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Posts from the ‘Politics’ Category

Google vs. The Teamsters

Yesterday, Google launched Chromecast, a streaming solution for integrating mobile devices with TV, part of another salvo against Apple.  Google vs. Apple has been the hot story now in Silicon Valley for a couple of years.  Before that, Google vs. Facebook.  Before that, Google vs. Microsoft.  Technology loves narrative, and setting up a battle of titans always gets the crowd worked up.

Lately, I’ve been thinking about the next fight Google might be inadvertently setting up, and wondering whether they are ready for it.

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Self-Driving Cars or Self-Driving Trucks

It turns out I’m not the only one who noticed that Google’s incredible push for self-driving cars actually has more likely applications around trucking.  Yesterday, the Wall Street Journal wrote an excellent piece about Catepillar’s experiments using self-driving mining trucks in remote areas of Australia.  It had the provocative headline:

Daddy, What Was a Truck Driver?

This is the first piece in the mainstream media that I’ve seen connecting the dots from self-driving cars to trucking, even with a lightweight reference to the Teamsters at the end.

Ubiquitous, autonomous trucks are “close to inevitable,” says Ted Scott, director of engineering and safety policy for the American Trucking Associations. “We are going to have a driverless truck because there will be money in it,” adds James Barrett, president of 105-rig Road Scholar Transport Inc. in Scranton, Pa.

The International Brotherhood of Teamsters haven’t noticed yet, or at least, all searches I performed on their site for keywords like “self driving”, “computer driving”, “automated driving”, or even just “Google” revealed nothing relevant about the topic.  But they will.

Massive Economic Value

The statistics are astonishing.  A few key insights:

  • Approximately 5.7 million Americans are licensed as professional drivers, driving everything from delivery vans to tractor-trailers.
  • Roughly speaking, a full-time driver with benefits will cost $65,000 to $100,000 or more a year.
  •  In 2011, the U.S. trucking industry hauled 67 percent of the total volume of freight transported in the United States. More than 26 million trucks of all classes, including 2.4 million typical Class 8 trucks operated by more than 1.2 million interstate motor carriers. (via American Trucking Association)
  • Currently, there is a shortage of qualified drivers. Estimated at 20,000+ now, growing to over 100,000 in the next few years. (via American Trucking Association)

Let’s see.  We have a staffing problem around an already fairly expensive role that is the backbone of a majority of freight transport in the United States.  That’s just about all the right ingredients for experimentation, development and eventual mass deployment of self-driving trucks.

Rise of the Machines

In 2011, Andy McAfee & Erik Brynjolfsson published the book “Race Against the Machine“, where they describe both the evidence and projection of how computers & artificial intelligence will rapidly displace roles and work previously assumed to be best done by humans.  (Andy’s excellent TED 2013 talk is now online.)

The fact is, self-driving long haul trucking addresses a lot of the issues with using human drivers.  Computers don’t need to sleep.  That alone might double their productivity.  They can remotely be audited and controlled in emergency situations.  They are predictable, and can execute high efficiency coordination (like road trains).  They will no doubt be more fuel efficient, and will likely end up having better safety records than human drivers.

Please don’t get me wrong – I am positive there will be a large number of situations where human drivers will be advantageous.  But it will certainly no longer be 100%, and the situations where self-driving trucks make sense will only expand with time.

Google & Unions

Google has made self-driving cars one of the hallmarks of their new brand, thinking about long term problems and futuristic technology.  This, unfortunately, is one of the risks that goes with brand association around a technology that may be massively disruptive both socially & politically.

Like most technology companies in Silicon Valley, Google is not a union shop.  It has advocated in the past on issues like education reform.  It wouldn’t be hard, politically, to paint Google as either ambivalent or even hostile to organized labor.

Challenges of the Next Decade

The next ten years are likely to look very different for technology than the past ten.  We’re going to start to see large number of jobs previously thought to be safe from computerization be displaced.  It’s at best naive to think that these developments won’t end up politically charged.

Large companies, in particular, are vulnerable to political action, as they are large targets.  Amazon actually may have been the first consumer tech company to stumble onto this issue, with the outcry around the loss of the independent bookstore.  (Interesting, Netflix did not invoke the same reaction to the loss of the video rental store.)  Google, however, has touched an issue that affects millions of jobs, and one that historically has been aggressively organized both socially & politically.  The Teamsters alone have 1.3 million members (as of 2011).

Silicon Valley was late to lobbying and political influence, but this goes beyond influence.  We’re now getting to a level of social impact where companies need to proactively envision and advocate for the future that they are creating.  Google may think they are safe by focusing on the most unlikely first implementation of their vision (self-driving cars), but it is very likely they’ll be associated with the concept of self-driving vehicles.

I’m a huge fan of Google, so maybe I’m just worried we may see a future of news broadcasts with people taking bats to self-driving cars in the Google parking lot.  And I don’t think anyone is ready for that.

Is the “Tesla Clause” a Good Idea?

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Todays’ news is filled with discussion and analysis of Elon Musk’s aggressive response to the negative review of the Model S sedan in the New York Times.

What makes Tesla’s response so ground breaking is that it involves releasing data, and lots of it.  There is some debate about the efficacy of Tesla’s response, and even more interest in the level of data collection that Tesla employs.

However, what I find most fascinating is the position Tesla is taking, in general, around data privacy for it’s users.

When is it OK to share user data?

Most modern websites and social networks have clear, articulated terms around the privacy protection they provide their users.  In general, these are encoded in both the user agreement that customers accept when they join the site, and the privacy policy that is provided for the site.

Tesla has, to my knowledge, staked out a new and interesting position around user data privacy:

After a negative experience several years ago with Top Gear, a popular automotive show, where they pretended that our car ran out of energy and had to be pushed back to the garage, we always carefully data log media drives.

The Tesla Privacy Policy has this to say about information sharing:

…we may share such information in any of the following circumstances:

* We have your consent.

* We provide such information to trusted businesses or persons for the sole purpose of processing personally identifying information on our behalf. When this is done, it is subject to agreements that oblige those parties to process such information only on our instructions and in compliance with this Privacy Policy and appropriate confidentiality and security measures.

* We conclude that we are required by law or have a good faith belief that access, preservation or disclosure of such information is reasonably necessary to protect the rights, property or safety of Tesla Motors, its users or the public.

So the question to be asked here, is which term is being used to justify the sharing of the journalist’s driving data?  I’m not a lawyer, but my guess is that Tesla would argue the third term covers this as necessary to protect Tesla Motors.

The Tesla Clause

Typically, the more specific and transparent a privacy policy is, the better.  Elon Musk is on the record as stating:

“While the vast majority of journalists are honest, some believe the facts shouldn’t get in the way of a salacious story.”

So the next question is, should web services reserve this right more generally?  Should it be explicit that the company reserves the right to reveal user data if deemed necessary to directly refute claims published publicly about the user’s experience with the product?

Will other web services implement the equivalent of a “Tesla Clause” in their privacy policies?

Keep Journalists Honest, Dampen Critique, or both?

If justified, this would dramatically increase the risk that journalists would take when publishing a product review of a web service.  For example:

  • How aggressive would you be reviewing Google vs. Bing if you knew either company could reveal how your past browsing history affected your results?
  • Would you critique Facebook’s new photo features aggressively if there was a risk that your photos might be included in a public response?
  • Is it fair game to respond to a review criticizing the battery life of the iPhone 4 by publishing the the specific apps and services that journalist had running?

Alternatively, the “Tesla Clause” could prove extremely valuable:

  • Forces journalists to more thoughtfully consider how their own usage patterns affected their results, and report that openly and honestly when applicable.
  • Prevent journalists from cherry picking data and screenshots to support a pre-determined conclusion (or more likely, headline).
  • Sets a marginally higher bar for web services to justify their rebuttals to negative product reviews.

Accredited Investors: Fixing the Dumb Money Problem

We’re now days away from the potential passage of significant financial reform, and a particular issue in the bill caught my eye.  This excerpt is from Businessweek:

Currently, a person must have a net worth of $1 million or an annual income of $200,000 if single or $300,000 if married (and filing jointly) to be an accredited investor. The senator’s proposed bill doesn’t say what inflation adjustment will be used to convert these numbers, established in 1982, to today’s dollars. But if we use the Bureau of Labor Statistics inflation calculator to adjust these figures on the basis of the consumer price index, then the annual income requirements for accredited investor status would become $449,000 if the investor were single and $674,000 if the investor were married, while the net worth requirement would become $2.25 million.

This is exceptionally bad news, if it passes, on multiple fronts.  To explain why, let’s review some of the basics.

What is an accredited investor?

Investing in public securities, like stocks and bonds, is heavily regulated.  There is a long standing legal concept, dating back to the 1930s, that individual investors need to be protected from nefarious money raising capitalists.  However, a special exception was carved out for the rich, under the auspice that sufficiently wealthy investors have enough education and resources to protect their own interests.  Thus, for private companies that wish to raise capital from private investors outside these large regulated facilities, there is a concept of an “accredited investor”.

Accredited investor qualifications have changed over the years.  Currently, there are two ways to qualify as an individual:

  • You are single and make $200K/year, or you are married and make $300K/year as a household
  • You have over $1M in liquid assets

When do you need to be an accredited investor?

You need to be an accredited investor to invest money in angel investments, hedge funds, certain private partnerships, and other high risk / unregulated investments.  For example, if Mark Zuckerberg came to you in 2005 and offered to let you put $25,000 into thefacebook.com, you’d need to be an accredited investor to do so.   (BTW If you can go back in time and do this, I highly recommend it).

Who is this going to hurt?

This is really going to hurt two groups – entrepreneurs and individual investors.

Entrepreneurs are going to be hurt by the severe limitation of who they can potentially raise money from at the angel stage.  As the Business week article points out:

Updating Reynolds’ estimate of the share of the adult population who are accredited investors to the 2008 adult population as reported in the Statistical Abstract of the United States, there were 5 million to 7.2 million American adults who were accredited investors in 2008…

Adjusting the income and net worth requirements for accredited investing to those proposed in the Dodd bill would reduce the number of accredited informal investors to 121,000 to 174,000 people.

So if this passes, we are talking about a massive decline in the number of potential angel investors in a new business.  Potentially a 98% decline, if the numbers above are accurate.  Outside of web 2.0 companies in Silicon Valley, raising angel funding is not trivial as it is.  Reducing the pool of investors here is massively disadvantageous to most entrepreneurs.

Individuals are also hurt here – that same 98%.  These are people who make a lot of money – $200K/year individually or $300K/year if married.  Imagine yourself as the founder of a cool web company, which sells to Google for $10M.  Your cut is about $1M after taxes.  Your friend is starting a new company, and you want to make a $50K investment.  You can’t because… the government says you aren’t rich enough?  Really? (I guess you are rich enough for a top tax bracket, just not rich enough to make investment decisions.)

Why do they think this is a good idea?

The amounts to qualify as an accredited investor haven’t been changed in a very long time.  Originally, these amounts were incredibly large, but they were never indexed for inflation.  I don’t think anyone ever envisioned millions of Americans qualifying.

Given the recent scandals around hedge funds and related ponzi schemes, these changes are an attempt to “protect” the public from people who would trick them into investing into shady schemes and poor investments.  The assumption is the same as the original one in 1933 – that in order to be sophisticated about investments, you need to be rich.

Alternatively, you could argue that we just don’t care that much if “rich” people lose their money, but that normal people, even those earning $300K/year, need to be protected from charlatans and rogues who would trick them into unregulated investments.

A better solution: make accredited status earned by knowledge, not income or assets.

We are learning the wrong lessons from the recent financial crisis and scandals.  If anything, recent events have demonstrated that dumb money is bad in large amounts, whether it is aggregated from a bunch of small investors, or funded by large rich investors.

We know from clear evidence that lottery winners, professional athletes, movie stars, and other wealthy people can still be incredibly financially ignorant.  Just because a retiree has accumulated $2M over a lifetime does not mean that they have significant financial education, or that they understand how to evaluate a hedge fund for legitimacy.  We also know that there is significant danger in this money being lost, stolen, or even worse, leveraged and invested in ways that can exacerbate bubbles.

My thesis is as follows:

  • Just because someone has a high income and/or significant wealth, does not mean that they have significant financial education, or will appoint/hire people who have significant financial education.
  • Depriving entrepreneurs and individuals from the opportunity to fund new businesses is completely unfair, and likely counter-productive to goals of encouraging new business formation and entrepreneurship.

My proposal would be as follows:

  • We introduce a new form of license / test that gives you “accredited investor” status for a fixed number of years (3-5 years).
  • We do increase the accredited investor limits – in fact, we eliminate them over time.

Look, we force people to repeatedly take a test to prove that it’s safe for them to drive.  It’s not a big stretch to insist that people who believe they are capable of making unregulated investments have the proper education.

The advantages of this program are clear:

  • Meritocracy.  This allows for anyone with the will to research and learn the ability to become an accredited investor.
  • Education.  This allows the government to ensure that all accredited investors, regardless of wealth, are aware of relevant financial and legal issues around investments.  This would help prevent charlatans from taking advantage of people.  For example, the test could ensure people are aware of their rights, of recent financial returns, of warnings signs, and of recourse for reporting fraud.
  • Self-funding. The government could charge a fee to take this test to help fund the license and potential even some enforcement resources.  It could also charge a licensing fee for institutions that want to offer classes around the license.
  • Centralized verification.  This would ensure that every accredited investor is easily verifiable.

As always, very interested in thoughts and feedback from those familiar with the issue.

Update: Good news.  It looks like some amendments have made it through on the Senate bill that restore much of the status quo.  That means the primary damage will be avoided.  Maybe now there is an opportunity over the next four years to take a different approach to qualifying accredited investors.

Embrace the Minimum Necessary Change (MNC)

In keeping with my theme this week of blogging observations, this one ties together a basic tenet that I learned from science fiction in my pre-teen years, and applies it to product management.

The concept is borrowed from “The End of Eternity“, one of the classic science fiction novels from Isaac Asimov.  The book imagines a future with time travel, and the guidelines that govern its use:

There is a group of people (only males) who are called The Eternals. They live outside of ordinary time and space in a man-made construct called Eternity. The Eternals can move back and forth between Eternity and Earth, entering into any time period of Earth’s history. Their mission is to make Reality Changes, changes in the course of human history that will result in an improved Reality. They try to do this with the help of computers that can predict how even subtle changes will alter Reality. There is an art to finding the minimal intervention that will result in a desired Reality Change. There is a special change called “The Minimum Necessary Change“.

I’ve been surprised over the years how often I find myself using this concept, the “minimum necessary change”, to help frame potential solutions to problems.

In some ways, it’s a fairly obvious outcome of a scientific education.  Occam’s razor demands that, all things being equal, we bias towards the simplest explanation.  It’s not a far stretch to morph that concept into a bias towards the simplest solution to a given problem.

Seasoned product managers are also familiar with another, related concept, the “minimally viable product”.  The MVP, of course, is the minimal number of features necessary for a product to be successful at achieving it’s business & product goals.

Today, at LinkedIn, I was in a fairly intense meeting discussing potential solutions for a product that we’re trying to roll out in the next few weeks.  A fairly significant issue has arisen, and the team has been debating solutions.

It’s very easy for product managers and engineers to sometimes get caught up in “redesign fever”.  An unexpected issue or constraint arises that wasn’t expected.  Immediately, smart people will retrace their steps back to the beginning, and imagine a radical new design for their product that incorporates that new issue.  The problem is, there are always new issues.  There are always unexpected constraints.  Redesign fever can and will prevent products from converging, and prevent teams from shipping.

I’ve found that the best way to resolve these types of issues is to clearly define the problem, brainstorm potential solutions, and then way the pros/cons of each.  Not rocket science.

However, make sure as part of the exercise that the “Minimum Necessary Change” is one of the solutions that is part of the decision set.  It helps frame the costs (and benefits) of more elaborate solutions.  In fact, the intellectual pleasure of finding a simple, elegant solution to a complex problem can turn into a highlight for the entire project.

If you believe in fast iteration, in shipping product quickly and frequently to incorporate real user feedback into your designs, then more often than not you’ll find that the Minimum Necessary Change is your friend.

Observations: MBAs & Government

Sometimes I am reminded that there are a lot of observations & stories that I tell in real life that I haven’t shared on this blog.  This is one that I’ve mentioned in conversation three times this week, so I’m making an effort to actually write it out.

When I attend business school at Harvard, I took a couple of elective classes that were roughly equally populated by both MBA students and Government students.  Harvard is fairly unique in that it has both a world-class business school (technically, the oldest) and a world-class government school (Kennedy School of Government).

What I learned in these classes had less to do with the material, and more to do with the fundamental difference in mindset between the two types of students.

In every class, for every business case, the argument almost always broke down as follows:

The MBA Students:

Tell us what the rules of the game are, and we’ll tell you how to win the game.

The Government Students:

Tell us who you want to win the game, and we’ll tell you how to make the rules.

Needless to say, the conversations typically went nowhere.  The business students always felt it was unethical to either change the rules mid-stream, or to create an unlevel playing field.  The government students always felt it was unethical to set up rules that weren’t destined to generate the ideal outcome.

Let me know how many times you see echoes of this disconnect in both business &  political discussions.

A Moment of Silence for the F-22 Raptor

Defense Secretary Robert Gates has recommended ending the the long-standing drama surrounding the F-22 (nee, the F-22A) supersonic fighter, capping the program with a purchase of four more planes in 2009, bringing the total number to 183.

F-22

A pair of F-22 Raptors during an Air Force training flight.
(Thomas Meneguin — U.s. Air Force Via Associated Press)

A bit of a sad day for me, really.

There is a nice column in the Washington Post today from the Air Force explaining why they support the decision to end the program, 60 planes shy of the 243 total they had originally estimated to be needed in a post-cold war world, and almost 600 shy of the pre-1989 estimate.

We are often asked: How many F-22s does the Air Force need? The answer, of course, depends on what we are being asked to do. When the program began, late in the Cold War, it was estimated that 740 would be needed. Since then, the Defense Department has constantly reassessed how many major combat operations we might be challenged to conduct, where such conflicts might arise, whether or how much they might overlap, what are the strategies and capabilities of potential opponents, and U.S. objectives.

These assessments have concluded that, over time, a progressively more sophisticated mix of aircraft, weapons and networking capabilities will enable us to produce needed combat power with fewer platforms. As requirements for fighter inventories have declined and F-22 program costs have risen, the department imposed a funding cap and in December 2004 approved a program of 183 aircraft.

Much has been made of the cost over-runs in the F-22 program, and there is some truth to those complaints.  Of course, they have been exaggerated in recent years since manufacturing planes is a volume business, and the average cost per plane drops significantly as you increase volume and speed delivery.

It may seem strange to wax nostalgic for a super-sonic aircraft, but I remember the F-22 fondly.  When I was in high school, I read Aviation Weekly regularly as one of the requirements for my high school debate research (the topic for the year was space exploration).  I remember at the time the race between the F-21 and F-22: competing prototypes for a new air superiority fighter that would line up against the latest generation MiG fighters from the USSR, and which would be able to deliver Mach 2.0+ speeds without afterburners and with low radar reflection.

It was post-1987, so already the era of disillusionment with the ridiculous mediocrity of the US space program had set in.  But warplanes were still an area of rapid technological advancement, and raw engineering wonder.  It was pre-1991, so the cold war was still there to propel investment in military technology.

The F-22 won the contest, of course.  As fate would have it, about the same time, the USSR lost the contest.  Almost immediately, the plane and the program were caught in an ongoing battle for existence – a battle that lasted almost twenty years.

There are good arguments by better informed people on the merits and liabilities of the F-22 program.  Right now, I’m not really interested in discussing them.

Instead, I want to take a moment to contemplate the wonder and excitement that aerospace used to hold for me and a generation of kids.  A time when the space program was filled with the best and the brightest, and when the best engineers devoted themselves to conquering air and space.

In truth, that time pre-dated me.  But I still felt the echoes of it in the late 1980s.  I was an intern at NASA Ames in 1990-1.  I dreamed of a robust space program, and limitless advancement in aerospace.

The F-22 was my desktop picture for the better part of the 1990s for goodness sake.

Of course, the much less impressive F-35 joint strike fighter program will continue.  And spurred by Space-X and the private sector, there may even be some signs of life in the US Space Program, particularly once we get rid of the generational vacuum that was the Space Shuttle.  The Orion may yet fly, and we may yet have a base on the moon, and land men on Mars.  Twenty years later than I had hoped, but better late than never, I suppose.

A moment of silence tonight, however, for the F-22.  A truly beautiful aircraft.

Two Thoughts on the AIG Bonus Scandal

I normally don’t comment on politics here, but wanted to share a couple thoughts I had about the recent churn and furor over the $165M in bonuses paid out to approximately 370 employees in the AIG financial products division.  As everyone now knows, this is the same division that apparently ended up with such large unhedged exposure that it required $170B of US government “investment” to prevent global economic collapse.

Now that’s chutzpa.  World record chutzpa.

Obama is pushing hard to get this reversed.  Trouble is, the contracts were signed before the bailout, and Connecticut actually has a law that requires double payment of withheld compensation.  Way to go, worker protection laws.  A couple thoughts:

  1. Avoid Bankruptcy at your own peril.  Our legal & financial system is like a giant, complex distributed system.  As anyone who works on distributed systems knows, common definitions and patterns are essential.  We have a pattern that’s been built over more than a hundred years for having debts greater than ability to pay.  It’s called bankruptcy.

    The problem is, AIG never went bankrupt.  That means all of the common agreements and assumptions, both written and unwritten, about failed businesses no longer apply.  In a bankrupt company, all debts are subject to negotiation, including wages and compensation.  Every state is different, but the lattitude to control the existence of prior contracts is huge.  By not letting AIG go bankrupt, we’ve probably actually limited the number of options we have in this and thousands of other situations tremendously, because there isn’t a hundred+ years of legal precedent for businesses that “should have failed but didn’t because of US government investment”.  Nope.  None.  As a result, a lot of laws that apply to companies that don’t go bankrupt apply here.

    This should be a giant warning flag to anyone who thinks keeping the auto companies in pseudo-bankruptcy is a good idea.  (They themselves are beginning to realize that negotiations with creditors, suppliers, distributors and the UAW are very complicated when you can’t invalidate contracts…)

  2. Sunshine may be the best disinfectant. I’ve heard a variety of proposals on this topic, ranging from the fatalistic (you can’t take the money back) to the extreme (we’ll fire anyone who takes the bonus.)  I’m skeptical that the latter really has teeth (Here.  Take $3M.  Don’t come back!), and I’m concerned the former declares defeat.

    Here is a middle proposal.  Publicity.  Cuomo is right on this one.  Give in to the subpoena. Publicly list the name of every single employee of AIG that receives a bonus over $5000 this year.  Name, Title, City, State.  Give them the option of declining the bonus, or appearing on the list.

    In this economy, with this attention from the public and the government, that list is one place I wouldn’t want my name to be.  It would follow you forever, and that’s assuming the government doesn’t directly target you.

Just a thought.  It might be naive, and I’m not sure of the legality of putting names on a list like that where a lynch mob might literally come out with torches and pitchforks.  But it’s a thought.

Obama Inauguration in Legos

I have to say, I am completely uninterested in the inauguration “event” that is going on right now.   Then again, I’m not really into the Academy Awards either.  My guess it has something to do with the amazing amount of real work to be done, and the amazing amount of time, effort and money being thrown instead into a party in Washington D.C.

In any case, of all the inauguration coverage, so far I’ve found this piece the most interesting:

That’s right, the entire inauguration, including hand-built mini-figures of over 1000 people, including the entire Obama family.  Note, these are not the typical mini-figs – they are actually 4-inch people made of lego blocks.  Amazing.

Now that’s historic.  Thank you, LA Times.

2008 Election Map by County

This is a quick follow on post to my 2004 Election Map by County from a week ago.

2008 Election by County

Needless to say, it definitely shifted bluer this election.  I thought I’d post it here so there would be an easy comparison.

Actually, for the best data, see the New York Time 2008 Election site.  Fantastic data, and a dynamic application that lets you look at election results going back to 1992.

2004 Election Map by County

On the eve before the 2008 elections, I thought I’d post a picture I saved from the last election in 2004.  It’s hard to believe the likely difference between this almost completely red map and the map that is likely going to be drawn tomorrow.

Bush Country 2004

It’s a good reminder of the hubris of Republican partisans after the 2004 elections, and a reminder to Democratic partisans of how quickly sentiment can shift.  The track record for parties that control both houses of Congress and the Presidency is exceptionally poor.

I’m hoping we won’t repeat past mistakes… but not counting on it.

“History does not repeat itself, but it does rhyme.” — Mark Twain

Carter:Bush, Reagan:Obama, Clinton:???

Whimsical pondering on politics tonight.

The Conscience of a Liberal has had more of an impact on me than I thought.

Let’s assume for a second that Carter was an unmitigated disaster, leading to an opening for a conservative rebirth with a Reagan presidency.  After all, before Carter, Reagan couldn’t even beat Ford for the nomination.

Let’s assume for a second that Bush (W) was an unmitigated disaster, leading to an opening for a liberal rebirth with an Obama presidency.

What might that tell us about 2012, 2016, 2020?

If the pattern repeats, inverted:

  • We’ll have a very hard 2009/2010 economically
  • Bernanke = Volker, and is kept by Obama for stability.
  • We’d see limited military actions in 2011
  • By 2012 it will be morning in America again
  • Obama will over-reach with his liberal tax/spend plans, but will rebalance in 2nd term
  • Obama will be followed by 1-term me-too candidate in 2016
  • We’d see a significant new military engagement/war in 2018-9
  • 2020 will see a fragmentation of the electorate, generating a third party candidate with some form of populist message (Perot analog).  This allows a centrist Republican (Clinton analog) to take office.

People want to map Obama to FDR or JFK.  But the parallels to Reagan, inverted, seem stronger.  The complete humiliation of Mondale in 1984 seems likely to repeat for Republicans in 2012 if they don’t adjust, and it seems like this election will be close enought that conservatives will argue McCain wasn’t conservative enough.   It’s only complete, abject humiliation ala-1984 and 1988 that makes a party redirect.

The pattern can’t be perfect, since Reagan had to deal with a Democratic Congress throughout his Presidency.  Obama is getting the Clinton 1992 situation with one party rule (similar to the Bush 2000 situation… yes, it’s not a good pattern historically).

Of course, I’ve also been known to muse about a Chelsea Clinton candidacy in 2020, since she has many of her father and mother’s best traits, without the baggage.

Problems with Obama’s Tax Credit = Tax Cut Accounting

I normally stay away from politically tinged posts.  Tonight, I’m posting two.

Call it formal recognition that the McCain candidacy is a lost cause, and that Obama is going to take the White House.  Futures on a McCain win are now down to 15.5% on the Iowa markets, even lower on the Intrade markets.  That’s bad for him, and good for everyone afraid of a McCain victory.  Since the Democrats will likely retain Congress, we will have, for the first time since 1992-1993, a full Democratic sweep.

So the topic turns to Obama, and what he’s likely to do in the next four years.  Obama, like Clinton, actually has a wide set of very smart economic advisors.  Unfortunately, they literally cover the spectrum of economic policy, from conservative to liberal perspectives.  Like Clinton, it’s hard to tell ahead of time which direction he’ll lean on once he’s in office.  It’s Robert Reich vs. Robert Rubin all over again.

This opinion piece ran in the WSJ last week, and it got me thinking.

Originally, I thought Obama’s tax plan was quite clever:

  • You can’t argue that income disparity hasn’t become extreme in the past decade
  • You can’t cut the taxes of most people, because 40% of Americans don’t owe any taxes
  • Most people will not accept higher tax rates to fund new entitlements/distributions
  • Solution: Effective negative tax rates!  That allows a progressive tax system to extend into the non-taxpayer minority, without having to approve new distributions.

The WSJ article, however, got me thinking about the accounting for all this, and it has some scary implications.  From the article:

The Tax Foundation estimates that under the Obama plan 63 million Americans, or 44% of all tax filers, would have no income tax liability and most of those would get a check from the IRS each year. The Heritage Foundation’s Center for Data Analysis estimates that by 2011, under the Obama plan, an additional 10 million filers would pay zero taxes while cashing checks from the IRS.

The basic idea is that Obama will change a large number of deductions to refundable tax credits.  That means that, effectively, a large minority of Americans will actually be paying negative taxes.

The problem sounds like semantics, but it has accounting implication:

When is a tax credit just a distribution?

Why does it matter?  Well, a tax credit is just treated like a negative tax.  So if I tax one person $1000, and give a tax credit of $200, it’s treated like $800 of tax revenue.

Welfare is treated like an expenditure.  If I tax one person $1000, and give $200 welfare to another, we declare $1000 of tax revenue, and $200 of spending.

Both net to $800, but have very different implications for the size of government and the perception of spending.

By using tax credits, Obama can state, with a straight face, that he isn’t going to raise taxes, he’s just going to redistribute the burden more fairly.  And technically, he’s correct.

However, if you treat tax credits as entitlement spending, then you see that what he actually could do is radically increase the tax burden on the country, but cancel out a large volume of transfer payments from the spending side of the equation.  So it looks like the tax burden has stayed the same.  It looks like spending has not increased.

But really what’s happened is that a whole new set of entitlements and taxes have come into existence, but cancel themselves out where no one can see them.

This may not sound like a big deal to you, but this type of accounting shenanigan looks highly prone to abuse.  Imagine what our debate about Social Security would look like if Social Security checks were positioned as tax credits instead of distributions?  Medicare.  Welfare.

I’m not saying that Obama will abuse this system per se, but it’s a bad accounting precedent, started by the Earned Income Tax Credit.  The CBO and GAO should declare that tax credits are distributions, and shift the accounting accordingly.  That would provide accurate transparency in the system, while still giving the government flexibility to tax & spend as it sees fit.

I’m not eager to see Enron-style accounting on this scale.

Update (10/16/2008): A few people have asked me for a concrete example of the problem here.  Here is an exaggerated one:

Imagine that Obama sets the income tax rate to 100%, and then gives back 80% of the money in tax credits.  By the Obama accounting, the government’s take would only be 20% of GDP.  However, in actually, the government has confiscated 100% of all income, and redistributed 80% of it.  The 100% is the number that truly reflects the government take, not the 20%.

Why the Liberal Political Engine is Working in 2008

“You have a great name. He must kill your name before he kills you.”

Juba, from the movie Gladiator

I’ve almost finished reading Paul Krugman’s The Conscience of a Liberal.  I’ll post a formal book review here soon, but right now, I wanted to highlight one of the insights that I gained from the book.

As a preface, Paul Krugman is a brilliant economist.  I’ve linked to his work here on this blog before.  He also, I’m afraid, is suffering from the aggressive form of anti-Bush psychosis – he hates the man & his policies so much that it’s pushed him into aggressively politicized commentary.  But it’s a common ailment these days, and likely to subside in the years to come.

However, in The Conscience of a Liberal, Krugman does the best job that I have ever seen laying out the principles and case for an aggressively liberal economic agenda in the United States.  Obama hints at these elements at times, but rarely pieces them together as effectively as Krugman does in this book.

I’ll save my evaluation of his analysis for a later post, but I wanted to highlight the reason that I think Obama & Krugman are onto something powerful politically here in 2008.  Sure, the timing is good:  Iraq, Katrina, and now the housing/financial crisis are a great backdrop for change.  But 2008 doesn’t feel like 1992 does it?  Let’s remember that the only people with a lower popularity than our Republican President is our Democratic Congress.

Here is my theory:

The liberals have learned, and learned well from the mistakes in 2000-2004.  They can’t defeat the conservative economic agenda of the past thirty years without killing the names of the heroes of those years.  Clinton made this compromise, but while it preserved him even in the face of the 1994 Republic Congressional wins, it didn’t make the party stronger.  As recently as 2004, people were talking about a permanent Republican majority.  (Yes, it wasn’t that long ago).

No, to win, they have to convince the American people that the entire last 25 years were a mistake.  The economic boom and resurgence of productivity post-1982 didn’t happen, or was fake in some way.  Reagan was not a great President.  Milton Friedman was not a brilliant economist.  Robert Rubin was not a great Treasury Secretary.  Alan Greenspan was not a great Federal Reserve Chairman.

Yes, to do this, they will have to throw Clinton & Rubin under the bus.  But that just might be the only way to really sell a liberal economic agenda.

Obama actually doesn’t stick to this line clearly – he has made “mistakes” in his campaign by praising Reagan and Clinton at times.  He’s inclusive, right?  But reading Krugman’s book gave me a clearer insight into the strategy, and it’s not a bad one.  Convince everyone that the last 25-30 years of economic progress/thinking was a mistake.  Rewind to the New Deal and the decades after it as a lost ideal.  Map the past thirty years to the 1890-1928 era.

Of course, intellectually, it’s not a terribly compelling position.  You aren’t going to be able to re-create the economic conditions of post-WWII America ever again, globally.  And of course, we now know that huge pieces of the government response to the market crash of 1929 were counter-productive, extending the Great Depression.  The US Government share of the economy is now close to 19% compared to less than 5% in the 1929.  Analogies to the 1960s really don’t help either, since the 1960s led to the 1970s.  Ugh.

Still, I think the strategy has legs.  If they can kill the economic heroes of the past 30 years (Friedman, Reagan, Rubin, Greenspan), we might really see a successful liberal economic agenda in the United States.  The combination of the Bush Presidency with the current economic morass produces an ideal backdrop for reconsidering economic policy.

Watch the news.  I’m seeing elements of this meme everywhere now.  It seems to be taking hold, even if people don’t see the pattern.  Example: Culprits of the Collapse, soon to air on CNN.

“You have a great name. He must kill your name before he kills you.”

Juba, from the movie Gladiator

Need Help: Obama on Glass-Steagall Repeal in 1999

I need some help here from those closer to the inner workings of the Barrack Obama campaign.  I have it from fairly good sources that Obama has a strong economic team, and that he’s intelligent.

So why would he advocate a position based on the repeal of Glass-Steagall in 1999?

Just to rattle off a few bullets:

  • Glass-Steagall prevented companies from having both commercial & investment banks.
  • The products of the mergers that were enabled post-Glass-Steagall have been the most stable in this crisis, because they have large deposit bases in their commerical arms to balance the leverage in their investment arms.
  • The non-diversified firms, both commercial & investment banks, have been the hardest hit.
  • The investment banks that are remaining (Goldman Sachs, Morgan Stanley) are pursuing this joint model to survive the crisis.  It wouldn’t be possible if Glass-Steagall were in place.
  • The universal banks, like those in Europe, are proving to be the acquirers in this crisis.
  • Academic research has effectively shown the fallacy of the original Glass-Steagall approach, which is why Bill Clinton supported the effort in 1999.  A majority of Democrats, including John Kerry & Joe Biden, voted for the final bill in 1999, as did a majority of Republicans.

The WSJ has a nice editorial here on the topic.  Marginal Revolution, as usual, has good data too.

Can someone help explain this one to me?  Is he just hitting McCain over the head with an easy talking point?  Or does he actually believe that repealling Glass-Steagall was a mistake?

This election would be a lot more enjoyable if either candidate was making any sense on economic issues.

Alan Greenspan is Right on Fannie Mae & Freddie Mac

The incredibly historic economic news keeps coming this week.  Truly momentous.  It’s as if every article, every book, every course I’ve ever taken in modern economic history and theory was to prepare to understand the events of the past 12-24 months.

In some ways, I think I’m in shock.  It’s like watching history in the making.  History that will be the subject of textbooks for decades to come.  It’s really unbelievable.

After 70 years, we’ve come to the realization that yes, in fact, you cannot keep the benefits of a private company with public guarantees without paying the price at some point.

To rephrase, for decades, politicians from all parties have been in awe of the magic of Fannie Mae and its brethren.  Born out of the Great Depression, and spun off to raise funds for Johnson’s Great Society projects, it seemed to good to be true:

  • Private investors provide capital to add liquidity to the mortgage market
  • Home buyers get cheaper rates
  • Investors get “completely safe” securities that pay slightly more than Treasuries
  • The company generates huge profits on the debt spread between their borrowing rates and mortgage rates/defaults

Well, now we know that it was, in fact, “too good to be true”.

There is a lot to be concerned about in the Paulson plan.  It’s not at all clear why the sub-debt holders were left whole.  It’s not at all clear why the shareholders were left with 20% of the company.

Given the magnitude of the problem and the unpredictability of the large number of parties and variables involved, however, I’m willing to assume that Paulson didn’t optimize for the “best” deal, but for the most pragmatic and least risky in the near term.

(By the way, if you are looking for details, the New York Times pieces here and here have the best write-ups I’ve found to date.)

My biggest fear, at this point, is that the plan really defers the final solution to this problem until the next administration, when hopefully we’re through the worst of this.  It sounds pragmatic, but in reality, it makes it much more likely that by then the crisis will have past, and Republicans and Democrats will retreat to their historic disfunction on the topic.

I’ve read a multitude of proposed solutions, but in this case, I have to say, “Please listen to Alan Greenspan on this one.”

Yes, I know bashing Greenspan has become popular.  I’ll address that in another blog post – I had the opportunity to read his recent auto-biography, and I thoroughly enjoyed it.

Try to ignore the bashing for now, and just focus on his recommendations for Fannie, Freddie, and their ilk.

Here is a WSJ story that summarizes his recommendations, made earlier this year:

His quarrel is with the approach the Bush administration sold to Congress. “They should have wiped out the shareholders, nationalized the institutions with legislation that they are to be reconstituted — with necessary taxpayer support to make them financially viable — as five or 10 individual privately held units,” which the government would eventually auction off to private investors, he said.

Instead, Congress granted Treasury Secretary Henry Paulson temporary authority to use an unlimited amount of taxpayer money to lend to or invest in the companies. In response to the Greenspan critique, Mr. Paulson’s spokeswoman, Michele Davis, said, “This legislation accomplished two important goals — providing confidence in the immediate term as these institutions play a critical role in weathering the housing correction, and putting in place a new regulator with all the authorities necessary to address systemic risk posed by the GSEs.”

But a similar critique has been raised by several other prominent observers. “If they are too big to fail, make them smaller,” former Nixon Treasury Secretary George Shultz said. Some say the Paulson approach, even if the government never spends a nickel, entrenches current management and offers shareholders the upside if the government’s reassurance allows the companies to weather the current storm. The Treasury hasn’t said what conditions it would impose if it offers Fannie and Freddie taxpayer money.

He’s right, and it’s not too late to move in this direction.

There is no reason for Fannie Mae & Freddie Mac to continue in their current forms.

The government should regulate strictly the requirements for securitizing and guaranteeing mortgages, the way that they regulate commercial banking, deposits, and other types of financial business.  They can define specific types of mortgages, even give the types names to make it easier for consumers to comparison shop, and let the “Baby Fannies” compete to make markets in them.

By breaking them up, and auctioning them off to the mega-banks, both domestic and international, they guarantee a distributed system that will be extremely fault tolerant to the failure of any one entity.  If they structure the regulation properly, they can turn this business into a stable, predictable, profitable business.

Gone is the government guarantee.  Gone is the lobby machine.  Gone is the too-big-to-fail entity.

I think Rep. Barney Frank (D, New York) is an example of why I’m afraid this won’t happen:

In the House, Mr. Frank, the chairman of the House Financial Services Committee, criticized the administration’s attempt to shrink the companies. He staunchly defended the companies’ ability to channel some of their profits from conventional mortgage financing to subsidize the construction of affordable rental housing and lower borrowing costs for low-income home buyers.

Mr. Frank seemed confident that he could stop the effort by the administration to ultimately shrink the companies through its rescue plan over the long term.

Catch that?  What Mr. Frank likes is the fact that instead of getting Congress to agree to fund affordable rental housing programs, which would have to be paid through taxes or spending cuts elsewhere, he liked having an “off the books” slush fund to pay for these projects.  He’s still at it:

After repeated clashes with the White House over legislation that authorized the Treasury to bail out the companies, Mr. Frank succeeded in including a provision that required Fannie and Freddie to divert some of their profit from buying up “jumbo” mortgages for expensive houses into a fund for affordable rental housing.

Great.  After all, passing a law to force Fannie Mae to spend money on a program doesn’t cost the taxpayer anything, does it?

Well, it does.  Those strings came at a price.  The price was the implicit government guarantee.

And now we have a better idea of what that price really was.  And it’s not worth it.

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