Year: 2013

Preventing Civil War in South Sudan

By Simon Johnson.  This post comprises the first two paragraphs of a column that appeared on the NYT.com’s Economix blog on Thursday, December 26, 2013.  To read the full post, click here.

The news from Juba is very bad. South Sudan is in the throes of political conflict and serious fighting, with several hundred people reported dead and more injured, that has the potential to become civil war. Unless cooler heads prevail, the situation in the capital Juba, Bor (the capital of Jonglei state, about 125 miles to the north of Juba), Bentiu (capital of Unity state, which has a lot of oil) and elsewhere could spiral out of control.

The outside world needs to get serious about preventing the escalation of this conflict; we can do this by applying appropriate economic pressure to all the military forces involved and by enduring that oil revenues are not used to fuel the conflict. This will require China, India, France and the United States to cooperate closely and in ways that may not come naturally.

To read the rest of this post, click on this link to NYT.com’s Economix blog: http://economix.blogs.nytimes.com/2013/12/26/preventing-civil-war-in-south-sudan/?_r=0

Free Market Reflexes

By James Kwak

I’ve been reading a lot about education recently, for reasons that are not worth going into here. I don’t know that much about the area, so I’ve been reading some background stuff and review articles, including a Hamilton Project white paper by Michael Greenstone, Adam Looney, and Paige Shevlin.

It’s pretty mainstream, self-professed “third way” stuff, with a heavy dose of measurement and performance evaluation. Basically they repeat over and over again that educational policies should be based on evidence and new programs should go through rigorous assessments. There are a fairly strong tilt toward market mechanisms and some idealistic naivete about practical problems (e.g., “One way to [improve accountability systems] is to develop tests that measure the skills children should learn”), but nothing too outrageous in substance.

The white paper, however, betrays a certain conceptual bias that I find disturbing, even in topical areas where it seems otherwise reasonable.

Continue reading “Free Market Reflexes” →

No You Can’t

By James Kwak

Yesterday the Obama administration announced that healthcare.gov “will work smoothly for the vast majority of users.” Presumably they intended this as some sort of victory announcement after their self-imposed deadline of December 1 to fix the many problems uncovered when the site went live two months ago. But anyone who knows anything about software knows that it’s not enough to “work smoothly” for the “vast majority” of users.

Apparently pages are now loading incorrectly less than 1 percent of the time. Well, how much less? Pages failing 1 percent of the time make for a terrible web experience, especially for a web site where you have to travel through a long sequence of pages. There is evident fear that the current site will not be able to handle any type of significant load, like it will get around the deadline to sign up for policies beginning on January 1. And we know that “the back office systems, the accounting systems, [and] the payment systems”—in other words, the hard stuff—are still a work in progress.

None of this should come as any surprise—except to the politicians, bureaucrats, and campaign officials who run healthcare.gov. The single biggest mistake in the software business is thinking that if you throw resources at a problem and work really, really hard and put lots of pressure on people, you can complete a project by some arbitrary date (like December 1). It’s not like staying up all night to write a paper in college. This isn’t just a mistake made by people like the president of the United States. It’s made routinely by people in the software business, whether CEOs of software companies who made their way up through the sales ranks, or CIOs of big companies who made their way up as middle managers. You can’t double the number of people and cut the time in half. And just saying something is really, really important won’t make it go any faster or better.

Continue reading “No You Can’t” →

Why JPMorgan Is JPMorgan

By James Kwak

Which is to say, a basket case. Along with Citigroup, and Bank of America.

We all know that JPMorgan Chase is too big to fail. We all know that this means that it enjoys the benefit of a likely bailout from the federal government and the Federal Reserve should it ever collapse in a financial crisis. So why does that make it a poorly run company? It’s possible for a behemoth to be well run; think of Intel in the 1990s, for example.

One reason, of course, is that it’s too big to manage. Even if bribing Chinese officials by hiring their children wasn’t part of the master strategy, not being able to stop it from happening is a sign that things aren’t really under control. (And for “bribing Chinese officials,” you can insert any number of other things, like “betting on the relative values of various CDS indexes,” or “manipulating LIBOR.”)

Mark Roe (blog post; paper) points out another reason. For decades, the supposed cure for bad management has been the so-called market for corporate control. In other words, do a bad job, and someone will take over your company and you’ll be out of a job. That someone might be a corporate raider like T. Boone Pickens, or it might be a private equity firm, but in either case bad management is a sign of opportunity.

Continue reading “Why JPMorgan Is JPMorgan” →

Parenting

By James Kwak

My seven-year-old daughter’s new favorite song is, no joke, “Banks of Marble,” sung by Pete Seeger. I swear I had nothing to do with it. She found a Pete Seeger CD one day, which I didn’t even know we had, and put it into our old boombox/CD player when my wife and I were out. (There was a babysitter over, but she was mainly taking care of my toddler son.) When we came home later that afternoon, she announced that it was her favorite song, and that her favorite part was the last verse.

For those who don’t know why this is remarkable, here are the lyrics to the last verse and final chorus:

I’ve seen my brothers working
Throughout this mighty land;
I prayed we’d get together,
And together make a stand.

Then we’d own those banks of marble,
With a guard at every door;
And we’d share those vaults of silver,
That we have sweated for

Of course, this is the girl who is quoted in White House Burning saying, at age five, that Social Security sounds like “the best program ever.”

Bad Government Software

By James Kwak

Ezra Klein, one of the biggest supporters of Obamacare the statute, has already called the launch of Obamacare a “disaster,” and it looks like things are now getting worse: as people are actually able to buy insurance, the data being passed to health insurers are riddled with errors (something Klein anticipated), in effect requiring applications to be verified over the phone. Bad software is one of my blogging sidelights, so I wanted to find out who built this particular example, and I found Farhad Manjoo’s WSJ column, which fingered CGI, a big old IT consulting firm (meaning that they do big, custom, software development projects, mainly for big companies). (See here for more on CGI.)

CGI was a distant competitor of my old company. I don’t recall facing them head-to-head in any deals (although my memory could be failing me), but they claimed to make insurance claim systems, which is the business we were in. So I don’t have an opinion on them specifically, but I do have an opinion on the general category of big IT consulting firms: they do crappy work, at least when they are building systems from scratch. (They generally do better when installing products developed by real software companies.)

Continue reading “Bad Government Software” →

A Few Quick Thoughts

By James Kwak

It pains me to see so much blogging fodder passing before my eyes and not have any time to do it justice. But here are a few thoughts:

  • Why does anyone think that anyone cares about what a rating agency has to say about Treasury debt? Credit ratings matter for obscure companies because they represent new information that is not otherwise available to investors. In the case of the U.S. Treasury, all the information you need to know is plastered across the front page of the world’s newspapers, all the time. Your not going to change your opinion because of something that Fitch says.
  • Since the debt ceiling mess started heating up, the yield on the one-month T-bill has increased from about 2 basis points (the rough average for September) to 32 bp. It makes sense to me that, if you absolutely have to get your cash back on October 31, it might make sense to be nervous about a bill coming due on that day. But otherwise, there is no chance that you won’t get your principal back. Does anyone think that the government won’t get its borrowing authority back one of these days or months? And does anyone think the Treasury won’t go back and redeem all the bills that came due during the hiatus? Which is why I’m not particularly worried about my holdings of the Vanguard Short-Term Treasury fund.
  • I am probably one of the few liberals who don’t think the Tea Party caucus is engaged in irresponsible hostage-taking. Sure, I disagree with their policy objectives, and they are risking economic catastrophe by trying to force the government into default. But they are also fighting for a principle, misguided as it may be: Obamacare is evil, and should be stopped. The debt ceiling is an absurdity that should not exist. But since it does exist, it is leverage that conservatives can use to try to achieve their policy goals. The problem is that the debt ceiling exists; given its existence, you can’t blame people for using it for their ends. It’s like the filibuster: you can say that the 60-vote requirement is bad, but you can’t blame people for taking advantage of it. As Norman Ornstein said (quoted in White House Burning, p. 103), “If you hold one-half of one-third of the reins of power in Washington, and are willing to use and maintain that kind of discipline even if you will bring the entire temple down around your head, there is a pretty good chance that you are going to get your way.”
  • Warning: If we get through this crisis alive, it’s because there are just enough Republicans who are just moderate enough to get sixty votes in the Senate, and John Boehner is enough of a realist (or a coward) that he doesn’t want to be known as the man who single-handedly caused a default (by refusing to let a compromise bill come to the floor). One more round of Tea Party elections, and Eric Cantor or Paul Ryan as speaker, and all bets are off.

 

Fiscal Madness And Entrepreneurship

By Simon Johnson. 

This post draws on points discussed in class #7 of Entrepreneurship without Borders, a course at MIT Sloan.  More details on the course are here.

With the US government in partial shutdown (including suspending a significant amount of research and development activity) and the very real threat of a default on US government debt looming, now is a good time to ask – can the US maintain its edge in technology-based entrepreneurship?  What would it take to squander the advantages we currently have?  Can other countries catch up or surpass us on this important dimension that matters a great deal for technological innovation, productivity improvement, and job growth? Continue reading “Fiscal Madness And Entrepreneurship” →

Economic Statecraft, Women, and the Federal Reserve

By Simon Johnson. 

This post draws on issues discussed in class #6 of Entrepreneurship without Borders, a course at MIT Sloan.  The syllabus and other materials are available here.

The US has a long and generally successful track record of using “economic statecraft” to advance its positions and values in the world.  We helped rebuild Europe and Japan after World War II, with a judicious mixture of aid and access to the US market.  Similarly, as the Iron Curtain fell after 1989, the US stepped in with targeted financial support and general encouragement to converge on the European Union’s political and economic institutions.  The International Monetary Fund (IMF) and the World Bank, where the US has a big voice, have also played positive roles in many instances over the past 70 years.

No policy is perfect or without controversy.  But surely this approach is better than relying primarily on military power in the way preferred by former dominant powers – think of Rome, the Ottomans, or even the British Empire (where there was some commerce, but also a lot of coercion.)  But can we continue to apply the same economics-first approach to the next frontier for economic development – women’s rights?  Whether Janet Yellen becomes the next Chair of the Federal Reserve will provide some insight into the answer to that question. Continue reading “Economic Statecraft, Women, and the Federal Reserve” →

The Wall Street Takeover, Part 2

By James Kwak

Five years later, and things seem marginally better in some areas (the CFPB exists), significantly worse in others (LIBOR, money laundering, London Whale, etc.). There has been some debate recently about whether we have a safer financial system today than before Lehman collapsed. But the fundamental issue, as Simon and I discussed in 13 Bankers, is whether our political system will put the interests of society at large ahead of the interests of large financial institutions. On that score, there is little to be encouraged about.

In 2002, Art Wilmarth wrote a mammoth (262 pages) article titled “The Transformation of the U.S. Financial Services Industry, 1975–2000.” In that article, he identified many of the key trends in the financial sector—consolidation, deregulation, breakdown of Glass-Steagall, complex products, increased risk-taking—that would not only produce a financial crisis but make it so destabilizing for the economy later in the decade. Now he has written a shorter (164 pages) article, “Turning a Blind Eye: Why Washington Keeps Giving into Wall Street,” on the key question: why our government doesn’t do anything about it, even after the financial crisis.

Continue reading “The Wall Street Takeover, Part 2” →

Starting With Chile

By Simon Johnson

This is a summary of class #5 in Entrepreneurship without Borders, a course at MIT Sloan.  For links to the course syllabus and summaries of earlier sessions, see this post.

Chile has experienced strong and relatively sustained economic growth in recent decades.  The economy has also proved more resilient to outside shocks (including to the price of copper, the largest export) than many others.  This is a case of good macroeconomic management, including by the central bank.  But there remains the question of how to create enough jobs and increase income levels – including for people at the lower end of the income distribution.

Start-Up Chile is an innovative approach to changing the culture about new ventures (see these FAQS).  By enticing would-be entrepreneurs with relatively small grants to spend at least 6-7 months in Chile, this initiative hopes to create role models and stronger connections between young Chilean people and global business opportunities.  If the entrepreneurs move on – as many do – perhaps this just helps build Chile’s position in global networks.  See this recent assessment, or the organization’s own 3 minute video pitch. Continue reading “Starting With Chile” →

Entrepreneurial Endeavor

By Simon Johnson

Below is a summary of points from Class #4 of Entrepreneurship without Borders, a course at MIT Sloan.  Use this link to look at earlier sessions.

The conventional view about entrepreneurship in emerging markets is that it is difficult or perhaps impossible for new start-ups to have a great deal of impact.  Local markets are dominated by big players who have a great deal of power and who can make life difficult for young competitors (e.g., a frequent complaint in South Korea).  Weak institutions, such as contracts that are hard to enforce, tip the balance towards large incumbents – many of which are based on a long-standing family business.

There is also often a culture (social norms and expectations) that does not view failure as a positive learning experience.  And access to capital and other critical inputs (e.g., talented workers) may be limited or not available to entrepreneurs at a price that makes the firm viable – or that allows for rapid growth.

Endeavor is an organization that works hard to address these issues, particularly by creating a local and global network of people who want to help entrepreneurs.  These communities have done very well in some countries – including in South America (see this visual representation of Endeavor’s impact in Argentina).  Continue reading “Entrepreneurial Endeavor” →

Thinking About Doing Business

By Simon Johnson

In class #1 of Entrepreneurship without Borders (at MIT Sloan) we discussed attitudes towards starting a new business.  In many countries, people want to become entrepreneurs, but they can access only limited types of opportunities.  Relatively small established elites, often with strong political connections, are able to mobilize the resources needed to build a company that can do well.  Class #2 focused on the details of the current situation in Portugal – the macroeconomy will presumably begin to improve and the basic enforceability of legal contracts seems fine, but we do yet see a breakthrough in companies being created by new entrepreneurs.  Below is a summary of the discussion in class #3.

The World Bank’s Doing Business indicators offer a rich set of data with many insights into the various barriers facing small and medium-sized business – as well as potential entrepreneurs.  These numbers provide a first-pass comparison across countries focused on (a) regulation, and (b) contract enforcement.

Singapore and Hong Kong are the impressive leaders of the pack (see Table 1.1 on page 3 of the executive summary of this report).  Countries can grow with an unfavorable environment, measured in this way, but this is more likely with a great deal of natural resources (e.g., offshore oil in Angola, ranked #172).  For most countries, it would be wise to look for a set of reforms that make it easier to do business.

Experience in Georgia since the mid-2000s is encouraging.  The government used the Doing Business indicators and related work to target their priorities – and made a great deal of progress, for example in terms of reducing the number of licenses required (for all kinds of activities) and creating a legal fast-track for applications (i.e., pay a premium and get your passport faster). Continue reading “Thinking About Doing Business” →

Where are the European Entrepreneurs?

By Simon Johnson

This post is based on class #2 in my MIT Sloan course, Entrepreneurship Without Borders.  An edited version appeared this morning on the NYT.com’s Economix blog.

Europe today is relatively rich on average, and there is undeniable potential for further convergence towards Northern levels in use of technology, organization of firms, and productivity levels.  We witnessed some impressive economic improvements over the past 20 years as Eastern Europe left behind its communist system – in part due to the creation of dynamic new firms (e.g., in Poland) and in part as a result of investments by foreign companies (e.g., in Hungary).  But the extent of North-South productivity convergence within Europe has proved disappointing since the formation of the euro area in the late 1990s.

Southern peripheral Europe is now in the midst of a serious economic crisis – precipitated by the realization that sovereign debt may actually be quite risky.  The immediate financial market pressure receded last year when the European Central Bank indicated that it will intervene to keep yields (i.e., interest rates on government debt) at manageable levels, but there is still the critical question of when growth will turn – and what rate of growth is sustainable in the medium term. Continue reading “Where are the European Entrepreneurs?” →