China Seminar Post 2: IBM

            In my last post, I recalled a visit to Baosteel, a symbol of the massive manufacturing capacity China has.  The following day, we visited IBM’s flagship office in Shanghai.  Not coincidentally, IBM ought to be taken as a symbol of China’s massive service-industry capacity.  For those who are unfamiliar, as I was to a large extent, International Business Machines provides custom programming services to business in need of software solutions, among many other things.  It is also a major player in the Big Data revolution, which I have written about before, competing with the likes of EMC and Google to meet the world’s growing data needs.  IBM has many branches beyond data processing and programming which makes it a major player and competitor in separate but complimentary industries such as financial management services and business operation planning.

            IBM is aware that the world is changing, sometimes for the better and sometimes for the worse.  But their overall mandate, as we learned in a lecture and saw on public service announcement posters hung around the office, is to build a smarter planet.  By “smarter”, they mean more connected, more responsive, and more efficient.  As we see, the world is a system of systems which exist not in isolation of each other, but rather as an ecosystem of its inhabitants.  In the broadest sense, IBM tries to measure the heartbeat of a city: its traffic, utilities usage, weather, and anything else one could possibly be imagine are all compiled and used to make a city run better.  Traffic is regulated more efficiently depending on the time of day, electricity is conserved in times of low demand, etc.  Weather readings are used to model climate patterns and make predictions for the future.  Even the pharmaceutical and medical research industries are being transformed as huge amounts of information is created from the processing of data at an The value of this kind of data compilation and processing can be seen at the individual user’s level as well when smart alarm clocks know poor weather conditions will exacerbate traffic and wake up their owners earlier.  The applications for this kind of technology are endless and as a doctor accesses and make decisions for his patient by measuring vital signs, so humanity can build a better world.

            IBM has been a particular boon to a developing nation like China because it is able to bring high technology to rural areas that are just beginning to modernize.  Without infrastructure like sewage systems, running water, power grids, public transportation, and the like, small towns are able to adopt the bleeding edge technology of city planning with the benefit of hindsight that is just one piece of the expertise IBM brings to its municipal clients.  By using IBM’s services, and the services of companies that offer the cutting edge of technology immediately, a town can make decades of regular development in one swoop of upgrade and join the 21^st century efficiently and quickly.  This means dramatic increases in the living standards for the populace touched by these improvements.  

  

                                                                                                                         IBM Logo

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China Seminar Post 1: Baosteel

I was in Shanghai recently with a school fieldtrip and we had a visit to one of the manufacturing facilities of China’s largest state-owned steel manufacturing company, Baosteel.  It is the second largest steel producing in the world after a Luxemburg company called ArcelorMittal.  With an area larger than the city of Macau (itself 11.39 square miles), the whole complex was an astonishing and breathtaking sight to behold.  One of my initial impressions was the fact that despite being a massive manufacturing area, the place did not give off the odor of pollution one would expect in a place where heavy machinery and metal smelting is in operation.  It turns out, and quite contrary to the popular culture belief of Western nations, China is quite environmentally conscious and has taken steps to offset the pollution created by Baosteel by covering 45% of the factory grounds with trees and foliage.  In reality, we learned that Baosteel is a small city with a zoo, pool, and other amenities that serve the employees and their families who live on-site.  I could not imagine an American company doing so much to take care of their people, and remember that this plant is in a country that often has a reputation for being a “pollution haven” by its detractors in the rest of the world.  Personally, I did not smell much pollution in the area and regardless of how effective their efforts are, one ought to give them credit for trying.

We witnessed the miracle of steel processing from the safety of a catwalk above the fray of the factory floor.  As we stepped into the room, it seemed as though we had been transported to a scene in Atlas Shrugged.  The heaviest of heavy industry came together in a shower of sparks emanating from fiery red steel ingots and measuring initially about three feet wide, by 50 feet long, and a few inches tall.  Over the course of a quarter mile of machinery, rollers pressed it down until it was much thinner and several times as long.  Before the metal was completely cooled, it was rolled into a coil.  Having finished, it was shipped off as the raw material for the next producer to use in his manufacturing.  Not only does the product from Baosteel go around the world but is used in a wide variety of applications from weapons to automotive, marine components to soda cans, and many more.  As a matter of fact, the 1 Yuan coin is stamped from their alloy.

As we drove around the city-factory, I was struck by many things.  The scale of the machinery was beyond anything I had seen before.  The blast furnace was actually several buildings because one could not contain it, for example.  Baosteel has three port harbors.  One is for receiving iron ore from Australia and Brazil.  A second is for shipping the finished product all over the world.  A final one is for the removal of slag, the impurities taken out of the ore in the smelting process.  It is common practice to recycle this slag and our tour guide was proud to inform us that many buildings are constructed of concrete made from Baosteel’s unusable materials. 

Despite the rather sun-shiny view we were given by the Baosteel executive/tour guide, I did hear from other sources that it is plagued with some large, but not unsurprising in light of the fact that it is a government-owned institution, problems.  First and foremost, and as one might expect, it is a highly corrupt institution.  It turns out that the monsters of patronage politics and its twin crony capitalism are alive and well all over the world when business and government are mixed. 

Overall, however, the tour was an eye-opening experience by any account and I came away with a more complete appreciation of the Far East’s progress.  So often in economics classes we will hear that the Chinese are building towers and buildings at unprecedented rates.  But this comes alive when we are greeted by a forest of cranes upon arrival in Shanghai.  In the same way, we hear that manufacturing is booming.  But I can say with some confidence that one starts to leave the realm of knowing and enter that of understanding while walking through in a room heated and illuminated by glowing steel. 

I didn't take this picture, but this is the room we saw. The line of fire is a steel ingot being rolled.

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The Enjoyment of Life and Liberty, the Means of Acquiring Property

I was reading recently that the famous line from the Declaration of Independence that calls “life, liberty, and the pursuit of happiness” inalienable rights is a paraphrasing of an idea that was expressed somewhat earlier that year by the writer of Virginia’s Declaration of Rights, George Mason.  See if you can find the similarity.

            “That all men are by nature equally free and independent, and have certain inalienable rights, of which, when they enter into a state of society, they cannot, by any compact, deprive or divest their posterity; namely, the enjoyment of life and liberty, with the means of acquiring and possessing property, and pursuing and obtaining happiness and safety.”

            That is Section One and clearly inspired Thomas Jefferson to start the US’s own Declaration with a somewhat more concise statement.  Mason hit upon a very important point in writing this bit, that the possibility of private ownership is part of the package of rights endowed to humans by the “Law of Nature and of Nature’s God” (to borrow from Jefferson).

            The idea of property is something that people often take for granted because it just seems so natural.  Yet a large issue arises when a government or some other authoritative entity encroaches on the property of others.  Often times, some will take the ideological stance that private property should be abolished and everything be shared equally.  Thankfully this is an antiquated view.  But a more common view, even today, is that the resources of those who possess more than the average citizen should be taken and redistributed to those who have less.  This broad concept is used, in part, for the justification of progressive taxes, entitlement programs, and the like.  But I digress.

            The ability to have and securely hold property is not only a human right necessary for the individual, but also for the smooth functioning of society as a whole.  Imagine what the world would be like if there was no property or only limited ownership! At the personal level, the need for ownership is easy to see.  After all, knowing that you have a bed, toothbrush, and cereal that will not be appropriated by others at their discretion is an important part of a smoothly operating life.  But at the level of society as a whole, things become more abstract.  Bur private ownership is crucial here too.  For example, patents, trademarks, and copyrights exist so that the creator of a medicine, the engineer of a car, the author of a book, or the scientist of some new groundbreaking material can reap the reward of his labor.  Without that, there would be no incentive to create.  Even for people who are motivated purely for the betterment of humanity must at the very least draw in the resources to pay for outlays made in the development process.

            In a different vein, think of the owners of businesses.  If they cannot operate in a legal environment which protects them from theft, then they will have very little incentive to do business in the first place.  One would rightly wish to reap the benefits and profits of his business if he must incur the costs and risks associated with it as well.  The benefit for society is the fruits of his labor.  Boeing makes airplanes, AstraZeneca makes medicine, and Archer Daniels Midland makes food.  Taken as a whole, the product of everyone’s labor is for the benefit of all a country’s inhabitants.  This well-functioning economy is made possible by many things, not the least of which being private ownership of the means of production, both physical and abstract.  Without property, a nation would function no less if it deprived its citizens of their liberty and even their lives. 

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Poster of the Year

Sometimes you see something that just has to be shared on an economics blog. Today's piece is a poster I saw hanging in my friend's room, which was originally painted by Glenn Beck and can be found here. More original content is coming soon. I've just been so busy with school work. Summer is coming soon and that should allow me to spend more time writing here.

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Margaret Thatcher: A Legacy of Principle

                Today the world mourns the death of Baroness Margaret Thatcher, the longest serving and only woman to be Prime Minister of England in the 20^th century.  Born in Lincolnshire, England in 1925, she began her career as a chemist and later joined politics in 1959 as a member of parliament.  She was most notably influenced by The Road to Serfdom, a book by everyone’s favorite: FA Hayek.  This piece talked about the evils of government intervention and why a more hands on central government was sure to expedite the downfall of a nation.

                Elected as Prime Minister in 1979, she carried the worldview set out in Hayek’s works and set about the enormous task of privatizing government-owned companies like British Steel as well as utility companies and others.  She was also famous for fighting labor unions and increasing interest rates to encourage saving.  This had the effect of slowing the growth rate of money supply and brought the rate of inflation down from 18% to 8.6% over the course of her tenure. 

As is typical of a disciple of classical and neoclassical economics, she slashed government spending ruthlessly in many areas including a 3.3 percent cut in defense, 67 percent cut in housing, and 5.8 percent cut in transport.  She did increase government spending in absolute terms between 1979 and 1990 by 12.9 percent by choosing to allocate resources to employment and training (+33.3%), health and social security (+31.8% each), and law and order (+53.3%), among others.  She was also instrumental in the skirmishes around the Falkland Islands when it was invaded by Argentina, preserving that territory for the Crown.

She acquired many detractors over the course of time, most notably in the Soviet Union who christened her the “Iron Lady”, a moniker that she embraced.  She was known for bold words that were often well received, but had a tendency to offend some who could not stomach disagreement with their own beliefs.  The people that tend to leave an impression on society are rarely known to be soft spoken.

                When I heard about her passing, I recalled a U2 lyric and thought, “’the last of the rock stars’ is gone”.  She belonged to a different era, an era where political correctness had not yet been contrived and a person was willing to be 100 percent transparent regardless of the ramifications for popularity.  She was from an era when a person’s beliefs guided his actions throughout time and not just conformed to the circumstances of the moment and disposition of the crowd around him.  The Iron Lady was well-beloved by some and well-hated by others.  But even her detractors would have to acknowledge that behind all the things she did and what she said was a strong human being that always had the best intentions of the British Isles at heart and would sacrifice anything, even her own interests, to do what she believed was right.  That is a lesson I think we should take to heart for our own integrity and the welfare of those around us.

                MSN has a page of her best quotes which I found to be an enjoyable read but there is a quote in particular I wanted to share from the 2011 movie “The Iron Lady”, a dramatization of her life, which sums up her character quite well.

“We will stand on principle, or we will not stand at all.”

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What's the Big Deal with Cyprus?

Trouble in paradise?

            To be perfectly honest with you, when I first saw Cyprus making headlines I thought to myself, “is this becoming news because the Wall Street Journal is tired of making front page stories about the Federal Reserve’s endless announcements to continue its quantitative easing program until 20xx?”  I’m telling you, this shows up on the front page of the WSJ at least once or twice every week and I think that Bernanke needs to realize that the world has caught on to his game.  I digress.  What is the big deal with Cyprus?  That’s the question that’s been in the back of my mind ever since the crisis popped up.  I’m sure that a big chunk of the issue is hype related to the fact that the Eurozone crisis isn’t really selling news anymore.  At the same time, a few things have happened differently with this crisis that make it noteworthy and not just another country experiencing hard times.  So the rest of this post is divided into three sections: an overview of the crisis itself, then a part on why this crisis is a big deal and one on why it is not a big deal. 

            The financial crisis in America had pretty far reaching consequences as we’ve seen.  For Cyprus, which is so dependent on tourism and shipping, those consequences hit quite close to home.  As a result of those tough times, it has been in a recession since 2009.  Government debt, in a manner similar to most of the rest of the world’s countries, has increased significantly since then.  Things got much worse recently when credit agencies downgraded its governmentally issued debt in 2011.  As we’ll see in the next section, most of Cyprus’ economy is involved in the tourism industries but there is a large banking industry for off-shore accounts, particularly Russian business magnates.  Allegedly 60 billion Euros worth of Russian assets are in Cyprus.  Cyprus banks are also very closely tied to the Greek economy as it had accrued 22 billion Euros of Greek private debt.  The wave of financial upheaval in Greece did not have very far to travel to drown its island cousin.  Still struggling from that issue, the credit downgrade was the spark that set the powder keg off and everything began to fall apart.

            Not one to let a comrade go to pieces, especially when it is so heavily invested, Russia loaned 2.5 billion Euros to Cyprus to be able to cover spending and refinance its debt.  This was a bandage solution, but a help nevertheless, until the European Financial Stability Facility gave them a bailout at the end of November, 2012.  The particulars of the bailout are fairly typical of any given one so I’ll spare the details.  The notable activity was the bailout from the European Central Bank and the IMF, which was in the amount of 10 billion Euros and, as part of the deal, took 6.7% of the amount in Cyprus bank accounts up to 100,000 Euros and 9.9% in accounts over 100,000 Euros. 

            What do you think when you think of Cyprus?  I always thought of fishing and I imagine most people do.  It may have been the national pastime back in the day, but I was surprised to learn that the populace is predominantly employed in service sectors related to tourism.  It is, after all, one gorgeous island nation.  Let me give you some particulars though.  Pulling numbers from the CIA’s World Factbook, I see that the country’s GDP is $23.57 billion (PPP) and the average gross salary is $2,636 per month.  Per capita GDP, also in purchasing power parity terms, is $26,900/year.  It has a population of 1,155,403, making it rank 160^th in the world.  It is considered a developed nation.  All in all, this is a small country and it’s crisis, while a big deal to them, does not really have repercussions in most of the rest of the world.  Remember the amount of the bailout?  I would venture a guess that 10 billion Euros is not a whole heck of a lot of money for the IMF considering that it holds claim to almost 11 trillion dollars worth of currency.  The biggest non-Cypriot consequences will likely be in Greece and Russia and any other folks they do major trading with, but the vast majority of the world goes on unaffected. 

            That is not to say that we in America should overlook this crisis because of the “creative” measures Cyprus has taken to make the bailout happen.  Recall the levy on bank accounts from above.  When I first heard about it I was first stunned beyond belief and then dreadfully (and hopefully irrationally) scared that this could become a common tactic.  Imagine a government reaching into its citizens’ bank accounts and taking their money!  Then I realized that… governments already steal their citizens’ money through taxes.  That is a whole other can of worms that will have to be opened some other time.  But for now, let us say that taxes are probably a necessary evil that we’ve all come to live with, but the idea of taking money right out of a bank account is just astonishing.  It’s really quite unheard of, quite an infraction of property rights, and sets a scary precedence now that this is on the table as a feasible option for ailing countries to solve their monetary crises.  That is not to mention the fact that they are taking foreigners’ deposits as well! 

            The Sicilian, from The Princess Bride, told us that the classic blunder is going into a land war with Asia.  We shall see now if Sicily’s neighbor on the other side of the Mediterranean accidentally started one by taking Russians’ money.  Perhaps desperate times require desperate measures, and I certainly won’t claim to know what will happen next, but it takes some level of desperateness to steal peoples’ money right out from their bank accounts and I suspect that a financial crisis is only the beginning of their troubles. 

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