Economic Growth Is Not Always Progress

Inflation and economic growth, measured by gross domestic product (GDP), have recently been headline news and have sparked serious debate among pundits, politicians and the citizenry-at-large. What do these stats mean for upcoming elections and for the average person’s daily life? Is it fair to compare China’s with the US? Is it fair to compare past GDP to today’s?
David Pilling’s 2018 book titled “Growth Delusion” explores these questions and many others and adds a healthy dose of skepticism along the way, especially when he points out that inflation effects reported GDP numbers, and vice versa.

Mr. Pilling makes a compelling case that GDP is an imperfect measure of economic growth that fails miserably to accurately indicate the welfare of a nation, with one exception: if “you’re poor, economic growth can be transformative” and effective in raising living standards out of poverty. However, he adds that GDP does not take into account, for example, income inequality, existing resource endowments and their depletion, and good and bad externalities. The author traces the history of GDP’s creation to the early twentieth century and explains that even at its inception, its creator saw flaws in the data used to compile it and in its tenuous ability to reveal the health of an economy.

The author also suggests that, even today, the GDP metric is fraught with pitfalls in comparing economic growth across nations, especially in emerging economies, and comparing those statistics over time. For example, some nations include illegal activities in the calculation, while others have huge underground economies which go unmeasured and unreported in GDP stats; others, such as China and Kenya, for example, deliberately underreport GDP growth, so as to keep subsidies coming from richer nations and certain global development institutions.

Mr. Pilling explains that technological changes that have transformed nations away from manufacturing and into service economies and the financialization of economies have further distorted and confused GDP meaning over the past half century. Through a series of specific anecdotes from developed and emerging nations the author demonstrates the many challenges inherent in devising this single metric of a nation’s economic health.

The author concludes that due to its shortcomings, and our inability to reduce all living standard factors to dollars and cents, the GDP metric needs to be supplemented with other types of stats and indexes; he highlights the many attempts to measure living standards by various researchers in recent years who have identified other factors that weigh in assessing human progress, prosperity and happiness.

Although rather comprehensive and detailed in its approach, the book’s analysis is an easy read and most accessible to readers with limited background in economic statistics and macroeconomic analysis. The book is an excellent introduction to this complicated and very detailed subject and should appeal to not only macroeconomists, but also to business executives and investors that rely on GDP statistics and forecasts in their decision-making.

Did Jack "Welch" on America?

David Gelles' recent, easy to read 231 page book about Jack Welch, "The Man Who Broke Capitalism,” about the former CEO of General Electric, is a must read for anyone interested in what went wrong with American Capitalism at the turn of this century. Mr. Welch was until recently considered the best American CEO of the 20th Century, and this book chronicles how he, during his 20 year tenure as CEO, made GE the most valuable company in the world, but along the way planted the seeds of ruin that became apparent not long after his retirement.

In addition, with Mr. Welch’s apparent success and celebrity, he unwittingly "single-handedly ushered in a new cutthroat era of American Capitalism that persists today." His obsession with "downsizing” (he eliminated 10% of GE employees ever year), “deal-making” (he acquired dozens of major companies through mergers and acquisitions), and “financialization” (he made GE a bank and used its cash for dividends and stock buybacks, rather than research and development or employee wages), allowed Mr Welch to drive profits and GE's stock price to ever increasing heights. Obsessed with his own success he eventually engaged in unethical and illegal business and accounting practices that would have driven this once AAA-rated company to extinction, but for the generous assistance it received from our government during the 2008 financial crisis.

The book highlights not only Mr. Welch’s career, but those of the many executives he trained who would go on to become CEOs of other world class corporations, such as 3M, Boeing, Home Depot, Chrysler, Allied Signal, and Honeywell. Many of the stories will be familiar to readers who have followed corporate America for the past 20 years, although the book offers many details about the events that most readers will find new and interesting.

As worthwhile a read as it is, the book veers off course a bit toward the end when it injects some partisan politics and begins to suggest remedies to our “broke” capitalist system. It compares the persona and the politics of Mr. Welch with that of former President Trump, suggesting that both men are cut from the same cloth as Republicans and suggesting that Mr. Trump's elevation to the Presidency was facilitated by his relationship with Mr. Welch.

The last chapter in the book, titled Beyond Welchism, tries to prescribe some ways to “fix” capitalism by specifically changing the practices of large corporations so that they are more beneficial to society at large. Unfortunately, the chapter is vague and unconvincing, referring to "studies" that claim to support the author’s ideas, but leaves readers with generalities. For example, he claims that "studies" have shown that increasing minimum wages make employees more productive and happier, but ignores other studies that show that raising minimum wages cause companies to reduce their workforces, thereby hurting the segments of the workforce they’re attempting to lift out of poverty or to a higher standard of living.

He mentions the need to "strengthen anti-trust policies" but offers no commentary on monopolistic and, by the way, liberal leaning companies like Facebook and Google, and other high tech companies that virtually control their markets. These companies also sell products that enable companies to employ fewer workers. Although the author comments on Jeff Bezos and Amazon, and depicts Amazon as possessing the worst anti labor relations imaginable, he omits the fact that Mr.Bezos is the owner of the liberal leaning Washington Post newspaper.

He talks about the need to raise taxes on the rich, especially on capital gains, but makes no mention of the most egregious tax policy in existence, that of treating carried interest income of uber rich hedge fund managers as capital gains instead of ordinary income, a policy that the Democrats failed to outlaw when they controlled congress back in 2009 (and failed again just this week).

He talks about the middle class fallout from the 2008 financial crisis, how the middle class lost their jobs while the corporate fat cats made millions, but again, fails to mention that the Democrat controlled congress in 2009 failed to hold many, if any, of those fat cats accountable with fines or jail time.

My point is that there’s probably enough blame on both sides of the political aisle for the failures of capitalism. Mr. Gelles seems to suggest that our government should try to “fix” our corporations, which is ridiculous when we realize that Congress “broke” our government decades ago and that government grows more dysfunctional each year.

Capitalism in its purest form, which does not exist today (and probably never did), needs an environment of unfettered economic freedom and fair competition in order to exist, and a profit motive to propel it forward. Interjecting more government and more regulations will only worsen the problem.

Mr. Gelles' book is essential reading for anyone interested in the back stories of many of the most important business headline stories of the past two decades, and I believe the book would be even better had it avoided bringing politics into the discussion. Moreover, instead of offering prescriptions for the future, this reader would have preferred, for example, that the author compare today’s failures with the practices that made those corporations great back in the first half of the 20th century.

ALASKA: Frontier Back In Time

Before embarking on this trip we had never thought much about the great state of Alaska or about the validity of anything we had heard about it for many, many years. In fact, before moving to the southwestern region of the United States three years ago we had never met anyone from Alaska but have since met a few, which raised our consciousness for the place and piqued our curiosity.

Everyone we know who explored Alaska did so via ocean cruise and did so in late spring or early summer months, and so we elected to follow their lead.

Alaska is huge and scarcely populated. It accounts for 20% of U.S. land mass and 40% of its coastline, but its total population is barely three-quarters of a million, spread over a land area that’s about 2.5 times as big as Texas. If Manhattan Island were comparable in population density, it would have only 14 residents! With more than a million visitors annually Alaska’s summer seasonal population swells considerably. In coastal town Skagway, for example, the summer population is twice as much as its year-round population.

It never occurred to us that Alaska would have its own time zone, one hour west of pacific time, or for that matter that it would actually have two time zones! Moreover, we thought Alaskan weather in summer would be dry and comparable to our early spring here in Las Vegas, but having endured nearly two weeks of rain and temperatures barely above 50 degrees, we now understand that climate and weather conditions here are complicated. Coastal and interior temperatures differ, with interiors drier and temperatures more volatile than coastal areas.

We obviously knew summertime up here has extended daylight but didn't realize it could be as much as 21 hours and it never does get completely dark even after the sun sets at this time of year.

Our trip had sea and land components, spanning twelve (12) days and traversing roughly 3,000 miles, originating in Vancouver, Canada and terminating in Fairbanks, Alaska. We moved from sea to land near Anchorage; not too impressive when viewed on an Alaska map, but most significant when considering that Anchorage and Fairbanks together comprise more than 80% of Alaska's population and more than 90% if Juneau is added. Moreover, Alaska’s road network mirrors that concentration of activity with two interstates passing through Anchorage and two passing through Fairbanks. Most of the other towns we visited comprise year-round populations measured in hundreds of persons. Much of Alaska’s land is held in seven (7) national parks and all seven rank in size among the nation's top ten.

Unlike most other visits in the U.S., an Alaskan trip requires multiple transportation modes and ours included a cruise ship, a riverboat, a few catamarans, two trains, and several busses. Sea planes are also typically used on excursions too. Many places are inaccessible by road with the most astonishing example being Juneau, Alaska’s capital! Most of Alaska still exists as wilderness and consequently its geological formations (mountains, rivers, glaciers, etc) and forests remain in tact as they have since the beginning of time.

Apparently man-made recorded history of Alaska begins in the mid-1800s with the US purchase of the Alaskan territory from Russia for 2 cents per acre or about seven (7) million dollars. According to locals the purchase paid for itself within a few decades with the gold rush in the latter 1800s. Our guides offered no history of the Russian occupation of the territory nor did they mention any notable Russian vestiges still existing today, which make us wonder about the legitimacy of Russia’s possession of the land and why the US felt compelled to buy it from them.

The early 1900s, after World War II, and especially during the past fifty (50) years were the periods that produced the rail, road and national park infrastructure that made our trip possible.

We knew Alaska’s economy was dominated by fishing, gold mining, natural resources, especially energy, and of course tourism, but did not fully appreciate the state's strategic importance as a military base and defender of U.S. sovereignty, especially since the cold war. The U.S. military has a major presence and is a major employer in Alaska even today.

One guide tried to convince us that from a strictly financial viewpoint, Alaska is a great place to retire citing the fact that Alaska has no state income tax, most places have no sales tax, and pension income earned in Alaska comes with COLA (cost of living) adjustments currently of 20%. There is also the coveted Alaska permanent fund dividend, deriving from the state’s huge presence of energy companies, payable to all bona-fide state residents which could amount to $4,000 per resident per year in 2022. Even though we found Alaska prices less inflated than expected with gasoline at $5.50 per gallon and food and restaurant prices high but not outlandish, we're still unpersuaded that Alaska is a financially attractive retirement venue.

We had always been told that salmon, halibut and king crab were plentiful and best in Alaska. Our experience both at sea and on land contradicts that claim, and we generally found fish to be not particularly fresh or adeptly prepared. Alaskan king crab as a menu offering was practically nonexistent and only our lodge in Denali offered it on its menu a whopping price of $150!

We came up here to get away from summer desert heat and to see all the natural wonders we had heard about, including glaciers, Denali (the highest mountain in North America), and various wildlife such as eagles, bear, moose, caribou and of course whales. Many glaciers were quite visible from our cruise, up in Glacier Bay, but seeing wildlife isn't quite a slam dunk even on land, unless you seek it out.

A view of Denali proved quite elusive due to heavy clouds and rain, but apparently not seeing it during a visit is normal. We were told that only 65 days during the summer season is it readily visible and that typically only a third of all visitors to the area actually see it. We found it ironic to have an entire national park dedicated to a subject that is so enormous yet so invisible to visitors most of the time. We thought perhaps it was a scam, and that maybe Denali didn’t really exist, until we finally caught a glimpse of it from the road as we traveled north to Fairbanks.

Our guides throughout were very knowledgeable and peppered their talks with interesting stories about local folks, customs and quips. In one town near Fairbanks, for example, they hold lotteries to guess when the first thaw will happen in spring. Up there in the interiors those folks also take their dog sled racing and the Iditarod very seriously. One guide quipped that “men are men and women win the Iditarod.” Another quipped that because there are more men than women in Alaska that “the odds are good finding a man, but the goods are odd.” And to attest to the strength of Alaskan women...”men are men and so are women!”

We would be remiss if we did not comment on the tour company, Princess Cruises, and our ship the Royal Princess that made our trip possible and a great experience.

Clearly the most efficient way to sample the wonders of Alaska is via cruise and we enhanced that experience with land excursions from the ship to: Ketchikan, where we visited a now silent salmon cannery and an area dedicated to totems made by Alaska’s indigenous people; Juneau, the state capital and a trip to the Mendenhall glacier and whale watching where we managed to see the flukes of many whales in a two hour period; and Skagway, where we did some remedial panning for gold and collectively managed to walk away with $30 worth of gold dust.

From our ship we saw many amazing glacial formations a day before we terminated our cruise in Whittier near Anchorage. Although well worthwhile and probably the most time efficient way to take in the sites, our seven-day cruise had three days at sea with no visual contact with the Alaskan shoreline. Our five-day land excursion took us to Princess Lodges in Kenai, Mt McKinley, Denali and Fairbanks. Although enjoyable, if we were to repeat the trip we would probably eliminate one or more legs of the land portion of the tour, in order to eliminate some redundancies and some of the wear and tear of bus travel.

We give Princess very high marks for the overall luxurious quality of the experience and their skill in daily handling very complicated logistics for a very wide of guests and itineraries. The food was generally very good with lots of variety offered in many venues. However, the quality of the Princess Lodges varied greatly among the four (4) we visited and generally speaking did not meet the service or venue standards we enjoyed on the cruise ship. Food offerings were limited in variety, quality and time convenience, offering mostly processed foods and not the best quality.

Very important: If you plan to take any Alaskan cruise, understand that your access to the internet and media in general will be very limited, and while at sea internet connections were virtually non existent or extremely slow. TV service was also intermittent at best. We were told that the remote sea location and mountains nearby made normal internet connections inoperable and so our service relied on antiquated and distant satellite technology that made connections slow when they existed. Don't expect to be connected to the outside world for most of your cruise.

In closing, one final comment: you can't beat an Alaskan cruise, especially Princess, for relaxation and sheer self-indulgence and opportunity to take in Alaska’s many breathtaking sights, but we believe adding an extended land excursion is really the only way to interact with Alaskans, appreciate their lifestyle, engage the expansive wilderness, and feel what it is like to live in Alaska.

Raising Interest Rates Will Prove Ineffective in Curbing Inflation and Could Exacerbate the Problem

Inflation, and how to curb inflation, seem to be the most important topics of the day. Many believe the Fed's current policy of raising interest rates will not work and I believe moderately higher interest rates may make the problem worse.

The Fed is in the midst of a campaign to raise its benchmark interest rate, the federal funds rate, which it began in March this year, continued in May and plans several more rate hikes this year. It will unlikely be able to raise rates enough to stem the currently 8+% annual inflation rate reported most recently in May.

The most recent example of using higher interest rates to dampen inflation dates back to 1979 when then Fed chairman Paul Volcker broke double-digit inflation by raising the federal funds rate higher than the inflation rate. Back then, Volcker reduced inflation that peaked near 15% in 1980 to less than 3% by 1983, by increasing the federal funds rate from 11% in 1979 to a peak of 20% in mid-1981. That drastic measure also led to the mild 1980-82 recession and a 10+% national unemployment rate that brought Volcker heavy criticism.

Raising interest rates above or even just to the level of today’s inflation rate, as Volcker did then, would surely lead to even more dire consequences today than they did 40+ years ago. It would most likely cause a severe global economic recession or worse, and a crash of the global bond and stock markets, which until very recently were at all time highs. So the Fed’s current half-baked plan to raise interest rates to less than half of the current 8% inflation rate is a real head scratcher as it is unlikely to curb inflation.

Why is the Fed unable to raise interest rates more? All-time high global debt in absolute terms and relative to global GDP will assure that even a modest rise in interest rates could lead to unprecedented levels of bankruptcies for individuals, businesses and governments of both industrialized and emerging nations. For example, in the US alone, the Debt-to-GDP ratio is today more than 120%, compared to a mere 30% back in 1980. Higher interest rates will likely have even more dire effects on other industrialized nations and could be catastrophic for emerging market economies.

Moreover, few observers seem to realize that the planned modest increase in interest rates with so much outstanding debt could worsen the inflation problem. Higher interest rates are already raising the cost of home mortgages and thereby home purchases, with a similar effect on auto loans and auto purchases. Back in the 1970s, the primary cause of inflation was the huge increase in energy costs, which effect just about all economic life on the planet. With today's huge and ubiquitous levels of global debt, interest rate increases similarly permeate all economic activity. There are already reports that family, business and government budgets are feeling the burden of higher interest costs from their historically high credit balances.

The Fed obviously knows all this, so what is its end game? By raising rates modestly, which it has and will continue to do, the Fed appears to be biding its time, letting some air out of the financial markets bubble, probably with the intention of persuading us by the end of the summer that that loss of wealth is reducing inflationary expectations. My best guess is that by the fall, the Fed will feel pressure to reverse course and begin to lower interest rates into the new year. The combination of midterm elections in November and the importance of fourth quarter business activity to annual budgets will provide the incentive necessary to stimulate the economy and the financial markets.