Category Archives: economics

Maybe Germany needs to be kicked out of the Eurozone

From Foreign Policy

Last year, Germany racked up a record trade surplus of 217 billion euros ($246 billion), second only to China in global export dominance. To some, this made Germany a bright spot in an otherwise anemic eurozone economy — a “growth driver,” as the German finance minister, Wolfgang Schäuble, puts it. In fact, Germany’s chronic trade surpluses lie at the heart of Europe’s problems; far from boosting the global economy, they are dragging it down. The best way to end this perverse situation is for Germany to leave the eurozone.

Germans usually respond to such charges with a kind of hurt confusion. We run trade surpluses, they patiently explain, because we are simply much more competitive than most of our trading partners. Can you blame us, they ask, if the world prefers to buy superior German goods (and has nothing we want in return)? So goes the argument: The rest of the world just needs to up its game, get its house in order, and become a bit more like Germany. In the meantime, don’t hate us ‘cuz we’re beautiful….

Contrary to popular mythology, however, there’s absolutely no reason why being “competitive” should mean running a trade surplus. As far back as 1817, the economist David Ricardo pointed out that the optimal basis for trade is comparative, not absolute, advantage. In other words, even if a country is better at everything, it should export what it is best at and import what it is less better at. Having an across-the-board advantage does not imply that it makes good economic sense to produce everything yourself, much less to sell more than you want in return. Or, to put it a bit differently, there’s no inherent reason why earning more can’t mean spending more, on consuming both public and private goods, as well as investing in future productive capacity.

Trade surpluses take place when a country chooses to spend less than it produces — when it has excess savings, beyond its domestic need for credit. It lends that excess savings abroad, financing another country’s ability to spend more than it produces and, by running a trade deficit, purchase the lender’s excess production. It’s true that a highly productive country might have the wherewithal to conjure up excess savings, while a less productive country might be inclined to borrow rather than scrape up the savings it needs. But fundamentally, trade imbalances arise not from competitive advantage but from choices about how much to save and where that savings should be deployed — at home or abroad.

Does it ever make sense to run trade imbalances? Sure it does. In the 19th century, Britain’s Industrial Revolution enabled it to reap vast earnings from expanded output, some of which it invested in the United States. The money lent to a rapidly growing American economy generated higher returns than it would have back home, while creating a market for British-made goods. The potential productivity gains made it a win-win: It made sense for the Americans to borrow and for the British to lend. But the case also highlights something that’s easy to forget: Running a trade surplus means financing someone else’s trade deficit.

The eurozone crisis is often called a debt crisis. But, in fact, Europe as a whole did not have an external debt problem, but an internal one: German surpluses and mounting debt in Europe’s periphery were two sides of the same coin. Germans saved (a lot), and the single currency induced them — rather than save less or invest it at home — to lend it to their eurozone trading partners, which used the money to buy German goods. By 2007, Germany’s trade surplus had reached 195 billion euros, three-fifths of which came from inside the eurozone. Berlin might call this “thrift,” but it’s hard to argue that Germany’s excess savings, which its banks often struggled to put to use, were well invested. Instead, they gave Germans the illusion of prosperity, trading real work (reflected in GDP) for paper IOUs that might never be repaid.

The solution? 

So what should be done? The best solution — and the least likely to be adopted — is for Germany to leave the euro and let a reintroduced Deutsche mark appreciate.

It will never happen but it is a solution that makes sense.

Introducing the Worst Airline in America

A business professor examines how bad the worst (and most profitable) airline in America really is.

Criticism of his company’s predacious practices doesn’t faze Baldanza. “Predatory means selling at below your cost,” the Spirit CEO told a skeptical questioner in a Reddit AMA talk last July. This is not only a novel definition, it is one that Spirit doesn’t risk illustrating. In October of last year, analysts at Morgan Stanley declared the carrier the “Most Profitable Airline in the World.” It is also among the fastest growing. Spirit launched 24 new nonstop routes in 2014 and plans another 26 for this year.

Success breeds admirers. In December, Delta announced that it was introducing five categories of service, including its answer to Spirit’s Bare Fare: Basic Economy. In addition to its precarious grammar, Basic Economy does not allow passengers to pick their seats, change their itineraries, or fly standby. The move is merely the most recent evidence that Spirit has become a trendsetter—arguably, the trendsetter—in the American airlines industry. But what trend is it exactly? Baldanza has repeatedly affirmed that Spirit is refining the art of offering affordable airfare, an effort which he qualifies as nothing less than an essentially democratic endeavor. He has a point, insofar that we live in a world where social mobility and simple mobility increasingly go hand-in-hand. Yet other low-cost carriers have long provided models of budget air travel without engendering nearly the angst of Spirit. Two of them, Jet Blue and Southwest, were even ranked number one and number two, respectively, in the 2014 American Customer Satisfaction Index survey of U.S. airlines.

No, rather than being a trailblazer in economy pricing, Spirit’s real significance is that it has come to embody one of the two guiding principles of customer service that, in capitalism, have always been contending centers of moral gravity. The first principle, embodied by Braniff, is: The Customer is Always Right. This approach assumes that commercial success depends on building strong bonds of customer loyalty. The second principle is: Caveat Emptor, or more familiarly, Buyer Beware. It assumes that, when it comes to turning a profit, preying on the ignorance and necessity of customers is not simply acceptable for private enterprise, it’s standard operating procedure.

It is a commercial truism that nothing succeeds like success, but might makes right is its cultural corollary. In the airlines industry, the success of Spirit has helped to legitimize practices that treat passengers, in the words of one consumer watchdog, like “meat in a seat.” When a carrier assumes the moral status of its customers to be different from an ATM only in respect to daily limits, monetizing the mistakes of first-time flyers can be a lucrative business. And for those passengers who return to Spirit a second, or even a third time, to say nothing of 13, they do so with a fatal sense of capitalism’s capacity to justify cruel choices, as well as with a growing cynicism of dealing with a company that regards common decency as a convenience fee. 

The contempt is mutual. A significant flight delay prevented a customer named James and his wife from attending a concert in Atlanta, the sole purpose of their trip. James emailed several of Spirit’s top executives to air his complaint. Baldanza made the mistake of hitting reply all, which is how the exchange became public: “We owe him nothing as far as I’m concerned,” Baldanza wrote in response. “Let him tell the world how bad we are,” Baldanza offered. “He’s never flown before with us anyway and will be back when we save him a penny.”

Shamelessness has certain advantages. A more succinct expression of Spirit’s credo is truly hard to imagine.

I have flown great airlines and have flown horrible ones I kind of defend Spirit Air.  It exists to get you from a to b as cheaply as possible.  For some people at some points in their life, that matters a lot. You may not like it but in the end, you chose to fly the cheapest airline in North America.  You get what you pay for.

There is no such thing as a skyscraper curse

But just in case, Saskatoon leaves Parcel Y undeveloped

Until recently, however, there had been no formal analysis of the skyscraper curse. A new paper by Mr Barr, Bruce Mizrach and Kusum Mundra (all of Rutgers) investigates Mr Lawrence’s musings in detail. They look at the building of 14 world-record-breaking skyscrapers, from New York’s Pulitzer (which opened in 1890) to the Burj Khalifa, and compare them to American GDP growth (which they see as a decent proxy for the world economy).

If, as the skyscraper curse suggests, the decision to build the biggest towers happens near the peak of the business cycle, then you could use record-breaking projects to predict the future path of GDP. However, the range of months between the announcement of the towers and the business-cycle peak is large, varying from zero to 45 months. And only seven of the 14 opened during a downward phase of the business cycle (see chart). In other words, you cannot accurately forecast a recession or financial panic by looking at either the announcement or the completion of the world’s tallest building.

With such a small sample, it is tricky to draw firm conclusions. But the paper expands the sample to 311 by looking at the tallest building completed each year in four countries (America, Canada, China and Hong Kong). The authors then compare building height to GDP per person. They find that in all countries GDP per person and skyscraper height are “cointegrated”, a fancy way of saying that the two things track each other. In other words, developers tend to be profit-maximisers, responding rationally to rising incomes (and thus increased demand for office space) by making buildings bigger. While ego and hubris afflict the skyscraper market, the authors argue, its foundations appear sound.

Canada ‘potentially vulnerable’ because of household debt: report

From the Toronto Star

A renewed warning on Canadian household debt levels is coming from a research report written by an international management consulting firm.

The report, published by McKinsey & Company on Thursday, singled out Canada and six other countries with “potential vulnerabilities in household debt.”
In Canada’s case, household debt levels are higher than those that existed in the U.S. at the peak of the credit bubble, the report notes.

The data suggests a “potential risk, but not an imminent crisis,” the report said.

“There is no sign that there are a significant number of Canadian borrowers today having trouble repaying their debt. The risk comes when you look to the future,” said Susan Lund, partner at McKinsey Global Institute in Washington, D.C.

“If the economy were to slow and unemployment started to rise, when people lose jobs, that’s when a mortgage that you could afford with a job suddenly becomes unaffordable. The other potential risk is if and when interest rates start to rise, that could create a much larger burden on households repaying debt.”

So what does that mean for Calgary which already has an obscene amount of household mortgage debt?  I hate to say it but what does it mean for Saskatchewan which has a high debt to income level.  

 

Westgate Books

I’ve been having some fun at Westgate Books lately.  A couple of weeks ago I wandered into the store looking for Saskatoon: A History in Photographs by Jeff O’Brien, Ruth Miller and William P. Delainey.

They didn’t have it but the staff that was helping me went to look in the warehouse.  Instead of the book I was looking for, he came up with two books, Saskatoon, the First Half Century by Don Kerr and Saskatoon, Hub City of the West: an Illustrated History by Gail McConnell.

I looked at them and took them both.  I also put my name down on a list if Saskatoon: A History in Photographs came in.  A couple of days later I got a phone call that told me that my book was in and come to pick it up.  Last Friday I went back to get it and it was the wrong book.  It was Saskatoon: A Century in Pictures by William Duerkop, John Sarjeant and William Delainey.  In hindsight I kind of wondered if there was a bit of miscommunication when I ordered Saskatoon: A Century in Pictures but I looked at this book and I realized I wanted to read it as well.  I had a blast all week looking at it.  So has Mark.

Since I am talking about books, it looks like Gail McConnell was doing Kickstarter long before Kickstarter was a thing.  The last 20 or so pages of her book is dedicated to patrons who helped pay to publish her book.  Local Saskatoon businesses sponsored the project and she does a one page profile on each company.  Who knew a history book could be so cutting edge.

While I was getting that book, another staff at Westgate Books went looking for the book in case they missed it and found me another book on the history of electric transit in Saskatoon.  I didn’t have the money on me to get it so they put that away for me.  I’ll wander by this week and get it.  Now I am curious as to what other books I will find in my brief stop at the store.

I know being in the used book business is a hard business to be in but I haven’t had as much fun shopping as I have had in Westgate Books in a very long time.  I hope that still counts for something.