October 22, 2017

Australia Mourns the End of Its Car Manufacturing Industry

Auto plants in Australia have slowly been closing over the last several decades, with Ford, Toyota and now Holden, a General Motors subsidiary, shutting their manufacturing operations over roughly the last year.

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Some blame the industry’s demise on the government’s refusal in 2013 to come to the rescue of the country’s automakers as they were battered by a high Australian dollar, high production costs and a shrinking domestic market.

Union officials estimated about 30,000 people lost their jobs as a result of the recent closures. In the area north of Adelaide, which has at times had South Australia’s highest unemployment rate and where Holden was the largest employer, nearly 1,000 people were left looking for work as a result of the automakers decision to cease production.

Leading politicians expressed dismay at the fate of the domestic auto industry.

“Personally, I feel very sad, as we all do, for the end of an era,” Prime Minister Malcolm Turnbull said during a radio interview on Friday. He added that the majority of workers in Elizabeth had either found new employment, decided to go back to school or retired.

But union representatives said most of the laid-off workers will never get work in the manufacturing industry again.

The average length of service among those at the plant was about 20 years, according to the Australian Manufacturing Workers Union, and the average age of those affected by the closure was about 38.

But John Camillo, the union’s secretary in South Australia, said it was the workers over 50 that were particularly struggling to find new employment.

“It’s difficult out there, especially here in Adelaide,” Mr. Camillo said.

The decision to stop making cars in Australia reflects “the perfect storm of negative influences the car industry faces,” Mr. Turnbull said. He pointed to the continued strength of the Australian dollar, high production costs, and a small domestic market that is both competitive and fragmented.

The small size of the domestic car industry made it almost impossible to compete against foreign automakers.

“It just didn’t reach the scale of operation,” said John W. Freebairn, an economics professor at the University of Melbourne. “You have to compete with the smart U.S. manufacturers, the Japanese, the South Koreans and so on who are producing several hundred thousand units a year. Our guys were nowhere near that.”

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Holden devotees drove their cars through the town Sunday to commemorate “the end of an era.”

“Holden is one of Australia’s most iconic brands,” said Mark Bernhard, Holden’s chairman and managing director, in a statement. “We built the auto industry in this country and Australia grew up with Holden.”

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Article source: https://www.nytimes.com/2017/10/20/world/australia/holden-automaker-factory-closes.html?partner=rss&emc=rss

China’s Reform Hopefuls Watch for Names. Only One May Matter.


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A worker in the city’s decrepit steel mill. Credit Billy H.C. Kwok for The New York Times

Still, when the party’s congress closes next week, world economic leaders may glean some clues about China’s direction depending on who is named to the Politburo Standing Committee, the seven-person group that makes its top decisions.

Should Mr. Wang be named to the committee, that could suggest a slightly greater emphasis over the next five years on economic reform, such as giving private enterprise more freedom or curbing dependence on state-directed lending.

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But the party could send a different signal if it appoints Chen Min’er, the party boss of the less developed province of Guizhou. Mr. Chen’s development strategy there relied on building lots of tall bridges, a giant telescope and other government-led projects, as well as using official influence to help persuade large companies like Apple and Oracle to locate extensive data centers there.

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One other possible new member, experts say, is Hu Chunhua, who succeeded Mr. Wang as Guangdong’s party boss. Mr. Hu has a much more cautious reputation on economic changes than does Mr. Wang, though he allowed many of Mr. Wang’s policies to continue. Outside of economics, Mr. Hu has taken a much tougher approach to dissent, crushing an experiment in democracy in a Guangdong village called Wukan that Mr. Wang had tolerated.

The last party congress, five years ago, offered a hint of China’s debt-fueled approach under Mr. Xi.

Joining him then on the standing committee was Zhang Gaoli, who ran the large metropolis of Tianjin. Mr. Zhang was best known for leading a government effort to build a “New Manhattan” — a forest of immense office towers and apartment buildings far from downtown Tianjin, erected in the hope of creating a new financial center. The vast satellite city has begun attracting some residents in recent years but has yet to turn into a financial hub.

By contrast, Mr. Wang was the mayor of an obscure town in south-central China, Tongling, when he wrote a pro-reform essay in 1991 for a local newspaper. The essay — with lines like “History will never allow us to slumber on” — set off a lengthy discussion in Chinese newspapers, giving him a national reputation at the age of 36.

Mr. Wang moved up quickly after that, and by 2007 had become the Communist Party secretary running Guangdong Province. Even before he arrived, the province was one of China’s richest and most entrepreneurial, and more recently it has benefited from a boom in high-end technology manufacturing and the country’s thriving internet scene.

Still, experts say Mr. Wang helped improve Guangdong. Mr. Wang’s administration imposed stringent environmental rules that forced old and dirty industries to give way to new development. Mr. Wang oversaw the construction of the opera hall and other cultural attractions.

Air pollution in the province peaked in his first year there and has been falling steeply ever since, according to satellite imagery analyzed at the Hong Kong University of Science and Technology.

In Guangzhou, the 14 million-resident hub of Guangdong, one of southern China’s biggest steel mills once loomed over the Pearl River. Now a dozen 42-story apartment buildings stand there. A few old furnaces are set to be part of a historical park.

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Across the river lies a stream misleadingly named Lychee Bay.

It once reeked with the effluent from nearby homes and from a nearby bronze foundry. A concrete covering failed to contain the smell.

During Mr. Wang’s tenure, the bronze foundry moved away and Guangzhou expanded its sewage processing capacity. The area became so clean that it now attracts tourists.

“Guangzhou is moving faster in dealing with air and water pollution,” said Peng Peng, the vice president of the Guangdong System Reform Research Society, a public policy group. “Guangzhou relies more on consumption, which seems relatively healthy, and pays attention to the quality of economic development.”

After 2012, as Mr. Xi pushed his government-centered economic strategies, Mr. Wang was named a vice premier and largely disappeared inside Beijing’s bureaucracy. There he was given responsibility for mitigating damage from earthquakes and floods and replanting forests.

Should Mr. Wang, now 62, finally join the party’s standing committee and take a more senior position in government, he would have more influence but still would be carrying out an agenda drafted by Mr. Xi.

“Perhaps with Wang Yang,” said Mr. Lam, of the Chinese University of Hong Kong, “they might be able to do a little more within the orders from Xi Jinping.”

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Article source: https://www.nytimes.com/2017/10/19/business/china-reform-economy-communist-party.html?partner=rss&emc=rss

China’s Economy Grew Steadily, Thanks to Loans and Homes

China’s debt has soared over the past decade as banks and other lenders, working at the urging of Beijing, turned on money spigots to fuel growth. That has led to worries about the stability of the financial system powering the world’s second-largest economy.

Chinese debt accumulation had slowed in some recent quarters, suggesting that the country’s leaders were getting a handle on the problem. But some Western experts are skeptical that China has really done much.

“While recent policies to contain financial risks have slowed the pace of debt accumulation, China has yet to achieve stabilizing debt ratios, and is farther still from outright deleveraging,” Andrew Fennell, the director of sovereign ratings at Fitch Ratings, wrote in an email.

Building Boom

Addressing the Communist Party Congress on Wednesday, Mr. Xi told officials, “Real estate is for living in, not for speculation.”

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Plenty of people in China apparently feel otherwise. Surging prices in cities like Beijing and Shanghai have led some consumers to feel prosperous but have raised concerns about housing affordability and the potential for sudden drops. Chinese officials have worked in recent months to limit housing-related financing in the biggest cities, among other steps to stop the surge.

It is not just housing. A strong increase in fixed-asset investment last month reaffirmed the central importance of construction that includes roads, bridges and other infrastructure. Considerable building has come from local governments, which contributed heavily to China’s current hefty debt load.

Zhou Xiaochuan, the long-serving governor of the central bank, warned in a speech in Washington on Sunday that a large chunk of the debt accumulated by Chinese state-owned enterprises might actually represent disguised borrowing by local governments.

“Chinese local governments borrowed money from various financing platforms, which caused relatively too much debt,” he said.

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Trading Up

China can thank the world for some of its third-quarter performance. Its exports grew at a healthy pace as a global economic recovery improved demand for Chinese-made goods.

Of course, China’s economic success is partly built on exports. Yet China can no longer compete on costs against cheaper countries as its workers demand more. China is trying to shift to manufacturing more valuable products, which would help it develop its economy and nurture a new generation of more sophisticated, technically adept workers.

China also bought up more of the world’s products during the quarter. Its imports grew faster than exports, thanks in part to China’s stronger currency, which gives consumers more firepower when purchasing things from abroad. That also signals that many of China’s consumers feel comfortable spending money.

Follow Keith Bradsher on Twitter, @KeithBradsher.

Ailin Tang contributed research.

A version of this article appears in print on October 19, 2017, on Page B6 of the New York edition with the headline: China Says Its Economy Grew Briskly In Quarter.

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Article source: https://www.nytimes.com/2017/10/18/business/china-economy-gdp.html?partner=rss&emc=rss

The Economy Is Humming, but That May Not Win Janet Yellen Another Term

“The economy is humming along,” said Julia Coronado, president of MacroPolicy Perspectives, a New York economic research firm. “The markets are humming along. Given all the other stuff that’s going on, why mess with that?”

Mr. Trump is considering four candidates to replace Ms. Yellen. On that short list: Gary D. Cohn, the president’s chief economic adviser; Jerome H. Powell, the only Republican on the Fed’s board of governors; John B. Taylor, a Stanford University economist who has criticized the Fed for raising interest rates too slowly; and Kevin Warsh, a former Fed governor and a fellow at the Hoover Institution.

“Honestly, I like them all,” Mr. Trump said Tuesday. He added that he would choose a nominee “over the next very short period of time.” The White House would like to make the nomination before he departs for a 12-day trip to Asia in early November. Ms. Yellen’s term ends in early February, and the next chairman must be confirmed by the Senate.

Ms. Yellen, 71, has spent almost two decades at the Fed. She was a Fed governor in the mid-1990s, then returned to the Fed as president of the Federal Reserve Bank of San Francisco in 2004. She became vice chairwoman in 2010 and chairwoman in 2014.

During her four-year term, the unemployment rate has fallen to 4.2 percent while inflation has remained below 2 percent. Both metrics are close to the levels the Fed regards as ideal. Indeed, it has seldom come closer. She also has presided over the gradual reduction of the Fed’s stimulus campaign, which was implemented in the wake of the 2008 financial crisis, as the economy struggled through a bruising recession with persistent unemployment that peaked at 10 percent in October 2009.

Ms. Yellen’s calm and careful leadership style has won fans, both inside and outside of the Fed. John Williams, president of the San Francisco Fed, said that Ms. Yellen had been effective in building a consensus about the direction of policy among Fed officials, and in communicating policy to the markets and the public.

“When she came in there was a lot of concern about how would we unwind our policies and would that be disruptive and difficult, especially in the context of a global economy where other central banks were going in the other direction,” he said. “Now it’s almost like, ‘That was easy!’ But it wasn’t. It took hard work.”

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Some of the other candidates, notably Mr. Taylor and Mr. Warsh, have argued the Fed should be raising interest rates more quickly. But financial regulation is the area in which a new chairman likely would make the largest changes. The Fed supervises the nation’s largest banks and oversees the broader financial system.

Mr. Trump wants to loosen financial regulations, which he regards as an impediment to economic growth. Ms. Yellen, who played a key role implementing the new banking rules after the 2008 crisis, has acknowledged room for improvement. But in a high-profile speech in August, she also issued a warning against going too far.

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The Treasury secretary, Steven Mnuchin, has argued that installing a new Fed chairman would help Mr. Trump achieve his goal of reducing regulation.

Charles W. Calomiris, a finance professor at Columbia University, said that Ms. Yellen’s approach to regulation was reason enough to replace her. “It’s not just that regulation is excessively costly and complex,” he said. “It’s also failing to achieve its objectives.”

But Ms. Yellen has faced relatively little public criticism. Mr. Trump criticized her on the campaign trail, but he has praised her since taking office.

House Republicans have been among Ms. Yellen’s fiercest critics, regularly calling on her to increase interest rates and to reduce financial regulations.

Representative Jeb Hensarling, the Texas Republican who chairs the House Financial Services Committee, sent a letter to Ms. Yellen in February demanding that the Fed stop crafting regulations until Mr. Trump appointed a new vice chairman for supervision.

Mr. Trump’s choice, Randal K. Quarles, who was sworn in last week, will oversee the Fed’s regulatory work, including its stress tests of large banks.

Mr. Hensarling also has criticized Ms. Yellen’s approach to monetary policy. But he has not commented on whether Ms. Yellen should be nominated for a second term, and a spokeswoman did not respond to an email on Wednesday.

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A spokeswoman for Senator Michael D. Crapo, the Idaho Republican who chairs the Banking Committee, said he had not taken a position on Ms. Yellen’s candidacy.

Even some of Ms. Yellen’s critics favor her reappointment.

“She is an intelligent and levelheaded individual,” said Deborah J. Lucas, an economics professor at M.I.T. who has criticized the Fed’s bond purchases. “I trust her to make prudent decisions, particularly when it matters most, which is if there is another crisis. Continuity and experience seem especially valuable right now.”

Presidents in recent decades have generally decided to reappoint Fed chairmen, even from the opposing political party, on the theory that stability would comfort markets. Ronald Reagan, the last Republican president to inherit a Fed chairman who was a Democrat, thought seriously about replacing Paul A. Volcker in 1983, but ultimately decided to nominate Mr. Volcker to a second term. “The financial market seems set on having him,” Reagan wrote in his diary. “I don’t want to shake their confidence in recovery.”

President Clinton nominated Alan Greenspan in 1996 and in 2000 and President George W. Bush nominated Mr. Greenspan to a fifth term in 2004, before tapping Ben S. Bernanke to begin in 2006.

President Obama nominated Mr. Bernanke for a second term in 2010. When Mr. Bernanke stepped down in 2014, Mr. Obama named Ms. Yellen.

The last Fed chairman who did not serve a second term was G. William Miller, who is widely regarded as the least effective leader in the Fed’s modern history. Mr. Miller was also the last person without an economics degree to run the central bank. He was nominated by President Carter in 1978. Both unemployment and inflation were high and rising, and he was replaced after just 17 months by Mr. Volcker.

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Article source: https://www.nytimes.com/2017/10/18/business/economy/janet-yellen-fed-second-term.html?partner=rss&emc=rss

A MacArthur ‘Genius’ on Overcoming Modern Farm Slavery

I went to Haiti after school and worked for three years with a peasant movement that was trying to build democracy. There was a remarkable effort by peasant organizations in the countryside, by unions in the cities, to mobilize a population that had never voted in a real election. I got to be a part of that process.

I learned Creole and came back to the States. Then a couple years later, my wife was working with farmworkers in Pennsylvania, and she got involved with some Haitian workers who were facing some pretty horrible conditions. They needed a translator, so I got involved. That was the first time I’d actually learned about what happened just beneath the surface of our food system. And it was pretty eye-opening.

How did you end up in Florida?

There was an opening in Immokalee at the legal services office. We worked in the community down here from 1991 on.

What do you find? How quickly does the picture start to fill in for you?

About as soon as you get to town. It was a very harsh, dog-eat-dog kind of world. You would regularly see people getting beaten in the parking lot on payday, by the crew leader or the crew leader’s henchmen, because they complained about not getting paid. Nobody would come to their defense.

Was it clear that some people were essentially slaves, being forced to work against their will?

We were doing simple outreach up in labor camps in South Carolina, and we came across people who said: “Can you help us get our pay? We didn’t get our final paycheck at the last place we were working.”

That happens a lot. So we said, “Sure, where were you working, and why didn’t you get that paycheck?”

“We had to take off a night because the police came” — because the crew leader had shot another worker who was telling workers in the camp that they didn’t have to work against their will, that they were free to work wherever they wanted.

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So this wage complaint, as you started to pull at the thread, became massive — hundreds of people, up and down the East Coast working in forced labor and in unimaginable conditions.

That was the extreme — slavery, modern-day forced labor — but generational grinding poverty, and pretty unconscionable labor abuse, was the norm.

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When did you start figuring out how you’re really going to root this out systemically?

We gradually realized that the power that set the parameters for farmworker poverty and the inhumane working conditions in the field didn’t reside here in Immokalee. It wasn’t something that we could confront face to face. It was actually at the top of the food system. There were these massive fast-food chains and supermarket chains that had an unprecedented level of market power over their suppliers. So they could demand lower and lower prices.

So we realized if we were actually ever going to have the ability to improve workers’ lives in a meaningful way, we were going to have to take the conditions that we saw and confront those corporations with those conditions.

Can you tell me about the Taco Bell campaign, which was the seminal campaign that showed you it was possible to do this?

Taco Bell’s target market was 18 to 24-year-olds. And 18 to 24-year-olds are people who still believe in justice, still believe change is possible. Students organized what was called the “Boot the Bell” campaign. At some campuses, Taco Bells were either removed or blocked from starting business, and I think that helped create a lot of pressure.

Eventually, to its credit, Taco Bell was the first to step up and say, “There are problems in agriculture, and we’re going to work with the coalition to fix them.” So they signed to pay the premium and to only buy from growers who comply with the code. That was in 2005. It took four years.

The Florida growers umbrella group — the Florida Tomato Growers Exchange — was opposed to it initially. How did it come around?

Yes, they were dead-set against it. There were actually a couple of farms that agreed to sell to Taco Bell, to pass on the “penny per pound.” But then that was brought to a halt when the F.T.G.E. said that any of its members who participated in the Fair Food Program would be hit with remarkably large fines. Growers stopped participating, and there was essentially a boycott for years.

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But what we did during that time was continue on two fronts. One was continuing to get more and more companies to sign Fair Food agreements, even if the program was halted. That included McDonald’s, Burger King, Subway.

On a parallel track, we continued our antislavery work. More and more cases were taken to court, working with federal authorities, and more and more crew leaders were put behind bars.

The names of a couple of farms where those workers were came out on the court record. And given that we had all these other companies that had signed agreements already, it was sort of a dual incentive that was facing the growers. One was there were all these buyers who had agreed they would only buy from growers who complied with the Fair Food Program. The other was that buyers were starting not to buy from growers that were implicated with an abuse.

What’s at the top of your priority list now?

Frankly, if we could stop campaigning today and dedicate all our resources to building the program out, extending its protections to tens of thousands more workers, we would prefer that infinitely to having to campaign to get companies to join. Unfortunately, we’re forced to continue campaigning. Some have shifted purchases to places where sexual violence against women is endemic.

I ask people to think of themselves at a farm stand with beautiful fruits and vegetables. When I ask people what they would do if they looked over the cashier’s shoulder and saw a woman being sexually assaulted in the crew leader’s truck, invariably, every single one says: “I would never by that fruit. I would do what I can to stop what’s happening.” Yet somehow when human beings come together to work as a corporation, the collective tolerance for outrageous abuse increases exponentially. That is what I can’t understand.

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Article source: https://www.nytimes.com/2017/10/18/business/economy/macarthur-genius-greg-asbed-ciw.html?partner=rss&emc=rss

On Money: North Korea Is No Longer the Hermit Kingdom — but How Long Will China Be Its Lifeline?

Nor is North Korea as ossified as outsiders might imagine. Kim still wields the instruments of totalitarian power, but he has relaxed the state’s grip on the economy, allowing officials and ordinary citizens greater autonomy to make money and engage in trade, so long as a chunk of the profits flows to Kim’s inner circle. As a result, the North Korean economy grew 3.9 percent last year. Food prices have stabilized. Mobile phones have proliferated. And construction cranes now dot Pyongyang’s rising skyline. “North Korea is no longer a communist country,” says Justin Hastings, the author of the book “A Most Enterprising Country.” “Every state entity has been deputized to make money.”

The nebulous unit that supervises much of North Korea’s hard-currency trade is a Workers’ Party of Korea bureau with the Orwellian name Office 39. As sanctions become more onerous, North Korean companies, whether dealing with licit or illicit goods, have become adept at operating with multiple layers of disguise: false identities, fast-changing front companies, ships sailing under “flags of convenience” from places like Togo or Tuvalu. Office 39 doesn’t coordinate all this activity, recent defectors say; along with other departments, it acts more like a collection agency, setting dollar quotas that enterprises must meet by any means necessary.

Kim Kwang-jin, a defector who worked in Singapore for a bank affiliated with North Korea, says his firm met its quota by running reinsurance scams on factory fires, transportation accidents and other disasters. In 2003, Kim Kwang-jin told me, he arranged to send Kim Jong-un’s father and predecessor, Kim Jong-il, the annual quota as a birthday gift — $20 million in cash, stuffed into two heavy-duty bags. The Dear Leader was so pleased that he sent a thank-you note along with fruit, blankets and a DVD player. “North Korea has gotten more adept at hiding its tracks since then,” says Kim, who now works at a think tank run by South Korea’s intelligence service. “But it is also much more dependent on China.”

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The countries have a love-hate relationship. In the Korean War, the two newly formed Communist states forged a bond that Chairman Mao Zedong claimed was “as close as lips and teeth.” But Kim Il-sung, who was nearly killed by Chinese allies in the 1930s, feared that China would take over his country at the end of the war. Decades later, when the Soviet Union, its main benefactor, collapsed North Korea had nowhere to turn but China and felt betrayed when Beijing established ties with South Korea in 1992. China now accounts for more than 80 percent of North Korean trade, yet Kim Jong-un — channeling his grandfather’s resentment — openly defies Beijing, accelerating his nuclear-weapons program and even timing missile tests to embarrass President Xi Jinping.

Until now, the calculus in Beijing has been guided by caution. Push North Korea too hard, the reasoning goes, and the resulting conflict or collapse could lead to millions of refugees pouring into China and a united, America-aligned Korea becoming entrenched on its doorstep. Now the balance may be shifting. Alarmed by Kim’s nuclear provocations — and perhaps pressured by the Trump administration — China is acting tougher on sanctions. In the past month, it has stopped trucks filled with North Korean seafood, ordered Chinese banks to drop North Korean clients and vowed to shut down North Korean companies. Some North Korean workers in northeast China are already heading home. As James Reilly, an associate professor at the University of Sydney, puts it, “China has really crossed the Rubicon.”

Photo
Credit Illustration by Andrew Rae

Yet there are serious doubts about how far China is willing to go. And because North Korean enterprises rarely leave their fingerprints on overseas bank accounts or companies, how tough can Beijing’s enforcement be? To skeptics, China’s late conversion signals not a commitment to sanctions but a desire not to be scapegoated by Washington, where the default position has long been that China is responsible for its wayward little brother. “China is not the only country that matters,” says Andrea Berger, a North Korea expert at the Middlebury Institute of International Studies at Monterey. “North Korea has a big footprint overseas, so we have to look at its networks around the world, too.”

North Korean trade outside China is deep and varied, its value often underestimated. Russia employs tens of thousands of North Korean workers in construction sites and Siberian logging camps even as it helps Pyongyang evade sanctions on oil imports. In Africa, where North Korea formed strong bonds during the independence struggles, the most visible signs are the massive statues built for leaders and dictators by North Korea’s state art studio, Mansudae. Behind these monuments is a bustling trade in arms, minerals and manpower, often aided by embassy staff. Only rarely are shipments stopped. Last year, though, Egyptian customs agents found 30,000 North Korean rocket-propelled grenades hidden under a mound of iron ore on a ship bound for their country, a United States ally. Since then, the Trump administration has withheld almost $300 million in aid and military funding from Egypt.

United Nations’ sanctions are now targeting one of the most lucrative enterprises: the export of quasi slave labor. An estimated 100,000 North Koreans are toiling around the world in abysmal conditions: 12-to-16-hour days under constant surveillance, their wages and freedom confiscated by the state. “North Korea is exporting crimes against humanity,” says Remco Breuker, a Dutch historian who led an investigation of companies using North Korean workers in Europe. These laborers can be found in roughly 40 countries, from shipyards in Poland to building sites in Qatar — to the little restaurant in my neighborhood.

When the disco lights at Pyongyang Okryu flashed on, our waitress appeared onstage in a lime green dress, crooning a North Korean melody. Two others danced beside her with little sense of rhythm or joy. Last year, 12 waitresses and a manager working in a restaurant in Ningbo, China, defected en masse, so the control over workers’ lives is reportedly even tighter now. Unlike my last visit to a North Korean restaurant, there were no homages to the leader, no conga lines to “Country Roads.” But near the end of the show, our waitress donned a traditional gown and played the 21-string gayageum, a kind of zither dating back to medieval times, when her Korean ancestors reigned over part of what is now China. After paying the bill — a hefty sum for Bangkok — I carried my sleeping son out and the waitress patted his head. I may be wrong, but I think I even detected a genuine smile.

Brook Larmer is a contributing writer for the magazine. Next Week: On Medicine, by Siddhartha Mukherjee

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A version of this article appears in print on October 22, 2017, on Page MM18 of the Sunday Magazine with the headline: No longer the Hermit Kingdom of old, North Korea is enmeshed in global trade — in ways that often help it evade international sanctions.

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Article source: https://www.nytimes.com/2017/10/18/magazine/north-korea-is-no-longer-the-hermit-kingdom-but-how-long-will-china-be-its-lifeline.html?partner=rss&emc=rss

Economic Scene: Why the Trade Deficit Matters, and What Trump Can Do About It

As C. Fred Bergsten, founder and director emeritus of the Peterson Institute for International Economics, told me, “Even if the deficit is financeable it is not sustainable in domestic political terms.”

The trade deficit’s political power raises a question that seems overdue: Why has an advanced nation like the United States allowed such large imbalances to persist for such a long time? Perhaps there is a case for policy makers in Washington to do something to narrow the gap.

American Imbalance

The United States’ large and persistent current account deficit — the broadest measure of its trade in goods and services — is an anomaly among rich countries. The main reason for the deficit, economists argue, is the strong dollar.

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By The New York Times | Sources: Organization for Economic Cooperation and Development (account balance); Federal Reserve Bank of St. Louis (dollar)

The American current account deficit — the broadest measure of the balance of trade in goods and services — is an anomaly.

Economists’ standard explanation of international trade says that rich countries like the United States will export capital, of which they have a lot, lending to poorer nations that have little capital but a lot of cheap labor. These poor countries, in turn, will invest the borrowed money in American-made machines for factories in which to employ their workers. So the lending will generate exports for the United States — building a trade surplus.

Most developed nations adhere to this pattern most of the time. The European Union now has a current account surplus. If it weren’t for the United States, so would the G7 group of major industrialized countries. But since 1980, the United States has found itself mostly on the borrowing end of the deal. It has used the foreign capital to finance investment at home, racking up huge trade deficits along the way.

Some economists will argue that the trade deficit is ultimately irrelevant if there is sufficient money coming in from abroad to pay for it at a reasonable interest rate. So what if China owns a ton of Treasury bonds? Even fears that it might dump them to hurt the United States ignore that China has little incentive to do that. It would amass enormous losses, too.

But it is a mistake to ignore the wounds caused by persistent trade imbalances on American workers.

The trade deficit hasn’t had a uniform effect across the economy. As it soared over the last half century, it was workers in industries that compete with imports — like manufacturing — who lost out. And employment shifted to industries that were not exposed to trade.

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Even if trade with China did not reduce overall employment, convincing new research shows that the two-decades-old flow of imports from China caused lasting damage to communities where industries that competed with Chinese goods lost out and whatever new jobs emerged couldn’t match the quality of those lost.

The money from China that financed the American trade deficit also financed the housing bubble, holding interest rates down in the run-up to the financial crisis of 2008. “China did not force our banks to make stupid subprime loans, but it enabled the macroeconomic conditions,” Mr. Bergsten said.

The combination, Mr. Bergsten suggests, produced the protectionist backlash that delivered the presidency to Mr. Trump.

Photo
President Trump with a signed memorandum in August calling for a trade investigation of China. Credit Tom Brenner/The New York Times

For all the angry rhetoric, there is little in Mr. Trump’s campaign against foreign trade that might help turn around the nation’s trade balance. Pulling out of trade deals won’t do it. At best, this will reroute trade to other countries. His rallying cry against China’s purposely weakening its currency — long a favorite on Capitol Hill — is pointless at a time when China is trying to push the value of the renminbi up, not down.

The United States has run large trade deficits when its trading partners were manipulating the currency and when they weren’t. It ran large trade deficits when President Ronald Reagan ran large budget deficits. It ran them again when the Clinton administration turned the budget deficit into a surplus — a change that should have increased national savings, economists argued at the time.

Economists argue that the deficits will stop when Americans stop consuming and investing more than they earn, reducing the demand for money from overseas. But that is easier said than done.

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The one straightforward recommendation to address the trade deficit would be for Mr. Trump to do something he surely won’t: drop the rest of his promised economic agenda, starting with his multitrillion-dollar tax cut, which would reduce national savings and make the trade deficit balloon.

But slashing the trade deficit for good will be very tough. That would require weakening the American dollar, the reserve currency of the world. That would be no easy task.

The dollar is the main currency used in global trade, as well as international capital market transactions. People and governments the world over store their wealth in American stocks and bonds. What’s more, the dollar is the go-to currency in the time of financial crises, even if the crises at hand are centered in the United States. Against these forces it is hard to keep the dollar down.

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Still, there is a promising path that Mr. Trump could pursue. The United States tried it before, two years before he ran his ads bashing Japan. The budget deficit was bloated. The dollar was soaring. And at the Plaza Hotel in New York, Treasury Secretary James Baker convinced Japan and West Germany that it was in their best interest to help the dollar fall.

All Mr. Baker had to do was convince his counterparts that if they didn’t play they might risk protectionist moves from Congress. And by 1989, the dollar had fallen 50 percent against the Japanese yen and more than 40 percent against the West German mark.

This kind of approach seems like a perfect fit for Mr. Trump, who tends to enjoy making threats. If he did so, the trade deficit might even close. In 1991, the United States even ran a current account surplus for two full quarters.

Email: eporter@nytimes.com; Twitter: @portereduardo

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Article source: https://www.nytimes.com/2017/10/17/business/economy/trade-deficits-nafta.html?partner=rss&emc=rss

Economic Trends: Why Surge Prices Make Us So Mad: What Springsteen, Home Depot and a Nobel Winner Know

Technology is making “variable” or “dynamic” pricing — the same strategies that ensure a seat on an airplane, a hotel room or an Uber car are almost always available if you’re willing to pay the price — more plausible in areas with huge social consequences.

Dynamic pricing of electricity could help bring down pollution, reduce energy costs and make renewable energy more viable. Constantly adjusting prices for access to highways and congested downtowns could make traffic jams, with all the resulting wasted time and excess emissions, a thing of the past. Any sector where supplies tend to be fixed but demand fluctuates — the water supply, health care — would seem like prime candidates for variable pricing.

But technologists, entrepreneurs and regulators who would go down this path first need to learn a few lessons from Mr. Thaler — and Mr. Springsteen.

“A good rule of thumb is we shouldn’t impose a set of rules that will create moral outrage, even if that moral outrage seems stupid to economists,” Mr. Thaler said.

As it turns out, when you look at when and how dynamic pricing provokes outrage, you detect some patterns — and a guidebook on getting some of the benefits of economic efficiency without fueling outrage that dooms the entire project.

Musicians taking the long view

The underpricing of popular concert tickets is nothing new. In an earlier era, this was visible in long lines of fans camping out to buy them. Now, the gap between fans’ willingness to pay and the official price drives online ticket marketplaces, and a constant cat-and-mouse game pitting concert promoters against ticket brokers. And Mr. Springsteen’s show is grappling with the same challenge that “Hamilton,” and other hot tickets on Broadway have faced: limited seating, seemingly limitless demand.

Research by the economists Marie Connolly of the University of Quebec and Alan Krueger of Princeton based on a sample of major concerts in 2006 estimated that artists and promoters left about 5 percent of potential income (or around $200 million) on the table by underpricing tickets relative to the market rate.

Advertisement

Continue reading the main story

Some in the music business see this as the height of irrationality. “Most concert tickets are not priced to market,” said Marc Geiger, a leading agent to musicians with WME Entertainment. He described showing an artist that the front-row concert tickets, priced flat at $125, were selling for $900 to $1,300 on the secondary market.

“I say, please, let me take some of those and price them at market,” Mr. Geiger said at the Music Industry Research Association conference in August in Los Angeles. Confoundingly, he said, the same artist might chafe at discounting the back rows of an arena to ensure a sellout, for fear of appearing to give away tickets too cheaply.

“We are still coming out of the era of rock ’n’ roll socialism,” he said. “I think the concert industry is still in a bit of head-in-the-sand economics.”

But given that the apparent underpricing has been so widespread and so persistent, is it possible the strategy is more rational than it seems? That’s what Ms. Connolly and Mr. Krueger argue. For artists, no one show exists in a vacuum. And the things that might maximize revenue for any given night might not be the elements that matter in the longer term in developing devoted fans.

There’s the issue of fairness, of course. Fans don’t want to think their favorite artist is gouging. And the entire concert experience may be better if raucous superfans are in the front rows, rather than whoever is able to pay four figures for a ticket. The goal is to create an experience that makes everyone leave with a warm glow, their fandom of that artist that much deeper.

If artists did raise prices sharply, there’s a risk they would need to discount prices later to fill up the arena. Research shows that when people find out they overpaid for something, they buy less in the future.

So one view of the Springsteen approach is that it is economically irrational. But another is that it is part of a long-term relationship between a performer and his fans.

That might be a lesson for the other industries where variable pricing could make a lot of sense.

Fairness helps people keep cool

Those scorching days of midsummer, when every air-conditioner in a hundred-mile radius is cranking at full blast, are hard on utilities.

Photo
Credit Illustration by Eden Weingart; Photo Michael Burrell/Alamy

Most of the time, they can meet electricity demand with modern, efficient natural gas power plants that keep power flowing consistently at reasonable cost and with moderate carbon emissions, combined with nuclear and renewable energy plants that are pretty much always operating.

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Continue reading the main story

But on brutally hot days (and perhaps a few bitter cold days in the winter, too), things get trickier. To keep up with demand, utilities have to turn to old, expensive, dirty coal and oil plants. Some power plants maintain a crew year-round in order to be able to generate electricity only a few days during peak demand.

As a result, the cost of energy production can be four or five times as high on a high-demand day as on a low-demand day.

Yet the way most Americans buy electricity, that is all invisible. Utilities typically charge a single price per kilowatt-hour of electricity no matter when it was used.

If the price of electricity varied from hour to hour as airline tickets do, it might create incentives on high-demand days for consumers to set their air-conditioners a few degrees higher or to postpone running their washer and dryer till the overnight hours. The old, inefficient plants could be mothballed, and air pollution would decrease.

It sounds easy, an elegant use of markets to increase efficiency. And in some limited-scale experiments, it’s already happening. In Illinois Elevate Energy says that it has saved 28,000 customers 15 percent on their electricity with a system of variable electricity pricing through two utilities. In normal times, energy might cost 3 or 4 cents, while on peak days it can surge to 14 cents.

But the people working on such programs are also aware of some of the problems that could emerge if they aren’t careful. And they come back to some of the same notions of fairness that underpin the concert pricing conundrum.

Affluent people could easily decide it’s just not worth the effort to adapt their energy consumption to the spot price, making the programs a penalty for the poor. And some people might have trouble following constantly changing prices or knowing how to trim their usage in response. Woe betide the utility executive facing customers who are angry upon suddenly receiving a $2,000 electricity bill after a heat wave.

Advertisement

Continue reading the main story

It could get worse. If a poor older person turned off air-conditioning during a heat wave to avoid the price spike and died of heat stroke, it would be a human tragedy. People on supplemental oxygen can’t turn the machines off to save money.

“I’m a big believer that you don’t just give people a raw price signal, but provide them with support and financing to invest in the infrastructure to respond appropriately,” said Daniel Esty, a Yale environmental law professor and former commissioner of Connecticut’s energy and environmental protection agency. “Even better over time would be a system where people don’t have to think about it, where smart appliances are connected to a smart grid that would enable them to do their part in a kind of invisible-hand sort of way.”

Newsletter Sign Up

Continue reading the main story

The Illinois program has included email and text alerts to tell people when surge pricing is in effect, and some customers are using technology involving smart thermostats so that their temperature setting adjusts automatically. “This doesn’t have to be something people need to monitor every day to be successful,” said Sarah Gulezian, senior manager of dynamic pricing programs at Elevate Energy.

Moreover, it might prove possible to create pricing structures that guarantee consumers won’t pay more than they would have under traditional pricing, essentially seizing the benefits of dynamic pricing without anyone getting an unpleasant risk of sticker shock. That’s because most households see savings under the plans, and only a handful see their prices rise.

Utilities and regulators, in other words, have to think a little like Mr. Springsteen: It’s not just about maximizing the efficiency of the energy market on any one day, just as the Boss isn’t trying to maximize his revenue from any one concert. Rather, it’s about maintaining a relationship in which people do not feel like they have been exploited.

Some short-term inefficiency can buy long-term viability. And that’s never truer than when disaster strikes, whether a heat wave, a blizzard or a hurricane barreling toward the most populous area of Florida.

Home Depot and a hurricane

As Hurricane Irma did just that in early September, about 150 Home Depot officials gathered in the company’s Atlanta headquarters in an auditorium and a series of conference rooms that became the company’s temporary command center. Logistics experts, store operations officials, corporate security staffers, human resources employees, lawyers and representatives of major suppliers were all there, in what is now a well-rehearsed exercise.

Photo
Credit Illustration by Eden Weingart

The first thing they did was direct all prices to be frozen in areas likely to be affected by the storm. There is no surge pricing at Home Depot stores after a disaster, in both a longstanding corporate policy and a matter of law in many states.

But the company doesn’t stop with that. All those logistics people and other staffers are there to ensure that the surge in demand after a disaster is matched with a higher supply of the goods people need.

Advertisement

Continue reading the main story

As hurricane season approaches, dedicated warehouses are stocked with goods that will be needed if a major storm hits, according to the company’s director of corporate communications, Stephen Holmes. And that’s why, as soon as Irma passed the Miami area and the major highways were confirmed to be passable, a convoy of 41 tractor-trailers full of generators, plywood, chain saws and similar items trekked from Georgia to South Florida, escorted by the police.

The key is responding to a desperate situation not by raising prices, but also not by being content with shortages of badly needed goods. Rather, emergencies are an occasion to increase supply, even if it means incurring big logistical costs to do so.

That could have a lot of implications, including for your morning commute.

Traffic-choked monster

The Capital Beltway that encircles Washington and its near suburbs is more than just a metaphor for the alleged insularity of the people who live within it. It is often a traffic-choked monster that ruins the commutes of many who must use it.

Photo
Credit Illustration by Eden Weingart; Photo Andre Jenny/Alamy

But for a 14-mile stretch, there is an out if you have the money. A parallel toll road allows those willing to pay — 20 cents a mile during slow periods, $1 a mile during a typical rush hour, more during times of extreme traffic — to ensure it is never clogged.

The toll road, a joint venture between Virginia’s transportation department and the Australian company Transurban, is an example of dynamic pricing as a tool to reduce traffic. Different in approach — but with the same ultimate goal — is congestion pricing, a fee on cars and trucks to enter a dense urban area. Congestion pricing has gone into effect in Stockholm and London but was rejected for New York in 2008 (Gov. Andrew Cuomo of New York has indicated new openness to the idea this year).

In these areas, there is too much demand for space on the roads and too little supply of road, and each of these strategies tries to use pricing to bring supply and demand into balance. But paying variable prices for a good that has previously been free (most roads) or charged at some fixed rate (traditional toll roads) raises all sorts of issues.

This new approach to modulating traffic may become more acceptable to voters when it is part of an increase in supply.

If variable tolls or congestion charges are merely about pricing some people out of the market and letting rich people avoid the nuisance of traffic, they probably won’t go over so well. But if they are part of creating more supply of road, ensuring more people over all can get where they want to go — and if people are frequently reminded of that — the measures may go down easier.

Advertisement

Continue reading the main story

The Transurban deal with Virginia essentially makes private money available for additional road capacity — the express lanes on the Capital Beltway were built from scratch. Its existence also serves to reduce the traffic on the traditional lanes.

Governor Cuomo has pitched a New York congestion fee as a funding stream to improve and expand New York’s rail system. If that happens, it could mean more capacity to get people in and out of the city.

Another lesson from these pricing experiments is that they tend to be most resisted when they are new. When Stockholm experimented with a charge to enter the city center in 2006, it was highly controversial, with people in suburban towns especially viewing it as an unfair tax.

But since being made permanent in 2007, opinion has shifted, said Maria Borjesson, a transportation economist at the KTH Royal Institute of Technology.

“I think an important lesson is that the conception of what is fair changes,” she said. “Before the charge, the discussion was of how unfair it was and how it would be hardest for low-income people. Now when we do surveys, we find that people think it is unfair if the people who use the streets and pollute and increase congestion don’t pay. We’ve seen this everywhere that has implemented congestion charges, that public support increases afterward.”

A lesson for Uber, and all of us

People’s perceptions of what is fair and just are not set in stone; they evolve over time. But companies looking to use variable pricing have to be cognizant of how important it is to respect those perceptions.

Uber has often been cast as the embodiment of excessive use of surge pricing. For example, in 2013, Jessica Seinfeld, the cookbook author and wife of the comedian Jerry Seinfeld, was outraged to face a $415 charge for a short ride in a snowstorm, and told her Instagram followers all about it. Since then, Uber has taken a range of actions to try to keep the benefits of variable pricing while reducing the outrage.

It has adopted a quicker trigger finger for eliminating surge pricing entirely in emergency situations, for one thing. When Mexico City had a major earthquake on Sept. 19, an operations worker at the company’s local headquarters turned off surge pricing, even while the building was still shaking.

Advertisement

Continue reading the main story

“The fact that one of our teammates had the presence of mind to turn off surge in that chaotic moment, I think, reflects the deep responsibility we all feel toward our fellow citizens and the cities we serve,” said Rodrigo Arévalo, general manager for Uber in Latin America.

The company also cut back on passenger complaints by giving a clear estimate of the price of a ride before a person books a car, a practice that began last year. It turns out it’s easier to decide whether it’s worth $30 for a car ride and act accordingly than it is to be told that a surge multiplier of 2.5 times is in place and that the normal rate would probably come to about $12.

Restaurants have long known that charging a fee for a reservation offends people’s sensibilities — but that on a big night like New Year’s Eve you can require everyone to eat an expensive fixed-price menu with lobster and filet. Diners will happily pay a surge price without thinking of it as such.

What the successful examples of variable pricing have in common is that they treat customers’ desire for fairness not as some irrational rejection of economic logic to be scoffed at, but something fundamental, hard-wired into their view of the world. It is a reality that has to be respected and understood, whether you’re setting the price for a highway toll, a kilowatt of power on a hot day, or a generator after a hurricane.

“If you treat people in a way they think is unfair, then it will come back and bite you,” Mr. Thaler said. And it doesn’t take a Nobel to understand that.

Continue reading the main story

Article source: https://www.nytimes.com/2017/10/14/upshot/why-surge-prices-make-us-so-mad-what-springsteen-home-depot-and-a-nobel-winner-know.html?partner=rss&emc=rss

Economic Trends: Why Surge Prices Make Us So Mad: What Springsteen, Home Depot, and a Nobel Winner Know

Technology is making “variable” or “dynamic” pricing — the same strategies that ensure a seat on an airplane, a hotel room or an Uber car are almost always available if you’re willing to pay the price — more plausible in areas with huge social consequences.

Dynamic pricing of electricity could help bring down pollution, reduce energy costs and make renewable energy more viable. Constantly adjusting prices for access to highways and congested downtowns could make traffic jams, with all the resulting wasted time and excess emissions, a thing of the past. Any sector where supplies tend to be fixed but demand fluctuates — the water supply, health care — would seem like prime candidates for variable pricing.

But technologists, entrepreneurs and regulators who would go down this path first need to learn a few lessons from Mr. Thaler — and Mr. Springsteen.

“A good rule of thumb is we shouldn’t impose a set of rules that will create moral outrage, even if that moral outrage seems stupid to economists,” Mr. Thaler said.

As it turns out, when you look at when and how dynamic pricing provokes outrage, you detect some patterns — and a guidebook on getting some of the benefits of economic efficiency without fueling outrage that dooms the entire project.

Musicians taking the long view

The underpricing of popular concert tickets is nothing new. In an earlier era, this was visible in long lines of fans camping out to buy them. Now, the gap between fans’ willingness to pay and the official price drives online ticket marketplaces, and a constant cat-and-mouse game pitting concert promoters against ticket brokers. And Mr. Springsteen’s show is grappling with the same challenge that “Hamilton,” and other hot tickets on Broadway have faced: limited seating, seemingly limitless demand.

Research by the economists Marie Connolly of the University of Quebec and Alan Krueger of Princeton based on a sample of major concerts in 2006 estimated that artists and promoters left about 5 percent of potential income (or around $200 million) on the table by underpricing tickets relative to the market rate.

Advertisement

Continue reading the main story

Some in the music business see this as the height of irrationality. “Most concert tickets are not priced to market,” said Marc Geiger, a leading agent to musicians with WME Entertainment. He described showing an artist that the front-row concert tickets, priced flat at $125, were selling for $900 to $1,300 on the secondary market.

“I say, please, let me take some of those and price them at market,” Mr. Geiger said at the Music Industry Research Association conference in August in Los Angeles. Confoundingly, he said, the same artist might chafe at discounting the back rows of an arena to ensure a sellout, for fear of appearing to give away tickets too cheaply.

“We are still coming out of the era of rock ’n’ roll socialism,” he said. “I think the concert industry is still in a bit of head-in-the-sand economics.”

But given that the apparent underpricing has been so widespread and so persistent, is it possible the strategy is more rational than it seems? That’s what Ms. Connolly and Mr. Krueger argue. For artists, no one show exists in a vacuum. And the things that might maximize revenue for any given night might not be the elements that matter in the longer term in developing devoted fans.

There’s the issue of fairness, of course. Fans don’t want to think their favorite artist is gouging. And the entire concert experience may be better if raucous superfans are in the front rows, rather than whoever is able to pay four figures for a ticket. The goal is to create an experience that makes everyone leave with a warm glow, their fandom of that artist that much deeper.

If artists did raise prices sharply, there’s a risk they would need to discount prices later to fill up the arena. Research shows that when people find out they overpaid for something, they buy less in the future.

So one view of the Springsteen approach is that it is economically irrational. But another is that it is part of a long-term relationship between a performer and his fans.

That might be a lesson for the other industries where variable pricing could make a lot of sense.

Fairness helps people keep cool

Those scorching days of midsummer, when every air-conditioner in a hundred-mile radius is cranking at full blast, are hard on utilities.

Advertisement

Continue reading the main story

Most of the time, they can meet electricity demand with modern, efficient natural gas power plants that keep power flowing consistently at reasonable cost and with moderate carbon emissions, combined with nuclear and renewable energy plants that are pretty much always operating.

But on brutally hot days (and perhaps a few bitter cold days in the winter, too), things get trickier. To keep up with demand, utilities have to turn to old, expensive, dirty coal and oil plants. Some power plants maintain a crew year-round in order to be able to generate electricity only a few days during peak demand.

As a result, the cost of energy production can be four or five times as high on a high-demand day as on a low-demand day.

Yet the way most Americans buy electricity, that is all invisible. Utilities typically charge a single price per kilowatt-hour of electricity no matter when it was used.

If the price of electricity varied from hour to hour as airline tickets do, it might create incentives on high-demand days for consumers to set their air-conditioners a few degrees higher or to postpone running their washer and dryer till the overnight hours. The old, inefficient plants could be mothballed, and air pollution would decrease.

It sounds easy, an elegant use of markets to increase efficiency. And in some limited-scale experiments, it’s already happening. In Illinois Elevate Energy says that it has saved 28,000 customers 15 percent on their electricity with a system of variable electricity pricing through two utilities. In normal times, energy might cost 3 or 4 cents, while on peak days it can surge to 14 cents.

But the people working on such programs are also aware of some of the problems that could emerge if they aren’t careful. And they come back to some of the same notions of fairness that underpin the concert pricing conundrum.

Affluent people could easily decide it’s just not worth the effort to adapt their energy consumption to the spot price, making the programs a penalty for the poor. And some people might have trouble following constantly changing prices or knowing how to trim their usage in response. Woe betide the utility executive facing customers who are angry upon suddenly receiving a $2,000 electricity bill after a heat wave.

Advertisement

Continue reading the main story

It could get worse. If a poor older person turned off air-conditioning during a heat wave to avoid the price spike and died of heat stroke, it would be a human tragedy. People on supplemental oxygen can’t turn the machines off to save money.

“I’m a big believer that you don’t just give people a raw price signal, but provide them with support and financing to invest in the infrastructure to respond appropriately,” said Daniel Esty, a Yale environmental law professor and former commissioner of Connecticut’s energy and environmental protection agency. “Even better over time would be a system where people don’t have to think about it, where smart appliances are connected to a smart grid that would enable them to do their part in a kind of invisible-hand sort of way.”

Newsletter Sign Up

Continue reading the main story

The Illinois program has included email and text alerts to tell people when surge pricing is in effect, and some customers are using technology involving smart thermostats so that their temperature setting adjusts automatically. “This doesn’t have to be something people need to monitor every day to be successful,” said Sarah Gulezian, senior manager of dynamic pricing programs at Elevate Energy.

Moreover, it might prove possible to create pricing structures that guarantee consumers won’t pay more than they would have under traditional pricing, essentially seizing the benefits of dynamic pricing without anyone getting an unpleasant risk of sticker shock. That’s because most households see savings under the plans, and only a handful see their prices rise.

Utilities and regulators, in other words, have to think a little like Mr. Springsteen: It’s not just about maximizing the efficiency of the energy market on any one day, just as the Boss isn’t trying to maximize his revenue from any one concert. Rather, it’s about maintaining a relationship in which people do not feel like they have been exploited.

Some short-term inefficiency can buy long-term viability. And that’s never truer than when disaster strikes, whether a heat wave, a blizzard or a hurricane barreling toward the most populous area of Florida.

Home Depot and a hurricane

As Hurricane Irma did just that in early September, about 150 Home Depot officials gathered in the company’s Atlanta headquarters in an auditorium and a series of conference rooms that became the company’s temporary command center. Logistics experts, store operations officials, corporate security staffers, human resources employees, lawyers and representatives of major suppliers were all there, in what is now a well-rehearsed exercise.

Photo
Credit Illustration by Eden Weingart

The first thing they did was direct all prices to be frozen in areas likely to be affected by the storm. There is no surge pricing at Home Depot stores after a disaster, in both a longstanding corporate policy and a matter of law in many states.

But the company doesn’t stop with that. All those logistics people and other staffers are there to ensure that the surge in demand after a disaster is matched with a higher supply of the goods people need.

Advertisement

Continue reading the main story

As hurricane season approaches, dedicated warehouses are stocked with goods that will be needed if a major storm hits, according to the company’s director of corporate communications, Stephen Holmes. And that’s why, as soon as Irma passed the Miami area and the major highways were confirmed to be passable, a convoy of 41 tractor-trailers full of generators, plywood, chain saws and similar items trekked from Georgia to South Florida, escorted by the police.

The key is responding to a desperate situation not by raising prices, but also not by being content with shortages of badly needed goods. Rather, emergencies are an occasion to increase supply, even if it means incurring big logistical costs to do so.

That could have a lot of implications, including for your morning commute.

Traffic-choked monster

The Capital Beltway that encircles Washington and its near suburbs is more than just a metaphor for the alleged insularity of the people who live within it. It is often a traffic-choked monster that ruins the commutes of many who must use it.

Photo
Credit Illustration by Eden Weingart; Photo Andre Jenny/Alamy

But for a 14-mile stretch, there is an out if you have the money. A parallel toll road allows those willing to pay — 20 cents a mile during slow periods, $1 a mile during a typical rush hour, more during times of extreme traffic — to ensure it is never clogged.

The toll road, a joint venture between Virginia’s transportation department and the Australian company Transurban, is an example of dynamic pricing as a tool to reduce traffic. Different in approach — but with the same ultimate goal — is congestion pricing, a fee on cars and trucks to enter a dense urban area. Congestion pricing has gone into effect in Stockholm and London but was rejected for New York in 2008 (Gov. Andrew Cuomo of New York has indicated new openness to the idea this year).

In these areas, there is too much demand for space on the roads and too little supply of road, and each of these strategies tries to use pricing to bring supply and demand into balance. But paying variable prices for a good that has previously been free (most roads) or charged at some fixed rate (traditional toll roads) raises all sorts of issues.

This new approach to modulating traffic may become more acceptable to voters when it is part of an increase in supply.

If variable tolls or congestion charges are merely about pricing some people out of the market and letting rich people avoid the nuisance of traffic, they probably won’t go over so well. But if they are part of creating more supply of road, ensuring more people over all can get where they want to go — and if people are frequently reminded of that — the measures may go down easier.

Advertisement

Continue reading the main story

The Transurban deal with Virginia essentially makes private money available for additional road capacity — the express lanes on the Capital Beltway were built from scratch. Its existence also serves to reduce the traffic on the traditional lanes.

Governor Cuomo has pitched a New York congestion fee as a funding stream to improve and expand New York’s rail system. If that happens, it could mean more capacity to get people in and out of the city.

Another lesson from these pricing experiments is that they tend to be most resisted when they are new. When Stockholm experimented with a charge to enter the city center in 2006, it was highly controversial, with people in suburban towns especially viewing it as an unfair tax.

But since being made permanent in 2007, opinion has shifted, said Maria Borjesson, a transportation economist at the KTH Royal Institute of Technology.

“I think an important lesson is that the conception of what is fair changes,” she said. “Before the charge, the discussion was of how unfair it was and how it would be hardest for low-income people. Now when we do surveys, we find that people think it is unfair if the people who use the streets and pollute and increase congestion don’t pay. We’ve seen this everywhere that has implemented congestion charges, that public support increases afterward.”

A lesson for Uber, and all us

People’s perceptions of what is fair and just are not set in stone; they evolve over time. But companies looking to use variable pricing have to be cognizant of how important it is to respect those perceptions.

Uber has often been cast as the embodiment of excessive use of surge pricing. For example, in 2013, Jessica Seinfeld, the cookbook author and wife of the comedian Jerry Seinfeld, was outraged to face a $415 charge for a short ride in a snowstorm, and told her Instagram followers all about it. Since then, Uber has taken a range of actions to try to keep the benefits of variable pricing while reducing the outrage.

It has adopted a quicker trigger finger for eliminating surge pricing entirely in emergency situations, for one thing. When Mexico City had a major earthquake on Sept. 19, an operations worker at the company’s local headquarters turned off surge pricing, even while the building was still shaking.

Advertisement

Continue reading the main story

“The fact that one of our teammates had the presence of mind to turn off surge in that chaotic moment, I think, reflects the deep responsibility we all feel toward our fellow citizens and the cities we serve,” said Rodrigo Arévalo, general manager for Uber in Latin America.

The company also cut back on passenger complaints by giving a clear estimate of the price of a ride before a person books a car, a practice that began last year. It turns out it’s easier to decide whether it’s worth $30 for a car ride and act accordingly than it is to be told that a surge multiplier of 2.5 times is in place and that the normal rate would probably come to about $12.

Restaurants have long known that charging a fee for a reservation offends people’s sensibilities — but that on a big night like New Year’s Eve you can require everyone to eat an expensive fixed-price menu with lobster and filet. Diners will happily pay a surge price without thinking of it as such.

What the successful examples of variable pricing have in common is that they treat customers’ desire for fairness not as some irrational rejection of economic logic to be scoffed at, but something fundamental, hard-wired into their view of the world. It is a reality that has to be respected and understood, whether you’re setting the price for a highway toll, a kilowatt of power on a hot day, or a generator after a hurricane.

“If you treat people in a way they think is unfair, then it will come back and bite you,” Mr. Thaler said. And it doesn’t take a Nobel to understand that.

Continue reading the main story

Article source: https://www.nytimes.com/2017/10/14/upshot/why-surge-prices-make-us-so-mad-what-springsteen-home-depot-and-a-nobel-winner-know.html?partner=rss&emc=rss

U.S. and Europe May Collide on Taxing Apple and Amazon

Republican leaders have already put at the center of their tax rewrite an idea borrowed from Europe and other countries: Replace the system of taxing the worldwide profits of a domestic corporation with one that taxes only profits earned within its own territory.

“If we don’t move to a more modern system, we may lose the ability to gain that revenue,” Mr. Camp warned.

Multinationals will inevitably shop around for low rates. Americans and foreign companies have all played the same games, shifting patents and copyrights, profits and royalties to places with no or low corporate tax rates, like the Cayman Islands and Bermuda. (The I.R.S. itself went after Amazon over assets it transferred to a Luxembourg unit, but Amazon ultimately prevailed.)

Efforts to cooperate have not always been successful, but there are signs that coordination can help. The Europeans’ effort is gradually shutting down the most notorious tax dodges that route corporate cash through Ireland and Luxembourg, said Michael J. Graetz, a professor and tax specialist at Columbia Law School.

“Those are like dinosaurs,” he said. “They’re moving towards extinction.”

And a new rule adopted by the Organization for Economic Cooperation and Development, requiring multinationals to report their income and tax bill in each country, will make it easier for the more than 60 governments that have signed on to monitor how much is actually collected.

So far, the team of Trump administration officials and lawmakers who drew up the latest framework for rewriting the tax code has released mostly general principles.

Now the I.R.S. taxes the worldwide profits of American corporations, but the tax kicks in only after that income is repatriated to the United States. As a result, American multinationals simply don’t bring much of it home. Republicans have made clear they intend to switch to taxing only profits earned within the United States, what’s known as a territorial system.

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Six Charts That Help Explain the Republican Tax Plan

The proposal lowers rates for individuals and corporations but leaves key elements up to Congress.

The $2.6 trillion in foreign profits that corporations already parked overseas in order to escape paying the I.R.S. would be required to be repatriated — although taxed at a steep discount. And there are promises to prevent the tax base from shrinking, and discourage businesses from putting more operations and earnings overseas. At the same time, the official corporate rate would be slashed to 20 percent, from 35 percent, to make American companies more competitive with their foreign rivals.

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But this frame still lacks a picture, missing the details of how to accomplish those ambitious if sometimes conflicting goals.

Without tough safeguards, for example, the shift away from a worldwide system could end up curbing rather than promoting investment at home as American companies move even more operations overseas to avoid paying any United States taxes.

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To some experts, like Kimberly Clausing, an economist at Reed College, the only way to prevent American companies from exploiting loopholes in a new territorial regime is with a minimum tax. If a company’s tax rate fell below the floor in, say, Bermuda, it would have to pay the difference to the I.R.S.

Other experts, though, suggest borrowing another idea to broaden the tax base from foreign tax regulators — like more aggressive efforts to tax foreign multinationals.

As the Amazon and Apple cases show, “the politics in Europe are to tax somebody else’s multinationals, particularly ours,” said Mr. Graetz of Columbia.

“All of these other countries are basically trying to beef up and protect their tax base by ensuring foreign multinationals pay tax on income earned in their country,” he added, “and not on income earned by their own domestic multinationals.”

This is a different tack from the one taken in the United States, where tax dodges by homegrown billion-dollar corporations have been criticized for increasing the tax burden on companies that can’t shield assets.

The complaint that the American tax code favors foreign multinationals over domestic ones did, however, arouse interest last week at Senate hearings on a tax overhaul.

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“The United States corporate and international tax rules are an anticompetitive mess,” said Itai Grinberg, a law professor at Georgetown University. And one of their most senseless features, he added, is the tax advantage that permits foreign-owned corporations to artificially strip out their earnings in the United States.

Both he and Bret Wells, a law professor at the University of Houston, testified that foreign and American companies should be treated the same way.

Leveling the playing field does not necessarily have to wait for a rewritten tax code. Adam Looney, a former deputy assistant secretary for tax analysis at the Treasury Department, said the Trump administration could take a step now. He urged the president to reverse a decision to delay an Obama-era regulation to limit foreign companies’ tax advantages and prevent them from transferring out their earnings.

“Without the regulations, American-owned businesses will be worse off,” while foreign multinationals avoid about $7.4 billion in United States taxes, Mr. Looney wrote this week in a policy brief for the nonpartisan Brookings Institution.

The delay, he said, means that the United States is, in effect, paying “foreign investors to take over our companies with our own tax dollars.”

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Article source: https://www.nytimes.com/2017/10/13/business/economy/corporate-tax.html?partner=rss&emc=rss