Opinion

The Edgy Optimist

In emerging countries, focus on progress — not market volatility

Zachary Karabell
Feb 4, 2014 20:43 UTC

The start of the year has not been an easy one for financial markets. The Federal Reserve is continuing its policy of trimming its bond purchases by $10 billion a month, and the immediate result has been a sharp pullback of the currencies, and to some degree equities, of countries such as Indonesia, Turkey, India, South Africa and Argentina. The reason? According to traders, commentators, and even the head of Brazil’s central bank, Fed policy will trigger interest rate rises around the world, staunching the flow of easy money that has purportedly fueled global growth — and leading to struggles everywhere.

That thesis is hardly new. It was widely circulated last summer, when the Fed first hinted that it might begin to wind down its more aggressive measures to stimulate economic activity, which it introduced after 2009. In this reading, the boom times of many countries around the world has had nothing to do with the change in economic fortunes, or skilled leadership, or shifting global sands. It was and is simply a derivative of U.S. policies.

This view has wide play, and goes nearly unchallenged. That does not make it correct.

Indeed, it is likely wrong for at least two major reasons: it forgets that financial markets are not perfect proxies for real world economies, and it misses the fundamental transformation in countries around the world that has taken place over the past few decades and is about to accelerate this year.

As I wrote in a column last August, a U.S.-centric view extends well back into the 20th century, and the only wrinkle today is that China has now entered the mix. Low and behold, China, too, has recently seen some slowing of its growth, largely because of the determination of the Chinese government to shift the mix of its economic growth from state-led infrastructure and exports to domestic consumption. That transition will, inevitably, result in diminishing demand for commodities and raw materials, and that demand had also been a key factor in the strength of other economies, including many of the ones above.

If the world is getting richer, why do so many people feel poor?

Zachary Karabell
Jan 24, 2014 18:39 UTC

In a widely-read statement in his annual foundation letter, Bill Gates took an unabashedly optimistic approach to the world this week. Not only did he tout the massive material progress evident everywhere in the world over the past decades, but he also predicted that as more countries accelerate their transformation from rural poverty to urban middle class societies, poverty as we know it will disappear within the next two decades. “By 2035, there will be almost no poor countries left in the world,” Gates wrote. “Almost all countries will be what we now call lower-middle income or richer.”

With an economy of words, Gates makes clear that he understands the issues. Yes, worldwide there is still immense poverty as defined by critically low incomes or GDP per capita, including less than $500 a year in Ethiopia, less than that in the vast and dysfunctional Democratic Republic of Congo, even less in Burundi and who knows what in North Korea. All of those countries, Gates predicts, will be substantially wealthier in twenty years.

This message is in rather stark contrast to the sense in the United States and Europe that we are mired in economic stagnation, and that as inequality grows, more people are unable to meet their basic needs. That message is likely to be a cornerstone of President Obama’s State of the Union address, and it suggests that life is not getting better for many Americans, but rather worse.

The real future of U.S. manufacturing

Zachary Karabell
Jan 17, 2014 16:36 UTC

Few topics have been more fraught than the fate of U.S. manufacturing. The sharp loss of manufacturing jobs since 2008 has triggered legitimate concern that America’s best days may have passed.

Even as recent leading indicators suggest more economic momentum, job growth remains at best sluggish and manufacturing has seen only marginal gains — having shed more than two million jobs in 2008-2009, and millions more since the peak in the late 1970s. Manufacturing accounted for slightly less than 20 million jobs at the peak in 1979. Now it’s barely 11 million.

The picture is even bleaker considering the population, since the labor force is considerably larger today. This has led to a widespread conviction that the core of the potent U.S. economy is being hollowed out.

What America won in the ‘War on Poverty’

Zachary Karabell
Jan 10, 2014 21:07 UTC

In an unabashed endorsement of government action to alleviate the plight of the poor, this week President Obama commemorated the 50th anniversary of the War on Poverty with his own call for new policies to address the continued struggles of tens of millions of Americans.

In his official statement, Obama remarked that, “In the richest nation on earth, far too many children are still born into poverty, far too few have a fair shot to escape it, and Americans of all races and backgrounds experience wages and incomes that aren’t rising… That does not mean… abandoning the War on Poverty.  In fact, if we hadn’t declared ‘unconditional war on poverty in America,’ millions more Americans would be living in poverty today. Instead, it means we must redouble our efforts to make sure our economy works for every working American. “

It would seem hard to argue with such sentiments, yet some have done so. Fox News published a piece saying “despite trillions spent, poverty won.” Many others react by shaking their heads sadly, acknowledging the noble effort and concluding that it was an abject failure. The implication is clear: government spent a mint and did not end poverty, and now Obama is calling for more of the same.

The audacity of optimism

Zachary Karabell
Dec 23, 2013 20:46 UTC

Over the past four weeks, we’ve had a run of undeniably good news. A panoply of data has shown that the U.S. economic system appears to be on firm ground. More people have jobs, albeit not necessarily sterling jobs, and the pace of overall activity as measured by GDP is at the highest level in two years, expanding at 4.1 percent annually. On the political front, Congress passed a budget for the first time in more than three years, which suggests a period ahead where Washington tantrums do not threaten to upend whatever delicate equilibrium currently exists.

And yet, an aura of unease still seems to hover over us. In the year or more that I have written this column, I have often emphasized the way in which things may be going at least a bit right. That contrasts with the frequently repeated mantra that we are going dangerously off the rails. Of course, like anyone, I may be right or wrong or somewhere in between. What’s been perplexing about responses to this column, however, isn’t whether the analysis is right or wrong, wise or naïve, but that the very hint of optimism makes a fair number of people extremely angry.

It may be, of course, that my optimism is misplaced. It may be that the United States is actually headed to hell in a proverbial handbasket; that Europe is in a brief lull before its next leg toward dissolution of the Union; that Japan’s easy money spigot unleashed by the new government of Shinzo Abe will end with the same no-exit stagnation of the past 20 years; and the glorious story of emerging economies from Brazil to Mexico to India to China will end not so gloriously. It may also be that whatever appears to be working in the developed world is in truth working only for a small minority — for the wealthy and members of the middle class in privileged urban areas, and for anyone tethered to financial markets and global commerce.

Why Washington’s growing irrelevance is good for the country

Zachary Karabell
Dec 13, 2013 19:52 UTC

After three years of sclerosis, Congress is poised to at last pass an actual budget. We’ve been so consumed with the dysfunction of the parties on Capitol Hill that this feat appears significant. In fact, it should be routine. Yet in the context of the past few years, it is anything but.

The budget that passed the House still must wend through the Senate, and it is not exactly a study in legislative daring. It is, however, an actual budget, passed with substantial support from both parties by a vote of 332 to 94 and negotiated by two leaders, one from each party and each chamber — Representative Paul Ryan (R-Wisconsin) and Senator Patty Murray (D-Washington). The bill is the most modest endorsement of the current status quo, which stems from both the automatic and crude 2013 budget cuts known as the sequester, and from the chronic inability of either party to compromise over the past three years.

Even though the only real change over current spending is a modest $60 billion increase (meager in relation to the $15 trillion-plus U.S. economy), conservative groups still condemned it as too profligate and liberal groups assailed it as too draconian. Said Ted Cruz, who may be having mild limelight withdrawal, “The new budget deal moves in the wrong direction: it spends more, taxes more, and allows continued funding for Obamacare…I cannot support it.” Paul Krugman argued the contrary — that the bill is too meager, and does nothing to address the problem of structural, chronic unemployment. Writes Krugman: “if you look at what has happened since Republicans took control of the House of Representatives in 2010 — what you see is a triumph of anti-government ideology that has had enormously destructive effects on American workers.”

The real issues behind the minimum wage debate

Zachary Karabell
Dec 6, 2013 18:03 UTC

In his speech at the Center for American Progress this week, President Obama devoted considerable time to an issue suddenly much in discussion: the minimum wage. This is not a new debate. In fact, it neatly echoes the last time Congress raised the minimum wage, in 2007, which echoed the debates before that. Few economic issues are such sweet catnip to ideological camps, and there is precisely zero consensus about whether these minimums have positive, negative or no effect.

Supporters say that a higher minimum wage will give people a better standard of living and boost consumption. Detractors argue that it will lead companies to hire fewer workers and kill job creation. One thing no one addresses, however, is that regardless of whether the government raises the minimum wage, our society can’t endlessly coast with a system that includes wage stagnation for the many and soaring prosperity for the few, nor can the government snap its legislative fingers and magically produce income. Someone will pay for these increases; nothing is free.

You wouldn’t know that from the tenor of the debate. In Obama’s speech, he stated that, “it’s well past the time to raise a minimum wage that in real terms right now is below where it was when Harry Truman was in office.” He acknowledged that many resist the idea of mandating a wage above the current $7.25 an hour. “We all know the arguments that have been used against a higher minimum wage.  Some say it actually hurts low-wage workers — businesses will be less likely to hire them.  But there’s no solid evidence that a higher minimum wage costs jobs, and research shows it raises incomes for low-wage workers and boosts short-term economic growth.”

The youth unemployment crisis may not be a crisis

Zachary Karabell
Nov 22, 2013 21:49 UTC

“Youth Unemployment is the Next Global Crisis”

“America’s 10 Million Unemployed Youth Spell Danger for Future Economic Growth”

“Relentlessly high youth unemployment is a global time bomb”

There’s no doubting that worldwide, kids are out of work. In the United States alone, the unemployment rate for 15 to 24-year-olds is about 16 percent, nearly twice the national average. In parts of Europe, the figures are much worse, with a whopping 56 percent youth unemployment rate in Spain alone — representing about 900,000 people.

But do these high numbers represent a global labor market crisis that imperils future growth, as the headlines warn? Maybe not. Maybe instead, they’re evidence of a generation of college graduates determined not to settle, which bodes well for our future.

Tweeting our way forward

Zachary Karabell
Nov 11, 2013 18:21 UTC

Twitter’s initial public offering last week was everything that Facebook’s botched offering a year and a half ago was not: the stock was reasonably priced; management wooed investors; and the company neither promised the moon nor the stars, and was rewarded with a substantial amount of cash raised, a stock that went up more than 75 percent, and a valuation of $25 billion.

Though shares pulled back sharply — and predictably — the day after its IPO, Twitter has now joined the pantheon of leading social media companies. It has yet to make a profit, but unlike the 1990s Internet comets it is routinely compared to, it is making substantial revenue (on pace for just under $600 million this year). That is substantially less than Facebook was making when it went public ($3.7 billion), but more than LinkedIn was generating when it went public in 2011 (estimated at $220 million).

That said, at its IPO Twitter was valued higher than either Facebook or LinkedIn at the time of their public offerings. In that sense, Twitter’s reception does raise a vital question: are these companies doing more than making their founders and investors rich? Are they doing more than satisfying some nice need of their customers? Are they, in short, changing the world the way they claim? Or is that claim just a useful marketing device that makes otherwise pedestrian businesses appear to be something far grander, convincing investors to pay more than they would for equivalent businesses in more prosaic industries?

Healthcare.gov is just the beginning

Zachary Karabell
Nov 1, 2013 20:52 UTC

The Obamacare blame game is in full swing, and without other news to fill pages and airtime, it’s likely to continue for some time. Attention is shifting from the myriad problems with the official website Healthcare.gov, and toward the health plans that are being canceled, even though President Obama promised that they would not be.

But the longer-term story isn’t the rollout and its many severe glitches. No one recalls whether the first batch of Social Security checks was sent on time in the late 1930s. The story that will matter, and linger, is that the Affordable Care Act was the first major law implemented almost entirely online. It’s the template for the future, and rather than using its launch as an excuse to renew attacks on the law, we need to learn what we can because, like this bill or not, it is part of the next wave of government.

The past two weeks have been filled with various individuals testifying to Congress about the design and implementation of Healthcare.gov, the web portal that allows individuals to access the new health plans and exchanges. The tenor of these hearings, convened by the Republican-controlled House, is that the design of the website exposed the fundamental failings of the law and government incompetence. But what’s actually been exposed is that the U.S. government has not yet made the transition to a digital age. While the administration could have and should have done far better, the reasons for its failure are less about a flawed process than a system currently ill-designed for this type of legislation.

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