My comments on Bad Company: The Cult of the CEO by Gideon Haigh have just been published in Quarterly Essay along with a response by Haigh. He argues that a focus on managerialism as an expression of the interests of the managerial class/caste as a whole is out of date because there’s now a cleavage interests between top managers and ‘middle managers’.

This got me thinking that although the phrase ‘middle managers’ is used a lot, I don’t know what it really means. In the large organisations I’ve worked in, people could be classified into three main groups. There are the people who actually do the work, the managers who tell people what to do and a group in-between, consisting of skilled and experienced workers who supervise others.

Sometimes the dividing lines are fairly sharp and sometimes not, but there’s usually a pretty clear line separating the managers proper from everybody else. In the public service, for example, the dividing line is generally provided by the boundary between the Senior Executive Service and what used to be called the Third Division.

What isn’t clear to me is whether the term ‘middle managers’ applies to the intermediate group I’ve described or (as Haigh implies) to managers other than CEOs and those in their immediate circle.

In debating things like managerialism, the two interpretations have radically different implications. I would certainly agree that the last decade has been a pretty miserable one for people in my worker-supervisor category. On the other hand, as David Gordon pointed out in Fat and Mean the idea that the corporate sector moved to slimmed-down management and flat organizations in the 1990s is a myth. Gordon was writing in 1996, but the dotcom boom was characterized by even more proliferation of management to the point where some firms had more vice-presidents than programmers.

Kieran Healy responds to my limited defence of existence theorems with the following challenge to economists

As John says, existence theorems are the negative form of impossibility theorems. The classic existence theorems in economics ÷ such as those for general equilibrium , also due to Kenneth Arrow, along with Gerard Debreu ÷ illustrate the point neatly. We begin with the result . Roughly speaking, Arrow and Debreu wanted to show that supply and demand could be in balance in all markets at once. We then move backward to the assumptions necessary to make possible such a result. These include (1) All individuals are perfectly rational, (2) All trades take place simultaneously and instantaneously, (3) There is perfect information about all markets for all products in all conditions both now and at any point in the future, (4) Money does not exist. With these (and other) assumptions in place, the existence of a general equilibrium can be proved. The proof is striking because the initial assumptions are so implausible, even absurd, but they must all be satisfied together in order for the desirable result to be possible. And so we give up our quest for what we now recognise is a chimera ÷ the idea that our world could ever contain economies capable of general equilibrium.

This attempt at a reductio ad absurdam doesn’t work properly, though, because Kieran is treating the sufficient conditions found by Arrow and Debreu as if they were necessary conditions. A lot of effort (too much, McCloskey would say) has gone into demonstrating that a general equilibrium can exist under weaker conditions than

I’ll grossly oversimplify and make the claim that an existence result for competitive general equilibrium like that of Arrow and Debreu will hold even if all of the conditions mentioned by Kieran are violated, provided only that technology sets are ultimately convex (that is, provided economies of scale run out in the end). Of course, even this condition is implausible and suggests that some activities where economies of scale are unbounded (for example, the dissemination of knowledge) must be excluded. But (if you accept my claim that convexity is the crucial necessary condition) at least the theorem is telling us where to look for problems.

The other main results proved by Arrow and Debreu are the First and Second Welfare theorems showing that
(1) a competitive general equilibrium is Pareto-optimal [you can’t make anyone better off without making someone else worse off]
(2) any Pareto-optimal outcome is the competitive equilibrium arising from some initial allocation of wealth and other endowments
For these theorems, the conditions found by Arrow and Debreu are, for all practical purposes, necessary and sufficient. The Big Argument in mainstream economics is whether the differences between the Arrow-Debreu conditions and the real world (often called, in a rather question-begging fashion, “imperfections”) are large enough to justify extensive intervention by governments that are, themselves, necessarily imperfect.

This piece by Paul Krugman covers a range of interesting issues. One is the attempt by US Treasury Secretary John Snow to push China into floating or revaluing (upwards) the yuan. Similar pressure is being applied to other Asian governments whose central banks have been resisting appreciation of their currencies and buying US dollars. Obviously if the yuan and yen go up, the dollar goes down. Despite this doublespeak from the US Treasury, the Snow initiative marks the abandonment of the misconceived strong dollar policy, which has helped to drive a 20 per cent reduction in US manufacturing employment over the past three years (for a detailed PDF file on employment and productivity, go here). But as Krugman implies, any serious adjustment of the dollar relative to Asian currencies will necessitate a significant rise in US interest rates.

The other point that comes through the whole piece is how rapidly the rhetoric of US hyperpower is becoming obsolete. The US has an impressive, and unique, capacity to deliver overwhelming military force anywhere in the world. But in economic terms, it produces about 21 per cent of world output and consumes about 22 per cent. The result, as Mr Micawber said is misery (or, if things are managed very well, unaccustomed austerity).

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I was looking at national savings figures for the United States when the Australian National Accounts came out yesterday, which is why I belatedly noticed the negative households savings figure.

The US has also experienced a big decline in household savings, but they remain positive at around 3 per cent of GDP. Retained corporate earnings are between 0 and 2 per cent of GDP depending on how you measure depreciation. These small positive contributions are wiped out by the government budget deficit (around 5 per cent for the Federal government – the states are also in deficit, but I don’t have a number yet). More on all this is available from the Bureau of Economic Analysis.

One interpretation of all this is that people from outside the US (and, for that matter) Australia, are eager to buy US assets, and Americans are simply cashing in the consumption benefits. I don’t agree. A steady decline in household savings seems to be occurring wherever financial markets have been liberalised. At the moment, the whole system is being kept in balance by massive purchases of US dollars by Asian central banks, but this can’t continue indefinitely.

It’s therefore time to invoke Stein’s Law – if a process can’t continue indefinitely, it won’t. There seems no prospect of an exogenous shift in the behavior of households or of a return to fiscal probity by the US government. I conclude that a return to equilibrium must involve an increase in real and nominal interest rates, probably facilitated by inflation. Even allowing for an inflationary cushion, this will not be a pleasant process for heavily indebted Australian households. American householders are protected by the structure of mortgage contracts, which allows them to lock in low rates, but the costs will be borne elsewhere in the financial system.

Apart from showing near-zero GDP growth for the quarter, the latest national accounts released today by the Australian Bureau of Statistics include the startling (to me, anyway) information that Australia now has negative household savings. I’ve reproduced the relevant bit of the release below.

Household saving ratio

In both trend and seasonally adjusted terms the household saving ratio was negative in the June quarter 2003 implying that household consumption was greater than household disposable income. In trend terms the ratio was -1.2% in the June quarter and in seasonally adjusted terms it was -1.3%. The deterioration in the saving ratio in recent quarters has been driven by both a slow down in the rate of growth of disposable income and the continued strength of household consumption expenditure. The movement in disposable income has been affected by the very weak income results for the farm sector arising from the drought. The impact occurs because the household sector defined in the national accounts includes unincorporated businesses and therefore includes most farm businesses. Consequently, most farm income (included as a significant component of ‘gross mixed income’ ) is also part of total household income. Although seasonally adjusted household saving has been negative in the past three quarters, net national saving has been positive over the same period. The net national saving ratio in the June quarter was 2.5% in seasonally adjusted terms.

Caution should be exercised in interpreting the household saving ratio in recent years, because major components of household income and expenditure may still be subject to significant revisions. The impact of these revisions on the saving ratio can cause changes in the apparent direction of the trend. The following graph presents the household saving ratio derived from trend and seasonally adjusted data (see Explanatory Notes).

As the graph shows, although the latest figures may be distorted by the drought etc., the long-term trend has been clearly negative, and the decline goes back further than this (the Fitzgerald report on declining national savings was commissioned at the beginning of this period.

When I responded to the Fitzgerald report, I argued that it was misleading because it failed to take account of investment in human capital. But we’ve done miserably on this score in the last decade or so, with school completion rates declining in the early 90s (they’ve since recovered a bit) and domestic higher education commencements frozen since 1996. In both cases, there was a direct link to expenditure cuts imposed in the name of economic efficiency.

I haven’t yet managed to work through to an aggregate national savings figure. But with the Federal government budget roughly balanced in accrual terms, the contribution from government savings can’t be large, and I’d be surprised if retained earnings of corporations accruing to Australian owners amounted to more than 3 or 4 per cent of GDP. So this suggests that Australian national savings are approximately zero, or in other words, that all net investment in Australia must now be financed by foreign debt or equity investment.

One reason for this negative saving is the fact that, thanks to the property bubble, people can spend more than they earn and still, apparently, get richer. But there’s a fallacy of composition here. We can’t all sell our houses to cash in this wealth – if we did, prices would fall and the wealth would disappear.

Of course, if we could persuade some overseas buyers to purchase a million or so houses at current prices, our problems with foreign debt would be over. But although it’s not precisely true that the only potential buyers of Australian houses are Australian residents, it’s a good enough approximation for economic analysis. A few thousand wealthy HongKongers may want a Sydney bolthole, and there are probably a few thousand more footloose global professionals in the market, but not enough, I think, to make a real difference.

Update My wife Nancy, who’s paying more attention than I am, tells me there’s nothing new in the negative household savings story, which is confirmed by a look at the graph (savings have been negative for three or four quarters now) and a quick Google. As so often, I’m a bit behind the times, but I’m still surprised there hasn’t been more comment on this.

Brad de Long slams as ‘fast food journalism’ a piece in the Financial Times by John Kay, on the topic of US and European retail productivity. His main complaint is that Kay implies that productivity statistics for retailing take no account of differences in the quality of service between friendly local retail markets and gigantic US-style megamarts. As Brad correctly says, the Bureau of Labor Statistics in the US takes a lot of trouble over this kind of thing.

Brad goes on to say, or at least imply, that Kay’s preference for the friendly local market over the Carrefour supermarket is snobbish and takes no account of the benefits to low-income workers from low-margin stores like WalMart, which are denied them by European regulation. This seems a bit unfair – as I read Kay, he’s saying that the regulations are superfluous and that the local markets can survive the competition.

Turning to the more general issue of productivity comparisons, Brad’s post raises quite a few points. First, while the BLS no doubt does its best, it is still true that retail productivity is hard to measure, and that claims of large gains must be taken with a grain of salt. For example, in principle, the BLS should take account of the increased travel time required for shoppers to go to edge-of-town Walmarts, but I don’t think they do so.

Second, as I pointed out in another recent post on this topic, the quality adjustments undertaken by the BLS do not take account, even in principle, of the negative externalities arising from people driving long distances, externalities that include traffic congestion, the loss of green space and thousands of extra road deaths every year.

Third, the BLS generally does a lot more of this ‘hedonic adjustment’ than do European statistical agencies (or, as far as I can tell, the Australian Bureau of Statistics). I think the BLS estimates are probably more accurate on balance. Regardless of which estimates are better, the inconsistency means that comparisons of US and European GDP and productivity growth are systematically biased in favor of the US, by about 0.5 percentage points per year.

Finally, the really big question is whether the differences in US and European consumption patterns, working hours and so on are driven by different tastes, different relative prices and regulatory constraints or some complex combination of the two. I’m still planning a big post on this question Real Soon Now.

My opinion piece in today’s Fin (subscription required) covers the failure of the Job Network to put people into jobs and the general tendency of Australian economic policy to destroy human capital rather than building it. It should be posted at Australian Policy Online fairly soon, and at my website a bit later on.

There’s an interesting piece in today’s Fin (subscription required) about Uni of NSW Vice-Chancellor Rory Hume, who says universities should give away (nearly all) the research they produce rather trying to make money out of intellectual property. I think he’s right for a number of reasons.

First, despite some impressions to the contrary, the returns to universities from commercialising research have been very poor, even in the US where this has been going on for a long time. The Australian Research Council did a study on this and found that the returns from commercialisation were about 2 per cent of the cost of research. In fact, if unis fully costed their commercialisation outfits, including land and administrative overheads, I suspect that the true figure would be negative.

Second there’s the standard public good argument. The social benefits are greater if the results are free to use.

Third, there’s something I saw on Four Corners a couple of weeks ago. They interviewed a very unattractive character who’s secured a dubious patent on non-coding DNA and is using it to extract license payments from virtually anyone engaged in genetic research. In a breach of previous tradition, he’s going after university researchers. When challenged on this, he made the point that uni research labs were commercial outfits these days and deserved to be treated as such.

Brad de Long links to this piece by Robert Gordon arguing that an important segment of the recent gain in US productivity growth has come in retail trade. Gordon says

America’s retail productivity performance has all been achieved in stores newly built since 1990, not in existing stores.

The new stores are the “big boxes” such as Wal-Mart, Home Depot and Best Buy, large new buildings set up on greenfield sites at interstate highway junctions, in suburbs and, increasingly, in inner cities. As these new stores reap the rewards of their size, openness and accessibility and drive smaller stores out of business, they bolster the average productivity of the US retail sector as a whole.

While countries differ, Europe has many ways of stifling modern retailing, from green belts and land-use restrictions to laws that prevent companies from lowering their prices. These make life difficult for new, more efficient retailers in order to protect small, traditional merchants. This is one of many cultural chasms across the Atlantic. Many Europeans could not care less about retail productivity and instead are adamant that Europe must avoid the US’s unregulated land use and starvation of public transport, which have produced its overly dispersed, energy-wasting metropolitan areas.

This is interesting in a couple of ways.

First, it helps to resolve a puzzle I’ve been pointing out for some time. If US productivity growth is so strong, why is employment in tradables like manufacturing shrinking so fast? On this account, the productivity growth is mainly in nontradables.

But the second point is more important. Retail productivity is very hard to measure. For example, measured retail productivity declined in Australia when shopping hours were extended – the extra convenience wasn’t taken into account in the statistics. By Gordon’s account, the apparent efficiency of big, edge-of-town stores is offset by a lot of negative externalities, and higher travel costs borne by consumers, and other road users. As I observed here and here the US has experienced a big increase in distances travelled, even compared to Australia and this has been accompanied by an increase in road deaths, giving the US one of the highest rates of road death in the OECD, about 50 per cent higher than Australia’s. And all of this reflects the fact that road use in the US is substantially underpriced, as was noted in a recent Chicago Fed letter.

Of course, there’s no easy way of telling whether the costs I’ve mentioned outweigh the benefits that are measured in the retail productivity statistics. Since so many of the costs are externalities, the success of WalMart in driving out the competition doesn’t prove anything. But it’s disappointing to see a fine economist like Robert Gordon fall back on cliches like ‘cultural chasm’ in relation to outcomes that are largely the product of economic policy. And, whatever the net balance, it’s clear that the measured growth in retail productivity is an overestimate.

While I was looking into household debt recently, I ran across a striking fact. In the year ending March 2003, more Americans went bankrupt than got divorced. There were 1.6 million bankruptcies in the year, about 40 per cent of which involved couples, implying around 2.2 million people going bankrupt. There were around 1.0 million divorces, or about 2.0 million people getting divorced. This (or maybe the year before, the divorce stats are a bit fuzzy) is the first time bankruptcies have exceeded divorces, at least since the Depression. The increase in bankruptcy has been exceptionally rapid. As recently as 1985, there were only 300 000 personal bankruptcies a year.

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