Category Archives: History

The Greatest Balancing Act

Nature and the global economy
By David Attenborough and Christine Lagarde – In nature, everything is connected. This is equally true of a healthy environment and a healthy economy. We cannot hope to sustain life without taking care of nature. And we need healthy economies to lift people out of poverty and achieve the United Nations Sustainable Development Goals.

In our current model these goals sometimes seem to collide, and our economic pursuits encroach too closely on nature. But nature—a stable climate, reliable freshwater, forests, and other natural resources—is what makes industry possible. It is not one or the other. We cannot have long-term human development without a steady climate and a healthy natural world.

The bottom line is that when we damage the natural world, we damage ourselves. The impact of our growing economic footprint threatens our own future directly. By some estimates, more than 50 percent of the world’s population is now urbanized, increasing the likelihood of people losing touch with nature.

With the projected rise in ocean levels and increase in the average temperature of the planet, large swaths of land, even whole countries, will become uninhabitable, triggering mass climate-induced migration. Never has it been more important to understand how the natural world works and what we must do to preserve it.

A necessary first step is to recognize that waste is the enemy. Wasting food, energy, or materials flies in the face of sustainability. Producing plastics fated to end up as litter is a waste, especially when these plastics pollute our oceans. If we could live by the simple injunction to “do no harm,” both individually and as businesses and economies, we could all make a difference. Overconsumption and unsustainable production have put the planet in peril.

Since the natural and economic worlds are linked, similar principles apply to both.

In the financial world, for example, we would not eat into capital to the point of depletion because that would bring about financial ruin. Yet in the natural world, we have done this repeatedly with fish stocks and forests, among many other resources—in some cases to the point of decimation. We must treat the natural world as we would the economic world—protecting natural capital so that it can continue to provide benefits well into the future. more>

There is No Economics without Politics

Every economic model is built on political assumptions
By Anat Admati – There is absolutely no way to understand events before, during, and since the financial crisis of 2007-2009 while ignoring the powerful political forces that have shaped them. Yet, remarkably, much of the economics and finance literature about financial crises focuses on studying unspecified “shocks” to a system that it largely accepts as inevitable while ignoring critical governance frictions and failures. Removing blind spots would offer economists and other academics rich opportunities to leverage their expertise to benefit society.

The history of financial economics is revealing in this regard. By the second half of the 20th century, when modern finance emerged as part of economics, the holistic approach of early thinkers such as Adam Smith—which combined economics, moral philosophy, and politics—was long gone. Narrow social-science disciplines replaced the holistic approach by the end of the 19th century. In the 20th century, economists sought to make economics formal, precise, and elegant, similar to Newton’s 17th-century physics.

The focus in much of economics, particularly in finance, is on markets. Even when economists postulate a “social planner” and discuss policy, they rarely consider how this social planner gets to know what is needed or the process by which policy decisions are made and implemented. Collective action and politics are messy. Neat and elegant models are more fun and easier to market to editors and colleagues.

Lobbyists, who engage in “marketing” ideas to policymakers and to the public, are actually influential. They know how to work the system and can dismiss, take out of context, misquote, misuse, or promote research as needed. If policymakers or the public are unable or unwilling to evaluate the claims people make, lobbyists and others can create confusion and promote misleading narratives if it benefits them. In the real political economy, good ideas and worthy research can fail to gain traction while bad ideas and flawed research can succeed and have an impact.

Having observed governance and policy failures in banking, I realized that the focus on shareholder-manager conflicts is far too narrow and often misses the most important problems. We must also worry about the governance of the institutions that create and enforce the rules for all. How power structures and information asymmetries play out within and between institutions in the private and public sectors is critical. more>

Updates from Chicago Booth

Does America have an antitrust problem?
Markets are becoming more concentrated—and, arguably, less competitive
By Jeff Cockrell – To those who are worried about the state of contemporary American politics—those who are concerned about the historically high levels of polarization between the two main political parties, who despair of the disappearance of anything that could be called common ground, who bristle at the apparent unwillingness of any occupant of national, state, or local office to recognize the common sense or basic human decency of any proposal coming from the opposite side of the aisle—we offer you this single harmonious word of relief: antitrust.

A vocal concern for the power held by some of the United States’ most dominant companies—especially tech giants such as Facebook, Amazon, and Google—may be the only shared material among the talking points of President Donald Trump and the Democrats vying to run against him in 2020. Trump has asserted that the US should follow the European Union’s lead in handing down large fines to big tech companies for antitrust violations, and during his presidential campaign, he charged that Amazon has a “huge antitrust problem.” A number of prominent Democrats, including Bernie Sanders and Elizabeth Warren, are on the same page, having suggested that many such companies may need to be broken up. In July, the Department of Justice (DOJ) announced that it was “reviewing whether and how market-leading online platforms have achieved market power and are engaging in practices that have reduced competition, stifled innovation, or otherwise harmed consumers.”

Concerns about competition are not unique to the tech industry. Aggregate levels of US industrial concentration—or how market share is divided among manufacturing companies—began to increase in the early 1980s after decades of relatively little change, according to research by Chicago Booth’s Sam Peltzman. The trend continued into the 21st century. Between 1987 and 2007, average concentration—as measured by the Herfindahl-Hirschman index, a commonly used gauge of market concentration—within the 386 industries included in his analysis increased by 32 percent.

If this trend toward more-concentrated industries has been accompanied by a small number of companies expanding their market power as a result of diminished competitive pressures, the effects could be momentous. In fact, some research suggests the exercise of market power could be responsible for everything from higher prices to reduced investment to the steadily diminishing share of the US economy that’s enjoyed by the labor force. more>

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Updates from McKinsey

How smart choices on taxation can help close the growing fiscal gap
The growing fiscal gap has policy makers in a difficult position. Swift action in a few areas can help them improve the operational efficiency of fiscal systems.
By Aurélie Barnay, Jonathan Davis, Jonathan Dimson, and Marco Dondi – Governments around the world have implemented a range of fiscal and debt measures to fund policy initiatives over recent decades. As a result, tax revenues as a proportion of GDP have risen four percentage points across Organization for Economic Cooperation and Development (OECD) countries since 1980. However, many governments remain inadequately funded. Despite higher tax revenues, spending is rising faster than income, leading to widening budget deficits and higher levels of debt.

Four distinct trends are playing out: increasing automation in the workplace, leading to pressure on employment; the evolution of global trade through the proliferation of e-commerce and digital business, raising questions over cross-border taxation; rising self-employment; and an aging population. Each of these could further widen the fiscal deficit in the years ahead. Moreover, we see all four accelerating, placing policy makers in an ever-tightening fiscal bind.

Basic economics provides two options for balancing the books: either increase revenues or decrease spending.

The bottom line for governments is that there are no easy answers. Whether they seek to increase taxation or boost efficiency, they are likely to face headwinds. Still, decisive and rapid action is essential to optimize tax collections and keep pace with an inevitable rise in demand for services.

Tax revenues in OECD countries have risen slightly over the past 35 years. However, spending has risen more, leading to widening deficits that governments have bridged with debt. OECD tax revenues were 34 percent of GDP in 2017. Because of tax deficits and the effects of the 2008 financial crisis, the average ratio of gross debt to GDP rose from 66 percent of GDP in 1995 to 88 percent in 2017.

Sources of tax revenue have remained stable over time. Over three decades, personal income and consumption together accounted for 82 to 89 percent of revenues. The biggest single contributor was payroll and income tax, accounting for 50 to 55 percent of revenues (even though the contribution of personal income tax declined by nearly 7 percentage points). Consumption and excise duties remain little changed at 32 to 34 percent of revenues.

More people are working for themselves, either as a contractor to several companies or a single company. This emerging gig economy accounts for an estimated 28 percent of EU and US employment. The proportion would rise to 46 percent if everyone had their preferred working arrangement, according to MGI research.

However, the gig economy creates challenges for tax authorities. First, independent workers are generally less compliant than their employed peers, and in some countries are required to pay less taxes. Evidence from the US suggests that workers subject to limited information reporting, such as the self-employed, have an around 50 percentage point lower rate of tax compliance than traditional workers. There are also ongoing legal debates in some jurisdictions over whether gig economy workers are employees for the purposes of worker classification and social security contributions.

Governments can close the widening gap between revenues and expenditures in a variety of ways through tax revenues, nontax revenues, and spending optimization. In addition, some governments are either implementing or considering approaches based on monetary finance.

The gap between government revenues and spending has widened and is likely to continue to do so. The onus, then, is on tax authorities to act now. more>

Why Corporations Can No Longer Avoid Politics

By Alana Semuels – For decades, most companies went to great lengths to avoid opining on social issues. No longer.

What’s changed? Frustrated with political gridlock, consumers have turned to business for leadership. “I think business has to pick up the mantle when governments fail you,” Patagonia CEO Rose Marcario told TIME earlier this year. Young consumers are also more likely to patronize brands whose business models claim to include social change.

Nine in 10 members of Generation Z, who account for as much as $150 billion in spending power globally, believe that companies have a responsibility to social and environmental issues, according to McKinsey. In an age when companies have detailed information on customers’ ages, incomes and political persuasions, they’re calculating that these socially aware consumers are more lucrative than those who might be put off by social-justice campaigns.

“In a politically polarized world that is saturated in social media, you’re not going to escape politics,” says Jerry Davis, a professor of management and sociology at the University of Michigan. “This is a sea change–in the past, companies kept their heads down and did their best to never be seen.” more>

We’re All Free Riders. Get over It!

By Nicholas Gruen – Anathematized and stigmatized today, free-riders built the lion’s share of the prosperity we enjoy today.

Does that mean we should ‘share’ or ‘pirate’ more copyrighted things on the internet? Not necessarily. The free rider problem is real enough.

But here’s the thing. In addition to the free rider problem, which we should solve as best we can, there’s a free rider opportunity. And while we whine about the problem, the opportunity has always been far larger and its value grows with every passing day.

The American economist Robert Solow demonstrated in the 1950s that nearly all of the productivity growth in history – particularly our rise from subsistence to affluence since the industrial revolution – was a result not of increasing capital investment, but of people finding better ways of working and playing, and then being copied. A little of this innovation was fostered by intellectual property rights which give temporary monopolies in technology. But much less than you’d think.

Most innovation can’t be patented. And after patents expire in 20 years (it used to be less) it’s open slather. We’re not paying royalties to the estates of Matthew Bolton and James Watt for their refinements to the piston engine. But we’re still free riding on their work. In other words, free-riding made us what we are today.

At the birth of modernity Thomas Jefferson spoke of the free rider opportunity more eloquently than any statesman then or since:

He who receives an idea from me, receives instruction himself without lessening mine; as he who lights his taper at mine, receives light without darkening me. That ideas should freely spread from one to another over the globe, for the moral and mutual instruction of man, and improvement of his condition, seems to have been peculiarly and benevolently designed by nature, when she made them, like fire, expansible over all space, without lessening their density in any point, and like the air in which we breathe, move, and have our physical being, incapable of confinement or exclusive appropriation.

Far from wanting to ignore the free rider problem, Jefferson was on top of that too, spearheading the institutionalization of intellectual property. But having done so, throughout his life, including in his administration of patents, he sought balance between dealing with the problems and seizing the opportunities presented by free riding. more>

The Adaptive Age

No institution or individual can stand on the sidelines in the fight against climate change
By Kristalina Georgieva – When I think of the incredible challenges we must confront in the face of a changing climate, my mind focuses on young people. Eventually, they will be the ones either to enjoy the fruits or bear the burdens resulting from actions taken today.

Our efforts to reduce greenhouse gas emissions through various mitigation measures—phasing out fossil fuels, increasing energy efficiency, adopting renewable energy sources, improving land use and agricultural practices—continue to move forward, but the pace is too slow. We have to scale up and accelerate the transition to a low-carbon economy. At the same time, we must recognize that climate change is already happening and affecting the lives of millions of people. There are more frequent and more severe weather-related events—more droughts, more floods, more heat waves, more storms.

Ready or not, we are entering an age of adaptation. And we need to be smart about it. Adaptation is not a defeat, but rather a defense against what is already happening. The right investments will deliver a “triple dividend” by averting future losses, spurring economic gains through innovation, and delivering social and environmental benefits to everyone, but particularly to those currently affected and most at risk. Updated building codes can ensure infrastructure and buildings are better able to withstand extreme events. Making agriculture more climate resilient means investing more money in research and development, which in turn opens the door to innovation, growth, and healthier communities.

The IMF is stepping up its efforts to deal with climate risk. Our mission is to help our members build stronger economies and improve people’s lives through sound monetary, fiscal, and structural policies. more>

Europe Wants ‘Strategic Autonomy,’ but That’s Much Easier Said Than Done

By Stewart M. Patrick – Strategic autonomy has obvious appeal to Europeans at a time of fraying trans-Atlantic bonds and deepening great-power competition. Aspiring to self-reliance is one thing, however. Achieving it will require much more from the European Union. The heterogeneous bloc will have to develop a coherent strategic culture and come to some agreement on a shared assessment of threats—and on how the EU should pursue its interests and promote its values internationally.

Europeans must also reassure the United States that any new EU military capabilities will complement rather than undermine NATO.

Europe’s strategic reappraisal is largely, though not entirely, a function of President Donald Trump. While his predecessors in Washington often pressed the Europeans to ramp up defense spending, Trump has upended the trans-Atlantic alliance in several ways. He has depicted it as obsolete, questioned America’s commitments to NATO’s mutual defense as outlined in Article 5 of the North Atlantic Treaty, and taken precipitous actions without consulting allies in Europe—such as his recent unilateral withdrawal of U.S. troops from northeastern Syria. Confronting such uncertainty, Europeans naturally want to hedge their bets. One way to do so is by developing autonomous military capabilities that permit them to act outside NATO, including with a post-Brexit United Kingdom.

Washington’s own identification of China as America’s primary economic, technological and strategic adversary reinforces these instincts. Few Europeans share such a zero-sum assessment, seeking instead to pursue what Beijing terms “win-win” relations. While Americans seem bent on a new Cold War with China, Europeans must confront a more immediate military and political threat: an aggressive Russia under Vladimir Putin, right on their doorstep.

Beyond defense matters, Trump’s disruption of U.S. foreign policy has persuaded a growing number of Europeans that they need to pursue strategic autonomy across the board. America’s abdication of global leadership has thrust the EU into an unaccustomed role—that of chief defender of the rules-based, liberal international order. As Trump has embraced unilateralism and protectionism, cozied up to dictators and ignored climate change, the EU has become the primary champion of collective security, multilateralism, human rights and the preservation of the global commons. more>

Updates from McKinsey

A transformation in store
Brick-and-mortar retail stores need to up their game. Technology could give them significant boost.
By Praveen Adhi, Tiffany Burns, Andrew Davis, Shruti Lal, and Bill Mutell – Now should be a great time in US retail. Consumer confidence has finally returned to pre-recession levels. Americans have seen their per capita, constant-dollar disposable income rise more than 20 percent between the beginning of 2014 and early 2019.

Yet despite the buoyant economic environment, many brick-and-mortar stores are struggling. In the last three years, more than 45 US retail chains have gone bankrupt.

Yet rumors of the physical store’s death are exaggerated. Even by 2023, e-commerce is forecast to account for only 21 percent of total retail sales and just 5 percent of grocery sales. And with Amazon and other major internet players developing their own brick-and-mortar networks, it is becoming increasingly clear that the future of retail belongs to companies that can offer a true omnichannel experience.

Retailers are already wrestling with omnichannel’s demands on their supply chains and back-office operations. Now they need to think about how they use emerging technologies and rich, granular data on customers to transform the in-store experience. The rewards for those that get this right will be significant: 83 percent of customers say they want their shopping experience to be personalized in some way, and our research suggests that effective personalization can increase store revenues by 20 to 30 percent.

Several new technologies have reached a tipping point and are set to spill over onto the retail floor. Machine learning and big-data analytics techniques are ready to crunch the vast quantities of customer data that retailers already accumulate. Robots and automation systems are moving out of factories and into warehouses and distribution centers. The Internet of Things allows products to be tracked across continents, or on shelves with millimeter precision. Now is a great time for retailers to embrace that challenge of bringing technology and data together in the offline world. more>

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The planet is burning

By Stephen J Pyne – From the Arctic to the Amazon, from California to Gran Canaria, from Borneo to India to Angola to Australia – the fires seem everywhere. Their smoke obscures subcontinents by day; their lights dapple continents at night, like a Milky Way of flame-stars. Rather than catalogue what is burning, one might more aptly ask: what isn’t? Where flames are not visible, the lights of cities and of gas flares are: combustion via the transubstantiation of coal and oil into electricity. To many observers, they appear as the pilot flames of an advancing apocalypse. Even Greenland is burning.

But the fires we see are only part of our disturbed pyrogeography. Of perhaps equal magnitude is a parallel world of lost, missing and sublimated fires. The landscapes that should have fire and don’t. The marinating of the atmosphere by greenhouse gases. The sites where traditional flame has been replaced by combustion in machines. The Earth’s biota is disintegrating as much by tame fire’s absence as by feral fire’s outbreaks. The scene is not just about the bad burns that trash countrysides and crash into towns; it’s equally about the good fires that have vanished because they are suppressed or no longer lit. Looming over it all is a planetary warming from fossil-fuel combustion that acts as a performance enhancer on all aspects of fire on Earth.

So dire is the picture that some observers argue that the past is irrelevant. We are headed into a no-narrative, no-analogue future. So immense and unimaginable are the coming upheavals that the arc of inherited knowledge that joins us to the past has broken. There is no precedent for what we are about to experience, no means by which to triangulate from accumulated human wisdom into a future unlike anything we have known before. more>