Archive for November 8th, 2011

Why Euro trades at a premium to US Dollar?

November 8, 2011

A nice article by Ken Rogoff.

The puzzle was always there and has only strengthened in this crisis. Rogoff probes at some answers but the puzzle still remains..

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Connecting entrepreneurship with cities and growth

November 8, 2011

A superb article from one of the best urban econ – Ed Glaesar.

In this piece he tells the importance of encouraging entrepreneurship in US and how that has been critical to growth and employment in the past.  He says cities that encourage entrepreneurship are the ones that succeed over a long period of time and remain sustainanble cities. Entrepreneurship or new firms in turn are the largest employers which helps the economy as a whole.

US policies in this crisis has thrown money at old existing companies and not encouraging new businesses:

Three years have passed since the financial crisis of 2008, and unemployment rates remain painfully high. As of August 2011, America employed 6.6 million fewer workers than it did four years earlier. To try to fix the problem, the Obama administration has pursued a variety of Keynesian measures—above all, the huge stimulus package of 2009, which included not only direct government spending but also such features as tax credits for home buyers and temporary tax cuts for most Americans.

Such policies ignore a simple but vital truth: job growth comes from entrepreneurs—and public spending projects are as likely to crowd out entrepreneurship as to encourage it. By putting a bit more cash in consumers’ pockets, the tax cuts in the stimulus package may have induced a bit more car- and home-buying, but the next Steve Jobs is not being held back by too little domestic consumer spending. Tax credits for home buyers and the infamous program Cash for Clunkers encourage spending on old industries, not the development of the new products that are likelier to bring America jobs and prosperity.

Linking cities to entrepreneurship:

Further evidence of the economic power of entrepreneurs is the strong connection between entrepreneurial activity and urban success. One way of estimating entrepreneurial activity is average firm size; the idea is that a city with lots of smaller firms must have a lot of entrepreneurs running them. Another commonly used measure is the percentage of a city’s employees who work in new firms. Over the last 30 years, cities that are entrepreneurial, according to either of these measures, have added jobs more vigorously than those that aren’t. Even within cities, researchers have found, more entrepreneurial neighborhoods add jobs more quickly.

He tells an exciting story of How Detroit became a car city which was good but encourage large firms over small entrepreneurship  types. As car companies made losses because of foreign competition etc the city could not change. This led to the huge decline of Detroit city. NY on the other hand always maintained itself as a city for entrepreneurs and hence remains US best city:

 These findings support the ideas of the economist Benjamin Chinitz, who argued 50 years ago that New York City was resilient—it could remake itself as economic conditions changed—while Pittsburgh was not, because New York had a remarkable history of entrepreneurship. New York’s garment industry, the largest industrial cluster in postwar America, was a hive of small companies where anyone could get started with a good idea and a few sewing machines. Pittsburgh, by contrast, was the home of U.S. Steel—practically the definition of corporate America—whose company men were exceedingly unlikely to become entrepreneurs when the steel industry faltered.

Even more than Pittsburgh, Detroit emblematizes un-entrepreneurial America. But before it was dominated by three gigantic auto companies, Detroit was filled with clusters of private, interconnected innovators. Indeed, without the economic energy that those innovators generated, Detroit would never have become the Motor City. So Detroit’s history testifies to two important phenomena: first, the link between American entrepreneurship and employment; and second, the ability of a successful, big-firm industry to destroy a local culture of small-firm start-ups.

Long before it made its first car, Detroit was one of the many economic hubs that grew up around water. The Erie Canal connected the Great Lakes to the markets of the East, and cities sprouted at convenient spots—such as the straits that gave Detroit its name—along the great inland waterway. Naturally, shipping companies emerged, like Detroit Dry Dock, where the young Henry Ford learned about engines. Ford soon found himself attracted to one of the great economic challenges of the 1890s: making affordable cars. The basic technology, including the four-stroke internal combustion engine, had been invented in German cities; it clearly had the potential to produce vast profits, but only if someone could use it to create a functional and affordable automobile. America’s tinkerers—bicycle producers, carriage makers, and engine experts like Ford—flocked to the challenge.

Detroit was just unprepared for the transition once the auto industry declined:

So far, so good. But when change happened, Detroit was unprepared for it. Seeking to reduce costs and fleeing the powerful Michigan unions, auto companies started building factories in lower-cost areas soon after World War II. (Comparing the industrial growth of adjacent counties in states with differing union rules, economist Thomas Holmes has found that between 1947 and 1992, manufacturing grew 23 percent faster on the antiunion side of the state line.) By the late 1970s, the car companies were also struggling to compete with a new set of foreign firms offering attractive prices, quality, and fuel efficiency.

So Ford’s legacy to Detroit has been mixed. On the one hand, he surely brought many jobs there. But the scale of his success transformed a city of small, smart entrepreneurs into a city of vast factories filled with less educated workers. Decades of dominance by big companies in a single industry left Detroit with an ample supply of company men but a dire shortage of the kind of entrepreneurs who can reinvent a city when the economic climate changes. Even today, only 12 percent of Detroit adults have college degrees, and firms remain big. Meanwhile, urban success over the past 40 years has been tightly tied to having an abundance of educated workers and lots of little firms. The scale of Detroit’s decline is breathtaking: a city of 1.85 million residents in 1950 has fewer than 720,000 today.

He says Detroit story tells you something else as well p bailing out sick companies does not help. Auto cos ie big three have been bailed out over and over again. Result is more bailouts are needed next time.

He talks about Sam Walton of Walmart and Howard Schultz of Starbucks which created some great companies. He poinst to example of Seattle which was going Detroit way but pulled back thanks to some real smart entrepreneurs.

Declining industrial cities don’t have to follow Detroit’s path—thanks to entrepreneurs. Forty years ago, as Boeing chopped down its local workforce, two jokers put up a billboard on a Seattle highway that read:WILL THE LAST PERSON LEAVING SEATTLE TURN OUT THE LIGHTS? Today, of course, Seattle looks nothing like Detroit. A stream of innovative companies—Microsoft, Amazon, Starbucks, Costco—has completely transformed the city. Between May 2010 and May 2011, it added more jobs than any metropolitan area except Dallas and Houston.

Seattle also owes its success to its formidable skills base, a major boon to high-tech giants Amazon and Microsoft, which both employ large, highly skilled local workforces. More than half of the city’s adults have a college degree, which makes it one of the more educated places in America. We know that the share of a city’s population with a college degree in 1970 is a strong predictor of its subsequent employment growth. Another predictor is the presence of a land-grant college in an area prior to 1940, which supports Senator Daniel Patrick Moynihan’s old claim that the best way to create a successful city is to found two world-class universities and wait 50 years. One reason an educated population leads to jobs is that it helps entrepreneurs find—and create—opportunity in today’s complicated, technologically intense world. After all, the occupation and skills of prospective workers shape the choices of entrepreneurs; no one would start an engineering company in a city without engineers.

He says this does not happen overnight. What polices help? Education and reducing business barriers help for sure.

A similar point was made by Luis Zingales who argued from a different angle of declining meritocracy. He talked about individuals and Glaesar talks from a more macro angle. The point is the same – American policies are encouraging  cronyism over competition and markets.

Superb stuff all through.


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