Durham's Bull

Are We Smart Enough for Authoritarian Capitalism?

No, and neither is China.

Investing is an inherently risky business.  Risk equals reward, and if you do not take risks, you will not be rewarded.  They really do not take very many risks, and thus I find it dubious that industrial policy et al are really what is driving their torrid economic growth.

Why is China growing so fast?  There are a variety of reasons, but the biggest two are:

1) They have a lot of room to grow: they have about 1/8 of the per capita income we do (mean - median is probably much lower), which implies both a cost advantage, and a moral imperative for growth that simply does not exist in the developed world.

2) More importantly, they free ride on the US and similar nations who have created environments conducive to entrepreneurial capitalism.  It is much easier and safer to let other people try and fail, and then steal their good ideas, and China has been very good at this game for the past couple of decades.

So why can't they do it endlessly?   I suspect it will come to an end as a result of the big mistake.  Which mistake?  We couldn't possibly know,  but it will come.  Sooner or later, we all get it wrong, and they will just have to hope that they get something small wrong, and not something that results in a serious crisis (mass starvation, etc).  

Jared Diamond tells of the difference between centralized China and fractured Europe with an anecdote about Christopher Columbus seeking financing for his expeditions.  He was turned down dozens of times before finally persuading the Spanish.  In China, there was only one source of financing available, and they weren't keen on that newfangled idea of sea-based exploration.  China has never recovered.

In summation, I like their short to intermediate term prospects, largely because of their work ethic, education and the reasons I mentioned earlier.  

I'm less sold on their long term prospects because I don't think that economic success is primarily a function of the quality of labor - you could put all of the smart, hard-working people in the world into Papua New Guinea or Haiti, and it won't change much.  

What really makes us wealthy is that we have allowed a system to evolve that provides individuals with incentives to use their local knowledge to create things that 99.9% of us would have never imagined on our own.  

Luckily, the US has such an economy.  Unfortunately for China (and for the rest of the world who might borrow some of their innovations), they do not, and no amount of brilliant consulting from the World Bank or anyone else will get them there.  

We live in a world that is far more complex than we could ever imagine.  I only hope we are as robust to shocks as we are innovative.  

How Valuable is Insider Information?

In a word, very.

It still takes money to make money, but good information doesn't usually have issues attracting investors.

The Myth of the Superstar

Why has CEO compensation risen so much in recent years? 

Many would have us believe that success is simply a function of having the best talent.  Superstars create value, and if you don't have the superstars, you're screwed. 

"Sound companies should be much bigger than any individual," is the essence of a recent Financial Times article decrying the notion that superstar individuals are responsible for success.  At the margin, yes, but success is much more about processes than people. 

Successful firms are those which have the discipline to think in institutional ways about complex problems, rather than putting all of their eggs in the basket of having the most intellectual horsepower.  Aptitude matters, but discipline matters most. 

Loss Vegas

So it turns out that gambling is a luxury good.  Who knew?

Homes Selling at a Discount to Construction Costs

This is ridiculous.  Most of it is happening from the Rust Belt and Midwest, with a few outliers like Greensboro, NC. 

Economic explanation?  I don't have a good one.  My best shot is that construction firms are still above their average variable costs, and therefore it still makes sense to produce to try to recoup some of the fixed cost, even if they can't get all of it back. 

For example, a firm bought a piece of capital (crane) and are making monthly payments on it.  Unless someone is willing to buy the crane off of you, you need to do something with it to make your payments, even if it costs you in the short run.  Some cash flow is better than none.

All of this is assuming that you expect the construction business to rebound in the not too distant future.  Simply eyeballing it, these places do not look like the places where home prices saw the most growth (and more recently the largest decline), and so this might not be too bad of an assumption. 

Another interesting scatter plot would have the percentage of houses selling below construction costs by area vs. IQ/Per Capita Income/Education Levels in those areas.

B-School and Insider Trading

"We find that portfolio managers place larger bets on firms they are connected to through their network, and perform significantly better on these holdings relative to their non-connected holdings. A replicating portfolio of connected stocks outperforms a replicating portfolio of non-connected stocks by up to 8.4% per year."

An all too believable paper from Lauren Cohen, Andrea Frazzini, and Christopher Malloy from the latest NBER Digest.  There are some really striking figures here beyond the jump.

So maybe that strategic management class was worth it after all...  Perhaps it's a good time to go to business school.

Market Failure? Think Again

"The Ford Motor Company, which devoted itself for nearly 20 years to putting millions of Americans into big pickup trucks and sport-utility vehicles, is about to drastically alter its focus to building more small cars."

Markets at work.

Open-Source Science

Outsourcing innovation from the Times.

Anyone Need a Long, Paid Vacation in Brazil?

Engineers wanted. 

More interesting from an economist's perspective are the ways in which self-interested capitalism spurs other desirable outcomes like education.

"That reality is leading thousands of Brazilian companies into the education business. Some teach basic literacy and arithmetic to janitors and manual workers. Other more advanced courses help factory and production line workers better understand math, science and composition. And major companies are increasing the amount of on-the-job training they give to engineers and professionals."

In reality, this is nothing new.  In spite of all of the talk of "new social compacts," and "corporate social responsibility," otherwise "greedy" people have been quite socially progressive for a long time thanks to the rigors of the iron cage. 

GMU Economics Professor Peter T. Leeson has an entire research agenda focused on elucidating the inherently progressive nature of capitalism.  His recent work has focused on how the demands of piracy broke down existing social barriers like racism, sexism, etc. long before the Martin Luther King or Susan B. Anthony.  "An-arrgh-chy: The Law and Economics of Pirate
Organization," was the first non-mathematical article published in the Journal of Political Economy in over a decade.

How Sweet It Is...

...to be a union worker.

"...G.M., Ford and Chrysler are obligated to pay workers more than half of their regular take-home wages, plus health benefits, with state unemployment benefits picking up a portion of the rest."

In today's Times.

So why are The Big Three getting hit so hard?  The only thing that has kept them afloat for the past twenty years has been their trucks.  With gas prices as they are, truck sales are sinking like a stone.

One has to wonder why they wouldn't have done a better job of diversifying over the past couple of decades.  Surely they understood the risk of gas prices, right?

  The reality is that they did, and they have diversified.  American cars are much, much better than they were a decade ago.  Unfortunately for Chrysler, Ford and GM, perception always lags reality. 

That said, there are two sides to every story;  it's a good time to bargain hunt for those of you in the market for an American-made sedan.