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« October 2011 | Main | December 2011 »

Too Many Employees Means No Jobs

There is only one woman visible in this CNN picture of a Chinese factory. Since the article is about a decline in Chinese factory orders, I think it is meant to be an illustration of layoffs. But look more closely; her chair is on a rail so she apparently can tend all those spools by herself. This is a highly automated factory. Looked at another way, whether this factory succeeds or fails has little to do with the cost of labor in China; the labor component of cost is low. Put more positively, productivity is high.

Now look at the second picture from a Daily Beast article about the failure of Evergreen Solar, a builder of solar panels heavily subsidized by the state of Massachusetts, which shipped its manufacturing from the Bay State and Michigan to China – and then went bankrupt with the loss of 1000 US jobs. Notice that the man in this picture from the Massachusetts plant appears to be putting solar panels together by hand. Even though there was indubitably some automation in this factory, the picture illustrates low productivity and a high labor cost per unit produced. Of course Massachusetts subsidized this factory because of the number of jobs it would create; so, in the search for subsidies, high productivity and low job count is a negative. Trouble is that, in the real world, low productivity and high job count leads to business failure. Exactly what happened here.

Private investors demand high productivity; democratic governments, as investors, looks for low productivity and high job counts. When I was Vermont's Stimulus Czar, we used to joke that we could make Washington happier with our job numbers if we banned the use of power tools on construction projects. We didn't laugh at our own joke.

The political problem with government investments is that some of them – like Solyndra and Evergreen – fail. The real problem with "job creation" investments by government is that they encourage inefficient enterprises and discourage private investors from putting their money into more efficient competitors, since the private investors don't want to compete with "free" government money.

New Chinese factories are highly automated and efficient even though they are often subsidized by government money or are simply government owned. The Chinese seem to realize that they need to efficient in order to compete. IMHO, however, the Chinese government investments are also riding for a fall; the Chinese bet, for example, that the West would continue to subsidize the purchase of solar panels. Meanwhile strapped governments in the Europe and the US are cutting back on and ending subsidies; not even cheap Chinese solar panels are a good business proposition without subsidies. Political favoritism plays an even greater role in the allocation of government subsidies in China than it does here in the US.

We now have a great opportunity to bring manufacturing jobs back to the US. The fact that labor costs are lower in China is less and less important as productivity rises everywhere. We have lower energy costs than China; we have the similar supplies of rare earths; it is obviously cheaper to transport goods to the giant US market from here rather than from China; and the Chinese have disappointed many of their American customers with poor quality (and dangerous additives). Some jobs are coming back already.

What we DON'T need is more government investment or even tax breaks for those who create "the most jobs". Lean factories will survive – and create high-paying jobs for American workers. Over-staffed enterprises will fail and create no jobs except for bankruptcy lawyers. American companies are sitting on piles of cash. Increasing sales – like those on Black Friday – will encourage them to build capacity, lean capacity. The big companies are sitting on so much cash, on which they earn almost no interest, that they don't even need the struggling banks to finance their expansion. And they certainly don't need the government to dispense even more subsidies to the inefficient.

The greatest stimulus government can deliver would be cutting the red tape needed to build and to tap into our own energy supplies. The second biggest stimulus would be an announcement that government is no longer going to try to pick industrial winners and losers – and recognizes that rewarding excess "job creation" is a surefire way to destroy private sector jobs.

Related posts:

Jobs Coming Back from China

America's Industrial Revival

Jobs Go Awaiting… Or to China

Medicare’s a Fraud – And I’m the Beneficiary

Somebody else has to pay for the stent placed in one of the arteries of my heart. Apparently that's how Medicare works; it's not a pretty – or sustainable – story.

Two doctors did a great job of threading a catheter from my wrist to my heart, finding the more than 90% blockage of a big artery, puffing out the artery with a balloon, and propping it open with a stent. They worked on me directly for about two hours not including prep work, followup, and explaining to Mary that I was still alive and what they'd done to me. I went home that night; a week later I could jog three times as far as before the operation, hike uphill faster, and in general have much more energy. The only disappointment is that I didn't immediately start winning at racquetball and tennis.

Last week the doctor bill came (haven't received the hospital bill yet). The charge for the two doctors was $9,690, not at all too much from my PoV and in line with what you'd pay lawyers or other highly trained professionals. I only owe $188.77; sounds like a great insurance program until you read on. Turns out Medicare pays just $755.06; the balance of $8746.17 is called "MEDICARE ADJ". In other words, because I'm covered by Medicare, the docs have to forgive most of their bill. What this really means, of course, is that other patients are charged more to make up for what we codgers don't have to pay. Our Medicare premiums don't begin to cover the high cost of treating people in Medicare-eligible age brackets, so all you young people get stuck with the bill. The doctor's list price would be lower if they didn't know that a high percentage of their bills would be "adjusted". Sometimes (NOT in my case) doctors stint on care for those with Medicare coverage because they know they will be grossly underpaid for it.

So government pretends to pay for our medical care with an "insurance" policy and makes us happy by charging us too low a premium for the amount of care we receive. Without ever appearing on the government's books, there is a cost shift to other patients so the cost of medical care for everyone else goes up. When "everyone else" complains that the cost of medical care is too high, government's solution (or at least some politicians' solution) is to say that a Medicare-like program should cover them, too.

But, if everyone is covered by a government program, there'll be no one left to pay the doctors the amount that government shorts them. We'll really have to pay for our care through either taxes or premiums. Either the level of care goes way down, premiums get very high, or we pay lots more taxes; there's no free lunch when there's no one else to pick up the check. Before we extend Medicare, we need to recognize that it is essentially an unsustainable fraud – of which we old people are the beneficiaries.

Related posts:

Great Docs and Technology Saved My Life Thursday

We Can't Have All the Medical Care We Want

Foodstuff Benefits

 

 

“Too Big to Fail” Assures Bigness – and Failure

Reader Bobsv57 asks:

"Tom, a question for you. I am under the impression that most, if not all, of the money used to bail out banks has been paid back with interest and it is actually the money used to bail out GM that hasn't been returned. Am I correct in this observation? and if I am, then why to you make the statement calling for no more bank bailouts? (Not that I particularly support them in any case) It would seem that the bail out was a money maker for the Fed, wasn't the interest they charged the banks for TARP funds greater than the interest the Fed pays on it's national debt?"

Bob is right that the banks paid back their loans with interest. But the eventual cost of the bailout is likely to be the failure of our banking system and massively increased public debt. Meanwhile, middle America is starved for credit while the "too big to fail" banks are getting bigger at the expense of their better managed smaller and safer brethren.

An article in the Wall Street Journal explains one way that corporations are positioning themselves for the next credit crisis:

"One strategy treasurers use is to let the government, in essence, pick your counterparties. Stock-photo company Getty Images limits its foreign-exchange business to banks that would be likely to get a bailout if trouble hit.

"'The banks on our list, every single one of them is too big to fail; that's been pretty well advertised,' said Treasurer Tim Murphy…"

How does a bank win business post-bailouts? By being too big to fail! It's hard to think of worse public policy. This guarantees that the "too big" banks will get bigger. Since the giant banks compete with each other and since their huge executive compensation is still based on short term results, these banks have an incentive to take excessive risk. Why shouldn't they. Heads, they win; tails they get bailed out as this quote from a French regulator in the New York Times makes frighteningly clear:

"Yet the French government recognizes that the risk of contagion 'is always there,' and is ready to backstop any of its large banks in the event that conditions deteriorate, said a French regulator who is directly involved in monitoring the national banking system.

"'The French government would never let any major banks fail, so of course we have money available to backstop them', the regulator said."

"Would never let any major banks fail"? Can you imagine a better prescription for irresponsibility? Don't be under any illusion that regulation will stop recklessness given the promise of bailouts. The New York Fed didn't notice the incipient instability of the money center banks before suddenly realizing the need to bail them out. The US government didn't even notice that its creations Fannie Mae and Freddie Mac were disasters on the way to happening; they are now fully government wards. MFS Global still hasn't accounted for $600 million of customer money that turned up missing; in months past its politically well-connected now-ex-CEO, Jon Corzine, convinced nervous regulators not to take any action.

Iceland promised to protect its banks; the country itself then had to be bailed out. Ditto Ireland which didn't run big deficits and had a healthy real economy – until the government decided to back its banks with the country's credit. The French government used to be able to sell bonds with interest rates almost as low as German bonds; now there is the highest spread between interest rates on French and German government bonds since the establishment of the Eurozone. Traders are not at all sure France can afford to bailout its banks – and they know there is no one to bailout France.

So back in the USA our previous bailout of banks has created an expectation that we'll do the same thing again whenever needed and has encouraged customers to make the biggest banks even bigger and more dangerous to the economy. Risky behavior and ludicrous executive compensation are still the rule. Attempts at regulation, like the appropriately named Dodd-Frank Bill, the law the foxes wrote to govern the hen houses, have become captive to the putative regulated institutions; the regulations are more of a burden to the smaller banks which don't pose systemic risk. The big US banks are already beginning to say they may need help with their exposure to their European counterparts. Treasury Secretary Tim "TARP" Geithner anxiously shuttles back and forth to Europe trying to get the Europeans deeper into the morass of bailing out their banks (and ours). He cites his "successful" effort to "save" our banks.

Yes, we got the bailout dollars back for the moment at a low interest rate; think what the banks would've charged for such risky loans if they made them instead of received them! But they are sure to be demanded again. The price of the last bailout was a dysfunctional banking system which is steadily growing riskier.

We must reverse the expectation that irresponsible behavior will be rewarded. We must make it possible for responsible smaller banks to compete, banks which can be allowed to fail if they screw up. Some Presidential candidate should promise to break up all "too big to fail" banks within his/her first year in office. If a big bank fails before we can afford to let it go, it should be dismembered and distributed to its smaller, safer rivals – not merged with another giant as we did during TARP. Being hostage to the investment banks, who've effectively occupied Congress, is not an acceptable status quo.

Related posts:

Preparing for the Next Banking Crisis

When Regulation Is Justified

The Occupiers and Tea Partiers Are Both Right

Everything is Shovel-Ready in China

Construction in China happens very quickly; but people with shovels have hardly disappeared. This crew rebuilt a section of road near the Beijing Zoo in a few hours. Possibly it was more efficient to use them than to bring in heavy equipment for a very small job; possibly the government is reserving some work for unskilled labor – I had no way to tell. Even in Beijing food is very cheap and workers can live on a low end salary of about $10/day.

On the other hand, when China decides to have a stimulus program, they can build big and fast. At $750 billion their stimulus program of 2008, which was passed to counter a slow-down in demand from customer nations, was about the same size as ours. The difference is that they actually managed to build infrastructure with the money. The already-planned high speed rail network was accelerated. The line between Shanghai and Hangzhou opened in October of 2010 and the 819 mile Beijing-Shanghai line started service at 236 mph in June of this year just slightly more than three years after construction began!

These trains run on a specialized elevated roadway built out of concrete with almost no curves and very little grade. It goes through hills which can't be moved out of the way. Huge equipment as well as massed manual labor was used in the railroad expansion project. Acquiring right-of-way is apparently not difficult when the government owns all the land to begin with; environmental permits weren't a problem.

But all is not well with the high speed project to build high speed rail. On July 23, 2011, a train which had been disabled by a lightning strike was hit from behind by another train – something the signaling system was meant to prevent. The government says that 40 people died; some Chinese we talked to said the actual death toll was much higher (they get their information from the Internet, natch). There has not yet been an official announcement of what went wrong.

Whatever the truth is about cause and fatalities, the government abruptly shut down the entire railroad construction project countrywide by denying the responsible ministry the authority to issue further debt. According to China Daily, $40 billion was just released, but that may be just enough to pay contractors and laborers for work that was done prior to the defunding – all payments stopped after the accident. We saw partially done rail projects in several parts of China and no evidence of ongoing work.

When we took the train from Beijing to Shanghai it had been slowed down to 186 mph for "economy and safety reasons"; so the 819 mile trip took 4 hours and 45 minutes with one stop. Obviously this is still very competitive, downtown to downtown, with flying the route – the distance is a little less than the highway miles from New York City to Chicago; imagine a train that did that in under five hours. Eighteen car trains run several times an hour during the day although some have more stops. This is infrastructure that makes a difference, although I have no way to judge the cost/benefit.

We don't have to adopt China's political system in order to make major infrastructure projects feasible again in the US. But, unless we reform our permitting system and curb the power of NIMBY to cause endless delay, we won't be able to compete with China's economic system.

Related posts:

Google Finds Nothing is Shovel Ready, Not Even for Free Fiber Build

Irene Lesson #2: Nothing in America is Shovel Ready – Until It Has to Be

America's Industrial Revival

The Economics of Lowell Mountain Wind: The Video

This is the video from an interview I did on WCAX 6PM news last night. Darren Perron did a good job with his questions. As always on TV, there wasn't enough time to say everything I'd have like to have said. So two additional points here:

  • Vermont can have an economically bright and CO2-light energy future if it becomes an energy corridor for Quebec Hydro and buys more from that source, expands its use of natural gas now abundantly available from the nearby Marcellus shale, takes advantage of the coming statewide SmartGrid to pass through the very low price of off peak electricity. Allows the Public Service Board to examine Vermont Yankee relicensing on its nonpolitical merits, and spends state energy dollars on projects with a real return like solar hot water, geothermal, and natural gas vehicles.
  • Even though the economics of Lowell Mountain Wind are inferior to other available clean sources of electricity, the project has had its day in court before the Public Service Board and other regulators and has been approved. I disapprove of the tactics of protestors trying to slow the project and think they ought to be liable for any extra expense they cause. In this case the extra expense to ratepayers could be considerable if project completion is delayed beyond the end of 2012 because that is the deadline for being eligible for a 2.2 cents/kwh federal subsidy (although this IS an expense we will bear as taxpayers).

If you don't see the video above this paragraph, you can view it by clicking on this link.

Related posts:

Energy for Jobs – Vermont Version

Green Mountain Power Sets Good Precedent on "Bad" Project

 

I’ll Be on @WCAX 6PM News Talking About Vermont Energy Policy

The live interview, which'll probably be around 6:20PM, is a followup to my post saying that, even though I think the Lowell Wind Project is bad economically and bad energy policy, those who seek to impose extra expense on it (and on ratepayers) by physically delaying it should be liable for the extra costs since the project DID get its permits and certificate of public good from the Public Service Board.

There is no streaming video of this show but segments are posted online after the fact, so I'll supply a link when I have one.

Related posts:

Energy for Jobs – Vermont Version

Green Mountain Power Sets Good Precedent on "Bad" Project

Thank you, soldiers. Our debt to you is one we can’t repay.

v-c: What If It’s Positive?

We all know that nothing can travel faster than c, the speed of light in a vacuum; or do we? A recent experiment called OPERA at CERN measured some neutrinos travelling fractionally faster than c. To be precise: (v-c)/c is approximately 3x10-5 where v is the observed velocity of the neutrinos. An earlier experiment called MINOS also appeared to have detected superluminal neutrinos; but this result was largely ignored because the superluminality was less than the error margin of the experiment – and because we all know that nothing can travel faster than c.

Jarah Evslin (full disclosure: he's my son) is delivering a paper today at a conference in Beijing on what it may mean for physics if the OPERA and MINOS results are proven to be correct by further experiments. He's a physicist at the Theoretical Physics Center for Science Facilities, Institute of High Energy Physics, Chinese Academy of Sciences.

 

Cautiously and correctly, Jarah says:    

 

"I will not speculate on whether this claim is correct or incorrect. In my opinion this determination can only be made by future experiments, and it will be made by future experiments perhaps within a few months, probably within a few years. Instead I will ask the following question: If neutrino superluminality is confirmed by future experiments, what does it teach us about physics? In other words, what models are consistent both with OPERA's results, and with other known experimental and theoretical constraints?"

Turns out that a dark energy model he and his colleagues have been working on may explain what might have been observed at CERN.

Any explanation for superluminality must also explain why neutrinos from a supernova observed in 1987 (SN1987A) apparently did not travel any faster than the speed of light and may even have been a little slower. (Actually the SN1987A neutrinos did get here a few hours before the light from the event which created them; but the light gets slowed down a little as it travels through cosmic dust, which most neutrinos sail right through without slowing down. When you allow for that, the neutrinos were NOT moving faster than light in a vacuum). If the SN1987A neutrinos were traveling as fast as OPERA would seem to indicate, they should've arrived 4.8 years before the light since both travelled 160,000 light years from the Tarantula Nebula (my calculation).

Jarah lists four differences between the space neutrinos from SN1987A and those produced for the OPERA and MINOS experiments. At least one of them could account for the observed speed difference.

  1. Lepton number: the observed space neutrinos were all antineutrinos. Only 2% of those from OPERA were antineutrinos.
  2. Flavor: the space neutrinos were electron neutrinos; the experiments produced muon neutrinos.
  3. Energy: OPERA neutrinos are a thousand times more energetic than those from SN1987A.
  4. Location: "MINOS and OPERA neutrinos traveled almost entirely through solid rock, while SN1987A neutrinos traveled almost entirely through the interstellar medium."

Somewhat counter intuitively, Jarah and his colleagues dark energy theory provides a possible explanation for the neutrinos moving more quickly through a dense medium (the earth) than they do through the near vacuum of space. Vastly oversimplifying (so I can understand what I'm writing), there could be a field associated with mass, but which is not gravity, which accelerates the neutrinos to superluminal speeds where the field is strong. Since the field's strength falls off very rapidly with distance, it doesn't significantly accelerate particles in space or even those at any significant distance from the surface of a massy object. So the MINOS and OPERA neutrinos are accelerated as they travel through the earth while the SN1987A neutrinos loaf along at near c in the near vacuum of space.

It helps in understanding all this to remember that neutrinos are so small that they rarely collide with anything even when they pass through very solid matter. From their very tiny PoV, there are huge gaps between the electrons and nuclei which make up the earth. An experiment called IceCube has determined that less than 20% of the neutrinos which enter the earth around the North Pole collide with anything on the way through the earth to the South Pole; the rest go through the earth and keep on going.

One theoretical objection which has been made to the OPERA results is that neutrino superluminality implies electrons also move faster than the speed of light since neutrinos morph into electrons (not exactly what was said but close enough). Jarah points out: "Of course a theoretical argument cannot disprove an experiment, only a failure to repeat the experiment by another group can do that." In other words, if it happened, it happened. But a model like the one Jarah and his colleagues are suggesting must answer theoretical objections.

Electron superluminality appears to be ruled out both by experiments with very high energy electrons and observations of very high energy cosmic electrons. However, these observations all involve electrons in a near vacuum; electrons, like neutrinos may be superluminal only in a very dense medium. If this is the case, unlike neutrinos, the electrons won't stay superluminal very long because, again unlike neutrinos, they interact strongly though the electromagnetic force; and so will quickly lose energy to their surroundings – especially quickly in a dense medium. That would explain why we haven't yet caught any electrons speeding. In fact it might be that all particles can be superluminal in a dense field, although this is not required by the model Jarah is proposing. If this were the case, it would be, he says "a feature of these models which could potentially be in conflict with [the current theory of] big bang nucleosynthesis." That would be almost as big a deal as exceeding Einstein's speed limits!

Fellow physicists have asked Jarah why he is speculating in advance of confirmation of OPERA's startling measurements. His explanation is simple. Speculation by theoretical physicists like him and his colleagues is orders of magnitudes cheaper than experiments – and may well help to better target future experiments and the precious time and resources of the CERN collider. Moreover (my explanation, not his), something is wrong with our current model of the universe and its genesis. We haven't had any new explanations in physics for a while even though our increasing ability to measure forces us to add "fudge factors" like dark energy and dark matter which we haven't directly observed. Physics typically has a breakout when we discover that some accepted bit of wisdom is not actually correct – like the speed of light in a vacuum being an absolute limit. It helps to ask "what if?"

Related post:

Killing Horizons

 

        

Fast Off the Mark in China

In the US we have countdown timers on green lights to tell us how long we have left to get across the street. In China the red lights count down so you can be fast off the mark when the light turns. This particular speed up technique isn't very effective because you can't count on the cross traffic stopping when their light turns red; busses and cars anywhere near the intersection just lean on their horns and keep going.

Much more frightening from a competitive PoV is the school day. From elementary school on, kids start at 7:30 AM; there's a break from 12:30 PM to 2:00; then classes continue until 5:30. Wow!

On the lunch break kids can go home if there is someone there to feed them. If both parents work, the children can either eat in school (where they don't like the food) and be supervised by teachers for a siesta or go to nearby private mini-daycare apartments. If hard working parents aren't going to be home at 5:30, the kids go to private places where they get homework help.

Class size averages around 70. Chinese parents would like it to be smaller but it is what it is. Apparently discipline is not a problem in these large classes. Teachers have and use authority.

Education is free through middle school although our sources on a recent trip to China told us that "contributions" are required to get into the best public schools; there are also private schools. Parents are expected to pay for high school and college. However, only those who have done well through middle school stay on an academic track; the others usually go to a trade school after middle school. About 50% of high school graduates go on to college, up from 5% a generation ago. College campuses, obviously, are growing enormously and moving to the suburbs to find expansion room.

The very limited number of Chinese we talked to still consider American universities to be the best in the world and want their children to have the option of coming here. I hope they still feel that way a generation from now. They're not going to wait for us at the traffic light or anywhere else.

 

When Regulation Is Justified

My last post recommended draconian regulation for bailed-out banks and some regulation of all banks which accept federally insured deposits. Reader Lupus Nomen pointed out an apparent inconsistency in a comment on Vermont Tiger.

"Tom, All of these suggestions make a lot of sense. But they also sound a lot like "big government" regulation, which I thought, according to Vermont Tiger at least, was nothing more than a python strangling the "productive sector" to death."

The different people who write for Tiger have different opinions on almost any subject so I can only speak for myself. However I do think that over-regulation is a "python" strangling not only the private but also the public sector. So what am I doing suggesting all these regulations for banks?

First, second, and third – once a company gets get bailed out with public money, it is no longer regulated by competition. Failure is how the marketplace punishes stupid and reckless behavior. Fear of failure discourages such behavior. The behavior of big investment banks post bailout but pre any meaningful regulation has made absolutely clear how quickly this arrogance can grow and how damaging it is. Institutions which government has insulated from market failure MUST be regulated by government. We not only have a right to regulate them, we have a responsibility to do so.

So do we want a regulated banking system forever?

No. Government should not be making investment decisions. Government shouldn't be deciding who gets loans. That's why the first regulation needs to be break up the banks that are "too big to fail". No institution which is subject to market discipline and shareholder votes – neither of which is perfect, BTW – needs to have the government deciding how much its CEO gets paid or the details of how it conducts its business within the broad bounds of the law including antitrust and liability for bad behavior.

But there's one more exception as far as banks are concerned: federal deposit insurance. If we the people are providing insurance for bank deposits, we have to have a way to make sure that the institutions holding the deposits don't take advantage of being insured by us in order to make inappropriately risky investments with the depositors' money and we need to make sure that the institutions have sufficient capital to make claims against the insurance pool unlikely. A private insurer would do the same thing.

A purist would say we shouldn't have federal deposit insurance for just this reason. I disagree (with some discomfort) on pragmatic grounds. Federal deposit insurance has ended the scourge of bank runs which left small savers either putting their money unproductively in a mattress or holding the bag for bank mistakes or misdeeds. But insurance requires supervision by the insurer.

I may rethink my opinion on this if banks don't start paying more interest than mattresses do.

Related posts

Preparing for the Next Banking Crisis

The Free Market Needs Government to Function    

Bankers and Oak Trees    

The World is Overbanked

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