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Thursday, May 28, 2015

So, Sweden

For many decades, Sweden has been the poster child for socialism and there is no doubt in my mind that it is indeed a very nice place to live (except for the climate and depressing lack of sun in the winter).

On the one hand, I tire of talking about Sweden because it has about a thousandth of the world's population and less than a hundredth of the world's output. Consider the following thought experiment: let's say we took the world's population, divided it up into exactly 1,000 completely homogenous pieces, with the same culture, government, taxation structure, resource, etc., and turned these 1,000 "countries" loose for a century; what would the standard deviation of GDP per capita be across the countries? It wouldn't be zero and I have a hunch it would be quite large, on the order of 10% to 20% of the mean GDP per capita. If so, this would mean that the success of a tiny country like Sweden could be mostly sheer luck.

On the other hand, I do find many aspects of Sweden interesting and it is very successful, so I find it's always interesting enough to contemplate.

If countries with substantial income from oil and gas are ignored, the three most successful economies in the world are Singapore, Switzerland, and Sweden. At first glance, they have nothing in common other than they all beginning with the letter 'S'. Everything from geography to culture is substantially different.  Singapore is fairly low-tax, Sweden very high-tax, and Switzerland has tax rates in the middle.

They do have a few things in common. They all have small populations, have limited resources, were on the periphery of the big wars during the last century, have been very open to international trade, and have very strong property rights.

Overall, Sweden does have very high tax rates and government spending which leads most people to assume that it's a workers' socialist paradise. And that's certainly correct to at least some extent.

Paradoxically, Sweden is also one of the most capitalistic countries in the world. The basis of this can be found in the following statements:
Sweden's wealth Gini coefficient at 0.853 was the second highest in developed countries, and above European and North American averages, suggesting high wealth inequality. [...] 
The vast majority of Sweden's industry is privately controlled, unlike many other industrialised Western countries, and, in accordance with a historical standard, publicly owned enterprises are of minor importance.
In other words, the wealth and capital in Sweden has been and continues to be concentrated in the hands of relatively few people, and those people control the capital and the companies that use that capital. In addition, in 2005, Sweden abolished inheritance taxes, enabling this concentration of capital to continue unabated into the future. Since the traditional definition of socialism is a system where the government or collective owns the capital, Sweden is pretty much the exact opposite of that.

Has Sweden become more socialist/redistributionist/big-governmentist or less over the last few decades and how have they done? I've already mentioned abolishing the inheritance tax, which in clearly in the "less" category. Also:
According to the Organisation for Economic Co-operation and Development (OECD), deregulation, globalisation, and technology sector growth have been key productivity drivers.
Note that "deregulation" is listed first in the above statement. Parts of the safety net are also private:
Sweden is a world leader in privatised pensions and pension funding problems are relatively small compared to many other Western European countries.
Minimize government involvement with pensions and the problems are reduced according to the Western European experience. Tax rates have also been coming down:
Total tax collected by Sweden as a percentage of its GDP peaked at 52.3% in 1990. The country faced a real estate and banking crisis in 1990-1991, and consequently passed tax reforms in 1991 to implement tax rate cuts and tax base broadening over time. Since 1990, taxes as a percentage of GDP collected by Sweden has been dropping, with total tax rates for the highest income earners dropping the most. In 2010 45.8% of the country's GDP was collected as taxes.
Since Sweden has deregulated, privatized and lowered taxes, how has it fared?
Overall, GDP growth has been fast since reforms—especially those in manufacturing—were enacted in the early 1990s. 
Sweden is the fourth-most competitive economy in the world, according to the World Economic Forum in its Global Competitiveness Report 2012–2013.
In other words, really good.

Sweden is an oddball. It's a pretty homogeneous and small population with a unique mix of "socialism" and "capitalism" with the control of the capital and economy in the hands of relatively few private individuals. Deregulation, privatization, and lowering taxes certainly haven't hurt and look like they might've helped boost growth (but there's certainly not enough data to be sure).

So, Sweden is not a very good poster child for either socialism or capitalism. It's an outlier for both, it works well for the Swedes, but it's far from clear to me that their successful mix of socialism and capitalism would work on the far larger scale required for a place like the United States.

Wednesday, May 13, 2015

Takin' Care of Business

Would you tell an accountant how to do their job if you had no accounting experience and limited knowledge of accounting? Would you second guess how a guitarist played a riff if you don't play the guitar, even if you know a little bit about music? Would you criticize a quarterback on how they played a game, especially if you've never played football?

Of course, we all do things like that, especially the last one which birthed the phrase "Monday Morning Quarterback." So the real question is whether the accountant or the guitarist or the quarterback would take you even vaguely seriously. The answer is: very likely NO. Partly because after the fact second guessing is very much different than making decisions in real-time under great uncertainty. But mostly because without the experience of setting up charts of accounts, fingering guitar riffs, or calling plays, realistically, your input isn't terribly useful. On the other hand, advice from another accountant, guitarist, or quarterback is much more likely to be of value since they've had similar experience and a great deal of knowledge.

Now I'd like to switch from accounting, guitar playing, and football and consider business. Of all of the things I've ever done, from recording rock music to robotics, starting and running a business is by far the hardest. Resources have to be constantly orchestrated and many of those resources need to be kept "happy" in order that they do the best job possible. Market trends have to be guessed, regulators complied with or dodged, suppliers (who have the same issues) have to be convinced to supply at an acceptable time and price, customers need to be found and product delivered, funding needs to be found, and on, and on, and on.

All of these ons and ons and ons have to be balanced in a web of hard to fathom tradeoffs. For example, perhaps there's yet another of the many cash crunches we've faced. Do I lay off a couple of employees now, hurting them, and if so which employees, or do I hold on and keep them because there's a reasonable possibility that one of two contracts will begin generating revenue in time, but if the revenue doesn't start in a timely fashion I won't be able to pay anybody next month and the whole company will unravel in an unpredictable way and possibly everybody will be out of a job? Every day, I have a hundred questions with that level of complexity.

So when non-business folk do the Monday Morning Quarterback thing regarding some business catastrophe, I mostly just laugh. Recently, I made the following comment along those lines:
"I rarely take criticism to entrepreneurs seriously except from other entrepreneurs because I'm convinced that those who haven't started and run businesses have no idea how hard it is since I certainly didn't before I did it."
That's not my friendliest comment ever and I apologize for the dismissive tone. I made that comment during a discussion about the 2013 Savar building collapse in which 1,129 people died and thousands more were injured. There were some comments that I found not credible and/or not relevant that went something like: "it pays for itself to implement basic safety standards."

Maybe. But the question is who has the incentive to take this safety action. Let's start in the middle of story. Let's say I'm one of the factory owners/managers. I don't own the building and I'm simply leasing space. The building is evacuated because there are large cracks in the building. But the next day:
It is also reported that Kabir Hossain Sardar, the upazila nirbahi officer visited the site, met with Sohel Rana, and declared the building safe. Sohel Rana said to the media that the building was safe and workers should return to work the next day. One manager of the factories in the Rana Plaza reported that Sohel Rana told them that the building was safe.
Assume I'm the manager mentioned. I see these huge cracks and I might well be skeptical that the building is safe even though I'm told that it is. I can make one of two choices:
  1. Not have my employees go in the factory and work. In this case, I'm nearly certainly bankrupt, which I'll bet is pretty damn unpleasant in Bangladesh. Not only is my family ruined and perhaps destined to be homeless on the streets, but my dozens or hundreds of employees aren't going to get paid which will seriously damage them as well. If the building doesn't collapse, I've badly hurt a lot of people, including my family, for no good reason in hindsight. If the building does collapse, I'm still ruined, but at least I've saved some people.
  2. Have my employees go in the factory and work. Hopefully, the building won't collapse, or if it does, perhaps there will be enough warning to get out.
The trade off is certain damage to a lot of people versus possibly catastrophic damage to a lot of people. In my experience, that would be an impossibly difficult choice to make in real-time. Now that we know the building collapsed, it's easier to make the choice as a Monday Morning Quarterback.

One thing that I've found is that many non-business owners think that all entrepreneurs and business owners are rich and have essentially infinite resources at their command. Nothing could be further from the truth:
...small business owners ... are receiving an average salary of $68,000 annually, down from $72,000 a year ago. In addition, nearly 15 percent of small business owners need to work a second job while running their business in order to make ends meet.
I'm in that 15 percent. Not all entrepreneurs are Bill Gates or Steve Jobs and even they were probably short on cash in the beginning. If I had to fix the building I'm in, I'd throw in the towel and walk away. There's no possible way I could afford to fix it.

Working backwards, where could've decisions been made to prevent the catastrophe. Clearly Kabir Hossain Sardar could've declined to declare the building safe. My bet is that some sort of corrupt deal between Sardar and Rana was made. However, let's assume not for a moment. Even without bribes Sardar would've been under immense pressure to say the building was "safe." Not only from Rana (possibly a mob thug), but also from the factory owners/managers and even the employees.  No factory equals no work equals no pay equals serious problem.

Working back from there, I could've not started the factory. But my opinion is that discouraging business in Bangladesh is wildly counterproductive. No businesses, no jobs, no work, no pay, no food.

Working back from there, Rana could've not built the building and/or not allowed the modifications to the building and/or made the building safer. My guess is that Rana simply wouldn't have bothered to build the building if he had to incur the extra cost of making it safer. In other words, the ROI wouldn't have penciled out. It's easy to Monday Morning Quarterback it and say that since the building collapsed, he would've been better off making it a safer building. Yes, but he might've been even better off not building it in the first place and investing elsewhere if it was going to be more expensive. Then, no building, no factories, no jobs, no work, no pay, no food.

Another choice is that the government could've done a better job enforcing building codes. Then Rana wouldn't have built the building. Then, no building, no factories, no jobs, no work, no pay, no food.

Another choice is that the government could've taxed the people more and built the buildings themselves using appropriate building codes. With $1,100 per year GDP, higher taxes pretty much means someone's not eating. And if you think the government is somehow going to tax people like Rana instead of the poor, think about how corrupt Bangladesh is.

Nobody had the incentive to prevent the catastrophe. Note that even the government wasn't going to bother doing anything about the collapse until Americans complained.

I want to end with a snippet about George McGovern.

Senator George McGovern was the Democrat's presidential nominee in 1972 and was possibly the most left wing candidate ever to run for president as part of a major party. As a Senator, he was involved in a great deal of legislation that directly affected business.

Later, he became a businessman (my guess is he thought it would be really easy) and reminisced about the experience:
In 1988, I invested most of the earnings from this lecture circuit acquiring the leasehold on Connecticut’s Stratford Inn. Hotels, inns and restaurants have always held a special fascination for me. The Stratford Inn promised the realization of a longtime dream to own a combination hotel, restaurant and public conference facility — complete with an experienced manager and staff.  
In retrospect, I wish I had known more about the hazards and difficulties of such a business, especially during a recession of the kind that hit New England just as I was acquiring the inn’s 43-year leasehold. I also wish that during the years I was in public office, I had had this firsthand experience about the difficulties business people face every day. That knowledge would have made me a better U.S. senator and a more understanding presidential contender. [emphasis added]
Everybody thinks business is easy, but most who try it, find it's not.

And now, one of my favorite songs:


Monday, May 11, 2015

I Feel So Guilty

Even as cynical and jaded as I am, every once in a while I read an article that makes me realize I'm not yet cynical and jaded enough. Linked indirectly from both instapundit and brothersjudd is an Australian Broadcasting Corporation article entitled "Is having a loving family an unfair advantage?" Note that the Australian Broadcasting Corporation is owned and funded (over $1 billion per year) by the Australian government so it's not a fringe news organization.

In the article, philosopher and Social Justice Warrior Adam Swift notes:
"The evidence shows that the difference between those who get bedtime stories and those who don’t—the difference in their life chances—is bigger than the difference between those who get elite private schooling and those that don’t"
For those who think that inequality is the great evil of the universe, this inherently leads to the following contemplation:
"One way philosophers might think about solving the social justice problem would be by simply abolishing the family. If the family is this source of unfairness in society then it looks plausible to think that if we abolished the family there would be a more level playing field."
I have to wonder if Adam Swift is related to satirist Jonathan Swift who also proposed that the state should raise children in Gulliver's Travels. Alas, Jonathan was kidding, though at least Adam admits it's not a perfect solution:
The break-up of the family is plausible maybe, he thinks, but even to the most hard-hearted there’s something off-key about it.
Hmmm, a bit off-key? Yeah, a bit. Progressives have been known to be a bit tone-deaf from time to time.

Asked if "parents snuggling up for one last story before lights out be even a little concerned about the advantage they might be conferring," Swift responds:
“I don’t think parents reading their children bedtime stories should constantly have in their minds the way that they are unfairly disadvantaging other people’s children, but I think they should have that thought occasionally.”
I'm guilty, oh-so-guilty for disadvantaging other people's children by all that bedtime reading I did. I managed to disadvantage hundreds of millions of children simply by reading bedtime stories.  Oh! The horrors! Guilty, I tell you, guilty guilty guilty!

Monday, May 04, 2015

deja vu - escaping poverty

Once almost everyone was poor, usually extremely poor.  Eventually there was a significant change.  Over the course of a recent few centuries many people around the world were able to improve their circumstances and live further and further above a subsistence level.  Although there are stories of how brutal this change was, by  revisiting history  we can achieve a more realistic perspective on these past events.  Contrary to the conventional narrative Mark Perry presents a post titled  In defense of sweatshops  offering support for their role in lifting people out of poverty.  One item on the post is a TED talk presented by Leslie Chang about alleged exploitation of Chinese factory workers.  Here are some excerpts from the  transcript:

Chinese workers are not forced into factories because of our insatiable desire for iPods. They choose to leave their homes in order to earn money, to learn new skills, and to see the world. In the ongoing debate about globalization, what's been missing is the voices of the workers themselves. --- Chen Ying: "When I went home for the new year, everyone said I had changed. They asked me, what did you do that you have changed so much? I told them that I studied and worked hard. If you tell them more, they won't understand anyway." 
So I spent two years getting to know assembly line workers like these in the south China factory city called Dongguan. Certain subjects came up over and over: how much money they made, what kind of husband they hoped to marry, whether they should jump to another factory or stay where they were. Other subjects came up almost never, including living conditions that to me looked close to prison life: 10 or 15 workers in one room, 50 people sharing a single bathroom, days and nights ruled by the factory clock. Everyone they knew lived in similar circumstances, and it was still better than the dormitories and homes of rural China.  
The workers rarely spoke about the products they made, and they often had great difficulty explaining what exactly they did. When I asked Lu Qingmin, the young woman I got to know best, what exactly she did on the factory floor, she said something to me in Chinese that sounded like "qiu xi." Only much later did I realize that she had been saying "QC," or quality control. She couldn't even tell me what she did on the factory floor. All she could do was parrot a garbled abbreviation in a language she didn't even understand.  
Karl Marx saw this as the tragedy of capitalism, the alienation of the worker from the product of his labor. Unlike, say, a traditional maker of shoes or cabinets, the worker in an industrial factory has no control, no pleasure, and no true satisfaction or understanding in her own work. But like so many theories that Marx arrived at sitting in the reading room of the British Museum, he got this one wrong. Just because a person spends her time making a piece of something does not mean that she becomes that, a piece of something. What she does with the money she earns, what she learns in that place, and how it changes her, these are the things that matter. What a factory makes is never the point, and the workers could not care less who buys their products.  
Journalistic coverage of Chinese factories, on the other hand, plays up this relationship between the workers and the products they make. Many articles calculate: How long would it take for this worker to work in order to earn enough money to buy what he's making? For example, an entry-level-line assembly line worker in China in an iPhone plant would have to shell out two and a half months' wages for an iPhone.  
But how meaningful is this calculation, really? For example, I recently wrote an article in The New Yorker magazine, but I can't afford to buy an ad in it. But, who cares? I don't want an ad in The New Yorker, and most of these workers don't really want iPhones. Their calculations are different. How long should I stay in this factory? How much money can I save? How much will it take to buy an apartment or a car, to get married, or to put my child through school?
 I would contend that like the historical experience of English workers had some important similarities to that of Chinese workers.  It was a rough experience, but there was a sense that they were improving their circumstances.

Is That Sexist?

My younger daughter just got her driving learner's permit. In California, after receiving one's permit, the first two hours of driving has to be with a professional driving instructor in a special car where the instructor has a brake and steering wheel as well.

My daughter wanted her instructor to be a woman. She asked me, "Is that sexist?"

The snarky comment that almost escaped my mouth was, "No, because only white males can be sexist." Fortunately, I choked that one back.

Instead, I said, "Well, I don't know, but if so, it would be an illustration of just how meaningless negative words like that can be at times. I wouldn't worry about it."

Was that the right answer?