America's potential GDP

Remembering when the future kept getting bigger 

May 24th 2012, 17:17 by G.I. | WASHINGTON 

HOW big can the American economy grow? This week’s Free exchange column tackles the critical question of America’s potential: the maximum output it can sustain given its endowments of capital, labour and technology.

The article notes that economic growth since the recession ended three years ago has averaged 2.5% a year. That is roughly the trend rate of an economy already at full employment. Given that America is still in a deep post-recession hole, such a rate should not be enough to reduce unemployment, and should have left so much spare capacity that inflation ought to have fallen sharply. Instead, unemployment has dropped nearly two percentage points in that time and underlying inflation, after dipping below 1%, is above 2%.

While various idiosyncratic factors can explain this behaviour, it could also be a sign that the crisis has significantly eroded potential GDP, and the output gap is much smaller than generally realised. (This is a topic on which I’ve blogged before, here, here and here.) Since 2005 the Congressional Budget Office has revised down its estimate of potential GDP in the year 2012 by 5%.

Doing this exercise for the late 1990s, a completely different picture emerges. As the accompanying chart shows, in 1997, the CBO estimated potential in early 2001 would be $8.3 trillion (in constant 1996 dollars). By 2001, it had revised that up a whopping 12%, to $9.3 trillion, a figure that looks more reasonable given what we now know GDP actually did.

The CBO’s shifting estimates of potential illustrate two things. One is that potential is almost impossible to pin down in real time since the economy’s equilibrium long-run stock of capital and labour are so difficult to estimate with precision; so we look at what GDP actually did as a hint of what it can do. 

Second, and more important, is that supply (i.e. potential) is itself affected by demand. Potential output is the product of capital, labour and innovation. Since economic booms bring more investment, more risk-taking, and higher labour force participation, they push up measures of potential. The opposite is true of busts. If overall spending is depressed long enough, many workers will experience prolonged unemployment that degrades their skills, making them unemployable; they may eventually quit the labour force altogether. 

Depressed sales also discourage investment in new technology and research, which can degrade productivity and efficiency for years to come. (A counter argument is that depressions may hasten the migration of capital and labour from dying, low-productivity sectors to growing, high-productivity ones. Apparently, scholars are still arguing over whether this happened in the 1930s.) Powerful evidence for this phenomenon comes in a paper that my colleague A.C.S. discussed Monday which found most structural unemployment begins during recessions.

It follows that efforts to preserve demand can also preserve the economy’s supply-side potential. That, too, seems to be one of the lessons of international experience. It is not too late for America to limit most of the long-run damage of its crisis; but it may soon be.

(Note: special thanks to Brent Moulton of the Commerce Department’s Bureau of Economic Analysis for technical advice on how to convert real GDP figures to a common base year.)

Source:  The Economist

U.S. space tourism set for takeoff by 2014, FAA says

By Irene Klotz | Reuters – 

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CAPE CANAVERAL, Florida (Reuters) - The Obama administration is preparing for a space tourism industry that is expected to be worth $1 billion in 10 years, the head of the Federal Aviation Administration's commercial space office said on Tuesday.

Rocket planes and spaceships to carry passengers beyond the atmosphere, similar to the suborbital hops taken by Mercury astronauts Alan Shepard and Virgil "Gus" Grissom in 1961, are being built and tested, with commercial flight services targeted to begin in 2013 or 2014.

"Based on market studies, we expect to see this type of activity result in a $1 billion industry within the next 10 years," George Nield, associate administrator for the FAA's Office of Commercial Space Transportation testified before the House Subcommittee on Space and Aeronautics.

"This is a new and growing industry. If you look at the last 25 years, almost all the launches were for the same basic purposes - to launch a satellite, such as a telecommunications satellite, to orbit - and that level of business for that part of the industry is continuing today. But there are several new segments that we see just on the horizon," Nield said.

The boom in launch business is expected to begin this year, he said in the hearing, which was carried via webcast.

NASA has hired two companies, privately owned Space Exploration Technologies and Orbital Sciences Corp., to fly cargo to the International Space Station, a $100 billion research complex orbiting 240 miles above Earth. The contracts are worth a combined $3.5 billion.

"We know that's going to start soon, probably this year," Nield said.

Space Exploration Technologies, which is known as SpaceX and owned and operated by entrepreneur Elon Musk, is preparing for a trial run to the station on April 30.

"We need to be careful not to assume that the success or failure of commercial spaceflight is going to hang in the balance of a single flight," NASA space station program manager Mike Suffredini told reporters during a separate news conference.

"If they have problems along the way, it's the kind of thing you experience in this difficult process of not only trying to launch into low-Earth orbit, but do the next-hardest thing which is to try to rendezvous safely with another spacecraft in orbit," Suffredini said.

Also on the horizon are commercial flights that reach at least 62 miles above the planet, an altitude that exposes passengers to a few minutes of weightlessness and a view of Earth juxtaposed against the black sky of space.

In addition to tourism, suborbital spaceflights are being marketed and sold to research organizations, educational institutes and businesses that want to conduct experiments and fly payloads in space.

One company, Virgin Galactic, an offshoot of London-based Richard Branson's Virgin Group, already has collected about $60 million in deposits for rides that cost $200,000 per person.

"Exactly when those launches will start is hard to predict, but it looks very very clear it's going to be in the next one or two years," Nield said.

(Reporting By Irene Klotz)

Source: Yahoo News 

Globalisation is Good - Johan Norberg on Globalisation

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Wal-Mart Buying Vudu Movie Service

SAN FRANCISCO — Sure, you took the plunge and bought that expensive high-definition television. But does it connect to the Internet?

Analysts estimate that fewer than 5 percent of the HDTVs sold in the United States last year can go online to pull in movies and television shows, bypassing traditional cable and satellite TV service. Now, however, the idea of an Internet-ready home entertainment setup has a powerful new backer: Wal-Mart.

The retail giant said on Monday that it had agreed to buy Vudu, a Silicon Valley start-up whose three-year-old online movie service is being built into an increasing number of televisions and Blu-ray players.

Terms of the acquisition were not disclosed, but a person briefed on the deal said the price for the company, which raised $60 million in capital, was over $100 million. Other companies, including Best Buy, Amazon.com, Comcast and the satellite company EchoStar, had also expressed interest in acquiring Vudu, according to this person, who asked for anonymity because the terms of the deal were private.

The two companies began informing Hollywood studios and television manufacturers of the deal on Monday, and Wal-Mart said it was expected to close within a few weeks.

The acquisition adds a forceful player to what is already a crowded field of companies aiming to deliver streamed entertainment to the living room.

Microsoft, Sony, Amazon, Netflix, Blockbuster and Roxio CinemaNow, a division of Sonic Solutions, all offer online movie stores for Internet-connected devices like HDTVs, Blu-ray players or video game consoles.

Apple sells movies and TV shows alongside music in its iTunes store. But iTunes is accessible only from computers and Apple’s own mobile devices, as well as on televisions through the Apple TV set-top box, which has not sold well and which the company has referred to as a “hobby.”

“It’s getting increasingly cheap to put Internet connections into televisions, and there are definitely financial opportunities to doing it,” said Riddhi Patel, an analyst at the research firm iSuppli, which estimates that over 60 percent of high-definition televisions will connect to the Internet by 2013.

This shift could shake up the television business, analysts say. Consumers will have more reasons to watch entertainment from sources other than their cable or satellite company, potentially motivating a greater fraction of them to cancel those monthly subscriptions.

Movie stores like Vudu’s also compete directly with the video-on-demand services of the cable companies, and generally have better selection, more high-definition content, friendlier menus and fuller descriptions of the programs.

More immediate, if Wal-Mart puts its marketing power behind the Vudu service, it could give a lift to sales of Internet-ready televisions and disc players, which generally cost a few hundred dollars more than devices without such capabilities.

Wal-Mart stocks fewer such televisions than its rivals Best Buy and Amazon, according to James McQuivey, an analyst at Forrester Research. “At the very least this shows Wal-Mart understands that has to change, because the DVD is eventually going away,” Mr. McQuivey said. “They are making a bet on connected devices.”

Wal-Mart has so far lacked a way to deliver movies digitally to people’s homes — but it hasn’t been for lack of trying. In 2007, Wal-Mart started a movie and TV show download service with the help of Hewlett-Packard. But customers never embraced it, and Wal-Mart shuttered the site the following year after H.P. closed the division that was providing the technology.

Wal-Mart introduced a digital music download store in 2004, but the effort has badly lagged behind iTunes and even Amazon’s MP3 store.

Vudu, based in Santa Clara, Calif., and backed by the Silicon Valley venture capital firms Benchmark Capital and Greylock Partners, has not turned a profit. It first emerged in 2007 pushing a sleek black set-top box, which people connected to their TVs to gain access to thousands of Hollywood films.

But like other Silicon Valley companies including TiVo and Roku, Vudu found it a challenge to persuade mainstream consumers to connect yet another box to their already cable-snaked televisions.

In 2008, Vudu’s chief executive left the company and was replaced by Alain Rossmann, a co-founder who was an early Apple executive and a pioneer in making the Web accessible from cellphones. Last year, Vudu stopped making hardware and instead began offering its movie store and simple interactive service as a feature that the largest consumer electronics manufacturers could build into their devices.

That effort has gained visible traction over the last few months. At the International Consumer Electronics Show in January, Vudu announced deals to put its service into devices made by Samsung, Sanyo, Sharp and Toshiba and said it was expanding its older relationships with LG Electronics, Vizio and Mitsubishi.

Panasonic and Sony are the only major manufacturers that have not yet added the Vudu service to their devices. With Wal-Mart, one of their biggest retailers, taking it over, manufacturers will now have another reason to include Vudu.

Vudu competitors like Netflix, of course, are cutting similar deals with manufacturers, who are happy to build multiple services into their devices and make them more versatile.

Vudu has sought to distinguish itself from its rivals by bragging about its large catalog of high-definition movies, its simple user interface and its integration of other Internet services like Facebook, Twitter, Flickr and Pandora.

The Vudu deal could allow Wal-Mart to one day sell a variety of other merchandise through people’s televisions via the Vudu service. One person who has been briefed on Wal-Mart’s thinking said that the retailer would keep the Vudu brand.

But the retailer will make one change. Vudu also has a plentiful selection of pornographic movies available to its customers. A person briefed on the Wal-Mart deal said the retailer would close down that category “immediately.”

By BRAD STONE
The New York Times

Toyota Motor Corporation

In 2008, Toyota achieved its long-held goal of becoming the No. 1 carmaker in the world, passing General Motors, which had been the world leader since 1931. Shortly after Toyota gained that distinction, global auto sales plunged, leading to a loss for the fiscal year of $4.8 billion, the largest in the company's 72-year history.

In late 2009, Toyota returned to the black. But its reputation for safety and quality — key elements in its success — took a battering. A series of recalls in recent years was capped by announcements in November 2009 and January 2010 that it would recall more than eight million cars globally to resolve a widespread problem with unintended acceleration. Under the recalls, Toyota will shorten gas pedals and in some cases remove padding from the floor to prevent the pedals from getting stuck on floor mats.

The automaker also said in January that it would temporarily stop building and selling eight models in the North American market. On its Web site, Toyota said the years and models affected in the sales suspension were the 2009-2010 RAV4 crossover, the 2009-2010 Corolla, the 2009-2010 Matrix, the 2005-2010 Avalon, the 2007-2010 Camry, the 2010 Highlander, the 2007-2010 Tundra, and the 2008-2010 Sequoia. Toyota said the move was intended to restore confidence in the automaker, and the safety of its products. Of the eight million vehicles recalled, about six million of the vehicles are in the United States.

In early February, days after the automaker said repairs to accelerator pedals would begin, Toyota suffered another blow to its reputation when Japanese authorities told it to investigate reports of faulty brakes on the Prius, a centerpiece of Japan's cutting-edge technology. Approximately 437,000 of its 2010 flagship Prius hybrid and other gas-electric models will be recalled worldwide.

More troubling news emerged on Feb. 21 when a document showed that the automaker estimated it saved $100 million by negotiating with regulators for a limited recall of 2007 Toyota Camry and Lexus ES models for sudden acceleration. The papers were among thousands turned over to the House Committee on Oversight and Government Reform as a result of congressional subpoenas.

The estimate was in a confidential presentation from July 2009 listing legislative and regulatory "wins" for the company. The House committee is one of three panels holding hearings in February on Toyota's safety problems.

Over the years of its rise to the top, Toyota has made no secret of how much it has learned from Detroit. Its first car, the AA, was a blatant copy of (or an homage to) a Chevrolet sedan. Its executives scoured every corner of the Ford Motor Company in the 1950s, taking home ideas to Japan that later inspired the Toyota Production System. The joint venture it launched with General Motors in Fremont, Calif., taught it how to manage American workers, lessons it put to work throughout its factories not only in the United States but in its plants around the world.

Toyota's decades of growth came after, and with, a number of setbacks. After World War II, Toyota resorted to making dinnerware and fish paste before it could get its factories running again. The first car it marketed in the United States, the Toyopet, was such a bomb that it was forced to shut down its dealerships and reopen again two years later. Despite its reputation for building high quality, fuel efficient cars, Toyota took a couple of slaps over the previous decade, when its recalls spiked and it was criticized for building the gigantic, gas-guzzling Tundra pickup truck.

Recalls
Toyota's November 2009 recall was intended to fix a design flaw that could cause the gas pedal to become trapped under the floor mat. It was prompted in part by the crash of a Lexus sedan that ran out of control and crashed into a ravine near San Diego, killing four people. But the automaker and federal safety officials continued to receive reports of unintended acceleration and stuck pedals even in cases where the floor mats had been removed, a stopgap measure recommended by Toyota.

As more details have emerged about the problems, the automaker is facing questions over whether it routinely fixed potentially dangerous defects in new models without recalling those already on the road.

In announcing the second recall, Toyota said the accelerator pedal could wear down and become difficult to depress, slow to spring back or get stuck partly depressed.

The company said its engineers have developed and "rigorously tested" a remedy involving reinforcing the pedal before vehicles leave the factory to eliminate excess friction. On cars and trucks that already have been sold, dealers will perform what Toyota said was an "effective and simple" process that involves installing a steel reinforcement bar into the pedal assembly to reduce the surface tension that could cause it to stick. The automaker said the parts needed were already on the way to dealers and that it had begun training workers how to make the repairs.

The president of Toyota Motor Sales U.S.A., James Lentz insisted that the pedal repairs, along with related modifications, would resolve the problems. In a two-minute video on Toyota's Web site, Mr. Lentz apologized to customers. "I know that we've let you down," he says. He concludes, "I hope you give us a chance to earn back your trust."

The Prius recall was the result of a software glitch leading brakes to fail. The fix, which would be handled by dealers, would take about 40 minutes for each car, the company said.

Separately, Toyota also recalled 7,300 of its latest-model Camrys in the United States to fix a power steering pressure hose in the engine compartment that may be the incorrect length. This could cause a hole in the brake tube and deplete the braking fluid, interfering with braking, Toyota said in a statement.

Company Information
Toyota Motor Corporation (Toyota) primarily conducts business in the automotive industry. Toyota also conducts business in the finance and other industries. It is organized in three segments: automotive operations, financial services operations and all other operations. Toyota's automotive operations include the design, manufacture, assembly and sale of passenger cars, minivans and commercial vehicles, such as trucks and related parts and accessories. Toyota's financial services business consists primarily of providing financing to dealers and their customers for the purchase or lease of Toyota vehicles. Toyota's financial services also provide retail leasing through the purchase of lease contracts originated by Toyota dealers. Related to Toyota's automotive operations is its development of intelligent transport systems (ITS). Toyota's all other operations business segment includes the design and manufacture of prefabricated housing and information technology related businesses

The New York Times

Understanding The Financial Crisis