Review of the Inner Lives of Markets

The Inner Lives of Markets - Fisman and Sullivan

New types of markets (for example Ebay, Uber or Airbnb) are an ever-growing part of our lives whether we are aware of it or not.  The authors argue that the answer lies somewhere between the free-market idealism and state-heavy regulation.  The authors also argue that people can make sense of the current market set-up through understanding the evolution of economic thought over the last 100 years. These ideas have slowly been building on each other leading us to better set-up and performing markets.

Key insight- They're not for everything!
I enjoy the book's idea that markets are increasingly sophisticated and can be utilized to solve an increasingly large number of problems.. However, they do NOT argue that they are the end-all be all for every challenge society faces.  There are plenty of situations where markets and platform companies can help facilitate inefficient groups to ensure everyone gets their best possible outcome.  However, on certain issues, societal concerns about fairness mean that the most "efficient" market is not the one society values most.  For example, it is likely that deaths due to people waiting on the kidney transplant list could be reduced with a system where people can offer money in return for a kidney.  More people would have the incentive to donate and it could be argued that even poorer people would be better off because they value the resulting payoff ($!) more than a second (unnecessary) kidney.  Free market advocates may say that is reason enough to go forward with the plan. However, do we want a system where poor people are selling their organs to the highest bidder, especially if that potentially crowds out people who can't pay for them?  I think the power of the more advanced thought on markets is that we now have a better understanding of how markets can best perform in a vacuum.. With that information, we can make better decisions on how we want to allocate weights to different challenges/variables.

Uber, Airbnb.. New companies that eliminate friction permanently or temporary?
People have hailed the rise of companies like Uber and Airbnb as revolutionary and that have permanently ended some of the frictions that have plagued consumers for years (such as difficulty in getting a taxi when you want one).  The authors make a great point however that these companies will have incentive to create friction in order to maintain their competitive advantage.  For example, Uber will raise obstacles so competitors like Lyft can't thrive which in the end may hurt consumers.

Executive Action on Refugee Program - Unnecessary and Counterproductive

The controversy surrounding the Trump administration continued with the executive order temporarily banning travel from seven Muslim-majority countries.  Proponents claim this is a necessary move (and a follow-through on a Trump campaign promise) to increase US security (America first!) and, anyways, it is just temporary.  I disagree with this executive order because it seems both unnecessary and counterproductive.

Unnecessary and Counterproductive
How does banning travel for those from these countries make the US safer? As many have noted, nobody from these seven countries has performed a terrorist attack in the US since 9/11.  It's not like people from these countries have just been waltzing into the US.  Refugees face a complex and stringent vetting process in order to be able to enter the US.  By shutting down travel from these countries, the US is seemingly handing Islamic terrorists group another propaganda gift.. As this story is covered globally, how easy must it be for ISIS and other groups to use it as "proof" that the US rejects Muslims.  To be clear, I don't think this executive order necessarily means that the Trump administration is rejecting Muslims but I think it is imperative to think of all consequences of these actions and this is one of them.

In my opinion, if the US is concerned about making the US safe, particularly regarding who is coming into our country, it would be a good time to be appreciating and strengthening our relationships with Mexico and Canada.  The effort, strength and cooperation of these countries helps to create the stable regional environment that the US lives in and one that almost any country would trade for.

With many campaign promises checked off in high profile manners, I hope to see the Trump administration think more long-term and strategically in these types of issues moving forward.

Voter Fraud.. You talking about voter fraud??

A main issue that Trump ran on during the 2016 Presidental Election was voter fraud.  Purportedly, millions upon millions of people were voting illegally, swinging elections to the Democrats and overall causing a degradation of our democracy.  Even after winning, a defiant Trump has said he only lost the popular vote because people voted illegally. To me, this is ridiculous as well as dangerous because it distracts from the proven bigger issue of voter suppression.

Ridiculousness

No credible source has agreed with Trump that voter fraud is a big issue.  Surprise! This is a bipartisan issue where everyone agrees very few (and not remotely close enough to affect an election) people actually commit voter fraud. In a day and age where the main parties can not agree on anything (read: Republicans claiming Democrats are going against the American people's will by delaying Supreme Court votes.. When Republicans did the exact same thing 6 months ago), this is something that almost nobody sees as an issue! Based off bi-partisan dismissal of the issue and voting experts claiming the system is secure, I dub this claim, ridiculous,

Dangerous

Maybe Trump knows it's a ridiculous claim. Maybe there's a more complex strategy in play here.  It's no secret that changing demographics are making Republican's jobs of winning elections tougher.  The population increase of minorities who have traditionally voted Democrats coupled with the decreasing population of the Republican base has made the election map more difficult (although the recent presidential election shows assumptions about who makes up the base may be ill-founded.. READ: Hillary's midwest bulwark.  Therefore, some have suggested Trump's pressing of this issue is more of distraction for other things that are going on in the voter area.  For example, the 2016 election was the first election in 50 years where the protections in the federal Voting Rights law were not in full effect. Many have noted that Republican led state governments have enacted many rules that seem to target traditionally Democratic voters such as students, minorities and immigrants.  Even if Trump's investigation into voter fraud results in nothing, it likely will be beneficial from a Republican standpont because it diverted attention from these laws.

Even in the age of fragmented media, I hope journalists continue to do their investigative duty to ensure comments from politicians from all parties are vetted and countered if proven incorrect.  

German Response to European Immigration and Refugee Crisis Creates Opportunities for Daimler and Siemens

(Originally Published on 2/16)

Recent news coverage of the European Migration Crisis has tended to focus on the potential negatives of this situation, while neglecting the possible opportunities that an influx of immigrants present for European companies, especially in Germany.  Faced with an imminent decrease in the native German population, including the working age population, major German companies are poised to benefit from their government’s policy of maintaining relatively open migration due to the medium to long-term increase in available labor and potential consumers.  Siemens and Daimler, two of Germany’s largest companies, are particularly well-positioned to benefit from the government policy due to their sizable domestic workforces and consumer bases.

Strong German growth rates, accompanied by a 24 year low in unemployment, have painted a rosy picture for the country’s economic future and have been critical to stabilizing Europe financially and politically but face a pending threat from population decline.  Forecasters predict the German population declining by between 8 and 13 million people by 2060, a 10-16% decrease from today’s level.[1]  In the next 15 years, Germany faces a 7% decrease in the working age population.[2].  This has problematic consequences for German businesses.  First, a decrease in German workers means fewer consumers with disposable income and thus more difficulty for German companies to maintain growth.  While Siemens and Daimler are global companies, 15% of Siemens’ revenue and 10% of Daimler’s revenue is generated domestically.[3]  A still greater concern is these companies’ abilities to find and hire qualified employees.  Currently 60% of Daimler’s employees and 33% of Siemens employees are in Germany.  Already the Germany economy is creating jobs faster than native Germans can fill them[4]; as Germany’s population ages, Daimler and Siemens will find it increasingly difficult to find sufficient German employees. Labor tightness may lead to higher wages, increasing costs, and declining competitiveness. 

Germany’s relative open policy on migration and acceptance of refugees has the potential to alleviate Germany’s need for working age young people and deliver benefits to Siemens and Daimler.  Germany’s response to refugees has become known as “Willkommenskultur”, or “welcome culture” in German.  Spurred on by German politicians, thousands of German citizens have volunteered to help refugees, for example through donating food and paying for medical bills[5].  This open door policy has been accompanied by government action to increase integration through the matching of skilled refugees to German jobs and job training for unskilled workers.  Siemens and Daimler have already been very forward and enthusiastic in their response to these government policies and the refugees.  For example, Daimler CEO Dieter Zetsche stated, “In an ideal case, this can help foster another economic miracle. Many examples of successful integration can be found in Silicon Valley”.[6]  Fifty-one percent of refugees are aged 18 years or younger and the average age of these newest immigrants to Germany is 15.[7]   Germany’s policy of welcoming refugees and other immigrants will help to blunt the difficulties arising from Germany’s demographic problem and support Daimler and Siemens as they continue to rely on domestic production and sales of their products. 

While the potential benefits of the current government policy for Siemens and Daimler are high, risks remain of a policy reversal. Concern about a flood of migrants, driven in part by the New Year’s Eve sexual assaults in Cologne and other incidents have spurred an anti-immigrant and anti-government policy backlash.  Chancellor Angela Merkel’s approval ratings are at a four-year low, driven in large part by perceptions of her handling of the migration crisis.[8]  A surge of support for restrictive policy, as championed by the anti-immigrant Alternative for Germany (AFD) party candidates running in the March regional elections, could undercut the anticipated population boost and gains for the large Germany companies.  Nevertheless, after ten years in office, Merkel remains a respected leader; despite the backlash, 38% of Germans would vote for her party if elections were held today.[9]

The present government response to the immigration surge creates an opportunity for growth for the large companies, giving them a much-needed boost to the consumer base and workforce.  Siemens and Daimler are intriguing investments based off the market’s underappreciation of the benefits they are poised to reap from the German government’s facilitation of changing demographics.

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[1] http://qz.com/394456/the-numbers-behind-germanys-demographic-nightmare/

[2] http://www.latimes.com/world/europe/la-fg-germany-refugees-demographics-20150910-story.html

[3] http://www.statista.com/statistics/278343/revenue-of-the-daimler-ag-by-region/

[4] http://www.wsj.com/articles/germany-grapples-with-growing-shortage-of-skilled-labor-1402064223

[5] http://www.theguardian.com/commentisfree/2015/sep/06/germany-refugee-crisis-syrian

[6] http://www.bloomberg.com/news/articles/2015-09-14/daimler-s-zetsche-channels-silicon-valley-integrating-migrants

[7] http://www.unhcr.org.uk/about-us/key-facts-and-figures.html

[8] http://www.theguardian.com/world/2016/feb/04/refugee-crisis-pushes-support-for-germanys-angela-merkel-to-four-year-low

[9] http://www.newsweek.com/issue-immigration-determine-germany-turns-merkel-416365

Tax Incentives: Benefit or Future Burden?

The fairness of tax system debate took an interesting turn this week as the European Commission ruled that tax deals granted to Starbucks and Fiat amounted to illegal state subsidies.  This could prove to be a landmark decision as countries have increasingly engaged in a "race to the bottom", where they offer dramatically lower tax rates and other incentives in return for large companies relocating part or all of their business to that country.  Countries due so with the hope of increased employment, tax revenue and other benefits.

Europe is not the only area where this phenomenon is occurring and this is by no means solely a recent phenomenon.  In 2001, Boeing engaged in a public auction as it looked to relocate its corporate headquarters from Seattle.  Chicago ultimately offered the most lucrative package, with the total value amounting to $56 million.  In the years since the Great Recession, feeling the sting of low growth, individual states offered increasingly aggressive packages in attempts to lure companies. In 2009, South Carolina won a Boeing 7E7 production line by offering a package estimated at $900 million dollars.

Supporters make clear the reasons they think these packages are justified.  Per the WSJ, "Proponents of corporate-tax subsidies said the incentives are a drop in the bucket, compared with the return to a state’s economy."  These supporters argue that to truly understand the benefits, you need to look at the overall rate of return, not just what the package costs.

However, as competition for these companies has increased, so has the size of the financial packages, which are beginning to cause a drag on state's budgets. The WSJ states, "in Oklahoma, where officials are grappling with a $300 million budget gap, Jeff Hickman,a Republican and speaker of the state House of Representatives, is calling for greater scrutiny of the $1.7 billion he said the state gives away each year on tax credits, incentives and exemptions."  A program that was sold to the public as increasing jobs could in reality be increasing the budget deficit and thus negatively affecting citizens.

The upshot is that citizens should always be wary of programs whose benefits are based on uncertain and fuzzy direct and indirect benefits.  States should continue to improve the business climates in their states and look for creative ways to attract investment.  However, they must also be more objective and transparent on projected benefits to ensure that voters can understand the true costs of such incentive packages and that future citizens are not saddled with heavier tax burdens.

Infrastructure: The Curious Case of Bipartisan Support and Lack of Action

Infrastructure!  Many seem to agree that the US is in dire need of an infrastructure upgrade. The Chamber of Commerce points out that "our interstate system is nearly 70 years old, and more than 61,000 bridges are labeled as deficient."  Even budget conscious Republicans see the need with Senator Deb Fischer (R-Neb) introducing legislation that would create a national Infrastructure bank. Heck, even President Obama can get behind this goal.  Per the think-tank American Progress, "On the campaign trail, the president repeatedly called for directing to infrastructure the federal spending saved by ending the wars in Afghanistan and Iraq, asking for those funds to support nation building right here at home.”  Yet here we are again, racing against the clock to pass another temporary measure that would allocate spending for the next three months on already approved infrastructure projects.  This would be the 35th time since 2009 where Congress has passed such a temporary measure.

In this cost conscious environment, it appears that lawmakers feel little pressure from their constituents to get a long-term deal done which illustrates an interesting paradox.  In 2014, infrastructure did not even crack the Top 20 for issues most important to Americans.  At the same time, citizens have direct exposure to many of the consequences of America's failure to maintain and improve its infrastructure.  Drivers tweet about constant stop and go traffic during their morning commutes in Los Angeles and Atlanta.  Passengers bemoan terrible conditions and long waiting lines at airports across the United States.  Citizens attribute these inconveniences to a myriad of causes (damn you United!), however as of yet have failed to make the connection with the lack of a national, long-term infrastructure plan.  Unfortunately, aging airline terminals and potholes aren't the only consequences from this consistent neglect of our infrastructure.  The WSJ reports that urban highway congestion costs the economy more than $100 billion annually.   The Journal also notes that billions are added to the costs of products Americans consume daily due to port congestion, lock delays and a lack of facilities. 

A lack of infrastructure spending and planning is an unseen weight around the US economy's shoulder and is choking growth.  The next time you are stuck in that traffic delay and tempted to deal with it via a witty Twitter post, consider instead thinking about the real root cause.

The Dilemma of China

Cisco's recently announced partnership with Chinese server maker Insur group illustrates the evolving challenges companies are facing as they attempt to thrive in China.  With slowing global growth, finding success in China's market is increasingly imperative for companies in every industry. However, China is taking advantage of this market power by favoring domestic companies and creating an environment where foreign companies are forced to partner with Chinese companies and thus risk losing their competitive advantage,

Why China?
Despite the recent volatility and underwhelming growth numbers, China's attractiveness as a market for a wide range of companies is obvious.  China's middle class continues to explode in size.  In 2001, the share of the Chinese population who were middle class was 1%. 10 years later, that share is 18%. Companies are eager to meet the demand created by these people with newly found purchasing power. In natural resources, China accounts for 49% of global coal consumption, recently became the largest importer of oil and is the second largest consumer of gold.  In 2010, China became the largest market for automobiles. Simply put, companies ignore the Chinese market at their own peril.

Increasing Difficulties
Sounds great right?  Problem is, with low growth elsewhere, companies are increasingly dependent on China for growth, and the Chinese government is well aware of this fact. The Chinese government is increasing its influence on the way foreign companies operate in the country, partially in an attempt to give its domestic companies a leg up.  The Chinese government is leveraging its power over domestic companies to encourage them to focus their business on domestic Chinese companies at the expense of internationals. Cisco is a prefect example.

Cisco's Chinese Experience
Cisco long resisted the partnership model in China, preferring to rely on its brand and expertise during its 20 years operating in the country.  Following this strategy led to impressive success. In 2014, Cisco controlled 21.2% of the Chinese server market.  However, this dominance is being challenged by domestic Chinese competitors, particularly Huawei, who are being steered business by the Chinese government.  In 2015, Cisco's share of the Chinese server market dropped to 9.4%.  Much of this decline can be attributed to the Chinese governments decision to remove Cisco (as well as other US companies such as Apple, Citrix and McAfee) from a government approved purchase list for small contracts amid concerns by the Chinese government that the US government had installed so-called backdoors into US made networking gear. Regardless of the reasoning behind the decision, this is a poignant example of the Chinese governments ability to determine winners and losers in its economy and its emphasis on supporting domestic companies.

What's Next
This trend has no end in sight. Companies will continue to struggle with the trade off of the massive financial potential of the Chinese market with the risk of sharing technological know how with Chinese partners who, with the assistance of the Chinese government, may soon become a competitor.