economics

I’m spending a lot of time on Mandel. Here is another one I disagree with.

In other words, if we suddenly get access to a bunch of cheap Chinese labor, we don’t bother to invent robots. Then tomorrow, when the cheap Chinese labor runs out, we find ourselves without any robots.

The point is that necessity is the mother of invention and Chinese labor is dialing down our motivation.

Can’t you just argue that cheap Chinese labor provides even greater competitive pressure than robots? Now the robots have to be even smarter/faster/etc.

Firms don’t stop competing when they lose a round to someone. It doesn’t matter whether it’s Chinese people, American robots or Chinese robots.

The technology just has to hit a higher target. And when those Chinese people become truly highly educated and start earning higher wages as a result (ie they finish the catch-up process), total innovation in the world will explode.

I’ll take another billion minds working on today’s problems, thank you very much.

Excellent piece by Cringely:

The decline of HP began, I think, with the spinoff of Agilent Technologies in 1999…

You see Hewlett Packard was in 1999 an instrument company that made a hell of a lot of money from printers, not a printer company that also built instruments…

Hewlett and Packard were instrument guys: had they still been on the job in 1999 they would have gone with Agilent.

The point is to say that the things that made HP great weren’t recognized by the people who ran it (“into the ground!” we’d like to shout) in its later years. ‘Professional managers’, as opposed to founders, need to really really understand why and how a company makes money.

It’s a key understanding that profitability isn’t in the numbers, it’s in the culture, in the people. Looking at HP’s numbers in the 90s, someone would say: “well, they’re a printer company that does all this other crap”. They’d also say about Apple: “they’re a computer company that makes a few cool accessories”.

HP’s power was the innovative capacity of its engineers, supercharged by its culture.

We’ve all heard how great it is that Google allows its employees to spend 10 percent of their time working on their own projects. Google didn’t invent that: HP did. And the way the process was instituted at HP was quite formal in that the 10 percent time was after lunch on Fridays. Imagine what it must have been like on Friday afternoons in Palo Alto withevery engineer working on some wild-ass idea. And the other part of the system was that those engineers had access to what they called “lab stores” — anything needed to do the job, whether it was a microscope or a magnetron or a barrel of acetone could be taken without question on Friday afternoons from the HP warehouses. This enabled a flurry of innovation that produced some of HP’s greatest products including those printers.

Understanding that point, that the printers were a lucky strike that emerged from an excellent, innovative culture was was absolutely critical to keeping HP on top. Such a culture could get lucky again and again.

But now the culture is a wreck.

Marc Andreessen in the WSJ is hard to excerpt. It’s a good article and here is my summary:

1. Technology companies are in the headlines again.
2. They aren’t getting awesome valuations in the stock market
3. Every major industry in the world is being transformed by software
4. Therefore the software companies should win

I agree with his sentiment and I agree that his investment strategy is probably the only way of trying to make money on this trend, but I see a non sequitur in #4 above.

The problem is that existing companies are pretty bad at software, particularly compared to the young, high-energy Valley startups. The Amazon/Borders story that Andreeseen references will probably prove the exception. It’s a path of much less resistance for incumbent companies to just pick up some Valley Best Practices and change their cultures a  bit over time than the other way around.

Certainly some will acquire their software-only valley doppelganger (if, say, Borders had bought Amazon in 2002) to try to change their culture. Over Andreessen`s macro time-horizon, this is probably the best he can hope for. But a software company just makes software and there aren’t many industries that can actually support SaaS players: not enough scale.

The pardigm will be for companies to keep doing what they do, but with more and more software.

The winners will have top-notch proprietary, internally developed and maintained software wrapped in a traditional business model.

 

Yikes:

I once read all the New York Times from the 1930s (on microfilm.)  You can’t even imagine how frustrating it was.  They knew they had a big problem.  Then knew that deflation had badly hurt the economy (including the capitalists.)  They new that monetary policy could reflate.  And yet . . .

Weeks went by, then months, then years.  Somehow they never connected the dots.

“Monetary policy is already highly stimulative.”

“There’s a danger we’d overshoot toward too much inflation.”

“Maybe the problems are structural.”

“There are green shoots, things are getting worse at a slower pace.  The economy needs to heal itself.”

“Consumer demand is saturated.  Even workingmen can now afford iceboxes and automobiles.  We produced too much stuff in the 1920s.”

And the worst part was the way political news kept slipping into the financial section.  Nazis make ominous gains in the 1932 German elections, Spanish Civil War, etc, etc.  In the 1930s the readers didn’t know what came next—but I did.

Thankfully we can learn from their mistakes.

As both a fact of labeling and an economic boogeyman, this now qualifies as a complete joke (from MR):

Chinese goods account for 2.7% of U.S. PCE, about one-quarter of the 11.5% foreign share. Chinese imported goods consist mainly of furniture and household equipment; other durables; and clothing and shoes. In the clothing and shoes category, 35.6% of U.S. consumer purchases in 2010 was of items with the “Made in China” label.

When my in-laws were renovating their home a couple years ago, I helped out where I could when we visited. They were intrigued and somewhat excited to source some shelf units from Canada (they live in Canada).

The shelf units were garbage. The customer service was garbage. I unhelpfully quipped that we should expect nothing less from something that wasn’t made in China.

Now, I’d say that the real story is that this company was just out of its league distributing furniture through Home Depot. It has nothing to do with Chinese vs Canadian manufacturing; it’s actually about scale and professionalism.

Let’s face it, most professional companies that operate at scale have a portion of their supply chain laying across the Middle Kingdom. In that sense, my comment was appropriate: a company that makes ‘stuff’  and doesn’t source something from overseas is suspect in my books. They’ve probably effed up their supply chain.

And that’s a signal that they’ve probably effed up a bunch of other stuff, too.

The point is that the bulk of value does not sit in China, no matter what the stupid label says. Most of it is very close to home.

Michael Mandel responds with two points in support of the “the sky is falling because we don’t make anything anymore” philosophy:

The authors did not distinguish between dollar shares and quantity shares of imports. When imported goods are much cheaper than domestic goods, then the quantity share can be much larger than the dollar share.

The input-output tables used by the authors contain no actual information about how much of Chinese imports are going to personal consumption.

I’ll start with the second point, which is a strong one: the data used to allocate the cost of imports to personal consumption don’t measure the imports for personal consumption and how could they? Intermediate goods, parts, goods for corporate consumption: it’s hard to tell what’s what.

The way around it is to measure the share of PCE in the economy as a whole and apply that share to the imports as a whole. If there is a different mix of GDP factors in imports relative to the whole economy, our figures are way off.  Ok, got it.

Now for the first point, which makes sense. The problem is that he goes on to say this:

Which share is right?  For sizing the  impact of imports on U.S. jobs and manufacturing, the quantity share is much more relevant than the dollar share.

But if the per unit cost of imports plummets, there’s a lot more money to be spent elsewhere. This isn’t measured in quantities.

Mandel is the most persuasive proponent of the manufacturing fetish around, but he still doesn’t have me.

Look at this graph from an earlier post:

The U.S. needs to change course to a production economy: put more emphasis on investment in physical, human, and knowledge capital, and less on consumption as the yardstick of success. We need to take up our fair share of the global productive burden.

Good analysis and graph.

But I don’t share the doom-and-gloom. I still can’t think of anything that says that this relationship is a terrible thing.

Personally, would I rather be an engineer or a sales manager? Engineer, for sure. But are sales managers less valuable to the world?

Look a bit harder and it looks like what Mandel is really worried about is debt, not consumption vs production:

Given that we as a society are running up big debts,  it is highly likely that our children will be better off if we choose to invest more today and consume fewer goods and services, whether they are imported or domestic.

No disagreement with me, then. If we took out gigantic blocks of debt and spent it on useless white elephant projects I presume Mandel would have a problem with that, too.