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August 17, 2010

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Latest Posts from Economist's View


"Capitalist Myopia"

Posted: 17 Aug 2010 12:33 AM PDT

Maxine Udall on the "socially detrimental effects of capitalist myopia":

Capitalist Myopia, by Maxine Udall: In 1955, the song, Sixteen Tons, written by Merle Travis and sung by Tennessee Ernie Ford, alluded to the down side of company stores. What seems surprising is the popularity of a song about owing one's "soul to the company store" among a  workforce that by 1955 had generally benefited from re-emerging post-war economic growth and heightened union activity. That the workforce had become more "white collar" and  that many employees were not actually members of unions makes it all the more puzzling. 

The company store has been a well-known and near-archetypal feature of Appalachian culture since well before my time. Coal companies built homes for their workers in areas where there was coal, but where there was often no other commercial activity. It was necessary to have a town if one was going to have workers nearby to extract the coal. The houses tended to look the same and are built close together. They were rented to workers with leases that enabled companies to quickly terminate and oust troublesome (i.e., union supporting) or unproductive workers.

It was also necessary to have a store where workers could purchase the necessaries of life, so companies provided it. Sometimes rents and purchases were deducted directly from miner's paychecks. You would think the resulting reduction in transaction costs would result in lower prices, but you would be wrong. Rents and company store prices tended to be higher than prices in nearby competitive markets.

Another "innovation" was the use of company scrip instead of US currency to pay wages. Scrip was only good at the company store. This assured that mining companies recaptured through monopoly prices some of the wages they paid. It occasionally allowed them to raise wages without eroding their profits (since they could recover the wage rise through higher store prices and housing rents).

The growth of other sources of jobs and the growth and legal empowerment of unions gradually eroded mining company power. This link from the West Virginia Division of History and Culture provides credible evidence that concentrated mine company economic and political power led to abuses and to violence on both sides of the "dispute."

I think about company towns and company stores whenever someone starts bleating about government power; the sameness that would be induced by government control of the means of production; the two-tiered system that will evolve if government has too much power; the inefficiencies that will result from government regulation. All more or less true. But then I think of the sameness of company town housing, the two-tiered system of worker and management, and I think of the "inefficiencies" of unsafe workplaces and the "race to the bottom" that must necessarily ensue in the absence of a common standard for consumer and worker safety. And I conclude that economic and political power should not be concentrated excessively in anyone's hands, whether public or private, and that a government constituted to be of, by and for the people will almost certainly have to provide some countervailing force against excessive corporate economic and political power.

Finding the balance will always be the problem. Simple answers will almost never be right.

Company stores and company towns were a way for those with economic and political power to extract a few more dollars from the people doing a lot of the work and assuming a lot of the workplace risk. Like investment bankers who apparently couldn't come up with (as Joe Stiglitz put it in Freefall) a good mortgage product with "low transaction costs and low interest rates" that "would have helped people manage the risk of home ownership, including protection in the event their house loses value or borrowers lose their job," so some coal companies could not come up with a means of providing necessary housing and food to employees without also further impoverishing workers and enriching owners. That lack of creative, far-sighted innovation got them (and us) unions and excessive regulation. A communist plot? Hardly. More like capitalist myopia, something that seems to plague certain sectors of our capitalist economy in ways that doom them (and us) to repeat the past.

The socially detrimental effects of capitalist myopia continue today [in the financial industry]. ...

People do indeed want to have green pastures in front of them, not a company town, not a company store, not a wholly-owned company nation. They want an economic arrangement that leaves something extra for them and their children. It's an important component of the wealth of nations. ...

And, yes, there is strength in numbers, especially in a democracy (unless, of course, one can successfully distract the people with emotionally-laden issues like gay marriage, guns, race, abortion, undocumented workers).

"But wait!" you say, "Strength in numbers? This sounds suspiciously like the beginning of collective action. Egad, what's next? A union or a strike or, worse, class consciousness? Why we have only (gasp!) capitalists to blame for this!"

Ironic, is it not? Socialized investment banking, the result of unfettered self-interest in combination with unregulated conflicts of interest, may accomplish what generations of coal miners, steel and auto workers, teamsters, teachers unions, and union organizers could not. Unfortunately, collective action uninformed by virtue is unlikely to result in anything that is any better than that achieved by investment banking without virtue. It might even be worse.

That will be the true cost of capitalist myopia.

Health Care and the Business Cycle

Posted: 17 Aug 2010 12:07 AM PDT

Should routine medical care be procyclical? Perhaps slightly, but as much as in the US?

Economy Led to Cuts in Use of Health Care, by Robert Pear, NY Times: The economic crisis in the United States has reduced the use of routine medical care, and the cutbacks here are much deeper than in countries with universal health care systems, researchers say in a new report.
The study, published by the National Bureau of Economic Research, finds that "Americans, who face higher out-of-pocket health care costs, have reduced their routine medical care" much more than people in Britain, Canada, France and Germany. ...
"We find strong evidence that the economic crisis — manifested in job and wealth losses — has led to reductions in the use of routine medical care," the researchers said.
"Reductions in care were far greater in the United States than elsewhere," they said, in part because about 15 percent of Americans are uninsured, whereas the other countries have near-universal coverage. ...
Among Americans responding to the survey, they said, 26.5 percent reported reducing their use of routine medical care since the start of the global economic crisis in 2007.
This proportion dwarfs the comparable numbers for other countries: 5.3 percent in Canada, 7.6 percent in Britain, 10.3 percent in Germany and 12 percent in France.
"Even in countries with universal coverage, individuals pay some medical care costs out of pocket," the researchers noted. ... The proportion of people reporting reductions in routine care was smaller in Britain and Canada, where the co-payments are lower, than in France and Germany, where somewhat larger co-payments are required.
In general, the researchers said, reductions in the use of routine medical care were most likely to occur among young people, those with lower incomes and those who had lost large proportions of their wealth in the latest economic turmoil. ...

links for 2010-08-16

Posted: 16 Aug 2010 11:01 PM PDT

"Killer Trade Deficits"

Posted: 16 Aug 2010 01:14 PM PDT

Paul Krugman:

Killer Trade Deficits, by Paul Krugman: I agree with everything this NYT editorial has to say about the economics of widening international imbalances. Where I disagree is on the issue of negotiating strategy. My colleagues believe that we should lecture the Chinese on what a bad thing they're doing, but not actually threaten sanctions, lest we start a trade war. My belief is that this gets us nowhere.

Right now, China is following a policy that is, in effect, one of imposing high tariffs and providing large export subsidies — because that's what an undervalued currency does. That should be a violation of trade rules; it might in fact be a violation, but the language of the law is vague on the subject. But leave aside the fine print of the law for a moment: what China is doing amounts to a seriously predatory trade policy, the kind of thing that is supposed to be prevented by the threat of sanctions.

Yet the Chinese have taken our measure, and decided that we won't act. Until or unless that changes, we're just whistling in the wind.

I say confront the issue head on — and if it leads to trade conflict, bear in mind that in a depressed world economy, surplus countries have a lot to lose from such a conflict, while deficit countries may well end up gaining. Or to put it differently, right now we're in a world in which mercantilism works. In the long run we'll emerge from this kind of world; but in the long run …

What Actions Should the Fed be Taking? Do Authoritarian Governments Reduce Growth?

Posted: 16 Aug 2010 10:17 AM PDT

The Economist asks:

1. What actions should the Fed be taking?

My stock answer is here. I decided to stay on message with regard to fiscal policy. I don't think we should let Congress off the hook as we criticize the Fed for its inadequate response. There are also responses from Viral Acharya, Laurence Kotlikoff, Guillermo Calvo, Michael Bordo, and Tom Gallagher, with (perhaps) more to follow. (all responses)

There is another question:

2. Do authoritarian governments reduce growth?

I didn't answer this one, but there are responses from Ricardo Hausmann, Alberto Alesina, Lant Pritchett, Daron Acemoglu, and Arvind Subramanian. Again, additional responses may follow. (all responses)

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