Opinion

Edward Hadas

How can a plane vanish in a small world?

Edward Hadas
Mar 19, 2014 15:23 UTC

How can a plane vanish in a small world? The information vacuum around Malaysia Airlines flight MH370 is as unusual as it is disturbing. In the modern, globalised economy, things normally work well. When they don’t, the causes can usually be identified, and changes often follow to prevent recurrence. So far, MH370 is a distressing exception.

Until a few decades ago, a plane that disappeared from radar would simply be gone. Today, though, it is normally possible to unravel almost all such mysteries. There is much more knowledge than ignorance in technical matters. Aircraft have numerous onboard systems to ensure they are going where they should be and working as they should be. These interact with overlapping communications and tracking arrangements on land and in space. Indeed, so much information is generated in the normal course of flying that, without expert knowledge, the Boeing 777 aircraft could not have come so close to disappearing from electronic sight.

The cloud of information surrounding aircraft is particularly thick, perhaps because the idea of flying seems exceptionally unnatural to many people. However, most parts of the modern economy are remarkably well monitored and measured – and more so all the time. Tastes and practices can be traced with uncanny precision. Cameras track people’s movement, sensors watch machines and buildings, labels track when and where a product was made. When something goes wrong, the precise problem can almost always be identified.

The search for technical expertise does not stop at national borders. True, the MH370 investigation has seen some national frictions. But investigators from many countries are working together and technical skills have been recruited from wherever they are available. In a region of mutually suspicious governments, even the military authorities seem to be cooperating.

The multinational effort is typical of aviation, which is perhaps the most global of all industries. While there are many flag carriers, they all follow the same safety standards and fly aircraft with global production chains. Manufacturers, national regulators and airlines mostly work closely together to minimise the complexities caused by political borders and to ensure they do not become technological hazards. Poor and generally disorganised countries may do less well but, even there, airports are almost always the safest places to be.

Russia and the unreliable West

Edward Hadas
Mar 12, 2014 16:13 UTC

The revival of East-West tension over Ukraine looks thoroughly geopolitical. But the context is bad economics. In the last century, Russia was damaged by flawed ideologies which originated in the West. And today it is damaged by Western economic policy.

It is easy for Western Europeans and Americans to look down on the Russian economy. Since the breakup of the USSR, the nation’s real GDP per person has increased at a 3.9 percent annual rate. That is a modest accomplishment for a middle-income country with a great deal of resource income. While Ukraine’s 1.7 percent growth rate is even worse, Armenia, Poland and Romania have all grown faster than Russia.

Now look at it from the other side: what the West has given Russia. There are good things, from markets for energy exports to many types of sophisticated technology. However, these positives are dwarfed by two disastrous ideologies in the past and two selfish and hostile policies in the present.

The ongoing ethics struggle of banks

Edward Hadas
Mar 5, 2014 15:58 UTC

The Swiss Bank Employees Association has told an uncomfortable truth: it was “generally known” that for many years some of their employers profited from customers’ “tax evasion.” That is incontestable, as many of the banks’ managers concede. But the practice, supposedly now ended, raises an important question about ethics and business. Why were neither the managers of the Swiss banks nor their employees worried by this business model?

The hardly hidden truth was included in an Association press release which called on Brady Dougan, the chief executive of Credit Suisse, to apologize for insulting the Swiss bank’s employees.

Dougan, who was trying to explain to U.S. legislators how Credit Suisse had stopped helping Americans escape taxes, said that “some Swiss-based private bankers went to great lengths to disguise their bad conduct from Credit Suisse executive management.” The claim, said the employees’ group, slighted the professionalism of the workforce. Besides, it was “hardly credible.”

How hunger and obesity go together

Edward Hadas
Feb 26, 2014 15:32 UTC

Global hunger is shrinking. Yet each winter operators of food banks in rich countries like the United States and Britain speak movingly of the plight of those who must choose between heating and eating. The desperation seen by Feeding America and the British Trussell Trust is real enough, but this is not a massive economic failure. The weakness is predominantly social.

When people do not have enough to eat, there are three possible causes: an inadequate food production system, a bad political choice or poor personal arrangements. Through most of history, the first problem was the most important cause of hunger. However, as the economist Amartya Sen pointed out three decades ago, food shortages can no longer be acts of nature.

The reason for Sen’s judgment is that nature has been tamed. More than enough food is already produced globally to feed all the people, and the technology of food transport and storage is sufficiently advanced to get the food to those who need it most. When that does not happen, there must be a human problem. Within a country, a shortage of food comes down to a failure of government to serve the governed. Internationally, it is a failure of the strong countries to help the weak.

AOL, solidarity and health insurance

Edward Hadas
Feb 19, 2014 15:59 UTC

The head of the American internet company AOL managed to say something really stupid a few weeks ago, and to sound callous at the same time. It’s a shame Tim Armstrong came off so badly, because he was trying to deal with a serious topic.

Armstrong was trying to justify the company’s decision, since reversed, to trim its employees’ retirement benefits. He started out at a disadvantage, because the chosen cutback was sneaky. A change that sounds innocuous, moving from monthly to annual employer payments into employee pension savings accounts, is actually a way to eliminate payments to employees who leave before the end of the year. It’s hard to look honest and upfront when explaining that.

But the former Google bigwig turned a disadvantage into a public relations disaster by bringing up the high costs of caring for two employees’ premature babies. The implied complaint about these million-dollar infants sounded heartless and invasive. In more humane hands, though, the Armstrong discussion could have been a fruitful one. The challenges that AOL faces are built into the way Americans arrange their employee welfare programs.

Mega sovereign writeoff could work

Edward Hadas
Feb 12, 2014 15:48 UTC

A massive sovereign debt reduction is the right way to reduce the ridiculously high indebtedness of governments. The idea might sound crazy, but it makes economic sense, and could be done, albeit after some serious preparatory work.

Many rich country governments have been borrowing excessively in recent years. In 1991, when the calculations from the International Monetary Fund started, gross government debt of advanced economies was 60 percent of GDP. This year it is expected to be 108 percent of GDP, or about $51 trillion.

The current level is much too high for the overall economic good. Heavily indebted governments spend too much of their tax revenue on interest payments and spend too much time trying to placate bond buyers, who rarely support useful long-term investments. Rumours of possible default can spark a financial crisis. And the excessive supply of sovereign obligations encourages parasitic speculation. The economically pointless trades of supposedly risk-free government debt pay much of the high salaries at investment banks.

Apple, banking and taxpayer subsidy

Edward Hadas
Feb 5, 2014 16:20 UTC

Why does Apple have such high profit? Why do banking systems have a tendency to fail? These seemingly unrelated questions have the same answer – taxpayers take a lot of the risk out of business activity.

The ideas of two unconventional economists, Mariana Mazzucato and Elinor Ostrom, can help improve policy. Mazzucato is a professor of the Economics of Innovation. Her 2013 book, “The Entrepreneurial State: Debunking Private vs. Public Sector Myths” does just what it says. It provides persuasive evidence that governments deserve more credit than private companies for the development of most important modern technologies.

Apple’s iPhone is her star example. She demonstrates that government programmes developed all the key technologies, from the internet to voice recognition. Her argument is that Apple’s profit margins are unjustly high – over 20 percent after tax – because the company’s financial flows are not accurate reflections of its genuine contribution. Taxpayers have done the heavy technological lifting; the company only adds a little engineering pizzazz and a lot of business acumen, but shareholders get rewarded for the whole piece.

Don’t be afraid of deflation

Edward Hadas
Jan 29, 2014 15:43 UTC

Christine Lagarde says deflation is an “ogre which must be fought decisively.” The managing director of the International Monetary Fund is merely dramatising the current conventional wisdom, but she is wrong.

Lagarde did not explain why she thought deflation was so dangerous. Most likely, she had three commonly-made arguments in mind.

First, deflation might make a tragic debt cycle more likely. The fear is not totally irrational; a generalised price decrease can lead to economic disaster. The American economist Irving Fisher described the toxic cycle: prices fall, debts go bad, banks collapse, businesses fail, desperate workers take pay cuts and then companies cut prices even more. The downward spiral lasts until something happens – war, anarchy or a new monetary order.

Bitcoin repeats gold-standard errors

Edward Hadas
Jan 22, 2014 15:07 UTC

I cannot judge whether bitcoin represents a technological breakthrough, but I am confident that the pseudo-currency’s popularity shows widespread economic amnesia. If bitcoin ever became a real currency, it would suffer from the crippling problems of the gold standard.

The underlying problem is the belief that the electronic token’s independence from the government is a good thing. This libertarian notion could hardly be more wrong. Money is a common good for the whole society, and in the contemporary world governments are the pre-eminent social guardians.

It is true that under dire circumstances people might have to resort to an inferior monetary substitute. If a government collapsed or totally trashed the monetary system, then some privately issued money could be the least bad alternative. In such apocalyptic times, though, a software protocol which relies on secure electronic communications would not be first choice. Gold, which is tangible and not subject to hacking, is more plausible. So are old baseball cards.

Madoff/subprime – spot the difference

Edward Hadas
Jan 15, 2014 15:36 UTC

Bernard Madoff still has some magic. The public finds anything connected to the fraudster’s case fascinating, from a prison interview to JPMorgan’s agreement last week to pay $2.3 billion for Madoff-related sins. And why not? Madoff was a grandmaster of the confidence trick. But there is more to it than that. His way of doing business was alarmingly close to the perfectly legal practices which brought down the financial system in 2008.

To see that, compare Madoff to a hypothetical pre-crisis hedge fund manager – one with a special interest in U.S. subprime residential mortgage securities. The common tale starts with a commitment to provide higher returns than the economy can safely offer to financial investors. Both Madoff and the hedgie took in funds without making any specific promises, but their investors’ expectations were lofty.

Madoff, of course, knew that he could not live up to those expectations. That makes him smarter than the hedgie, who was either foolish, if he thought American house prices would keep rising for many years; or arrogant, if he was confident that he could sell out before the losses hit.

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