222 (22 July 2015)

Welcome to week 222!  The articles below caught my attention this week.  Please note that what are intended to be relatively objective “briefs” are preceded by dashes (——–), whereas additional material or relatively subjective comments are preceded by asterisks (********).  The links to articles preceded by [SR] require a subscription to be read in their entirety, although complete articles may frequently be found by a title search.

You can find a pdf of this issue, a cumulative pdf for issues 1-208, and a cumulative pdf for issues 209-present at: https://sites.google.com/site/brucedeanlarson/the-invisible-forces.

(16 July 2015): “Los Angeles’ Garment Industry Frets Over Pay Hike” [SR](http://www.wsj.com/articles/los-angeles-garment-industry-frets-over-pay-hike-1436986903)

——–According to a new law, the minimum wage of Los Angeles, which “boasts more jobs making jeans, jackets and other apparel than any other pocket of the country,” will increase to $15 per hour by 2020; the Los Angeles metro area “employs twice as many manufacturing workers as the Chicago or Detroit regions, with better than one in eight of them in Los Angeles county working in the apparel industry.”  The CEO of L.A.-based contract apparel manufacturer 5 Thread Factory, Brian Zuckerman, has already made his response to the wage change clear: “The simple answer to this whole conversation is we’re moving out of the city of L.A.”  Although San Francisco and Seattle have moved to establish the $15 wage rate, “Los Angeles marks the first time a city with a large low-wage manufacturing base has decided to raise its wage floor so high.”  The wage law “applies only to the city of Los Angeles” and not currently to other areas of Los Angeles County.  Steve Barraza, the CEO of designer and manufacturer Tianello Inc., comments that as a result of the wage law, “We won’t hire as many people, but the people we do hire have to be high-quality tailors.”

********You can learn more about the proposed $15 minimum wage in L.A. at: http://blogs.wsj.com/economics/2015/07/15/champion-of-15-minimum-wage-in-l-a-says-the-rate-is-too-high-for-u-s/.  It is not only apparel manufacturers that are rethinking their approach.  Apparel brand Karen Kane Inc. “plans to keep a careful eye on labor costs when selecting contractors to manufacture clothes,” and will “look closer at contractors outside the city” of Los Angeles.  You can get a look—23 photos—inside one of the L.A.-based manufacturers for American Apparel at: http://framework.latimes.com/2014/07/08/inside-the-american-apparel-manufacturing-facility-in-downtown-los-angeles/#/0.

********One of the things that caught my attention about this article was the influence of spatial wage differentials, i.e., the difference between the city of Los Angeles and areas just a few miles away.  Evidently that is enough to cause a manufacturing facility to move.  That is the case of domestic wage differentials.  Then there is the case of international wage differentials, as examined in “Search for Ever Cheaper Garment Factories Leads to Africa” [SR](http://www.wsj.com/articles/search-for-ever-cheaper-garment-factories-leads-to-africa-1436347982).  As the article notes, “Africa is the final frontier in the global rag trade—the last untapped continent with cheap and plentiful labor.  Ethiopia’s garment sector has no minimum wage, compared with Bangladesh, where workers earn at least $67 a month, according to the International Labor Organization.  Garment workers in Ethiopia started at about $21 a month as of last year, the Ethiopian government said.”  As of January 1, garment workers in China “earned anywhere from $155 to $297 a month . . . Garment workers in China tend to do more sophisticated production while basic cutting and sewing goes to countries with lower wages.”  This connects nicely with the comments of Steve Barraza of Tianello Inc. of Los Angeles, to wit, jobs where the value of the “marginal product” of labor is lowest are those that are most likely to move when relative wage rates rise.

(17 July 2015): “Silicon Valley Doesn’t Believe U.S. Productivity Is Down” [SR](http://www.wsj.com/articles/silicon-valley-doesnt-believe-u-s-productivity-is-down-1437100700)

——–According to official U.S. figures, economic output per hour has barely budged in the last ten years; in the last two quarters it has fallen.  But Google chief economist Hal Varian holds that “the U.S. doesn’t have a productivity problem, it has a measurement problem, a sound bit shaping up as the gospel according to Silicon Valley.”  One aspect of this measurement problem is that “a lot of what originates here is free or nearly free.”  As it is, “the only way goods and services move the official U.S. productivity needle is when consumers and businesses pay for them.  Anything free, no matter how much it improves everyday life, isn’t included.”

********It seems that issues concerning GDP measurement have been in the news more frequently of late but this is the first time I can recall the element of “freeness” being discussed.  Hal Varian has had an interesting career as both an academic and business economist.  You can get a sense of both at: http://people.ischool.berkeley.edu/~hal/.

(18 July 2015): “Free exchange: Sorry to burst your bubble” (http://www.economist.com/news/finance-and-economics/21657817-new-research-suggests-it-debt-not-frothy-asset-prices-should-worry)

——–Until recently the idea that stockmarket busts “are very damaging for the economy” has received “surprisingly little scrutiny.”  But in light of two new papers, it appears that not all bubbles “are equally bad.”  The “crucial variable that separates relatively harmless frenzies from disastrous ones is debt.  In many cases, though certainly not all, stockmarket manias fall into the less worrying category.”  In a paper examining bubbles “in the housing and equity markets over the past 140 years” Oscar Jorda, Moritz Schularick, and Alan Taylor conclude that “The most dangerous . . . are housing bubbles fueled by credit booms.  The least troublesome are equity bubbles that do not rely on debt.”  In a paper by Markus Brunnermeier and Isabel Schnabel “examining 400 years of asset-price bubbles . . . they find that the consequences of a bursting bubble depend less on the type of asset than on how it is financed.  High leverage is the telltale sign of trouble.”

********The papers are accessible via links embedded in the article.  The article suggests that the current situation in China is akin to a stockmarket bubble “accompanied by lots of debt,” i.e., the kind that “can cause severe economic damage.”

(21 July 2015): “Investors Flee Commodities” [SR](http://www.wsj.com/articles/investors-flee-commodities-1437434367)

——–“The prices of raw materials from oil and gold to copper, cotton and sugar tumbled, underscoring an increasing aversion to commodity investments as the Federal Reserve prepares to raise interest rates for the first time in nearly a decade.  U.S. oil prices dipped below $50 a barrel on Monday during intraday trading for the first time since April, while gold slid 2.2% to its lowest level in five years.  The drops extend a retreat from the commodity sector that has picked up speed in recent months.”  It is expected that an increase in interest rates by the Fed will “tend to draw money into yield-bearing assets and away from commodities, which pay their holders nothing and often carry storage costs.”  The expectation is that the dollar will continue to appreciate against other currencies and, since commodities tend to be priced in terms of U.S. currency, will contribute to continuing movements away from commodities.  Notes Edward Meir, a strategist for brokerage firm INTL FC-Stone Inc., “It is a question of choosing which asset class you want to be in and for many investors, commodities are not that asset class” given current conditions.

********The article clearly illustrates the interdependent nature of asset markets and indicates why so many follow the Fed with such interest.

May you have a good week!

Bruce

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