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Sunday, November 22, 2015

Real Effective Exchange Rates vs Market Rates: the RMB (Chinese yuan)

Mike Smitka, Washington and Lee University

Here's a chart I created for my China's Modern Economy class showing the appreciation of the Chinese RMB / yuan [人民币·元] relative to the rest of the world. I put in the US$/yuan rate, inverted so that higher means stronger. But the core series is the monthly real effective exchange rate from the Bank for International Settlements. This the average value of the yuan with the exchange rates of the world's 61 largest countries, weighted by the amount of trade China conducts with each. In addition, the BIS corrects for inflation in each country, because if for example there's deflation in Japan, then at the same exchange rate US$1.00 buys more goods and services. Again, higher means stronger. At the bottom I append the most recently available (2013) trade data from the China Statistical Yearbook, to highlight the need to view China through lens with a wider perspective than the US bilateral relationship.

[I was in Japan this summer and benefited both from a weak dollar and Japanese deflation: it's really a good time for an American to be a tourist there. I have an additional advantage, because I speak and read Japanese, so can find cheaper lodging and so on.]

Oh, to politicians and businessmen everywhere: while the yuan may have fallen against the dollar, from China's perspective it's not depreciated because the dollar has gotten stronger, and they trade more with Europe and Asia than with the United States.

One tweak is that I use a log scale. This is second nature for those of us who grew up using slide rules, but what it means is that a 5% change, up or down, is always the same vertical increment. I adjusted the scale so that the horizontal lines represent (duh) a 5% increase. (I don't know why I never thought of doing that before...).

For those rusty on logs, log AxB = log A + log B, so if B = 1.05 (+5%) then we have a 5% increment equal to log A + log 1.05. The latter obviously doesn't change, whatever the magnitude of A. There is one minor issue: a 5% decrease (multiplying by .95) is not exactly the same as 1/1.05 (which is .952). So moving down one increment is a little less than a 5% fall.

To get even more technical, while correcting for inflation is important, the BIS uses the consumer price index, because it's readily available with the lag of only a month or so. Trade data come out with a greater lag, so the latest November release is only for August 2015. However, trade doesn't take place at retail prices, and consists of a different basket of goods than what households purchase. A country may import coal and wheat, while consumers buy electricity and bread. Those prices don't move independently, but the link isn't tight. This is of course a generic issue for economists: the data that are available seldom align exactly with the concept we're trying to measure.

11-6 Value of Imports and Exports by Country (Region) of Origin/Destination; Source China Statistical Yearbook 2014
Country (Region) 2013 2013 Share
  Total (US$ billion) Exports Imports % Total % Exports % Imports
Total $ 4,159 $ 2,209 $ 1,950 100.0% 100.0% 100.0%
  Asia $ 2,224 $ 1,134 $ 1,090 53.5% 51.3% 55.9%
      Hong Kong $ 401 $ 384 $ 16 9.6% 17.4% 0.8%
      India $ 65 $ 48 $ 17 1.6% 2.2% 0.9%
      Indonesia $ 68 $ 37 $ 31 1.6% 1.7% 1.6%
      Japan $ 312 $ 150 $ 162 7.5% 6.8% 8.3%
      Malaysia $ 106 $ 46 $ 60 2.6% 2.1% 3.1%
      Saudi Arabia $ 72 $ 19 $ 53 1.7% 0.8% 2.7%
      Singapore $ 76 $ 46 $ 30 1.8% 2.1% 1.5%
      South Korea $ 274 $ 91 $ 183 6.6% 4.1% 9.4%
      Thailand $ 71 $ 33 $ 39 1.7% 1.5% 2.0%
      Vietnam $ 65 $ 49 $ 17 1.6% 2.2% 0.9%
      Taiwan $ 197 $ 41 $ 156 4.7% 1.8% 8.0%
  Africa $ 210 $ 93 $ 117 5.1% 4.2% 6.0%
      South Africa $ 65 $ 17 $ 48 1.6% 0.8% 2.5%
  Europe $ 730 $ 406 $ 324 17.6% 18.4% 16.6%
      U.K. $ 70 $ 51 $ 19 1.7% 2.3% 1.0%
      Germany $ 161 $ 67 $ 94 3.9% 3.0% 4.8%
      Netherlands $ 70 $ 60 $ 10 1.7% 2.7% 0.5%
      Russia $ 89 $ 50 $ 40 2.1% 2.2% 2.0%
  Latin America $ 261 $ 134 $ 127 6.3% 6.1% 6.5%
      Brazil $ 90 $ 36 $ 54 2.2% 1.6% 2.8%
  North America $ 575 $ 398 $ 178 13.8% 18.0% 9.1%
      United States $ 521 $ 368 $ 152 12.5% 16.7% 7.8%
Australia/Pacific $ 153 $ 45 $ 109 3.7% 2.0% 5.6%
      Australia $ 137 $ 38 $ 99 3.3% 1.7% 5.1%

Thursday, November 5, 2015

China's One-child Policy: redundant and now go

Mike Smitka, Prof of Economics, Washington and Lee

Here I discuss the end of China's one-child policy. In my weekly WREL economics segment I also discussed , the auto industry in China, Yellen and the Donald and interest rates, and gave an update on the United Way of Rockbridge. I provide only a paragraph one each at the end.

This past week China announced the end of its policy that limited most families to one child. Now it never was a strict limit, rural residents could have a second child if the first was a girl, and minorities were exempt altogether. But when it was first implemented in 1980, most women still wanted more than the permitted number, and the policy was draconian, indeed horrific, with women dragged away to undergo forced abortions and (slightly less horrific) forced sterilizations.

In the background, the formation of the People's Republic in October 1949 brought an end to a century of almost continual civil war, including the Taiping Rebellion in the 1860s that led to perhaps 25 million deaths. The impact of the Japanese occupation in World War II was also horrific, in large part because it disrupted agriculture in the most productive parts of the country. So with peace after 1950, couples were both willing and able to raise children, and population growth rose. Fearing nuclear war with the Soviet Union, in the 1960s Chairman Mao actually encouraged large families. The problem was food. By the 1970s, the industrialization policies under Mao led to a sharp rise in fertilizer output, and pesticides and herbicides too, as the chemical industries expanded. Enter the Green Revolution, with "dwarf" varieties of rice and wheat that wouldn't grow tall and flop over when fertilizer was used. So in the 1970s the population ate a lot better, but the new leadership feared that was a one-time increase that would be eaten up over time. Hence fertility restrictions.

        In fact agricultural productivity kept improving. Today the public health challenge isn't dealing with undernourished children, it's dealing with the consequence of too much food, obesity and diabetes. Now environmental issues are affecting grain yields, but famine is no longer a realistic worry. Oh, and while the popular view attributes agricultural improvement to the breakup of the communes and the restoration of family farming, yields began growing well in advance of such institutional changes. It's not that the "Household Responsibility System" that gave land to the tillers didn't matter. But it mattered because it allowed families to send their children to the cities to work, and to shift their attentions from growing corn, wheat and rice to vegetables, pigs and fish farming.

But was this policy effective? In the early 1980s it certainly was, and it remains wildly unpopular today. Ending it, though, is now irrelevant, because on average women don't want large families. Most of the population now lives in cities – those who remain in the countryside tend to be old – so children are no longer useful as farm labor. Plus farmers now have better tools, herbicides take care of weeding and threshers handle the harvest. Compulsory education also means families have to support children for a longer period than in the past, and if parents want their children to do well they need more than the minimum education. With the growth of financial markets, it's now possible for families to save for their old age by putting money in the bank – Chinese save a lot, 25% or more of income. Even in the face financial scams and pyramid schemes, that's more reliable than depending on a single child who might turn out to be a prodigal daughter who only looks after her in-laws. Of course many couples want children, the social and biological impulse remains. But overall the benefits of having children are lower.

Meanwhile, the cost of children has risen. Women not only work off-farm jobs, but over time the past 25 years those jobs paid better and better wages. Having children means lost income, unlike when a wife could combine farmwork and child rearing. Furthermore, education is universally viewed as important. Even though compulsory education is now free, that's not enough to do well, and education doesn't come cheap, at least relative to incomes. Likewise healthcare is more costly, and with higher incomes overall, kids want fashionable clothes, not hand-me-downs. So the costs of children are up, indeed up a lot.

So with lower benefits and higher costs, Chinese families don't want two kids. This isn't just hypothetical. Fertility was falling sharply even before 1980, and was below the magic "two" number in urban areas as early as 1970. Demographers have examined the behavior of individuals for whom the policy wasn't binding, who were allowed to have more children. Many don't, the evidence is pretty clear that on average families want fewer than two children. So from the perspective of population growth, ending the one-child policy is a cheap shot. But there are plenty of couples who want two or more children, and for them this is a really good change, even if for China as a whole the policy no longer matters.

Now with smaller family sizes from 1980, the number of young women today has also fallen. Meanwhile, longevity has increased and with better nutrition and access to clean (bottled!) water that is set to continue. The biggest age bracket in the population are those in their late 40s. Already the working age population is falling, and by the early 2020s the overall population in China will be in decline even as the number of elderly is rising. That's today's worry, that the number of workers per retiree is set to fall sharply.

The policy change is however too late to make a difference. Even if today's young women start popping babies at double the rate of their mothers, there just aren't enough young women for that to have a big impact. It would be only when those new babies in turn become mothers (and their brothers workers) that the ratio of 20-64 year olds to those 65 and above will start improving. I've run simulations: that won't happen until 2063, a full half-century from now.

For my simulations, I used the age distribution of women in 2013 (see the population pyramid above), the age-specific fertility rate for women for 2013 [both from the China Statistical Yearbook 2014, and mortality from the WHO life tables, which matters for the old-age portion of the projections. I held fertility for young women (20-24) at a 50% increase, given the ongoing increase in education and work, but let that for the next two brackets (age 25-29 and age 30-34) double. I did not put in the likely decrease in mortality at older ages. Note that a 50% change in fertility in the space of 5 years represents a very fast pace of social change; doubling is even less realistic. My intent however is not to be realistic, but to ask how big and how soon the impact would be IF women start popping babies left and right. The asnwer: not much. There are a few more young Chinese in 2043, but a lot more old Chinese. Only in 2063 does the number of young Chinese rise enough to offset the aging of the population, and then it's not by a lot.
Age 20-64 pop to Age 65+ pop

Addenda #1: Yellen in Congressional testimony noted that the time for interest rate hikes might be at hand. She has only 1 vote, and others have indicated they don't favor raising rates this year. Still, as Chairman of the Board of Governors her voice matters a lot. Accordingly, short-term interest rates are up, one-year bonds from 0.23% to 0.40% and 2-year bonds from 0.6% to 0.84%. Since current rates are zero, the interest rate next year has to jump a lot to give those yields, So the prediction incorporated into bond prices is for 1.25% rates for one-year bonds in 2017 and 1.75% in 2018."

Meanwhile the Donald lambasted Yellen for holding rates down. Why? – because it makes Obama look better. We probably ought not take too seriously what the Donald says, with his penchant for hyperbole and for saying what he thinks his audience wants to hear. As a businessman he surely knows that higher rates hit construction harder than most sectors of the economy, and that means eliminating a lot of non-elite jobs. Doesn't he think that a president ought to care about average Americans? Cynically, higher rates do boost incomes for the ultra-rich, and I'm sure he hears from his billionaire friends about the harm lower rates are wreaking. But I frankly doubt Trump is being that calculating when he steps in front of a CNN camera.

Addenda #2: Our moderator Jim Bresnahan asked why we haven't seen Chinese cars in the US. Now the industry there is the biggest in the world. It's sophisticated, to: the leading firm (given VW's problems) is GM. The head of GM's operations is Chinese, and with 2,000 engineers in Shanghai the R&D is increasingly done there. But until this year the leading firms in the market couldn't build cars fast enough. Profits were higher in China than elsewhere, too. So why export? We'll see that change, with Honda and GM and others shipping cars overseas. But the auto industry is global in its reach, and most cars are built where there's sold for reasons of cost and market fit. Furthermore, costs in China aren't low, the computer chips and software and paint and specialized steel for auto bodies cost the same everywhere. We won't see huge numbers of cars washing up on our shores from the other side of the Pacific.

Addenda #3: From this year the United Way of Rockbridge supports the Natural Bridge Food Pantry. For many years it operated quietly, with one local resident supporting them financially. He's passed away, so they are working to expand their funding base. As we go into winter, when many older residents of the Rockbridge area face the choice of medicine and food versus heat, the food pantry provides a crucial safety net. For more information, or to click to donate, go to the UWR web site at uwrockbridge.org.

Wednesday, October 28, 2015

Walmart overseas: why so poor a performance?

Mike Smitka

Let me follow up on my previous post on Walmart's strategic challenges. There I noted that Walmart has been singularly unsuccessful in many of the markets it tried to enter. The "why" is my focus below.

Within economics and management there's a strand of research called "population ecology," spearheaded by the work of Glenn Carroll and Michael Hannan. They begin with a simple model: that early in its history an industry is populated by numerous firms with varying business strategies and management structures and operational setups. Some of these are ill suited to the competitive environment and disappear; others are a better fit and grow. These don't always scale. In my region of the US barbecue restaurants take a standardized form, a standard business model has evolved, but franchising doesn't seem to work.

I contend that the same is true for retail. In Japan at least 4 different national firms tried variations of the large-format, low-margin, high-volume retail store, and there are likely others that did so but failed before reaching a scale where I learned of them. (I know of a couple that appear to fit the mold but are limited to one or another region.) For example, while it claims a century-plus history, today's Jusco chain began in rural Japan, and expanded based on rural stores at the intersection of major roads. Even better, they were often able to do so outside of then-existing city boundaries, and so either were not regulated under the [now defunct] Large Store Law, or had only a small number of retailers on a town's main street who had to acquiesce to their setting up shop. I lived briefly in rural Niigata Prefecture, where there was a store as part of a mall outside of Muikamachi, at the intersection of two main roads and just off an expressway exit. The flower shop, the fruit shop, a local liquor store and others either found space inside the main Jusco building, or in a row of shops just across the parking lot. All of this was tied to regional logistics centers and the growth of national and not just regional wholesalers. They could also direct source clothing from overseas; most of what was on their racks carried labels of origin from elsewhere in Asia. Having previously lived in urban Japan in a house situated on a street of mom-and-pop retailers [that on one side was run by a mom, on the other by a dad], I was used to shopping daily for small quantities, and of facing that day's selection of fish and vegetables, a function of what the owner chose on their last trip to a local wholesale market or the current sale from distributor from whom they bought most of their clothing. These stores were friendly, but not inexpensive, and they kept short hours; they were often long closed by the time I got home. The alternative was the department store at a major train nexus, a possible stop on the way home. But there was no way to take a full shopping bag on a train during the Tokyo rush hour... So it was mind-blowing to drive to a mall in Japan, park my rental car and get out to find a huge store with copious variety and low prices.

Jusco and its rival Ito-Yokado chain filled the Walmart niche. They were intimately linked to the rise of new wholesale channels, they focused on markets where they faced no competition and lower capital costs, and from the beginning they built their businesses around modern inventory control systems and an ability to manage part-time workers to offer longer hours of operation. A third chain, Daiei, originated in urban areas. While it was for a while wildly successful, its focus on prime commuter-rail-based shopping areas left it with stores smaller in size and irregular in format – their layout and location were subject to the availability of a tract of land or an empty building of suitable size. In the process of expanding they accumulated a lot of debt, and ultimately went through a forced restructuring that left them under the control of the holding company of the Aeon chain, the parent to Jusco.

In short, by the time Walmart turned its attention to Japan, incumbent Japanese firms already occupied their strategic space: large-format rural "hypermarkets" open long hours that were in locations convenient for car-based shopping, buttressed by a strong position at the wholesale end, supported by management information systems and dedicated warehousing and logistics that gave them greater control over their sourcing and control of their inventory. While Walmart had a far bigger purchasing budget on a global basis, only some of what they'd order for US customers was appropriate to Japan, and they didn't have dedicated channels from their sources in China and elsewhere to store shelves in Osaka or Tokyo. Nor did they have sourcing for vegetables and other goods with short shelf lives. So while they did purchase the Seiyu retail chain, it was an older one with urban origins and a weak presence in the new car-based suburbs of Tokyo, and virtually no rural footprint. The store local to me in Inage, Chiba was a train stop (or 7 minute bike ride) away, but was small, and on a side street adjacent to a train station with room for only 4 cars to park. Yes, its price for peanut butter was great, but its vegetables were not, and the layout was impossible, I had to negotiate narrow stairs into a dingy basement. In contrast I could ride my bike in a different direction to an Aeon store that was bright, airy and had an adjacent food court and several other restaurants. It was also open both earlier and later, and off of two major roads with an attached multistory parking deck. And in another direction was a full shopping mall, a full kilometer in length on a major road, with parking for 2,000 cars and two hypermarkets facing each other. [Apparently when the developer told these stores they'd be "an anchor store" they heard they'd be "the anchor store" – great for shoppers, not so good for the stores!]

A final point: it wasn't just Walmart that tried and failed, but also the French giant Carrefour. They were more careful than Walmart, with better locations and larger footprints and parking garages for their stores. They still faced an uphill battle. Unfortunately they chose to advertise themselves as a French retailer. Japanese shoppers went in expecting fashionable clothes and accessories, unusual foods and a good selection of wine. What they found was a Walmart-like experience. By the time Carrefour realized its branding disconnect, it was too late.

To sum, 30 years ago "pre-modern" retail in Japan – and in Germany and France and the UK – was populated by a lot of entrepreneurial players. A few of them hit on the Walmart strategy, and of those some were analytic enough to realize why they were doing well, and grow. Carrefour and Tesco and Ito-Yokado and Metro and their peers have their strengths and weaknesses relative to Walmart. In the end, though, they're sufficiently strong and cover enough of their domestic markets to close off cross-border entry to the likes of Walmart. Unlike in their formative years, international expansion offers no low-hanging fruit ripe for outsiders to pick, be they a Walmart or a Kaufmarkt.

So what is it about Trader Joe's? They [and their sister operation Aldi] are to my knowledge the only foreign retailers in the grocery store segment in the US. Has TJ been able to cross other retail borders?

Thursday, October 22, 2015

The Economics of Strategy: Walmart's Senescense

Michael Smitka

Washington and Lee University

October 22, 2015 WREL Update

Today there's no "news" – nothing in the latest economic data is (to me) surprising – so instead I'll speak on topics tied to my teaching, and close with a brief note on United Way of Rockbridge. This term I'm teaching three very different classes, a senior "capstone" focusing on modern macroeconomics, a course on China's economy, and the other on the economics of business strategy. On air I spoke on two topics. One was Walmart as an exemplar of strategy. Yesterday I also "taught" a paper of Milton Friedman's, and so I started a multiweek series examining the evolution of "rules versus discretion" in policymaking. But for this blog post I'll limit myself to Walmart.

...Walmart is left as a bottom-feeder…

First, Walmart's strategy was to use economies of scale to gain a competitive advantage in its initial market, rural America. As long-time residents of the Rockbridge area will recall, Lexington used to have a hardware store on a prime piece of Main Street. There's still a building supply business a couple blocks away, back near W&L's Lenfest Center, across from where the railway station was located, back in the days when every town had train service. Buena Vista still has a couple hardware stores, and in Lexington there's one off of Nelson Street, behind Wendy's and Frank's Pizza (which I like), and the Rockbridge Farmer's Coop at the south end of town.

As hinted at, the geography of hardware stores, and the local dry goods store and so on, dated back to when roads weren't particularly good and many people lacked cars. Such stores had a local monopoly albeit in a market of limited size; they didn't discount. Their focus on a local market meant they carried a restricted range of goods, so you might have to order what you needed. Their competition was not internet sales, but the Sears, Roebuck and Company catalog, which provided parcel post delivery that might prove cheaper than your local store, and offered a huge array of products that a small town retailer couldn't begin to touch. (Aside: only later did Sears move to brick and mortar – will history repeat, with Amazon stores in every town?)

Walmart took advantage of better roads and pervasive car ownership to set up larger stores with greater variety, and to use scale to allow it to offer these at a lower margin. It could staff lightly, by locating outside of towns it could manage its real estate costs while providing better parking and road access, and it chose to offer hours far longer than those of any downtown retailer. Call these economies of scale plus the ability to push against the operating limitations of small town retailing. In addition Walmart offered greater convenience by carrying in one location what would in general have been spread across several stores – basic clothing, hardware, and other "hard" goods. Eventually this expanded to include a pharmacy, groceries (with the launch of Supercenters in 1988) and a full line of consumer electronics. No single department could match those of a specialty retailer, and you couldn't get the service provided by the local hardware, which could advise on tools and materials. But a large proportion of sales volume was of common items where customers didn't need (and maybe didn't want) such service. And there was the convenience: quick in and out for three items, which might have required you to visit three stores downtown during the busiest part of your day. This we could term economies of scope.

Walmart pushed this strategy for their first couple decades, gradually expanding across rural America while avoiding suburban locations. (You still can't find Walmart in urban locations – they have zero stores in Detroit, zero stores in New York City.) They faced no competitors. K-Mart, for example, began as the Kresge Five-and-Dime chain, located in big cities, and gradually expanded to the suburbs. They never managed that transition well, the operational efficiencies never matched those of Walmart. Sears set up stores in urban areas, and then expanded to malls, but was unable to leverage its catalog strengths to create a distinctive bricks-and-mortar strategy in rural areas.

Walmart also offered operational efficiency. In the retail world, their management information system was matched only by that of 7/11 in Japan. When you went to Walmart, you could find what wanted; they did not stock out. In contrast, with K-Mart you could never be sure they'd actually have what you wanted on their shelves. Their stores were smaller, carried a narrower range and otherwise were not up to their competition, and in particular to Walmart.

Once Walmart had filled rural America, however, they started losing steam. While they were better than K-Mart, they did face competition. Real estate was more expensive, and urban consumers were more prosperous and had varied tastes. Walmart couldn't tap the full breadth of the population, and instead had to bottom-feed. In addition, expansion slowed.

...senescence will be followed by debility...

Meanwhile they'd become a mature big business, with a headquarters staffed by professionals in finance, marketing and other functions – that is, not staffed by people with hands sullied from initially working retail. They brought new ideas and technicals skills, but not necessary better ideas, or the ability to understand how their expertise contributed to the overall position of Walmart. In short, they could optimize their narrow function while losing sight of what the business was about.

That structure in general meant more rules and regulations, and less delegation of authority. Our local store can't readily adjust staffing when local conditions give them busy periods other than those built into regional and national operating plans. Ordering is at the regional level; garden supplies come in line with the growing season in Richmond and Virginia Beach, which means inventory arrives too early in the season to plant. All of this works to the advantage of smaller retailers more attuned to our area, or focused retailers (Lowes).

Then there's the stock market growth imperative, that each quarter ought to have higher profits than the preceding one. Why management should respond to this is not so clear. Some comes from the perverse incentives that pay and bonuses are more closely linked to scale than to profit margins. Put simply, it's better in pay and prestige to be an exec in a big business than a medium-sized one. At some point, though, Walmart scaled out, and additional expansion leads nowhere, or nowhere good. Walmart tried the international side, and lost billions in Germany, Korea and Japan, among others. (While they exited from Germany, they maintain ownership of the Seiyu chain in Japan, most of whose stores are small and in poor locations for today's suburban, car-driving population.) My sense is that they do well only in Mexico and secondarily in Canada, due to organic expansion. In other countries they tried the acquisition route, and so were unable to leverage such strengths as their US experience might afford. We'll see how they do in China...

Now if organic expansion is slow – adding a store doesn't add a visible amount to sales – and the merger and acquisition route has hit a dead end, then the only route remaining is to cut costs. When your business model was based from the start on low costs, that requires cutting services. Staffing means shelves don't get restocked, and checkout lines can be unbearably long. Middle management is cheapened, without authority you don't have to spend time on hiring and training good people, or encouraging those you have to develop in their jobs. All of this rebounds into a poorer customer experience.

And I see no way out. There's no room for expansion geographically. Higher-margin goods face the rise of online retail. Specialty chains and Target pull away the more desirable customers, aided and abetted by the shopping experience Walmart provides. So Walmart is left as a bottom-feeder. While they could spend more, that would hurt profits for a period of years, and might not be well-managed if those in Bentonville want to remain as decision makers. While I'm not aware of any retail concept that might eat into Walmart's core rural markets, I'm afraid that the management focus on growing profits means they will be neglected, with a cumulative impact on their profitability. My expectation is that senescence will be followed by debility.



For 2016 United Way of Rockbridge will provide grants for 22 projects to be undertaken by 18 community-oriented non-profits. One focus are critical needs such as food, shelter, and assistance to the disabled. Our other focus is on having a positive long-run impact on our community through improving the preparation of children for kindergarten and elementary school. Note that to be useful to these groups, who have to draw up their budgets and operating plans, we have to make our funding decisions well in advance of when we actually hand out money. So any amounts I mention are for CY2016.

Each week I'm speaking briefly about one of these organizations; today it's Campus Kitchen at Washington and Lee. They began in 2008, and work with the dining services of Washington and Lee, Virginia Military Institute, Carilion Stonewall-Jackson Hospital, and Walmart to see that food does not go to waste. To date they've repurposed 200 tons of food to provide almost a quarter million meals to families in the Rockbridge area. During the course of the year, they'll typically get over 300 individuals volunteering to collect and repackage food and for certain groups whom they serve, to cook meals.

This coming year UWR will fund two projects. One is $2,000 for their "backpack" program in cooperation with local schools, in which they send groceries home with children whose families face challenges in putting food on the table. The second project is $2,000 for their mobile food pantry, which provides food to outlying areas of the county that are not near any of the existing food pantries.

As with other projects, we evaluate their paper application, and then arrange for two reviewers from the community – volunteers including but not limited to members of the United Way board -- to visit each group. Unfortunately we can seldom provide groups with all the money they request; we instead strive to allocate to generate a good impact for the money we can allocate.

Later in the fall I'll have information on the progress of our 2015-16 Annual Campaign, which seeks to raise $250,000, slightly more than we managed last year. Please consider helping us toards our goal of "Building a Caring Community". Some of you will receive appeals through your employer. Even a dollar per pay period is meaningful – the groups we support leverage volunteers and other resources, so that even seemingly small amounts make a difference to someone. More generally, please visit our web site. You can use our "Donate Now" function to make a contribution with a credit or debit card. It's secure – we never see your card number, and the data isn't stored. We also provide details on our grants, our finances and Board. And our address, in case you'd like to contribute by check...

Thursday, October 15, 2015

TPP and Inflation: Weekly News

Mike Smitka, Washington and Lee University

First, Wednesday Oct 14 and Thursday Oct 15 (today, but after taping my radio segment) saw the release of the latest inflation data. Neither suggests a rise in inflation; if anything, they point in the opposite direction and reinforce the sense that growth is not speeding up, and may even be slowing. Thus the Monday (Oct 12) speech by Federal Reserve Board Governor Lael Brainard suggesting that the Fed should hold off on interest rate increases until next year. (She is, of course, a voting member of the FOMC, which sets short-term interest rates.)

Thursday, October 8, 2015

Employment and Dynamic Scoring

Mike Smitka

Economics, Washington and Lee University

Here are quick notes on my WREL Lexington AM 1450 radio show of October 8, 2015. There's the employment update. I also did the calculations for last week's topic, whether tax cuts could boost revenues, and add those graphs. Plus a United Way of Rockbridge update.

The latest (un)employment data for September 2015 were released at 8:30 am sharp on Friday morning. The numbers were discouraging, lower than the growth of the potential workforce. This is in line with a gradual decline since the beginning of the year. Consistent with that, interest rates remain low, under 3% for 30-year bonds and 1% for 3-year bonds. Clearly bond markets don't anticipate rapid growth in the next year or so, nor do they see any increase in inflation down the road.

Thursday, October 1, 2015

Can tax cuts pay for themselves?

The assorted Republican hopefuls are now trotting out pieces of policy platforms. Most of them aren't very good working with media. Then there's Trump. If you have to watch a would-be politician speaking nonsense, then he's the clear winner, so untroubled by consistency and logic as to be fun. So while Jim Bresnahan, the host of my radio show on WREL Lexington VA (at 1450 AM), asked me to comment on Trump. Well, I'm not willing to read much into any of the Republican policy pronouncements at this point. Those will flip: we know that what appeals to Republican primary voters does not work with the general electorate. Trump will do well if he reaches that point, as no one expects him to be consistent.

...the mantra that tax cuts ... pay for themselves ... but repetition doesn't mean it's true

That said, the biggest dollar component of Trump's proposals – as with those of Jeb Bush – consists of tax cuts for the rich. Yes, there's Trump's headline proposal of zero taxes below a certain income level, but those people already pay little or no income tax. Yes, certain deductions for the wealthy will be removed. At the same time, he's put forward a lot of arcane-sounding items that in fact represent very large tax cuts for the wealthy. That shouldn't be a surprise: he makes no bones about being a billionaire, and when it comes to taxes he knows how to butter his own bread. In any case, he's not shy about chanting the one mantra all Republicans share: cut taxes. Remember: presidential candidates can propose, but it's the actual elected Congress that legislates.

Thursday, September 24, 2015

Econ Update: WREL Lexington VA

by Mike Smitka, Economics Dept, Washington and Lee University

Sept 17 (here) and Sept 24 (below)

The Fed – specifically the Federal Open Market Committee, comprised of the 12 presidents of the regional Federal Reserve banks and the five members of the Board of Governors – meet today, and will issue their press release at 2 pm. Even if they bump rates [they did not], "bump" is the operative term as any increase would be from 0% to 0.25% or 25 bp (basis points). Now 6 month rates have built into them a bump up to 0.5% by March 2016. In the past 12 months two year rates have really climbed – to 0.75%. [Laugh: sarcasm.] Keep going: 5 year rates, car loan territory, are at 1.5%. You have to get to 30 yrs (mortgage rate territory) to be above 3.0%. But those looking at long-term bonds don't have much to gain (or lose) by what the Fed announces tomorrow – they anticipate rates gradually rising, but over 30 years it matters little whether it occurs today or early next year. So don't expect those to move much, whichever way the FOMC votes. Remember, too, that rates jump around every day for a wide variety of reasons – so far this year 10 year and 30 year rates have averaged a bump up or down of 5 bp (.05 percentage points) each business day.

Monday, September 21, 2015

Electric Cars: Renault's the Leader, not Tesla!

by Mike Smitka
During the GERPISA auto conference in Paris in June I stayed in a hotel with a row of electric vehicles parked out front. The "Bluecar" wasn't fancy, but they were used: at times all slots were full, at others none were parked there. I don't know whether the company involved, Autolib', is doing well. But the point is that in parts of Europe a sizable part of the population sees electric cars, day-in and day-out. In Norway, they're 17% of the cars on the road, despite the challenge that batteries face in a low ambient temperature environment.
Within the electric car market the clear leader is the Renault-Nissan alliance, not Tesla. On a worldwide basis they now have over 250,000 vehicles on the road. What is most interesting are the components of Renault's business model.
First, Renault is launching multiple vehicles. Their best seller is the ZOE, made on the same assembly line as the Clio. In other words, they are not needing to design a whole new vehicle, and are gradually leveraging their multiple platforms. (They also have the Kangoo light commercial van.) With this experience in hand they are now ready to launch additional electric vehicles in short order, of course subject to demand.

Thursday, September 10, 2015

Reconsidering China: An Essay

by James Vena | Jun 3, 2014 | Essays |

posted by David Ruggles

Co-blogger Mike Smitka (住老师 in his China class) comments at the end.
He's also edited out typos, filled in dates and so on using [italics].

In light of recent events some might be interested in what this China expert had to say over a year ago. He speaks as someone who has done business there for decades. Ruggles

Have China’s “growing pains” manifested into something a bit more troubling relative to its growth, internally and externally?

My first visits to Asia & China (on business) were in the early-mid 1980’s and things were obviously much different back then. Aside from being much more socially oppressed and isolated, the most glaring difference was in its local economy, as all business was nationalized.

Tuesday, September 8, 2015

Generational War: Do Older Worker Squeeze Today's Young Out of Jobs? Weekly WREL Radio Show

Click on Figures to enlarge!
Figure 1

Mike Smitka

I generally focus on the medium-run picture of the US labor market, the recovery process from the Great Recession. (Here is an example from this blog, replete with graphs.) As noted last week, my analysis shows we're on track to reach "normalcy" in 2018, assuming various headwinds don't slow us down. That's also the bottom line of the latest July 2015 IMF Article IV review of the US economy: we still have lots of excess capacity, in this case people who would like a full-time job but either have stopped looking on a regular basis (and hence are not counted as "unemployed") or are on involuntary short hours.

Thursday, August 27, 2015

Thursday morning radio: the economy on WREL

Mike Smitka

Well, I've gone through another week without a post on the auto industry, but Thursday has come and my WREL Lexington (VA) radio segment with it. Here's my latest.

First, our host Jim Bresnahan asks about the gyrations of global stock markets. China? – attributing a reason to what happens in the stock market is hard. As an economist I don't pay attention to the stock market, because how it does has no link to the economy in the short run, and little or no impact on the economy. Most trading now is computer to computer, operating faster than the blink of an eye, and opaque in details. So why things move in a particular direction, and how much, no one can explain. Now the reporter on CNN has to give a report every hour, and we as humans like things to have causes, and they'll attribute the up or down to something. So in the short run the market is random, and betting on it is a crap shoot, one where the house – Wall Street – wins. You have to pay a fee, and the computers can see your trade before it gets executed and (legally – there's no regulation) bet against you. As to the US, we're seen a strong rise in the market the past few years have seen; the US economy has after all been growing, and corporate profits are up. Stock prices ought to reflect that, but the link is loose so things will go up and down. Don't panic, invest for that long-run link and don't let yourself try to beat the house in the short run.

Sunday, August 23, 2015

Low oil prices: not a Saudi conspiracy

Mike Smitka

Saudi Arabia is not what it used to be. Their petroleum and other liquids production in 2014, at 11.6 million barrels per day [mbd], is only about 1 mbd above what it was in 1981 (and is just shy of the peak over the period 1980-2013). But their market share is distinctly lower, falling from 17% (of global output of 60.6 mbd) to under 13% (of 93.0 mbd). That limits their pricing power.


Elasticities tell the story. The short-term price elasticity of demand is about -0.2, the medium-term one of course is more elastic at -0.5 or greater. [In most energy markets the income elasticity of demand is roughly 1, though recent work finds it is less in the OECD.] So if the Saudis cut output by 10%, global output falls about 1%. That means prices rise 5%. But with the quantity they sell down 10% and prices up only 5%, that means their income falls by 5%. With a population burgeoning in numbers and expectations, and as the ideological seat of the Wahhabi sect that fuels radical Islam – but so far has not seen cause to bite the Saudi hand that feeds them – well, the kingdom can't afford a large income hit. Oh, and they're consuming what to me is a surprising amount of oil.

One other bit of economic logic reinforces this argument: when interest rates are low and prices are low, it makes sense to leave oil in the ground rather than to pump and sell it. Selling turns oil into bank deposits, and those earn nothing. Leaving oil in the ground also provides the option to benefit from future price rises [though the option loses its value if prices fall further]. So do you want to store your oil in the ground, or store your oil in the bank? (Those with finance acumen can do the corresponding net present value calculation, and maybe even put a valuation on the option.) For the Saudis, pumping oil makes sense only if their focus is cash flow rather than maximizing national income.

Saturday, August 22, 2015

Thursday Update (albeit posting late)

Mike Smitka

I do a weekly radio segment on the economy on WREL, the local Lexington Virgina AM radio station. Here are my notes from the Aug 20th show. These are not necessarily the order in which I presented them, and I avoid numbers when I can - radio is not the medium for conveying data – but I like to have them in front of me.

Employment: I won't talk details, but job growth continued to trend somewhat above population growth, with no sign of acceleration. Projecting out, as I've mentioned periodically for the past two years, we won't return to normal levels of employment until 2017 and more likely 2018. I'll return to that topic later in the fall.
New Residential Construction: The latest data were out Tuesday [Aug 18]. The showed slow improvement, especially for multifamily units, the latter something we've seen all this year. For all the feel-good headlines, residential construction is still only level of January 1992 when the population was 20% smaller [321 mil today vs 255 mil then]. Corrected for population growth, the adjusted rate is still below any point of the last 60 years – we're at about the 1990 trough, but still below the level of the early 1980s housing bust. [If numbers are bad on radio, graphs are worse, but I can include here!] The recent peak was in January 2006. Today we're at half that level [49%] in per capita terms. Times are good only if you don't remember what things were like a decade ago, before the Greenspan-Bush bubble burst: relative to April 2009, well, housing starts are 2.4x that level! The bottom line is that housing continues to be a big drag on the economy.

Tuesday, August 18, 2015

China: yuan depreciation or dollar appreciation?

by Mike Smitka, Economics, Washington and Lee University

forex BIS

The coverage I've read focuses, implicitly or explicitly, on the RMB [yuan 元] / US$ rate, that is, the bilateral context. (An exception is the graph in the latest Economist article, The Devaluation of the Yuan: The Battle of Midpoint, 15 Aug 2015, 63). Their focus is however capital flows, which as I've blogged about before in "China's Pending Depreciation" [on this blog] and "Foreign Exchange Controls" [on my Econ 274 "China's Economy" class blog] will lead to a fall in the value of the yuan – exactly what's happened.

Ho, hum: the 3% change still leaves the yuan stronger than in September 2008