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THE US ECONOMY IS SUFFERING FROM LOW DEMAND

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We have concluded that demand matters for productivity growth and that increasing demand is key to restarting growth across advanced economies, write James Manyika, Jaana Remes, and Jan Mischke in Harvard Business Review.

A little over a century ago, Henry Ford doubled the minimum pay of his workers to $5 a day. When other employers followed suit, it became clear that Ford had sparked a chain reaction. Higher pay throughout the industry helped lead to more sales, creating a virtuous cycle of growth and prosperity. Could we be at another Henry Ford moment?

Some major companies have announced plans to boost employee pay. Target raised its minimum wage to $11 this past fall and committed to $15 by 2020. More recently, Walmart announced plans to match that increase to $11. In banking, Wells Fargo and Fifth Third Bancorp also announced pay increases for minimum wage employees.

These pay increases have occurred against a backdrop of weak economic growth and rising income inequality. Economic growth has been stuck in low gear for almost a decade now, averaging around 2% a year since 2010 while productivity growth, the key to increasing living standards, has been languishing near historic lows since the financial crisis. But more recently there has been a glimmer of hope. After stagnating for years, wages have begun picking up slightly, as has productivity growth, while corporate profits remain near record highs.

Are these recent wage increases merely necessary in light of a tightening labor market, or could they start a broader trend that may change our economic growth trajectory?

After a year-long analysis of seven developed countries and six sectors, we have concluded that demand matters for productivity growth and that increasing demand is key to restarting growth across advanced economies.

The impact of demand on productivity growth is often underappreciated. Looking closer at the period following the financial crisis, 2010 to 2014, we find that weak demand played a key role in the recent productivity growth decline to historic lows. In fact, about half of the slowdown in productivity growth — from an average of 2.4% in the United States and Western Europe in 2000 to 2004 to 0.5% a decade later — was due to weak demand and uncertainty.

For example, in the mid-1990s to the mid-2000s, rising consumer purchasing power boosted productivity growth in both the retail and the auto sector, by encouraging a shift to higher-value goods that can be supplied at higher productivity levels. In the auto sector, as customers in the early 2000s purchased higher value-added SUVs and premium vehicles in both the United States and Germany, they spurred incremental productivity growth of 0.4 to 0.5 percentage points. Today, that trend has slowed slightly in both countries, contributing only 0.3 percentage points to productivity growth in the period 2010 to 2014.

Similarly, in retail, we estimate that consumers shifting to higher-value goods, for example higher-value wines or premium yogurts, contributed 45% to the 1995-2000 retail productivity acceleration in the United States. This subsequently waned, dragging down productivity growth.

To put it simply, when consumers have more to spend, they buy more sophisticated things. That’s good not just for consumers and producers, but for the overall economy, because making more sophisticated, higher-value things makes everyone involve more productive, and therefore helps increase overall standards of living.

In addition, we found two other ways weak demand hurt productivity growth in the aftermath of the financial crisis: a reduction in economies of scale and weak investment.

First, the economies of scale effect. In finance, productivity growth declined particularly in the United States, United Kingdom, and Spain due to contractions in lending volumes that banks were unable to fully offset with staff cuts due to the need for fixed labor (for example to support branch networks and IT infrastructure or to deal with existing loans and bad debt). The utilities sector, which has seen flattening demand growth due to both energy efficiency policies as well as a decline in economic activity during the crisis, was similarly not able to downsize labor due to the need for labor to support electricity distribution and the grid infrastructure, and here, too, productivity growth fell.

Second, the effect of weak investment. We have found from our global surveys of businesses that almost half of companies that are increasing their investment budgets are doing so because of an increase in demand. Demand is the single most important factor driving corporate investment decisions. Investment, in turn, is critical for productivity growth, as it equips workers with more – and with more recent and innovative – equipment, software, and structures. But we have seen capital intensity growth fall to the lowest levels in post-WWII history. Weaker demand leads to weaker investment and creates a vicious cycle for productivity and income growth.

Of course, the financial crisis is long since over, and the economy has recovered, at least by some measures. So what’s to worry about? Won’t demand return to pre-recession levels, and thereby increase productivity?

Unfortunately, there is reason to believe that some of the drags on demand for goods and services may be more structural than crises-related. Slowing population growth means less rapid expansion of the pool of consumers. And rising income inequality is shifting purchasing power from those most likely to spend to those more likely to save. This is reflected in slowing growth expectations in many markets. For example, across our sectors and countries studied, in the decade from 1995 to 2004, growth in demand for goods and services averaged 4.6%, slowed to 2.3% in 2010 to 2014, and is forecast to slightly increase to 2.8% in 2014 to 2020.

Today, there is concern about where the next wave of growth will come from. Some prominent economists worry that we may be stuck in a vicious cycle of economic underperformance for some time. Our analyses strongly suggest that supporting sustained demand growth needs to be part of the answer. Demand may deserve attention to help boost productivity growth not only during the recovery from the financial crisis but also in terms of longer-term structural leakages and their impact on productivity. Suitable tools for this longer-term situation include: focusing on productive investment as a fiscal priority, growing the purchasing power of low-income consumers with the highest propensity to consume, unlocking private business and residential investment, and supporting worker training and transition programs to ensure that periods of transition do not disrupt incomes.

Companies play a key role in promoting growth through investment and innovation as well as supporting their workforce through training programs. Yet companies may also want to consider the words of Ford when he said: “The owner, the employees, and the buying public are all one and the same, and unless an industry can so manage itself as to keep wages high and prices low it destroys itself, for otherwise it limits the number of its customers. One’s own employees ought to be one’s own best customers.” While this is certainly not true for individual companies, it is true for the broader economy, and we might be at a rare point where the representatives of employees and employers alike share a common interest in healthy wage growth.

 

 

 

 

Source:  Harvard Business Review.

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Business

EUROPEAN INVESTMENT BANK RUNS BLOCKCHAIN HACKATHON

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A team from EY triumphed in a 48-hour European Investment Bank (EIB) hackathon designed to find ways to use blockchain technologies to redesign the transaction processing of commercial paper.

The EIB brought together 56 coders from 15 countries in 12 teams for the hackathon, run alongside the bank’s annual forum dedicated to treasury issues.

While the conference was running, the coders were locked in an adjacent room, trying to prove that blockchain tech can improve the transaction process of commercial paper – a short-term financing instrument that is used worldwide in treasury operations and still relies on an ‘archaic’ and complex process.

In the pitching session, the EY team won the contest with an effort that taps a combination of blockchain, robotics and business AI tools to optimise the issuance process and reduce the number of exchanges between the EIB and its counterparties while maintaining each one’s role within the ecosystem.

The EY team won a EUR5000 cash prize and a contract with the EIB to further develop its solution into a proof of concept.

Alexander Stubb, vice president, EIB, say: “There will be major gains from the use of new technologies such as blockchain, generated from the simplification and streamlining of existing financial processes. The new perspectives opened up by digitalisation and Distributed Ledger Technology must be assessed and we must all be ready to make use of them and embark on this new venture.

“As the EU’s financial arm, we decided to be on the active side, learn by experience and make things happen, to be a facilitator and join with our banking partners to pave the way for tomorrow’s financial industry.”

Separately, Barclays is planning a hackathon that will see coders use blockchain technology for post-trade processing of derivatives contracts. The event will take place over two days in September in London and New York, according to Coindesk.

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GOOGLE WILL PAY YOU $100,000 IF YOU CAN HACK A CHROMEBOOK

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Since 2010, Google has been paying money to hackers who have found vulnerabilities in its hardware or software. And after a call last year to crack its Chromebook’s security system went unanswered, Google is now doubling its reward to $100,000.

The $100,000 payout specifically applies to anyone who can crack the yet-uncrackable Chromebook, but Google also has a wide range of bounties for smaller bugs. Payouts start at $500, and if you provide a fix with your bug submission you’re rewarded with the hacker-friendly sum of $1,337 (the digits appear similar to the word “leet,” which is hacker slang for “elite hacker”).

Google also says that any vulnerabilities — regardless of whether there’s an official bounty — are potentially eligible for a reward, although the rules for qualifying submissions are relatively strict.

Bub bounty rewards programs like these are becoming more and more common among tech companies, which is good for those of us hoping for safer hardware and software. Google even ended its bounty announcement with an encouraging note: “Happy hacking!”

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THE STORY BEHIND GOOGLE’S SECRET OFFER TO SETTLE EU’S ANDROID PROBE

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European Union Competition Commissioner Margrethe Vestager coolly hit Google with a 4.3 billion-euro ($5 billion) fine last week, the biggest penalty in the history of antitrust enforcement.

It didn’t have to be that way. Months earlier, when the company — already reeling from a 2.4 billion-euro fine in another EU case — made quiet attempts to settle the probe into deals it has with Android phone makers, the response was equally chilly.

The Silicon Valley search giant had waited at least a year too long to broach the subject of a settlement, the 50-year-old Vestager said in an interview. When a company wants to settle, it needs to “reach out immediately after” getting the EU’s initial complaint or statement of objections.

“That didn’t happen in this case and then of course it takes the route that it has now taken,” Vestager said of the settlement talks, which haven’t been previously reported. “So no surprises.”

Google, a unit of Alphabet Inc., has been one of the EU’s biggest antitrust targets, with three probes, countless headlines and a steady drumbeat of smaller rivals and customers demanding action. The company has now twice failed to strike settlements that would resolve cases into its shopping services and Android that have resulted in a total of 6.7 billion euros in fines — with a looming threat of more still to come.

Google declined to comment on the settlement attempts. Google will appeal the EU decision, Chief Executive Sundar Pichai said in a blog post. The company has “shown that we’re willing to make changes,” he said.

In the weeks after the June 2017 fine in the shopping case, Google lawyers began to make overtures to their EU counterparts to express a willingness to settle the probe into Android, one of the company’s flagship products. Previous attempts to start a conversation with the EU on ways to end the probe had failed to catch fire, with officials stonewalling or saying it was too early to negotiate, people familiar with the negotiations said.

The Mountain View, California-based company’s incentive to settle the Android probe was easy to see.

Google gives Android software for free to mobile phone makers but coerces them to pre-install Google’s apps if they want the Play app store, which offers more than a million programs. The search giant also pays phone manufacturers, telecommunications carriers and other browser makers to run Google’s search engine which collects user data. Thanks to those agreements, Google has captured almost $50 billion in yearly mobile ad-market sales, or a third of the global market, according to research firm EMarketer.

Google executives believed Vestager left the door open to a deal when she refused to rule out a settlement at the June 27, 2017, press conference where she announced the fines in the shopping case.

“Each case is separate,” she told reporters. “And obviously I have taken no conclusions in the cases that are still open.”

 

Google Fined Record $5 Billion by EU

 

Vestager said Google must end its “illegal practices” within 90 days.

Source: Bloomberg

Encouraged, Google’s lawyers drafted a letter suggesting possible changes to address the EU concerns, according to the people familiar with the discussions.

Some people said contacts started in August. Two others said a discussion started later in the year and a formal letter wasn’t sent until shortly after Pichai’s Nov. 16 meeting with Vestager in Brussels.

Google said it was prepared to adjust contracts to loosen restrictions the EU didn’t like, even weighing distributing apps in two different ways going forward. The letter didn’t go into detail, only setting out an outline to kickstart talks, according to the people, who declined to be identified because the initial conversations with regulators were confidential.

The lawyers never received a formal response, hearing from officials by phone months later that a settlement was no longer an option. That prevented them from even discussing whether the company would be willing to pay a fine as part of a deal, the people said.

EU officials didn’t find the offer convincing and viewed it as too little too late, two other people said.

Moving to a cease-and-desist order for Google “seemed to be the best thing to do in this case in order to enable mobile manufacturers to have a real choice,” Vestager said in the interview. “It’s a very serious legal infringement and you see how it has worked. It has cemented Google’s position in search and it has de-facto locked down Android in a completely Google-controlled ecosystem.”

Vestager indicated in the interview that any settlement offer should have been made in 2016, after the company received the EU’s statement of objections, which detailed the antitrust problems with Android. The EU said the company might breach competition rules by unfairly pushing search and browser apps onto Android phones.

That might have been the narrow window to settle the case, but Google’s legal team were spinning dozens of plates in 2016. They had deadlines to respond to the Android charges, the shopping probe was still a major priority and there were new complaints filed to the EU by News Corp. and other rivals.

After the rebuff, the EU stepped up its probe, sending a formal “letter of facts” in November 2017, adding new evidence, two people said. There was little substantive contact between the two sides until Google representatives talked with EU officials in April during a so-called state of play meeting about the case, which was well on the way to the record fine.

Google hasn’t had much luck trying to find a path to peace with the EU. It spent two years trying to negotiate a settlement in the shopping probe. But a tentative deal came under heavy fire from publishers and politicians, forcing the EU to abandon it shortly before Vestager became commissioner in November 2014.

One of Vestager’s first acts was to restart the Google shopping investigation, putting a final end to the botched settlement attempt. She quickly racked up a fearsome reputation as the scourge of U.S. tech giants, She ordered Apple Inc. to pay 13 billion euros in back taxes and fined Facebook Inc. 110 million euros over allegations the company misled regulators during a merger review.

“Android, as compared to shopping, is a Vestager case, one not inherited,” said Nicolas Petit, a visiting fellow at the Hoover Institution and a law professor at the University of Liege in Belgium. “Her incentives to make this case the emblem of her tenure were presumably higher. So the odds of a settlement were, to me, lower.”

The EU isn’t always averse to thrashing out a deal even after a long investigation. The nation’s state-controlled gas export giant Gazprom PJSCside-stepped a potentially huge EU penalty after seven-year-long probe by agreeing in May to change how it sells gas to Europe. Vestager said Gazprom had “reached out very very quickly” to the EU to negotiate a settlement after receiving objections in April 2015.

Google had a better time in Moscow. Russia’s Federal Antimonopoly Service fined the company $7.8 million as part of an April 2017 settlement to end a probe into similar Android concerns.

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