Productivity puzzle:

Why motivation is the real key to Britain’s productivity puzzle By Jeremy Renwick, CapX

The UK’s productivity problem is well-documented. Just this month a report from the Office for National Statistics highlighted a drop in productivity at the end of 2018.

Since the 2008 financial crisis our productivity has barely increased and is lower than in nearly all comparable economies. This matters because it means that we are not getting wealthier as a nation or as individuals, on average, with obvious impacts on public services and living standards.

It’s now high time for a new approach to the productivity gap — one that draws lessons from growth sectors and focuses on motivating people.

What’s really interesting is that commentators including the Office for Budget Responsibility, McKinsey & Co. and many thinktanks have neither explanations for nor answers to this problem. The typical factors used to explain productivity challenges include slow adoption of technology, lack of willingness to invest, cheap labour reducing the incentive to invest, the need to improve education and lots of low-productivity “zombie” companies being kept alive by low interest rates.

The real productivity puzzle is that all of these factors are also true to a greater or lesser extent in the other G7 countries, so why is productivity a particular problem for us?

There is a key signpost in the Manufacturing Organisation EEF’s article on the subject. They highlight that the productivity gap does not apply to the manufacturing sector. Given that 79 per cent of the UK economy is services — the largest proportion amongst the countries in the G7 — clearly this is where we must look.

Like manufacturing, services companies are investing in technology and infrastructure to support their staff, while opportunities to use low-skilled labour are fairly limited. These companies are also investing in learning and development and putting pressure on government to improve education. If these firms are not increasing their productivity, it appears to be down to something other than the standard levers.

Service businesses are all about the people, so perhaps the link the economists are missing is something more personal — motivation. There is lots of research that identifies that motivated people are much more productive. Could it be that, since 2008, those working in service industries have not been given the motivation to become more productive?

People are working longer and longer hours, in jobs that are increasingly insecure, for organisations focused solely on the bottom line who don’t seem to care about their employees. Given this context, is it any surprise that many workers feel demotivated and unloved? There is a possible explanation for the 2008 inflection points, in that polling shows many workers still resent the lack of accountability for the financial crisis, and the bailouts that resulted from it.

It does not seem a stretch, in this context, to suggest that increasing productivity, GDP and GDP per capita means creating a more motivated British workforce. Even if the link turns out to be less direct than I’m suggesting, increasing motivation is a good thing in itself as motivated people tend to be happier.

So the key question is how do we go about increasing motivation?

We can look to examples from the corporate world, case studies written by senior managers or presentations given by consultants at conferences. But this territory has been explored before. Now is the time for new solutions and there is somewhere less obvious we should explore in order to learn lessons.

The UK’s growing gig economy represents about 20 per cent of the workforce, is the largest in the G7 and presents a major competitive advantage simply by providing labour market flexibility. More subtle, but equally important in this context, is that most gig economy workers have actively taken a choice to act on and manage their own motivation.  Whatever your views on the merits and pitfalls of the gig economy, it’s clear that the behaviour of those involved in it, particularly in high end jobs such as IT contractors, could help us to understand what motivates knowledge workers. This, in turn, indicates where productivity gains could be made elsewhere in the economy.

Having been part of the high-end gig economy since 2001, both as a contractor and as someone growing consultancies based on contractors, I believe there are seven patterns the broader economy can learn from to potentially increase productivity.

Focus on outcomes/outputs: Contractors are typically contracted to deliver a set of specific outcomes or outputs, and bosses should not be too prescriptive on how to achieve them. A lack of micro-management is well known to be key to motivation, which is why I believe service companies should be looking closely at how their leaders are managing their people in order increase motivation and productivity.

Flexible working: Linked very closely to being outcome-focused, is ensuring there is the flexibility to allow each individual to do the work where and when it suits them – allowing each individual to fit other parts of their life around work more easily.

Avoiding toxic environments / working with people we like:  Probably the most important part of keeping us happy and motivated at work is the people we are working with.  Part of the motivation for contractors is that the underlying expectation of moving on regularly allows them the safety net of getting out of difficult environments with little penalty and switching to join people they have enjoyed working with before. Fully buying into the philosophy that a happy work environment is a productive one, and ensuring that toxic ones are dealt with quickly, will make a massive difference to productivity in service businesses.

Fair reward: Contractors typically take home more money than the equivalent employee and this is a large part of the motivation for moving into contracting. Service companies, and their shareholders, can do much more to acknowledge that motivated people are productive people by taking steps to share more of the profits with them – John Lewis has shown the way here.

Flexible benefits: A more subtle aspect of reward is that contractors choose the benefits they want to opt into e.g. self-funding private health care rather than buying expensive health insurance.  Good practice in industry already provides flexible benefits to employees but there is more that can be done to motivate employees and increase productivity.

Entrepreneurial opportunities: It is particularly true for IT contractors that they spot niche (and sometimes large) entrepreneurial opportunities e.g. for them to develop a mobile phone app.  Their problem is typically finding the business/marketing expertise and finance to turn the idea into a business.  This happens for some employees in large service companies as well, so setting up an authentic early stage business fund to help employees be entrepreneurial could help increase general motivation.

Meaningful work: Again more subtly, contractors are increasingly attracted to work that has meaning for them and are open to adjusting their rates to take on meaningful work.  Companies can do much more to bring their employees closer to the benefit they deliver to society.

Being a contractor has productivity downsides such as having to pay for and manage your own training and development, which is a core part of being an employee. There is also the fundamental issue of constantly looking for work, whereas an employee still has a reasonable expectation of work being provided. So could the way forward, for maximum motivation and productivity, be to find ways to combine the best of the contractor and employee mindsets?  If so, there are steps the traditional corporate sector, along with the public sector, could take to further motivate employees now, starting with the seven patterns of behaviour outlined above.

If they can really get to grips with the productivity challenge, the prize for policymakers, business leaders and civil servants is clear, and the value created could be transformative in the years ahead. Productivity gains are the fuel that will power the British economy into the 2020s, through Brexit and beyond.

And another thing... Bernard Connolly on problems with capitalism

Worth reading just for an adult perspective on significant issues, but also helpful for your macro/paper 3:

The problem with global capitalism

The EU sorted out (or not…), we move on to what’s wrong with global capitalism. Two things, says Connolly (which he has, by the way, been warning about for much longer than almost everyone else). The first is the rise of crony capitalism. The industrial revolution saw a lot of people getting rich. But they at least “made something” and helped to set in train a series of developments that “after thousands of years of nothing much happening… lifted people out of poverty and gave them opportunities and standards of living they would never otherwise have had”. Are the people getting superrich today improving standards in the same way? Some are (Amazon, while far from perfect, has improved the lives of many consumers). But there is also a “huge amount of rent-seeking”: large firms have too much power to crowd out the small, and regulators do too little to stop it.

The second is that much of the new wealth has been created simply by those riding on the coattails of Federal Reserve policy (cheap money) by buying into stock and property markets. That creates nothing for anyone else – and is thus politically unacceptable. But it’s hard to reverse. You can deal with the first problem with good anti-trust regulation. But the concentration of wealth created by the equity bubble? That puts the Fed in a “terrible dilemma” – it can’t really be reversed “without crashing the world economy… we’ve seen the extent over the past three months of how dependent the US stockmarket is, not so much on trade talks with China, not so much on China’s growth or global growth, not so much on what happens to wages in the US, but on what happens to interest rates and what happens to interest-rate expectations”.

Fed chairman Jerome Powell has pulled back from rate rises to stop the market falling, but how much longer can he do that for? US unemployment can’t fall much further and if the Fed continues to try and keep US growth at an annual rate of 2.5% (as it plans to) “there will be an L-shaped Phillips Curve, wages will start to accelerate quickly, there will be inflation…  then there’s real trouble” for the stockmarket and the global economy. The Fed got itself into this spot of course – starting with Alan Greenspan keeping rates too low in the mid-1990s, and most recently with Janet Yellen not putting rates up fast when Donald Trump came in with policies that “did increase the level of potential growth in the US.” Had they done that, they’d have less of a bubble to deal with. While the rate of growth would have been less fantastic than over the last year, “the prospects for growth going forward would be much better” as would the politics of wealth distributions. Now, says Connolly, it is all too late. “There is no easy way out.”

• Listen to the full interview here

Understanding Europe - Bernard Connolly

Who is Bernard Connolly?

Oxford-educated economist Bernard Connolly made headlines when he lost his job at the European Commission in 1995, after writing The Rotten Heart of Europe: The Dirty War for Europe’s Money. The book (reissued in 2013 by Faber & Faber) attacked the European Exchange-Rate Mechanism (the euro’s precursor), arguing it was part of a plan to force a greater degree of political integration than voters would support. The Times’s Anatole Kaletsky called the book “the most intellectually persuasive, economically coherent and politically prescient account yet published of the development of European institutions in the 1990s”. In 2001, Connolly received the Frode Jakobsen prize, awarded in Denmark for “outstanding moral courage in public affairs”. He is the founder and CEO of a macroeconomic research boutique, with asset manager clients in New York, and is now writing a book on how central banks and academic economists have perverted capitalism.

Merryn Somerset Webb talks to economist Bernard Connolly about Brexit, the true nature of the EU project, and what’s gone wrong with global capitalism.

Merryn recently spoke to Bernard Connolly for the MoneyWeek podcast. This article is taken from that interview. You can listen to their whole conversation here.

Before I met Bernard Connolly recently, I watched his appearance on Panorama in 1997, where he explained clearly why the UK would be mad to join the euro. There were, he said, no “good economic arguments” for the single currency at all; it was clearly a political project – a step on the path towards a European superstate.

If it went ahead, said Connolly, the European Central Bank (ECB) would become a “political football”; voters would soon feel they had “no control over either their politicians or policies”; and Europe would end up with a nasty mix of “economic distress and political despair” leading to “xenophobia, nationalism, (and) a retreat from democracy and free markets”. Connolly got short shrift from some of the other participants. But look around you today and you might think the world would be a better place if more people across the European Union (EU) had listened to him then.

We start our conversation with the sad conclusion that the enmity and discord he predicted 20 years ago are here and affecting us all. Look at how the Greeks feel about the Germans. Look at how those in Italy – who used to be among the most enthusiastic eurozone members – are “now heartily sick of everything to do with the stupid currency”. The acute phase of the 2011/2012 crisis has passed, but much of the EU is now in a state of “chronic pain”, with the young and the poor suffering the most (Connolly is not alone in wondering why the UK’s young voted remain, when they could surely see what was happening to their generation in Italy, Portugal and Greece).

So here’s the question: if this enmity and discord were the inevitable conclusion of the imposition of the euro – something both Connolly and, he says, everyone involved in the practicalities of it, understood – how did it ever get off the ground? Because the political impetus behind it was always (as former European Commission president Jacques Delors said) the eventual creation of a European superstate. The monetary union was always going to come to a fork in the road, when it would either collapse (with a nasty bout of political upheaval), or its participants would be pushed into a single country. Those who craved the latter, says Connolly, were prepared to risk the former (and its worrying potential for “political violence”).

The EU: built on Vichy economics

This, of course, leads to the question of why they wanted a superstate to replace the nation states we know in the first place. For the answer to that, you have to go back to the end of the war, says Connolly. The European Coal and Steel Community (formed in 1951 with the idea that if we “communitise the sinews of war, steel, coal, basic industries – that may go some way to prevent another war”) and then the beginnings of the common market were very much Franco-German arrangements, extensions even of the “economic arrangements between Vichy France and Nazi Germany” (although with France, not Germany, as “top dog”).The idea being that with the Anglo-Saxons on one side and the Soviet Union on the other, the only chance of reasserting themselves on the world stage was to do it together.

It’s also worth studying the economic organisation of Vichy France under Jean Bichelonne (minister of industrial production until his transfer to, and death at, the SS hospital at Hohenlychen in late 1944) to get a little more insight into how the EU has ended up being run. Bichelonne was “the archetype of the European technocrat” – and particularly giving towards big businesses in terms of helping them decide how best to “stitch up their particular industry and… avoid competition from new smaller firms”, something that “has been a thread running right through the history of the EU”.

Britain’s biggest post-war mistake, as far as Connolly is concerned, was joining in. After Suez, it was clear that (like France) we were no longer going to be an independent world power and that we must tie ourselves to someone. France chose closer ties with Germany. The UK initially tried to find a middle way between that and aligning with the US: in the late 1950s and early 1960s, the “big thing in British diplomacy was the idea of an Atlantic free-trade area”. That didn’t happen (though it would, says Connolly, have been an excellent thing). Then the arguments for the common market began (they were the same then as now – the EU is protectionist and we will be shut out of their markets); by 1961, Harold Macmillan had decided we should be in; and the die was cast. All other options vanished and we have been tied in ever since to an organisation that has always been designed to create a Franco-German-led Europe and an economy run in the style of Vichy France – “essentially in the interests of existing large corporations”.

The euro’s part in the EU’s downfall

Will the superstate succeed, I ask? It depends, says Connolly. The obvious historical precedent is the Austro-Hungarian Empire. It could survive “as long as it wasn’t democratic” and had a “multinational army, in which units drawn from one of the peoples in the constituent countries were always stationed in another of the constituent countries”. But as soon as “democracy obtrudes or tries to make a reappearance in such a union it tends to fall apart”. So the risk is that the fantasy that the EU allows “domestic democracies, and that’s where you can express your democratic choices, that’s where rules get made, that’s where laws get made, that’s where policies are implemented” continues to fall apart. Note that “the single currency has actually been a very powerful force in disclosing the nature of that fallacy”.

It’s also eating away at the idea that the EU is somehow noble and “a guarantor of peace and stability”, such that even if you do find Brussels “irksome” it’s still worth staying. The truth, of course, is that peace is not down to the EU, but to the North Atlantic Treaty Organisation (Nato), capitalism, democracy, “the principal of non-interference by one country in the domestic affairs of another”, political legitimacy and the economic prosperity these things have allowed – and which are all effectively “undermined by the EU”. Look at it like this, says Connolly, and the EU is not a noble institution. It is more a force for evil (in its effect, if not its intention).

Does he think the UK will make it out? He does. He puts the odds at 50% on a clean Brexit (that’s “crashing out” to those on the other side of the argument and “joining the other 135 countries in the world” that survive outside the EU to Connolly); 40% on Brino (Brexit “in name only”); and 10% on no Brexit at all. He’s optimistic on the basis that Prime Minister Theresa May, while a Remainer, does at least appear to feel that it is her duty to get us out – and so probably will despite the efforts of politicians, bureaucrats, businessmen, Davos man, lobbyists, much of the media, much of the academic world, and the “self-regarding, cold-hearted, boneheaded members of the metropolitan unintelligentsia” with their propaganda-driven, semi-religious attachment to their perceived identity inside the EU, trying to prevent her.

The nature of Brexit

What if there was another vote, I ask (something we both think is unlikely). Connolly reckons it would go the same way. The last result was about “people saying ‘I’m not going to be told what I should think, I don’t live in a totalitarian society and I don’t want to, I know what I think. My eyes are open, I’m not stupid, I can put two and two together. I can see what it all means’”. Most of us know very significantly more about the EU now than we did three years ago – and it is hard to see how that knowledge would push anyone to remain.

Is he happy to leave under May’s withdrawal agreement? No. But it is not just the withdrawal bit that bothers him. It is the political declaration on our future relationship too. If we stick to it, we end up under the control of the European Court of Justice in many areas indefinitely. There are particularly frightening bits – including, for example, “one article that commits us to co-operation on combatting misinformation”. So anything anti-EU could be instantly “classed as misinformation”. Is it worth going ahead even so, just to be a little bit out?

“It depends on whether or not we’d be prepared, once we saw how dreadful the withdrawal agreement and declaration was, to break the treaty.” The key here is that if you are in, you can get out with Article 50. It isn’t easy, but it is possible. That’s not so with May’s deal. So it could be “much worse than being in”.

Modern Monetary Theory (MMT) debunked

Modern Monetary Theory was mentioned in a recent CPD event, so some schools will be looking at it. It is extension material, rather than required reading, although the more basic points are elements you will recognise from our lessons on inflation and crowding out. There is a very nice, accessible explanation of the issues associated with using the printing press to fund government investment at the end, worth reading to help explain this particular issue. For those of you interested in how the future will develop you might like to remember (and keep an eye on) the term "AOC" - it is included in a lot of economic and political discussion taking place in America, and thus will affect developments elsewhere. You might want to look at Amazon's decision NOT to build a new HQ in NY as well. Slightly bigger issue than Honda leaving Swindon...

MMT Is Even More Dubious Than AOC's Green New Deal

• 

48 COMMENTS

TAGS Big GovernmentMoney and BanksOther Schools of Thought

• LEA ESTO EN ESPAÑOL

02/25/2019Robert P. Murphy

One of the most interesting aspects of the “Green New Deal” is that its progressive proponents hardly mention taxes at all—even as some Republican economists continue to champion a carbon tax. Faced with the political defeat of the Waxman-Markey “cap and trade” bill, as well as the failed carbon tax initiatives in Washington State, it seems that Rep. Alexandria Ocasio-Cortez and the other Green New Deal supporters are just going to accentuate the positive. In other words, they are going to focus on all the goodies contained in their proposals—such as a trillion dollars in spending projects—while downplaying taxes and regulations.

Indeed, some of the Green New Deal proponents have turned this liability into an apparent asset. When asked, “How are you going to pay for this?!” they flip the question around, by bringing up “Modern Monetary Theory,” or “MMT” for short. This is a relatively new economic school of thought that ostensibly overturns much of the conventional wisdom about government finance, in the age of fiat money. By directing the skeptics to MMT gurus like Prof. Stephanie Kelton—who served as Chief Economist for the Democratic Minority Staff of the Senate Budget Committee, before advising Bernie Sanders’ campaign—the Green New Dealers can dodge awkward questions and come out looking quite sophisticated.

In previous IER articles — one, two, and three — I have directly criticized the Green New Deal. In the present post, I will focus on its relationship to MMT, and then I will explain why MMT is even more dubious than the Green New Deal itself.

Using MMT to Defend the Green New Deal

There is a growing link between the Green New Deal and MMT on social media, but here let me link to an article from Forbes.com that spells out the connection. Author Robert Hockett explains how Ocasio-Cortez has deflected criticism by relying on the new financial framework:

Representative Alexandria Ocasio-Cortez’s announcement of an ambitious new Green New Deal Initiative in Congress has brought predictable – and predictably silly – callouts from conservative pundits and scared politicians. ‘How will we pay for it?,’ they ask with pretend-incredulity, and ‘what about debt?’ ‘Won’t we have to raise taxes, and will that not crowd-out the job creators?’

Representative Ocasio-Cortez already has given the best answer possible to such queries, most of which seem to be raised in bad faith. Why is it, she retorts, that these questions arise only in connection with useful ideas, not wasteful ideas? Where were the ‘pay-fors’ for Bush’s $5 trillion wars and tax cuts, or for last year’s $2 trillion tax giveaway to billionaires? Why wasn’t financing those massive throwaways as scary as financing the rescue of our planet and middle class now seems to be to these naysayers?

The short answer to ‘how we will pay for’ the Green New Deal is easy. We’ll pay for it just as we pay for all else: Congress will authorize necessary spending, and Treasury will spend. This is how we do it – always has been, always will be.

The money that’s spent, for its part, is never ‘raised’ first. To the contrary, federal spending is what brings that money into existence.

Although Hockett doesn’t use the term “MMT” directly in the article, he is clearly referring to the framework. (Ocasio-Cortez herself has explicitly endorsed MMT.) And so we see the clever rhetorical move: The critics of the Green New Deal who focus on its price tag are cast as Neanderthals—and hypocrites to boot—who don’t understand that Uncle Sam can “pay for” anything he wants.

Indeed, given the shot in the arm from Ocasio-Cortez, MMT is becoming such a hot topic that even Paul Krugman has been moved to gently critique it. (Incidentally, when Paul Krugman warns that your economic philosophy downplays the dangers of government spending, it’s time to reevaluate your life choices.) In the same spirit, then, in the rest of this post I’ll explain why the “insights” of MMT don’t mean what its proponents seem to think.

The U.S. Government Never Needs to Default

Perhaps the single biggest “insight” of the MMT camp is that the United States government, as an issuer of an unbacked fiat currency and an entity that doesn’t carry significant foreign debts, can never become legally insolvent. In short, no matter how many Treasury securities outsiders hold, ultimately the Federal Reserve can simply create more dollars in order to pay them off. Under a gold standard this would not be true, but ever since 1971, the U.S. government has had no official constraints on its spending.

This is why MMTers think it so old-fashioned when the critics ask, “How will you pay for the Green New Deal?”—or Medicare For All, a Universal Basic Income, etc. To ask, “How will you pay for it?” implies that there is a budget, where the federal government must first raise revenue and then spend it. But as the MMT gurus like Warren Mosler explain, under a fiat currency a government first spends the money in order to bring it into existence, and only then is it even possible to tax it back from the citizens. (This MMT mindset is quite clear in Mosler’s interview with me on my podcast.)

I hate to break it to the MMTers, but fuddy-duddy economists already knew this. Indeed, among free-market economists it is a standard pedagogical device to tell the audience that the government has three ways of financing its spending, namely (1) taxes, (2) borrowing, or (3) inflation. So this notion that only the MMTers perceive the possibility of the printing press as a means of “paying for” government programs is silly.

For proof, consider the following excerpt from Austrian economist Murray Rothbard’s economics treatise, Man, Economy, and State, published in 1962:

Many “right-wing” opponents of public borrowing, on the other hand, have greatly exaggerated the dangers of the public debt and have raised persistent alarms about imminent “bankruptcy.” It is obvious that the government cannot become “insolvent” like private individuals—for it can always obtain money by coercion, while private citizens cannot. (Rothbard, p. 1028, bold added.)

Here is another example, this one from Ludwig von Mises, speaking in 1951 on wartime finance:

What is needed in wartime is to divert production and consumption from peacetime channels toward military goals. In order to achieve this, it is necessary for the government to tax the citizens…

…

Part of the funds may also be provided by borrowing from the public, the citizens. But if the Treasury increases the amount of money in circulation or borrows from the commercial banks, it inflates. Inflation can do the job for a limited time. But it is the most expensive method of financing a war; it is socially disruptive and should be avoided. 

There is no need to dwell upon the disastrous consequences of inflation. All people agree in this regard. But inflation is a very convenient makeshift for those in power. It is a handy means to divert the resentment of the people from the government. In the eyes of the masses, big business, the “profiteers,” the merchants, not the Administration, appear responsible for the rise in prices and the ensuing need to restrict consumption.

…

A truly democratic government would have to tell the voters openly that they must pay higher taxes because expenses have risen considerably. But it is much more agreeable for a government to present only a part of the bill to the people and to resort to inflation for the rest of its expenditures. What a triumph if they can say: Everybody’s income is rising, everybody has now more money in his pocket, business is booming. (Mises, bold added.)

For a third and final example, here is Henry Hazlitt, writing in his classic book Economics in One Lesson, which came out way back in 1946:

It is because inflation confuses everything that it is so consistently resorted to by our modern “planned economy” governments. We saw in chapter four, to take but one example, that the belief that public works necessarily create new jobs is false. If the money was raised by taxation, we saw, then for every dollar that the government spent on public works one less dollar was spent by the taxpayers to meet their own wants, and for every public job created one private job was destroyed.

But suppose the public works are not paid for from the proceeds of taxation? Suppose they are paid for by deficit financing—that is, from the proceeds of government borrowing or from resort to the printing press? Then the result just described does not seem to take place. The public works seem to be created out of “new” purchasing power. You cannot say that the purchasing power has been taken away from the taxpayers. For the moment the nation seems to have got something for nothing. (Hazlitt, bold added.)

As the above examples illustrate, there is nothing new under the sun. Free-market economists have long understood that modern governments have the legal ability to resort to the printing press to finance their expenditures. The problem is, creating green slips of paper—or electronic bank reserves—doesn’t generate more labor-hours or acres of farmland. The problem of scarcity isn’t banished simply because we’ve gotten rid of the pesky gold standard.

Moving the Discussion From Revenue to Inflation

Now to be fair, the more responsible MMT proponents do not say, “Deficits don’t matter.” (Though see these examples from Bill Mitchell where he does say just that, notwithstanding the other MMTers’ willful refusal to admit as such.) Rather, people like Warren Mosler and Stephanie Kelton merely point out that insolvency is never an issue. In other words, we don’t need to worry that Uncle Sam will “go broke” or be unable to pay the bills, but we might worry that too much spending will lead to undesirably high price inflation.

But if this is the essential MMT insight, then it’s old news. Again, the three examples from the previous section show that classically liberal, free-market economists have known this all along. What those economists recognized, however, is that financing government spending through taxation (and to a lesser extent, borrowing) is more “honest” in the sense that the public can better understand the actual costs involved.

Consider a simple example: Suppose the Green New Deal contains a proposal to spend $24.8 billion on electric vehicle mass transit options in certain cities. If the proposal were financed by a flat $100 tax on every adult American (of which there are about 248 million), then it would be obvious what “the cost” of the proposal was. Every adult American would have $100 less to spend on private investment or consumption, and the government would devote the $24.8 billion in funds to the “green” infrastructure projects.

But what if, instead, the Treasury floated $24.8 billion in additional bonds—thus increasing the federal budget deficit—and the Federal Reserve kept interest rates from rising by creating $24.8 billion in new money with which it bought $24.8 billion in Treasuries from the bond market? This would be a convoluted way of having the Fed effectively “pay for” the projects using the (electronic) printing press.

The political benefit of this method of finance is that no American is apparently “down” any money, and yet the lucky cities get their infrastructure projects, with all of the spillover effects (in terms of construction jobs, etc.) they entail. It seems that inflationary finance is all gain, no pain.

But of course, in reality real resources are still being diverted from the private sector into the channels dictated by the political process. The construction workers who move to the cities in question are now no longer able to work on private buildings or houses. The rubber, cement, steel, glass, lumber, and other materials devoted to the new projects are not available for use in other possible projects elsewhere in the economy.

When all is said and done, the average American still “pays for” the new government spending, but via higher prices. In other words, rather than the average American’s income dropping by $100, instead the prices of other goods and services rise slightly, so that the original income no longer fetches as much stuff in the market.

However, the two methods are not equivalent. Most obvious, the source of the (real) income drain is harder to detect under inflation. If a family can’t make ends meet because of taxes, then it knows to blame the government. But if a family sees prices rising at the store faster than the paychecks from work, it might blame greedy capitalists or trade unions or OPEC; it might not realize the Federal Reserve is the true culprit.

Conclusion

The MMTers are “right” in the sense that yes, modern governments that issue fiat currency need never default on their bonds. But they are wrong if they think this observation absolves Alexandria Ocasio-Cortez from explaining how she will pay for the Green New Deal. The printing press doesn’t create real resources, it only obscures the method by which the government siphons them away from the private sector.

To be sure, MMTers would respond that the economy currently suffers from excess capacity, and then we could safely accommodate large deficit finance without pushing up the CPI. Yet we have now moved beyond accounting tautologies and into competing theories of how the economy works. I am happy to have that debate as well, but much of the existing discussion involves MMTers acting as if they alone understand that the government can buy stuff by printing money. Yes, free-market economists have understood that all along, and have explained in elementary detail why it is such a dangerous option.

Originally published at the Institute for Energy Research

Robert P. Murphy is a Senior Fellow with the Mises Institute and Research Assistant Professor with the Free Market Institute at Texas Tech University. He is the author of many books. His latest is Contra Krugman: Smashing the Errors of America's Most Famous Keynesian. His other words include Chaos Theory, Lessons for the Young Economist, and Choice: Cooperation, Enterprise, and Human Action (Independent Institute, 2015) which is a modern distillation of the essentials of Mises's thought for the layperson. Murphy is co-host, with Tom Woods, of the popular podcast Contra Krugman, which is a weekly refutation of Paul Krugman's New York Times column. He is also host of The Bob Murphy Show.

Tech Giants & Oilgopoly - Must Read for Y13

This is a fascinating insight into a big - and for me, a hitherto unseen - reason for regulating the tech giants from The Economist. If you get a question on this in Paper 1 there is a wealth of material in here you can bring to bear to really lift your answer:

American tech giants are making life tough for startups

Big, rich and paranoid, they have reams of data to help them spot and buy young firms that might challenge them

 Print edition | Business

Jun 2nd 2018| SAN FRANCISCO

IT IS a classic startup story, but with a twist. Three 20-somethings launched a firm out of a dorm room at the Massachusetts Institute of Technology in 2016, with the goal of using algorithms to predict the reply to an e-mail. In May they were fundraising for their startup, EasyEmail, when Google held its annual conference for software developers and announced a tool similar to EasyEmail’s. Filip Twarowski, its boss, sees Google’s incursion as “incredible confirmation” they are working on something worthwhile. But he also admits that it came as “a little bit of a shock”. The giant has scared off at least one prospective backer of EasyEmail, because venture capitalists try to dodge spaces where the tech giants might step.

The behemoths’ annual conferences, held to announce new tools, features, and acquisitions, always “send shock waves of fear through entrepreneurs”, says Mike Driscoll, a partner at Data Collective, an investment firm. “Venture capitalists attend to see which of their companies are going to get killed next.” But anxiety about the tech giants on the part of startups and their investors goes much deeper than such events. Venture capitalists, such as Albert Wenger of Union Square Ventures, who was an early investor in Twitter, now talk of a “kill-zone” around the giants. Once a young firm enters, it can be extremely difficult to survive. Tech giants try to squash startups by copying them, or they pay to scoop them up early to eliminate a threat.

The idea of a kill-zone may bring to mind Microsoft’s long reign in the 1990s, as it embraced a strategy of “embrace, extend and extinguish” and tried to intimidate startups from entering its domain. But entrepreneurs’ and venture capitalists’ concerns are striking because for a long while afterwards, startups had free rein. In 2014 The Economist likened the proliferation of startups to the Cambrian explosion: software made running a startup cheaper than ever and opportunities seemed abundant.

Today, less so. Anything having to do with the consumer internet is perceived as dangerous, because of the dominance of Amazon, Facebook and Google (owned by Alphabet). Venture capitalists are wary of backing startups in online search, social media, mobile and e-commerce. It has become harder for startups to secure a first financing round. According to Pitchbook, a research company, in 2017 the number of these rounds were down by around 22% from 2012 (see chart).

The wariness comes from seeing what happens to startups when they enter the kill-zone, either deliberately or accidentally. Snap is the most prominent example; after Snap rebuffed Facebook’s attempts to buy the firm in 2013, for $3bn, Facebook cloned many of its successful features and has put a damper on its growth. A less known example is Life on Air, which launched Meerkat, a live video-streaming app, in 2015. It was obliterated when Twitter acquired and promoted a competing app, Periscope. Life on Air shut Meerkat down and launched a different app, called Houseparty, which offered group video chats. This briefly gained prominence, but was then copied by Facebook, seizing users and attention away from the startup.

The kill-zone operates in business software (“enterprise” in the lingo) as well, with the shadows of Microsoft, Amazon and Alphabet looming large. Amazon’s cloud service, Amazon Web Services (AWS), has labelled many startups as “partners”, only to copy their functionality and offer them as a cheap or free service. A giant pushing into a startup’s territory, while controlling the platform that startup depends on for distribution, makes life tricky. For example, Elastic, a data-management firm, lost sales after AWS launched a competitor, Elasticsearch, in 2015.

Even if giants do not copy startups outright, they can dent their prospects. Last year Amazon bought Whole Foods Market, a grocer, for $13.7bn. Blue Apron, a meal-delivery startup that was preparing to go public, was suddenly perceived as unappetising, as expectations mounted that Amazon would push into the space. This phenomenon is not limited to young firms: recently Facebook announced it was moving into online dating, causing the share price of Match Group, which went public in 2015, to plummet by 22% that day.

It has never been easy to make it as a startup. Now the army of fearsome technology giants is larger, and operates in a wider range of areas, including online search, social media, digital advertising, virtual reality, messaging and communications, smartphones and home speakers, cloud computing, smart software, e-commerce and more. This makes it challenging for startups to find space to break through and avoid being stamped on. Today’s giants are “much more ruthless and introspective. They will eat their own children to live another day,” according to Matt Ocko, a venture capitalist with Data Collective. And they are constantly scanning the horizon for incipient threats. Startups used to be able to have several years’ head start working on something novel without the giants noticing, says Aaron Levie of Box, a cloud and file-sharing service that has avoided the kill-zone (it has a market value of around $3.8bn). But today startups can only get a six- to 12-month lead before incumbents quickly catch up, he says.

There are some exceptions. Airbnb, Uber, Slack and other “unicorns” have faced down competition from incumbents. But they are few in number and many startups have learned to set their sights on more achievable aims. Entrepreneurs are “thinking much earlier about which consolidator is going to buy them”, says Larry Chu of Goodwin Procter, a law firm. The tech giants have been avid acquirers: Alphabet, Amazon, Apple, Facebook and Microsoft spent a combined $31.6bn on acquisitions in 2017. This has led some startups to be less ambitious. “Ninety per cent of the startups I see are built for sale, not for scale,” says Ajay Royan of Mithril Capital, which invests in tech.

This can be enriching to founders, who can go on to start another firm or provide financing to peers with smart ideas. To the extent that such exits provide more capital to spur innovation, this is no bad thing. The tech giants can help the firms they acquire grow more than they might have been able to do on their own. For example, Facebook’s acquisition of Instagram took out a would-be competitor, but it has thrived under the social-networking giant’s sway by adopting the technical infrastructure, staff and know-how that Facebook had in place.

Friend or foe?

But plenty of people in the Valley reckon the bad outweighs the good and that early, “shoot-out” acquisitions have sapped innovation. “The dominance of the big platforms has had a meaningful effect on the entrepreneurial culture of Silicon Valley,” says Roger McNamee of Elevation Partners, a private-equity firm, who was an early investor in Facebook. “It’s shifted the incentives from trying to create a large platform to creating a small morsel that’s tasty to be acquired by one of the giants.”

And when startups are bullied into selling, as some are, it is even more worrying. Big tech firms have been known to intimidate startups into agreeing to a sale, saying that they will launch a competing service and put the startup out of business unless they agree to a deal, says one person who was in charge of these negotiations at a big software firm (which uses such tactics).

There are three reasons to think that the kill-zone is likely to stay. First, the giants have tons of data to identify emerging rivals faster than ever before. Google collects signals about how internet users are spending time and money through its Chrome browser, e-mail service, Android operating system, app store, cloud service and more. Facebook can see which apps people use and where they travel online. It acquired the app Onavo, which helped it recognise that Instagram was gaining steam. It bought the young firm for $1bn before it could mature into a real threat, and last year it purchased a nascent social-polling firm, tbh, in a similar manner. Amazon can glean reams of data from its e-commerce platform and cloud business.

Another source of market information comes from investing in startups, which helps tech firms gain insights into new markets and possible disrupters. Of all American tech firms, Alphabet has been the most active. Since 2013 it has spent $12.6bn investing in 308 startups. Startups generally feel excited about gaining expertise from such a successful firm, but some may rue the day they accepted funding, because of conflicts. Uber, for example, took money from one of Alphabet’s venture-capital funds, but soon found itself competing against the giant’s self-driving car unit, Waymo. Thumbtack, a marketplace for skilled workers, also accepted money from Alphabet, but then watched as the parent company rolled out a competing service, Google Home Services. Amazon and Apple invest less in startups, but they too have clashed with them. Amazon invested in a home intercom system, called Nucleus, and then rolled out a very similar product of its own last year.

Recruiting is a second tool the giants will use to enforce their kill zones. Big tech firms are able to shell out huge sums to keep top performers and even average employees in their fold and make it uneconomical for their workers to consider joining startups. In 2017 Alphabet, Amazon, Apple, Facebook and Microsoft allocated a whopping $23.7bn combined to stock-based compensation. Big companies’ hoarding of talent stops startups scaling quickly. According to Mike Volpi of Index Ventures, a venture-capital firm, startups in the firm’s portfolio are currently 10-20% behind in their hiring goals for the year.

A third reason that startups may struggle to break through is that there is no sign of a new platform emerging which could disrupt the incumbents, even more than a decade after the rise of mobile. For example, the rise of mobile wounded Microsoft, which was dominant on personal computers, and gave power to both Facebook and Google, enabling them to capture more online ad dollars and attention. But there is no big new platform today. And the giants make it extremely expensive to get attention: Facebook, Google and Amazon all charge a hefty toll for new apps and services to get in front of consumers.

Seeing little opportunity to compete with the tech giants on their own turf, investors and startups are going where they can spot an opening. The lack of an incumbent giant is one reason why there is so much investor enthusiasm for crypto-currencies and for synthetic biology today. But the giants are starting to pay more attention. There are rumours Facebook wants to buy Coinbase, a cryptocurrency firm.

Regulators will be watching what the giants try next. Criticism that they have been too lax in approving deals where tech firms buy tiny competitors that could one day challenge them has been mounting. Facebook’s acquisition of Instagram and Google’s purchase of YouTube, before it was obvious how the pair might have taken on the giants, might well have been blocked today. To fight back against the kill-zone, regulators must closely consider what weapons to wield themselves.

This article appeared in the Business section of the print edition under the headline "Into the danger zone"

The importance of good public transport

This ties in beautifully with a great article on the radio yesterday about Pacer trains in the North - stopgap trains introduced as an emergency measure in the 1980s, basically buses bolted onto a train chassis, with many, many drawbacks, and intended to be used for a few years only, but still in use after more than 30 years - in the words of an interviewee, "They are not good enough for use in the South - another example of discrimination..."

This looks at the impact of public transport on mobility of labour - a really good point you can bring to bear in micro and macro:

Birmingham is a small city during peak hours

For a year now, the Open Data Institute Leeds has been tracking most of the buses and trams in the West Midlands, the UK city region centred on Birmingham. We do it by polling the live departure screens that you see at bus stops, even at stops where they aren’t installed.

So far we’ve recorded 40m bus departures, a total of 16GB of data. And we’ve written tools to explore it in seconds.

You can try for yourself here. You can see how long every bus took to connect any two bus stops anywhere in The West Midlands, and calculate averages over tens of thousands of bus journeys at specific times, to see how bus journey times change over the course of a typical day.

But why?

The agglomeration effect

We’ve mostly done this work because of the following graph.

Click to expand.

Many economists argue that larger cities are more productive than smaller cities, and become ever more productive as they grow due to something called “agglomeration benefits”.

There are many other factors that contribute to productivity, but this simple law seems to hold well in economies like the USA, Germany, France, and the Netherlands. For example, Lyon, the second largest city in France, is more productive than Marseille, the third largest city, which is in turn more productive than Lille.

Almost uniquely among large developed countries, this pattern does not hold in the UK. The UK’s large cities see no significant benefit to productivity from size, especially when we exclude the capital.

The result is that our biggest non-capital cities, Manchester and Birmingham, are significantly less productive than almost all similar-sized cities in Europe, and less productive than much smaller cities such as Edinburgh, Oxford, and Bristol.

Public transport and city size

One notable difference between the UK’s large cities and those in similar countries is how little public transport infrastructure they have.

While France’s second, third, and fourth cities have eight Metro lines between them (four in Lyon, two each in Marseille and Lille), the UK’s equivalents have none.

Manchester and Lyon have similar-sized tramway systems, with about 100 stations each; but Marseille (3 lines) and Lille (2 lines) have substantially more than Birmingham (1 line) and Leeds (0 lines).

Is it possible that poor public transport in the UK’s large cities makes their effective size smaller, and thus sacrifices the agglomeration benefits we would expect from their population?

Our Real Journey Time data lets us ask this question.

Real journey time, and journey time variability

There is an important difference between bus public transport and fixed infrastructure public transport: reliability. I have used our Real Journey Time tool to calculate the worst-case (95th percentile) journey time on public transport on two routes into Birmingham. This is the time that a public transport user must leave for their journey to ensure that they are only late for work or a meeting once a month.

The first journey is a bus from the south of the city, Stirchley to, Birmingham. This 3.5 mile journey takes about 20 minutes between 6am and 7am, and about 40 minutes between 8am and 9am.

The second journey is a tram from West Bromwich to Birmingham. This 8.5 mile journey takes 30 minutes regardless of when it is taken, as the tram route is almost completely segregated from traffic.

Click to expand.

While the tram is substantially quicker at all times than the bus, the reliability of its timing, even during the most congested periods, provides an additional large benefit to users.

We think that people generate the most agglomeration benefits for a city when they travel at peak times, to get to and from work, meetings, and social events. Our tool shows us that, at the times when people need to travel in order to generate these benefits, buses are extremely slow. And since buses are by far the largest mode of public transport in Birmingham, this is likely to have significantly higher impact there than in Lyon; in the latter, the largest mode of public transport is the metro, which delivers reliable journey times no matter the time of day.

Our hypothesis is that Birmingham’s reliance on buses makes its effective population much smaller than its real population. This reduces its productivity by sacrificing agglomeration benefits. For the past six months, using our Real Journey Time tool, we’ve worked with The Productivity Insights Network to quantify that.

At peak times, Birmingham is a small city

The technique is quite simple. We pick 30 minutes as the travel time by bus that marks the boundary of the Birmingham agglomeration. This doesn’t include walking at either end of a journey, or waiting time, so this figure may well mean a 50 minute total journey.

We then use our real journey time to examine how far from central Birmingham that allowed journey time would let a person live.

For example, by examining six months of journeys on the buses, we calculate that, at off-peak times a person five miles from Birmingham in West Bromwich is part of the Birmingham agglomeration. At peak times, this is no longer the case and the outer boundary of the Birmingham agglomeration is reduced in size to just 3.5 miles away in Smethwick.

Making use of our data on trams, we can also imagine a Birmingham where major bus routes are replaced by trams and enjoy fast and reliable journey durations, even at peak times. The agglomeration then includes people as far away as Bilston, 9 miles away.

By repeating this process for bus route into Birmingham from every direction, we create a boundary of the effective size of Birmingham at different times of the day. By summing the population living within each boundary, we calculate the real size of Birmingham under three conditions: by bus at peak time, by bus at off-peak time, and in an imaginary future where all buses travelled as quickly and reliably as trams (simulated tram).

At this point you might see why we picked 30 minutes as our travel time. Allowing 30 minutes of travel time using fixed infrastructure such as a tram gives Birmingham a population of about 1.7 million people, which is very close to its population as defined by the OECD of about 1.9 million.

But at peak time Birmingham’s effective population is just 0.9m – less than half the population that the OECD use.

Birmingham’s effective size might explain most of its productivity gap

This is where things get very interesting. If we consider that Birmingham has a population of 1.9m, and we assume that agglomeration benefits should work in the UK to the same extent that they work in France, Birmingham has a 33 per cent productivity shortfall. This underperformance of the UK’s large cities is part of the productivity puzzle that UK economists have been desperately trying to solve.

But once you understand that Birmingham’s real size is much smaller, below 1m people, the productivity shortfall reduces to just 9 per cent and is no longer significant.

Click to expand.

Our hypothesis is that, by relying on buses that get caught in congestion at peak times for public transport, Birmingham sacrifices significant size and thus agglomeration benefits to cities like Lyon, which rely on trams and metros. This is based on our calculations that a whole-city tramway system for Birmingham would deliver an effective size roughly equal to the OECD-defined population.

This difference seems to explain a significant proportion of the productivity gap between UK large cities and their European equivalents.

So what should we do?

The good news is that Birmingham’s current plans for transport investment are aimed at increasing its effective size at peak times.

• Using our Real Journey Time tool, TfWM are targeting investment in bus lanes and bus priority measures to improve journey speed and journey reliability on existing bus routes.
• Seven sprint bus routes are being planned, with bus priority measures hopefully delivering journey time reliability similar to a tram.
• Two tram extensions (to Wolverhampton Train station and Edgbaston) are under construction, with two more (to Dudley and Birmingham Airport) under study.
• Station re-openings at places like Moseley and Kings Heath will offer reliable journeys by rail to new areas of the city.

The prize for achieving this is large. If bus journey times became as reliable at peak time as they are off peak, the effective population of Birmingham would increase from 0.9m to 1.3m. If we assume that agglomeration benefits in the UK are as significant as in France, this would lead to an increase in GDP/capita of 7 per cent.

Tom Forth is head of data at the Open Data Institute Leeds. This work was undertaken with Daniel Billingsley and Neil McClure.