Must-read: Ben Thompson: “China Watching”

Posted on by Brad DeLong

Must-Read: Ben Thompson: China Watching: “I am often asked why I don’t write more about China…

…the reason, as I’ve explained in the past, is that the country, particularly anything having to do with the government–which by extension covers all big businesses, tech included–is basically unknowable to an outsider, and the more you learn about China, the more you realize this is the case. To that end, while I feel relatively confident about what I am going to write, given the Chinese angle I am unashamed to admit that I could be 100% wrong; frustratingly, we will probably never know for sure…

Must-read: Marshall Steinbaum: “Uber’s Antitrust Problem”

Posted on by Brad DeLong

Must-Read: Are Uber and companies like it anti-rent seeking plays? Yes. Are they regulatory arbitrage plays? Yes. Are they behavioral economics plays–exploiting their workers who don’t properly calculate depreciation? Plausibly. What’s the proper balance? Allowing Uber to claim that its workers are in no sense its employees is surely wrong. Shielding existing rent-seeking monopolies created by regulatory capture from competition from Uber and its ilk is also surely wrong:

Marshall Steinbaum: Uber’s Antitrust Problem: “The Uber lawsuit captures the key question facing policymakers struggling to regulate the ‘gig’ and ‘platform’ economies…

…Are the new behemoths of the tech sector innovators that make the economy more efficient by ‘disrupting’ antiquated business models? Or are they just the trusts of a second Gilded Age, their new-fangled apps the equivalent of the railroad networks that monopolized commerce and access to markets 126 years ago, when the Sherman Act first took effect?

Until now, Uber and its fellow tech giants have managed to mystify policymakers and judges with double-speak regarding their relationship with employees. But in his decision allowing the case to move forward, Judge Rakoff wrote: ‘The advancement of technological means for the orchestration of large-scale price-fixing conspiracies need not leave antitrust law behind.’ Now one court has the chance to decide whether Uber can continue to have it both ways.

Must-reads: May 18, 2016

Posted on by Brad DeLong

Must-Read: Ben Thompson: Apple in China

Posted on by Brad DeLong

Must-Read: Ben Thompson: Apple in China: “Apple… with its model of status-delivering hardware differentiated by software locked to its devices…

…has been uniquely successful in the world’s most populous country. [And] for many years Apple’s model freed them from the usual hoops that most Western tech companies have had to jump through to get a piece of the irresistible Chinese market. For example:

  • Microsoft spends $500 million a year in China, mostly at its Beijing R&D center (its largest outside of Redmond), and has promised to up that total after a recent antitrust investigation
  • Cisco pledged to invest $10 billion in China last year after being increasingly frozen out from Chinese purchases after the Edward Snowden revelations
    Qualcomm, after settling an antitrust case, formed a $280 million joint venture with a provincial government that included technology transfer
  • Intel has promised up to $5.5 billion to transform a chip plant that it originally said would be two generations behind to become cutting edge; a few months later the company formed a joint venture with two local firms in direct response to Chinese concern about reliance on foreign companies in the chip industry. That follows a previous $1.5 billion investment in two other chipmakers partially owned by the Chinese government
  • Dell adopted a new strategy last fall predicated on partnering in China to the tune of $125 billion over five years, forming a joint venture with the Chinese Academy of Sciences, and deep partnerships with Kingsoft Corporation for work in the cloud ‘fully supporting and embracing the China ‘Internet+’ national strategy.’

The Internet+ strategy is a plan to integrate the Internet with traditional industries, but its introduction has gone hand-in-hand with an increasingly strong preference for Chinese technology from Chinese firms. Thus the partnerships, joint ventures, and investment. And yet, until now, the most successful American tech company in China has operated mostly without interference…

Today’s Economic History: John Maynard Keynes (1919): “I personally despair of results from anything except violent and ruthless truth-telling…”

Posted on by Brad DeLong

Today’s Economic History: John Maynard Keynes (1919): To Jan Smuts: “Ruthless Truth-Telling”: “My book [The Economic Consequences of the Peace] is completed and will be issued in a fortnight’s time…

…I am now so saturated with it that I am quite unable to make any judgement on its contents. But the general condition of Europe at this moment seems to demand some attempt at an éclairecissement of the situation created by the Treaty [of Versailles ending World War I], even more than when I first sat down to write. We are faced not only by the isolation policy of the U.S., but also by a very similar tendency in this country. There is a growing an intelligible disposition to withdraw (like America), so far as we can, from the complexity, the expense, and the unintelligibility of the European problems: and particularly as regards financial assistance, the Treasury is inclined, partly as a result of our own financial difficulties and partly because of the hopelessness of doing anything effective in the absence of American help, to let Europe stew. Also anti-German feeling here is, still, stronger than I should have expected.  But perhaps most alarming is the lethargy of the European people themselves. They seem to have no plan; they take hardly any steps to help themselves; and even their appeals appear half-hearted. It looks as though we were in for a slow steady deterioration of the general conditions of human life, rather than for any sudden upheaval or catastrophe. But one can’t tell.

Anyhow, attempts to humour or placate Americans or anyone else seem quite futile, and I personally despair of results from anything except violent and ruthless truth-telling–that will work in the end, even if slowly…

Must-Read: Simon Wren-Lewis: A General Theory of Austerity

Posted on by Brad DeLong

Must-Read: Simon Wren-Lewis: A General Theory of Austerity: “I start by making a distinction… between fiscal consolidation, which is a policy decision, and austerity, which is an outcome where that fiscal consolidation leads to an increase in aggregate unemployment…

…Monetary policy can normally stop fiscal consolidation leading to austerity, but cannot when interest rates are stuck near zero…. I say that austerity is nearly always unnecessary… has nothing to do with markets: the Eurozone crisis from 2010 to 2012 was a result of mistakes by the ECB. If a union member’s government debt is not sustainable, there needs to be some form of default (Greece). If it is sustainable, then the central bank should back that government, as the ECB ended up doing with OMT in 2012…. None of this theory is at all new….

That makes the question of why policy makers made the mistake all the more pertinent. One set of arguments point to… austerity as an accident… Greece happened at a time when German orthodoxy was dominant…. [But this] does not explain what happened in the US and UK…. The set of arguments that I think have more force… reflect political opportunism on the political right which is dominated by a ‘small state’ ideology…. [But] how was the economics known since Keynes lost to simplistic household analogies[?]…. [And why] in this recession, but not in earlier economic downturns?… It does not have to be this way…. We cannot be complacent that when the next liquidity trap recession hits the austerity mistake will not be made again…

Equity crowdfunding is here. Now what?

Posted on by Bridget Ansel
Photo of the U.S. Securities and Exchange Commission building, in Washington, DC.

It’s taken almost four years, but now any American, regardless of their income level, can invest in start-ups. Known as equity crowdfunding, this change to regulation seemingly throws open the door for everyday Americans to invest in companies that aren’t yet listed on public stock exchanges such as NASDAQ or the New York Stock Exchange. As part of the Jumpstart Our Business Startups Act, or JOBS Act, the crowdfunding provision was developed in the hope that it would, as the name says, jumpstart small business formation. And at the same time, with high-growth companies increasing staying private, some people hope equity crowdfunding will broaden investor access to the high-returns of these young firms beyond venture capitalists, institutional investors, and high-net-worth individuals.

But with investing officially allowed today, it seems unlikely either of these dreams will come to fruition any time soon. That’s not to says that the U.S. economy isn’t in need of a jumpstart when it comes to new business creation. The start-up rate has been on the decline since the 1980s without any sign the trend is about to reverse. Not only are startups less likely, but the decline has been very pronounced for high-growth startups. In short, there are fewer startups and the ones that do exist grow slower.

A policy change that accelerates business startups and their growth would certainly be welcomed. The reasons for the decline in the startup rate (and overall business dynamism) aren’t well understood. But it seems unlikely that access to capital is a powerful reason, as credit became more available at the same time that the startup rate began declining.

But even if capital were at the heart of the problem when it comes to high-growth startup, the new equity crowdfunding measures seem unlikely to help. When the rule was finalized by the Securities and Exchange Commission late last year, Nick Tommarello of the investment crowdfunding platform WeFunder wrote about some of his concerns with the rule. His chief concern: The rule doesn’t allow newly eligible investors (those who weren’t already rich enough to invest before) to pool their funds together to invest in new firms looking for investors.

As Tommarello explains, because high-growth startups with a large number of investors may scare away later-stage investors, they prefer to lump the crowdfunders together into  one bigger fund. This means the new regulation will make it extremely difficult if not impossible for everyday Americans to invest in potential high-growth startups. Recipients of new funding will most likely be firms that didn’t have access to funding previously and have a low growth potential. These small businesses may be good businesses, but they likely aren’t the kind that’ll significantly boost employment and productivity growth in the United States.

This part of the regulation also means that average investors won’t have direct access to the kind of returns that accredited investors and venture capital funds do. Now, that might be a good thing as these kinds of investments are high-risk. Given the state of saving in the United States, policymakers may not want to encourage everyday Americans to invest in such risky assets. Perhaps traditional mutual funds may be able to provide some access to these returns in the future, though their current experience valuing these kinds of firms might make us less optimistic on that front.

Increasing business dynamism in the U.S. economy is vital to long-term economic growth and prosperity. In a period of weak productivity growth, new high-growth entrepreneurial firms have the potential to help boost the productive capacity of our economy in the long-run. Unfortunately, it seems the JOBS Act, one of the first efforts in this area, is unlikely to be a big step forward. But in the spirit of startups, we should pick ourselves up quickly from this misstep, dust ourselves off, and pivot to the next idea.

Must-reads: May 17, 2016

Posted on by Brad DeLong

Must-read: Kara Scannell and Vanessa Houlder: “US Tax Havens–The New Switzerland”

Posted on by Brad DeLong

Must-Read: Kara Scannell and Vanessa Houlder: US Tax Havens–The New Switzerland: “In an old discount store hugging a corner in downtown Sioux Falls, South Dakota…

…the heirs to the William Wrigley chewing gum fortune have an office for their family trust. So do the Carlson family, owners of the Radisson hotel chain, and the family of John Nash, the late hedge fund giant. They are among the 40 trust companies sharing an address at 201 South Phillips Avenue, a modest, two-storey white-brick building. Inside, $80bn worth of trust assets are administered…. Assets held in South Dakotan trusts have grown from $32.8bn in 2006 to more than $226bn in 2014…

Maybe central banks should buy stocks as well

Posted on by Bridget Ansel
Specialist Charles Boeddinghaus, center, works on the floor of the New York Stock Exchange, Friday, May 13, 2016.

The main tools for fighting recessions have been fairly consistent: Central banks lower interest rates, and governments cut taxes and increase spending. Over the past few years, there have been innovations when it comes to monetary policy, with banks trying quantitative easing—the purchase of long-term bonds—and the recent adventures into negative nominal rate territory. But central banks are still largely in the business of intervening in the short-term end of the bond market. Perhaps monetary policy or fiscal policy, should consider intervening in a much riskier market: stocks.

The idea that policymakers may want to buy and sell stocks in the equity markets is far from mainstream, but University of California, Los Angeles economist Roger Farmer is forcefully arguing this idea. Understanding the case for intervening in the stock market first requires walking through Farmer’s views of the macroeconomy. For the most part, economists believe that the overall economy is self-correcting—that after a recession, the economy will eventually return to its previous size and growth rate. The debate is about how quickly the economy will return to that point and how to help it get there. But Farmer doesn’t subscribe to that underlying assumption. Farmer argues that an economy can get stuck in a situation where economic output is lower and won’t return to its previous size and growth rate until proactive action is taken to boost the economy.

Farmer’s argument stems from the idea that, according to his research, capital markets aren’t efficient. Price changes in assets like stocks aren’t based on changes in fundamentals of the assets, such as potential profits, but rather on seemingly random fluctuations in belief. In a recent paper, Farmer builds a model that incorporates this assumption along with one other assumption: People live and die. The fact that there are generational changes in the model allows for jumps in the prices of equities, which cause recessions or booms, to result in changes in the distribution of wealth and consumption across generations. This makes sense if you consider the large costs to recent graduates who enter labor markets during recessions.

Farmer’s model with these assumptions manages to partly explain two big puzzles in financial economics: the fact of excess volatility in stock prices, and the fact that the returns on equities are far above those of government bonds.

So how should policymakers make sure that these transfers (recessions) don’t happen? Well, if the problem is that asset prices are fluctuating too much, then policymakers have a reason to intervene in these markets to stabilize prices. Central banks or treasuries would buy stocks when the market is on the decline and sell when the market is on the upswing.

This idea does have some precedent. Consider the quantitative easing programs many central banks have implemented in recent years. Part of those programs are pure quantitative easing according to Farmer and Pawel Zabczyk (expanding the size of a central bank’s balance sheet) as well as qualitative easing (bringing more risky assets onto the balance sheet). Adding stocks would just be a change in the riskiness of the assets purchased. The Bank of Japan has been buying stocks via exchange-traded funds for years, though Farmer says it’s important not to just buy stocks but to do so in a way that reduces changes in the relative price of stocks.

For now, Farmer’s ideas are still at the edges of the policymaking world. But then again, so were the ideas that central banks would cut rates below zero or even contemplate “helicopter money.” Recent years have found opportunities for those ideas. Perhaps the future will find some for Farmer’s.