Tag: Steve Suranovic

Originally published on 02/27/2007

Marketplace did a story today with John Mackey [dead link], the founder of Whole Foods Market. It is a nice account of entreprenuership in a competitive market.

Originally published on 02/25/2007

It is generally accepted that competition encourages innovation. Many assume that innovation comes with expenditures on R&D. This makes sense – if a company directs some of its people to think up new ideas, it is more likely new ideas will arise. However, I have always suspected that many innovations come about in unexpected and unusual ways, often not with directed effort. Here’s a true story of one such innovation that literally(!) involves a better mousetrap.

I woke up early yesterday morning and as I walked into my kitchen I heard a strange clicking noise. Tentatively, I approached the stove, the source of the noise. At first, I thought the noise was from the range fan and vent since it was very windy outside, but that wasn’t it. I turned on the stove light, since dawn’s light was still dim. I looked down to find something remarkable.

It is important to know that I have an electric stove with a perfectly flat surface: the heating elements are built into the surface. I also have a pot with a clear glass top. Well, when I looked down I discovered the top of the pot laying flat on the stove surface …. with a vole, or field mouse, trapped inside!!! I couldn’t believe it! He kept moving around trying to escape but he could only lift the lid enough to rattle it. How did he get under there? I’ll tell you in a minute.

First, what does one do with a live, scared and frustrated mouse stuck under a pot top on your stove? Lift the lid and I know he’s gonna scurry away. Brave as I am, I don’t wanna try to catch a scared rapidly-moving mouse. The solution seemed pretty simple. I quickly searched for a thin piece of cardboard and found a small box. I flattened the box and slid it under the lid. My mouse wasn’t too happy, but had no choice but to hop aboard as the new floor slid beneath his feet. Then I picked up the mouse in my pot top and released him in the field outside. A successful and humane mousetrap was created!

But how did he get under there? It’s simple my dear Watson!

I regularly boil water in that pot for tea. Afterwards the pot top is wet from the steam. Sometimes after boiling water, I would leave the top flat on the stove but the condensation would never disappear even after a long time. Thus, I began to tilt the top and lean one edge on the countertop next to the stove. Since the lid was propped up a little the water quickly evaporated.

This also afforded easy access for my mouse. Clearly, as he squeezed under the lid, he pushed the edge away from the counter and trapped himself. To my knowledge I have never had a mouse in my kitchen before. If I knew I had a mouse in my house, I know I would never have thought up this mousetrap idea. Instead I would probably have reverted to the old-fashioned (and deadly) mousetraps we used when I was a kid. Luckily though, I quite unexpectedly discovered a better mousetrap.

And I will use this device again since I think I heard another mouse (or the same one returned) yesterday afternoon. So last night I set up my new mousetrap. On the floor of my kitchen I propped the pot top lid up on a breadboard and put some peanuts and cracker pieces on the floor at the far end of the lid. If a mouse tries to eat the snacks, he will push the lid off the board and trap himself harmlessly.

I didn’t catch another mouse last night but I will let you know if my new mousetrap works again. In the meantime, if you know any stories of interesting and unexpected discoveries or innovations, please post them here. I’d like to create a collection. Thanks.

Originally published on 02/25/2007

By reading the popular press one might form the impression that the WTO has one set of trade rules for all countries. The truth is there is no common set of WTO trade rules. Instead each country has made a set of promises, or commitments, to reduce trade barriers from its earlier levels. In the area of tariffs on commodities, each country has committed itself to a maximum tariff rate – called a tariff binding – for each product category. The level of each country’s commitment varies, typically by level of development. For example, the bound tariff rates for developed countries are generally much lower than bound rates by developing countries. In addition many developing countries have many product categories on which there is no bound rate, or maximum tariff. For these products a developing country is free to set any rate it wishes.

In this Table, we can see some of the patterns. For example just 67% of the Philippines goods have a tariff binding. The average bound tariff rate is 21.3%. Notice also that their average applied rate is just 9.1% meaning that they choose to set many of their tariffs below the bound levels and thus are more liberalized than promised. On the other hand, they are also free to raise tariffs considerably without violating their WTO promises putting traders of these products at some risk.

Notice that Sri Lanka has bindings on only about 10% of product lines and the average tariff in these goods is 17.9%. Their average overall tariff is higher at 19.8% because so many products are unbound.

In contrast, developed countries have almost 100% of their tariff lines bound and applied rates are typically set at the bound level. Because developed countries also have much lower applied rates on average, this has become the basis for calls that developing countries should commit to liberalize trade much further to reciprocate for lower agricultural subsidies by the developed countries.

Originally published 2/23/2007

Another way to see the turnover, or churning, that takes place in an economy is to consider business startups and closures. In the US in 2005 there were about 672,000 new businesses (with employees) created while about 545,000 businesses shut their doors. The total number of businesses in the US with employees are about 5.8 million. (only 17,000 businesses have more than 500 employees) Thus, about 10% of the business stock is refreshed each year with a small net gain each year being the norm. (See this SBA FAQ [dead link]).

In the UK, the churning is similar. In 2005 there were 178,000 new businesses and 153,000 closures. This is also about a 10% turnover each year. (See this SBS report)

I would be curious to know what these numbers, and the employment churning looks like in other countries, especially in France and some of the Scandanavian countries. If anyone knows these please post.

Originally published 2/23/2007

Freer trade and globalization will surely mean firms will face more competition. Some of these firms will lose out in competition to others and be forced to layoff workers or close their doors. On the business pages of newspapers it is common to see reports of this or that company laying off 50 or 500 or 5000 workers. (CLICK HERE to see the latest news stories on layoffs. ) The more these layoffs are associated with companies facing import competition, the more likely support for free trade will wane.

However, it is very important to put layoffs in perspective. For every news story reporting layoffs, it is unlikely there’s another one next to it reporting job hires. (In fact when you search for “job hire” stories you see stories about individual hires).

Every month the Labor Department reports the aggregate employment changes by industry. In this report we learn that in January 2007 employment fell in many industries: motor vehicles and parts lost 23,000 jobs, furniture and textile mills both lost 4,000 jobs and computer and peripheral equipment lost 6,000 jobs. However, in the same one month period health care employment rose by 18,000 jobs, professional and business services was up 25,000 jobs, while food services employment rose by 21,000 jobs. The net effect for the month was a gain of 111,000 jobs. This follows a net increase in December 2006 of 206,000 jobs. The total number of payroll jobs in the US economy is 137.3 million.

The point here is that the layoff stories are dwarfed by the typical churning of job gains and losses in the entire economy. Even these statistics don’t report all of the churning taking place within an industry. Every industry loses many workers each month and immediately replaces them with new hires. These numbers only report the net effect in each industry.

Originally published 2/22/2007

Here’s two op-eds expressing increasing wariness about free trade with some suggested solutions.

Matching Free Trade with Taxes by Sebastian Mallaby

Can Free Trade be a Fair Deal? by Harold Meyerson

(Thanks to Jeff Hay for finding these.)

Originally published 2/22/2007

The logic of free trade is little more than the extension of logic of the division of labor to an international level. Adam Smith discussed the productivity improvements that can arise by dividing labor into distinct tasks when he wrote about the pin factory. This example may not resonate very well with people today, since most know very little about manufacturing pins. The same idea can be expressed in a slightly different way though.

Suppose tomorrow the US implements a ban on all imported goods and services. Let’s ignore the immediate transition effect of empty shelves and lost jobs for those people dealing with imports and ask a more basic question. Can the US produce on its own all of the goods and services it currently imports? The answer to this is probably (or mostly) yes. The US is a very large country filled with people of all sorts of different skills and expertises. It has considerable untapped resources of oil, gas, minerals. It has a variety of climates stretched across the continent. With time, and if we put our mind to it, the US could surely produce almost everthing we currently import.

Now suppose tomorrow your state implements a ban on imports from every other state (and country). Ask the same question: can your state produce everything the country can produce? Maybe yes if you are from California or Texas, but probably no if you live in Washington DC or Rhode Island.

Now suppose your city or town implements a ban on all imports coming from outside. Can your city produce everything your state could? What about food? How much city land will need to be converted to raise crops and chickens and pigs? How much land is there for that?

Finally suppose tomorrow you implement a self-imposed ban on all “imports” that were not produced by yourself. Simply look around you and ask how many of the things you see you could produce yourself. For me the answer is virtually nothing. I can’t produce anything effectively except information about international economics, and that’s not gonna feed and clothe me in this new world.

The example shows that as we imagine going backwards towards greater and greater self-sufficiency, our abilities to produce the same collection of goods and services that we enjoy on a typical day disappears completely. If I did have to rely on producing everything myself, I would have to move to the country, learn to fish and farm, build a makeshift shelter, who knows what else. I know I would not enjoy anywhere near the standard of living I currently enjoy.

Now let’s run the story in reverse. As I open up to potential trade with more and more people, with my community first, then my region, then my country, and finally the world, my ability to focus my expertise on just one tiny body of knowledge (like international economics) expands. As my specialization becomes finer, so does everyone else’s. The result is a increasing quantity of goods and services produced with the same collection of resources (labor, capital, and land). It also means that virtually everyone can enjoy a much higher standard of living than they would if they were required to engage in subsistence agriculture.

That standard of living improvements arise from the division of labor is NOT simply a quaint theory. It’s obvious that it works in reality too. This is the basic reason why living standards are so much higher now than they were 300 years ago. The theory of comparative advantage is also based on this simple idea. Supporting free trade simply means pushing the principle of the division of labor to its logical extreme.

There are a few notable implications:

1) The story implies that smaller countries (like Jamaica, or Kenya) have more to gain from open trade than larger countries (the US and EU). Large countries can be self-sufficient and produce everything for themselves, however even they will suffer a drop in living standards because resources will not be divided as finely as possible. Small countries are more like the individual trying to be self-sufficient – it is possible, but not without a substantial reduction in living standards.

2) If you are concerned about the the sustainability of the economic system, or about the degredation of the environment, you should support policies that allow us to achieve the highest standard of living with the limited resources we have. Free and open trade helps to achieve that. Restrictions to trade will mean the same standard of living requires more resources, which in today’s energy-driven economy means more oil and gas and coal.