Opinion

Edward Hadas

Detroit, decay and solidarity

Edward Hadas
Jul 31, 2013 14:29 UTC

The bankruptcy of the city of Detroit has many causes, including poor management, industrial history and dysfunctional American sociology. I think there is also an ethical problem: too little cross-border solidarity.

I don’t want to downplay the other failures. A more competent city government would have addressed, rather than added to, the problems. The U.S. car industry proved a disastrously weak economic anchor. And without widespread racism, there would have been fewer ghettoised African-Americans.

Still, the economic and sociological poison has not been spread equally. On the contrary, it is concentrated inside the legal borders of the city of Detroit. The Detroit of common speech and common sense – the big blob on a national map, the urban area served by a single international airport – has suffered much less.

In the United States, population change is a crude but accurate indicator of economic success. The city is failing; its population declined by almost 60 percent in the half-century from 1960 to 2010, to 714,000. The rest of metro Detroit, as defined by the U.S. government, is doing all right: the headcount increased by about 70 percent, to 3.6 million.

True, metro Detroit as a whole may not be thriving. The unemployment rate of 9 percent is well above the 7.6 percent national average. But the problems are concentrated in the city, which is in an apparently unstoppable economic and social decline. That descent has undoubtedly been accelerated by the legal and financial isolation of the city from suburbs.

Static in the electricity market

Edward Hadas
Jul 24, 2013 13:41 UTC

Let me start with a confession. I do not fully understand what the Federal Energy Regulatory Commission says Barclays did wrong in the U.S. electricity market, and I am not entirely sure about the claimed misdeeds of JPMorgan. But my inability may well have less to do with my inadequacies than with the fundamental futility of trying to use financial markets to set the price of electricity.

Very approximately, FERC says Barclays sold electricity in order to manipulate a price index in ways that created profit on related positions in a related financial market. The UK bank plans to contest the $453 million judgment. According to news reports, JPMorgan is about to agree to pay almost as much to settle charges that it unfairly solicited “make whole” payments, which compensate utilities for setting up but not actually running power plants on a particular day.

I am not competent to judge the banks’ legal and moral culpability, because the details are little short of diabolical. The jargon includes the “volume-weighted average price of the dailies’ trading”, not to mention spot markets, day ahead markets, physical positions, fixed-to-floating contracts and nodes. Still, FERC’s summary of electricity trading in its latest annual review suggests there is problem. Purely financial strategies can easily play an unhealthily large role in a market where, according to the watchdog, financial volumes represented about 100 times the physical volumes.

Fear, greed and bank capital

Edward Hadas
Jul 17, 2013 14:27 UTC

Buildings should be strong enough to withstand storms and earthquakes. Similarly, banks should be able to remain upright after massive waves of losses. Engineers have a pretty good idea of how to make skyscrapers strong. The regulators and lawmakers who set the rules for big banks are still struggling, five years after the government rescue of many American and European banks.

Bankers and their defenders say that the struggle is over. The financial structures have been reinforced: deeper capital foundations, new supports added and weak materials removed. But many critics point out that the banks have not done the one thing necessary – to double or triple the ratio of shareholders’ equity to total assets. That is the only sure way, they say, to guarantee that large losses on loans do not threaten the ability of the institution to remain standing.

I think the critics are largely right. As economists Anat Admati and Martin Hellwig explain in their book, The Bankers’ New Clothes, the bankers’ almost instinctive aversion to equity protects bonuses and shareholders at the expense of the general public. Still, in my view banks have a more fundamental problem than poor capital structures. It is society’s unreasonable expectations of what they can accomplish.

Get used to zombie economics

Edward Hadas
Jul 10, 2013 12:15 UTC

Zombies are neither really alive nor fully dead. Moviegoers know that, but the idea is also useful in demographics and economics. Although economic zombification receives little attention, its effects could be as important as monetary policy, fiscal deficits and structural reforms.

The demographic trends are well known. For the past three or four decades in most developed economies, the number of children born has been too low, often by a wide margin, to keep the population constant. Japan is the leader in this decline. Indeed, the zombification of the Japanese population could well be the most dramatic such shift in history, at least during a period of peace, prosperity and good health.

Of course, Tokyo and Osaka are not actually filled with walking, flesh-eating corpses. But as in a horror film, the nation’s life-force is waning. Over the last decade, the number of Japanese people aged between 20 and 25 years old has declined by 22 percent. Since there is almost no immigration, the demographic future is easy to predict: another 22 percent drop over the next 20 years.

China’s wisdom on GDP growth

Edward Hadas
Jul 3, 2013 12:10 UTC

“We should no longer evaluate the performance of leaders simply by GDP growth. Instead, we should look at welfare improvement, social development and environmental indicators.” That is a fine piece of wisdom from Xi Jinping, China’s president. Leaders of developed economies can learn from it.

Xi was speaking to a domestic audience about the choice of leaders within the ruling Communist Party. The desire for people who are “devoted fighters for the socialism with Chinese characteristics” is distinctly local, but Xi identified a fact which transcends all Chinese characteristics: GDP is a poor measure of economic progress.

Actually, for China, GDP is modestly helpful. In a country still so poor, increases in output correlate well with genuine economic improvements: factories and farms producing more and better goods, enterprises offering more and better services, and so on. Still, Xi is right that China is ready to outgrow this crude indicator. The idea is all the more relevant in richer economies, where GDP growth is a terrible measure of economic progress.

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