President Obama’s First Weekly Address – Transformation and Transparency

Posted in Economics, Politics by Arasmus on January 24, 2009

Here is the first weekly presidential address of Barack Obama. In this broadcast he describes the recovery plan in greater detail. You can see the text of this address on this page and you can stay up to date on the latest news from the White House by checking the new White House blog.

For me the top level concerns that I am glad he underlined in this address are;

(1) that the transformation of the US economy should be the primary focus of the recovery plan with stimulation of the economy a secondary effect and not vice versa. At present the Republicans on the Hill are on the other side of this issue – seeking tax breaks for the wealthy (quel change?) rather than investing the money today to yield greater and more sustainable returns tomorrow.  This is not the oft-cited example of Friedman economists because in this case we must transform and stimulate, rather than merely stimulate the economy.  Whether it was the dawn of the nuclear age, the space-race or the internet, the history of the US economy demonstrates that the great leaps forward were initiated by the state and then developed and expanded by the private sector.  So it must be with alternative energy. The network effects of the current out-dated means of energy supply and usage are so large that only the state is powerful enough to point the market in the right direction.  It is vital that the state do this in the right way, but do it, it must.  It must not pick its favorite candidate for the energy of the future, but it must offer rewards and incentives for whatever source achieves the metrics that it defines.  I believe that one important element in creating this fertile environment is to introduce a cap-and-trade carbon market so the real cost of pollution can be assigned to dirty-industry and clean-industry rewarded.  By contrast, the alternative favored by the Republicans, giving people cash, will not lead to solar panels on roofs, it will not lower our dependence on oil and it will not lead to better schools. We must make this transition at some point between now and when oil runs out. As time passes the pain of climbing energy costs will increase. We are peculiarly fortunate that if we effect the stimulus that we require by making this transformation today we will kill two birds with the one stone and position ourselves to lead the next phase of global economic growth. The consequence of a stimulus package that is in the majority composed of tax breaks to the wealthy, will be that at some point in the future we will still have to transform our economy to alternative energy but at that point we will have to do so with less money, more debt and an economy drained of its vigor after a decade of high energy prices. Its always better to bite the bullet when you still have teeth!

(2) transparency and accountability are not preferable – they are essential: without transparency and accountability there is absolutely no doubt whatsoever that the taxpayer will be cheated and robbed by immoral private-market partners. The behavior of contractors during the Iraq War offers shocking support of this claim (see The Three Trillion Dollar War by Nobel Laureate Joseph Stiglitz and Linda Bilmes). Indeed, one only has to look at the behavior of individuals like ex-Merrill Lynch CEO John Thain (spent $1.22 million redesigning his CEO office last year while at the same time failing in his role of steward so badly that the company had to lay off thousands of workers and was eventually bought out by Bank of America) to realize how callous and clueless powerful individuals can be when they are not supervised, even in times of grave national emergency.

So far, so good. We move forward.


Warren Buffett on the Financial Crisis

Posted in Economics by Arasmus on October 2, 2008

Here are my notes from this Charlie Rose interview with Warren Buffett on the subject of the current financial crisis.

  • Financial Crisis is an economic Pearl Harbor and people are right to be worried
  • Bailout is essential – we need to get it done now
  • Paulson is the best man for the job.
  • Time is essential – delay will be deadly
  • Bailout will not produce remarkable results
  • Congress needs to focus its oversight on ensuring that assets purchased will be purchased at market price but politicians should not be allowed to determine what the investments are – otherwise you will have pork-barrel decisions by politicians
  • He is very confident in America’s future but the athlete is on the floor right now
  • Future inflation will be the cost of doing what we have to do to fix this problem
  • Inflation and unemployment will go up from here
  • Best case scenario we recover in 6 months, worst case scenario we recover in 5 years
  • Long-term balance of payment deficit is bad news for the country and bad news for the value of the dollar, partially ameliorated by our improving productivity and exports
  • He is paying the lowest taxation he has ever paid in his life.  He believes it is just not fair that he pays 15% capital gains while woman emptying waste-paper basket pays higher rate of income tax.
  • Doesn’t have a problem with America sharing global prominence with others – inter-connected world is safer.

The Global Credit Crisis And How It Happened

Posted in Economics, History by Arasmus on September 17, 2008

Here is a transcript of a “This American Life” radio program examining the origins and progress of the current global credit crisis.  It examines the invention of the financial instrument that started the whole ball rolling and its subsequent unravelling.  To listen to the report click here.  For context, here is an excerpt from a September 17, 2008 interview with former head of the Federal Reserve, Alan Greenspan.

Clay Sharky on the Idea of Cognitive Surplus

Posted in Economics, Media, Technology by Arasmus on September 8, 2008

Here is a video of a speech given by Clay Shirky, author of the book Here Comes Everybody, at this year’s Web 2.0 Conference in San Francisco.  Shirky elaborates the idea that our society has enjoyed a bounty of leisure since the Second World War but that it has not known what to do with that “cognitive surplus” until now.  As a result of our new found ability to contribute rather than merely consume media, we can now covert that cognitive suprlus into more productive uses ranging from Wikipedia to mailing lists etc.  Shirky tries to estimate the size of this cognitive surplus and set it in context.  He estimates that creating Wikipedia took about 100 million hours of human thought.  By contrast, Americans spent 200 billion hours watching television every year (100 million hours every weekend watching ads), the equivalent of 2,000 Wikipedia projects per year.  An increase in productivity of just a fraction of that surplus could have a profound impact on the way we live and the institutions we create.  For example, the internet connected population currently watches one trillion hours of television per year.  Just 1% of that time spent on say Wikipedia-like projects could produce as many as 10,000 Wikipedia projects per year.

Its an interesting idea but it assumes that an hour of thought is equal to an hour of thought which it clearly is not.  An hour spent by a professor of anthropology on the extinction of the Maya civilization is more valuable than an hour spent by me on the same subject.  We see this difference in the marketplace all the time; a lawyer can sell an hour of thought for a much higher value than a traffic warden.  Nonetheless, I still find the idea of a cognitive surplus attractive, its utilization plausible and its potential exciting.

Professor Joseph Stiglitz on Globalization

Posted in Economics, Politics by Arasmus on March 20, 2008

Here is a very interesting presentation by Nobel Prize winning economist Professor Joseph Stiglitz in which he defends the thesis of his book, “Making Globalization Work.” Stiglitz presents some enlightening statistics on the conclusion that, contrary to what one would expect as a result of increased free trade, the gap between rich and poor, both within and between nations, has widened. He argues that this phenomenon is too common to be blamed on relatively local issues such as corruption and bad management and is more likely the result of a systematic problem in the current method of globalization. He also comments about global problems resulting from the current system of patents (e.g. in the area of medical research) and suggests that a prize rather than a patent system might be a preferable way for society to encourage innovation.

Got Acorns?

Posted in Anthropology, Economics, Technology by Arasmus on August 24, 2006

If you like what you do for a living then you should be worried, that is unless you are a pervert. Let me explain. Wired Magazine recently published an article about “crowd-sourcing”. In it a professional photographer described how competition in his business had become overwhelming, given the proliferation of high quality photographs on online databases ranging from iStockphoto to Flickr. The article started me thinking about what sorts of other markets might be vulnerable to crowd-sourcing.

At the outset, the most vulnerable markets are those for products that have a low marginal cost of production and by that I mean that the cost of producing one additional unit of the product is low. Thus, for example, Apple has probably spent millions developing OSX, but once developed, the cost of making a copy of the operating system is nothing more than the cost of burning a copy of the program onto a DVD or putting it on a website for consumers to download. “Digital products” such as software, e-books, music and photographs easily fall into this category. The markets for these products are vulnerable because the low distribution cost allows anyone in the world to easily sell these products to anyone anywhere.

But fixed costs or semi-fixed also have a role. If fixed costs are too high then a market will not be vulnerable to crowd-sourcing. The difficulty or cost in developing the Google search algorithm ensures that there is not a cottage industry for search algoritms. If fixed cost is zero then no one is willing to pay for the product because it has little or no value or it is just as easy for the consumer to make it themselves – e.g. the market for people to set your alarm clock. However if fixed costs are falling then a market may become vulnerable to crowd-sourcing. Fixed costs fall when the price of the means of production falls. For the purposes of crowd-sourcing I want to focus on the cost of labor which can be more of a semi-fixed cost than a variable cost depending on the labor market and regulations. The cost of labor is the price at which a worker is willing to sell utility or alternatively buy disutility. Returning to the example of photos – “workers” are willing to sell photographs for very little because they actually get utility rather than disutility out of taking them. This is all fancy language for saying a much more simple proposition which is that people are willing to work for less if they enjoy what they are doing. If technology can increase the utility a worker gets from their job then the salary for that job will fall because more people are willing to do it for less.

The film business offers an interesting example. Back in the 1930’s making a film was beyond the ability of the average Joe – i.e. it was hard work and you had to pay people to do it – indeed you still have to pay people today. However, technologies such as iMovie and high quality video cameras now allow you to make films that would have amazed audiences in the 1930’s. Indeed, film-making has not only become feasible for the average Joe it has become fun – in other words, for some portion of the workforce, making films has gone from being disutility to utility. As a result, you have television programs such as America’s Funniest Home Videos that show hours and hours of videos that cost them nothing because the people that made them enjoyed doing it. The internet is full of video footage and even independent films that you can consume for absolutely nothing.
What’s the bottom line? If you enjoy what you do and if other people would enjoy doing it too – be afraid. If you make a digital product – be very afraid. The world is full of people who want to have just as much fun as you and you will get to exchange Cyworld acorns with them on the one-way train to the badlands. Only those that enjoy what others do not enjoy will survive and the richest of these will be the most perverted. Quel change?