Apr 30, 2013

Highest-Paid College Majors - Graduates' Starting Salaries - At Work - WSJ

Christine Evans, 22, has wanted to be an engineer since before she can remember.

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Engineering majors are tops when it comes to starting salaries out of school, according to a new survey.
Her father, a mechanical engineer, encouraged her to attack school projects with a systematic mindset from an early age, and she eventually followed in his footsteps, studying mechanical engineering at the University of Alabama.
The choice has paid off. After graduating this weekend, she’ll take a few months off before starting a job at the development company of Exxon MobilCorp. XOM +0.24% in Houston, Tex., where she’ll be earning nearly six figures, she said.
While college majors may seem irrelevant to employers who mainly want to hire young people who can think critically and communicate well, that doesn’t mean all majors are created equal.
Engineering grads of 2013, like Evans, will still earn far higher salaries, on average, than the typical new college graduate, according to the latest salary survey from the National Association of Colleges and Employers, which releases reports on the earnings of new graduates three times a year.
The average starting salary for a member of the class of 2013 is $44,928, up 5.3% from the previous year, driven by big gains in fields such as health sciences and business.
But these figures are relevant only for those grads lucky enough to find a job during college-recruiting season or soon after. A recent report from the Department of Labor looked at data from 2007 to 2011 and found that 13.5% of bachelor’s degree holders were unemployed a few months after their 2011 graduations (Bleak, but far better than the 17.6% unemployment rate among that group in 2009).
Engineers took seven of the top ten spots in NACE’s April survey, with petroleum engineers–a category added this year–earning the most, with average starting salaries of $93,500.
The survey is based on data from 400,000 employers, gathered from government and private sources. The data reflects actual starting salaries, not offers.
Other than engineering majors, the list of highly paid grads includes computer science majors, management information systems/business majors, and finance majors.
Engineering salaries rose, on average, 4% over the previous year to $62,535, but other industries saw larger increases. Those majoring in health sciences will see a 9.4% increase over last year, while business majors’ salaries will rise 7.1%.
The grads seeing the smallest pay bump are humanities and social-science majors, whose starting salaries inched up 1.9%, to $37,058.
In the industry with the most hiring – educational services, which includes teaching and special education, among other professions – employers pay average salaries of $39,992 to the 455,000 new graduates they hire.
Here’s the list of top 10 majors, with starting salaries:
Petroleum Engineering: $93,500
Computer Engineering: $71,700
Chemical Engineering: $67,600
Computer Science: $64,800
Aerospace/Aeronautical/Astronautical Engineering: $64,400
Mechanical Engineering: $64,000
Electrical/Electronics and Communications Engineering: $63,400
Management Information Systems/Business: $63,100
Engineering Technology: $62,200
Finance: $57,400

Apr 29, 2013

Tech Stocks Cheapest in Seven Years as Profit Estimates Drop - Bloomberg

U.S. technology stocks, the second- best industry of the past decade, have fallen to the cheapest levels in at least seven years and are vulnerable to more losses as analysts reduce second-quarter profit estimates.
Earnings at computer companies will fall 5.5 percent in the three months through June as consumers and government agencies cut spending, according to more than 2,000 analyst estimates tracked by Bloomberg. The group, led by Apple Inc. (AAPL) and International Business Machines Corp. (IBM), trades at 13 times projected profit, the lowest level compared with the Standard & Poor’s 500 since Bloomberg began compiling the data in 2006.
A trader talks on a telephone while working on the floor of the New York Stock Exchange (NYSE) in New York. Companies from Accenture Plc to Juniper Networks Inc. and Motorola Solutions Inc. have predicted sales that trailed analyst estimates. Photographer: Scott Eells/Bloomberg
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Bulls say the unprecedented discount means technology stocks, which tend to lead during expansions, are too cheap to pass up as the world economy grows. Bears say the shares will remain the worst-performing group in the S&P 500 (SPX)this year with companies and governments spending less on technology as growth weakens in Europe and China. PresidentBarack Obama’s proposed budget would reduce spending oninformation technology by $2.5 billion by 2015, according to Bloomberg Industries.
“I get the sense from a lot of managers that they’re going to sit on their budgets until the end of the year,” Peter Sorrentino, who helps manage about $14.7 billion including shares of Google Inc. and Intel Corp. at Huntington Asset Advisors in Cincinnati, said in an April 24 phone interview. He soldAccenture Plc (ACN) and Apple shares last year.

‘Disappointing Numbers’

“It is looking as though the economy is going to flatline for a while, after the disappointing numbers from China,” Sorrentino said. “There isn’t a real catalyst here for ramping up production.”
The S&P 500 advanced 1.7 percent to 1,582.24 last week after better-than-projected earnings from Travelers Cos. and United Parcel Service Inc. outweighed data showing the U.S. economygrew 2.5 percent last quarter, less than forecast. Technology shares have underperformed theS&P 500 by 9 percentage points this year.
Of the 270 S&P 500 companies that have posted earnings this month, 74 percent exceededanalyst estimates, according to data compiled by Bloomberg. Rising corporate profits have helped lead the S&P 500 up 0.8 percent since the end of March, a shift from the past three years when the S&P 500 declined an average 15 percent after peaking in April. Futures on the index rose 0.3 percent at 8:48 a.m. in London today.
Companies from Accenture to Juniper Networks Inc. (JNPR) and Motorola Solutions Inc. (MSI)have predicted sales that trailed analyst estimates. The industry is 9.1 percent cheaper than the S&P 500, a bigger discount than seven of the nine other industries, behind only energy and financial stocks.

Technology Spending

Apple, the world’s second-biggest company by market value, posted the first profit drop in a decade and said sales would be lower than analysts estimated this quarter. While the Cupertino, California-based maker of iPads also said it would return $55 billion to shareholders through buybacks and dividends, the stock ended the week at $417.21, 41 percent below the peak reached in September.
The valuation fell to 10.4 times forecast earnings, the ninth-lowest in the industry.
IBM missed forecasts for the first time since 2005, sending its shares tumbling the most in eight years, as demand for hardware weakened and the company failed to sign customers to contracts. The world’s biggest computer-services provider plans to spend $1 billion cutting jobs in the second quarter, when profits are projected to climb at the slowest pace since 2004, data compiled by Bloomberg show.

IBM Shares

Shares of Armonk, New York-based IBM trade at 11.4 times projected earnings, cheaper than 78 percent of S&P 500 companies.
EMC Corp., the world’s biggest maker of storage computers, said last week that it plans to buy back $1 billion in shares in 2013. The Hopkinton, Massachusetts-based company had reportedfirst-quarter earnings that missed estimates as customers restrained spending. The shares are down 12 percent this year, sending the valuation to 11.7 times projected earnings.
Estimates show profits for the 70 companies in the S&P 500 Information Technology Index may shrink in the second quarter, according to a survey of analysts tracked by Bloomberg. The projection for a 5.5 percent profit contraction is down from an estimate for 7.2 percent growth at the start of the year, according to Bloomberg data.
For James Paulsen, who oversees $325 billion as the Minneapolis-based chief investment strategist at Wells Capital Management, the industry is a bargain. He predicts technology stocks will rally as companies use excess cash to repurchase shares. Paulsen’s firm added to stakes in Salesforce.com Inc. and Cisco Systems Inc., according to a Dec. 31 filing.

Extra Spending

“I’m as nervous about the large-cap tech growth stories as anybody, but I also think that they are getting to be really reasonable values,” Paulsen said in an April 24 phone interview. “There’s a lot of extra spending to come. I think we may start to see some of that starting to emerge before the year’s out.”
For contrarian investors, now may be a good time to buy. Computer shares have fallen 6.6 percent since reaching a peak in September, while makers of household goods and health-care stocks soared at least 14 percent. Technology, energy and financial stocks are the most inexpensive industries in the S&P 500 with multiples of less than 14 times earnings.

Budget Deficit

The U.S. government will spend less on information technology in the next three years, curbing revenue for companies from IBM to Oracle Corp. and BMC Software Inc., data from Bloomberg Industries and the U.S. Office of Management and Budget show. The budget deficit narrowed in March as spending shrank almost 21 percent during the first month of mandatory federal cutbacks known as sequestration. The $1.2 trillion in across-the-board reductions are spread over nine years as part of a 2011 deal to increase the U.S. debt limit.
IBM Chief Financial Officer Mark Loughridge said in an April 18 conference call that the company’s U.S. federal business fell 13 percent last quarter, calling it a “drag on the U.S. performance.” F5 Networks Inc. said on April 4 that spending cuts dragged down government sales and forecast quarterly revenue that missed analyst projections. Shares of the company, which makes data-management equipment, have tumbled 24 percent this year.
Harris Corp., which sells communications equipment to the military, cut its profit and sales outlook for the year on April 11, citing delayed orders from U.S. agencies. Analysts forecast the Melbourne, Florida-based company will post the biggest profit drop since at least 2003. The stock has slipped 5.2 percent this month, to trade at 9.7 times projections.

Sales Miss

Motorola, the maker of two-way radios and bar-code scanners, fell the most in more than two years after saying second-quarter profit and sales would trail estimates. The company is depending more on its government customers, which account for about 70 percent of revenue, as corporations defer orders, according to Chief Executive Officer Greg Brown.
“We saw customers delay or defer some key purchases” in logistics and retail in particular, Brown said in an April 24 interview. The price-earnings ratio for Schaumburg, Illinois- based Motorola fell to 15.5 last week, down from 17 earlier this month.
When technology shares outperform, the U.S. economy has seen bigger expansions. In quarters when the group rallied the most or second-most in the S&P 500, the U.S. expanded 3.2 percent, compared with the average of 2.4 percent since 1989, data compiled by Bloomberg show. The growth rate falls to 0.8 percent on average when computer shares trail the S&P 500.

Economy Watch

GDP will increase 2 percent this year, down from 2.2 percent in 2012, according to the median of 80 economists’ forecasts compiled by Bloomberg. Last quarter’s 2.5 percent growth fell short of the 3 percent gain projected.
The International Monetary Fund has cut its outlook for global growth the past four quarters, andChina’s economy, the second-biggest in the world, expanded at a slower-than-forecast pace in the first quarter, helping drag commodities such as gold and copper into a bear market. Economists project Europe’s GDP will contract for a fifth quarter in the three months ending in June, falling 0.3 percent after a 0.5 percent decline in the first three months of 2013.
Orders for U.S. non-defense capital goods excluding aircraft, a proxy for future business investment in equipment such as computers and communications gear, rose 0.2 percent last month, less than estimated and failing to make up for a 4.8 percent slump the previous month, according to a report from the Commerce Department April 24.

China Slowdown

“Capital expenditures in corporate America, corporate China, corporate Europe, are what drive the technology sector profits, and that has just remained flat,” Chris Hyzy, who helps oversee about $325 billion as chief investment officer of U.S. Trust in New York, said in an April 25 phone interview. “Because Europe is in very bleak economic times and China’s facing a slowdown, the tech sector is unfavorably harmed more than most sectors, if not the most.”
Juniper, the second biggest computer-networking equipment, forecast profit and sales belowthe average analyst estimate after reporting last week weaker sales to telecommunications providers and big companies. Chief Executive Officer Kevin Johnson said after last week’s report that demand from government agencies and financial-services firms had also weakened. The shares fell 20 percent in 2013, sending the valuation to 13.4, the lowest since July.

China Weakness

Cisco said in February that weakness in China and Europe and lackluster government spendingon networking equipment had slowed sales. The San Jose, California-based company, which cut 500 jobs last month, will post the smallest profit increase in six quarters when it reports May 15, according to analyst estimates compiled by Bloomberg. The shares, down 2.2 percent since then, trade at 10.2 times projected earnings.
“It has been nothing short of terrible in this space,” said Walter Todd, who oversees about $940 million as chief investment officer of Greenwood Capital Associates LLC in Greenwood, South Carolina. “We really need to see these downward revisions abate in the sector before you get sustainable outperformance.”

Diagnosing the Wrong Deficit: the evidence on sleep deprivation vs ADHD

IN the spring of 2010, a new patient came to see me to find out if he had attention-deficit hyperactivity disorder. He had all the classic symptoms: procrastination, forgetfulness, a propensity to lose things and, of course, the inability to pay attention consistently. But one thing was unusual. His symptoms had started only two years earlier, when he was 31.

Though I treat a lot of adults for attention-deficit hyperactivity disorder, the presentation of this case was a violation of an important diagnostic criterion: symptoms must date back to childhood. It turned out he first started having these problems the month he began his most recent job, one that required him to rise at 5 a.m., despite the fact that he was a night owl.

The patient didn’t have A.D.H.D., I realized, but a chronic sleep deficit. I suggested some techniques to help him fall asleep at night, like relaxing for 90 minutes before getting in bed at 10 p.m. If necessary, he could take a small amount of melatonin. When he returned to see me two weeks later, his symptoms were almost gone. I suggested he call if they recurred. I never heard from him again.

Many theories are thrown around to explain the rise in the diagnosis and treatment of A.D.H.D. in children and adults. According to the Centers for Disease Control and Prevention, 11 percent of school-age children have now received a diagnosis of the condition. I don’t doubt that many people do, in fact, have A.D.H.D.; I regularly diagnose and treat it in adults. But what if a substantial proportion of cases are really sleep disorders in disguise?

For some people — especially children — sleep deprivation does not necessarily cause lethargy; instead they become hyperactive and unfocused. Researchers and reporters are increasingly seeing connections between dysfunctional sleep and what looks like A.D.H.D., but those links are taking a long time to be understood by parents and doctors.

We all get less sleep than we used to. The number of adults who reported sleeping fewer than seven hours each night went from some 2 percent in 1960 to more than 35 percent in 2011. Sleep is even more crucial for children, who need delta sleep — the deep, rejuvenating, slow-wave kind — for proper growth and development. Yet today’s youngsters sleep more than an hour less than they did a hundred years ago. And for all ages, contemporary daytime activities — marked by nonstop 14-hour schedules and inescapable melatonin-inhibiting iDevices — often impair sleep. It might just be a coincidence, but this sleep-restricting lifestyle began getting more extreme in the 1990s, the decade with the explosion in A.D.H.D. diagnoses.

A number of studies have shown that a huge proportion of children with an A.D.H.D. diagnosis also have sleep-disordered breathing like apnea or snoring, restless leg syndrome or non-restorative sleep, in which delta sleep is frequently interrupted.

One study, published in 2004 in the journal Sleep, looked at 34 children with A.D.H.D. Every one of them showed a deficit of delta sleep, compared with only a handful of the 32 control subjects.

A 2006 study in the journal Pediatrics showed something similar, from the perspective of a surgery clinic. This study included 105 children between ages 5 and 12. Seventy-eight of them were scheduled to have their tonsils removed because they had problems breathing in their sleep, while 27 children scheduled for other operations served as a control group. Researchers measured the participants’ sleep patterns and tested for hyperactivity and inattentiveness, consistent with standard protocols for validating an A.D.H.D. diagnosis.

Of the 78 children getting the tonsillectomies, 28 percent were found to have A.D.H.D., compared with only 7 percent of the control group.  

Even more stunning was what the study’s authors found a year after the surgeries, when they followed up with the children. A full half of the original A.D.H.D. group who received tonsillectomies — 11 of 22 children — no longer met the criteria for the condition. In other words, what had appeared to be A.D.H.D. had been resolved by treating a sleeping problem.

But it’s also possible that A.D.H.D.-like symptoms can persist even after a sleeping problem is resolved. Consider a long-term study of more than 11,000 children in Britain published last year, also in Pediatrics. Mothers were asked about symptoms of sleep-disordered breathing in their infants when they were 6 months old. Then, when the children were 4 and 7 years old, the mothers completed a behavioral questionnaire to gauge their children’s levels of inattention, hyperactivity, anxiety, depression and problems with peers, conduct and social skills.

The study found that children who suffered from sleep-disordered breathing in infancy were more likely to have behavioral difficulties later in life — they were 20 to 60 percent more likely to have behavioral problems at age 4, and 40 to 100 percent more likely to have such problems at age 7. Interestingly, these problems occurred even if the disordered breathing had abated, implying that an infant breathing problem might cause some kind of potentially irreversible neurological injury.

CLEARLY there is more going on in the nocturnal lives of our children than any of us have realized. Typically, we see and diagnose only their downstream, daytime symptoms.

There has been less research into sleep and A.D.H.D. outside of childhood. But a team from Massachusetts General Hospital found, in one of the only studies of its kind, that sleep dysfunction in adults with A.D.H.D. closely mimics the sleep dysfunction in children with A.D.H.D.

There is also some promising research being done on sleep in adults, relating to focus, memory and cognitive performance. A study published in February in the journal Nature Neuroscience found that the amount of delta sleep in seniors correlates with performance on memory tests. And a study published three years ago in Sleep found that while subjects who were deprived of sleep didn’t necessarily report feeling sleepier, their cognitive performance declined in proportion to their sleep deprivation and continued to worsen over five nights of sleep restriction.

As it happens, “moves about excessively during sleep” was once listed as a symptom of attention-deficit disorder in the Diagnostic and Statistical Manual of Mental Disorders. That version of the manual, published in 1980, was the first to name the disorder. When the term A.D.H.D., reflecting the addition of hyperactivity, appeared in 1987, the diagnostic criteria no longer included trouble sleeping. The authors said there was not enough evidence to support keeping it in.

But what if doctors, before diagnosing A.D.H.D. in their patients, did have to find evidence of a sleep disorder? Psychiatric researchers typically don’t have access to the equipment or expertise needed to evaluate sleep issues. It’s tricky to ask patients to keep sleep logs or to send them for expensive overnight sleep studies, which can involve complicated equipment like surface electrodes to measure brain and muscle activity; abdominal belts to record breathing; “pulse oximeters” to measure blood oxygen levels; even snore microphones. (And getting a sleep study approved by an insurance company is by no means guaranteed.) As it stands, A.D.H.D. can be diagnosed with only an office interview.

Sometimes my patients have resisted my referrals for sleep testing, since everything they have read (often through direct-to-consumer marketing by drug companies) identifies A.D.H.D. as the culprit. People don’t like to hear that they may have a different, stranger-sounding problem that can’t be fixed with a pill — though this often changes once patients see the results of their sleep studies.

Beyond my day job, I have a personal interest in A.D.H.D. and sleep disorders. Beginning in college and for nearly a decade, I struggled with profound cognitive lethargy and difficulty focusing, a daily nap habit and weekend sleep addiction. I got through my medical school exams only by the grace of good memorization skills and the fact that ephedra was still a legal supplement.

I was misdiagnosed with various maladies, including A.D.H.D. Then I underwent two sleep studies and, finally, was found to have an atypical form of narcolepsy. This was a shock to me, because I had never fallen asleep while eating or talking. But, it turned out, over 40 percent of my night was spent in REM sleep — or “dreaming sleep,” which normally occurs only intermittently throughout the night — while just 5 percent was spent in delta sleep, the rejuvenating kind. I was sleeping 8 to 10 hours a night, but I still had a profound delta sleep deficit.

It took some trial and error, but with the proper treatment, my cognitive problems came to an end. Today I eat well and respect my unique sleep needs instead of trying to suppress them. I also take two medications: a stimulant for narcolepsy and, at bedtime, an S.N.R.I. (or serotonin-norepinephrine reuptake inhibitor) antidepressant — an off-label treatment that curtails REM sleep and helps increase delta sleep. Now I wake up without an alarm, and my daytime focus is remarkably improved. My recovery has been amazing (though my wife would argue that weekend mornings are still tough — she picks up the slack with our two kids).

Attention-deficit problems are far from the only reasons to take our lack of quality sleep seriously. Laboratory animals die when they are deprived of delta sleep. Chronic delta sleep deficits in humans are implicated in many diseases, including depression, heart disease, hypertension, obesity, chronic pain, diabetes and cancer, not to mention thousands of fatigue-related car accidents each year.

Sleep disorders are so prevalent that every internist, pediatrician and psychiatrist should routinely screen for them. And we need far more research into this issue. Every year billions of dollars are poured into researching cancer, depression and heart disease, but how much money goes into sleep?

The National Institutes of Health will spend only $240 million on sleep research this year. One of the problems is that the research establishment exists as mini-fiefdoms — money given to one sector, like cardiology or psychiatry, rarely makes it into another, like sleep medicine, even if they are intimately connected.

But we can’t wait any longer to pay attention to the connection between delta sleep and A.D.H.D. If you’re not already convinced, consider the drug clonidine. It started life as a hypertension treatment, but has been approved by the Food and Drug Administration to treat A.D.H.D. Studies show that when it is taken only at bedtime, symptoms improve during the day. For psychiatrists, it is one of these “oh-we-don’t-know-how-it-works” drugs. But here is a little-known fact about clonidine: it can be a potent delta sleep enhancer.

The Ponzi scheme called China

The two miracle economies during the global financial crisis – China and Australia – are in trouble. As we look back at the various crises over the last 15 years it is clear that, in hindsight, there were clear warning signals, if only we had been smart enough to recognise those signals. Suddenly clear advanced warning signals are emerging from both Australia and China.
Australia’s signal will come later today when Prime Minister Julia Gillard announces that Australia’s tax revenue has slumped. Deep down, Australians know they are in trouble which is one reason why the voters, according to the opinion polls, have turned to Opposition Leader Tony Abbott.
China’s problems are not as widely recognised and the advanced signals are confused – at least, until now.
You may remember that the 1997 Asian Financial Crisis could have been recognised by travelling to Thailand or Indonesia and discovering that they were borrowing vast sums in US dollars with no currency hedge. That practice had to end in grief and it did.
The US meltdown was discoverable by going into the American housing markets and seeing that unemployed people who had no hope of repaying loans were being advanced money. That practice had to end in grief and it did.
Europe’s crisis could have been seen by a short visit to Greece (or similar countries) and discovering they were borrowing money they had no hope of repaying. It would have the same outcome as Asia and the US.
In the case of China we are now also seeing an advanced warning. I have not been to China recently but at last week's ADC China summit and the Patrick Chovanec KGB interview that followed, the warning was signalled – the secondary banking market in China is borrowing short-term at interest rates of above 8 per cent and even 10 per cent. Vast sums are involved. That is an unstainable rate and shows that there is a deep problem that has yet to surface.
China’s secondary banking market and many other parts of its banking system have borrowed money to undertake uneconomic investment and, to continue to finance those investments, unsustainable rates of interest must be offered. In Australia we know where that practice ends – companies that undertake such borrowing can’t service their debts and fall over.
That’s what will happen in China. However, unlike Australia, because of the potential political and social ramifications, the Chinese government will almost certainly pick up these broken enterprises but the rescue effort required will be so large that capital investment and demand for our minerals will be cut back. The Patrick Chovanec KGB interview puts a new light on China.
But Chovanec – a former professor at the Tsinghua University’s School of Economics in Beijing and now a global investment strategist – is merely reporting to Australia that a practice we know to be unsustainable is taking place. It’s just as in Asia, the US and Europe where people saw the bad practices but did not recognise the seriousness of the problem until it was too late.
China will not fall over tomorrow or the next day, but borrowing at high rates of interest always comes to grief because it represents yet another Ponzi scheme. (Wikipedia defines a Ponzi scheme is an investment operation that pays returns to its investors from their own money or the money paid by subsequent investors, rather than from profit earned by organisation running the operation. Such scheme usually entices new investors by offering higher returns than other investments and requires an ever-increasing flow of money from new investors to keep the scheme going.)
The quicker China recognises its vast Ponzi scheme and takes action the better for Australia and the world.


When stability goes belly up | Business Spectator

As I noted in my previous post, neoclassical economics made it an item of faith that capitalism was inherently stable, and dismissed arguments to the contrary as no more than left-wing propaganda. My favourite statement of this perspective came from the pen of Nobel Prize winner Ed Prescott, who was one of the key players in introducing the concept of “rational expectations” into economics. Not only was capitalism inherently stable, he claimed in 1999, but it was so stable that we can reliably expect the economy to double the standard of living every 40 years. Marx and his ilk were simply wrong:
“The Marxian view is that capitalistic economies are inherently unstable and that excessive accumulation of capital will lead to increasingly severe economic crises,” Prescott said. “Growth theory, which has proved to be empirically successful, says this is not true. The capitalistic economy is stable, and absent some change in technology or the rules of the economic game, the economy converges to a constant growth path with the standard of living doubling every 40 years.“
About 15 years later, after the dot.com bubble and burst, the subprime bubble and burst, the apparently never-ending ‘Great Recession’ in the US and Europe’s second Great Depression, the alternative argument that capitalism is indeed inherently unstable is looking somewhat better than Prescott’s Panglossian vision.
That’s not to say that instability is always a bad thing: to Schumpeter (and to Austrian economists), instability is an essential part of the creative process of capitalism. Its darker side, which Minsky focused upon, was the tendency for this instability to lead to excessive debt and, ultimately, a Depression.
Though this might surprise some people, I’ve tended to stand closer to Schumpeter than to Minsky on this. Minsky argued that the destructive instability was endemic to capitalism, as much as the creative instability was, because finance necessarily had to be destabilizing. I have tended to argue instead that finance’s destructive tendencies arise because we let the banks finance Ponzi schemes -- bubbles in real estate and shares -- that add to debt without adding to the capacity of society to finance that debt. Eliminate that tendency, I have argued, and the destructive side of finance could be tamed.
Now I’m not so sure—thanks to some modeling I did recently as a prelude to presenting a seminar to staff at the Australian Treasury last week.
This was my second invitation to present to a Treasury audience -- the previous experience was in New Zealand last year. That was a high-level meeting: I had been invited over by the Secretary of the Department, and there was hope that this would lead to a joint project to develop a monetary, Minsky-inspired model for the New Zealand Treasury.
That hope was scuppered by the Treasury economists themselves, who (with some notable exceptions) were hostile to the anything other than neoclassical economic modeling. It didn’t matter a piffle, it seemed, that neoclassical models completely missed the economic crisis of 2007-08, and instead predicted that tranquil economic times lay ahead. Just tweak the models a bit and we can simulate the crisis after it happened, so what’s the problem…
Given that previous experience, I prepared to meet a number spurious objections to my modeling that were thrown up in New Zealand. One in particular was the claim that the instability my models displayed was simply a by-product of the exponential functions I used to simulate the behavior of workers and capitalists. Remove them, I was told, and the instability would disappear.
I knew that was a mathematically false objection: if a model has an unstable equilibrium with exponential functions, it will be unstable with linear ones too. But when you’re arguing with True Believers in a false paradigm, simply telling them that there’s a mathematical theorem that proves them wrong doesn’t cut it: you have to show them (and even that might not work, but it’s worth a try).
So I did something I’ve never done before for my Treasury audience: I rebuilt my Minsky models using strictly linear functions. Though this resulted in unrealistically large cycles when I ran simulations, it also made it much easier for me to do some simple exploration of the properties of my models -- and this led to the surprise I’m leading up to.
My Minsky models themselves are built on the foundation of a model constructed by Richard Goodwin back in the 1960s (Goodwin 1967), and his inspiration came from a verbal model developed precisely one century earlier, by none other than… Karl Marx (Marx 1867, Ch. 25 Section 1). The great appeal of this model to me was that, in a ‘let’s assume we have a can opener’-laden discipline, Goodwin’s model was as close to being assumption-free as you could get.
Starting from the top, to produce output you need factories, and factories can’t produce without hiring workers. The level of employment influences worker’s ability to get wage rises, and profit is basically what’s left after wages have been paid. Capitalists then invest using profits, and that investment determines whether the number of factories increases (because of gross investment) or falls (because of depreciation).
That’s it: if you follow that verbal logic then you understand Goodwin’s model (and even Marx’s prose!). To turn it into a mathematical model, Goodwin assumed the simplest possible relationships between each chain in this causal loop: that each relationship was simply linear. Output was some constant times the amount of capital, workers’ wage demands were some constant times how much the employment rate differed from some threshold level, and so on. Of course, the actual relationships in the real world are very complex and change over time, but this was partly Goodwin’s point (and mine): if even a simple model like this was unstable, then the real world was likely to be more unstable still.
Of course, you might not expect much of interest to come out of such a simple model -- and you’d be wrong. Despite its simplicity, the model generates persistent cycles: its equilibrium is unstable (or technically speaking, neutral) -- and with not an exponential function in sight (see figure 1).
Figure 1: Goodwin's model -- endemic cycles

Graph for When stability goes belly up
Instead, cycles occur because the wage bill -- the upper-case Wat the bottom of figure 1 -- is equal to the wage rate (w), multiplied by the number of workers employed (L). Multiplying two variables together gives you an inherent nonlinearity, and this is what drives the cycles.
When both wages and employment are rising -- which does happen, as you can see from the left hand plot in figure 1 (during the first three years) -- the product rises even faster, cutting in to profits and reducing investment. This in turn slows down economic growth, which results firstly in falling employment, and then in falling wages as well (from years five to eight in figure 1). This restores profits, leading to more investment, and another cycle: rinse and repeat, without ever approaching equilibrium.
I built my Minsky model by adding a bit of reality. In Goodwin’s simple model, all profits are invested; but in the real world, firms invest less than profits during a slump, but more than profits during a boom -- and bank loans supply the additional revenue for investment in excess of profits, charging interest on the accumulated debt for the service.
This required adding both an investment function -- some relationship between the rate of profit and the level of investment -- and a banking sector. In my published papers I’ve always used an exponential form for the investment-profit relation, but for Treasury -- in case I copped the same neoclassical push-back that I copped in New Zealand last year -- I used a linear one. That led to the model shown in figure 2 (the investment and banking features are added in the lower left hand corner of the diagram).
Lo and behold, chaos -- and without an exponential function in sight. Were I to get the same sort of neoclassical pushback in Canberra that I experienced in Wellington, I had a comeback.
Figure 2: Goodwin plus banks equals ... chaos

Graph for When stability goes belly up
As it happened, I needn’t have worried. I had an attentive and friendly audience in Canberra, and the spurious ‘that only happens because of your exponential functions’ objection didn’t even arise.
But I now had a version of my Minsky model with linear functions, and that made it easy to do something that is very difficult with nonlinear functions: to work out the overall stability of the model.
The simplest metric of stability starts with the model in an equilibrium, pushes it away a tiny fraction, and works out whether it will return to equilibrium or not. If a key value (known by its German name which simply means “inherent value”) is negative, the equilibrium is stable; if it’s positive, the equilibrium is unstable.
This model has two equilibria: a ‘good’ one with positive workers’ share of output, positive employment, and finite debt, and a ‘bad’ one with zero workers’ share, zero employment, and infinite debt -- the economic equivalent of a gravitational Black Hole.
I already knew that the bad equilibrium was unconditionally stable: if you start there, there’s no escape. I expected that the model’s stability around its ‘good equilibrium’ would not be absolute: that there would be some parameter values (rate of interest, response of workers to unemployment, etc.) and some initial conditions (initial debt level, initial employment etc.) for which the equilibrium was stable, and others for which it was unstable.
Here’s where I got my surprise. I was wrong: the ‘good’ equilibrium appears to be unconditionally unstable. If the model starts a small distance away from equilibrium, it will continue to diverge until it ultimately falls into the ‘bad’ equilibrium.
The implication this has for the real world is that perhaps debt crises are, like instability itself, also not an optional extra. Even with nothing other than responsible ‘Schumpterian’ finance, a debt crisis will ultimately occur -- unless we find some mechanism to reduce the level of accumulated debt.
One such method, of course, is inflation -- which isn’t considered in this simple model. Believers in the (inherent stability of the) free market often claim that prices are capitalism’s great leveler: the market mechanism and prices will solve all the problems that capitalism encounters, and the reason critics like me get it wrong is that we don’t consider the price mechanism. I’ll get on to that topic in my next installment on instability.

Read more: http://www.businessspectator.com.au/article/2013/4/29/economy/when-stability-goes-belly#ixzz2RnHAQ7A3

Farmers living in a fool's paradise, say cattle barons | The Australian

TWO of the nation's richest cattle barons have called on policymakers to take urgent action to address the high Australian dollar and the crisis that has engulfed the live cattle export trade, claiming beef production is "no longer sustainable" in Australia.
Hughes Pastoral Group chief executive Peter Hughes and Acton Land and Cattle Company founder Graeme Acton said the prevailing high debt levels in the sector, coupled with soaring costs and a lack of progress in free trade deals, were driving generations of families from the land.
"Our costs in Australia are two to three times what they are in America. How we think we can survive with that cost structure around our neck, we are living in a fool's paradise. The way the situation is at the moment, in a pretty short time there won't be many in it," Mr Hughes told The Weekend Australian.
Asked about whether policymakers should be doing more to address the high Australian dollar and its crippling impact on the sector, he said: "I'm amazed that they say they can't do anything. We've got the highest interest rates in the world and with all the quantitative easing done around the world, all that money is flowing into Australia because this is the place they can make money.
"If they don't do anything about it, there won't be much left. What do you do, sit on your hands until there is no one left?"
In Queensland -- where both Mr Hughes and Mr Acton have their stations -- cattle farmers are battling debt levels approaching $9 billion. In the Northern Territory there is also a host of cattle stations that have been on the market for extended periods with no buyers.
"The red tape, the green tape and the bureaucracy is escalating every day. There is no profitability in the industry whatsoever and that's why there are so high debt levels," Mr Acton said this week. "There has been no margin for many, many years, and that is why the debt levels have escalated . . . I'm a major beef producer in this country and certainly beef production is not sustainable."
Mr Acton's business owns about 1.5 million hectares of stations in northern Australia and exports beef all over the world. It markets beef in Australia under the Acton Super Beef brand.
During the depths of the global financial crisis, he sold his Moray Downs station in Queensland for an estimated $100 million-plus to Indian power giant Adani to help reduce his debt levels.
"This issue of not being sustainable needs to be corrected immediately, otherwise it is getting worse by the day," Mr Acton said.
The Hughes family still operates Tierawoomba station southwest of Mackay, where it runs about 32,000 head of wagyu-infused cattle, and has other stations in northern Australia.
A decade ago Mr Hughes led the syndicate that bought Stanbroke Pastoral Company, and then formed Georgina Pastoral Company with the Scott family, before embarking on a string of station acquisitions and sales culminating in the purchase of Colonial Agricultural Company in 2006.
Mr Hughes said the industry in northern Australia had been hit hard by last year's decision to ban live exports following the animal cruelty scandal at an Indonesian abattoir.
"It has had a terrible setback with the live export trade. It is almost reaching crisis point now because the values are down, they can hardly sell a property up there, the banks are moving in," Mr Hughes said.
Mr Acton revealed that a government-sponsored delegation from Queensland, Western Australia and the Northern Territory -- representing 70 per cent of the nation's cattle -- was preparing to visit Indonesia next month to help kick-start live cattle exports. He said he was confident a Coalition government under Tony Abbott would also move quickly to repair relationships in Indonesia and other Asian nations.
"I've spoken to Tony Abbott about it and as soon as he gets in, he will be straight over there on their doorstep to try to change the perception that they have about us as the bad guys," he said.
But Mr Hughes said the move to shake up the live export trade had ensured that processing plants in Asia had "improved their game tremendously and it is making it harder for the cowboy to get in there."

T. Rex rises - dim, dangerous, doomed | The Australian

FACED with Kevin Rudd's initial foray into essay writing, Rossini's quip about Wagner's Lohengrin leapt to mind. "One cannot judge Lohengrin from a first hearing," said Rossini. "And I certainly do not intend to hear it a second time."
Unfortunately, not only was Rudd undeterred by reviews that would have silenced a lesser man, but he has spawned epigones. Foremost among them is Wayne Swan, whose latest effort was released on the weekend.
Sure, the Treasurer's colleagues, showing a shrewd sense of survival, have flocked to that most popular of authorial associations, Labor's 6W club: Where, Why, When We Went Wrong (coming soon to a Melbourne University Press distributor near you). But as he girds his loins for next month's budget, Swan remains defiant. And far from analysing Labor's blunders, he paints them as triumphs that confirm Labor's call to govern.
Deconstructing Swan's arguments is as challenging as picking a dead man's wallet. Shop-worn tropes go round and round, like unclaimed bags on an airport carousel: Labor is the party of opportunity, a sentiment to which Eddie Obeid, Ian Macdonald and John Maitland are presumably living testimony; Tony Abbott, accused of every possible malfeasance short of starting a leprosy pandemic, would destroy what this country retains of good and true; and only Swan and his colleagues stand between Tony Abbott's Visigoths and the "fair go".
All that is lacking, to complete the pictorial link with the Labor pedigree, is the virginal figure of White Australia, draped in a "land of the fair go" sash, recoiling from the Liberal hoards.
Expressed in prose as riveting as elevator music, Swan's claims are unsullied by evidence. The inconvenient fact that the Howard government made greater inroads on inequality and did far more to spread prosperity is simply ignored; instead, taking the dream-to-reality ratio to new heights, Swan focuses on the glories ahead thanks to the National Broadband Network, the Gonski spending and the National Disability Insurance Scheme.
Given the fate of his commitment to a budget surplus, one might have expected Swan to show some reticence on those promises. But fiscal rectitude came late to the Treasurer under whose watch public spending rose more than twice as rapidly as it did under Howard. And when it did come, it proved as fleeting as an alcoholic's credit in a pub.
Now, yesterday's virtues are menacing vices, and a speedy return to surplus, that only months ago was "non-negotiable", would be "reckless and irresponsible" . How that can be reconciled with the assertion, made just paragraphs later, that the economy is stronger than ever is left as a puzzle for less agile minds.
In the end, Swan's propositions are not merely misleading; they are incoherent. But what his writing lacks in reach it more than makes up for in anger. An eclectic hater, Swan hates people who hate each other, going from populists such as Clive Palmer to the free marketers of the Institute of Public Affairs. And most of all, he hates the "vested interests" whose hands he sees behind Labor's current unpopularity. Not that Swan claims the government has been perfect; a sliver of grace intrudes in the recognition that (unspecified) errors have been made, albeit one rapidly drowned in a sea of "say what you will" justifications.
But his account leaves little doubt that Labor's woes are due to the class enemy: as implacable as ever, and every bit as determined to grind working Australians into the dust.
Nor does Swan show any doubt that the only salvation lies in that old-time religion, the gospel of redistribution, whose tireless prophet he is. It is as if the resources boom, rather than having ended 18 months ago, would go on forever, a bottomless pot from which to finance Labor's schemes and to benefit its favoured constituencies.
Given the confusion in which Swan's views are mired, these delusions appear to spring less from a surfeit of ideology than from a deficit of clear thought. Having gained office after losing the battle of ideas, Labor was left with an operational code that belongs to another time and place: one still seething from the humiliation of the Howard years and nostalgic for a 1950s unionism that disappeared before today's cabinet ministers were in short pants.
It is thus unsurprising Swan and his colleagues have proven subservient to a union movement that combines the relentless pursuit of self-interest with a startling disregard for its policies' long-term consequences. Sheltered from market disciplines, the public-sector unions that dominate the ACTU see public spending as the key to prosperity, regardless of the costs it imposes in wasted resources, distortionary taxation and upward pressure on the exchange rate. As for their private-sector counterparts, they have shrunk to such narrow bases that the economy-wide effects of their inefficiencies escape them.
Little wonder they seem like dinosaurs: dangerous, dim-witted at all but violence and doomed to extinction. And little wonder the government they control has excelled at transforming opportunity into disaster.
In its own way, that unbroken record of failure is impressive. Its legacy, however, is an enduring fiscal weakening, with the International Monetary Fund estimating that even long after the GFC the structural budget position will have deteriorated by 1.5 per cent of GDP. And it leaves 687,000 unemployed who, put in a line with three per metre, would form a queue stretching 229km.
As for Swan, he has become the Cheshire cat of Australian treasurers: his predecessors' smirks linger, but their competence has vanished. Touchy, testy and tetchy, he scratches on; when he rises Tuesday fortnight, however, it will not be to grasp the future, but as the last gasp of the past.