Showing posts with label economics. Show all posts
Showing posts with label economics. Show all posts

Tuesday, March 22, 2011

On March 17, 2011, USA Today observed, “Tech and Internet stocks turned into bad words after the dot-com bust in 2000. But the get-rich-quick feelings toward tech are back. . . . Given the near-hysteria about promising but largely unproven companies, investment [practitioners] warn that things could start getting out of hand.” So why doesn’t the government step in and stop it from going so far and then crashing?  This is easier said than done. Beyond the difficulties in having regulators intercede to stop transactions that may be necessary to avert a party from bankruptcy, the sheer ambiguity in ascertaining whether a bubble does in fact exist can have a paralyzing effect. "It's a boom, not a bubble, when you hear the sound of dynamite profits," according to Bing Gordon, a partner at a venture-capital firm and a board member of social-gaming company Zynga, which was valued at $9 billion in March of 2011.

However, a big boom can explode in a giant bust; Gordon’s distinction doesn’t carry much water. Neither does that of Geoff Yang, a founding partner of Redpoint Ventures. "There is effervescence, but no bubble." Effervescence can manifest, however, as an attribute of the sort of irrational exuberance that characterizes bubbles. That the market mechanism not only does not temper, but may even magnify the volatility from, this all-too-human psychology, whether in pushing a “boom” or “bubble,” is the real problem. Government regulation will not be able to effectively pull up this root until its nature is uncovered. In the meantime, we are left with the problem of discerning whether a bubble can even be identified as it is expanding. Consider, for example, Facebook in 2010.

In 2010, Facebook had about $2 billion in revenue according to USA Today. MSNBC puts the company’s profit for that year at $600 million. Facebook was being valued at $75 billion, based on private transactions from the SharesPost market. If an accurate valuation, USA Today claimed that “this would make the social-media upstart more valuable than Disney.” It would also mean that Facebook had a price-earnings ratio (P/E) of 125.  This essentially means that higher future profits were expected.  The average P/E ratio for the technology sector was about 25, making 125 extraordinarily high.  This could be taken as being indicative of irrational exuberance,  as one typically compares a company’s number with the average of its sector. However, the technology sector was quite broad at the time, and one would expect companies on the forefront like Google, Yahoo and Facebook to have much higher numbers than other companies in the sector. In other words, even a very high P/E ratio, even relative to a sector’s average, does not necessary point to there being a bubble. Therefore, it is notoriously difficult to identify one definitively without ongoing debate delaying any regulatory action.  Also, if the sector itself is in the grip of irrational exuberance, comparing a company’s ratio to the average is relatively useless in proffering an indication.

In March of 2011, USA Today claimed, “Even big companies are said to be drinking the Internet Kool-Aid. There is speculation that Google and Facebook have considered bidding as much as $10 billion for online microblogging service Twitter.”  In December of 2010, according to USA Today, “The New York Times reported that Twitter was valued at $3.7 billion after a funding round. In March of the following year, it was pegged at about $7.2 billion, according to SharesPost.” The sheer variance between these figures indicates high risk, but this did not seem to bother those drinking the kool-aid. Such psychology is a red-flag that a bubble is likely in the works. It is like a tornado watch: conditions are right for one to form.

The risk can be seen by uncovering fallacies in the way the private tech companies are valued. According to USA Today, “Until companies finally go public and the stocks actively trade on major exchanges, the small and relatively thin trading on private markets sets the price. . . .  Private marketplaces, including SecondMarket and SharesPost, allow owners of shares of private companies such as Digg, Facebook, Zynga and Twitter to sell to high-net-worth individuals and institutions. Typically, the sellers are employees at these firms looking to cash in on shares they've received. And the buyers are sophisticated investors who understand they could lose their entire investment. These online services provide a way for employees to sell their shares now rather than waiting for an IPO that may never occur. However, with the great power that such marketplaces offer comes confusion. Many of the valuations put on companies are overinflated based on limited sales of shares occurring on the relatively small markets. . . . Before long, estimates for the value of popular Internet companies can soar.” In short, one should not generalize from a highly particularized market to project a total market value because there are unique dynamics going on in that market that would not apply were the firm listed on the NYSE.

Crucially, the generalization is in the direction of overstating; hence, it can camouflage irrational exuberance while feeding it. Therefore, risk is increased by how private companies are restrictively “traded” even as the risk is cloaked—making it even more dangerous. “Given such huge risks, the level of the public's infatuation with shares of privately held Internet companies is again taking on a feel of a mania, Gary Freedman, securities lawyer, said, according to USA Today. He noted that several ingredients that inflate bubbles were all present, including a broad acceptance of the companies' products.  Intensifying the distortion, according to him, was the fact that there was very little financial information on these private companies. "It's the same mania," he claimed. "Markets are cyclical. It's really no different than looking at the Internet bust and the housing market." Lest one conclude from this a slam-dunk case, USA Today pointed out that the not all of the practitioners were on board.  That is to say, there was serious difference on whether there was any bubble at all.

USA Today represented the other side as follows: “proponents of the next breed of Internet companies say the valuations aren't absurd this time because the companies have fundamentals behind them. ‘We're talking about real companies with real revenue and real profit,’ says Jeremy Smith of SecondMarket. A major shift in technology is bound to create companies with massive market values, the proponents say. The emergence of social media (more than 500 million accounts on Facebook alone), combined with mobile phone use (4.5 billion), is disrupting all of technology, so giant winners are to be expected, say venture-capitalists such as Cohler and Yang. ‘I think this boom is going to last awhile,’ Ted Schlein, a managing partner at KPCB, averred. ‘The trend lines are unlike anything we've seen in history,’ He says the enormous size of the social and mobile Internet market — tens of billions of people — dwarfs the markets for the fledgling Internet (billions) and personal computers (hundreds of millions), putting companies such as Facebook, Twitter and Zynga in prime position to strike it rich in IPOs. ‘This is just the beginning of a big market run,’ says Tim Draper, founder of a venture-capital firm.”

To be sure, the emergence of social media had been a huge phenomenon in defining or characterizing the age from roughly the year 2000. Indeed, the computer and internet may have represented the biggest change in daily life from the world of even the last few decades of the twentieth century. It follows that anything so big would have attracted a lot of money, as per Facebook’s ratio of 125. However, like a jet plane that steeply climbs on take-off and then eventually levels off, the social media companies could not be expected to remain the leading edge forever; they were bound to level off at some point, and then the extended boom would be truncated or even turned to a bust if the market gets stung by the high P/E ratios. Moreover, a bubble just is an expectation of an “extended boom.” The “bubble” lies in the difference between the expectation and the reality that even such a boom is apt to end.

All of this is to say, identifying a bubble in progress with some degree of consensus does not seem to be possible, at least as of 2011. Were such an identification even possible, what would government regulators do to let the air out of the balloon? If Facebook, itself iffy with a P/E ratio of 125, wants to buy Twitter for $10 billion even though the latter had been valued at just over $3 billion a few months before, would blocking the purchase lessen the bubble? Were Twitter in trouble in spite of its growing presumed market value, would its bankruptcy take the air out of the bubble only to provoke a recession?  The aim of the regulators would have to be to release air from the balloon without triggering a recession (which is the downside of a bubble anyway). If anything is clear, it is that much more knowledge is needed for the market to be managed, let alone designed, so bubbles are identified and depressed before doing so could do harm to an economy as a whole. In the meantime, we can expect bubbles to top up because markets are susceptible to the human psychology of irrational exuberance.   

Click to add a Comment or Question (or View Posted Comments) on whether a social media bubble exists.

Sources:

http://www.msnbc.msn.com/id/41521349/ns/business-us_business/

According to USA Today, by mid-March in 2011 the World Bank’s food index had soared 29% from its level just the previous January and was a mere 3% below its 2008 peak. From March in 2010, Corn had increased 52%, sugar, 60%, soybeans, 41%, and wheat 24 percent.  The paper reports that the surge in food prices had many causes, including 1) rising population, which means increased demand for food, 2) speculators, who bid up commodity prices to artificial heights unrelated to supply, 3) soaring oil prices, which increase resource costs to the farmers and transporters, 4) trade policies, which become restrictive when shortages arise within a country (increasing the price on the world market), and, ironically, 5) improved standards of living in emerging nations, as new middle class consumers buy more meat. Of all of these factors, I contend that the rising population is the most fundamental, followed up by the related factor of oil.

A few months into 2011, the world's population stood at 6.8 billion, more than double the three billion in 1960. For a person of 50 years, the world's population had doubled in his or her lifetime. Thomas Malthus, the early 19th-century scholar who proposed that eventually, the world population would exceed the Earth’s ability to feed everyone, has been consistently ignored as India and China in particular have continued to grow in population at unsustainable rates (especially India--China having a quasi-one-child policy that has moderated its increase). Dan Seiver, a financial economist at San Diego State University, points to the green revolution as still being implemented in parts of the world; he is thus not yet ready to concede that the Mathusian thesis has arrived. However, he discounts the relatively high population growth rate; the increased efficiency or yield from the continued dissemination of "green" technology would have very great to outweigh the fixed (and in fact constricting) constraint of the world’s fertile land area that is used to grow food. In fact, according to the World Bank’s Hassan Zaman, the percentage of the U.S. corn crop that was used to make ethanol went from 31% in 2008 to more than 40% projected in the 2010-2011 growing season. While it is true that unlike the supply of oil in the ground, the land is being consumed, it can indeed be overused if it is not allowed to lie fallow, for example, to rest for a growing season. As the growing population exerts more and more pressure on the land to produce more and more, the land, like a horse pushed too far on a long journey on a hot August day, will tire and slow down. This would tend to happen just as the world needs each agricultural acre more. Therefore, if we as a species are unwise and expedient now in how we manage our land, our descendants will pay for our selfishness later.

I contend that it is in our interest as a species to see that our population size is managed toward a steady state rather than as a maximizing variable (i.e., schizogenic). In fact, we have a right and obligation as one body to see that our various limbs are coordinated such that none engages in hypertrophy. That is to say, the whole has the right to protect its viability by arresting excessive growth in one of the parts. That much of the world's population growth takes place in the developing world does not mean that this right, or obligation, of the world is somehow a plot by the developed countries to oppress the poorer countries. In fact, much of the pain of the higher food prices is in the developing world rather than in the industrialized countries, so it is in the interest of the developing countries to accede to the world’s demand that their population growth be stopped.

While the effect of higher food prices is modest in the developed world, 50% or more of a family budget goes toward food in many emerging markets. American consumers spend about 9% of their income on food, and another 3% for dining out. The difference is not because food is more expensive in the developing world; rather, the percentage is so high because the typical income there is so low. “For many people who spend two-thirds or three-quarters of their income on food, even small price increases disrupt normal routine,” says Hassan Zaman, lead economist for the World Bank in poverty reduction and equity. “They start sacrificing non-food items, such as clothing, and then start eating less.” Indeed, the rising cost of food has been one factor in the protests in the Middle East that were not so pristinely "pro-democracy" as the media represented. 

USA Today reports, for example, that "(w)hen Mohamed Bouazizi set fire to himself in Tunisia in December [of 2010], it wasn’t because he was yearning to vote. It was because he couldn’t feed his family and police had confiscated the fruits and vegetables he was trying to sell." Although perhaps not focused on gaining a vote, however, Bouazizi had had enough of police-state tyranny so his protest was not merely economic. Perhaps the economic, at least when it manifests in vast inequalities supported by an infrastructure tilted by powerful vested interests rather than by a differential in talent and effort, is inherently political.

In short, developing countries should be amenable to population control even if the directives come from international organizations. Such countries should not resist the world acting as one body just because much of correction needed for sustainable human living on Earth would take place in the developing countries.  We as a species can no longer afford to be petty or partisan with such matters as concern our species' continued existence. If the world does not act as one mind over its body and engage in some much needed weight-control, the patient will grow too big and soon die of a heart attack. In the end, it is not a developed/developing contest, but, rather, a decision for all of us: are we to continue growing like a virus or are we better than that?  If we continue to refuse to take responsibility for our species as a whole, perhaps the cock roach will deserve to survive us.

It is ironic that we vaunt ourselves as being made in the image of God while our species refuses to step up to the plate even to manage itself so it can survive. Many of the world's religions teach us to submit to something greater--to something wholly other. It is more difficult, it would seem, for us to submit to the good of our species as a whole, even as we as a species run up against the semi-permeable membranes that delimit us on our planet in so many ways.

I contend that we are getting closer Malthus’ "the threshold point." Future population growth (and the added consumption, such as of food and energy, that is inevitable with such growth) could have dramatic implications for human life. The previous growth did not have such implications, at least  with respect to the world as a whole, so that growth was qualitatively different than that which we shall face if we continue to add billions to the global human population.  This qualitative distinction is precisely what we as a species have been having such a difficult time in grasping. To the chagrin of financial chartists, who try to divine stock movements in the future based on past trends, what was the case yesterday may not be the case tomorrow anymore. We got hits of this when the global financial system almost collapsed in September of 2008 and the Japanese nuclear plant almost had a meltdown in March of 2011. There being no financial market or no Japan would have been a wake-up call to us all concerning the assumptions we all implicitly make about there being a tomorrow like today. The sun may rise again, but we may not be around to watch it. Being made in God’s image does not guarantee us a seat. To grasp this vital point requires moving one's eyes from the rising prices on the shelves at our favorite local grocery store to consider the big picture with respect to the human race on planet Earth.  To act on this point requires significant reform of international organizations, such that they would be more than the sum of their parts.

If coordination between countries such as through the U.N. is not sufficient to arrest growth in the worst offenders, a transfer of a degree of sovereignty adequate for the tasks needed to avert reaching the threshold point beyond which the Earth can no longer support the human race is needed. This is particularly true if the worst offenders do not have the political will to correct themselves even if doing so is in their own interests. All too often, continuing in the status quo is too convenient to be resisted with enough energy to reverse the entropy even if correction is urgently needed. Lest the fear of a world government or federation enable the insufficient coordination to be presumed as the best we can do, the governmental sovereignty that is transferred should be accompanied with a design of checks and balances such that political consolidation does not occur. This is not, in other words, an argument for one world government. Rather, it is an observation that the human race as a species as reached a point where the species itself needs manage itself with respect to the planet as a constraint. Otherwise, the continued viability of our species will be in jeopardy. The fear of nuclear war during the last half of the twentieth century was just the dawning of this recognition. The question now is whether we act on our new awareness and situation with respect to the Earth.

Click to Add a Comment or Question (or View Posted Comments) on food prices and global population growth.

Source: http://www.usatoday.com/money/industries/food/2011-03-17-food-costs-world-hunger.htm

Tuesday, February 8, 2011

The New York Times reports that President Obama urged American businesses on February 7, 2011 to “'get in the game' by letting loose trillions of dollars being held in reserves, saying that they can help create a 'virtuous cycle' of more sales, higher demand and greater profits that will put people back to work and turn around the sluggish economy.” Obama continued, “If there is a reason you don’t believe that this is the time to get off the sidelines — to hire and invest — I want to know about it. I want to fix it.” In the speech at the U.S. Chamber of Commerce, Mr. Obama said that companies have a responsibility to help the economy recover. The trouble is that responsibility is a rather vague term that can be variously applied. This is one reason why the corporate social responsibility concept could mean providing society with the products and services that are sought via the marketplace (e.g. Milton Friedman of the Chicago school) while meaning for others increasing corporate philanthropy to alleviate a society problem such as poverty. In other words, responsibility can be made concrete in various ways that can accommodate and indeed reflect the ideologies of those applying the term.

It could be predicted, therefore, that the President's application of responsibility might have differed from some of the business managers in the audience. Indeed, Obama’s suggestion that businesses could help the economy recover by spending their reserves was met, according to The New York Times, “with skepticism by some in the audience.” For example, Harold Jackson, a executive at Buffalo Supply Incorporated (a medical supply company), called the President's suggestion naive. “Any business person has to look at the demand to their company for their product and services, and make hiring decisions,” Jackson said. “I think it’s a little outside the bounds to suggest that if we hire people we don’t need, there will be more demand.” In effect, Jackson was defending Friedman's application of corporate social responsibility from that of the President's.

To President Obama's assumption that American businesses were still sitting on the sidelines, it can be asked, in what sense? The President was pointing to what he viewed as excessive retained earnings. Yet John Schoen of MSNBC reported the same day that the American manufacturing sector was “roaring back” after the recession. Schoen reports a sustained rise in factory orders in five of the last six months, which prompted manufacturers to boost hiring. The Commerce Department had reported a few days before Schoen's report on February 7, 2011 that the manufacturing sector had added 49,000 new jobs in January. Yet this is hardly a roaring comeback in terms of new jobs. Schoen reports that businesses have figured out how to make more widgets with the same number of workers, resulting in higher productivity and profits. Investing reserves in automation, for example, raises productivity by making products faster and better. According to Schoen, “Productivity is a pretty simple concept: It’s a measure of how much stuff a worker makes in a given number of hours. . . . Productivity has also risen as American manufacturers have moved to specialize in more valuable products, sending manufacturing of cheaper goods overseas where wages are lower. As the value of American-made products has risen, so too has the average level of output per worker when measured in dollar terms.” Schoen reports that according to the U.S. Labor Department, the level of output per hour worked rose by 2.6 percent in the last three months of 2010. Even if it is not in the interest of labor, such improvement is in line with the logic of business, given how business is designed and how a competitive marketplace works. Spending retained earnings beyond that which can be expected to raise productivity simply does not make sense to a business practitioner.


In general terms, the (nearly) “jobless recovery” can be seen as pointing to a major difference between the interests of business and society—the latter being represented by the President at the Chamber of Commerce. Given the nature of business enterprise in a competitive market, it is only natural for managers (and boards) to work toward (and reward) greater efficiency (i.e. productivity). Business managers thus understand or apply responsibility in this way. As per Harold Jackson's point, to hire labor beyond the optimal efficiency point in order to solve the wider societal problem of unemployment would run against a firm's telos, or goal. Ultimately, such over-hiring would compromise a company's continued viability (which could result in the loss of even more jobs).

One cannot blame a manager for thinking in line with his or her company's logic, or raison d'etre, any more than one can blame a shark for hunting for food and eating like a shark. A shark is a shark, and a business can also be viewed as a feeding machine. To posit or impose responsibilities onto a machine does not make sense either to the machine or to those who operate it (in their functioning as operators). To an operator, responsibility means operating well—which, by the way, is virtue in the ancient Greek sense. The President's use of responsibility extrinsic to a business calculus simply would not register. It would be like trying to get ought out of is. Even within business functionality, responsibility even as in fiduciary duty to the stockholders is simply translated into “try to get as much profit as possible, now or later.” In other words, ought does not compute in a business technical vocabulary. The term is extrinsic, like societal problems and goals. To come from a societal standpoint and impose “be responsible” to a business practitioner is like shouting at a deaf person. The business person is apt to simply look curiously at the person as if wondering why he is speaking in a foreign language while assuming he is being understood nevertheless. “How odd,” is perhaps the most honest response that one could give to such a display.

The difference between the President's application of responsibility and that of Jackson can also be understood as the difference between the interest of a subunit and the system as a whole. It is only natural for a part of a whole to operate in the interest of the part itself rather than necessarily the whole. The interests of the latter can thus fall through the cracks. Government regulation is an attempt to plug such cracks, but regulations, like firms, are particular. On the issue of unemployment, the societal question is whether even a fully-operational economic system can supply full employment. If not, it may be the government's responsibility to supply the surplus employment, directly or indirectly via subcontracting. Crucially, this supply must be designed such that it does not reduce the employment provided by the private sector. The surplus jobs must be functions that the private sector does not and would not address. The President's error in his speech to the Chamber of Commerce could be that he was assuming this surplus is the responsibilities of “parts” of the system (i.e. individual companies) rather than of the system itself (i.e. the government).

In sum, responsibility is a dubious concept to apply to business; the term is too vague to have much traction in discussing such vital matters as affect our economic livelihoods and the related viability of our economy. It seems to me that the priority ought to be that every able-bodied and minded adult has a job (or, otherwise, a means by which he or she can have sufficient economic wherewithal to survive in this interdependent society), whether through business, non-profits or government. Ideologies, including responsibility itself, ought to be relegated as luxuries with which we can play on the margins once full employment has become a fait accompli. That is to say, ideologies might contribute to improving full employment, rather than being depended on to reach it or allowed to keep us from it. Of course, it could be countered that ideologies are part and parcel of this entire discussion and thus cannot be dissected from it. That may well be. Even so, I submit that ideologies such as laissez faire and corporate social responsibility ought not be allowed to thwart us in how we constitute full employment as a societal fact. That is to say, we ought to direct full employment by whatever means necessary then work from there (once attained) to improve it. Simply put, for some reason, we don't treat full employment as necessary.; rather, we treat it as a goal.  "How odd," an alien from another gaxaxy might say (in its own language, of course), should one visit us and want to study us.
Sources:

Friday, February 4, 2011

Socialism 101

I was surprised to hear Brit Hume and Newt Ginrich (former Speaker of the US House) (re)define socialism as “government control of private property.”  My understanding of socialism is that the state owns as well as controls the means of production.  By “owns,” I do not mean holding the majority of shares, for there are no stockholders in socialism.  Government control of a give economic transaction is called government regulation; this is not to say that the government owns the economic institutions.  Remember socialism is a type of economic, not political, system.  Anyway, Ginrich then said that Obama would instill socialism in the US if he could…and that it would be like Western Europe (which by implication is socialist already)…but there are plenty of privately-held companies sourced in the EU.  To say that the EU or any of its states own the businesses would be a gross error.  But all too often, if someone on television says (or implies) that this is so, it is taken as such by the general public. What concerns me here is that our public political discourse over the airwaves lets such redefinition go unfettered. The graver implications from the real definition can still scare people even as some new definition is cited.  That is to say, people who know what socialism really is might fear that the US Government may take ownership of their small businesses, when what is being feared is that government regulations will increase.  That is a far different thing than government ownership of the means of production.  When such distances are trespassed in the name of political expediency, we all lose.

Even more disconcerting are the admittedly few baleful warnings that if we are not careful, the communists will take over.  Firstly, socialism is not communism; there can be government ownership of the means of production and a market mechanism, and socialism does not require dictatorship.  Secondly, the fear of the spread of communism ended in the late twentieth century when the USSR folded.  To use the old communist-fear-mongering line in the twenty-first century strikes me as antiquated, if not downright stupid.  To those who would still like to wave the anti-communist banner, I can only say that most people have moved on to the twenty-first century.  Perhaps it will take a bit more time for the last century to die out, but we are in a different century now.

 

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