Evergreen Gavekal weekly snapshot
THE PRODUCTIVITY DEBATE
This is only beginning. John Mauldin writes about that this week (Productivity and Modern-Day Horse Manure) after the debate started with this WSJ piece:
Silicon Valley Doesn’t Believe U.S. Productivity Is Down Contrarian economists at Google and Stanford say the U.S. doesn’t have a productivity problem, it has a measurement problem.
(…) “There is a lack of appreciation for what’s happening in Silicon Valley,” he says, “because we don’t have a good way to measure it.”
One measurement problem is that a lot of what originates here is free or nearly free. Take, for example, a recent walk Mr. Varian arranged with friends. To find each other in the sprawling park nearby, he and his pals used an app that tracked their location, allowing them to meet up quickly. The same tool can track the movement of workers in a warehouse, office or shopping mall.
“Obviously that’s a productivity enhancement,” Mr. Varian says. “But I doubt that gets measured anywhere.”
Consider the efficiency of hailing a taxi with an app on your mobile phone, or finding someone who will meet you at the airport and rent your car while you’re away, a new service in San Francisco. Add in online tools that instantly translate conversations or help locate organ donors—the list goes on and on.
Surely, Mr. Varian says, they also make the U.S. more productive.
But the only way goods and services move the official U.S. productivity needle is when consumers and businesses pay for them. Anything free, no matter how much it improves everyday life, isn’t included.
Many in Silicon Valley say it is just a matter of time before new innovations surface in salable products and goose the official productivity tally. First, though, businesses must harness the innovations to the products they sell. Driverless car technology, for example, won’t hit city streets for a while. (…)
One problem with the government’s productivity measure, Mr. Varian says, is that it is based on gross domestic product, the tally of goods and services produced by the U.S. economy. (…)
Technological improvements and timesaving apps are trickier. For one thing, it is tough to capture the full impact of quality improvements. For example, if a newer model car breaks down less often than older models but cost the same, the consumers’ gain can get lost in the ether.
Many economists question why productivity measures can’t capture the full benefit of improved products and services, such as a refrigerator that signals when the milk is getting low.
Is GDP outdated?
The U.S. Labor Department has sought to update its GDP measure over the years to include more intangibles, such as adjusting for higher quality. Productivity measures of computer chips, for example, are periodically updated to account for faster speeds. But critics say the process lags behind badly.
The economy also needs time to make use of new capabilities before they show up in productivity numbers. James Manyika, who heads technology research at McKinsey & Co.’s San Francisco office says, “A lot of the technologies we’re most excited about are relatively new.”
McKinsey has compiled a list of more than 100 disruptive technologies—cloud computing, for example—and most provide what economists call “consumer surplus,” the extra benefit from technology above the price paid.
“We have all these benefits,” he says, “but we’re not paying for them.”
Silicon Valley’s complaints echo earlier eras. The introduction in the last century of indoor plumbing and household appliances drastically increased the efficiency of performing domestic chores. But since domestic labor isn’t counted in GDP either, the time saved hauling water or washing clothes by hand didn’t show up in productivity numbers.
However, these timesaving technologies—among other factors—eventually led to the flood of women into the workforce starting in the 1960s, which, in turn, sent U.S. output soaring.
Mr. Varian is convinced something similar will happen again. At the heart of his argument is the Internet search, cutting short the time to, say, learn how to grow geraniums or find the best Mexican restaurant—a free tool that provides uncounted value at home and at work.
In 2009, researchers at the University of Michigan, following a suggestion from Mr. Varian, ran an experiment to see how much time was saved by search engines. Two teams were given a set of complex questions; one was told to use a search engine to find the answers, the other the library. On average, the search engine team beat the library team by 15 minutes.
Add up those results at every office, school and home around the world and, Mr. Varian argues, the result is a major contribution to efficiency that isn’t strictly counted in U.S. productivity. “To be fair,” he says, “as we adopt technologies that save time in these nonmarket activities, that frees up time for market-based activities which will show up in GDP.”
Outside Silicon Valley, the arguments aren’t as persuasive. University of Chicago economist Chad Syverson said there might be some measurement problems, but that has always been the case. And, he says, he doubts it would account for more than a small part of the recent productivity slowdown.
Mr. Syverson, an expert on productivity, says a more likely explanation for the current slowdown is timing. Productivity has always tended to ebb and flow as new technology is introduced, with waves of gains followed by years of doldrums. The world is likely in a normal lull, he says.
Economists also say that stagnant wages don’t reflect hidden productivity gains. If U.S. productivity was indeed going up, they argue, so would wages.
“I’m always reluctant to point a finger at failure in measurement because it feels like you’re making excuses, ” says Marco Annunziata, chief economist for General Electric Co. One explanation for the paradox of low productivity in a time of technical advances may be the uneven way innovation spreads, he says. Some firms gobble up new technology while others don’t, so productivity growth could be lagging because many U.S. companies are laggards.
American business since the recession has, in fact, been stingy about investing in new equipment.
It may also be harder for companies to charge higher prices for innovated product lines,Preston McAfee, Microsoft Corp.’s chief economist says. For instance, when UPS started using new GPS technology to speed package deliveries, it couldn’t charge more for the improvement in service because FedEx and other carriers could easily match them.
“Maybe our mysterious productivity gain is in the form of less inflation than we deserve,” Mr. McAfee says.
Back at Google, Mr. Varian admits that slow and uneven adoption of new technology puzzles him. “If you go to Europe,” he says of restaurants there, “all the servers have hand-held devices for ordering, payment.” But the technology has yet to spread across the U.S., even though it would make a slice of the economy more productive.
He also acknowledges the gold-rush optimism that drives work and local attitudes: “People in Silicon Valley always overestimate what can be accomplished in two years, and underestimate what people can accomplish in 10.”
THE IRAN DEAL
This also is only beginning. Beyond statements like “the only alternative is war” and “you can’t trust Iran”, there are “other, possibly more objective views”. The FT:
Opponents of the deal in the Middle East and Washington have lambasted it for its loopholes and weaknesses, while its supporters have angrily defended a victory of careful diplomacy over bellicose grandstanding. A lot of heat has been generated, but little light. The FT has spoken to some of the foremost experts and commentators on Iran’s nuclear programme to try to rectify the imbalance.
Robert Einhorn, senior fellow, arms control initiative, Brookings Institution
The deal stands up pretty well — it doesn’t deviate from the framework that was reached in Lausanne. My view is that the deal meets the standards that were set forth in the June statement [a list of concerns released by the Washington Institute cosigned by leading Iran experts].
(…) The deal conforms to that framework and builds on it in a number of very positive ways: it makes clear that sanctions won’t be suspended until Iran fulfils its commitments first.
Another question was over International Atomic Energy Agency access to military installations — the deal makes clear that the IAEA will be able to seek access to any installation, civilian or military. If the IAEA is denied access it can appeal to the Joint Commission where Iran, even if supported by China and Russia, can be outvoted and required to admit inspectors or face the possibility of sanctions being reimposed.
On R&D into new centrifuges — something that was seen as a big issue in the last weeks of the negotiations — the deal is much more specific than I expected. It codifies some rigorous limits especially in the first eight years.
Cliff Kupchan, chairman, Eurasia Group
The final accord between the P5+1 and Iran is a defensible deal for the Obama administration, but it contains more US concessions than expected. The deal has many strengths. It sets Iran’s breakout time [the minimum time period it would take for Iran to dash to build a bomb, if it decided to renege on the deal] via the uranium enrichment route at roughly one year by drastically reducing the number of operational centrifuges and Iran’s uranium stockpile. The heavy water reactor at Arak will not produce weapons grade plutonium, and the transparency measures . . . provide a strong hedge against a clandestine programme. (…)
The weaknesses of the deal merit concern. I worry about the five-year limit on the arms embargo, and eight years on missiles. That’s short and it’s going to add kerosene to the firestorm in Congress. The nuclear deal has not become about regional geopolitics. [Those] make this all the more complex.
Moreover, the back-end issue remains problematic. After year 10, Iran will be able to deploy advanced generation machines at a rate that has not yet been made public. Breakout times could drop quickly after this point.
Mark Fitzpatrick, director of non-proliferation, International Institute for Strategic Studies
It’s not a great deal for either side but it’s certainly good enough. It has prevented a nuclear weapon and a war over a nuclear weapon for the next 15 years. We’re absolutely in a better place than we were when these negotiations began. In 2013, in the race between sanctions and centrifuges, centrifuges were winning and Iran was getting very close to having a very quick breakout capability. This deal has cut centrifuge numbers by 3/4 and reduced Iran’s enriched uranium stockpile by 98 per cent. That is a tremendous accomplishment in walking back Iran’s ability to build a bomb.
The dispute resolution process around inspections can delay access by 24 days, during which time you could remove equipment from a site, but you wouldn’t be able to erase uranium signatures and that’s one of the principal things the IAEA will be looking for and able to detect.
I can still see trouble ahead, though. The thing the deal did is kick the can down the road. It isn’t as good a deal as I had hoped for in allowing the IAEA to investigate Iran’s weaponisation research. Iran is supposed to co-operate with the IAEA and address its concerns about that. The key word is address. They don’t necessarily have to satisfy. If doubts about Iran’s nuclear programme still exist after eight years, there’s still nothing stopping the automatic lifting of all sanctions.
As for the arms embargo and the ballistic missile technology ban, I think the west did quite well to get what it did. Under UN Security Council resolution 1929, the language says the ban can be lifted if Iran enters into international negotiations. So the west was already on fairly shaky ground in insisting the bans stayed in place, particularly after Russia and China sided against the rest of the P5+1.
Jon Alterman, director Middle East programme, Center for Strategic and International Studies
It strikes me as a strong basis from which to hold the Iranians to account, partly because the configuration of the panel to evaluate Iranian or American concerns is weighted in favour of Washington. Whenever I’ve talked to people in the US government, there seems to be a high degree of confidence that the Iranians will not be able to do things without being caught. I get a nod and a wink that it’s going to be extraordinarily hard for the Iranians to cheat. (…)
The politics of this are going to be hard, for the Iranians and for the US. Each side still has a challenge ahead of it. In the US, the president has a low bar that he needs to meet to move forward, but having to use a veto doesn’t strike me as a strong position to be in. On the other hand, it’s not clear to me that Congress really wants to be in charge of Iran policy. (…)
Karen Elliot House, a former publisher of The Wall Street Journal who won a Pulitzer Prize as a reporter for her coverage of the Middle East, is the author of “On Saudi Arabia: Its People, Past, Religion, Fault Lines—and Future” (Knopf, 2012).
Obama Pours Gas on the Mideast Fire The nuclear deal with Iran will stoke more Sunni-Shiite violence, and the Saudis may go shopping for nukes.
While President Obama hopes his nuclear deal with Iran will burnish his presidential legacy as a great peacemaker, the near-term consequence will be more—and even bloodier—sectarian violence in the Middle East. In particular, security threats will escalate for Saudi Arabia and Israel, until now America’s two major Mideast allies.
The Israelis and Saudis, longtime adversaries, in recent years have joined in vehement opposition to Mr. Obama’s attempts to negotiate a nuclear deal with Tehran. For the Israelis the concern was entirely about an Iranian atomic weapon. But for the Saudis the fear was less about future nuclear capability than about the real and present threat that a deal would further enhance Iran’s regional stature and its capability to ratchet up the regime’s exploitation of regional sectarian divisions.
That nightmare has arrived. The immediate threat to Saudi Arabia far exceeds that to Israel, which (without saying so) already possesses nuclear weapons and in a real crisis can almost surely be more confident of U.S. support—from future American presidents, if not the current one—than can Saudi Arabia. Furthermore, Sunni Saudi Arabia, not Jewish Israel, is Shiite Iran’s primary rival for regional hegemony.
Under the deal announced Tuesday, Iran stands to have $100 billion of assets unfrozen by late this year. That, coupled with the bizarre U.S. decision to unfreeze the ban on selling Iran conventional weapons and ballistic missiles down the road, means that Tehran can use those billions of freshly available assets not to enhance its economy, as the Iranians promised negotiators, but rather to buy deadly new arms for its nefarious partners across the region. These include Shiite militias in Iraq, Syria’s Bashar Assad, Hezbollah in Lebanon and Syria, and the Houthi rebels in Yemen.
A cocky, conventionally armed Iran increasing regional mischief-making puts Saudi Arabia in the cross hairs—of Iran, but also of Islamic State in Iraq and Syria (ISIS). As Iranian-backed Shiites across the region increase efforts to exploit turmoil in failing Mideast states for Tehran’s benefit, so too will their Sunni opponents in ISIS, who are no friends of the Saudis.
The expansion of Iran and ISIS also means ever-greater internal threats to Saudi stability. Some 60% of the Saudi population is under 30 years old, and unemployment among those young Saudis is about 30%. Saudi Arabia has made it a crime for its citizens to join ISIS, but the Saudi Interior Ministry has acknowledged that in recent years some 2,200 young Saudis have gone to Syria to fight. As Saudi Sunnis watch their Sunni coreligionists being killed by Iranian-backed Shiites across the region with little opposition from any force other than ISIS, that terror organization’s appeal grows, especially among deeply religious young Saudis.
But what are Saudi Arabia’s choices? The short, subdued statement this week by Riyadh’s embassy in Washington again calling for “strict, sustainable” inspections speaks volumes about the kingdom’s precarious position and its lack of good options. The deal obviously comes as no surprise to the Saudis, who have watched the Obama administration fervently court Iran at Saudi expense. Given that the kingdom already has taken any number of actions to try to protect itself, few remain. So don’t expect any significant Saudi action in the short term, not even openly lobbying Congress against the deal.
Already, Riyadh has reached out to a broader range of countries, sending its top officials to China last year and Russia last month. Only last week, the kingdom’s young deputy crown prince boarded a U.S. aircraft carrier in the Persian Gulf to keep alive the impression, however dubious, that Saudi Arabia still can count on the U.S. for protection.
The kingdom has become more assertive on its own behalf, though this can easily be overstated. Saudi efforts to confront Syria’s Assad have been mostly unsuccessful, and as Iran gains the freedom under the nuclear deal to buy and share new conventional armaments, overthrowing the Assad regime will be ever harder. Riyadh’s bombing campaign against what it sees as an Iranian-backed insurgency by Houthi tribesmen in Yemen has killed more than a thousand civilians but failed to achieve the Saudi goal of restoring Yemen’s deposed president.
One semi-successful action by the Saudis: increasing their oil production to put pressure on an Iranian economy already staggering under economic sanctions from the U.S. and Europe. This month the Saudis have been pumping 10.6 million barrels of oil a day, a historic high.
A final option open to the Saudis: Get a nuclear weapon as soon as possible. Prince Turki al Faisal, the kingdom’s former head of intelligence, vowed in the spring that “whatever the Iranians have, we will have.” The kingdom doesn’t have the technological ability to build its own nuclear program and is more likely to lobby Pakistan—whose nuclear development the Saudis helped fund—to establish a weapons program on Saudi soil. But Pakistan’s nonproliferation commitments make that solution less likely than many Saudis like to pretend.
So, while the nuclear agreement is being cheered in Tehran, while Obama aides are fist-pumping in the White House, while Europeans are salivating at the prospect of doing business in Iran, and while the Israelis are trying to lobby the U.S. Congress against the deal, the Saudis are left grinding their teeth in Riyadh, surveying a bleak future and no good options to change it.
The Caijing report suggests the PBoC is seeking to minimise its direct role in lending to CSF, preferring to rely on commercial banks to provide funds for the stock market rescue. (…)