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The future economy

MASSIVE government debt, who pays that off?

Many companies out of business because of bankruptcy.

People without jobs don’t spend money.

Employers lay off more people because there’s no demand, creating even more people without jobs who don’t spend money.

People become used to ordering stuff online, lots of demand for retail never returns.

People become used to a lifestyle of more saving and less spending. The Great Depression of the 1930s created a generation like that. Will probably happen again. This further reduces demand.

Democrats take over House, Senate and Presidency in January 2021, with mandate to do radical stuff. What will they do?

Written by Lion of the Blogosphere

April 29, 2020 at 10:51 AM

Posted in Economics

Economic disruption to the furniture industry

I saw the following on Reddit. Of course, any bozo or hoaxster can post on Reddit, but it seems legit, because our economy is based on “just-in-time supply chain management.”

I worked in the furniture business. My company has full furniture imported from China and for the made in the USA stuff the fabric is imported from China (China makes over 40% of the worlds textiles). For a few weeks we haven’t even been able to reach our Chinese vendors much less get in contact with them. We finally reached our biggest vendor who supplies all of our fabrics, the PO dates are insane. For our popular fabrics we are looking at PO dates to mid JUNE as of right now, less popular stuff it’s early august. That’s just to get the fabric to the US factory. We are told if factories even open up they are going to be producing a fraction of the product due to employees being locked down in their home cities.

We are already running low on our warehouse stock because income tax return is the busiest time of the year. Once we run out we can’t even put in further purchase orders. Since we’ve already ran out of lighter stocked merchandise it’s been calculated we already lost over a million dollars in potential sales. My company has close to 100k employees and our jobs are seriously at risk right now.

People are so focused on the virus that they aren’t even realizing that hundreds of thousands of people will be out of work if this continues any longer. It’s not as simple as sourcing from another country, it’s extremely expensive to relocate production to another country, it’s also a very slow process.

Even if this ended tomorrow there’s a good chance our company can tank from this situation. I’ve already been told by a friend in corporate to get my resume ready to go.

The economic fallout from this is going to be life changing.

Proves my point from yesterday that even stuff that’s allegedly made in the USA is dependent on materials from China. Who knows what else they could run out of besides fabric? Where are the screws and stuff like that made? I bet they’re made in China.

* * *

According to this article at a supply chain website, hardly anything is shipping out of China right now.

The coronavirus outbreak in China continues to severely disrupt supply chains, the few export sailings this week not cancelled by carriers departed barely 10% full.

With reported deaths now in excess of 1,300 and confirmed cases at over 63,000, some provinces and cities in China have extended movement restrictions until 1 March.

“The network has almost ground to a halt,” one carrier source told The Loadstar this week.

“We sailed a 23,000 teu ship this week from China to North Europe with less than 2,000 teu – we can’t carry on much longer like this.

“It’s no good discounting rates if the cargo is not there, so we might have to ask for a premium for customers that do manage to get their containers on the quayside,” he warned.

A UK forwarder told The Loadstar this week one carrier told them that it might anchor its biggest ships and deploy smaller vessels on a very limited service until demand picked up.

Here’s a tip to sound educated: the word “quayside” is pronounced “key-side.”

Written by Lion of the Blogosphere

February 16, 2020 at 1:40 PM

Posted in Economics

The coming economic collapse

The feudal economy was very resilient. Each feudal estate was an almost entirely independent economic unit, growing its own food, manufacturing its own tools, clothes, etc. If one feudal estate got wiped out by a plague or a war, it would have little if any impact on other feudal estates.

The modern global economy is the very opposite of that. Everything is dependent on everything else, and most of all dependent on China which is the manufacturing center of the world. Even for items that aren’t manufactured in China, they are dependent on parts for China. For example, it’s unlikely that there’s a car made anywhere in the world that’s not dependent on China for some of its internal parts. The same goes for anything high-tech. And most low-tech stuff is also dependent on China. Without China exporting stuff, the shelves at Target and Walmart will become pretty bare.

And you know what’s happening right now? China has stopped manufacturing stuff because they’ve put a huge portion of their country under martial law lockdown. And in the places where factories are allowed to open, they have the same dependency for parts on the factories that are still closed. Word is that hardly anything is being shipped into or out of China right now.

How long before car factories in other countries have to shut down because they are missing that one key part that hasn’t been shipped in from China? What happens to the workers when the factory shuts down? Unless there’s a union contract which says otherwise, they get sent home without pay, and people without pay stop buying stuff. It becomes a vicious circle of collapsing supply and collapsing demand. Not to mention how much additional supply and demand will collapse when the virus becomes pandemic in other countries. Even without martial law like they have in China, people will stop going out of their houses and spending money like they normally do.

So many companies are highly leveraged and can’t handle the economic stress of a collapse in revenue for a few months. Bankruptcies inevitably happen. It becomes a cycle of badness that will surely be worse than what happened in 2008 which was just a collapse of the business cycle and not a collapse caused by an external event like the virus.

Of course, if China goes back to normal on Monday with everyone going back to work, we will just have one quarter of lower growth than normal, and that’s what the stock market, close to all-time-highs, seems to have priced in. But that rosy scenario just doesn’t look very likely. People just aren’t taking this virus seriously enough.

Written by Lion of the Blogosphere

February 15, 2020 at 12:24 PM

Posted in Economics

Higher IQ correlates with greater honesty

Click to access dp9860.pdf

This is an extremely interesting psychological (or economics) experiment.

The person being experimented on was asked to secretly roll a six-sided die and report the result. Soldiers who reported higher numbers were allowed to leave earlier from their job, and civilians who reported higher numbers got a higher reward (which was only 10 shekels for each pip, or about three US dollars).

The distribution of numbers reported for those in the top half of intelligence, based on either the kaba (the Israeli military evaluation score) or a 12-question intelligence test, closely resembled what would have been expected based on chance, except that it seems that the high intelligence responders sometimes under-reported high die rolls.

But when you look at the distribution of numbers for those in the lower half of intelligence, it’s pretty obvious that a substantial number of them are lying about what number they rolled in order to get a higher payout or an earlier release time from their military job. More so for the civilians than the soldiers.

None of the other factors they looked at (such as self-reported honesty) had a statistically significant impact on the distribution of die rolls. Although I wish that they had done this test on more people in order to be sure; there was a possible correlation between being from a city and having less honesty, and having higher honesty if from a rural area.

This experiment has huge implications for what kind of society you want to live in. It’s pretty clear that higher IQ leads to high-trust societies where people are honest with each other, while lower IQ leads to crime-ridden disorderly societies. Also, if hiring people, it’s way better to hire people from the top 50% of IQ if you want to have honest employees. IQ is way more important than merely being the ability to do well on tests.

The paper is also informative because it includes the 12 question Raven’s Progressive Matrices test that was used. This is an IQ test that is talked about a lot, but I’ve never actually seen what the test is like.

There were 12 questions, but only a stupid person could get more than 1 question wrong (because the last question on the test was slightly non-obvious, so if someone wasn’t motivated they might blow it off). Indeed, about a quarter of the test-sitters got all 12 questions correct, and another quarter got 11 questions correct. So my conclusion is that the test is good at measuring stupidity, but bad at measuring intelligence. If this is the test that was used to conclude that intelligence is rising (the so-called Flynn Effect), then the alleged rise means that stupid people became less stupid, not that smart people became smarter.

Written by Lion of the Blogosphere

December 28, 2019 at 9:03 PM

Posted in Biology, Economics

“The Real Class War”

The Real Class War

Commenter Lowe plugged this article in a comment. It’s pretty good as an attempt to create grand theory of what’s going on and why college-educated people are voting Democratic, but without HBD it doesn’t tell the whole story. Also important and not discussed is the decline of Christianity and its replacement with a religion of climate change and SJWism.

Written by Lion of the Blogosphere

November 29, 2019 at 10:14 PM

Posted in Economics

Raising the minimum wage helps the low-wage workers

I’ve been saying so for a long time, and this NY Times article provides proof backing me up.

Simplistic supply-and-demand-curve-based macroeconomics is wrong about a lot of stuff. As I’ve stated over and over again, Michael Porter’s book Competitive Strategy or one of its derivatives, taught at every MBA program, is a much better book for understanding how the economy works than an economics textbook.

Although the economics textbooks do have a term to explain why supply and demand doesn’t work, and it’s called “elasticity of demand.” So if demand for low-wage workers is “inelastic,” then increasing the price of low-wage workers through a government-mandated minimum wage doesn’t cause the demand to become lower by a significant amount, because the demand is “inelastic.”

But if you want to understand why demand is inelastic, then you need to turn to Michael Porter. Compared to workers, businesses have a lot more bargaining power, so although they would hire 10 workers for $12/hour if that were the going rate, they can get away with paying them $7/hour because of their superior bargaining power. The goal of minimum wage laws, therefore, should be to find the correct minimum wage so that workers are getting their fair share of profits without causing unemployment or other disruptions to the market.

Written by Lion of the Blogosphere

November 13, 2019 at 9:36 AM

An important lesson in business competition and economics

Do you remember the article in the Wall Street Journal (from 2006) about how a once successful black entrepreneur saw his stucco business ruined because of competition from Mexican immigrants. [Bypass the paywall by opening the link in an incognito window!]

By the mid-1990s, stucco jobs increasingly took Mr. Hairston and his predominantly black crew from Atlanta to Hilton Head Island. Mr. Hairston fell in love with the moss-draped oak trees and intercoastal waterways inhabited by snowy egrets. Golf and hotels had turned the area into a resort mecca, and in the mid-1990s, a housing boom in the area allowed Beaufort County to boast the fastest growth and lowest unemployment in the state. “There was tons of work … and only a couple stucco contractors in the whole area,” recalls Mr. Hairston, a tall, strong man who sports a shaved head and a goatee.

According to the article, Mr. Hairston’s most profitable year was 1997 when he had $971,000 of revenues and “roughly $500,000” of net income.

Half a million a year is a huge income even for a white Harvard educated professional living in Manhattan. What did he do to actually “earn” that income? He found a market where there was little competition, and we presume that there were barriers to entry which prevented competition. What exactly were the barriers to entry? (1) You have to be smart enough to manage a stucco business, and (2) you need to work in the industry to learn the ropes. Probably, nearly all the people with enough intelligence and ambition to run their own businesses were turned off by the idea of working for low wages as a stucco person, and they got sucked into more prestigious occupations, probably ones that require a college degree.

How much of his big income did he share with his black workers? Probably, like a good capitalist, he kept all the money for himself and paid his workers the lowest wage he could get away with. It’s not just the white man keeping the black man down. As soon as a black man makes it big, he also participates in keeping the other blacks down.

But then Mr. Hairston discovered immigrant labor.

Latin American immigrants were just starting to trickle into the area, as word spread that jobs in construction and hospitality were plentiful. Immigrants were increasingly bypassing traditional gateways, like California and Texas, to seek work in the Southeast.

So Mr. Hairston, who until then had mostly relied on black labor, hired a handful of Mexicans. He says they were diligent and eager to learn. They were “prepared to acquire basic knowledge and not afraid to try” new work, says Mr. Hairston. When he needed more hands, his Mexican workers sent for their relatives back home and elsewhere in the U.S. Mr. Hairston says they presented Social Security numbers, and he in turn paid taxes and workers’ compensation although he acknowledges some of them had probably entered the U.S. illegally.

It sounds pretty good for Mr. Hairston. Better quality labor for the same low price, or even lower, than before.

I have no doubt that the Mexicans were better workers. The black workers were probably from the bottom half of the black bell curve. Who else would want to do manual labor in the hot humid climate of South Carolina? The Mexicans, on the other hand, took these jobs because barriers to entry (such as being illegal and not speaking English) prevented them from working at higher level jobs. But some of Mr. Hairston’s new Mexican workers were smart and ambitious enough to learn the business and then compete against him!

Mr. Serrano began to work in stucco, perfecting his skills as an employee of Mr. Hairston’s Pro Plastering & Stucco. He says he earned $8 to $10 an hour during the two-and-a-half years he worked for Mr. Hairston. In the beginning, Mr. Serrano recalls, Mr. Hairston still employed several black workers. But gradually Mr. Hairston came to rely more on Mr. Serrano and other Mexican immigrants. “We showed up for work every day and we were dedicated,” Mr. Serrano recalls.

On His Own

Around 2000, Mr. Serrano struck out on his own, working as a subcontractor to Mr. Hairston. He supplied Mr. Hairston with crews for several jobs. “I was able to train the workers,” who were all Spanish speakers, he recalls. Mr. Hairston typically paid him about 25% of the value of the contract for the job, he says. Mr. Serrano says that he pays taxes on all his workers, as well as workman’s compensation.

Mr. Hairston says that for a while it didn’t bother him that some of his Latino workers, like the Serranos, struck out on their own. “I never thought I would be competing against them,” he says. But he felt particularly stung when he encountered one of his workers — who had asked for two weeks off — working on an $80,000 job on a high-end house that Mr. Hairston’s company had bid for.

Mr. Hairston’s business gradually began to unravel. Mr. Hairston “would bid and another guy who used to work for him would bid on the same job,” recalls Greg Goldberg, another builder, who is currently president of the local home builders’ association. Mr. Goldberg himself says he hired some of Mr. Hairston’s former workers.

Because of the new competition, “the Hairstons’ net income plunged from roughly $500,000 in 1997 to about $70,000 in 2005.”

$70,000 isn’t a bad salary for a guy doing manual labor. Skilled engineers or computer programmers, jobs which require much more sophisticated knowledge, probably don’t make much more than that when they are working in a low wage area of the country such as South Carolina.

Once Mr. Hairston’s monopoly power was destroyed, his income sunk to the normal level of a skilled worker.

The lesson is that whenever people are making a lot of money, it’s because there are barriers to entry and lack of real competition.

BIGLAW and investment banking are both very profitable for the people who work in those industries. Let’s examine what investment banks and BIGLAW do differently from Mr. Hairston to maintain their market power and high incomes.

What they don’t do is hire dumb employees. This is what Mr. Hairston used to do. If he had continued to hire the lousy black workers instead of the smarter and more motivated Mexican workers, he wouldn’t have trained the people who ended up competing against him. Investment banks and law firms don’t hire dumb people, but in corporate America, it’s not uncommon for managers to purposely hire people not as capable as themselves to prevent their employees from eventually displacing them.

So how do investment banks and law firms keep their smart and ambitious employees from competing against them? One of their most important strategies is that they share the profits. This is why professional service firms are set up as partnerhips with large numbers of partners, and why so many people get large chunks of the profits. Goldman Sachs, by paying out billions of dollars in bonuses, demonstrates that it’s more profitable for the employees to stay with the firm than it is for them to try to compete against it.

This is one of the things that Mr. Hairston did wrong. He paid Mr. Serrano a lousy $10/hour salary and kept all the profits for himself. If he made Mr. Serrano, and other workers who were identified as being the most likely to be able to successfully compete against him, junior partners, and upped their salary to $100,000 year, Mr. Hairston might still be making $500,000 a year. Instead of a bunch of small stucco firms competing against each other, there would be one big stucco firm with monopoly power and with several partners making big incomes.

The partnership model is used in industries where the primary barrier to entry is knowledge of the industry. In industries where there are other barriers to entry, such as high capital requirements or unique intellectual property protected by law, companies don’t have to share the profits with the employees, and they don’t. (Except for the CEO, but the reason for crazily high CEO salaries is beyond the scope of this essay.)

To further prevent competition within the industry, firms work towards creating group loyalty. Why do new investment bankers have to work 90 or 100 hour weeks? One reason is limit the number of people in the industry who have the knowledge of how to compete. But another very important reason is because this hazing experience actually creates group loyalty. As copied from Wikipedia:

Hazing is often used as a method to promote group loyalty and camaraderie through shared suffering, either with fellow participants, past participants, or both.

A tentative explanation from evolutionary psychology is that hazing can activate the capture-bonding psychological trait also known as Stockholm syndrome.

The group loyalty and camaraderie created by the grueling 100 hour work weeks and brutal treatment of investment banking associates discourages them from later competing against other investment bankers in a manner which would ruin the profits for the entire indusry.

The following description of the bidding process for stucco jobs demonstrates the lack of market power held by the stucco companies:

Mr. Hairston says that he never knew by how much he was undercut because the bidding process in construction isn’t open. Builders often approach two or three subcontractors and invite them to make an estimate for a project. The builders rarely reveal the value of the winning bid to the losing parties.

What would happen if a company asked a bunch of investment banking firms, or law firms, to submit sealed bids in this manner? I’m pretty sure that the lawyers or investment bankers would say “sorry, that’s not the way we do business.” They know that as soon as one firm submits to this indignity, the profitability of the entire industry would unravel.

Furthermore, in investment banking, the amount paid to the bankers can’t be hidden. The financial disclosure requirements, required by law, ensure that everyone knows how much the investment bankers made from the deal. How convenient that the law, which supposedly protects investors by disclosing financial details to them, has the parallel effect of making the industry less competitive and helps the investment bankers rip off the investors.

Law firms, of course, also take advantage of the law to limit their competition. All lawyers must pass the bar exam of the state in which they practice. Although passing a bar exam isn’t the most difficult thing to do, the fact that each state has its own bar exam prevents lawyers from competing with lawyers from other states. So instead of one big national legal market with a large number of law firms, there are 50 legal markets each with a much smaller number of firms. The fewer the number of members, the more powerful the cartel.

Lawyers also have Model Rule 5.4 which ensures that lawyers get to keep their profits.

Mr. Hairston has learned the lessons of the lawyers and, with the help of his wife, is now trying to get the government to make his competition go away so he can once again make big profits:

In September, Mrs. Hairston presented a draft of an “illegal immigration relief ordinance” to the County Council. Under the ordinance, companies that knowingly hire undocumented laborers could have their business licenses revoked. The ordinance would require that all businesses volunteer to participate in a federal government pilot program that verifies whether a Social Security number matches an individual’s name. It would bar illegal immigrants from getting a business license.

Written by Lion of the Blogosphere

October 8, 2019 at 9:59 AM

Posted in Economics

Another example of “I told you so”

In 2010 I wrote:

To the extent that Democrats believe in value creation at all, they believe that value is created by evil deeds such as enslaving black Africans, stealing land from the American Indians, and desecrating the planet in order to extract resources.

And now, for those who think I was just making that crap up:

Written by Lion of the Blogosphere

August 18, 2019 at 6:52 PM

Posted in Economics

Our nation’s declining capabilities

According to this Wikipeda article, in just six years, between 1863 and 1869, a 1,912-mile railroad line was built to connect the east-coast rail network to California. And they had to deal with stuff that we don’t have to deal with today, like massive buffalo herds and hostile Indian tribes.

Not that I’m saying that California needs a high-speed rail line (they probably don’t), but if they wanted to build one, then it’s pretty pathetic that it took 11 years to study a 450-mile-long line, less than one-quarter of what was built in the 1860s, and then scrap the project.

We used to be a nation that got stuff done, but today we can’t do anything despite having huge technological advantages compared to the 1860s.

Written by Lion of the Blogosphere

February 14, 2019 at 11:26 AM

Posted in Economics

College, part 8, cost disease

So what’s driving college cost disease?

I think these points are pretty conventional, but not so conventional that journalists in the mainstream media and politicians widely believe in them.

1. The widespread and increasing availability of student loans means that people can afford to pay more, and colleges act like greedy corporations in that they charge as much as the market will bear. Even though student loans eventually have to be paid back, they feel like free money to 18-year-olds. And let’s not be too critical of 18-year-olds; do you remember what it was like to be 18? It’s up to more responsible and wiser adults to steer 18-year-olds in the right direction.

2. There has been a massive marketing effort to inflate the desirability of college. The message that is being given to high school graduates is that they will be economic losers without a college degree (which is not entirely false), and that college is this super-awesome-amazing experience that no one should miss (partially true to the extent that some college graduates, mostly those from upper-class families, do indeed look back to their college days like that).

I’m not sure who, exactly, is behind the marketing.

This point, however, doesn’t fully explain why people aren’t more price sensitive. People need food to live, so it’s even more important than college, but there’s price competition with food; there exists food that is very cheap.

3. Competition causes higher prices. Libertarian types hate it when I say that competition causes higher prices. But in many cases, it does.

The people who attend college are not paying with their own hard-earned money. They are almost entirely paying with other people’s money. Their parents. Financial aid. Student loans which feel like free money to 18-year-olds.

A low price could indicate an inferior school with less prestige than higher-priced schools. Furthermore, if students are paying with someone else’s money, will they pick the cheap bare-bones experience, or the experience with expensive gyms and student entertainment, better dorms, and expensively landscaped grounds?

Written by Lion of the Blogosphere

February 4, 2019 at 2:30 PM

Posted in Economics, Education

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