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Exchange Rates 101

2014 December 18

In light of the collapse of the Ruble I think it’s worth revisiting what controls exchange rates.

Supply and Demand.

Yeah, if you know something about the subject you’re probably shaking your head.

Supply and Demand doesn’t set prices in many cases in the way that an Economics 101 course tells you.

Such texts will say that the exchange rate is based on exports and imports.

For many countries, that isn’t true; or not all the time.  The US dollar can move up even when the trade balance is south (as it has been for decades now.)  The same is true of many other economies.

Britain hardly exports anything any more.  But people want to live in London.  Or they want the city to invest their money, or they want to buy art at Sothebys, or they just want a relatively safe place they can run to if the politics in their country go south.

People likewise want Manhattan real-estate; a US passport, and so on.  A vacation or home in Paris or the South of France.

They want to buy stocks in important companies which are defining the future, like Apple, or Tesla, or Google, even if those companies manufacture overseas.

They want money in China to take advantage of China’s high growth rate and returns, while Chinese want money out for diversification and to have a safe place to go if the politics turn against them.

People don’t want vacation homes in Russia, by and large.  They may want to take advantage of growth opportunities (which exist in certain sectors), but before the sanctions they were scared of corruption (with good reason) and post sanctions they are worried about getting returns out.  Since most of Russia’s exports are of hydrocarbons, and since people don’t want to move money into Rubles otherwise, the value of the Ruble in terms of other currencies moves up and down with the price of hydrocarbons.

There are other factors, for example if you offer high returns, that can matter (raising returns didn’t matter to Russia, because the potential value was swamped by fears of further ruble and oil devaluation.) Speculation of future gain or loss in the futures and options markets can raise or lower the value of your currency as well.  You can fix your currency and you can make it stick if your economy is strong enough in specific ways (mostly having to do with producing what you need).  China did this for years, and so have many other countries.  This can lead to black market currency markets and problems, but that can be better than the alternatives (as Russia may now be finding out.)

But if you float your currency, the bottom line is that excahnge rates (with a few exceptions) to rise and fall based on how much people want from  your country which they have to buy with your currency.

Collapse of oil prices and the Russian Ruble

2014 December 16
by Ian Welsh

These are the same thing.  Russia sells oil to the world, and their currency is based on the price of oil.  (It is for this same reason that the Canadian dollar has been sliding.)

Putin has been a competent leader for Russia in many ways, but the failure to diversify the economy from oil is his primary failure.  You might say “corruption”, but resource economies are almost always corrupt.  The only way to (somewhat) avoid it is to put the money away in a sovereign fund or the equivalent.

It is also important to not allow the currency to become a resource currency, because that crushes all other export businesses.

Why did the price of oil drop?  There are a lot of theories, from screw-ups in the futures market, to increased supply and reduced demand, to intent to destroy Russia.

What is interesting is that OPEC (meaning, in this case, Saudi Arabia) has refused to do anything to stabilize oil prices and prevent the collapse.

Saudi Arabia needs higher oil prices, they have no economy other than oil of significance, but they also have more ability to handle oil price collapses.  Saudi crude is cheap to produce, under $10/barrel.  The profit may be less, but they are making a profit.  A lot of Russian, American, Canadian and other oil is not profitable at low prices.  Letting oil prices be low for a year or two will probably help Saudia Arabia more in the long run.  Certainly it hurts their competitors more than it hurts them.

Many also believe that the US and Saudi Arabia are doing this deliberately to hurt Russia.

Of more fundamental interest is that China has been buying less and less commodities (not just oil, but metals like copper).  China is the most important economy in the world now for hard commodity prices.

The Ruble collapse is going to hurt a lot of people, most especially the Europeans.  Europe sells a lot of goods and services to Russia, and Russia is no longer going to be able to afford them.

For now, low oil prices will be good for the US, but the general commodity price drops are hammering many other countries, and that will lead to reduced demand globally.  This isn’t a good thing, however much many Americans are enjoying Russia (and Putin”s woes.)

I will note also that Russians seem to be blaming the West for the collapse of the Ruble.  That’s a good thing if they decide going supine will help them.

It’s not a good thing if they get angry about it and decide the West (meaning the US) is deliberately trying to destroy them.

America’s Depraved Leadership Has Created a Depraved Population

2014 December 15
by Ian Welsh

A majority of Americans thing torture is justified.  They are split on whether the Torture report should have been released.  And they think Torture prevented attacks.

According to the American people, torture is justified, and it works.

Every demographic has at least a plurality for torture: men and women, young and old, white and non-white.

The only good finding is that a plurality of Democrats believe torture was not justified, though, within the margin of error, they do believe it was helpful.

Before Bush, most Americans were against torture.  The endless drumbeat of propaganda and the need to justify what America does (America is good, therefore America does not do evil), has had its effect.

I will make an ethical judgment: people think torture is justified are bad people. Depraved people.  A society where a majority thinks it is justified is a depraved culture.  (And remember, 51% think it was justified, but 20% don’t have an opinion.  Only about a third of Americans are opposed.)

The Ethics of Torture 101

2014 December 10
by Ian Welsh

There are two arguments against torture.

The first is ethical: torture is evil and should not be engaged in.  (This is, for the record, my personal view.)

The second is pragmatic: torture doesn’t work, or does more harm than good.

These are separate arguments: you may believe that torture works, but is too evil to use.  You may believe that it’s not evil, but ineffective.

Contrariwise, you may believe that torture is bad, but that the potential good outweighs the potential bad.  You may even, as many people do, believe that torture is something some people deserve (just as rape, according to Clarence Thomas, is part of the punishment of prison.)

Ethical arguments are rarely conclusive: they must start from unprovable axioms.  If someone disagrees with the axioms, it does not matter how tight the logic is, you cannot come to agreement.  It is for this reason that some argue the need for a God—an ultimate authority who lays down axioms.

I am of the school which believes that there are certain things we should never do to other people.  Death, to me, is not the worst thing that can happen to someone—go into a burn ward and ask the people with large body burns if they want to live or die, and understand that odds are you’d be no different.

Torture does horrible things not just to those who are tortured, but to those who torture.  There is often a pleasure in hurting or humiliating other people. Those who pretend otherwise are deluding themselves, most likely because they don’t want to admit that such evil lurks in their psyche.

If you torture, you become a torturer.  This is also why I do not laugh at rapists being raped: whoever did it is now a rapist too.

The counter-argument is simple enough: we do bad things all the time if we think the good outweighs the bad. If a few people’s suffering creates more good (for other people) than their suffering, we should allow it.

This is the dark side of utilitarianism: the greater good can lead to horrible actions.  Yet our entire society is based around such compromises: from industrial agriculture, the use of plastic, widespread automobile adoption; CO2 emissions and pollution caused by activities we value more highly than the widespread harm they cause.

So why make torture different?

If you don’t make torture different: if you don’t red line it, then you are reduced to the pragmatic arguments: does it work, what is the ratio of good to harm, and so on.

The world is a better place if we simply red-line some behaviour.  Thou shall not torture, thou shall not rape, thou shall not use nukes, thou shall use jacketed bullets instead of soft bullets, thou shall treat prisoners of war with decency, thou shall not shit in thy neighbours air so they get sick and their kids have asthma.

Red-lining certain types of behavior creates a better world.

The pragmatic ethical problem is “but if I don’t do it, others will.”

If I don’t torture, those who torture have an advantage.  If I don’t rape, those who rape have advantage (what?)  If I don’t pollute, those who do, have an advantage.

The pragmatic ethical response is “if I do do bad things there are more bad things in the world.”

If America doesn’t have prison rape and doesn’t torture, there is less torture (and a huge amount) less rape.

This is a unilateral action that the US (or any other country which tortures) can take to make the world and their country a better place.

At some point the world only becomes better when we say “no, I’m not going to do evil whether or not I perceive an advantage to it.”

Now a strong argument can be made that treating people better is an advantage, and there are many ways in which you can deny an advantage to those who are evil (generally by refusing to compete with them on their terms.)  That’s another article, so I won’t go into it here.

But I will say the following: personally, I hold torture apologists in the same sort of contempt I hold rape apologists and those who make rape threats.  Such people are worse than animals, and are a large part of why the world has so much suffering.  Their arguments from pragmatics are vile and self-serving.  The line must be drawn somewhere, but no matter where you draw the line, torture is over it. If you torture, or support torture, you’re evil.

That we have to have this discussion is amazing to me.  Torture should be the sort of action which people are ashamed of.  If they support it, if they’ve done it, they should be trying to conceal it, knowing all decent men and women will have nothing to do with them if their vileness is discovered.

That this is not the case is the saddest thing about American torture.

The CIA Torture Report

2014 December 9
by Ian Welsh

Just a few quick points:

  • It seems HQ wanted more torture than those in the field did, and would insist;
  • Torture,  Stirling Newberry once told me, is about sending information “we torture”, not getting it;
  • But really, torture can provide any info you want, like that Saddam has WMD;
  • It is interesting that the report is so negative.  Maybe the CIA screwed up by spying on Congress and getting caught?

We knew it was happening over 10 years ago. We knew then that it didn’t work in the sense of providing reliable information, and we knew then that the cost of torture in terms of damage to America’s reputation would be huge (and reputation does matter.)

As Bmaz points out at Empty Wheel, a great number of crimes were committed, and not just by the CIA, but by government officials, and they knew at the time torture was illegal.  There’s no chance of them being prosecuted now, but we can hope that some of them will face a court in the future.  Times do change, and those who must protect them to protect themselves will not always be in power.

One day it would be nice to see Bush in the dock.   Cheney, unfortunately, will probably die before then.


In Light of Eric Garner

2014 December 5
by Ian Welsh

Understand this, if you understand nothing else:

the system is working as intended.

It is true that a prosecutor can get a grand jury to indict a sandwich, and it is tempting to blame the prosecutor, Donovan.  Certainly he made a decision, but he made the decision that the system wants: police are almost never prosecuted for assault or murder and on those rare occasions that they are, they almost always get off.

Donovan did what the legal system wanted him to do.

As for the police in question, well, they did what the legal system wants them to do, as well:

“Get away [garbled] … for what? Every time you see me, you want to mess with me. I’m tired of it. It stops today. Why would you…? Everyone standing here will tell you I didn’t do nothing. I did not sell nothing. Because every time you see me, you want to harass me. You want to stop me (garbled) Selling cigarettes. I’m minding my business, officer, I’m minding my business. Please just leave me alone. I told you the last time, please just leave me alone. please please, don’t touch me. Do not touch me.”

” I can’t breathe. I can’t breathe. I can’t breathe. I can’t breathe. I can’t breathe. I can’t breathe. I can’t breathe. I can’t breathe,” he said, as officers restrained him.

What you will hear defenders of the police say is “he was non-compliant.”


If a police officer tells you to do anything, you do it immediately.  If you do not, anything that happens to you, up to and including death, is your problem.

The legal system exists, today, to ensure compliance.

Graph of incarceration in the US over time

From Wikipedia

American oligarchical society rests on people not effectively resisting.  All gains now go to the top 10%, with the rest of society losing ground.  Incarceration rates blossom in 1980, which is also the year that the oligarchical program is voted in and becomes official.  (Trickle down economics can be understood no other way.)

Any part of the population which is inclined to resist, must be taught that it cannot resist.  Get out millions to demonstrate against the Iraq war: it will not work. Protest against police killings of African Americans, it will not work.

Nothing you do will work.

You will comply, and you will learn that resistance is futile.

strikes over 1000The more outside the mainstream you are, the more you will learn it.  African Americans, Latinos, poor whites (in that order.)  Those who are fundamentally authoritarian, but somewhat opposed to the system (like the Bundy ranch) are treated more carefully (though the militia movement has its martyrs).  But the fundamental lesson of life is to do what your lords and masters tell you to, and to not protest any law or order, no matter how nonsensical, trivial, or unjust it is.

Three strikes laws and the end of judicial discretion are about this.  During the 80s the legal system was taken away from the judges and given to the prosecutors and the police. Almost all sentences are plea-bargained: the person with almost all the power in the system is the prosecutor.  He or she is judge and jury for the vast majority of cases, and even when a case does go in front of a judge, the judge’s discretion is extremely limited.  Your third crime stealing a bike?  Too bad, we’re throwing the key away.

Compliance when given specific orders and learned hopelessness about protest or organizing are the aims.  Ordinary citizens must understand that they cannot change the system if elites do not agree with the changes they want made.  If they try, they will be arrested and receive a criminal sentence, meaning they can never again have a good job.

In this system the wolves or goats identify themselves.  An injustice is committed, people protest and the most aggressive protestors (which doesn’t always mean violence) are arrested.  Certainly the organizers are.  Those people are, as a result, usually destroyed economically even if they aren’t locked up for years.

The system is doing what it is meant to do.  It teaches compliance, it teaches hopelessness and it identifies those who will not obey laws that don’t make sense (marijuana possession, for example), or who will fight or organize against the system and then it destroys them economically and often psychologically through practices like solitary confinement and prison rape.

The system will not change until those who want it to change have the raw power to force it to change, because it does serve the interests of its masters by destroying or marginalizing anyone who is actually a danger to oligarchical control of the system.

Race is an effective tool in this system, dividing the lower classes (and almost everyone is lower class now) against each other.  No matter how bad a poor white’s life is, well hey, he ain’t black.  He or she can feel superior to someone, can have someone to kick down at.

And understand this, most of what police are paid in is social coin: the right to demand immediate obedience and fuck people up; the solidarity of the blue line; the feeling of belonging and power, is what makes the job worth having for (probably most) of the people who are now attracted to it.

Being a thug; having social sanction to be a thug, is enjoyable to a lot of people. Since that’s what cops get to do, those are the sort of people who tend to be attracted to the job.  The police are the biggest toughest gang around, and belonging to them has most of the rewards of gang life, without the dangers of going to jail.

Working as intended



The Silver Lining of Thanksgiving Past

2014 November 30
by Ian Welsh

I had originally intended to write a rather cynical Thanksgiving weekend post – pointing out that the Indian tribes who helped the pilgrims in that first Thanksgiving feast made a big mistake by helping Europeans figure out how to live and prosper in the new world. Their reward, ultimately, was slavery, scalp bounties, smallpox (sometimes deliberately spread) and, in the end, genocide. But it turns out the story has an interesting twist:

The Puritans were religious radicals being driven into exile out of England. Since their story is well known, I will not repeat it here. They settled and built a colony which they called the “Plymouth Plantation”, near the ruins of a former Native village of the Pawtuxet Nation. Only one Pawtuxet had survived, a man named Squanto, who had spent time as a slave to the English. Since he understood the language and customs of the Puritans, he taught them to use the corn growing wild from the abandoned fields of the village, taught them to fish, and about the foods, herbs and fruits of this land. Squanto also negotiated a peace treaty between the Puritans and the Wampanoag Nation, a very large Native nation which totally surrounded the new Plymouth Plantation. Because of Squanto’s efforts, the Puritans enjoyed almost 15 years of peaceful harmony with the surrounding Natives, and they prospered.

At the end of their first year, the Puritans held a great feast following the harvest of their new farming efforts. The feast honored Squanto and their friends, the Wampanoags. The feast was followed by 3 days of “thanksgiving” celebrating their good fortune. This feast produced the image of the first Thanksgiving that we all grew up with as children. However, things were doomed to change.

Until approximately 1629, there were only about 300 Puritans living in widely scattered settlements around New England. As word leaked back to England about their peaceful and prosperous life, more Puritans arrived by the boatloads. As the numbers of Puritans grew, the question of ownership of the land became a major issue. The Puritans came from the belief of individual needs and prosperity, and had no concept of tribal living, or group sharing. It was clear that these heathen savages had no claim on the land because it had never been subdued, cultivated and farmed in the European manner, and there were no fences or other boundaries marked.

The land was clearly “public domain”, and there for the taking. This attitude met with great resistance from the original Puritans who held their Native benefactors in high regard. These first Puritan settlers were summarily excommunicated and expelled from the church.

I had assumed that those who had been saved, had been helped, by the natives, had turned against them. It seems that wasn’t the case.

Later on different types of Thanksgiving days occurred:

In 1641, the Dutch governor of Manhattan offered the first scalp bounty; a common practice in many European countries. This was broadened by the Puritans to include a bounty for Natives fit to be sold for slavery. The Dutch and Puritans joined forces to exterminate all Natives from New England, and village after village fell. Following an especially successful raid against the Pequot in what is now Stamford, Connecticut, the churches of Manhattan announced a day of “thanksgiving” to celebrate victory over the heathen savages. This was the 2nd Thanksgiving. During the feasting, the hacked off heads of Natives were kicked through the streets of Manhattan like soccer balls.

The killing took on a frenzy, with days of thanksgiving being held after each successful massacre. Even the friendly Wampanoag did not escape. Their chief was beheaded, and his head placed on a pole in Plymouth, Massachusetts — where it remained for 24 years. Each town held thanksgiving days to celebrate their own victories over the Natives until it became clear that there needed to be an order to these special occasions. It was George Washington who finally brought a system and a schedule to thanksgiving when he declared one day to be celebrated across the nation as Thanksgiving Day.

Pleasant, no?

I don’t generally dwell on the fact that the US and Canada are countries based on the destruction of the original inhabitants of the land. Genocide, for all that we act as if it were suddenly invented in the 20th century by the Nazis, or perhaps by the Turks, is nearly as ancient as recorded history. The Roman destruction of Carthage, perhaps the most famous genocide of ancient history, was hardly the first. Nor is modern weaponry necessary, as both Genghis Khan, who had entire cities slaughtered, and the Hutus, with their slaughter of half a million to a million Tutsis, primarily with machetes, could attest. Sharp objects don’t run out of bullets, after all.

Yet, no question, the natives would have been wiser to have never helped Europeans learn how to survive the new world, even if one can argue that in the end, the result probably would have been the same.

Still, I come back to this, the Puritans who were helped by the Indians resisted to the point of excommunication the destruction of their benefactors. Such a penalty, at the time, was the equivalent of being ostracized from their communities, other puritans were forbidden to have any civil comunication with them whatsoever, including eating with them.

This is the point in an essay where I’d normally draw a lesson, but I don’t know that I have one. What I do know, from my own personal experience is that many people aren’t even as thankful as those pilgrims – helping someone often creates resentment. And certainly one should never expect thankfulness to extend to those not directly helped, even if they indirectly benefit. But the effect of gratitude runs both ways. As a child one of the first full novels I ever read was Ernest Thomas Seton’s “Rolf In the Woods” about a white teenager effectively adopted by an Indian in early 19th century America. The Indian helps him, and then, as Seton notes, feels both kindly towards him and a sense of responsbility for the young man’s continued wellbeing.

We tend to look well upon those we’ve helped, especially if they respond with gratitude and make good use of what we’ve given, be it knowledge or material goods. Helping people makes us feel better about ourselves. Empathy, the ability to feel another’s pain, is as naturally human as is callousness, let alone the actual enjoyment of the pain of others, empathy’s dark twin. Feeling another’s pain we either wish to relieve it, or we close ourselves off to the other person. To do so requires making that person, or those people, into something other than ourselves. It’s much easier not to feel for those who aren’t like you, who are lesser, who are, indeed, nothing but uncivilized beasts or savages, little more than animals.

The Puritans who had personally been helped by, feasted with, and befriended by the Indians couldn’t do this. And the natives who had befriended the Puritans couldn’t do it either. They had been made aware that both sides were like them, were human. The Puritans felt grateful, the Indians, benevolent.

But those who came afterwards, those who benefitted from the knowledge the Indians had given, but never dealt with them as humans, they could feel superior. They could know, not that they had needed the Indians help and that it had been given, and that in exchange they were able to help the Indians by giving or trading them steel and iron goods and other advanced European items, but that the Indians were nothing but animals, who didn’t own the land and were savages fit for death.

There was no room for empathy, or for a bond of thankfulness to occur. For the reciprocity of favors and affection that leads to friendship.

And so those Indian tribes were virtually destroyed. And yet we still pretend we are thankful for what they gave, when the record shows that the only people who were thankful were a few hundred Puritans who were rewarded for their faithfulness by excommunication.

Every Thanksgiving I’ve thought of those who died, a sour smile on my face. But in Thanksgivings to come I’ll think also of those who didn’t break faith. A bitter silver lining perhaps, but I find in such things the true gold of the human spirit, untarnished even in failure.

(Originally published for the 2007 Thanksgiving.)

Ferguson and the brokenness of America’s “Justice” System

2014 November 26

There isn’t much to say that others haven’t, but let’s go through it anyway:

  • There was never any chance that Darren Wilson would be charged;
  • the prosecutor acted as defense attorney, not as prosecutor;
  • A grand jury, for all intents and purposes does what the prosecutor tells it to;
  • Doing the announcement at 8pm at night was intended to incite violence;
  • Police in America are completely out of control, and police have a license to kill;
  • this is bad for anyone, but it is terrible for African Americans and Muslims.

At this point, in America, calling the police for anything short of a murder is more likely to make your situation worse than better if you aren’t solidly middle upper class or better, and white.  If you are black or Muslim, you might not even want to call them for murder.

Police can beat your, rape you or kill you, and the odds are very high they will get away with it.  In far too many cases they are nothing but the strongest gang.

The police are so militarized that they amount to a domestic army, stationed in every city.  The civil forfeiture laws, RICO statutes and the cost of an effective defense, plus the removal of most judicial discretion and the fact that the vast majority of cases are plea bargained, not tried, means that for most accused of a crime there is no justice.

The police have huge incentives to charge people with crimes, because they can seize the assets of those charged (well, strictly speaking, they can seize your money without ever charging you, and do.)  For profit prisons and prison guard unions support prosecutors and judges who will imprison more people, not less.   The incentives in the system are almost all towards incarcerating more people and seizing more assets, because that’s how police and prosecutors improve their personal situation.

Prisons are rural support projects where poor whites are paid to lock up poor blacks.

The entire system stinks from one end to another.  The simple solution would be to repeal all drug ordinances, make civil forfeiture illegal, get rid of the RICO statutes, most of the anti-terrorism statutes and mandate that plea bargains are illegal and all criminals must have a trial.  The fact that the current system cannot run if a trial is necessary is the point, too many things are crimes which should not be.

If you really want to make the system work, make all private lawyers for criminal charges illegal, and use only public defenders, chosen by lot. I guarantee that the pay and competence of public defenders would soar and their case load would drop as soon as rich people realized that they could be the one being defended by an overworked and underpaid lawyer.

A word on Abenomics, QE and doing Stimulus right

2014 November 20
by Ian Welsh

Quantitative Easing, to put it simply, no matter what form you do it in, is only marginally effective.

Most of the money goes to the rich, you may or may not get a technical win in GDP, and in many cases the money may flow out of the country.

If you want to improve the economy overall, enough that it shows up for everyone and you get an actual good economy (as opposed to an economy where the poor and middle class actually get poorer) you have to target where the money goes very carefully, and not just use it to buy various financial instruments.

The idea that buying more bonds, or mortgages or whatever, is an effective way to help the overall economy has been disproven over and over again.

Be clear, QE picks winners.  Buying mortgages or buying bonds is picking winners.

Any effective government intervention in the economy must pick winners.

In most cases this is not about infrastructure.  Japan poured ludicrous amounts of concrete over the last 4 decades and it did very little: infrastructure is great if you don’t have enough, but building more than you need is stupid.

In early 2009 I wrote about how to do stimulus right.  Here are the parts that are most applicable right now.

Provide a direction private industry and individuals can get behind

The stimulus bill and other economic policies need to show where the industry of the future is going to be, so that private actors know where to build up their own capacity, where to hire and what to buy capital equipment for.  Commit 200 billion a year to a massive telecom buildout for the next 4 years, and companies are going to line up to get involved in that business.  Make it clear you’re going to massively expand health infrastructure and they’ll line up for that business.  They’ll make long term investments, hire people, train people and do R&D. Programs that look like they will go away almost immediately won’t make businesses decide to invest in increase capacity—it might not be there next year.  Right now the only large scale project that looks really certain to occur for years under the Obama administration is a war—the Afghan war.

Restructure to allow unfettered growth in the future

The last economy cracked up for a reason.  Or rather, for multiple reasons.  You need to know what those are, and you need to get rid of them, so it doesn’t happen again.  If you don’t properly regulate the financial industry they will do another bubble (especially since you bailed them out of the downside, so why shouldn’t they?  They got the profits, and the public paid the losses.)  If you don’t do something to make sure that oil prices don’t spike again (both on the demand end and in terms of reigning in speculative excess) then the next time there’s a half decent economy they will strangle growth again.  There are plenty of other places where problems need to be fixed (too low corporate tax rates leading to cashing out instead of reinvestment, if you want a third).  If you don’t fix them, all you’re doing is putting electrical paddles to a patient whose heart is still a piece of junk and who is still going to have another heart attack when he eats his next cheeto ™.

In addition to these two things, one should spend when it’s cheap (aka. in recession or have the government buy up houses in distress, fix them and rent or sell them), and it should move money to people with a marginal prospensity to spend.  (AKA. cutting food stamps is idiocy, since people on food stamps spend all of them.)

This isn’t difficult and it is complicated only in the details so that it isn’t and wasn’t done indicates a combination of ideological blindness, greed and corruption.  It isn’t done because the people at the top don’t want to do it.

Why the Sharing Economy is Destroying Prosperity

2014 November 13
by Ian Welsh

Let us start with Uber drivers:

Uber has become like Walmart. Drivers now make less than the minimum wage when we do the math,” said Abdoul Diallo of the newly formed Uber Drivers Network, which opposes new lower fare rates set by the company.

The high-tech livery-service firm recently slashed passenger fares to compete with car services such as Lyft, Gett and regular yellow cabs, a move that drivers say takes money out of their pockets.

Some Uber drivers claimed fares — and their paychecks — had been chopped 25 percent in recent months.

Other drivers said they make less than a living wage, just $7 to $12 an hour after expenses and fees — far less than the $25.79 an hour Uber promises drivers can make by joining its fleet, protesters said.

Drivers began complaining that Uber was taking them for a ride back in July, when the company temporarily launched its less-than-taxi-rate Uber X service.

In late September, Uber ­extended those cuts permanently — outraging drivers.

Uber treats drivers like private contractors, saddling them with insurance, gas and vehicle expenses but the company has total control over fares.

In its essence the sharing economy is similar to offshoring and outsourcing in how it works.

Let us establish the basics: high income for individuals, absent government fiat, is based on a tight supply of whatever it is they are selling, and nothing else.

This can be a generally tight labor market, as in the late 90s or most of the years from 45 to 68, or it can be in a specific area.  If you have an occupation where most people can’t compete, you make more money.  This could be because you have skills they don’t have, it could be because of artificial scarcity imposed by regulation (most professions which require licensing), it could because of geography, and so on.

Hotels make decent money because any Joe or Jill can’t sell their rooms.  Taxi drivers (or, more accurately, those who own the licenses) used to make decent money because any schmo with a car couldn’t compete.  And so on.

In manufacturing terms, when those jobs pretty much had to be in a first world country, and the government enforced the ability of unions to strike by forbidding replacement workers, assembly line workers made good money.

So the sharing economy increases capacity.  It increases supply to areas which had constricted supply.

Supply increases, and the profits and/or wages of those in the old sector go down.  Spotify claims artists receive 6 cents to .84 cents per thousand plays.  That means 1 million plays will get you 6K to 8.4.  But there’s reason to doubt those numbers, Swift has refuted them, and earlier reports were lower as well, plus Indie labels get less.

All of these platforms: Spotify, AirBnB, etc… take huge margins.  Spotify takes 30%.  This is in line with what App Stores take, again, 30% being standard.

That number is one we’ve become numb to, but it’s essentially oligopoly or monopoly profits, a huge distribution rate. If you add that much to the cost of a product, it will sell far fewer copies and make far less money.  That percentage comes directly out of profits.

In most cases, one or two sites control most of the business.  Maybe three.  That makes them oligopolies or monopolies. You go through them, or you don’t make a living, and once they are established, they are essentially impossible to dislodge.

In the fifties or sixties this would have been recognized as clear abuse of monopoly or oligopoly power and they would have been busted up or regulated.

But they aren’t. Instead what they do is lower prices, vastly concentrate earnings (30% is a lot, and makes you billions if you control any reasonable platform, even if that billions is from equity), and they lower wages and earnings to everyone who doesn’t control the platform.

Now the sharing plaftorms would be ok (minus the oligopolistic abuse) in a genuinely booming economy where there genuinely weren’t enough workers, and where companies were competing for workers by increasing wages and treating them well (think how programmers were treated during the late 90s internet boom.)

Bring the extra resources online, let people earn some extra cash by driving occasionally, and move people over to the parts of the economy that are booming and need workers.

We don’t live in that world.  We haven’t, absent a few years, since somewhere between 1968 and 1980.

Instead what the sharing economy does is lower the value of specific types of labor and assets, allowing more people to compete, but reducing the actual earnings for those who are in that market.

Reduced prices might increase standards of living, and in any single case they do. The number of musicians who can’t earn a living under the new regime (not just Spotify) is much less than the number of people who can consume much more music.  People who want to be driven prefer to pay less to Uber.  AirBnB makes it cheaper to travel.  Etc… There are genuine gains.

But added to offshorng, outsourcing, oligopolistic storefronts like AppStores and Amazon, and with increase parts of the economy moving into the sharing economy, while in the meantime older jobs have been deskilled (all fast food is deskilling of cooks jobs, for example), and you reach a point where “there are hardly any good jobs”.  Prices are not dropping faster than good jobs.

The other effect of this is that because many of these trends are naturally oligopolistic or monopolistic (even fast food is, if you take a bit of time to think about all the small business restaurants they put out of business), they tend to concentrate wealth and income radically.  That leads to capture of the political process by the rich (yes, even more than already), and that leads to policies like, well, turning anti-trust law into a dead letter, or endless copyright extension, or vast numbers of anti-union policies.

As Stirling Newberry once pointed out to me the more humans are fungible; that is one human can replace another and do whatever that person is doing, the less they have value.  That doesn’t mean that fungibility is necessarily bad, it increases efficiency, can increase economic capacity, and so on, IF we choose to distribute the gains properly.  But absent trends moving in opposite directions it decreases the amount everyone except those who control the points of coordination of the economy make while vastly centralizing wealth, income and power.

The Sharing Economy really isn’t.  Sharing is the wrong word.  And for now, while some of us many win and get income we need for it, overall we’re losing.

The way we distribute resources; the way we distribute necessities and the good stuff of life is going to have to change.  Ultimately a market which  clusters into oligopolies;  deskills jobs; makes humans interchangeable; is not one which can produce widespread prosperity, let alone well being.  If we continue to distribute goods and power primarily by market success, even if we manage a fix, it will only last a few decades at most—and there is no guarantee, this time, that we will manage a fix.

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