This week a colleague and very good friend came back from China. She went there for 3 weeks to visit her family. I think it has been a couple of years since she has not been in her homeland. After talking a while, I asked her what were the things she found different. She said now there are many more businesses, shops and great restaurants. For her dismay as earning a PhD on Urban Planning & Environmental issues, she also found many more cars and and extremely quick urban sprawl. She also commented how food has doubled price (e.g. vegetables or the same bowl of noodles from 2 yuans to 4). Other things, like transportation had not increased so much, though. An interesting thing, she found that in fashion stores like the Swedish H&M, clothes were more expensive in China than here in Denmark. “Even if they were Made in China!!”. I answered that maybe it was because over there H&M was seen as a luxury European clothes, while here it was more normal. She did not think so, arguing some reasons. [I admit I also thought about some conspiracy theories, such as dumping and others]. All in all, these stories from China are nothing new for the ones we try to follow some a little bit the Chinese economy evolution, it is just nice to confirm the data from a friend.

Then I asked her about the condo. A flat she and her husband bought in the outskirts of city relatively close to Shanghai, about a year ago. They bought it to invest their savings, not really to live there. Upon my wondering when they bought it, they explained to me that prices have increased a lot, and while they may not increase so much as the last years, prices will not go down. It found a good deal, and they rent it right away, and who knows maybe in the future they could temporarily use it, etc… I told them, the story sounds awfully similar to the one repeated over and over, in the Western countries a few years ago. I also showed them some graphs of the housing prices in Europe and the US. They said China is different because, it is not convenient for “the” Government, and that the starting prices in China were very low…. Anyways, you can’t go wrong investing in property in China… Once they bought it, the prices went up a little, but they have become flat.

-”So how’s the price of your apartment, is still stable?” I asked. “Yes -she answered- it is more or less the same as the last months… You’re SO interested about our apartment!! Why?”- She said smiling.

– “Because… your apartment is a symbol, it’s a sign for me. If the price of it goes down, then it’s like a dominoes that will reach the economy everywhere…. If prices go down, the new huge middle class in China will loose financial stability, they will get nervous and highly constrain spending. The Government and elites have been doing whatever they want, and the people won’t complain because they’re getting economically and socially ahead, but if things starts getting shaky and social protests come, they will have to start trying to give better expectations to the people. That could be spending not only in infrastructure as they have done, but they may have to offer more available health care, cheaper education (student loans?), etc. At the same time industrial production will come to halt, and unemployment will rise, then they may have to offer more unemployment benefits, and well connected companies will need more public funding, etc. Same thing as in Europe and US. For all these, China will need to start using their money and deposits in various forms in foreign countries. They will need to stop buying the crappy Western debt. This will unleash bad things. Western countries for sure will retaliate and block their products (kind of a similar thing happened when the Japan stopped buying debt from the US in the 1980s and then coincidentally the US blocked imports from Japan, destroying much of their industry. China and major Asian buyers have a much bigger population that only Japan, so they would not have a lost decade, but), this would not help China’s economy, creating more instability. Probably then China will unpegged the Renminbi from the dollar. The instability will not only be in China but everywhere. Of course, this is all a possibility, but with 65 million empty homes in China, and they’re constructing like crazy, it does not seem so unfeasible there is a housing bubble going on, and that people like in the rest of the world will start asking for more responsibility to their governments. [Ok, I gave her a lighter version]. So that’s why I care about your apartment. So could you please tell me if the prices go down, even a little?

She said she would tell me. I’ll keep you updated.

p.s. Telling this horror story I feel like using a blah, blah, blah from the zero hedge blog.

During the last couple of years there has been much discussion about debt. Is it good or not? In a family setting, common sense tell us that debt is not good. At the same time it also says that in many instances such as getting a house (or an education in some countries), it’s necessary to get into debt. For business it gets more complicated; incurring into debt or not has many variables. But what is really complex, is for a national economy. The public in general do not want their governments to get into excessive debt, in particular, to foreigners. If you have an education in economics, you know Keynes talked about it.

It’s my opinion that no matter what political orientation, politicians are not motivated to avoid debt at long term. Thus, this creates a great problems for many local, regional and national governments. Of course, this all gets very political, which by definition, ‘politics’ means how to spend our money.

Without getting very philosophical, political, technical or economic, I wondered : Are citizens happier if their countries are more in debt?

I checked real quick Wikipedia for a list of countries by external debt (public+private), and public debt by GDP. Then I compared it to the Map of Happiness. I had no idea what was the correlation going to be. I choose some countries and plot it. This of course is full of caveats, is just a quick and dirt view. I think an economists from Norway has done similar things (in a serious way), but I can’t find it now.

External debt vs. Happiness.
x = external debt (public + private) per capita in $USD; y = happiness index (from Map of Happiness)

x = public debt per GDP; y = happiness index (from Map of Happiness)

Well friends, the verdict is clear, and I had not idea it was going to be like this:

The more debt a country has, the more likely the citizens will be happier.

Bliss ignorance?

I would like to share this video from Tim Harford, first because I liked one of his book on economics (probably it would be good to get the last one “Adapt”), and second, because this video has an interesting teaching that can not be enough remembered by all of us. It’s about an illness [not really an illness] that a smart doctor, with experience in the Spanish Civil War and WWII, found among our species.

Anyways, here below is the way Tim Harford explained about him. Below I typed the part when he specifically introduces this specific illnes.

“Archie Cochrane all his life fought against a terrible affliction, and he realized it was debilitating to individuals and it was corrosive to societies; and he had a name for it, he called it the ‘god complex’. Now I can describe the symptoms of the ‘god complex’ very easily, so, symptoms of the ‘god complex’ are… no matter how complicated the problem, you have an absolutely overwhelming belief that you are infallible right in your solution. Now, Archie was a doctor, so he hangs out around with doctors a lot, and doctors suffer from the ‘god complex’ a lot. Now, I’m an economist I’m not a doctor, but I see the ‘god complex’ around me all the time: in my fellow economists, I see it in our business leaders, I see it in the politicians we vote for. People who in the face of an incredible complicated world, are nevertheless absolutely convinced that they understand the way the world works. (…) The world is simply far too complex to understand in that way.”

I love this quote, and the whole speech.

Unfortunately, I think like all of us, he’s not free from this illness. In the same speech to prove his point he mentions than 10% of the American business disappear every year. That is for him an example of the crucial trial-and-error process.

Trying to explain the entrepreneurial dynamics only through these entrepreneurship rates… it’s as he would say: “simply far too complex to understand in that way“.

This is a continuation of my last post: Reflections on the IEDC Conference

I attended the roundtable “How effective are today’s incentives in tomorrow worlds?”. There were 9 roundtables simultaneously and this was the largest. It had around 25 people, all from local governments (no State). It was remarkably directed by a gray haired facilitator. I loved the way he facilitated the conversation and asked interesting questions. Now I will transcribe my notes:

Facilitator: Who has free land for potential new comers? 6 out of 28 people.
Who would like to have it? 5 raise their hand.

Who has cash incentives? The majority. In the last 10 years, they have given 500,000$, 2million and one guy said 10 million.

Facilitator: They looked at how much money they have given in the last years, and how much they have collected. They have only gave 600,000$, but that they have got 16 million dollars in tax revenues. “A pretty good return of investment”. (later he changed to over 10 million dollars, so I’m not sure about the figure).

Most of the incentives (which can be tax abatement or other types of support – it is not always cash), is usually done over 3 years. Some said in 7 years or 10.

Usually money is for potential incomers, but sometimes they would give money if a company is planning to leave, and or they have an offer on the table from another place.

They all offer workforce training programs.

They all have guidelines, that is no strict policies (check list)

Tax benefits were usually based on investment, but in today’s economy the main thing is jobs.

They know big companies receive training to get governments money. They know the lingo, etc.

But they know that companies will hardly leave only because of the money. They also know that sometimes they just want attention, not money. “If they call you to complain about traffic, for example, it was advised not to excuse yourself by saying that this is not your department! You have to be the facilitator and help the firms!” (I loved that answer).

One Mayor of a small city in Milwaukee: “I was impressed yesterday, about what the keynote speaker said, that people first choose a city, then a job. I never though in that way!” (Richard Florida influences :)

Lady: How can we promote quality of place?

Facilitator: that’s very interesting, but it’s another subject, let’s stay focused.
Lady, a little in doubt: But, quality of place is also an incentive to bring companies! We have a great living standard, but we don’t know how to market it.
People agreed, this was also important, and the facilitator let them talk a little about it. (they use images with sailboats and kids with tricycles in their pamphlets).

Young fellow: We’re trying to focus on certain industries.
Facilitator: Yeah, we all are trying to do that.
Young fellow: We in Anytown, Colorado, we’re trying green energy, etc.
Facilitator: Yeah, we all try to target industries, the cluster idea, but boy if there is a bakery that will hire 25 people, we all run like…

Facilitator: In a very hypothetical case, that the federal government will ban cash incentives. Would you agree? Yes = 8. No=3. Undecided= A few.

Facilitator: It would be good, because at the end of the road, we’re fighting against each other (Some nodded) But why would it be bad? Let me ask among the ones who said -no-.

Man who raised his hand fastest when answering no: We will lose firms… In this globalized and competitive world, they will leave us.
Facilitator: So you’re saying that other countries will out-compete us with financial incentives.
Man: Yes.
Facilitator: Could not they do it now?
Man: Errr… yes. But… it would be worse…

Facilitator: Many here have not participated. Any of you have any comment?

I raise my hand.
“I’m a phd student, researching on LED, so I’m really happy to be here, because you’re the guys running the real show. My perspective from the academic research is somewhat different. Most research is very skeptical of incentives. Mainly for two reasons, first because as you said, you’re fighting against each other, and second, it’s really difficult to measure the impact of them. I mean sometimes it can be done (pointing with my hand to the facilitator’s example) but it can be very biased”.

(small silence)

3 old guys, including the facilitators, were hard on me.

Experienced man: “You got your research wrong!! In terms of recruiting, we have got many jobs because of the incentives we have given…. ”

Me: “Just to clarify, I’m talking about cash incentives”.

Experienced man: “Cash incentives, we rarely do it, but they are important…”

Facilitator (looking at me): “I tell you, we gave so little money, and we have got so much! It really works!!

Another guy also was hard on me, I could see his lips moving, but at that point I could not really hear much more nor take notes.

It would have been completely futile for me to quote authors and years, to prove a point, like in an academic conference. These people, they knew, they have been there, they have seen it with their eyes…

Two worlds. I hope you get my point, regardless of what field you come from.

One of the most interesting questions was when the facilitator asked who will increase/the same/decrease their cash incentives the short term future.
Decrease = 8 (our current economic situation won’t let us do it)
Increase = 8 (we have to do it, we have no option)
The same = 4

What a great topic for research, uh!! It would be great to see in 5 years, how these cities have performed in several aspects. It would be such an interesting and publishable paper :) I thought about asking for their business cards, but first I ran out of biz cards (I forgot to bring extras!), and after my controversial question, I don’t know how happy they would be to give me info. I’m sure, like always, some researchers have already done that. I have to find these papers… For my post-doc :)

image via Vanity Fair

Much media reports economists saying, “the economy is going to be good”, or “the economy is going to be bad”. There is of course a relationship of the political agenda of the outlet, to have a line towards more positive or negative. I find that both of the economic predictions are mostly right. Because for some the economy does good, and for others does not really improve. And this is what I find that the media does not report it too much on it. That is: inequality.

One person who says it clearly, is Berkeley professor Robert Reich. In his predictions of the economy for 2011, he asseverated

“If you’re referring to profits of big corporations and Wall Street, next year is likely to be a good one. But if you’re referring to average American workers, far from good.”

Similar thing is happening in many places, and the media usually puts together countries, states, provinces (and rarely cities), and they say: “the economy has grown (or decreased 1%)”, but they do not say where and who wins or looses this 1% of the economy. It actually it should not be that hard to introduce some coeficients like the Gini index, or even better some type of Human Development Index. I’ve also heard in the news how Sarkozy, it’s trying to do some alternative socioeconomic indexes, “different than the Anglo-Saxon”. I think it should interesting to look at some of them.

I have also noticed that there is an increasing discussion about inequality among bloggers, not corporate outlets but even in some places like The Economist or Vanity Fair. In fact, I have recently tagged with #inequality 10 or 15 articles in my twitter.

Just browsing the news during lunch I see the conservative American radio-tv commentator Glenn Beck, apologizing or something he said. This picture is shown in the article:

I focus in the poster behind this gentleman. Entrepreneurship it says, and then two hands trying to grab or magically making float a light bulb.

I have the impression that this is a promotion of the classical idea of Entrepreneurship. The 1000 times repeated mantra that anyone can have an idea, work hard and become rich. The proof is the thousands of individuals who have done it.

Light bulb is a popularly known icon for an idea. This was “coined” by Alva Edison. I mean, I don’t think that anyone took a picture with a light bulb before him :)

We all have seen this picture below. And perhaps listened to the stories of how patience he was. How he tried his experiments over and over… Persistence is the key ingredient to success…. bla, bla, bla…

They have put in our mind the idea of Edison working in his lab, coming up with something that we all admire. Sure, he was a genius, but he was not alone.

Successful entrepreneurship is about working with people. Even though Edison is alone in the pictures, there should have been a picture of many. He had a strong network of people who provided valuable ideas, not only for the light bulb, but many other inventions. See for example the article in Wikipedia: Edison Pioneers.

Entrepreneurship is not about individualism. I thought that, but I was wrong. Ideas are good, but are worthless until someone get things done. That is an entrepreneur. But entrepreneurship lives within a system. And if we want economic development, and progress we need the right socioeconomic innovation system. An environment, that I would say in most of the times it’s not necessarily accord to the ideas aired by Beck.

I come from a family of entrepreneurs, some firms did ok but the majority failed. I know how the lives of these people are, because it was mine. The vast majority (for example in the US, every year 2 million Americans start their own business) is a bad life. It really breaks my heart to see people buying the story of a successful individual, and just keep trying day after day, without the right network. Let’s not encourage wrong ideas about entrepreneurship.

So, Mr. Beck, I really like this promotion of entrepreneurship. But maybe you could have, instead of two hands reaching the light bulb, maybe a diverse team holding it…

If you have problems wathing the video, just click on his name.

Ed Glaeser was last night at The Daily Show with Jon Stewart. A comedy show based on news that I always find funny. I started watching it when I went to study to the US in 2003, a that time I was surprised how they criticize the Bush administration. Anyways, yesterday Glaeser went to the show, one of the economists I like to follow. So Ed Glaeser and Jon Stewart, a perfect mix. He was promoting his very interesting book “Triumph of the City: How Our Greatest Invention Makes Us Richer, Smarter, Greener, Healthier and Happier” Penguin. I think it’s a book I’d like to read. See today’s book review at The Economist. I would say his approached looked a little bit like Richard Florida’s love for urban areas, and that’s great we need many more guys supporting the concept of the cities from different points of view

I was surprised how young he is. I always pictured him as a 60 yeard old guy.

Here it is a podcast of Ed Glaeser in Freakonomics: Why Cities Rock. From February 18. I really liked it. I didn’t like some stuff, but I enjoyed the idea of building up in San Francisco Bay Area.