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posts relating to economics. For more economics posts see our Investing and Economics blog.
Recommended posts: Manufacturing Jobs Data: USA and China - Manufacturing Value Added Economic Data - Estate Tax Repeal - USA Health Care Costs reach 15.3% of GDP - Housing and the Economy - Science and Engineering Macroeconomic Investment
The recent drastic reductions again emphasize (once again) that changes in the federal funds rate are not correlated with changes in the 30 year fixed mortgage rate. In the last 4 months the discount rate has been reduced nearly 200 basis points, while 30 year fixed mortgage rates have fallen 18 basis points.
I have update my article showing the historical comparison of 30 year fixed mortgage rates and the federal funds rate. The chart shows the federal funds rate and the 30 year fixed rate mortgage rate from January 2000 through April 2008 (for more details see the article).
It is surprising to me how incorrect beliefs about what predicted federal funds rate cuts will mean for mortgage rates are so common when the data makes it clear that such beliefs (I should wait because the fed is going to cut the fed funds rate and so if I wait my mortgage rate will be lower) are unwarranted. But I should not be this type of behavior goes on all the time, inside organization and outside them.
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Chinese firms bargain hunting in U.S.
Liu spent about $500,000 for seven acres in Spartanburg — less than one-fourth what it would cost to buy the same amount of land in Dongguan, a city in southeast China where he runs three plants. U.S. electricity rates are about 75% lower, and in South Carolina, Liu doesn’t have to put up with frequent blackouts.
About the only major thing that’s more expensive in Spartanburg is labor. Liu is looking to offer $12 to $13 an hour there, versus about $2 an hour in Dongguan, not including room and board. But Liu expects to offset some of the higher labor costs with a payroll tax credit of $1,500 per employee from South Carolina.
“I was surprised,” said the 63-year-old president of Shanxi Yuncheng Plate-Making Group. “The gap’s not as large as I thought.” Liu is part of a growing wave of Chinese entrepreneurs expanding into the U.S. From Spartanburg to Los Angeles they are building factories, buying companies and investing in business and real estate.
True this is still a relatively small macro economic factor. However, it is growing. The primary push so far is economic - not a move to lean manufacturing (as far, as I can tell) to put manufacturing close to the customer. What is the biggest factor? The USA is spending more than $400 billion every year more than it produces. The only way to consume more than you produce is to borrow (and take an obligation to pay back those that lend you money) or sell the stuff you own to those that are producing more than they are consuming. China is producing more than $200 billion more than it consumes every year.
For decades foreigners have taken debt from Americans that promise to pay back later (to pay for what they consumed). Now many are deciding that these debts are not attractive investments and are looking to own productive assets in the USA (companies, factories…). Which is smart on there part in my opinion.
Related: The Budget Deficit, the Current Account Deficit and the Saving Deficit - Moving Jobs to Silicon Valley from India - $2,540,000,000,000 in USA Consumer Debt - How to Keep the USA Manufacturing - Top 10 Manufacturing Countries 2006
Warren Buffett’s 2004 Annual Report:
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PBS presents a very nice overview of the heath care systems in Japan, United Kingdom, Germany, Taiwan and Switzerland in: Sick Around the World. It is a just a surface view of the overall system but even so does a good job of providing more understanding of the options available to fix the failed system in the USA. The US system costs over 50% more than others and has worse outcome measures than the alternatives (and leaves many without any coverage). And while the alternatives are not perfect the defenders of the status quo make claims about the alternatives are not accurate.
Table combines data from my previous post, International Health Care System Performance, and the PBS website:
| Australia | Canada | Germany | Japan | Netherlands | New Zealand | Switzerland | Taiwan | UK | USA | |
| National health spending - Percent of GDP | 9.5% | 9.8% | 10.7% | 8.0% | 9.2% | 9.0% | 11.6% | 6.3% | 8.3% | 16.0% |
| Percent uninsured | 0 | 0 | <1 | <2 | 0 | 0 | 16 |
Switzerland, spending 11.6% of GDP on health care, is the 2nd most expensive in the world.
Related: USA Spent $2.1 Trillion on Health Care in 2006 - Measuring the Health of Nations (USA ranks 19th of 19 nations studied) - Drug Prices in the USA - USA Health Care Costs 16% of GDP (2006) - Deadly Diseases of Western Management - 5 Million Lives Campaign
Kiva provides loans through partners (operating in the countries) to the entrepreneurs. Those partners do charge the entrepreneurs interest (to fund the operations of the lending partner). Kiva pays the principle back to you but does not pay interest. And if the entrepreneur defaults then you do not get your capital paid back (in other words you lose the money you loaned).
They do an excellent job of using the internet to allow people like me to feel connected to people we can help. And in so doing, they do an excellent job of implementing their strategy (providing funds for micro-loans) to achieve their goal (to alleviate poverty). “Kiva’s mission is to connect people through lending for the sake of alleviating poverty.”
Today I added $450 to my loan portfolio with Kiva and donated another $100 to Kiva. I added 5 loans in: Tanzania (2 loans), Uganda, Paraguay and Ecuador.
I am happy with the success of the Curious Cat blogs but I do have one item I wish would improve. I wish more Curious Cat readers would take advantage of Kiva. If you lend through Kiva, please add a comment with a link to your Kiva page and I will add you to our list of Curious Cat Kiva Contributors.
The Kiva web site includes all sorts of data on the partners making the loans (the capital at risk is provided by Kiva donors but a local organization services the loans…). For example, see the profile for Tujijenge Tanzania Ltd. This shows for example the Amount Repaid Vs Expected Rate (100% for this partner - no defaults or delinquency). The rates for all Kiva loans are 3.75% delinquent and .12% defaulted. They also show the Average Interest Rate Borrower Pays To Kiva Field Partner (which is 24% in this example) and the Average Local Money Lender Interest Rate (which is 60%).
One of things I really hope to see is some research on the results Kiva is producing. What kind of changes are these loans bringing about: specifically looking at Kiva. And also looking at various factors such as the interest rate and whether targeting my lending to those with lower average rates results in greater benefit. There is a great deal of unknown and unknowable numbers involved but some data would be interesting as well as analysis even without numbers of results.
Related: Using Capitalism to Make the World Better - Frontline Explores Kiva in Uganda - Providing a Helping Hand via Kiva - Expanding Credit Access: Using Randomized Supply Decisions to Estimate the Impacts - Microfinance research links
In 2005 I posted about some of the problems with drug pricing. It is nice to find at least a couple of people at MIT that want to have MIT focus research on the public good instead of private profit. As I have mentioned too many universities now act like they are for-profit drug or research companies. That is wrong. Drug companies can do so, institutions with purported higher purposes should not be driven to place advancing science below profiting the institution.
The DDC also would serve as a mechanism for prioritizing drugs for development, noted Finkelstein. “It is a two-level program in which scientists and other experts would recommend to decision-makers which kinds of drugs to fund the most. This would insulate development decisions from the political winds,” he said.
I see their idea as one worth trying. Lets see how it works. Their book: Reasonable Rx - Solving the Drug Price Crisis by Stan Finkelstein and Peter Temin
Related: USA Spent $2.1 Trillion on Health Care in 2006 - Measuring the Health of Nations - Antibiotics Too Often Prescribed for Sinus Woes - $600 Million for Basic Biomedical Research - articles on improving the health care system
As usual, Warren Buffett’s letter to shareholders is packed with wisdom. He is best know for his investing genius but his writing provides great thoughts for managers also: Berkshire Hathaway 2007 Letter to Shareholders:
Related: Buffett’s Letter to Shareholders (from last year) - Buffett’s Shareholder Letter (2006) - Overview of Warren Buffett - Annual Report by Warren Buffett (2005) - Hiring the Right People
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Lean manufacturing saving jobs
“This is not about a reduction in the workforce, it is about reducing waste in the system,” Cook said. “There is a lot to be gained . . . and it is really just common sense.” The lean manufacturing session got its start in November at a mayor’s roundtable on advanced manufacturing. When the issue of cutting waste arose, Cook volunteered to lead a session and the London Economic Development Corp. organized it.
“This information is not proprietary. If these people take it back to their plants and expand on it, we all gain,” Cook said.
A number of great points, including:
the best management ideas are not proprietary - Management Improvement - Management Advice Failures - Open Source Management Ideas
Related: Manufacturing Jobs - Lean Thinking Misconception - Lean Manufacturing Resources
Do corporations exist solely to maximize their bottom lines? We don’t think so., Forbes Magazine:
They don’t mention the importance of other stakeholder (employees, customers, suppliers - other than the Starbucks example) but still it is nice to read some support for the principles Deming supported: the corporation seeking to benefit all stakeholders.
Related: Curious Cat management search engine - Deming on Management - Focus on Customers and Employees
Last week their was a recall of 143 million pounds of beef in the USA. Lets take a short systemic view at what is going on. The public has an interest in a safe food supply which is difficult to enforce through caveat emptor (buyer beware). So this is a natural situation for government regulation (to protect the public interest) - plus it relates to public health which is another natural for government regulation.
The USDA regulates the industry and puts in place rules as new threats emerge. So a few years ago they instituted rules that if an animal can’t walk after the USDA pre-death inspection they be re-inspected “largely as a precaution against bovine spongiform encephalopathy, or mad cow disease .” It seems hard to argue with that plan. If the pressures to maximize profits (assuring every cow is processed) exceed the desire to take precautions to ensure the safety of customers the risk of losing the trust of consumers is great.
There have been several instances, that have been made public, which call into question how effective the system is at preventing self interest from endangering the food supply. That then calls into question the safety of all meat that is part of that system. Many in the industry seem not to realize that they will be judged by the failures of any in the industry. And in my view, it is in their interests to have strong protections industry-wide.
The export market for meat is large. For political reasons some countries aim to protect local farmers and ranchers (the USA is a huge subsidizer of farmers and ranchers - Sugar Industry Quotas). And when the system continually shows that bad practices are allowed to continue it makes it a very easy decision to not allow the import of meat. Why would a country want to import food from a system that fails to follow food safety standards (especially if politically that is what they want to do - this provides them a pretty darn good reason to do what they want).
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The percent of GDP spent on health care in the USA increased again in 2006 - to 16%. Health care spending reached a total of $2.1 trillion, or $7,026 per person in 2006, up from $6,649 per person in 2005.
Related: USA Healthcare Costs Now 16% of GDP - Measuring the Health of Nations - USA Paying More for Health Care
Five American Manufacturers Doing It Right
Related: North American Manufacturing - Top 10 Manufacturing Countries 2006 - Top 10 Manufacturing Countries (2005) - Innovation Needed to Keep USA Manufacturing?
Do Lean Companies Create Fewer Jobs?
No, they create more. If you assume the lean company grows sales at the same rate as some poorly management company then it may well be that the lean company creates fewer jobs. However that is not a valid assumption. Deming provided the reason in his presentations to Japan in the 1950’s with his chain reaction. From page 3 of Out of the Crisis
For an example of this process at work see GM, Ford and Toyota. Toyota defines lean (Toyota’s management system is what was called lean manufacturing by Jim Womack and Dan Jones). Toyota continues to add employees while Ford and GM have been shedding jobs.
It is true, for lean (and un-lean) companies alike, productivity is improving (it just improves more at lean companies) which means that fewer people are needed to produce the same amount as we have in the past. We have posted previously about the mistaken belief that jobs are moving overseas.
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Here is updated data from the UN on manufacturing output by country. China continues to grow amazingly moving into second place for 2006. I plan to write more on this data in the Curious Cat Investing and Economics Blog. UN Data, in billions of current US dollars:
| Country | 1990 | 2000 | 2004 | 2005 | 2006 |
|---|---|---|---|---|---|
| USA | 1,040 | 1,543 | 1,545 | 1,629 | 1,725 |
| China | 143 | 484 | 788 | 939 | 1096 |
| Japan | 808 | 1,033 | 962 | 954 | 929 |
| Germany | 437 | 392 | 559 | 584 | 620 |
| Italy | 240 | 206 | 295 | 291 | 313 |
| United Kingdom | 207 | 230 | 283 | 283 | 308 |
| France | 223 | 190 | 256 | 253 | 275 |
| Brazil | 117 | 120 | 130 | 172 | 231 |
| Korea | 65 | 134 | 173 | 199 | 216 |
| Canada | 92 | 129 | 165 | 188 | 213 |
| Additional countries of interest - not the next largest | |||||
| Mexico | 50 | 107 | 111 | 122 | 136 |
| India | 50 | 67 | 100 | 118 | 130 |
| Indonesia | 29 | 46 | 72 | 79 | 103 |
| Turkey | 33 | 38 | 75 | 92 | 100 |
Another interesting experiment from Google: Using Prediction Markets to Track Information Flows: Evidence from Google
Interesting paper. I would guess most readers of this blog won’t be able to apply prediction markets to there workplace in the short term but never-the-less I find the paper interesting.
Related: Management is Prediction - Google Experiments Quickly and Often - Secrets of the World’s Best Companies
Measuring the Health of Nations: Updating an Earlier Analysis
Rankings: 1) France 2) Japan 3) Australia 4) Spain 5) Italy 6) Canada… 18) Portugal 19) USA. Maybe the United States is last but still not significantly behind?
It might seem like a stretch to compare the lowest ranked country to the average of the top 3, but, for all those that feel the USA is the best health care system it raises the questions of why they don’t think 100,000 annual deaths is a significant enough problem to lower their opinion of the current system. And remember the USA system costs something like twice as much as the average system: up to 16% of GNP in 2006.
I must say I would rather have the Toyota mindset shown by those talking about the USA health system instead of the claims of how the current USA health system is number 1. In Toyota’s horrible last year they still had a profit of about $14 billion (I believe something like 20 companies have every made that much). The United States health system sure has some things to point to positively but the system seems to be losing ground to the rest of the world more and more quickly while many cling to a belief it is the best system around.
Related: Evidence-based Management - posts on improving health care - Improving Hospital Performance - articles on improvement health care - Best Research University Rankings - Top 10 Manufacturing Countries - Dr. Deming’s Seven Deadly Diseases of Western Management
Editorial: Engineering Innovation, Milwaukee Journal Sentinel:
Or Werner Zobel, a Modine Manufacturing engineer working in Germany who hatched the idea for a new cooling system that the Racine-based company believes could be revolutionary. The system uses ultra-thin layers of aluminum to dissipate heat, a breakthrough that has potential for car and truck radiators and air conditioning condensers.
Intellectual candlepower will fire the regional economy, the Milwaukee 7 regional economic development group believes. Its strategic plan relies on innovation-driven manufacturers that are heavy with engineers. But across the region, those companies say they can’t recruit enough engineers, and they worry that shortages will worsen as baby boomers retire. Complicating the picture is a shortage of visas for foreign-born engineers and increased competition from rapidly developing economies in China and India for those students even when they complete their studies in the United States.
The University of Wisconsin-Milwaukee, Marquette University and the Milwaukee School of Engineering are racing to fill the pipeline. Marquette and UWM are promising expansive new buildings and increased enrollment of both undergraduate and graduate students.
The USA continues to be by far the largest manufacturing in the world. And one important reason is the contributions provided by science and engineering (fed by strong science and engineering schools). In addition to other smart economic policies (The World Bank’s annual report on the easiest countries to do business in ranks the USA 3rd - after Singapore and New Zealand). Wisconsin manufacturing continues to get good discussion on various lean blogs for good reason(More Wisconsin Lean, Wisconsin Continues to Lead in Lean Government, History repeats itself). The success Wisconsin is enjoying is not due to one single factor but the efforts of many actors including companies, universities, government, the press… and groups like the Wisconsin Manufacturing Extension Partnership and the Madison Quality Improvement Network (I have managed MAQIN’s web site since it was created - John Hunter).
Related: Best Research University Rankings - 2007 - S&P 500 CEOs - Again Engineering Graduates Lead - Invest in New Management Methods by William G. Hunter, Commentary to the Milwaukee Journal, 1986
From my post on the Curious Cat Investing and Economics blog: My guess is that traveling for health care is going to increase greatly in the future. Health costs in the USA are enormous. Costs in Europe are different - often in wait time (or costs to avoid waiting) but another option is available - travel. Countries would be very wise to focus on building up this industry in my opinion. The economic benefits could be huge.
The market is huge and growing. And the rich countries do not appear to be doing very well - especially the USA. The country needs to invest in a rigorous system to ensure world class medical care. It is almost certain the first attack will be attempts to frighten customers by saying your country is unsafe…
On this management improvement blog I continue to encourage the USA to improve the health care system. And some great strides are being made. But, Dr. Deming named the excessive health care costs a deadly disease decades ago and it is much worse today. So much so that the odds of avoiding a huge increase in overseas travel for health care is very unlikely in my opinion - even if we make better progress than I expect toward improving the USA health care system. It is an macro-economic problem and not one easily solved in 5 years or 10 years. The results (as long as countries step in to fill the market need - as has been happening) is people will travel to get health care.
Related: USA Paying More for Health Care - Change Health Care - Health Care Crisis
Manufacturing takes off in India by John Elliott:
This is not some futuristic vision of India. It’s the main factory of Moser Baer, a 24-year-old Indian company that was one of the first in the world to make high-definition DVDs and is now starting on flash memories and solar panels. And while not typical of most Indian factories, Moser Baer is one of a number of companies utilizing the same brainy ability that fueled the country’s IT boom to remake its manufacturing landscape.
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The second problem is India’s infrastructure, especially power shortages and the grossly inadequate highways and ports that make it difficult to transport goods. New highways are helping, but growing urban congestion is making the problem worse, and there are seemingly endless bureaucratic and physical delays at ports.
India has a great deal of potential for manufacturing. The roadblocks are largely economic I think. Poor infrastructure is a huge problem that requires huge investments be made. China has made huge investments in infrastructure and they have paid off. Another incredible drain on India’s progress in manufacturing is the government bureaucracy.
Related: Manufacturing in Asia - Hopeful About India’s Manufacturing Sector - Top 10 Manufacturing Countries - articles on manufacturing management
I have mentioned Kiva before: Microfinancing Entrepreneurs (on our Curious Cat Economics and Investing blog). In addition to being a good cause Kiva really shows some great management strategies. The use of Information Technology to connect people directly is a wonderful example of using IT effectively (understanding psychology).
Kiva lets you loan money directly to an entrepreneur of your choice. Kiva provides loans through partners (operating in the countries) to the entrepreneurs. Those partners do charge the entrepreneurs interest (to fund the operations of the lending partner). Kiva pays the principle back to you but does not pay interest. And if the entrepreneur defaults then you do not get your capital paid back (in other words you lose the money you loaned). I plan to just recycle repaid loans to other entrepreneurs.
I have just placed an additional $150 in loans to 6 business entrepreneurs (in Honduras, Indonesia[2 loans], Tajikistan, Uganda and Ukraine), along with a $100 donation to Kiva (adding to my previous Kiva loans of $350). Since our last post the Oprah Winfrey Show, President Clinton’s newly released book Giving and others have sung the praises of Kiva and made it a challenge to find entrepreneurs of Kiva to lend to (Kiva is working on building their capacity - to keep up with the demand. That seems to have been partially fixed (for awhile the supply of the entrepreneurs was completely exhausted) in last few weeks (though still they limit you to no more than $25 per entrepreneur - in order to allow the large numbers of people that want to lend to at least have the chance to loan something).
If you lend through Kiva, add a comment with a link to your Kiva page and I will add you to our list of Curious Cat Kivans.
Related: Kiva: Microfinance Loans - helping people succeed economically - Thinking About the Future
The USA health care system is well known as by the most costly in the world. Most also agree the system provides far from the best results - perhaps great results could justify such high prices but that is not the case (though some still argue this point). Decades ago W. Edwards Deming targeted high health care costs as a deadly disease of the US economy decades ago and the problem has just gotten worse almost every single year since. In the last few year the “good news” is that while health care costs are still rising above the rate of inflation above the growth in the economy the rate of the increases were declining. From the Kaiser Foundation news release:
Luckily some good work is being done but so much more is needed. Seeing figures like these should make people understand this system is broken and needs to be fixed. This has been a known seriously problem for quite a long time. It is very difficult for an economy to sustain such large negative factor in economic performance. Luckily the USA has a strong enough economy to sustain a large negative impact from the health care system (it is also able to overcome: a huge amount of government and consumer borrowing - ludicrasly overpaid senior executives). (more…)
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