Tuesday, July 17, 2018

The Problem With Innovation: The Biggest Companies Are Hogging All the Gains

Economists trying to explain a long-term slowdown in productivity increasingly believe gains are not spreading through the economy, as they once did

By Jason Douglas, Jon Sindreu and Georgi Kantchev of The WSJ. Excerpts:
"Lately, economists have discovered an unsettling phenomenon: While top companies are getting more productive, gains are stalling for everyone else. And the gap between the two is widening, with globalization and new technology delivering outsize rewards to the titans of the global economy."

"big firms can exploit economies of scale offered by new technology and global markets. Companies with more orders can better shoulder upfront investments because each new unit produced will be less expensive."

"Since the 2008 financial crisis, U.S. productivity has grown by about 1.2% a year. That is half the rate it clocked in the 1970s and around one-third of what it was in the decades after World War II, once adjusted to strip out the temporary effects of economic booms and busts. Japan and Europe—especially the U.K. and Italy—have fared even worse.

Researchers have blamed the productivity slowdown on a range of factors including ultralow interest rates, mismeasurement of output in a digital world and a decline in humanity’s innovative prowess. Most theories don’t seem to explain the whole puzzle.

Researchers now are zeroing in on diffusion. According to data on advanced economies from the Organization for Economic Cooperation and Development, the most productive 5% of manufacturers increased their productivity by 33% between 2001 and 2013, while productivity leaders in services boosted theirs by 44%.

Over the same period, all other manufacturers managed to improve productivity by only 7%, while other service providers recorded only a 5% increase."

"nearly all of the increase in wage inequality in the U.S. since 1978 stems from pay disparity between workers at different companies. Pay gaps within companies remained mostly unchanged."

"one-quarter of U.S. productivity growth between 1995 and 2000 was driven by retailers, with almost one-sixth of that by a single company, Walmart Inc. Smaller rivals were left in its wake, if they survived at all."

Data show the most productive companies are usually the biggest. Globalization allowed them to grow bigger, while giving some specialized niche firms a big enough market to succeed.

For digital titans such as Amazon, Google parent Alphabet Inc. and Facebook Inc., the benefits of scale are substantial. Not only are their customers not limited by geography, but whenever more sellers sign up in Amazon’s platform or more users join Facebook’s social network, the service they offer gets more valuable for everyone else.

Another advantage: Researchers have found that bigger firms are better at protecting their technological advantages by patenting them. Only 25 companies accounted for half of all tech-related patents filed with the European Patents Office between 2011 and 2016, official data show.

Scale makes it possible to experiment with advanced technology that is out of reach for many companies. A separate McKinsey Global Institute report, published in April, found early adopters of artificial intelligence may already have gained “an insurmountable advantage” in earnings over competitors who have yet to take the plunge.

Gains at the top have been the key driver of productivity since the days of the industrial revolution, and the whole economy benefited. What is different now?

Some economists say it could be that good managers have flocked to top firms—enticed by the larger pay offered by multinationals—and the laggards need to catch up. According to the World Management Survey, smaller firms are consistently worse run and are responsible for most differences in management across countries."

"Globalization made it easier to automate sectors that produce goods and services that can be traded around the world, but this means those sectors now employ far fewer people than they did 40 years ago. Recent research finds that the result may be a shift in employment toward lower-productivity jobs such as delivering fast food by bike or cleaning offices—much harder tasks to automate."

"Jürgen Maier, chief executive of the U.K. arm of Siemens AG , says reviving diffusion is in the interests of the biggest, most productive companies, because many laggards are their suppliers. “If we get our supply chains more productive, more agile, delivering in time, that’s good for everybody in the ecosystem,” Mr. Maier says."
Here is something from Nobel prize winning economist Paul Krugman that is related. See The Accidental Theorist. Excerpts:
"Imagine an economy that produces only two things: hot dogs and buns. Consumers in this economy insist that every hot dog come with a bun, and vice versa. And labor is the only input to production."

"It so happens that I am about to use my hot-dog-and-bun example to talk about technology, jobs, and the future of capitalism. Readers who feel that big subjects can only be properly addressed in big books--which present big ideas, using big words--will find my intellectual style offensive. Such people imagine that when they write or quote such books, they are being profound. But more often than not, they're being profoundly foolish. And the best way to avoid such foolishness is to play around with a thought experiment or two.

So let's continue. Suppose that our economy initially employs 120 million workers, which corresponds more or less to full employment. It takes two person-days to produce either a hot dog or a bun. (Hey, realism is not the point here.) Assuming that the economy produces what consumers want, it must be producing 30 million hot dogs and 30 million buns each day; 60 million workers will be employed in each sector.

Now, suppose that improved technology allows a worker to produce a hot dog in one day rather than two. And suppose that the economy makes use of this increased productivity to increase consumption to 40 million hot dogs with buns a day. This requires some reallocation of labor, with only 40 million workers now producing hot dogs, 80 million producing buns."

"Yes, technological change has led to a shift in the industrial structure of employment. But there has been no net job loss; and there is no reason to expect such a loss in the future. After all, suppose that productivity were to double in buns as well as hot dogs. Why couldn't the economy simply take advantage of that higher productivity to raise consumption to 60 million hot dogs with buns, employing 60 million workers in each sector?

Or, to put it a different way: Productivity growth in one sector can very easily reduce employment in that sector. But to suppose that productivity growth reduces employment in the economy as a whole is a very different matter. In our hypothetical economy it is--or should be--obvious that reducing the number of workers it takes to make a hot dog reduces the number of jobs in the hot-dog sector but creates an equal number in the bun sector, and vice versa. Of course, you would never learn that from talking to hot-dog producers, no matter how many countries you visit; you might not even learn it from talking to bun manufacturers. It is an insight that you can gain only by playing with hypothetical economies--by engaging in thought experiments."

Monday, July 16, 2018

The best age for entrepreneurship

By Michael Taylor of The San Antonio Express News. Excerpts:
"A new research paper co-authored by researchers from MIT, Northwestern University, and the U.S. Census Bureau shows the surprising relationship between business startup success and the age of the founders."

"The researchers first discovered the average age of startup founders, which is a surprisingly non-youthful 41.9 years old."

"Their study zeroed-in on unusually “high-growth” companies, the type of company that creates an extraordinarily big economic impact. They calculated the average age of the founder of the top 0.1 percent of startups in terms of employment growth — in other words the best successes compared to 999 of its startup peers. Before I give the answer, want to guess the average age of founder for these companies?

The answer is 45."

"Beyond that average age for top performers, the researchers found that the probability of entrepreneurial success in general increased steadily with age.

Founders who were 50-something were almost twice as likely to succeed at the highest level than 30-something founders. Not only that, but business founders in their 20s were the least likely to succeed. All of this flies in the face of the popular image we get from financial media of Silicon Valley prodigies disrupting everything around them before they’ve been kicked off their parents’ health care plan."

"age and experience bring even more important advantages to bear. The three most important of these appear to be deep experience in a particular industry, access to financial resources, and harder-to-measure factors like managerial experience and social capital."

"young founders often seem to believe that their youth is an advantage, despite the data to the contrary. They self-perceive as “the next Mark Zuckerberg.” For better or worse, they have absorbed the media narrative around young disrupters, especially in technology."

Here is a short article by me called "Aging and Entrepreneurship." Article in the Encyclopedia of Financial Gerontology, Lois A. Vitt and Jurg K. Siegenthaler, Editors-in-Chief, Greenwood Press, 1996.
"ENTREPRENEURSHIP, the initiation and assumption of the financial risks of a business and its management. The decision to start a business is often complex.  Many factors, including the need for achievement, the need for control over one's destiny, the willingness to take risks, the loss of one's job, and other forms of displacement may prompt a person to start his or her own business. While some writers see no link between age and the decision to start a new business, others have found close links. When age is a significant factor, it is often for psychological reasons.

Entrepreneurial opportunities are most likely to be pursued by people with a college education who are in their late thirties and have established careers. Age is relevant to entrepreneurship, and entrepreneurship is important for the aged. Of those who are employed at age 65 or older, 27% are self-employed (Maddox 1985). It is useful to examine the relationship between entrepreneurship and aging through the internal or psychological aspects of a person's decision to become an entrepreneur.

The Entrepreneur and Hero Compared

Joseph Campbell believed that the entrepreneur was the real hero in our society. Although he never systematically compared the entrepreneur and the hero, it is interesting to do so. Heroes and entrepreneurs are called to take part in an adventure that is a simultaneous journey of self-discovery, spiritual growth, and the personal creativity they make possible. An entrepreneur's journey closely resembles the journey of the hero in mythology as outlined in Campbell's book, The Hero 'With a Thousand Faces (1968). There is a strong similarity between the journey that entrepreneurs take and the adventure of heroes. Entrepreneurs and heroes also have similar personality traits. Myths describe the universal human desires and conflicts we see played out in the lives of entrepreneurs. Ian MacMillan and Rita Gunther McGrath (Wall Street Journal 1992) of the Wharton School's entrepreneurial center found that entrepreneurs, no matter what country they call home, think alike. Campbell found that the basic pattern in the hero's journey is the same in every culture.

Heroes bring change. Campbell (1968) refers to the constant change in the universe as "The Cosmogonic Cycle" that "unrolls the great vision of the creation and destruction of the world which is vouchsafed as revelation to the successful hero." This recalls Joseph Schumpeter's theory of entrepreneurship as creative destruction. A successful entrepreneur simultaneously destroys and creates a new world, a new way of life. Henry Ford destroyed the horse and buggy age while creating the world of the automobile. Campbell's hero finds that the world "suffers from a symbolical deficiency" and "appears on the scene in various forms according to the changing needs of the race." Changing needs and deficiencies correspond to the changing market conditions or the changing desires for products. The entrepreneur is the first person to perceive changing needs. Campbell believed that people become creative when they engage in an activity, pursue a career or entrepreneurial venture, because it is what one loves to do and because it bestows on one a sense of personal importance and fulfillment. It is not the social system that dictates that it be done; rather, the drive comes from within. It is this courageous action that opens up doors and creative possibilities that did not previously exist.
Relationship of the Hero's Journey to Aging

The hero's goal is now to find a purpose in life. Campbell's and Erik Erikson's (1963) heroes are similar, because the hero's journey is a quest for personal identity that can be found in service to others or to society, or in finding and delivering a boon. During the generativity versus stagnation stage, which comes in the second half of life, in Erikson's eight ages of man, people become willing to take risks in order to be creative or make their mark upon society. Generativity involves establishing and guiding the next generation, but it also includes productivity and creativity, which, along with the willingness to take risks, are essential to entrepreneurship. For Campbell, the act of creating involves the willingness to take a risk and cross a boundary into a new domain of ideas. To be unwilling or afraid to do so is to be controlled by what he calls "the elder psychology," or the unwillingness to strike out on one's own and take risks.

The paradox, then, is that although entrepreneurship may be an important path for people to discover themselves and "do something meaningful for society" as they become older, they must resist this "elder psychology," which Campbell believes blocks risk taking, creativity, and entrepreneurship. When a person is able to champion things becoming, he or she can achieve generativity by making a significant and unique contribution to society. If one is able only to maintain the status quo, he or she will stagnate and will remain self-centered and unable to contribute to society. Almost by definition, entrepreneurs are champions of things becoming.

In counseling and advising the elderly in the area of entrepreneurial activity, it is useful to keep these insights from mythology and psychology in mind. They deal with the deepest of needs and forces in the human psyche. For an older person contemplating a new business venture, it will be helpful to recognize that it is not just the potential financial gains or losses involved that are important. The entrepreneurial act may be a life-defining and self-defining act, one with deep personal and perhaps even spiritual implications for the individual and his or her relationship with society. Entrepreneurs are often seen as having different attitudes toward risk: what a nonentrepreneur might view as a great financial risk, the entrepreneur may see as a cost of learning and adventuring. The venture is an end in itself, more than the profit. People who start new businesses in the second half of life may view risk in this way, because they feel such a strong need to define themselves and contribute to society.

Campbell, Joseph. 1968. The Hero With a Thousand Faces. Princeton. NJ: Princeton
University Press.

Erikson, Erik H. 1963. Childhood and Society. New York: W. W. Norton.

Jung, Carl G. 1956. Symbols of Transformation. New York: Harper TorchbookslBollingen Library.

Maddox, George L., et al. 1985. The Encyclopedia of Aging. New York: Springer.
Wall Street Journal. 1992. 6 February; A1."

Sunday, July 15, 2018

Can the right story increase your income or help the poor?

See Think Positive, Climb Out of Poverty? It Just Might Work by Seema Jayachandran in The NY Times. I have a blog that sometimes touches on issues like this called Dollars and Dragons A look at the intersection of economics and mythology. Even if these programs work, they raise an important question: if everyone gets the "right" story told to them, would we all become richer?

"In Kampala, Uganda, students who watched a feel-good movie about a chess prodigy improved their academic results. In Oaxaca, Mexico, clients of a microcredit organization were successfully trained to have greater aspirations for the future. And in Kolkata, India, sex workers in brothels were imbued with a sense of empowerment that helped them to take concrete steps to improve their lives."

"In Kampala, Uganda, for example, a study by Emma Riley, a graduate student at the University of Oxford in Britain, examined the effects on students of watching a movie, “Queen of Katwe,” starring Lupita Nyong’o and David Oyelowo. The Disney movie is based on the life of Phiona Mutesi, a girl from a poor township in Kampala, whose father died of AIDS when she was young.

Ms. Mutesi went on to become a champion chess player, representing Uganda in international competitions, an achievement that exceeded what many students in Uganda had expected for themselves or even thought possible.

To encourage them to aim higher, students preparing for their national exams were shown the movie. When they took the exams, they performed better than a control group that instead watched a Hollywood fantasy movie, “Miss Peregrine’s Home for Peculiar Children,” that did not feature an appropriate role model. Significantly more of the “Queen of Katwe” movie watchers had scores high enough to gain admission to a public university."

"The Kolkata, India, experiment, conducted by five scholars based in the United Kingdom and India, ran a short course on personal growth for 264 sex workers, who had often felt stigmatized and powerless. After participating, the women had measurably greater self-esteem and a stronger belief that they could determine the course of their lives. More concretely, they began saving more money and getting more frequent health checkups.

These successes suggest that even traditional anti-poverty programs work partly because they lift people up psychologically. For example, a program designed by a nonprofit in Bangladesh that has also been used in India, Ethiopia, Peru and other countries has given poor people livestock plus training on how to care for the animals.

This aid package has raised participants’ incomes more than might have been expected, based on the direct monetary value of the animals and the education. What helps to explain the outsize impact is that participants started working more hours."

Critics of anti-poverty aid have charged that it encourages laziness, but in this case, the opposite happened. The assistance motivated people to work harder. The extra work was partly a rational calculation: Productive assets like cows or goats magnified the payoff from labor. But it’s also true that participants’ mental health improved, which likely made them able to work more.

Better mental health is also one of the striking benefits of the cash grants that the American nonprofit, GiveDirectly, has given to poor households in Kenya."
"Hope isn’t a cure-all. In none of these examples can we be certain that it actually explains the gains in people’s income or education. And instilling hope without skills or financial resources is unlikely to be enough to lift people out of poverty."
"unrealistically high aspirations can be so discouraging that they are harmful. Repeatedly falling short can deplete motivation.

Still, it is welcome news that poverty-alleviation programs can amplify the good they do just by making a better life seem — and actually be — within reach."

Saturday, July 14, 2018

Student-Debt Forgiveness Is a Wonderful Boon, Until the IRS Comes Calling

Education analysts, student advocates warn of impending crisis from one-time tax bills individuals may not be prepared to pay off

See By Josh Mitchell of The WSJ. Excerpts:
"The tax bills are a feature of the “income-driven repayment plans” that have been offered by the Education Department since 2007. One version of these plans allows borrowers to set their monthly student-loan payments at 10% of their discretionary income. The balances often grow over time because the payments aren’t big enough to cover accruing interest.

Private-sector workers pay for 20 or 25 years. At the end of that period, any remaining balance would be forgiven. Under federal tax rules, that disappearing debt is considered part of a borrower’s income for that given year, and taxed as such.

Those delayed tax bills are piling up. There are now 7 million borrowers owing $389 billion in income-driven repayment, according to the Education Department. The first borrowers likely won’t have debt expunged until 2027. As enrollment surges, education analysts and student advocates are warning of a potential crisis facing borrowers and the government down the road: huge one-time tax bills that individuals aren’t prepared to pay off.

With the inflating tax bills, the plans for some borrowers resemble “balloon payment” plans offered by some mortgage lenders, under which borrowers make low monthly payments for a period and then are required to make a big, one-time payment to pay off the sum. Some policy makers have criticized balloon payments as a form of risky lending."

"Taken altogether, Americans could be on the hook for tens of billions of dollars of one-time taxes down the road."

"borrowers in income-driven repayment plans to have an average of $41,000 forgiven. For borrowers in the 25% tax bracket, that could mean a tax bill of more than $10,000."

"many student-loan borrowers are unaware they will face a big tax bill."

"The government already garnishes Social Security checks and wages for retirees who failed to repay student debt."

"For those borrowers who don’t have enough money to cover tax bills, taxpayers would be on the hook."
Related posts:

Who Is Most Likely To Default On Their Student Loans?

Student loan delinquency is higher than for other borrowing

The Diminishing Returns of a College Degree: In the mid-1970s, far less than 1% of taxi drivers were graduates. By 2010 more than 15% were

Friday, July 13, 2018

Unemployment Has Bottomed Out. So Where's the Wage Growth?

By Michael R. Strain. He director of economic policy studies at the American Enterprise Institute (AEI).
"There is “hidden slack” in the labor market because many people were driven out of the workforce by the severity of the Great Recession. The composition of the workforce is changing in ways that affect measured, economy-wide pay. Businesses are using levers other than wages to attract workers. Many of us are in for pay cuts that we should have received during the Great Recession but didn’t due to employers’ reluctance to reduce nominal pay. And maybe you’re reluctant to go to the boss and ask for a raise?"
There could be slack since the percentage of 25-54 year olds, although rising, has still not reached the pre-recession peak. See last week's post The percentage of 25-54 year olds employed rose in June.

See also Labor Market Dynamics and Monetary Policy by former Fed Chair Janet Yellen.
"the sluggish pace of nominal and real wage growth in recent years may reflect the phenomenon of "pent-up wage deflation."15 The evidence suggests that many firms faced significant constraints in lowering compensation during the recession and the earlier part of the recovery because of "downward nominal wage rigidity"--namely, an inability or unwillingness on the part of firms to cut nominal wages. To the extent that firms faced limits in reducing real and nominal wages when the labor market was exceptionally weak, they may find that now they do not need to raise wages to attract qualified workers. As a result, wages might rise relatively slowly as the labor market strengthens. If pent-up wage deflation is holding down wage growth, the current very moderate wage growth could be a misleading signal of the degree of remaining slack."
Here is a graph from today's WSJ:

Thursday, July 12, 2018

Chaos ensues when stuffed bears are given away (almost) free of charge

See Build-A-Bear shuts down 'Pay Your Age' deal after huge crowds mob stores. By Kate Taylor of Business Insider. Excerpts:
"On Thursday, Build-A-Bear was set to celebrate "Pay Your Age Day" in the US, Canada, and the UK. Customers had the chance to purchase a stuffed animal and pay only their age for the day. Kids were able to pay just a few dollars for stuffed bears, while adults' fees were capped at $29. The bears usually fall in the $20-$35 range.

However, the event had to be cut short after stores descended into "madness."

"Per local authorities, we cannot accept additional Guests at our locations due to crowds and safety concerns," Build-A-Bear posted on Facebook at 11 a.m. ET. "We have closed lines in our U.S. and Canada stores. We understand some Guests are disappointed and we will reach out directly as soon as possible.""
If a kid who was five years old could by one for $5 that normally costs $35, that is 86% off. Not quite free, but close to it. These bears are scarce. Give them away for (almost) free and you don't have enough to go around.

Update on July 13: Build-A-Bear CEO apologizes after crowds shut down promo event by Susan Heavey of Reuters.

Related posts about problems when thing are given away for free:

Domino's & T-Mobile discover there is no such thing as free pizza. Too many took advantage of offer. They ran out.

What happens if you give electricity away for free? (Tesla post)

Taco Bell Gives Away "Free" Tacos, Problems Arise.

IHOP Gives Away Free Pancakes And Gets Slammed.

There Is No Such Thing As Free Salt (Or Sand) .

Trees Are Scarce In San Antonio!

Free Can Be Deadly.

More Free Give Aways Lead to Trouble.

Josh Hamilton’s grand slam causes a flooring and countertop shortage