1. Apple
2. Google
3. Toyota Motor
4. Microsoft
5. Nintendo

Innovative or not, it is hard to imagine Toyota holding its ranking with all of the company's recent problems.  Who do you see at the top this year?  Read Debate: Who's the Most Innovative Company of 2010? here, and then tell us what makes a company stand out as a leader in innovation.

Posted by Graham Griffith

The Return of Cov-Lite Loans

03-30-2010 9:50 AM with no comments

A little more than a year ago, the chemical company Lyondell declared bankruptcy.  Last week, in an effort to get out of bankruptcy, Lyondell raised $2.7 billion in what Forbes's Matthew Craft describes as "one of the largest junk-bond deals this year."  The sale also included a $500 million loan with "weak terms" known as "covenant lite."  

"Cov-lite" loans were a big part of buyouts pre 2007. And their possible return is a reason for worry, say Marketplace's Paddy Hirsch.  He explains cov-lite loans, and the danger they present, in this Whiteboard video: 

Cov-lite loans are back! from Marketplace on Vimeo.

Posted by Graham Griffith

A Case For Bubbles

03-30-2010 9:26 AM with no comments

Nick Rowe--professor of economics at Carleton University in Ottawa, ON, and one of the authors of the Worthwhile Canadian Initiative blog-- argues that there is value in bubbles.  A lot of value.  At least in economies where the rate of growth out-paces the "natural rate of interest."  

In this diagram, the Y axis is the real rate of interest, while the X axis is "the real value of the stock of assets."

Rowe writes:

Economists normally define desired savings as a flow demand for assets. Here I want to think of it as astock demand for assets. Think of an overlapping generations model in which people desire to accumulate a certain value of a stock of assets for their retirement. And for emergencies and other lean years. I have drawn the savings curve as upward-sloping, so people's desired value of their stock of assets is an increasing function of the rate of interest. But that is not essential to my argument.

Economists also normally define desired investment as a flow. Here I want to think of it as a stock supply of real assets. It's the fundamental value of the stock of capital plus land, where "fundamental value" means the present value of the flow of earnings. The investment curve slopes down for two reasons: because a lower interest rate means a higher present value of a given flow of earnings; and because more investments become profitable at a lower rate of interest.

Read Rowe's full explanation here.  (H/t Mark Thoma, Economist's View)

Posted by Graham Griffith

Jeremy Rifkin: Energy + Communication = Economic Advancement

03-29-2010 4:42 PM with no comments

What are the key components in societies' economic and cultural progress?  Advancements in energy and communication.  That's what Jeremy Rifkin, president of the Foundation on Economic Trends, argues.  In this talk at the American Academy in Berlin, Rifkin highlights the moments in history when energy and communications progress converge:

You can watch the full speech at Fora.tv, here.

Posted by Graham Griffith

Fairness vs. Self-interest

03-29-2010 7:28 AM with no comments

This slideshow from the Carnegie Council is a good conversation starter on a classic debate: fairness vs. self-interest.  Carnegie's William Vocke asks, "What do you think maximizes individual benefits? Is it cut throat competition or altruistic norms of fairness and trust?":

Posted by Graham Griffith

John Deere's Global Outreach

03-26-2010 9:53 AM with no comments

John Deere is an iconic American company.  And yet if the maker of farming and construction equipment relied on the US market, especially during the recession, it would have been in a lot of trouble.  As it is, the company saw a big drop in sales--45% for construction equipment, and more than 15% for farming equipment since 2007.  But with earnings of $873 million and sales of $23 billion in 2009, the company has managed to stay in the black.

Kathleen Kingsbury of Time reports on how Deere has survived the recession, and she points to two key factors.  1) Bob Lane, CEO until June, 2009, and his const-cutting moves, and 2) recognizing that global markets are the key now for the company.  With the shift to large agribusiness, the demand for John Deere dealerships in the US has waned considerably...

Another factor in Deere's shrinking U.S. presence is that its biggest opportunities will be overseas: 60% of its current business is in North America, 40% in the rest of the world. Allen knows that ratio will change drastically. "Emerging markets hold the most potential," Buckingham Research Group analyst Joel Tiss says. "It makes no sense to open a new dealership in Dubuque, Iowa, anymore when they could put it in Santiago, Chile, where they can do 10 times the volume." Sales in South America are expected to rise as much as 15% in 2010.

Likewise, Russia and Eastern Europe offer potential. Russia has arable land and an aging Soviet fleet of farm equipment, and the government has put a priority on being self-sufficient in food and agriculture. The recession has made financing hard to come by in the region, but "Deere is planting the seeds for when the markets normalize," says Lawrence De Maria, an analyst at the New York brokerage firm Sterne Agee. Still, De Maria adds, "it's sticking with assembly factories for now so that if they had to pick up and leave, it wouldn't kill the shareholders."

Posted by Graham Griffith

Employment and U.S. Recessions

03-26-2010 9:13 AM with no comments

As the econoblogosphere debates the economic benefits of health care reform, and anticipates monthly job figures (coming in a week), Mark Thoma, of EconomistsView, shares this image:

Posted by Graham Griffith

Top 100 Podcasts from Small Business Trends

03-25-2010 5:35 PM with no comments

Small Business Trends has compiled their annual list of the top 100 small business podcasts.  It is a long list, and 100 entries can be overwhelming, but at least they break it down by topic.  Some of the hot topics on the list:

• Leadership and Management
• Marketing and Sales
• Operating a Small Business
• Startups and Starting a Business
• Small Business Technology

Check out the list and start listening here. 

Posted by Graham Griffith

Pay Czar Feinberg Tells Newshour His Moves to Cap Pay Are Getting Results

03-25-2010 9:17 AM with no comments

We posted earlier this week in advance of pay Czar Kenneth Feinberg's release of his latest findings on executive compensation at companies that received TARP funds.  Last night, Judy Woodruff interviewed Feinberg on PBS's Newshour, and asked him to share details about his latest efforts to cap pay, his process, and what effects he might be able to have from his self-describe "bully pulpit":

Posted by Graham Griffith

Donald Kohn Assigns Homework to Monetary Policymakers

03-25-2010 8:57 AM with 1 comment(s)

Donald Kohn, still Vice Chairman of the Federal Reserve for a few more months, spoke yesterday at Davidson College in North Carolina, and he assigned some homework to monetary policymakers.  Kohn was trying to shed light on areas that need further study, and he stressed that while he himself was having trouble coming up with clear answers, he shared his "tentative thoughts" as a way of jump-starting important areas of inquiry:

The first two assignments concern the policy actions the Federal Reserve and other central banks took during the financial crisis. A key part of the Federal Reserve's response was to fulfill its traditional role of providing backup liquidity to sound institutions during times of financial turmoil. In a break with tradition, we had to provide that liquidity to nonbank financial institutions as well as to banks. One assignment is to evaluate the implications of the changing character of financial markets for the design of the liquidity tools the Federal Reserve has at its disposal when panic-driven runs on banks and other key financial intermediaries and markets threaten financial stability and the economy. In addition to providing liquidity on an unprecedented scale, we reduced our policy interest rate (the target for the rate on overnight loans between banks) effectively to zero, and then we continued to ease financial conditions and cushion the effect of the financial shock on the economy by making large-scale purchases of several types of securities. My second assignment involves improving our understanding of the effects of those purchases and the associated massive increase in bank reserves.

The third and fourth assignments relate to whether changes to the conduct of monetary policy in normal times could make financial instability and its wrenching and costly economic consequences less likely. Number three involves considering whether central banks should use their conventional monetary policy tool--adjusting the level of a short-term interest rate--to try to rein in asset prices that seem to be moving well away from sustainable values, in addition to seeking to achieve the macroeconomic objectives of full employment and price stability. The fourth and final assignment concerns whether central banks should adjust their inflation targets to reduce the odds of getting into a situation again where the policy interest rate reaches zero.

It is a refreshing speech, in that Kohn does not run away from any responsibility to do a better job in creating better monetary policy.  In his conclusion, he offered up a candid assessment of the shortcomings of central bankers at the outset of the global economic crisis:

We thought we knew enough about the basic structure of the markets and the economy to achieve economic and price stability with relatively minor perturbations. And we thought we had the tools necessary to deal with liquidity shortages and maldistributions. The reality is that we didn't understand the economy as well as we thought we did. Central bankers, along with other policymakers, professional economists and the private sector failed to foresee or prevent a financial crisis that resulted in very serious unemployment and loss of wealth around the world. We must learn from our experience.

Read the full speech here.  

Posted by Graham Griffith

Genius Design: A Model For Others, or Uniquely Apple?

03-24-2010 4:25 PM with no comments

Many people attribute Apple's success over the last decade to the company's "Genius Design" approach.  It is a model that many companies would like to emulate, but Nathan Shedroff--interactive media designer and co-founder of Vivid Studios--says only Apple can use "Genius Design," and the process wouldn't work for another company.  Shedroff spoke as part of a panel on the importance of design to business success at Swissnex San Francisco.  Here is an excerpt in which he discusses Apple and "Genius Design."

Watch the full panel discussion at Fora.tv, here.

Posted by Graham Griffith

New Bloomberg Poll Reveals Americans Distaste for Bankers, Banks, Execs, and Desire for Regulation--but not Much Faith in Politicians

03-24-2010 8:15 AM with no comments

Bloomberg has released the results of a new national poll on Americans' attitudes toward Wall Street, bankers, and regulation of financial institutions.  The poll shows that Americans are not too fond of anyone at this moment::bankers, insurance companies, Wall Street, corporate executives.  And while they favor "punishing banks,"  nearly 70% say they want the government to regulate consumer protection through currently available means, rather than establish a new agency.  

John McCormick and Alison Vekshin report:

As Democrats and Republicans seek to tap populist ire, the poll shows there may be political advantage in taking on big financial institutions such as Charlotte, North Carolina-based Bank of America Corp., and New York’sGoldman Sachs Group Inc.

The majority of poll participants -- 56 percent -- say big financial companies are more interested in enriching themselves at the expense of ordinary people, while 40 percent say such firms play a vital role in enabling the economy to grow.

At the same time, Americans are divided over the scope of government regulation. More than 40 percent of Americans say the government has gone too far in measures to fix the financial industry; 37 percent say it hasn’t done enough. Almost six out of 10 people say Wall Street hasn’t gone far enough on its own to protect against future emergencies.

“Anything the government gets their fingers in, they mess it up,” said poll participant Norman White, 60, a community college electronics instructor who lives in Colfax, Louisiana. “I don’t have a very high opinion of the government running anything.”

Read Wall Street Despised in Poll Showing Majority Want Regulation here.

Posted by Graham Griffith

The Return of CLOs

03-23-2010 2:01 PM with no comments

Collateralized loan obligations (CLOs) were a key tool in the amped-up housing market of the last decade, but they seemed to largely disappear with the subprime mortgage crisis.  Now, Marketplace's Paddy Hirsch says they are back, and he describes their importance in the buying and selling of leveraged loans:

CLOs from Marketplace on Vimeo.

Posted by Graham Griffith