Saturday, May 26, 2018

Self driving cars

Self-driving cars have face two related problems; reliability and liability. First, it might make sense to distinguish between two kinds of accident - one in which the driver is injured or killed, the other in which another person outside the vehicle is. Those who get into the vehicle do so (hopefully) understanding the risk, so caveat emptor. Those who not in the car and are involved in an accident have a more substantial claim, since they did not chose to weigh the risk before hand. For these folk, the car maker's liability is likely to be much higher.

Self-driving car thus face two separate problems; one is reducing failures to the point that car buyers will assess the risk as acceptable and drive the product; and the second is reducing failures to the point that the profits are sufficient to cover potential liabilities, which means either pricing them high or reducing failure rates.

The problem is exacerbated by the fact that auto makers may be seen as having deep pockets (and thus good sources of income for lawyers). That will inhibit self-driving cars' roll-out. One solution might be to separate the car makers from the makers of self-driving control systems, which means separating the two components.

A public API that all car makers agreed to would provide an inviting platform for smaller companies to develop self-driving systems on. By having self-driving systems made by smaller start-ups, the population of  self-driving systems firms could survive the demise of one or more firms without that industry niche being crushed by litigation. 

Sunday, May 13, 2018

North Korea Nuclear Deal

Will Trump get a successful deal from the North Koreans? Of course he will, and at least in his telling, it will be the greatest deal ever made. How can it be that the man with no plan might do something no other president in 20 years was able to?

First, the deal won't be his; it will be whatever the North, the South and China want. His only accomplishment is getting them to sit down to talks. And since he has no plan and his goal is only to put something, anything, on the score board that he can point to and say "look what I did", the terms are largely immaterial. So how did Trump get the parties to the table?

Kim agreed to the talks because he has a nuclear weapon and a delivery system and is negotiating from a fairly strong position.  What about the South? They likely felt that Trump was so unpredictable that the US could no longer be relied on. Trump might on a whim pull troops out of South Korea leaving it exposed to invasion from the North. So better make a deal quickly before something worse happens. As for China, North Korea will be less of a problem when it is less economically isolated and the lifting of sanctions will reduce the likelihood of mass migration from the North into China. The only part of the calculus Trump changed was sowing doubt in the South's leaders' minds that the US was a reliable ally; quite an accomplishment! 

Second, don't be fooled into thinking that the JCPOA, aka the Iran deal, represents the minimum acceptable set of terms. Trump doesn't really care about the details of the deal. He hated the Iran deal because it was Obama's not because he really thought it was a bad deal; he almost certainly doesn't know either the details of the deal or its implementation. As long as the North and South agree to something and China blesses it, he will trumpet it as a victory he, personally, the great negotiator, delivered. What will he have had to do with it? "How about everything" he will yell at anyone foolish enough to listen. 

The talks will conclude; Trump will declare victory; and the situation on the ground may be little changed other than the lifting of economic sanctions on the North.

Friday, May 4, 2018

What would you trade for a bonus check?

Big tax cuts for corporations and the rich doesn't look much like a winning populist strategy. So many firms, possibly prompted by the GOP, chose to use employee bonuses to demonstrate that they weren't only thinking of shareholders. These, of course, are a 'one-offs' and represent a much smaller commitment than wage increases which have to be paid for many years rather than just once.  But they have allowed the administration to boast that its tax cuts are putting money into peoples' pockets even if it's only a one time benefit, never mind that it has created an even bigger hole in the federal budget that at some point will cause a day of reckoning. And when that happens, the programs that will be cut will be those that help most vulnerable. But by then those who voted for the package will be safely retired from congress on their lobbyists salaries.

On the other side of the scale, the things the GOP and its voters have given up as part of the bargain they made electing Trump are many and intangible.

They have given up on the idea that our leaders set a moral tone to be aspired to.

They have abandoned the idea that honesty is a virtue.

They have chosen cynical self-interest over high-minded pursuit of a worthy common goal.

In short they have given up on some of the foundational ideas that underpinned the fabric of what America stood for.

And that's something that won't be easily or quickly rebuilt.  

Contestable labor markets

In economics, contestable markets are ones in which, because barriers to entry are non-existent, incumbents are prevented from raising prices (and profits) for fear that in doing so new entrants would flood in.

There has been much hand-wringing lately about the effect of the recent tax cuts. While many feared that companies would use the windfall only to buy back stock or pay dividends, an there has, according to David Brooks on the News Hour, been an appreciable (36%) increase in capital spending.

However reinvesting in building the business hasn't led to an increase in wages even as the labor market tightens to levels not seen in 17 years. With the low levels of unemployment, economists generally predict that as the economy continues to expand, faster than the labor supply, wages will rise. So why are they not?

Several suggestions have been proposed to account for this. The uncertainty surrounding the potential trade disputes with China and NAFTA renegotiation might be causing firms to hold off on hiring; but that's seems inconsistent both with a relatively good jobs report and the spending on capital projects. Another more compelling argument is that the decline of trades unions and a long period in which firms were unable to give any pay raises has blunted labor's ability to bargain effectively. That seems plausible. A third explanation is that the labor pool is larger than the figures suggest with people who had stopped looking for work and were therefore not counted as unemployed not coming back into the market. 

But here's another possible cause; the contestability of labor markets. Although the labor market may be tightening, people looking for work are no longer competing only with other people; they are increasingly competing with automation not to mention off-shoring. Both represent a more significant threat than they did before the great recession. Technology has improved and automation has therefore gotten cheaper; and supply chain logistics has become more robust and cheaper too, facilitating off-shoring. So while a tightening of the labor market 12 years ago might have led to a modest rise in wages, today there are more and more accessible and financially feasible alternatives for firms to consider. That trend is only likely to continue, so while economic growth in a tight labor market is not driving up wages today, expect growth and investment in the future to be met increasingly with labor-saving alternatives which will lead to downward pressure on wages. 

The correlation between unemployment and wage growth will weaken and may even turn negative. When firms are doing well and have money to invest, they may choose increasingly to use that opportunity to restructure, replacing domestic labor with foreign labor and labor in general with machines.