Ray Dalio: The Economic Machine and Beautiful Deleveraging
Ray Dalio, founder of Bridgewater Associates, released a 30 minute video in 2013, explaining his template of the economy and how central banks and government should manage a deleveraging like the Great Recession and its after-effects.
Ray proposes three simple rules to avoid future crises:
- Don’t let debt grow faster than income (GDP) otherwise it will eventually crush you;
- Don’t let income grow faster than productivity otherwise you will become uncompetitive in international markets; and
- Do all that you can to raise productivity because in the long run that’s what matters most.
What is productivity and how do we measure it?
Productivity is the result of hard work and innovation, both of these factors will increase the level of output (GDP) per unit of input.
We measure productivity by comparing GDP to units of input, either:
- the population of a country;
- the number of hours worked; or
- the number of people employed.
Each will give a different perspective, but there are a few general rules:
- countries with high technology and innovation (e.g. Germany or USA) show high productivity;
- as do resource-rich countries with big extraction industries (like Norway and Australia); and
- countries with low tax regimes (Singapore and Ireland) which attract transient income.
Read more at Labor productivity can be misleading.
The Magical World Where McDonald’s Pays $15 an Hour? It’s Australia | The Atlantic
Jordan Weissmann compares wages paid to McDonalds workers in Australia and the US, raising four interesting points.
Firstly, McDonalds (or “Maccas” if we use its colloquial name in Australia) is profitable in both low-wage and high-wage countries:
The land down under is, of course, not the only high-wage country in the world where McDonald’s does lucrative business. The company actually earns more revenue out of Europe than it does from the United States. France, with its roughly $12.00 hourly minimum, has more than 1,200 locations. Australia has about 900.
They achieve this partly through higher prices, but also through adjusting their staff structure in Australia.
The country allows lower pay for teenagers, and the labor deal McDonald’s struck with its employees currently pays 16-year-olds roughly US$8-an-hour, not altogether different from what they’d make in the states. In an email, Greg Bamber, a professor at Australia’s Monash University who has studied labor relations in the country’s fast food industry, told me that as a result, McDonald’s relies heavily on young workers in Australia. It’s a specific quirk of the country’s wage system. But it goes to show that even in generally high-pay countries, restaurants try to save on labor where they can.
They also focus on increased productivity.
It stands to reason that in places like Europe and Australia, managers have found ways to get more mileage out of their staff as well. Or if not, they’ve at least managed to replace a few of them with computers. As Michael Schaefer, an analyst with Euromonitor International, told me, fast food franchises in Europe have been some of the earliest adopters of touchscreen kiosks that let customers order without a cashier. As always, the peril of making employees more expensive is that machines become cheaper in comparison.
That is one of the primary dangers of high minimum wages: automation is used to improve employee productivity and shrink the required workforce. Shrinking the national wage bill might seem like good business sense, but if we look at this on a macro scale, reduced incomes lead to reduced consumption and falling sales.
Finally, McDonald’s have attempted to add value to their product range, moving slightly more up-market in order to capture higher prices.
McDonald’s has also helped its bottom line abroad by experimenting with higher margin menu items while trying to court more affluent customers. Way back in 1993, for instance, Australia became home to the first McCafe coffee shops, which sell highly profitable espresso drinks. During the last decade, meanwhile, the company gave its European restaurants a designer make-over and began offering more localized menus meant to draw a higher spending crowd.
If we take McDonald’s as a microcosm of the entire economy, the trade-offs and benefits (or lack thereof) are evident. Funding wage hikes out of increased prices (for the same quality products) is futile. It adds no benefit: the increased wage is eroded by higher prices. Reduced wages for younger workers simply disadvantages older workers, excluding them from certain jobs. Increased productivity — higher sales per employee — on the other hand, can benefit the entire economy.
Improved training or increased automation may increase output, but run the risk of shrinking the jobs pool — unless new jobs created in training or manufacturing are sufficient to offset this. Product innovation, on the other hand, is an immediate win, raising sales while encouraging job growth in new support industries.
How do we encourage product innovation? Higher minimum wages is not the answer. Nor, on its own, is increased investment in research and education. What is needed is a focus on international competitiveness: reducing red tape, ensuring basic goods and services such as electricity, water, shipping and transport are competitively priced, lowering taxes and stabilizing exchange rates. That would encourage the establishment of new industry locally rather than exporting skills and know-how to foreign shores. We need a culture of innovation and entrepreneurship, rather than lip-service from politicians.
Read more at The Magical World Where McDonald's Pays $15 an Hour? It's Australia – Jordan Weissmann – The Atlantic.
Why We Can't Solve Big Problems | MIT Technology Review
Jason Pontin, MIT Technology Review Editor, provides some interesting insights into why innovation sometimes fails.
Sometimes big problems that had seemed technological turn out not to be so, or could more plausibly be solved through other means. Until recently, famines were understood to be caused by failures in food supply (and therefore seemed addressable by increasing the size and reliability of the supply, potentially through new agricultural or industrial technologies). But Amartya Sen, a Nobel laureate economist, has shown that famines are political crises that catastrophically affect food distribution. (Sen was influenced by his own experiences. As a child he witnessed the Bengali famine of 1943: three million displaced farmers and poor urban dwellers died unnecessarily when wartime hoarding, price gouging, and the colonial government’s price–controlled acquisitions for the British army made food too expensive. Sen demonstrated that food production was actually higher in the famine years.) Technology can improve crop yields or systems for storing and transporting food; better responses by nations and nongovernmental organizations to emerging famines have reduced their number and severity. But famines will still occur because there will always be bad governments.
Yet the hope that an entrenched problem with social costs should have a technological solution is very seductive — so much so that disappointment with technology is inevitable. Malaria, which the World Health Organization estimates affected 216 million people in 2010, mostly in the poor world, has resisted technological solutions: infectious mosquitoes are everywhere in the tropics, treatments are expensive, and the poor are a terrible market for drugs. The most efficient solutions to the problem of malaria turn out to be simple: eliminating standing water, draining swamps, providing mosquito nets, and, most of all, increasing prosperity. Combined, they have reduced malarial infections. But that hasn’t stopped technologists such as Bill Gates and Nathan Myhrvold, the former chief technology officer of Microsoft (who writes about the role of private investors in spurring innovation), from funding research into recombinant vaccines, genetically modified mosquitoes, and even mosquito-zapping lasers. Such ideas can be ingenious, but they all suffer from the vanity of trying to impose a technological solution on what is a problem of poverty…….
via Why We Can't Solve Big Problems | MIT Technology Review.
EconoMonitor : Last Days of Rome » How America Builds Its Way Back to Balance
Michael Moran: While China excels at building and even incrementally improving established product lines like GM’s Buicks and countless other Western and Japanese goods manufactured there, it has struggled to innovate. Even in 2010, the year China officially overtook Japan as the world’s second largest economy, no Chinese brand could viably be called a household name in any Asian market, let alone in the wider world. The annual global branding study by the market research firm TNS found in 2010 that, while consumer brands from Denmark, Finland, South Korea, and Switzerland make the top 20, no Chinese product or brand appeared in the top 1,000.
……China can claw its way up the value-added food chain and move its companies beyond the goal of building a better, cheaper Buick and into the high-end, high-margin markets for software, aerospace, robotics, and sophisticated engineering currently dominated by the United States, Europe, and Japan. But the progress to date has been almost impossible to measure, and the country’s substandard educational system, demographic and political challenges, and corruption suggest that this will be more of a Long March than a Great Leap Forward.
via EconoMonitor : Last Days of Rome » How America Builds Its Way Back to Balance.