Here are my favorite articles from the Economist (Sept 29-Oct 5) this week.
Breathtakingly up to date look at what is about to take place between the retiring baby boomers (that will need more money to keep them well and safe in their dotage) and the contracting workforce of younger folks (that will not be able to pay for their grandparents, parents, or even their own retirement with their taxes). This issue is creating yet another set of political group dynamics that are diametrically opposed and will support yet more political schism. The growing grey group will vote for anything (and anyone) that promises more or at least to protect their rights and benefits, even if the bank can no longer afford it. The smaller, contracting work ready force will prefer to vote for tax reducing policies since they want to preserve their conditions. Since there is not enough pie to go around, there is a major disappointment pending.
Short article about the launch, crash, and more recent re birth of an online currency. It’s not the first online currency, and today there are all manner of online variations of currency, many can be traded for real world cash. But Bitcoin sounds interesting given the idea that there is no central authority controlling the pool or flow of currency. Anyone with a powerful enough computer can solve complex math problems and in so doing, generate Bitcoins. There is a way to slow the flow, and that is to increase the complexity of the math problems to be solved. But it is not regulated like real world currency, or even by other online currencies – even those used in flourishing demand-driven World of Warcraft. Now the company that is behind Bitcoin is doing well.
This article, or more precisely its contents, troubles me – seriously. It concerns the ‘cost disease’. The idea concerns average (economic) productivity and how different industry productivity changes at different rates, thus creating margin and profitability distortions. The article troubles me in that the idea explained is self evident but I get the feeling that the idea is new, and perhaps not taken into account with our leaders’ economic models!
Take an industry whose productivity increases. As it does, one would assume wages increase. The industry is seen a successful even progressive and firms reward their workers. Take a different industry where productivity growth is slower, or even nonexistent. That industry faces major challenges. To stop its resources defecting and moving to places where wages are going up, the wages of slow productivity industries has to increase to prevent the hemorrhaging.
“As costs of production in these stagnant industries raise, firms are forced to raise prices. These increases are faster than those in sectors where productivity is improving, and faster than inflation (which blends together all the prices in the economy). So prices from stagnant sectors must rise in real terms. Hence the “cost disease”.
The issue is how to balance this difference in productivity with return (real and/or relative wage increase). Those that are less productive gain a benefit, short term. Long term, they and in fact the whole industry lose out as the inefficiency gets baked into overall economic cost. This must be happening each and every day. This is why I am amazed if this “cost disease” is not taken into account in economic models. At the aggregate level one could imagine a huge waste factor that represents the sum of all the erroneous cost increases due to the shadow “productivity” baked into our prices.
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