Sunday, May 3, 2015

Book Review: The Frackers

I really enjoyed this book.

The Frackers, by Gregory Zuckerman, is an excellent account of the short history of fracking. It's a spellbinding description of the over-sized personalities that have made the phenomenon happen.

Unlike Silicon Valley, fracking is not the preserve of youth. Indeed, most leaders were older people. The modern founder of the art was a fellow named George Mitchell (not to be confused with the clown politician from Maine), who started work on the idea in his sixties back in the 1980s. He kept doggedly at it until his dying day--at age 94 in 2013.

Mr. Mitchell was born to Greek immigrant parents. His father's name was Savvas Paraskevopoulos, whose first job in America was working on the railroad. The Irish paymaster could neither pronounce nor spell his name, declaring from now on your name is the same as mine: Mike Mitchell. Son George married another Greek immigrant, siring ten children of his own, and settling in Galveston, Texas.

He went on to build Mitchell Energy & Development, turning it into a Fortune 500 company. The development part included Houston's planned community of The Woodlands, a successful suburb. But the money came from oil and gas. For most of his career he was a classic wildcatter.

Perhaps as a retirement activity, Mr. Mitchell became obsessed with the Barnett shale, a geologic feature that underlies Dallas. It was long known that there was natural gas in shale rock, but nobody besides Mr. Mitchell thought it could be profitably extracted. In the beginning he was a minority of one, but already being a billionaire he had some cash to invest in the hobby.

There are three ingredients to fracking's success. First was the use of explosives to crack open an oil well and get the oil flowing. Mr. Zuckerman tells us this practice began during the civil war. Second, in order to successfully remove gas from tight shale, fracking fluid had to be used to open up cracks in the rock, and then to prop them open so that the gas would continue to flow. Mr. Mitchell was the man who put these two concepts together, so we can rightly consider him the father of the industry.

The third key to fracking's success, which Mr. Mitchell did not initiate, was horizontal drilling. This is a practice where a well is drilled down to the gas-bearing layer, and then horizontally drilled along the layer. Mr. Zuckerman reports that this practice originated in a government lab, probably the only positive contribution of the federal government to the industry. It was later refined to a high art by Harold Hamm, founder of Continental Resources.

A second difference between fracking and Silicon Valley is that, in the latter, most of the participants graduated or attended elite schools, Stanford and Harvard being the most prominent. That's much less evident with the frackers. Mr. Mitchell's alma mater was Texas A&M; another common choice was the University of Oklahoma.

Still, generalizations are made to be broken. Aubrey McClendon graduated from Duke University, co-founding Chesapeake Energy at age 28. He comes from a distinguished family, sharing his heritage with a former Oklahoma governor, and the founders of the Kerr-McGee Corporation. Still, as his mother often pointed out, illustriousness didn't translate into a trust fund--Mr. McClendon would have to earn his own way in the world. Despite lacking for money, he did inherit blinding charisma, capacious intelligence, and single-minded drive. He's since made and lost a fortune, and made it again. Today he's a billionaire--again.

His partner was a fellow named Tom Ward, one of 13 children of an alcoholic, hardscrabble farmer from rural Northwestern Oklahoma. He grew up in Grapes of Wrath country. Interested in oil from the beginning, he majored in petroleum land management at the University of Oklahoma. No famous pedigree there, but Mr. Ward also came with a high IQ and a prodigious work ethic.

Chesapeake Energy (founded by McClendon & Ward in 1989) was named for Mr. McClendon's pleasant vacations along Chesapeake Bay--it was always an Oklahoma company. They added horizontal drilling to the tools inherited from Mr. Mitchell. Instead of the Barnett Shale, the company branched out to other fields such as the Austin Chalk and the Bakken. Mr. McClendon raised money and leased drilling-rights acreage. It was left to Mr. Ward to turn those assets into a revenue stream by producing natural gas.

They were successful beyond their wildest dreams--too successful in fact. Mr. McClendon, suave and charming, was an ace on Wall Street and brought in money by the bucket. He used that to buy up drilling rights in odd places where nobody else expected there'd be natural gas. He got it cheap. Through the 1980s people assumed that the US was running out of oil and gas. Through the 1970s gas prices had slowly risen, reaching $2.71 in 1984 (worth $6.28 today). Mr. McClendon assumed he'd make a killing selling gas, which he did.

But Mr. Ward (along with others) was too successful. Fracking was so productive that by the late 1980s gas prices began to go down. By 2012 they reached a low of $1.89. Fracking was no longer profitable, but Mr. McClendon couldn't stop. He kept buying drilling rights and going deeper in debt. Mr. Ward, who didn't like the debt, quit. And eventually Mr. McClendon got fired (only to come back again in a different company).

A third difference between the frackers and Silicon Valley is that no women are involved. Silicon Valley supposedly excludes women, but at least there they make up 10-15% of the leadership--most famously Sheryl Sandburg. But amongst the frackers there are zero women. The men are all highly driven, single-minded, workaholic, and extraordinarily intelligent. In many respects they are all very far out on the bell curve--not just in terms of intelligence. Few women are to be found amongst those very unusual people.

Silicon Valley was and remains an important driver of technological progress. But so far in the 21st Century fracking is the most important new technology. Government played only a very small positive role (along with a somewhat larger negative one). The major oil companies (ExxonMobil, et al.) also ignored the business until it was too late--they remain bit players. This was an industry founded by wildcatters, using their own money and following their own dreams. It is a true, American success story.

Mr. Zuckerman gives a balanced and (I believe) correct account of the environmental hazards. The industry has mostly underplayed those (Mr. Mitchell being a notable exception), an attitude that now hurts them. The environmental critics, on the other hand, have hugely exaggerated the risks involved. Fracking is much better for the environment than any alternatives, especially coal. I'd argue it's cleaner than solar power given the current state of that technology.

Panic-mongering aside, fracking is here to stay. And eventually the technology will spread around the globe. The world is not running out of fossil fuels any time soon.

Further Reading:

Friday, April 24, 2015

How to Change the Climate

Back in 2005, in the aftermath of the disastrous, Indian Ocean tsunami, The Militant coined a phrase that shouldn't need to be said: "Geology indisputably played a role." As though anybody argued with that. But The Militant thought geology played a rather small role, as the rest of the paragraph makes clear.
The staggering loss of life produced by the tsunami’s wrath, though, was largely due to the absence of any warning system—including in places such as India where the waves struck the shores four hours after the quake. Resources on hand—from communications, to roads, transportation, electrical grids, medical care, and food supplies—have also been scarce to respond to the disaster in its immediate aftermath. These are the products of the plunder of the region’s resources and labor over decades by the wealthy imperialist states—whose governments are now tripping over each other to paint themselves as generous benefactors—aided and abetted by the local capitalist regimes.
The claim--that capitalism bears most of the fault for the disaster--is silly. I argued as much in this blog's past incarnation, here. Still, at least The Militant granted some role for geology, or more generically, for acts of God. Not every problem can be laid at the feet of capitalism.

Not so with Socialist Action. They have gone from the plausible hypothesis that human activity has some influence on the climate, directly to the claim that the climate is completely within human control. It is only because of the greed of the bankers and capitalists that we have bad weather at all. The opening sentence of Andrew Pollack's article on Hurricane Sandy makes the point. "By now the scientific consensus is clear: the fury of Hurricane Sandy was greatly magnified by human-caused climate change." No room left for natural causes.

Far from being a scientific consensus, the sentence is a crackpot idea, arrived at by taking literally the most exaggerated fever dreams of extremist climateers. But our task here is not to argue with them, but rather to take the statement as a given. Assume, therefore, that the future climate (and not the distant future, either) depends sensitively on how we as a society organize our means of production.

The relevant question then becomes How do we change the climate?

That brings us to the speech by the South African activist, Patrick Bond, delivered in Tunis in March (reprinted in Socialist Action). The event was an organizing meeting in preparation for the COP21 United Nations shindig to be held later this year in Paris. Mr. Bond discussed different strategies that the Left might pursue. Socialist Action makes it clear they don't agree with either of his alternatives, and instead in a lengthy preface propose a third.

The first option (which I'll dub the reformist strategy) is to work "inside." That means collaborating with governments and NGOs to find practical solutions to curb CO2 and methane emissions, ideas such as carbon taxes, carbon capture, or more nuclear power.

Both Mr. Bond and Socialist Action reject the reformist strategy. First, it in no way rises to the urgent challenge of rescuing the planet from imminent disaster. Minor fiddling with CO2 output is drastically insufficient. Second, reformists will inevitably get bought off, making deals with the capitalists for small (albeit lucrative) favors that don't benefit the climate. Trotskyists have always opposed reformism as being class-collaborationist, which in their view always fails. (No doubt in terms of making revolutions it always does fail, but then so does Trotskyism.)

Mr. Bond supports the second alternative, that I'll dub the ultraleft approach. It can be summarized as shut the mother down. The template is the protests in Seattle around the WTO conference in 1999. Those did manage to short circuit the WTO meetings, but otherwise seemed to have rather little impact. It is not clear how similar events in Paris are going to modify the climate. Throwing a temper tantrum is rarely a constructive solution.

Socialist Action poses a third solution, which I'll call the mass movement strategy. This is always Trotskyists' favorite solution, since ultimately organizing the masses is the only way to effect revolutionary change. Their model is the People's Climate March in New York, last Fall, in which 400,000 people marched for--just what exactly? Socialist Action raises the slogan System change; Not climate change, which presumably is the modern analog of the Vietnam war era slogan, Out Now.

But the slogan is completely empty. First, system change is much more ambitious that simply changing the climate (though that seems hard enough). It requires a root and branch change in the very way we organize everything. Climate activists--i.e., people who are actually seriously interested in problems related to climate change--will be unwilling to make their task oh so much harder and more complicated. Rather than simplifying the problem for them, Socialist Action's slogan makes it sound impossible.

Second, system change is not obviously connected to climate change. What guarantee is there that changing the system will improve the climate? Certainly it didn't work in the former Soviet Union or Maoist China. The only evidence that it will work in the future are vague promises from Andrew Pollack, Bill Onasch, and Carl Sack. And activists are supposed to stake their cause on that? Not likely.

And finally, system change is completely disconnected from any individual effort. This, too, is a Trotskyist theme, because they maintain that all social problems are because of capitalism, not because of any individual cupidity.

So, for example, Socialist Action never asks how Patrick Bond got from Durban to Tunis. Presumably he took an airplane, which is not very environmentally conscious of him. Socialist Action will claim that this is irrelevant, because until we change the system, nothing Mr. Bond can personally do will change the climate. But after system change, then the airplane ride will be OK. Because--don't you know--pilots working for the working class pollute much less than pilots flying planes for capitalists. Go figure.

The problem with Socialist Action is they moralize everything. The climate is a moral issue, capitalism is immoral, and therefore capitalism must be bad for the climate. The argument doesn't even work as a syllogism even if you're willing to grant the premises. It's completely nutty, as I suspect the folks at Socialist Action realize. Their involvement in the climate fight is merely tactical--to recruit members to their cause--rather than any heartfelt seriousness about the urgency of climate change.

The climate movement is ultimately doomed. First, the catastrophe predicted by the likes of Socialist Action is unlikely to come true. So facts will eventually prove them wrong. But more importantly, solving the climate problem ultimately means forcing everybody into poverty. The marchers in New York believe themselves exempt from that fate. They are all part of the rich world, comfortably middle class, even by American standards. They can afford to ask other people to forfeit their comforts and livelihoods.

But poor people--people in China, India, Bangladesh--depend much more directly on world trade and fossil fuels for what little prosperity they have. The climateers--unwittingly to be sure--are condemning billions of people to utter destitution, forced back to scratching out a living as subsistence farmers. Poor people are smart enough to realize that the climate movement does not have their back.

That's why India, for example, is simply rejecting the whole movement. PM Narendra Modi speaks for the vast majority of his countrymen when he refuses to accept poverty as an outcome. I agree with him.

Down with poverty!

Further Reading:

Sunday, April 12, 2015

Paul Le Blanc & the Minimum Wage

Paul Le Blanc is surely one of today's leading Marxist theologians, as an article reprinted in Socialist Viewpoint proves. He will surely object to the noun, preferring instead to be known as a theoretician. And with some justification, since many (including me) use the religious term as a pejorative.

Yet the term fits, typically for two reasons. First, Marxist academics are known for their turgid, unreadable prose, presumably imitating the master himself. This, sadly, is a trait they share with other academics, especially those who call themselves post-modernists. Incoherence leads to nonsense, and accordingly these people are not worth reading.

But on this score Mr. Le Blanc is not typical. He is a limpid, clear-thinking writer who actually has something to say, unlike the reputed theologians of yore.

On the second point, however, I count Mr. Le Blanc as guilty. His article, entitled Explorations in Plain Marxism, is typical of the genre, being a Talmudic exegesis on ancient texts and commentaries. Actual data is used only for decoration, by way of example to illustrate some point. Marxists apparently have never heard of Big Data. Concepts such as statistical significance or correlation are completely foreign to them, as is, for that matter, any kind of mathematical relationship. For a discipline that claims to be scientific, it sure pays short shrift to empirical data.

So Mr. Le Blanc's current essay begins with a commentary on sundry descriptions of capitalism. He eventually settles on a baroque, four-part definition that ultimately says that capitalism is pretty much everything we encounter in today's society. Of course, being a Marxist, he misses capitalism's essential feature, so let me enlighten him with simpler language: Capitalism is an economic order that strives to maximize opportunities for consumption.

That's it. Capitalists (along with their employees) want people to buy things. They all work tirelessly to put more, better, and cheaper products and services on the market. They want people to be rich, happy, healthy, and acquisitive. Shop till you drop! So what's wrong with that?

Mr. Le Blanc's next exegetical effort is to define the working class. Here he acknowledges that the proletarian of yore--the brute laborer--is no longer a relevant part of the economy. Instead, skilled labor, people with some autonomy over their working conditions, and people who are part of the "labor aristocracy," have to be included in the working class, broadly understood. Otherwise the Marxist audience shrinks to the vanishing point.

Further, the relatively petty bourgeois layers of the working class are, in fact, most likely to be the class leaders. Mr. Le Blanc cites Engels as a source, as opposed to more modern authors such as Erik Olin Wright.

And then we get to the most interesting part of the article, under the post-modern heading Identity & Intersectionality. The problem is that workers lack class consciousness. This isn't because they are stupid, but because there are so many other ways for them to identify themselves. Or, as Mr. Le Blanc puts it,

One can begin an understanding of this conception by reflecting on the fact that each of us is conscious of having many different identities that are important to defining who we are. Among the variety of such identities—some of which seem more vibrant to us than others—are (in no particular order): our place within a particular family; our gender; our race and/or ethnicity; our nationality; our age; our religious orientation; our attitude toward specific political ideas; our sexual orientation and preferences; the foods we like; our musical preferences, the clothes we choose to wear, and other cultural inclinations; our favorite hobbies and pastimes; organizations that we happen to belong to; whether we live in a city, a small town, or a rural area; our income level; our particular economic occupation and skill level within that occupation; and the socio-economic class we happen to belong to.
Far from having the contradictions of capitalism driven home--as might have happened during the industrial revolution when workers were just workers pure and simple--today they're Sikhs, Jehovah's Witnesses, Koreans, Masons, Veterans, Grandfathers, bloggers, etc., etc. Being an employee of some company is just not the defining feature of life.

The classical Marxist view is that un-class conscious workers are simply stupid, befuddled by bourgeois trickery into believing unimportant nonsense. But Mr. Le Blanc is wise enough to realize that workers are people, too, and have the freedom to associate with whom they please. It will be impossible to squeeze workers back into a Marxist mold, from whence they'll emerge as identical and interchangeable proletons.

[w]e are many, but our success will be dependent upon a sufficient degree of class-consciousness among a substantial number of us. This class-consciousness, in our own time, must incorporate insights that reflect the realities associated with notions of identity and intersectionality. It must be said that this approach is not entirely new. “The Social-Democrat’s ideal should not be the trade union secretary, but the tribune of the people, who is able to react to every manifestation of tyranny and oppression, no matter where it appears, no matter what stratum or class of the people it affects,” Lenin insisted.
So let's see how Mr. Le Blanc's Plain Marxism survives an encounter with the struggle du jour, namely the Fight for $15 (an effort to raise the minimum wage). His point that labor aristocrats are the leadership of the movement is true--the leaders are the traditional unions such as the SEIU. Indeed, the actual fast food workers are barely represented.

Second, the movement has had some apparent success--both Walmart and McDonalds have raised wages for their hourly employees. This is probably not because of activism, but rather because both companies have been losing market share. Even poor people--the folks who shop at Walmart and eat at McDonalds--demand high quality products and good service. Neither company has been able to meet that standard recently, and so they need to upgrade their workforce. Rather than hiring casual labor, they want to ditch the "dead-end" job label. They're building a career track for their workers.

This compounds Mr. Le Blanc's problem, creating yet another layer of "privileged" workers who have something to lose if the company goes bankrupt. Yet another layer of "intersectionality."

Richer people--including richer workers--can indulge more interests. They can afford to be Jehovah's Witnesses if they want to. They don't have to work two full-time jobs to earn a living. The problems of "intersectionality" get worse. We're all petty bourgeois now. Organizing a proletarian revolution becomes more and more like herding cats.

More, it is impossible to see how Walmart employees benefit from going on strike. A strike confronts the company with two choices: defeat the union or go out of business. Neither alternative benefits the workers. The Marxists template, that assumes that capitalists and workers are irrevocably opposed, is just wrong. Both of them depend on customers being happy and buying more products. Going on strike doesn't help at all.

So I think Mr. Le Blanc lives in a make-believe land. Admittedly, it's a fun one, with many intelligent participants. But, detached from empirical reality as it is, modern Marxism is more and more akin to a game of Dungeons & Dragons, rather than a true understanding of the world.

Further Reading:

Sunday, March 15, 2015

Labor Strategy for the Coming Period

This post begins with an article in Socialist Action by Carl Sack, entitled 'Right to Work' Battle in Wisconsin. The scare quotes imply that "right to work" is anything but. Indeed, Mr. Sack claims that "Median wages for workers in states with Right-To-Work laws are almost $6000 a year lower than in states without them."

Of course that's the wrong metric. The true measure of government policy is the relative size of the total payroll--not the pay per worker. Even if the median salary is lower, but many more people are employed growing the total payroll, then both workers and society are better off.

The article (well-written and informative) reports on Wisconsin becoming the 25th state to pass a right-to-work (rtw) law. That means that workers in that state may join a union if they wish, but are not forced to do so if they don't wish. It is a right to disassociate. The so-called "battle" was a bit of a dud. There were a few demonstrations around the state, but the law passed with surprisingly little controversy.

The big brouhaha occurred in 2011 when the newly elected Republican governor and legislature defanged the public employee unions, essentially imposing rtw-light on them. Accordingly, as Mr. Sack reports, this "...has decimated the membership of the state’s public worker unions and the wages and benefits of public workers here."

So that begs the question. If unions are so valuable to workers, why don't they flock to join even without the legal obligation? The reason is pretty obvious--unions are no longer able to deliver benefits to their members commensurate with the union dues. Thus most workers simply choose to stop paying dues. I'm forced to pay dues to the professors' union, even though I don't think I derive any benefit from it.

Mr. Sack suggests that the public employees back in 2011, and private sector unions today, should have called for a general strike rather than fight the changes through the political process. Of course that wouldn't work. Public employees are not popular people these days. (Scott Walker has won three elections in four years, all by substantial margins.) Going on strike would simply have meant they'd all be fired.

The college professors wouldn't even be missed if they went on strike.

An article in North Star (whose new page design is vastly improved) by Ben Smiff is entitled In Search of Workers' Power. This engaging piece is about "deindustrialization," and attempts an analysis about how the labor movement should respond to the phenomenon.

Deindustrialization has two parts: 1) an increasing percentage of labor is working in so-called service industries, and 2) manufacturing has moved to rural places in the Southeast, far from any union influence.

Mr. Smiff recounts the efforts of workers in Minneapolis sandwich chain called Jimmy John's to organize a union. They eventually failed--by narrowly losing an NLRB vote. Why--if a union were such a slam-dunk good thing--would the election even be close? Because there is no money in fast food. The union would never be able to keep its promises. The only "benefit" accruing to the employees is the right to pay union dues.

Mr. Smiff notes that manufacturing remains a major part of the American economy, still employing 9% of the labor force. {Emphasis mine}
What’s more, as Kim Moody and Charlie Post point out in a recent article in Socialist Register 2015, despite overall losses in manufacturing jobs over the past several decades, as it stands today, “the United States produces more goods… than ever”:  ... 
The reason for this, Moody and Post note, relates to “enormous productivity increases since the early 1980s[…].” This stems from unceasing speed-ups imposed upon workers through the introduction of new machinery and, most significantly, through the social reorganization of production along more-efficient lines – so-called “lean production” techniques. {Emphasis mine}
Speed-ups is surely the wrong word. Automation, globalization, and above all, logistics, are more accurate descriptors. Manufacturers are able to deliver more products of higher quality to more people at ever cheaper prices. Only a Marxist can complain about that.

Mr. Smiff does us a good turn by citing an important article by Jasper Bernes entitled Logistics, Counterlogistics, and the Communist Prospect. Mr. Bernes is among the few Marxists who actually takes deindustrialization seriously.
Today’s supply chains are distinguished not just by their planetary extension and incredible speed but by their direct integration of manufacture and retail, their harmonisation of the rhythms of production and consumption. Since the 1980s, business writers have touted the value of “lean” and “flexible” production models, in which suppliers maintain the capacity to expand and contract production, as well as change the types of commodities produced, by relying on a network of subcontractors, temporary workers, and mutable organisational structures, adaptations that require precise control over the flow of goods and information between units.
Mr. Bernes describes accurately the dense connectivity of the modern economy, which he labels logistics. In such an environment it is almost impossible to go on strike. There exists another plant somewhere on the planet that can replace your output almost instantaneously.

Yet, as Mr. Bernes mentions, there are still a few choke points where labor holds the edge. One of these is the huge container ports, through which almost all freight must flow. He (writing in Sept., 2013) cites the Occupy blockade of the Port of Oakland. An even better example is the recently concluded work slowdown at the Port of Los Angeles. There a small group of longshoremen held a knife to the throat of the entire economy, extorting for themselves yet another large salary increase. They can get away with that as long as they don't overplay their hand. (It seems to me they've been very skillful.) For if they raise costs too high, then public pressure will eventually force their ouster, or somehow the Port of Los Angeles will be bypassed.

Mr. Bernes makes two claims--one which I think is factually wrong, and the second which makes me angry.

The first is that the new logistics is centralizing. He implies that it only works for big companies, such as Walmart. While it is true that Sam Walton was a leader in establishing the new logistics, it is not true that only Walmart-sized firms benefit from the technology. Indeed, even Ma & Pa shops use container shipping. Every product is assigned an SKU (store keeping unit), represented by the little barcode on the box. There are on the order of trillions of SKU numbers. Amazon (as best I can determine from the web) stocks 125 million SKUs. Walmart only carries around 300,000 SKUs. So of all the millions and (maybe) billions of different products out there, Walmart only sells a tiny fraction.

Most of the rest are sold by small firms. Amazon is less and less a store, and more a platform for third party vendors. My immigrant wife's employers sell products from the old country via Amazon, imported by container ship. And theirs is a small business indeed. So Mr. Bernes is wrong about how logistics favors big firms.

His second claim is even worse. He writes,
Much of the machinery of contemporary logistics aims to streamline the circulation of commodities and not use-values, to produce not the things that are necessary or beneficial but those that are profitable: individually packaged boxes of cereal, for instance, whose complex insignia distinguish them from the dozens of varieties of nearly identical cereals (sold and consumed in sizes and types that reflect certain social arrangements, such as the nuclear family).
So there it is--Marxism's dedication to poverty is laid bare. You want Cheerios for breakfast? Why you petty bourgeois scumbag! How dare you decide you want to eat something that has no use-value! After all, Jasper Bernes knows much better than you do what you should eat for breakfast. After all, he teaches poetry at UC Berkeley. He is much, much smarter than you are.

North Korea, Cuba and Venezuela are not poor because of some evil, imperialist plot. No--they are poor by design. Communism can't deal with too many SKUs. Everything has to be filtered through poetry professors. You little shits just need to get with the program.

Or face the firing squad.

Further Reading:

Tuesday, March 10, 2015

Walmart's Wages

Perhaps it's not surprising that The Militant is the only Trotskyist paper I follow that bothered to cover the news about Walmart raising it's wages. An article by Glova Scott states the facts clearly in her lede.
The Feb. 19 announcement that Walmart will increase starting wages to $9 an hour in April and for current “associates” to $10 next February puts wind in the sails of all of us fighting for better pay, a 40-hour workweek, union representation and dignity.
The Militant has long done a superb job of covering labor market issues, for which I commend them. I'm not sure that makes them more "revolutionary" (whatever that means), but it does make the paper more interesting for me to read.

Ms. Scott's explanation for Walmart's new found generosity is predictable. She credits the "...years of protests, including recent actions by OUR Walmart, backed by the United Food and Commercial Workers union." Wages are set from the bottom up, she maintains, and through struggle Walmart workers have done us all a favor by forcing more pennies from their employer.

I find this story unlikely. Very few OUR Walmart participants work at Walmart, and likely they're not even Walmart customers. Why Walmart should raise wages by a billion dollars on their account defeats reason. OUR Walmart is an irrelevant nuisance.

Some argue (not Ms. Scott) that Walmart is anticipating raises in the minimum wage, preempting the event. This might be more of a factor, but Walmart's core business is in low-wage states away from the coasts. So this does not look to be an important criterion--though surely more significant than OUR Walmart. (h/t Megan McArdle)

The CNBC crowd has yet another explanation, namely the imminent return of inflation. Their theory is that labor markets are becoming increasingly competitive, and therefore wages are being bid up. When this happens the Fed will inevitably raise interest rates to prevent a price spiral. And we should all quiver in our boots. Ms. Scott mentions this theory in passing, mostly as a reason why OUR Walmart's campaign was now successful.

I find the CNBC theory implausible. Labor market participation is still very low, and a relatively large number of workers are employed only part time. There remains a lot of slack in the labor market writ large, though for skilled workers it is much tighter than it used to be. Still, I don't think inflation is anywhere on the horizon. Everything from a glut of oil, to the rise of the dollar, to slowing economies elsewhere in the world argues against it. I see no evidence of wages generally being bid up anytime soon.

I actually think Megan McArdle has hit on the truth. She summarizes her case nicely in her closing paragraph.
I’ve written before that a company’s labor model is its business model, and Wal-Mart is no exception. If Wal-Mart is making a radical shift in one, it’s likely that you can expect at least a modest change in the other.
That is, Walmart doesn't need more employees, but rather different employees. It wants skilled workers who are willing to commit to the company for the long term. Walmart is by far the largest grocery store chain in the country. As Ms. McArdle points out, you can't run a produce or meat department with casual labor. When we used to live in Indiana we bought most of our groceries at Walmart. But since moving to New York we've found Walmart completely unsatisfactory. Shoddy merchandise, empty shelves, and terrible service made shopping in the store unpleasant. I haven't been in the store for several years now.

Walmart caught a lot of flak for its poor performance, and it's earnings have stagnated accordingly. You can't fix this without the right kind of workforce. The wage hike is the start of a new business model.

There are other clues. Fortune reports that Walmart is building a career path for its employees.
The company is also piloting a training program to help employees move out of entry-level positions and potentially make $15 an hour and more with increased responsibilities.
I'll take issue with one statement from Ms. McArdle. She says
Wal-Mart’s business model is, as my old entrepreneurship professor used to say, “Big Stores in Small Towns.” Its core value proposition is, as the slogan goes, “everyday low prices.” Its core demographic is the lower middle class. For a long time, this was a recipe for rapid growth. But the heartland is pretty much full of Wal-Marts, the lower middle class is struggling harder and spending less, and there’s more competition on the “low price” front than there used to be.
I'm not sure the lower middle class is struggling as much she says. Contrary to popular opinion, everybody in this country is getting richer. While incomes for lower middle class households might be decreasing, it's only because there are fewer people per household. Fewer people means money goes around further, and even those shoppers have more discretionary income. Walmart has competition from Target and TJMaxx. Accordingly, it has to move upscale.

Upgrading its workforce means that some current Walmart employees just won't cut it. Indeed, it is likely that they'll be hiring fewer employees overall. The folks most likely to be let go are those with the lowest skills. They may be forced out of the labor market.

John Tamny grapples with this problem in a recent piece.
About those choices, it once again needs stressing that the employment possibilities today aren't the same as they were in the mid ‘80s, late ‘90s, or as recently as 2003. Work opportunities have surely shrunk since then, and were particularly dire back in 2008-2009. There's no flippancy here despite a more unconventional attempt to explain unemployment. The main reason the latter remains high is due to government barriers to growth that have reduced the number of quality of jobs on offer.
I don't think he appreciates the difficulty. The redundant Walmart workers will join my neighbor's son, a man in his early 30s who has never had a job. He clearly has a below average IQ (though not retarded). I don't think he's ever been in serious trouble with the law. Obviously he made bad decisions back when he was 18 or 19 (drugs). You can blame him for that if you want, not that it helps any now.

How is he ever going to be employed? He'd need $2/hour just to cover the expense of working (gas, clothes, laundry, lunch). There's no way his labor is worth that much. So all he does is live off his mother's social security check.

There are lots and lots of former Walmart workers who are going to join him. So I think Mr. Tamny underestimates the barriers to full employment. Short of massive government subsidies these people will never find jobs.

The welfare state, far from shrinking, is likely going to grow. I see no way around that.

Further Reading:

Wednesday, February 25, 2015

Money and Gold

An article by John Tamny gives me an opportunity to opine on some topics I've been thinking a lot about. Mr. Tamny expresses an opinion common on the libertarian Right, also held by people like Steve Forbes and Rand Paul. These are people I respect because they get the biggest of the big issues right, namely that economic freedom is the most effective way of reducing poverty and improving living standards. So I'm distressed to have to disagree with them.

The problem is that they are looking for utopian simplicity. Thus they take a grain of truth and exaggerate it into absolute certitude. In extreme forms this leads to completely stupid policy suggestions such as going on the gold standard or abolishing the Fed.

For example, Mr. Tamny makes a claim that is simply not true. He argues that money is money is money, and that the euro is just as good (or bad) a currency as the mark or the franc or the drachma. Greece's problems were not caused by the euro, nor would they be solved by leaving the euro. Indeed, Greece leaving the euro is just as unreasonable as Mississippi leaving the dollar, even though it's vastly poorer than New York or California.

He writes:
In truth, money is solely a measure. I have bread, I want your wine, but you don’t want my bread. Money makes a transaction possible between a baker and vintner with differing wants simply because it’s historically been viewed as a stable “ticket” that allows producers of actual wealth to measure what they produce on the way to trade. Money facilitates exchange, and that’s why a common dollar has long made so much sense. That’s why the euro still makes sense.
He uses an analogy from physics. Whether one measures the distance from Chicago to Milwaukee as 90 miles or 150 kilometers, it's still the same distance. The same is true of money: drachmas, dollars, or euros--there is no real difference.

Of course Mr. Tamny is right on some level. Printing up bits of colored paper does not produce wealth. Devaluing a currency changes no comparative advantage between countries. But he's also wrong. While good money creates no wealth, bad money can certainly destroy it. A country that lacks liquidity or secure banks will be neither productive nor wealthy. And that's the difference between Greece and Mississippi. The latter has good money, while the former doesn't.

Let's count the advantages of Mississippi. Many payments are made independently of Mississippi's wealth. Social security recipients receive the same benefits in Ole Miss as they do in the Big Apple. Military pay is the same, as are payments for civil service and postal employees. Thus a significant fraction of Mississippi's income does not depend on current economic circumstances. By using the dollar they are essentially insured against temporary misfortune.

Greece has none of those benefits.

People in Mississippi can move to New York and vice versa. We both speak the same language, share much of the same culture, drive the same cars, and eat the same food. I could move to Mississippi and within a couple months establish residency, obtain a driver's license, register to vote, join a church, and find a job. In a word, in the dollar zone the labor market is very liquid.

Nominally, Greeks have many of the same rights in Germany, but in practice they don't. Very few Greeks speak German, and even fewer Germans speak Greek. Political institutions are completely different in the two countries. Apart from the exceptional few, Greeks working in Germany can't aspire to anything more than the most menial, low-paid job. And Germans have almost no reason ever to move to Greece. By comparison with the dollar zone, labor markets in the EU are massively inefficient.

Even worse, land title, property rights, investment opportunities, taxes, and almost everything about money do not mean the same thing in Greece as they do in Germany. It's likely not possible to accurately translate the word collateral from one language to the other. That means banking customs have to be different between the countries. A German bank working under German rules will not be successful in Greece, and vice versa. They can't do business the same way.

In order to have a functioning banking system there has to be a lender of last resort. Walter Bagehot describes that necessity precisely in his famous 1873 book entitled Lombard Street. Then the (privately owned) banking department of the Bank of England served that role. In New York and Mississippi it is the Federal Reserve Bank system that does the dirty. Without that guarantee of liquidity all banks in any country will inevitably collapse, credit will disappear, and the economy will shrink.

Mississippi has access to liquidity from the Fed. Deposit insurance applies there as much as it does in New York. Greece, on the other hand, has no guarantee of liquidity unless it follows banking rules set by Germany. Accordingly, Greek banks will eventually fail and everybody knows that. You can't have a growing economy without stable credit markets.

Greece will eventually have to repatriate its banking system. That is, it will have to establish an institution similar to the Fed or the ECB that operates under rules consistent with Greek labor and financial customs. In a word, it needs a drachma. The drachma will not cause economic growth--on this Mr. Tamny is correct--but it is an essential prerequisite before economic growth can occur.

(Mr. Tamny discusses smaller countries that peg their currencies to the dollar or the euro. That works as long as those governments possess sufficient foreign reserves to be a credible lender of last resort. Failing that, the peg will eventually fail. See, e.g., the Argentine peso - dollar peg in effect from 1991 to 2002.)

So it is not true to say that money makes no difference. It makes a huge difference.

Another common simple fix to all our economic woes is to re-institute the gold standard. Mr. Tamny only hints at this in this article, but I'd like to take the topic full on.

Unlike what Mr. Tamny claims, money is not a fixed measure of value in the way a mile is a fixed measure of distance. Money is instead a social convention. You can spend dollars because I'm willing to accept them. That's all there is to it. The value of money is determined by social convention, otherwise known as expectations. I expect a dollar to buy me a donut tomorrow morning. If tomorrow the price of a donut went up to $5, and then the following morning down to thirteen cents, then my faith in the dollar would waver. I'd look for another way to settle my debts.

Inflation is caused when people expect their dollars to buy less tomorrow than they buy today. So they will spend their dollars today. Inflation is not caused by the Fed, or by Congress, or by the price of gold.

Deflation is caused when people expect their dollars to buy more tomorrow than they buy today. So they will stash their dollars and spend them tomorrow. Deflation is not caused by the Fed, or by Congress, or by the price of gold.

Inflation and deflation are caused by changes in expectations. Now in extreme cases--e.g., helicopter drops of massive amounts of currency--the Fed can change expectations. And the Fed certainly tries to change expectations. Mr. Tamny undoubtedly recalls the famous words that Janet Yellen uttered on July 15th of last year. Did she say something about "patience" and "data-driven analysis?" Or was it the other way around? Every speech ever made by Ms. Yellen (or Mr. Bernanke before her) sounds exactly the same. Some days the market moves up. Other days the market moves down.

The Fed is irrelevant. Nothing they do matters at the margin. (Nothing, that is, except their role as the lender of last resort.) All these people who hyperventilate about how the Fed is doing it wrong (or right), or who care about what magic words the Chairman will utter next week or next month, are wasting their time and breath. The Fed has nearly zero control  over inflation, velocity, exchange rates, money supply, interest rates, or anything else.

So now the gold bugs want to have the Fed regulate the price of gold. The largest consumers of gold are jewelry buyers in India. How regulating the jewelry business in India is going to help the US economy is a big mystery to me. But it gets worse. Any regulatory agency is eventually captured by the industry it is trying to regulate. So the Fed (which has no other important function except to serve as the lender of last resort) will eventually kowtow to the needs of Canadian miners and Indian jewelers.

In Mr. Bagehot's day gold was used to reconcile debts between countries. So if an Englishman owed money to a Frenchman, the debt would be settled in the common currency--gold. That led to all sorts of opportunities for arbitrage and fraud, as the book describes.

Today it's much more efficient. We have a foreign exchange market that trades more than $5 trillion dollars every day. It's the biggest, most liquid, most efficient market on earth. But the gold bugs don't like it--they want to force all trades to go through gold first. Why?

Compare that amount with what the people who fret over the feckless Fed are worried about. At the height of quantitative easing, the Fed was pushing less than $3 billion per day into the economy. Our Fed fretters predicted imminent inflation and forecast a rise in the gold price to over $2000/oz. But it's less than 0.1% of the daily currency trade. It's a gnat on the back of an elephant. QE had absolutely zero impact on inflation in the US. It was a complete non-event.

Further Reading:

Saturday, February 14, 2015

Working on the Railroad

This post is inspired by Guy Miller's reminiscence reprinted (from Counterpunch) in Socialist Viewpoint, entitled Blood on the Tracks. The title is misleading. Despite Mr. Miller's efforts to be angry at capitalists like Warren Buffett, I sense more an overwhelming pride in his profession. This fellow loves the railroads and all they stand for.

I knew Mr. Miller--more an acquaintance than a friend--back in the days when the Chicago branch was at 180 N. Wacker. I vaguely recall a conversation I had with him after he first got a job with the Chicago & Northwestern. I was one of those College Boys who didn't know too much about real work, so he and I didn't have much in common. But I was genuinely curious what railroad guys did all day.

I confess that I underestimated him. I thought his getting a union job was just a political ruse and that eventually he'd get tired of it and go back to college like the rest of us. So I'm pleased to read that he retired 37 years later from the Union Pacific. That actually squares with my impression of him back then. Mr. Miller was a man you could trust.

You don't work for the railroad for 37 years unless you're trustworthy, reliable, and sober. The best thing the Socialist Workers Party (SWP) ever did for me was the drug discipline--its absolute prohibition on using any illegal drugs. No doubt that was true for Mr. Miller as well. Even today, a primary criterion for employment at the Union Pacific is that you be drug-free. How many children of the 60s could meet that standard?

Railroading is not like working in a factory. It's a skilled job that requires close attention. There is little room for error (as the accident at Lac-Megantic, Quebec, illustrates, where 42 people died). Mr. Miller describes it nicely.
You’re given a stack of track bulletins, each one with specific, complicated instructions. Each one of these bulletins can be a question of life and death. In the course of your run you are constantly interacting with dispatchers, train masters, yardmasters, track foremen, control operators, other trains and emergency personnel. Many of these radio conversations require exact wording, and a long ritualized formula: “Engineer on UP7215 East calling foreman Brown in charge of track bulletin 624 issued on September 24, between mile post 281.6 to mile post 285.7, over.” And so on back and forth the exchanges go over and over, with every word repeated exactly.
It's like being an airline pilot.

Or at least it was like being an airline pilot. For as in that profession much of the work is being computerized and automated. Voice radio communication is what we, today, would call low bandwidth. Much more efficient is the high speed, digital communication from computer to computer. Both the track bulletins and the operator's response can be computerized, and you can take humans out of the equation. Just as the military flies drones all over the world piloted from a bunker outside Las Vegas, so the Union Pacific could drive trains from a control room in Omaha.

Mr. Miller recounts how train crews have gradually been shrinking over the years. Firemen got off in the 1960s. Apprentice engineers disappeared with the shift from steam to diesel. Brakemen and helpers left the tracks with the caboose. Today trains are run by two-man crews: an engineer and a conductor.

Recently the union signed a tentative agreement with BNSF to move to one-man crews--just an engineer. The conductor would work from an office off the train. The company added all kinds of bennies to sweeten the pot, buying off the union negotiators. But, as Mr. Miller reports, it wasn't good enough. The union rank & file voted down the deal, so BNSF is stuck with the two-man crews for the moment.

But only for the moment. Automating trains is a compelling project. Most accidents are caused by human error, so taking humans out of the loop will surely improve safety. No longer will one need to worry about misunderstanding static-filled radio lingo, fatigue, or lack of complete information. A computer can track sensors on every wheel every second--no human could do that. Engineers will stay on board for a few more years as a sentimental relic, but soon they, too, will be gone.

Factory jobs are increasingly done by robots. Over-the-road truck drivers will be displaced within a decade. Airline pilots have ever less and less to do (though they're furthest from redundancy). That railroads should be exempt is impossible.

And now the rot spreads into the white collar workforce as well. Us College Boys can't sleep well anymore, either. Computers have eliminated my dad's old profession--travel agent. Human lawyers are increasingly unemployed because of computers. IBM is working hard to displace the doctor. And we professors are finding our jobs increasingly automated.

So Mr. Miller, retired, speaks fondly about the job he did in the past. And his pride is well-placed. He is an honorable man who did an honorable job. And judging from his article he must have done it very well. But the times they are a changing, and the job that Mr. Miller did doesn't need to be done anymore. That's sad, but that's the way it is.

Further Reading: