The Storm Over Income Inequality

March 20, 2018

Thirty percent of the US electorate continue to stand by Trump despite his ability to change the channel when some issue gets too hot. Why do voters stick with him? Part 1 outlines some facts about income inequality in the US, as set out by Jonathan Tepper – (see his blog for Feb. 17, 2018.) Part 2 suggests some measures aimed at reducing income inequality.

Part 1

Income inequality in the US

  1. Corporate profits are rising but with corporations keeping a larger share of gross earnings, and a smaller share going to employee compensation.
  2. Changes in average hourly earnings use to be a leading indicator of a growing economy. Wages pick up and growth soon follows. Today, growth is leading, while slowly rising wages show that workers salaries are being left behind as the economy grows.


  1. Industrial concentration is rising, as are measures such as the share of gross and net income by the largest firms in an industry. Between 1997 and 2012, two-thirds of US industries are in the hands of fewer firms.


  1. Evidence for 3. is suggested by the fall in the number of publicly listed companies, so that more industries have only fewer but larger firms.
  2. Productivity is increasing at a faster rate than average hourly compensation, suggesting that workers are not being rewarded for their share in the rise.


  1. Corporations today having more market power is suggested by data showing that average markups of 18% in 1980 rose to 70% in 2014. In the beer industry, two American firms have 90% of the market. For high-speed internet access, 75% of households have one provider. Four US companies dominate US airline traffic. In many US states, the top insurers have 80-90 percent of the market. In pesticides, three companies have 70% of the US market, and three companies have 80% of the corn-seed market.


  1. Between 1996 and 2016, publicly listed companies fell by 50 percent (7200 to 3600). There are now less listed companies than there were in 1970.
    More US towns now have one major buyer of labour, or are a monopsonist, such as coal mining towns and towns with Walmart stores. These conditions tend to depress wage increases.


  1. The extent of unionized labour has fallen. In 1983, 20% of workers were unionized; today it is 11% and coincides with a fall of national income going to workers. The rate of strike action has also fallen from 1960 to today.


  1. The gap between CEO and worker compensation has increased markedly.All this is consistent with a U – shaped distribution of income by population, with a high proportion of income going to many low-income families and a similar high proportion to far fewer upper income families. Many of the 30% solid Trump supporters reside at the low-end of this scale and want the Washington swamp drained; some would have supported Bernie Sanders. They feel that the political and economic situation is stacked against them.

    Part 2

 Measures to counteract income inequality

If the US is experiencing domestic political upheaval due to growing income inequality, are there precedents elsewhere and what measures might address this situation? The French Revolution from 1789 and the Russian Revolution in 1917 have some similar features which played out in unique ways. (The American Revolution and the Declaration of Independence in 1776 were more a fight to overthrow British rule, than over aspects of income equality.)

In the case of France, the aggrieved classes took to the streets overthrowing the monarchy and eventually accepting Napoleon as their leader which he did until the Battle of Waterloo in 1815. This may seem a long time ago, but my grandfather was born in 1824 and must have grown up wondering what was going on in his world, as many of us do today in ours.

Income inequality in the US, and to some extent in Canada and Western Europe, has grown since the end of WW2 and especially with the economic growth experienced by many countries. The factors associated with this situation include the restoration of economies devastated by war such as Japan, Germany, the UK and other countries of Western Europe, as well as the USSR and countries of the Soviet bloc.

From the 1970s onward, the introduction of computer communications and the internet in many phases of production and distribution led to changes in the production of goods and services and the way supply chains are organized. This caused changes in the demand for labour skills and the need for retraining. What is happening today is not new but is occurring rapidly so that some workers get left behind and naturally feel aggrieved.

An earlier example from around 1900 is the mechanization of agriculture so that today only about two percent of the labour force is assigned to this sector, while output has vastly increased. That adjustment was made with the growth of manufacturing and good wages. Today manufacturing output is growing, but with less employment and some of the service sector jobs have lower incomes than in manufacturing. It is the latter who now are Trump-style supporters.

Some jobs disappeared and new ones introduced as supply chains are reorganized. The new ones are often not suited to those who have lost jobs. While retraining takes place, it is often not fast enough to make up the differences in required skills. Having said that, the unemployment rate is hovering around 4%. The problem is that many lower paid workers see little opportunity for rising incomes and experience a declining standard of living. All this results in growing income inequality.

If the foregoing is an approximate account of economic conditions in the US, and to some extent Canada, what policies might alleviate this situation. There is no quick turnaround to a set of circumstances that have built up over decades. It would be like trying to turn around the Queen Mary in the Thames. The example of how Silicon Valley emerged in the US illustrates some peculiarities of the policy environment, and the time factor which accompanied its development. The reasons for Silicon Valley’s success in the 1950s and 1960s include the following:


Government programmes, intended to surpass the Soviet Union in space and weapons systems, galvanized investment in education, research, and engineering across a broad range of technologies. This ultimately gave rise to Silicon Valley where it was infused by a spirit of free enquiry, vigorous competition and a healthy capitalist incentive to make money. It was supercharged by an immigration system that welcomed promising minds from every quarter of the planet. Sixty years after the Sputnik moment, America needs the same combination of public investment and private enterprise in pursuit of a national project. (Economist March 17th, 2018 The Battle for Digital Supremacy).

The foregoing is illustrative of what policymakers are up against and the recognition of the time it will take to bring about change incorporating new technology and modes of organization. Meanwhile there are policy initiatives that can be taken which may be helpful and nibble at the growing unease felt by those who feel disadvantaged by these entrepreneurial initiatives.

Following is a list of some fairly mundane measures which may help to reduce inequality and are easier to implement than waiting for structural changes in the economy and/or political unrest:

  1. The immediate circumstances of low incomes can be addressed by a combination of some form of guaranteed annual income, which phases out as incomes rise and labour receives a mix of education and training to address evolving technological conditions.
  2. Implementing a system of repayable loans to aid students entering the labour force as well as older persons requiring retraining. Repayment would be made out of future income according to ability to pay
  3. Planned increases of minimum wages that employers can anticipate.
  4. Improved access to good-quality public services such as libraries, public parks, bus services and safe streets for low-income people funded by taxpayers.
  5. Restructure executive remuneration at the high income end by paying executives out of current income rather than including some stock options.

(I am indebted to Professor Timothy Taylor, Macalester College for suggestions re 4. And 5.)



Competition Policy in the 21st Century

March 1, 2018
In 1900, at the turn of the century, US business moguls included Carnegie, Dupont, Ford, Guggenheim, Morgan, Rockefeller and Vanderbilt. Among the largest firms were US Steel, Standard Oil, Ford, J.P. Morgan, DuPont, and a number of railway and financial corporations.

Compare these with some of today’s largest firms, their founders and founding dates, the last four labelled by some as the FANGs.

1975 Microsoft- Gates and Allen
1976 Apple – Jobs and Wozniak
1994 Amazon – Bezos
1997 Netflix – Hastings and Randolph
1998 Google – Brin and Page
2004 Facebook – Zuckerberg

Today’s giants and their industries are the result of developments in computers and communications since the 1960s when this technology began to permeate our economic and social life.

My first interaction with computers was in 1962 when they were housed in large air-conditioned rooms with data fed in on punched cards. Computational work was processed in batches and the output would be available perhaps the next day. It was often necessary to learn a programming language such as Fortran and write one’s own program. Later, programs such as Word Perfect and Excel could be purchased. I acquired my first desktop computer in 1970 for $5000.00. It had 64K memory. It was followed by laptops, pads and the smart phones available today. My regular use of email dates from 1985 when words were spelled out slowly across the screen, rather than appearing instantly.

Big business, both in absolute and relative terms, has long given rise to concern over its economic power associated with the creation of combines, trusts, and restrictive trade practices. In North America, this lead to the passage of antitrust laws. Canada passed the first such legislation in 1889 followed by the US in 1890. Both were a reaction to concerns about the potential harmful effects of monopoly power in industries such as steel, railroads, petroleum and banking. Today, questions are raised about the market power of information related industries, both the hardware and software.

One example is Amazon. The firm was founded by Geoff Bezos as an online bookstore, and has morphed into a firm engaged in electronic commerce and cloud computing with a head office in Seattle. Today it is the largest internet retailer supplying almost anything that can be sold online, either by distributing the item online or arranging for physical delivery. A recent acquisition was Whole Foods.

Amazon operates internationally with retail websites in fifteen countries. Currently it has revenues of $136bn, assets of $83.4bn, net income of $2.4bn and 542,900 employees full and part time. The firm did not record a profit for seven years, that is until 2001. (Further information is available on Wikipedia).

Amazon has morphed into a type of public utility in the business of delivering goods and services, similar in many ways to the delivery of electricity, gas, communications and postal delivery services.

The Economist, Jan 20th, 2018, provides an excellent summary of the possible antitrust issues stemming from how communications technology can affect competition in a wide variety of markets. The issues concern the generation and collection of data as well as its pricing in different markets. For example Facebook and Google are responsible for 80% of news publishers referral traffic affecting how buyers and sellers interact.

These and other firms collect mountains of data as people surf the net and are able to sell this information to producers of goods and services, as well as to monitor the communications of sellers and buyers. It reveals an Orwellian world where individuals may lose their privacy. When Orwell wrote 1984 in 1948 he was unaware of the technology that would emerge and reinforce his warnings.

Public policy

Do existing public policy measures address issues concerning these firms? Competition policy deals with features raised in a wide variety of markets dealing with monopolies, mergers, price fixing and a range of restrictive practices. There seems to me no reason why these measures cannot be applied to markets where information technology is used.

But in addition, the use of information technology is so pervasive in terms of communications and the internet that it has become a type of public utility. For example, businesses and homes demand connection to the internet at a reasonable cost. Today, a hotel, coffee shop, store or manufacturer would be unable to operate successfully without being connected. In this sense the technology has the features of a public utility and may need to have a policy framework similar to other utilities. Governments will certainly have to rule on the question of net neutrality.


Review of Trumpocracy by David Frum

March 1, 2018

David Frum’s Trumpocracy, The Corruption of the American Republic, (Harper Collins, 2018) provides clues to understanding Trump’s voter appeal. Leaving aside the millionaire and billionaire backers who have a direct financial interest in lower taxes and less regulation, the majority of his supporters (by numbers not wealth) feel that their living standards have not kept pace with the economic developments resulting from rapidly changing technology and globalization. To them, a Trump administration could be no worse than the status quo and what occurred under eight years of the previous Democratic presidency, so why not vote for him. For them there were no alternatives.

Frum, Ch. 10, summarizes the Trump management style as follows:

“Trump did not merely fail to organize his government. He actively sabotaged organization wherever it began to take form….The Trump administration settled for …. paralyzing the state either by failing to staff it….or by filling its ranks with incompetents and self-seekers, by trashing ethical rules, and by abdicating the responsibility of the president and the White House to set policy and then confirm that policy is in fact executed. Trumpocracy as a system of power rests not on deregulation but on no regulation, not on deconstructing the state but on breaking the state in order to plunder the state.” (100-101). (This is very much the view of Bannon, an on and off Trump political guru, and of how Trump operated his businesses (99).)

Trumpocracy, Ch 10, Resentments, best describes who were and many remain Trump’s supporters or the 30 percent. While indications can be gleaned from the following quotes, reading this chapter provides a far more complete understanding.

Trump’s supporters were often millennials (those born between 1982 and 2004) who were opposed to prevailing political correctness (192-3).

The radicalization of white men. Trump supporters love him because of his sexism. (194-5).

The dwindling rate of steady employment for young white men brought these into the fold (195).

Growth in online support for pornography. Pornhub, one of the largest sites started in 2007 had 5 million visits in July 2008 and 50 million on 2015. Americans had the largest number of visits, 192 page views per US resident followed by Canada with 165. (196).

Hillary Clinton’s candidacy repelled US whites. (197). White male Democrats backed Sanders far more than Clinton. (197).

Trump is a post-religious conservative. He does not hate gays, and does not care if women have abortions. His supporters are like a labyrinth with no centre, because that is how they feel and how the world works around them. (199).

Among non-Hispanic whites life expectancy is actually declining, while suicides are rising especially among males. (201).

Perhaps this can be summarized as follows, Trump supporters felt they had nothing to lose by voting for him. Whether they will feel that way in the midterm 2018 elections or the 2020 presidential election is open for speculation.

Review of WTF by Robert Peston

March 1, 2018

North Americans are so immersed in Trumpocracy that they often fail to see the connections to Brexit and the the rise of populist politics in Europe. Robert Peston in WTF provides an explanation or wtf is going on by showing the similarities between what is taking place on both sides of the Atlantic.

These are remarkable and represent different brands of populism. In the UK none of the cognoscenti realized that Jeremy Corbyn, the Labour leader would do so well in the 2016 UK election and now could become Prime Minister. In the US few of the same group imagined that Trump would win the presidency but he did, and daily we witness the turmoil that ensues.

Trump and Corbyn understood that large chunks of the electorate in their countries had not prospered from economic change resulting from the combination of technological change and globalization. Each man tapped this vein of discontent. One became President, the other the likely next Prime Minister.

So far, populism has not shown its face in Canada except perhaps with the Ford brothers in Toronto. The extremes of political correctness and multiculturalism, and opposing views on immigration could change all of this. No country is immune from the what is making news in other countries.

A word about Robert Peston who has been a journalist focusing on business and economic affairs for both the BBC and ITV. His father Maurice Peston taught at LSE when I studied there in the 1960s. Maurice was born in London, the son of Polish Jewish parents who came as refugees to the UK in the 1930s. Maurice Peston had a distinguished academic career, received a peerage and became an active labour member of the House of Lords focusing on economic issues. Father and son were/are aware of the how political turmoil can emerge from conditions of gross income inequality combined with racism.

Trump after Year 1

March 1, 2018

After a year long roller coaster ride for US politics, some assessment can be made of the Trump presidency. The man behaves like an autocrat attempting to take over or in some way control the US political process using the techniques of former autocrats. So far, American institutions have held out, but the longer Trump and his associates retain power, the more likely a tipping point will be reached with at least unfortunate, or perhaps even fatal consequences for the democratic process. Now he wants a military parade. What will it be tomorrow? (The following was written before the February 2018 mass school shooting).

Two questions arise,

1. Why does Trump retain the solid support of 30 percent of the US electorate?
2. Why has no credible Democrat emerged to lead the opposition?

Trump’s appeal to the 30 percent revolves around his claim that he would drain the Washington swamp, implying that in recent years US governments of all political stripes have feathered their own nests at the expense of others, especially lower income families, which have seen no rise in their real incomes.

In fact, Trump’s few legislative achievements have favoured the top five rather than the bottom thirty percent, but the latter still stick with him, or at least they have so far. They want to see Washington shaken up, perhaps not as much as advocated by Bannon, but more than will occur with the likes of existing Democrat and Republican politicians.

It is unclear how Trump’s policies will benefit the 30 percent unless there is a significant uptick in the US rate of growth. At present unemployment is low and economic growth solid, and this has been the case since before the election.

A second puzzle is why the Democrats, even without majorities in the House and Senate have been unable to be a more effective opposition given the weaknesses of the Republican majorities. While the Democrats have pointed out the harmful effects of Republican policies, they have been unable either to respond with alternatives, or to anoint leaders who are attractive to at least some of the 30 percent.

The Congressional Democratic triumvirate of Schumer, Pelosi and Clinton are all associated with the past, and viewed as inhabitants of the swamp, and no short list of Democratic candidates has emerged to challenge Trump. During the last election, it was known that if Bernie Sanders was not the Democratic candidate his supporters would not vote for Clinton and might even vote for Trump. Sanders and Trump appealed to the same section of the dissatisfied electorate. One person who understood this was Michael Moore the film director of Roger and Me who called the 2016 Presidential election correctly. He attended meetings of all the main candidates and watched how audiences responded to the orations.

How to think about the current scene

The US political situation resembles a festering boil. At it’s head it is red, swollen and oozing. Underneath infections are brewing causing the unsightly surface. Remedies require attacking the conditions that feed the process.

Some of the malignant viruses are discussed by Elizabeth Drew in a New York Review of Books article (August 18, 2016 – available online) titled American Democracy Betrayed, where she reviews Ratf**ked, The True Story Behind the Secret Plan to Steal America’s Democracy by David Daley.

Daley explains the process of gerrymandering electoral boundaries which are redrawn at the state level. Republicans have been far more successful than the opposing Democrats in drawing these boundaries. In the 2016 US election only 37 of the 435 Congressional seats had opposing candidates. This would be like a federal election in Canada where only 27 of the 338 constituencies were contested.

The Future of Employment – a Focus on Skills

January 7, 2018

Where will the jobs be – and how to prepare for them?

The answer depends in part on where you live and what age you are. Discussion of this question can be found in numerous places, authored by governments, think tanks and universities. Here I aim to address an audience of those in high school and university, but it may have some value for those already in the work force, since a main conclusion is that there will be fewer and fewer life-time jobs and many will have to retrain and requalify throughout their working life.

The chart found at the following site graphs how 16 labour force occupations by sector have changed between 1850 and 2015 in the US.

See Part 3, Exhibit 2.

The three categories above Agriculture (-55.9%) are:

Trade (wholesale and retail)



The twelve categories below Agriculture are:



Professional Services


Business and Repair Services






Financial Services

Source: McKinsey and Co. 2017


Two obvious changes are the vast reduction of those employed in the agriculture, shown by the shrinkage of the light blue area, and more recently the reduction of manufacturing jobs (dark blue). Each OECD economy would show similar changes modified by the physical location and a number of other factors affecting the geographic boundaries and natural and human resource endowment of the economy. Canada would be much like the US, but with a greater relative importance associated with natural resources such as forestry and mining.

The shrinking share of agriculture is associated with a vast increase in farming output, and the substitution of machinery such as tractors and combine harvesters. The manufacturing and other sectors have expanded their share of employment at the same time that it has shrunk in agriculture. Similar forces are at work today with manufacturing, which with automation has increased the demand for service sector employment associated with computer and communications related service activities. A main conclusion will be that it is more helpful to examine the skills that are likely to be needed in the economy than the changing share of the employment by sector.


Some facts about underlying changes

Employment takes place in different sectors of the economy; the share of employment by sector changes over time, sometimes slowly and today quite rapidly.

Existing sectors, as shown in the chart, can change the type of skills required and the arrival of new technology creates the need for new skills. (When you see the word skills think of education and training now and in the future).

For example, the agricultural sector employs fewer people today but the output of the sector has increased. Manual work was taken over by machinery such as tractors, and combines. At the same time the sector created new industries and jobs with employment rising in manufacturing, improvements in seed and cattle production and now the use of information technology. Output has grown in all sorts of ways.

A remarkable statistic shows that in 2012 the average American cow produced 22,000 lbs of milk each year compared with 5,300 lbs in 1950, an increase of 16,700 lbs per year or about four times as much a year. (I imagine a Canadian cow would be equally productive, although supply management may require it to work shorter days and take longer vacations.) With 1950 model cows, today’s 33 million Canadians could be supplied with a pound of milk per day by about just over two million cows. With today’s more productive cows, it would take about half a million cows, such has been the increase in productivity.

 Other sectors have seen a real shrinkage of employment. Horses no longer do the work of machinery so the work horse industry has declined to almost nothing, as have the people who bred horses. There is a horse industry but it is associated with equestrian events such as racing, show jumping, dressage, and circus performances.

In contemplating job opportunities look for situations of job creation and job destruction, as well as for education and training now and in the future.


Will technology eliminate jobs?

The lump of labour argument states that there is only so much work in an economy and that technology will reduce the need for work in the future. The facts show otherwise as argued by the “lump of labour fallacy,” namely that employment to-date shows the total amount of employment has increased over time, but the type of jobs has changed requiring different combinations of skills and development of new skills.

One difference today is that the rate of change has increased relative to most times in the past, and this has led to the need for retraining and re-education. Doctors and dentists undergo annual retraining seminars, academics do research and take sabbatical, teachers have PD days. People can train to be a nurse today, but will have to retrain to keep up to date with nursing skills. If in the future there is a declining need for nurses but an increased demand for MRI technicians then major retraining is required to operate this equipment.

My experience of training in economics and being an academic all my working life is not typical for many of those entering today’s work force. I was employed by several different universities but to teach economics in all instances. Part of my retraining came from doing research as well as teaching, including the use of online learning techniques. It was an evolving skill set that I had to learn.


What skills will be needed?

There is extensive research and reporting by economists and others on Future Work Skills and the education and training needed for a person to meet the likely needs. While economists and others don’t have a particularly good record of forecasting future jobs, they are better at suggesting what skills will be needed in the future, given the changes, technological and other, taking place. A focus on skills allows predictions to be made on the type of education and training likely to be needed.


Drivers of change – some examples

  1. People are living longer. With an older population, people may work to an older age, either full or part-time. They will have increased medical and care costs some of which can be provided by healthcare workers.
  2. Smart machines: these will be used to monitor healthcare needs for young and old persons. Security and defense are examples of other areas using monitoring techniques, such as the use of unmanned drones and security cameras.
  3. Technology now allows for massive amounts of information to be collected and manipulated in real time in areas such as medicine, security and education. This has allowed a computer to beat human chess players and win quiz games such as Jeopardy.
  4. New techniques of manipulation and communication of information has led to multimedia forms of communication. Oral, visual and written information can be created and stored for use anywhere on the planet, meaning that the footprint of an industry or occupation can be global
  5. Social media is a particular form of global footprint (Facebook, Twitter and email) where experimentation is taking place. I first used a computer in 1962. It was housed in a large air-conditioned room and processed input entered on punch cards in batches. Early portable computers weighed 25 lbs and had 64K memory. I first used email in 1989. Messages were sent and received with letters being written out slowly across a computer screen. Today we expect instantaneous receipt of the whole message together with pictures and sound.
  6. The world is connected globally so that information can be transmitted anywhere in the world that has the technical facilities. This expands the opportunities for all kinds of activity, medical, educational and other. It also allows for bad things to happen.

Hit by ideological traffic going in opposite directions – Year end 2017

December 30, 2017

I fully expect this to happen and it will affirm that many people can easily be annoyed. Start with my favourite Christmas card featuring three women on a motorbike with a sidecar. The caption reads:

“Three Wise Women would have asked directions, arrived on time, delivered the baby, cleaned the stable, made a casserole… and there would have been peace on earth.”

Alternative wording (mine) reads:

Three politically correct women would have ignored gender equality when forming their committee, returned the diapers because they were the wrong colour, sent Joseph out to get coffee after he had cleaned the stable….and there would be slim prospects for peace in the home.”

One of the joys of growing old is to say things that will irritate people; another is to ignore warnings about what to drink or eat. So here goes:

  1. As a result of a recent hospital stay, it is clear that positions requiring a range of skill levels (doctors to cleaning staff) could not be staffed without encouraging some level of immigration. The same is true for employees in shopping malls and fast food outlets. One public policy issue is how to integrate newcomers into Canadian society and what is reasonable to expect from them.
  2. A prime issue is making sure that non-French or English speakers get language training. Without it employment opportunities are minimal except to live and work in a ghetto where their native language is spoken. Young arrivals who enter the school system will quickly adapt linguistically and act as interpreters for their elders.
  3. Newcomers need to be made aware of Canadian values…. this is where it gets interesting. At this time of year there are many summaries of what Canadian society looks like after 250 years as a nation. One I found interesting was penned by Jonathan Kay (read especially the last two columns on page NP2 of the National Post for Dec. 20, 2017)

“Will Canada come to regard itself as a sunny forward looking, pluralistic democracy that champions a generous social contract on a colour-blind basis…or a guilty grievance-infested patchwork of racial communities perpetually publishing angry manifestos and living in the shadow of bygone horrors?”

The latter gets the most public attention because angry people with grievances make the news, sell papers and attract eyeballs. Examples of social harmony don’t make headlines or tweetable epithets. One example, I suggest, of a well-functioning multicultural society is New York City, population 8.5 million. The country, state and city have no overt multicultural policy. The citizens from all over the world just get on with doing their jobs and living their lives. At least up to 2017, this has worked well. In contrast, Canada has a closely defined multicultural policy at least at the federal level, unfortunately ill-formed and implemented.

  1. Those seeking to evaluate existing Canadian multicultural objectives carefully avoid asking the difficult questions. Gilles Paquet is an exception in his Deep Cultural Diversity (University of Ottawa Press, 2008)
  2. An associated puzzle is why there is no discussion of the overall desired size of Canada’s population. Immigration acts as a tap for the flow of people into the population bath tub. Does Canada need to open the tap? If so I would like to see the rationale. Countries like Norway and Switzerland with smaller populations and land area have remained prosperous with small populations – for Norway 1990 and 2017 – 4.2mil and 5.3mil; for Switzerland 1990 and 2017 – 6.1mil and 8.5mil. In a sense Canada is similar size-wise in that almost all immigrants want to live in urban centres such as Montreal, Toronto and Vancouver. These cover a far smaller area than either Norway or Switzerland.

What happened in 2017 and what might happen now?

December 24, 2017

My favourite Xmas card for 2017 reads,

“Three Wise Women would have asked for directions, arrived on time, delivered the baby, cleaned the stable, made a casserole….and there would have been Peace on Earth.”


Overwhelmed by news coverage of the Trump presidency, I think we have lost sight of what actually happened which is a precursor for trying to figure out the future.  I suggest that Trump is like the head of a nasty boil beneath which resides a lot of infectious puss resulting from some unpleasant causes. It could kill you but can hopefully be treated.

What follows may be an oversimplified explanation, but here goes. Since becoming selected as Republican candidate, being elected and governing for a year, Trump has managed to grab the headlines with outrageous comments and behavior. If anyone else had done this they would have been crucified politically and in the press. Trump manages to change the channel when public indignation is stoked. He is an artiste at managing the press. He is more clever than mad.

So far the president’s support is rock solid with 30-35% of the US electorate. Some are traditional Republican voters, while others probably supported Bernie Saunders and may not have voted for Clinton. The Saunders followers felt and still feel that Washington is a swamp and Trump’s boast to drain it remains attractive to them.

The 30-35%, or a portion of them, feel that they have not shared in the economic growth of the past decades. Growth has seen significant structural changes in the economy, such as the loss of manufacturing jobs and their replacement by a combination of outsourcing and growth of service sector jobs associated with rapidly evolving communications technology. At the same time, some groups have managed to shape the rules of the business game, through such things as tax breaks, subsidies and protectionism favouring certain investors and sectors. In turn, these favoured ones finance political campaigns and keep the swamp well infested.

Responsible for all this are the acts of previous Democrat and Republican administrations, which have shaped the policy infrastructure to the benefit of their traditional supporters. What we observe and experience today is the result of an evolving social, political and economic backdrop. Trump is the focus of this scene. But without him the same underlying forces would be at work leading to some probably unwelcome outcome.

Can there be a positive future given these events? Probably, but this depends on the sturdiness of the of the American political system over the next three years. Trump will have left some unexploded mines on the political battlefield. He will have governed by signing executive orders (Obama did the same thing in his second term with a Congress controlled by Republicans), and by making judicial appointments of people favouring his political views. In this sense Trump is here to stay by leaving a lasting mark on American society. It will take time and leadership to redirect the ship of state.

Seasons greetings to all.


What might a post NAFTA world look like?

December 13, 2017

It is time to think about life after NAFTA. Since we don’t know what the details will be, all that can be done is to try to map out the factors, other than the revised terms, which could be no NAFTA, needing consideration. For this I refer to the methodology pioneered by Ronald Coase (Nobel Prize Winner in Economics 1991) focusing on how firms organize factors of production.


The term supply chain seems to have displaced vertical integration to outline how firms organize the production of goods and services. In general, firms weigh a make versus buy decision for the various goods and services needed, where make versus buy may involve a cross border transaction. An aluminum smelter may source bauxite and alumina from its own operation abroad or from an independent supplier abroad (or domestically). Both involve a transaction between the two stages of production. One is an intrafirm and one an interfirm transaction. Multiply these alternative opportunities for one stage of the supply chain by all the inputs required at different stages of production, and you get a large number of decisions to be made. A firm’s management has to get input from engineers, tax accountants, shipping specialists and others in order to reach the least cost way to organize the supply chain.


A similar situation exists when organizing the production and use of services, as opposed to goods. Input from lawyers and accountants, for example are needed to aim for the least cost way of production and distribution for a firm’s supply chain. For both goods and services, tariffs and non-tariff barriers are ingredients to take into account, hence the importance of the terms written into trade and investment agreements like NAFTA.


With ongoing technological change, it has become easier and cheaper to undertake crossborder transactions for goods and services, but especially for services such as finance, technology, accounting and advertising. The service alternatives available to many firms provide a similar challenge for those monitoring the operations of firms such as tax collectors.


What has this all got to do with the outcome of current NAFTA negotiations? Technological change has given firms more ways to organize domestic as well as international operations. The extent to which a NAFTA with new terms will raise costs for individual firms depends on the numerous alternative ways in which the supply chains can be organized.


The items to focus on include the ease with which capital, labour and technology can be moved across borders before and after a new international agreement is reached. At one time, Canadian manufacturing industry was protected by tariffs from imports. This lead to US firms hopping the tariff wall by investing in Canada, and more often than not setting up plants on a smaller less efficient scale in Canada, thereby creating what was called the miniature replica effect (plants that were too small to achieve scale economies in production and distribution). With lower tariffs due to NAFTA, imports could flow across the border in both directions. Similar opportunities opened up to Canadian firms selling into the US market as a result of NAFTA. If lower tariffs are removed, firms could be forced back into less efficient (higher cost) means of production.


It is highly likely that the abolition of NAFTA would lead to higher production costs and prices in Canada and the US, but the harm may not be as great as would have taken place a decade ago as firms have developed more ways to reduce costs. Where do these new opportunities exist? A combination of inward and outward investment, inflow of cheap labour (temporary foreign workers), and outsourcing abroad of work are areas to monitor and study.


When Ronald Coase researched similar issues, he did it by visiting plants and interviewing plant managers and workers on the shop floor who made the decisions about how to produce and ship goods and buy services. Others tend to do this by examining published statistics which is a step removed from the people actually handling the goods and making the decisions. Alfred Marshall, another economist used a similar methodology in research for his major work Economics of Industry (1879).


Of course, the cancellation of NAFTA will raise the costs of production for certain firms and industries, but the consequences may not be as dire as some predict.


December 8, 2017

I confess I am addicted to following the antics of Comrade Trump, partly because it is such good theatre with the curtain rising on a new scene almost daily. But partly because events south of the border are already impacting our lives. Regardless of the outcome of the NAFTA re-negotiations, business will delay or cancel investment opportunities for the time being thereby slowing the economy. I am still amazed about why the US stock market is doing so well.

My addiction is fed by watching excerpts from Morning Joe on MSNBC for the anti-Trump view, and Fox News for opposing commentary by pro-Trump supporters. Add a puff of Steve Bannon and Breitbart News and the day can be shot without doing anything else, except to wonder whether Little Rocket Man or Humpty Dumpty (HD) will light the fuse for a nuclear holocaust. The Daily Show is another channel I watch. Hardly a day goes by that host Trevor Noah does not have a clip about the President and his supporters.

Each day Humpty Dumpty on Twitter offends someone personally, and as soon as the reaction gets out of hand he changes the channel –  from the charges laid against former campaign manager Paul Manafort, to Michael Flynn’s guilty plea, to testimony to Robert Mueller’s investigation, to the meeting of son Donald Jr with the Senate Committee on Russian election interference, to the decision to move the embassy in Israel from Tel Aviv to Jerusalem, to name a few. What will it be tomorrow?

The news media grab any story involving the President and his cabinet, and we the audience dutifully follow assuring that network audiences remain high. After a year in office, I conclude that one needs to watch both sides, in my case that is MSNBC versus Fox News with a touch of Breitbart. If one only listens to the MSNBC viewpoint then one misses the reason why HD won the election (OK with fewer votes), and why it is that over 30% of the electorate continue to support him, and apparently quite strongly. The majority of the electorate is fed up with the way Washington is run and support him as someone who could shake things up. Unfortunately, he is doing it for the benefit of his wealthy friends, not for the masses.

Michael Moore was one of the few people outside the President’s close supporters who called the election correctly. Moore spent time attending rallies for both candidates, noting that Clinton often had small and unenthusiastic audiences. And when Sanders’ supporters were asked if they would vote for Clinton, if Sanders was not the candidate, they often said no. Twenty-five years of Bill and Hillary in Washington was viewed as enough by many. And when Obama later accepted $400,000 for a speaking engagement five months after his term ended, this seemed to reinforce the need to drain the swamp.

HD is now behaving like a dictator. He asks the head of the FBI to drop the inquiry on Russian interference in the election; his legal advisor says he is above the law; his son claims client-counsel privilege when neither of them are lawyers; and he tweets his feelings daily. One hopes that the adults around the White House can keep him in check. They are mainly military men who must be wondering why they took their jobs. Tillerson from head of Exxon has become little more than an errand boy. Males groping females has now become headline news with the resignation of Al Franken, and the forgotten news that a president boasted about his groping.

These stories fill the headlines, and there will be more. Meanwhile important events are taking place in Europe and Asia which could ignite economic and political tumult around the world. Today our attention is drawn to the resignation of Senator Al Franken for behavior that HD boasted about. What will it be tomorrow?