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.
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.
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:
3. Toyota Motor
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.
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.
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."
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)
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.
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?":
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."
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:
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:
Check out the list and start listening here.
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":
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.
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.
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.
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.
As Google tries to sort out its strategy in China (yesterday it moved its search engine operations to Hong Kong, and today the Chinese government partly blocked the site), some private equity firms are working to get more involved in the economy of the world's largest nation.
The Carlyle Group has made a big move into China. Carlyle Group Founder and CEO David Rubenstein says his firm is not the largest private equity investor in China. He is a little concerned about moves toward "economic nationalism" there, as he is with protectionism other places, including the US. But that hasn't stopped him from wanting to participate in what he sees as rapid economic growth of the economy.
Rubenstein recently spoke with the Wall Street Journal's Alan Murray, and he said he expects China to overtake the US as the dominant global economy by 2035:
Kenneth Feinberg, the government appointed "special master for executive compensation," (often referred to as the Pay Czar), will approve the pay packages of the top 25 earners at companies that received more than one bailout from the government. New York Times reporter Eric Dash writes that average compensation for those executives is expected to drop 11% from last year. That is a significant drop, but compensation fell more last year. The average pay for the top earners is now $1.62 million, down "nearly 77 percent from 2008." And yet, the impact of this drop on executive retention is not so big, at least not yet.
For months, Wall Street banks and the troubled automakers feverishly protested that their top executives would flee if they were not lavishly rewarded for their talents. New data, however, suggests the departures were more of a trickle than a flood.
Of the 104 senior executives whose pay was set by the federal pay regulator in the last two years, 88 executives, or nearly 85 percent, are still with the companies even though their pay was drastically cut back, according to people briefed on the government data.
The relative stability, at least within the executive suite, suggests that a soft job market, corporate loyalty and personal pride helped deter the feared management exodus at the companies hardest hit by the pay rules.
Read Few Fled Companies Constrained by Pay Limits here.
Spain's government has passed a bill that aims to overhaul its economy. With the largest unemployment rate in the Eurozone, Prime Minister Luis Rodriguez Zapatero says the bill is necessary to move his nation's economy from what RTT News refers to as "over-reliance on the construction sector."
Mauro Guillen, professor of Management at the Wharton School, says that Spain's economic problems today are, in large part, the result of a construction boom. He recently discussed Spain's challenges, and how being a part of the EU affects the way the country can respond to those challenges, with Wharton's Stephen Sherretta:
Alan Greenspan spoke at the Brookings Institution on Friday. The former Federal Reserve chair delivered a paper on the root causes of the financial crisis, and argued that monetary policy was not the cause. He defended the Fed's decision to keep the short-term interest rate low in during the height of the housing bubble:
The funds rate was lowered from 6½% in early 2001 to 1¾% in late 2001, and then eventually to 1% in mid-2003, a rate that held for a year. The Federal Reserve viewed the 1% rate as an act of insurance against the falling rate of inflation in 2003 that had characteristics similar to the Japanese deflation of the 1990’s. The Fed thought the probability of deflation small, but the consequences, should it occur, dangerous. But we recognized that a funds rate held too low for too long might encourage product price inflation. I thought at the time that the rate decrease nonetheless reflected an appropriate balancing of risks. I still do.
To my knowledge, that lowering of the federal funds rate nearly a decade ago was not considered a key factor in the housing bubble. Indeed, as late as January 2006, Milton Friedman, historically the Federal Reserve’s severest critic, in evaluating the period of 1987 to 2005, wrote, “There is no other period of comparable length in which the Federal Reserve System has performed so well. It is more than a difference of degree; it approaches a difference of kind.”
Read Greenspan's paper, The Crisis, here.
The Kauffman Foundation is holding an "Economics Bloggers Forum" today at their headquarters in Kansas City. David Warsh, of the "online column" Economics Principals is the keynote. Ryan Avent, Megan McArdle, Mark Thoma, and others will speak throughout the day. The forum starts at 8:30 am CDT. You can look at the agenda here, then watch online here.
Dan Lovallo--of the University of Sydney and the Institute for Business Innovation at the University of California, Berkeley, and an adviser to McKinsey--and Olivier Sibony--a director for McKinsey in their Brussels office--have an article in the March edition of the McKinsey Quarterly on behavioral strategy for executives. They analyzed 1,048 "major decisions" by strategic managers over the last five years, and found that very few of them effectively examined their own "cognitive biases" while making a decision. And they concluded that process matters more than analysis:
We asked managers to report on the extent to which they had applied 17 practices in making that decision. Eight of these practices had to do with the quantity and detail of the analysis: did you, for example, build a detailed financial model or run sensitivity analyses? The others described the decision-making process: for instance, did you explicitly explore and discuss major uncertainties or discuss viewpoints that contradicted the senior leader’s? We chose these process characteristics because in academic research and in our experience, they have proved effective at overcoming biases.
After controlling for factors like industry, geography, and company size, we used regression analysis to calculate how much of the variance in decision outcomes was explained by the quality of the process and how much by the quantity and detail of the analysis. The answer: process mattered more than analysis—by a factor of six (Exhibit 2). This finding does not mean that analysis is unimportant, as a closer look at the data reveals: almost no decisions in our sample made through a very strong process were backed by very poor analysis. Why? Because one of the things an unbiased decision-making process will do is ferret out poor analysis. The reverse is not true; superb analysis is useless unless the decision process gives it a fair hearing.
Here's the above mentioned Exhibit 2:
Read The case for behavioral strategy here.
When Michael Lewis wrote Liar's Poker twenty years ago, he thought he was writing about "an end of an era," and not, as it turned out, "the beginning of an era." And as amazed as he was by some of the practices he saw working on Wall Street in the Eighties, he was astounded by what happened later. For example, he says no Wall Street bank that was a partnership would ever "end up owning $50 billion worth of CDO's backed by subprime mortgages," as happened during the era of publicly traded firms. Lewis, who has a new book, The Big Short, was Charlie Rose's guest on Tuesday. Here's an excerpt of the conversation:
You can watch the full interview here.
Earlier this week, Greg Mankiw gave some sage advice on how to choose a graduate program in economics, which prompted William Easterly to share the observation that the top ranked programs are almost all located in four countries: The US, UK, Australia, and Canada. Here's the breakdown from Easterly:
We don't have a similar breakdown of MBA programs, but according to Business Week's Mark Scott, business schools across the European continent are seeing more students and still managing to place them in good jobs.
In recent years, a growing number of foreign students have flocked to the continent's top MBA programs, such as London Business School, France's Insead and HEC, Switzerland's IMD, and Spain's powerhouse trio of IE, IESE, and Esade—all of which routinely draw dozens of nationalities into their ranks. The global perspectives offered by these programs, along with their strong links to multinational employers, such as consultancy Accenture (ACN) and banking giant Barclays (BCS), helped graduates land jobs even during the worst economic downturn since World War II.
"We're not concentrated on one specific industry, so our recruitment hasn't suffered compared with others," says Peter Lafferty, director of international business at Vlerick Leuven Gent Management School in Belgium, who adds that 80% of his program's international graduates land jobs across Western Europe.
Read Europe's B-Schools Are Soaring here.
Anton Valukas, chairman of Jenner & Block and the court appointed examiner of Lehman Brothers' collapse and bankruptcy filing, released his report last week. And one of his findings jumped out at a lot of people: Lehman's use of something called Repo 105 transactions to hide the amount of debt at the firm. Paddy Hirsch, of Marketplace, provides one clear explanation of Repo 105 in this Whiteboard video:
Repo 105 from Marketplace on Vimeo.
You can read the full Valukas report here. And Abigail Caplovitz Field of Daily Finance provides a very good summary of the report here. (hat tip to John Cassidy for the recommendation)
Japan's central bank started to pursue a policy of quantitative easing in 2001. It moved off of the "zero-interest rate" policy after 5 years, but then the global economic crisis hit, and rates went down again. Now, it is continuing to push monetary policy as a means of fighting deflation in the world's second largest economy. Hiroko Tabuchi has the story in today's New York Times:
Central banks around the world have in recent weeks mulled rolling back stimulus steps put in place during the global economic crisis, gradually shrinking excess liquidity in their banking systems. The U.S. Federal Reserve said Tuesday it will let a mortgage-security purchase program expire at the end of March.
But in Japan — where prices have remained sluggish amid a lackluster recovery from its worst recession since World War II — the government has urged monetary authorities to further stimulate the economy by flooding the banking sector with cash.
Japan is also leaning on monetary policy because its public debt load, the highest among industrialized countries, makes it reluctant to spend more money on public works projects and other government stimulus programs.
Read Japan Eases Monetary Policy to Fight Deflation here.