Opinion

Edward Hadas

Social media sets us free, or not

Edward Hadas
Jun 12, 2013 14:15 UTC

Modern history can be told as a story of new communications technologies which both undermine authority and reinforce the power of the state. The last week has shown that the Internet and social media are playing these two roles well.

Start with the contrasting historical narratives. In the 15th century, printing undermined the autocratic Catholic Church. A few centuries later, cheaper printing made possible the newspapers and pamphlets which helped destroy monarchies and then spread democracy, nationalism and revolution around the world. Telephones and now the Internet have sped up the process.

But there is also the expanding state. Printing allowed central governments to set up and monitor extensive bureaucracies. Cheaper printing gave governments the means to take control of the education and indoctrination of children. Add in telephones, communicating computers and now the Internet, and liberal governments feel free to set up an extensive bureaucracy which monitors and guides almost any aspect of life.

Until Tuesday, it looked like Turkey might be demonstrating the disruptive power of new technology. It took only a few days for a protest over a building project in Istanbul to spark a national movement and become a global cause. A small group of people without anything like a clear agenda was able to jump ahead of the unpopular traditional opposition parties and the cowed old media. Recep Tayyip Erdogan, the popular prime minister of Turkey, rightly held social media responsible. He called it “the worst menace to society”.

Tear gas and rubber bullets have scattered the demonstrators, but it’s too early to say that Erdogan has won. I think of the rebels who eventually unified Italy in the 1860s. Inspired by one of the first media-aided anti-authoritarian successes, the American Revolution, they spent decades using the popular press to win hearts and minds, both inside Italy and in several European powers. The new popular opinion eventually prevailed.

Bond markets and failed theory

Edward Hadas
Jun 5, 2013 14:00 UTC

In theory, interest rates are one of the jewels of capitalist economies. The theory has been well tested over the past half-century, and it has failed. Interest rates have become a mark of shame. The recent increase in yields on government bonds in much of the world – by a quarter, from 1.65 percent to 2.1 percent since the beginning of May for 10-year U.S. government bonds – is only the latest chapter in a long and depressing story.

The theory starts well, with a plausible behavioural generalisation. A lower interest rate encourages less saving and more consumption today, while a higher rate encourages saving now and boosts consumption in the future. But the theoreticians are not content with that; they want mathematical precision. They get it by adding some extraordinarily unlikely assumptions about knowledge, uncertainty, defaults, growth, and inflation.

The result is almost magical: a single “natural” interest rate which serves as a sort of economic fulcrum. At this ideal rate, saving and consumption are supposed to be balanced correctly, and the financial system is perfectly aligned with the real economy of making and selling.

The dangerous aristocrats of finance

Edward Hadas
May 29, 2013 14:21 UTC

In many ways, the financial world has changed remarkably little in the five years since the 2008 financial crisis. Yes, banks, brokers and other intermediaries are neither as profitable nor as popular as in the pre-crisis years. However, the industry is still arrogant, isolated and ridiculously lucrative. Leading financiers look more like pre-revolutionary aristocrats than normal businessmen.

Pay is the most obvious sign of this privileged social position. Consider JPMorgan, a fairly typical financial firm in terms of remuneration. Last year, the annual compensation per employee was $192,000.

That already seems high, but the measure includes the majority of employees whose pay is bunched around the $45,000 average for non-supervisory U.S. workers in finance. Assume that two-thirds of Morgan’s employees were in that group. For the rest, the people at the top and upper middle of the company, that leaves an average pretax reward of $485,000 – more than 10 times the norm of the lower orders.

Apple, hypocrisy and stakeholder tax

Edward Hadas
May 22, 2013 14:00 UTC

Apple is the latest multinational to feel the heat on cross-border tax management. The news that the tech giant used Irish law to lower U.S. tax payments should not have been surprising. After all, “Do no evil” Google had no second thoughts about recording what were essentially British sales as Irish, for the sake of a lower tax rate. It’s hardly likely that Apple, which has cultivated a certain anti-establishment air, would have hesitated.

Indeed, until a few months ago, I don’t think there was a corporate treasurer anywhere who would have taken justice into account when deciding on tax strategy. At most, there might be worries about bad publicity, but the well-established corporate practice of tax dodging had generated little attention.

And who would complain? Lower taxes on profit bring benefits to most people connected with companies; the money that doesn’t go to the government goes to workers, customers and shareholders. Besides, most experts who understand the arcane rules of international taxation are paid to use them to keep payments down.

Keynes, fertility, and growth

Edward Hadas
May 15, 2013 13:43 UTC

“Keynes was a homosexual and had no intention of having children. We are NOT dead in the long run … our children are our progeny.” This tirade came from Niall Ferguson, the financial historian, Harvard professor and pundit, speaking in the third capacity at an investor conference two weeks ago. Though largely misguided, part of that comment is interesting. The idea that fertility has something to do with economics is due for a revival.

The sexual slur, for which Ferguson apologised, is tedious, as is the wilful misunderstanding of John Maynard Keynes’s quip: “in the long run we are all dead”. That was a complaint about the glib willingness of rival economists to endorse temporary suffering, which Keynes thought was largely unnecessary, for the sake of some distant good, which he thought was far from certain to arrive.

But Ferguson’s comment assumes, correctly, that our economic activity cannot be separated from an almost biological desire to create a good society which will endure into the future. In other words, there is a valid analogy between our biological drives to survive and reproduce and the economic desires to satisfy our needs and to thrive, now and in the future. Economists have captured the close ties of biology and society with two different images: growth and fertility.

Rana Plaza and union labels

Edward Hadas
May 8, 2013 14:34 UTC

The 1911 Triangle Shirtwaist Factory was a turning point in the history of American labour relations. It led directly to a slew of new laws on safety and labour practices in New York State, and indirectly to a less exploitative approach to industrial labourers throughout the country. Last month’s Rana Plaza disaster in Bangladesh, where the collapse of a clothing factory killed more than 700 people, demonstrates that the lessons need to be learned again, this time on a global scale.

It is not a coincidence that both these accidents involved the garment trade. This is an industry of mostly small, poorly capitalised companies, which jostle against each other in a long and rapidly shifting supply chain. Retailers shop around aggressively, suppliers sub-contract freely and the price pressure is relentless. No one takes responsibility, and it can seem like almost everyone involved is irresponsible.

It does not need to be like this. In the first few decades after Triangle, the common good increasingly prevailed in the clothing trade in the United States, and eventually in other rich countries. Trade unions protected workers, customers learned to pay enough for their clothes to support fair wages, and price competition was muted.

In favour of much less trading

Edward Hadas
May 1, 2013 13:40 UTC

It was front page news in the Wall Street Journal. For three long hours last week, there was no trading on the Chicago Board Options Exchange, the home of S&P 500 stock index options and the Vix volatility index. The Journal quoted a trader: “It was very, very unnerving”. Risks went unhedged. Experts worried about the effect of a more grievous software fault on an even more important exchange. What would happen then?

Almost nothing. Imagine a worst case scenario: a hacker closes down all the exchanges for a full month. All portfolios of stocks, bonds, options, futures, currencies and commodities are exactly the same on June 1 as on May 1.

What would the outage change? The prices at the end of the “exchange holiday” would presumably be about the same as they would have been otherwise. The lost income of brokers and traders with superior insight or information would be matched by the foregone losses of their counterparties. As for the economy, a few new issues of bonds and shares would have been delayed a few weeks, but the losses would be more than matched by gains: the absence of frenetic trading would remove a significant distraction for business people.

Debt debate in need of upgrade

Edward Hadas
Apr 24, 2013 14:31 UTC

In retrospect, last week’s debunking of one of the key conclusions of Kenneth Rogoff and Carmen Reinhart about government debt looks inevitable. The whole story, from the initial lavish praise for the Harvard professors to the current harsh criticism, is a sad reminder of the power of ideology in the angry debate over economic policy.

In 2011, the two eminent professors claimed to show a tipping point for government borrowing. If the debt amounted to more than 90 percent of GDP, the GDP growth rate was typically much slower than in more fiscally prudent countries. When Thomas Herndon, a mere graduate student at the University of Massachusetts, redid the maths this year, he also found a correlation between higher government debt and slower growth. But there was nothing remotely like a tipping point.

The new paper was a blow to the politicians who relied on the Rogoff-Reinhart 90 percent line to support fiscal “austerity” (smaller government budget deficits). But they were always foolish to trust a study which drew a universal conclusion from a small sample of countries in vastly different situations.

Make business ethics less boring

Edward Hadas
Apr 17, 2013 13:53 UTC

Business ethics is too bland. That thought crossed my mind during a quite good speech on the topic by Vincent Nichols last week at St Paul’s Cathedral in London.

The Catholic Archbishop of Westminster said many things, but his main idea of how to improve businesses can be summed up in one sentence: “All businesses big or small should be able to demonstrate how they are making the world a better place through providing goods that are truly good, or services that truly serve people, and, by doing so, create employment and fair returns to investors, whilst minimising harm”.
A few moral relativists or free-market ideologues might argue with that, but most business people think they are already behaving as the archbishop thinks they should. They usually see themselves as well-meaning cogs in a basically benign economic machine which provides people with a remarkable array of desired goods and services, and does so efficiently, safely and in a way that is fair to workers and the world.

That self-image is fair. Most businesses in developed economies do work to a quite high ethical standard.

In favour of the living wage

Edward Hadas
Apr 10, 2013 12:05 UTC

In the United States and some other developed economies, wages for the least well paid are too low. A mandatory living wage is the best way to redress this injustice.

The idea of minimum wages is well accepted, but the American $7.25 an hour does not meet the simple standard of providing enough to support the worker who earns it. For an adult in New York State, self-support requires 55 percent more, $11.25 an hour in a full-time job, according to The MIT Living Wage Calculator. And a just minimum should really be enough to raise a family – something closer to the $23.58 an hour required to support a single wage-earner with one child.

The minimum wage is one part of the remarkably complex pay system found in all developed industrial societies. Economists often suggest that wages are determined by market forces, the supply and demand for labour, and by employers’ calculations of the value of labour. But actual wages influence both the market and the perceived value of labour. It is more accurate to include market forces and economic value somewhere in the middle of the long list of factors which contribute to the ever-shifting social agreement on pay levels. This agreement is established in the mysterious way that all social orders are built – the powerful push, the weak resist, traditions are followed and evolve, justice is respected and flouted, market forces and economic calculations nudge.

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