Saturday, August 29, 2015

Stock Market Decline Signals End of World

Newsflash: Stock markets sometimes go down. Recessions occasionally happen.

The Militant's Brian Williams ruins an otherwise perfectly good article with breathless predictions of catastrophe. At the end, his soothsaying is completely detached from reality, as even he admits. The article's final words:
Whether the stock market will continue to tumble this week, or take a breather, the capitalists have no answer to the crisis of their system. The crisis will deepen.
Facts be damned--we're doomed no matter what.

For all that, The Militant is the only paper on my regular beat that takes economics seriously. Mr. Williams does a creditable job as their lead reporter on the issue, and this article is no exception. He's got the facts mostly right.

This is both true and important:
World trade in the first half of 2015 has tumbled to the lowest level since 2009. Steel, oil, iron ore, copper, aluminum and nickel are contracting. The Bloomberg Commodity Index, which follows a basket of 22 raw materials, is at its lowest point in 16 years.
In China, where production is mostly geared for export, exports dropped 8 percent in July from a year earlier, and auto sales dropped 7 percent. Manufacturing in August shrank at the fastest pace since 2009.
And finally there's this, though I'd put a different spin on it.
“The trigger was most likely the sudden deterioration of leading economic measures, energy prices, and industrial commodities, both in the U.S. and globally,” investment analyst John Hussman wrote in his weekly column Aug. 24.
I think these facts get to the nub of the issue and the news is not good. I, too, think that the economy is in for a rough patch. I predict a recession, and mostly for the reasons Mr. Williams cites.

So no question that global trade is declining, and when trade declines we're all getting poorer. If international trade is shrinking, then it's hard to imagine that trade within national borders (domestic trade) is growing. So Mr. Williams is right to suggest that the Chinese economy may very well be in recession, government statistics notwithstanding.

Mr. Williams adduces that this conclusion also follows from the fall in commodity prices. But here he is in error, as summarized by Scott Sumner's catchy phrase Never reason from a price change. For prices can change for two reasons: either slack demand means there is a contraction in the amount consumed, or cheaper production has increased supply leading to lower prices that way. The former is an adverse demand shock to the economy, while the latter is a beneficial supply shock.

The decline in oil prices is due to American fracking--that is a supply shock. By making oil cheaper it benefits all users of oil, i.e., all consumers. It makes us richer. That cannot be the cause of recession.

On the other hand, nobody has been fracking for iron ore. While the world's supply has greatly expanded over the years, the current price decline looks to be due to shrinking demand, notably from China. This is an adverse demand-side shock, and will result in a shrinking of the economy, possibly leading to recession.

Mr. Williams conflates these two effects--he's reasoning from a price change. The fall in commodity prices is, in fact, a complicated phenomenon whose effects probably cancel out.

Nevertheless, the hard truth is that China cannot continue to grow at a rate substantially faster than the global economy, which looks to be in the 3-4% range. China has maxed out because it has fully deployed its excess agricultural labor force into the cities, and it is a country in long-term demographic decline. It's growth rate going forward will not be significantly faster than that in the US or Europe.

Also, China can no longer export its way out of recession. It is simply too big--the world is not big enough to consume all of China's output. So China will have to grow domestic consumption to maintain growth. There's a lot of room for that--Chinese are still poor people--but they're going to have to make substantial changes to their political and economic institutions for that to happen.

So the world has to readjust to diminished, long-term growth prospects in China. Another word for that is recession, which is what I think will happen. But contra Mr. Williams it does not auger the end of the world. Why? Because while Mr. Williams correctly cites the overproduction of commodities as a drag, that is only a small bit of the economy. Services make up almost 80% of the American economy, and over 40% of the Chinese economy. Commodities have little effect on the service sector, and hence are a relatively small contributor to growth.

The headline article in the same issue of The Militant is also relevant. It concerns the looming expiration of union contracts with the steel industry: ArcelorMittal, USSteel, and ATI, among others. At the latter, workers have been locked out at a plant near Pittsburgh. The piece--actually a series of articles by multiple authors--reports on labor actions happening around the country.

The issues focus around pensions, healthcare, overtime, and working conditions. Plants near Birmingham and Philadelphia are closing. "The price of steel has dropped sharply in the past year," consistent with Mr. Williams' analysis.

So it is very clear that there will be fewer steel workers in the future than there are today.
  • There is too much global manufacturing capacity. Some plants have to close.
  • Workers will become more productive--jobs will be lost through automation.
  • Competitors from overseas and non-union mini-mills will reduce the competitiveness of closed-shop companies.
Thus the union's battle is already lost. It is only a question of how long they can hold out.

Here is a poignant demand.
Workers now pay no premium and have a total annual deductible of $600 for family coverage, Arabia told the Militant. ATI is demanding a $214 monthly premium with a $6,000 to $8,000 deductible. “It’s a plan designed to keep people from using it,” Arabia said. “Plus new hires will get only a health savings account of $500 per year, and no pension, just a 401(k) plan.”
Organizers clearly hope that capitalists will pay for continued pension and health benefits. But capital never pays operating costs (unless the firm is going bankrupt). Capital is for investment. Operating costs will always be borne by either the customer (higher prices) or by the employee (lower wages). As the size of the workforce shrinks, the existing employees will shoulder an ever growing burden paying pensions for retirees.

Just ask the United Mine Workers how that has worked out.

Further Reading:

Friday, August 21, 2015

Book Review: Walmart

The Retail Revolution: How Wal-Mart Created a Brave New World of Business, by Nelson Lichtenstein, is a marvelous book. Published in 2009, I wish I had read it years ago.

Despite Mr. Lichtenstein's credential as a Leftist college professor unduly critical of Walmart*, this is not a hit piece. Though I have no independent ability to judge the facts, there was little in the book that didn't ring true to me. While Mr. Lichtenstein does not hide his own perspective, he makes a good faith effort to accurately represent the opinions of others, especially the company. Better than that cannot be expected.

The key question, to my mind, is this: Is the world a better place because of Walmart? Mr. Lichtenstein asks that question only indirectly, quoting Hillary Clinton.
"Is Wal-Mart a good thing or bad thing for America?" Hillary Clinton, who had served six years on the Wal-Mart board, answered cautiously. "Well, it's a mixed blessing," she said, noting both the inexpensive goods the company brought to rural America as well as the controversy over the company's health insurance program and its failure to promote women to management ranks.
Well, of course. Nobody can seriously claim that Walmart is an unalloyed good with no demerits. But still, if you add up the balance sheet I think the answer to that question is pretty obvious. The company substantially raised the standard of living for millions of people in rural America by selling quality goods at low prices. It invented a whole new way of doing retail, eliminating wholesalers, middlemen, and jobbers, thereby reducing costs. It provided jobs to hundreds of thousands of low-wage workers in the US. And it started China on a path to becoming the world's second largest economy.

The world is unequivocally better off because of Walmart. I think if you pushed Mr. Lichtenstein to the mat and forced him to answer he'd agree with that.

Mr. Lichtenstein evades the question by taking us on a grand tour of all the demerits--a fascinating and informative read to be sure. But at the end of the day it's something of a red herring. For example, he describes in great detail the unfortunate lives of women workers in Chinese factories. They work very long hours for low pay in tedious jobs under dangerous conditions. Factory fires occasionally kill hundreds. The government imposes apartheid-style rules on them (hukou) preventing them from becoming residents in the cities where they work.

It's terrible, awful, no-good. We should all be happy that circumstances in China are gradually changing for the better. But Mr. Lichtenstein's description, while not inaccurate, is somehow irrelevant.

He misses the mark in two ways. First, he blames almost everything on Walmart. If it weren't for the Bentonville behemoth squeezing suppliers and turning a blind eye toward illegal factories, then none of this would have happened. Instead, Mr. Lichtenstein implies, our Chinese friends would be earning $15/hour working in bright, airy factories, all while smiling and singing songs, just as depicted in those socialist realism posters.

But Walmart is just a link in the chain. Consumers (especially Walmart consumers) can't buy toys unless they're cheap. Walmart operates on very thin margins and has to squeeze its suppliers. Those, in turn, cut corners to maximize the business that comes their way. The subcontractors are under pressure to deliver on time and under budget. The Chinese government--more crooked than most--insists on its cut.

And Chinese workers are all to happy to go work in the factory. Especially considering the alternative: walking very slowly behind a water buffalo in some rice paddy somewhere, with no chance of ever having a better life.

Despite his prejudice, Mr. Lichtenstein does tell the truth:
Factory wages are low--about one hundred dollars a month--but far higher than in agriculture, and they are rising fairly quickly because of the labor shortage generated by the export boom in toys, garments shoes, and electronic devices.
Thank you, Walmart!

The second miss stems from Mr. Lichtenstein's misunderstanding about the role of capital. In 2015 Walmart earned about $16 billion on revenue of $486 billion, or approximately a 3% margin. My understanding (Mr. Lichtenstein doesn't tell us) is that the company has kept margins mostly constant over the years. That means as costs go down, then prices also go down instead of margins going up. The Walton family owns roughly 50% of the company. Therefore in round numbers, 1.5 cents on every dollar of sales at Walmart goes to them.**

So contrary to Leftist (and Mr. Lichtenstein's) imagination, the Waltons are not paying for Walmart employee's health insurance. They don't earn nearly enough money to make that possible. Shareholders never pay operational expenses. So who is paying that bill? There are only two other choices: the employees themselves, or the customers. Both of them are poor.

Progressives are simply delusional if they think health insurance is paid for by the shareholders. I think it is odd that Mr. Lichtenstein, along with most of the Left, is so upset about Walmart employees being subsidized by local governments, e.g., Medicaid or Medicaid-like programs. Surely taxpayers on average are richer than Walmart's customers. By saving their customers' money and pushing their employees onto the government's nickel, Walmart is helping poor people in ways that progressives should applaud.

Likewise, Mr. Lichtenstein happily recounts how local governments stick it to evil corporations:
In effect, these California cities were leveraging their zoning authority to recreate a set of mini-New Deals that ensured a more progressive distribution of the wealth generated by private interest ... But Wal-Mart would not play ball.
And good for Walmart! All of these extra costs that sundry civic corruptocrats thought were good ideas had to be paid for somehow. Those all come out of the hide of either customers or employees. Why does Mr. Lichtenstein want to make Walmart's employees poorer? A tax on Walmart isn't a blow to the wealthy--instead it's just ripping off poor people. And all the more so for Walmart since their customers are as poor as their employees.

Mr. Lichtenstein recognizes as much. In the new normal he envisions, Walmart will have to raise prices to cover the expenses of a "living wage," presumably not just for Americans but also for Chinese. He's never heard of market elasticity, i.e., when prices go up sales volumes go down. If Walmart could raise prices without hurting revenue they would certainly do so. The fact that they haven't means that they can't.

Walmart employees are precarious workers, which I defined as workers whose income depends sensitively on the market. That's true not just for the hourly employees, but also for Walmart's managers. Mr. Sam fired his executives with abandon when they no longer served the company. No loyalty there.

But unlike Mr. Lichtenstein, I think that precarious workers are our most productive citizens. They waste nothing! How different they are from government bureaucrats and professors who are immune from market forces. Those people are parasites.

The true road to wealth is not by government mandate or union featherbedding. No. Instead Mr. Sam got it right with his company's first mission statement: To give common folks the opportunity to buy the same things as rich people.

If you want to criticize Walmart, then the extent of their failure to live up to that aspiration is the place to start.

Down With Poverty!

*Mr. Lichtenstein hyphenates the company's name: Wal-Mart. However the firm no longer uses the hyphen. Except in quotes I use the current spelling: Walmart.

**The web, including Wikipedia, claims the Walton family collectively is worth $143 billion. But total Walmart equity is only $81B of which they own only half. And 50% of $80B does not add up to $143B, so something is wrong. I don't believe the $143B figure.

Further Reading:

Wednesday, August 12, 2015

Jeff Mackler's Greek Post-Mortem

The article by Socialist Action's Jeff Mackler reprises Syriza's humiliating capitulation to the Troika. Mr. Mackler gets some basic facts all wrong.

Here's the big howler:
Greece today, as with all capitalist states, is ruled by an elite ruling class that long ago established the fundamental rules that govern social relations. Its highly profitable shipbuilding industry and related merchant-marine manufacturing stands second or third in the world. Yet these industries are virtually untaxed by the state. The same situation exists with virtually all major Greek private capitalist corporations and financial institutions.
A quick check of the CIA Factbook shows that Greece has no shipbuilding industry at all. The top four shipbuilding nations are China, S. Korea, Japan, and the Philippines, who between them manufacture over 90% of gross tonnage. Greece doesn't even show up in the top ten. Of course Greece has a large merchant marine, essentially a ferry boat service between their myriad islands, analogous to the highway department in most countries.

So it's hardly surprising that shipbuilding is untaxed. Even for the most devout revolutionary taxing a non-existent industry will prove to be a challenge.

But Greece does have a problem collecting taxes--tax evasion is endemic since Ottoman times. By far the biggest export industry is tourism, contributing 18% to GDP. This led to the humorous attempt by the government to ask tourists to rat out restaurants and hotels who didn't provide receipts.

More seriously, Mr. Mackler doesn't understand what "austerity" is. I don't totally blame him since most media reports are similarly unclear. But it's important to get this straight.

The problem Greece has is that it has been living off borrowed money. Germany has been by far the biggest lender, and some blame Germany for causing Greece's problems in the first place. (That's like blaming Budweiser for alcoholism.) Whoever is to blame, Germany is no longer willing to lend money to Greece except under very stringent conditions.

So when you're living off the credit card and the credit card is taken away, then of course your standard of living is going to go down. This accounts for the decline in GDP and living standards in Greece--nothing more.

Now Germany--as I think Mr. Mackler hints at--does not want to lend Greece any more money under any conditions. They prefer that Greece leave the Eurozone, after which Germany and other countries can provide humanitarian assistance--a gift rather than a loan, and money that remains entirely under the control of the donor. Though for a whole bunch of reasons, some of which Mr. Mackler alludes to, Germany didn't get its way. So the Germans are now on the hook for yet another bailout.

The conditions are that Greece run a primary surplus. That means they must meet their daily expenses without having to incur more debt. (If they have a symbolic amount left over to repay the principal, so much the better.) Then the Troika will provide Greeks with enough money to pay the interest on the debt already accrued. That is, it's really a bailout of European banks rather than Greek citizens. The advantage to the Greeks is they don't default, i.e., they remain members in good standing in both the Eurozone and the world economy. That's a huge advantage!

And that's the third thing that Mr. Mackler doesn't comprehend. Giving the world market the middle finger is a really bad idea. North Korea is the country that's gone furthest with that, and they're poor as rats. Cuba and Argentina aren't far behind. Greece is historically a trading nation. You can't be a trading nation if you promise up front that you'll never pay your debts. Welshing on world trade will drive Greece into African levels of poverty.

The Greek people understand that. They overwhelmingly do not want to leave the Euro. Whatever had to be done to avoid defaulting on their debt needed to happen. I think that's why the pushback against the Tsipras surrender has been so modest. Only random Trotskyist grouplets and sundry fascists have opposed it. Everybody else is smarter than that.

Fourth, Mr. Mackler doesn't quite understand Syriza's class character. He describes them as washed-up Stalinists, unrepentant liberals, and fuzzy-minded socialists--all people without the proletarian sensibilities necessary to lead a socialist revolution.

All true as far as it goes. But the key point is that Syriza represents government employees, i.e., the 40% of the workforce employed by the state. Since the government can't collect taxes and relies on borrowed money, they're the folks who are most hurt by cutting up the credit card. They'd also be most hurt by leaving the Euro. So frankly, Mr. Tsipras did as much for them as he could. At the end of the day that constituency wants to stay in the Euro, and that's what has happened.

So what would a true revolutionary leadership have done?
Had Syriza spent its first six months governing Greece looking to the working-class masses as its source of strength and power, the result might well have been inspirational to the workers of the rest of the oppressed European states and beyond.  
But instead of mobilizing its millions to challenge capitalist rule, to take over the major industries, to tax and/or expropriate the rich, to national the banks and major corporations, all under the control of the working masses, Syriza and its sycophants (blind and obedient followers) envisioned social change as a product of clever negotiations with the capitalist elite, employing leading intellectuals to press for modest reforms within the framework of capitalism. Greece’s working-class masses were shunted to the sidelines by the Syriza/ANEL government.
Given that the major industry doesn't even exist, this will not prove easy. The biggest money earner is tourism, which depends crucially on small restaurants and stores, along with foreign expertise and capital to run hotels and cruise ships. You can't nationalize this stuff!

All in all, Mr. Mackler's article is a waste of time.

Further Reading: