Tag Archives: Economy

Updates from McKinsey

Four ways governments can get the most out of their infrastructure projects
Best practices can help governments invest in infrastructure that expands the economy and better serves the public.
By Aaron Bielenberg, James Williams, and Jonathan Woetzel – Infrastructure—for example, transportation, power, water, and telecom systems—underpins economic activity and catalyzes growth and development. The world spends more than $2.5 trillion a year on infrastructure, but $3.7 trillion a year will be needed through 2035 just to keep pace with projected GDP growth.

National, state, and local governments are devoting increased amounts of capital to meet these needs, and for good reason. The McKinsey Global Institute estimates that infrastructure has a socioeconomic rate of return around 20 percent. In other words, $1 of infrastructure investment can raise GDP by 20 cents in the long run.

Gains from infrastructure are fully realized, however, only when projects generate tangible public benefits. Unfortunately, many governments find it difficult to select the right projects—those with the most benefit. Furthermore, infrastructure can provide social and economic advantages only when the capital and operating costs can be financed sustainably, either by the revenues a project generates or by the government sponsor. Too many projects become an economic burden and drain on finances when a government borrows money for an undertaking and neither its revenues nor its direct and indirect economic benefits adequately cover the cost.

Our framework includes four key best practices to help modernize decision making for infrastructure and to improve its social and economic impact. Each step is enabled by and contributes to a consistent, fact-based process for identifying and executing infrastructure projects. The first step—ensuring that projects yield measurable benefits—lays the foundation for all the rest.

  1. Develop projects with tangible, quantifiable benefits
  2. Improve the coordination of infrastructure investments to account for network effects
  3. Engage and align community stakeholders to promote inclusive economic and social benefits
  4. Unlock long-term capital

Consistent, transparent assessments are required to determine if infrastructure satisfies the elements of our framework—whether a project offers robust public benefits, is compatible with other projects and appropriately aligned with the community’s objectives, and uses the best long-term financing available. Thus, governments may have to invest in capabilities to evaluate the benefits of projects and commit themselves to transparent evaluations that include the necessary checks and balances.

Governments should assess their institutional capabilities against the framework’s elements, such as mapping current processes to develop infrastructure projects from concept to operation.

Can the government complete a structured quantification of public benefits?

Is there a way to assess the portfolio as a whole in light of the debt-management strategy? more>

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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>

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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Optimizing for Human Well-Being


By Douglas Rushkoff – The economy needn’t be a war; it can be a commons. To get there, we must retrieve our innate good will.

The commons is a conscious implementation of reciprocal altruism. Reciprocal altruists, whether human or ape, reward those who cooperate with others and punish those who defect. A commons works the same way. A resource such as a lake or a field, or a monetary system, is understood as a shared asset. The pastures of medieval England were treated as a commons. It wasn’t a free-for-all, but a carefully negotiated and enforced system. People brought their flocks to graze in mutually agreed- upon schedules. Violation of the rules was punished, either with penalties or exclusion.

The commons is not a winner-takes-all economy, but an all-take-the-winnings economy. Shared ownership encourages shared responsibility, which in turn engenders a longer-term perspective on business practices. Nothing can be externalized to some “other” player, because everyone is part of the same trust, drinking from the same well.

If one’s business activities hurt any other market participant, they undermine the integrity of the marketplace itself.

For those entranced by the myth of capitalism, this can be hard to grasp. They’re still stuck thinking of the economy as a two-column ledger, where every credit is someone’s else’s debit. This zero-sum mentality is an artifact of monopoly central currency.

If money has to be borrowed into existence from a single, private treasury and paid back with interest, then this sad, competitive, scarcity model makes sense. I need to pay back more than I borrowed, so I need to get that extra money from someone else. That’s the very premise of zero-sum.

But that’s not how an economy has to work. more>

Eight Reasons Why Inequality Ruins the Economy

What matters is not so much the level of inequality as the effect it has.
By Chris Dillow – Roland Benabou gave the example (pdf) of how egalitarian South Korea has done much better than the unequal Philippines. And IMF researchers have found (pdf) a “strong negative relation” between inequality and the rate and duration of subsequent growth spells across 153 countries between 1960 and 2010.

Correlations, of course, are only suggestive. They pose the question: what is the mechanism whereby inequality might reduce growth? Here are eight possibilities:

1. Inequality encourages the rich to invest not innovation but in what Sam Bowles calls “guard labor” (pdf) – means of entrenching their privilege and power. This might involve restrictive copyright laws, ways of overseeing and controlling workers, or the corporate rent-seeking and lobbying that has led to what Brink Lindsey and Steven Teles call the “captured economy.

An especially costly form of this rent-seeking was banks’ lobbying for a “too big to fail” subsidy. This encouraged over-expansion of the banking system and the subsequent crisis, which has had a massively adverse effect upon economic growth.

3. “Economic inequality leads to less trust” say (pdf) Eric Uslaner and Mitchell Brown. And we’ve good evidence that less trust means less growth.

One reason for this is simply that if people don’t trust each other they’ll not enter into transactions where there’s a risk of them being ripped off.

5. Inequality can cause the rich to be fearful of future redistribution or nationalization, which will make them loath to invest. National Grid is belly-aching, maybe rightly, that Labour’s plan to nationalize it will delay investment. But it should instead ask: why is Labour proposing such a thing, and why is it popular? more>

Why Wall Street Isn’t Useful for the Real Economy

By Lynn Stout – In the wake of the 2008 crisis, Goldman Sachs CEO Lloyd Blankfein famously told a reporter that bankers are “doing God’s work.” This is, of course, an important part of the Wall Street mantra: it’s standard operating procedure for bank executives to frequently and loudly proclaim that Wall Street is vital to the nation’s economy and performs socially valuable services by raising capital, providing liquidity to investors, and ensuring that securities are priced accurately so that money flows to where it will be most productive.

The mantra is essential, because it allows (non-psychopathic) bankers to look at themselves in the mirror each day, as well as helping them fend off serious attempts at government regulation. It also allows them to claim that they deserve to make outrageous amounts of money.

According to the Statistical Abstract of the United States, in 2007 and 2008 employees in the finance industry earned a total of more than $500 billion annually—that’s a whopping half-trillion dollar payroll (Table 1168).

Let’s start with the notion that Wall Street helps companies raise capital. If we look at the numbers, it’s obvious that raising capital for companies is only a sideline for most banks, and a minor one at that. Corporations raise capital in the so-called “primary” markets where they sell newly-issued stocks and bonds to investors.

However, the vast majority of bankers’ time and effort is devoted to (and most bank profits come from) dealing, trading, and advising investors in the so-called “secondary” market where investors buy and sell existing securities with each other.

In 2009, for example, less than 10 percent of the securities industry’s profits came from underwriting new stocks and bonds; the majority came instead from trading commissions and trading profits (Table 1219).

This figure reflects the imbalance between the primary issuing market (which is relatively small) and the secondary trading market (which is enormous). In 2010, corporations issued only $131 billion in new stock (Table 1202).

That same year, the World Bank reports, more than $15 trillion in stocks were traded in the U.S. secondary marketmore than the nation’s GDP. more>

How capitalism without growth could build a more stable economy

By Adam Barrett – On a finite planet, endless economic growth is impossible. There is also plenty of evidence that in the developed world, a continued increase of GDP does not increase happiness.

Back in 1930 the economist John Maynard Keynes predicted that growth would end within a century – but he was unclear whether a post-growth capitalism was really possible.

Today, mainstream economic thinking still considers growth to be a vital policy objective – essential to the health of a capitalist economy. There remains a concern that ultimately, a capitalist economy will collapse without growth.

I recently published new research that suggests a different view – that a post-growth economy could actually be more stable and even bring higher wages. It begins with an acceptance that capitalism is unstable and prone to crisis even during a period of strong and stable growth – as the great financial crash of 2007-08 demonstrated.

I found that an end to growth reduces profits for business owners.

Therefore, if it remains relatively easy for money to flow across borders, then investors might abandon a post-growth country for a fast-growing developing country. Also, businesses are beholden to shareholders keen on growth as a means to rapid profit accumulation.

Some mainstream commentators and economists are now predicting a transition to a post-growth era, whatever our environmental policy – which means the study of post-growth economics is a field which itself will grow. more>

An ambitious project to measure the wealth of nations shows how GDP is a deceptive gauge of progress

By Eshe Nelson, Dan Kopf – Is gross domestic product a sufficient measure of an economy’s health?

Many argue that GDP, which counts the sum of the goods and services produced by a nation, fails to reflect a population’s well-being, because it accounts for neither distribution of income nor extractive effects such as pollution.

Wealth includes all assets, which means human capital (the value of earnings over a person’s lifetime), natural capital (energy, minerals, agricultural land), produced capital (machinery, buildings, urban land), and net foreign assets.

Assessing an economy by GDP instead of wealth is like looking exclusively at a company’s income statements without considering the assets on its balance sheet. A company can make its income look good for a short time by liquidating assets, but over the long run this will reduce the firm’s productive capacity and other means of generating income in the future.

The same applies to a country. GDP “does not reflect depreciation and depletion of assets, whether investment and accumulation of wealth are keeping pace with population growth, or whether the mix of assets is consistent with a country’s development goals,” the report states. more>

Cities: Where the economy plays scrabble


By Brad Cunningham – For those who haven’t played Scrabble recently, here’s a refresher. Players collect a number of individual tiles, each of which carries one letter of the alphabet. Players then combine their letters in order to spell words. The value of the words is determined by the sum of the value of each letter, with rarer letters (e.g. Q, X, Z) having a higher value than common letters (e.g. A, E, S, T). Players then compete to produce the most valuable words out of the letters available to them.

In an economy, firms endeavor to make products similar to how Scrabble players make words. To make a product, firms must bring together a variety of very different and very specific inputs and activities. Each of these inputs can be thought of as one capability needed for production, just as a letter in Scrabble represents one capability needed to make a word possible.

Under this model, there are two paths to industrial growth. The first path occurs when an industry with potential is new to an area and some necessary capabilities are not available locally. An entrepreneur must figure out how to create the missing letters and coordinate them with locally available letters to spell a new word. Once this problem is solved, industries can grow via the second path: by simply replicating and scaling up existing capabilities.

Developing countries can grow by bringing in capabilities from around the world, whereas developed countries generally have to innovate new capabilities to grow. more> https://goo.gl/m52AbL

The Three Major Trends that Shaped the Global Economy for Decades Are About to Change

BOOK REVIEW

Capital in the Twenty-First Century, Author: Thomas Piketty.

By Luke Kawa – According to Charles Goodhart, professor at the London School of Economics and senior economic consultant to Morgan Stanley, demographics explain the vast majority of three major trends that have shaped the socioeconomic and political environments across advanced economies over the past few decades.

Those three would be declining real interest rates, shrinking real wages, and increasing inequality.

The conditions that fostered these three intertwined major developments are nearly obsolete, and this has profound implications for the framework of the global economy in the decades to come. more> http://tinyurl.com/ntyfgd8