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.

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.

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 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.

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.

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.

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.

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

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.

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%.

“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

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.

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.

Right now, I’m hopelessly behind on keeping up with the conventions – I’ve downloaded all the speeches from the DNC, but haven’t watched them yet.  Similarly, I haven’t yet watched a single minute from the RNC.

Strangely enough, however, I was forwarded a link to an article Marc Andreessen wrote about meeting Barack Obama in March 2008 that is worth reading:

A Hour and a Half with Barack Obama

Marc’s blog, by the way, is the blog that most closely resembles what I wish my blog could be.  Or should be.  Most of the articles are deep, interesting, sharp, and reflect frank advice and perspective that you don’t typically find in either professional news or popular blogs.  Worth subscribing to if you don’t already.

That sympathizers of Osama bin Laden sink three oil tankers in the Strait of Hormuz and choke off the narrow, bow-shaped channel that funnels 14 million barrels a day from the Persian Gulf to the rest of the world. That the United States attacks Iraq, and Israel launches a huge strike against the Palestinians, driving them from their camps and staking out more land — all of which spurs the Persian Gulf states to cut off oil for the West. Or perhaps that a popular uprising, led by sympathizers of Mr. bin Laden, topples the ruling Saud family in Saudi Arabia, by far the world’s largest oil producer.

”If bin Laden takes over and becomes king of Saudi Arabia, he’d turn off the tap,” said Roger Diwan, a managing director of the Petroleum Finance Company, a consulting firm in Washington. ”He said at one point that he wants oil to be $144 a barrel’‘ — about six times what it sells for now.

Very interesting and eery given today’s oil price.  And no needed to become king of Saudi Arabia to do it.

Tonight, with the marginal victory for Clinton in Indiana, and the large win for Obama in North Carolina, a major shift happened in the future markets at IEM.   See below for the graph:

As pointed out on IdeoBlog, the likelihood of a Clinton victory, according to these futures, dropped today from 28% down to 12%… a 55% change.  That’s an incredibly significant shift, and it puts Obama back in the probability range that he spiked to after Super Tuesday.

Interestingly, there are still arbitrage dollars to be made on John McCain, whose futures are only trading at around 94.5%.  You can make 5.5% or so just by buying the obvious winner.  Of course, I believe IEM still limits your total funds to $500, so I’m not sure you can really make that much money here.

It’ll be very interesting to see the presidential futures for the final candidates once they are out – I’m expecting a very different story than the polls to date have been indicating.

Is there really a connection between sipping your double tall breve and voting for Obama? We’ll leave political analysis to the professionals, but this is the kind of food question we’re equipped to investigate. Unfortunately, we can’t directly measure how much latte everyone is drinking. But as an approximation, we looked at the number of Starbucks stores per capita on a state-by-state basis. Compare this to how states voted in the primary:

The blue line measures the percentage by which Obama beat (or lost to) Clinton. The green dots represent the number of Starbucks stores per million people for each state. The black line is the trend line of Starbucks stores, drawn to make it easier to see the relationship between voting and latte sipping.

Love it.  Thanks to Paul Kedrosky for the pointer.

I’m going to try to be careful here not be too specific about any candidate or their plans.  I felt, however, that this topic was non-obvious enough that it was worth commenting on, despite the danger.  I can only hope that these comments might reach the ears of all three of the currently viable candidates…

Please don’t raise capital gains taxes in this environment

Or at least, please don’t raise them without also indexing gains to inflation.  It’s not a serious problem when inflation is extremely low for long periods of time, but it could be very very bad if we are, in fact, heading into an environment with a weak dollar and higher prices.

Why?  Because the capital gains tax today is based on nominal gains, not real gains.

Not clear on why this is a problem?  Here is an example:

Let’s say you bought a stock in 2009.  It’s a good stock, but not a great one, and it returns roughly 10% per year for the next 7 years.  In fact, by 2016 the stock has doubled, exactly, from $10 per share to $20 per share.  Since you bought 1000 shares, you’ve just turned $10,000 into $20,000, for a $10,000 gain.

That sounds good, and you might be thinking, “Well, with a $10,000, why should I begrudge the government $2,000 or even $2,800 of that gain?  After all, it’s this great country that has made that type of gain possible.”

Here’s the problem.  Let’s say inflation over the next 7 years is higher than it has been.  5% instead of 3%.  Well, then actually $10,000 in 2016 doesn’t buy what it did in 2009.  In fact, it takes over $14,000 2016 dollars to buy the same car that $10,000 did in 2009.

But the tax man doesn’t care.  The IRS still calculates your gain as $10,000, not $6,000.  So $2,800 might be 28% of your nominal gain, but it’s 47% of your real return, after inflation.

Ouch.

It gets worse.  If inflation manages to soar to around 8%, which it did in the 1970s, then actually that $2,800 tax becomes more than your entire real return.  At 8.1%, in fact, your real return becomes negative – you end up paying a real tax of over 100% of your inflation-adjusted gains.

Double-Ouch.

That’s pretty much what happened to people in the 1970s.  And it really did have a drastically negative effect on capital investment and tax collection, because rich people basically decided to either avoid capital investments, or they decided to postpone taking gains.  (Little known fact, but capital gain tax revenue has increased since we lowered the rate to 15%… a combination of better market performance and likely some acceleration of people taking gains.)

Now, in the 1980s and 1990s, this wasn’t such a big deal, because we both lowered capital gains tax rates and we killed inflation.  Or, at least, we wounded it.  When inflation is low, and the holding periods are relatively short (under 10 years), you could argue that the inflation “tax” automatically adjusts the 15% up to something higher, but manageable.

So, I think that leaves us in a policy bind, since it’s very likely we’re headed for higher inflation in the next 10 years.  In fact, you could argue that cutting the capital gains tax commensurate with the increase in inflation and the average holding period might make sense, if the goal was economic neutrality.

One solution would be to index capital gains for inflation.  It’s a sticky problem, because it means that taxpayers would have to have a table of “multipliers” to apply to any investment, based on the year of investment.  You would also likely have to exclude shorter holding periods to avoid trading scams, and have some sort of wash-sale like rule.  But this is all doable.

If you see another path around this problem, I’d love to hear it.  Right now, it feels like inflation is going to take a serious whack at capital investment if we’re not careful.

First, hat’s off to Google for sharing their visiting scholar program online.  I found this video, from December 14th, on Youtube this week.  It’s a great talk, from Paul Krugman, about the causal elements behind the current housing liquidity crunch.  (It’s over 1 hour, including Q&A.  And yes, I listened to the whole thing.)

But that’s about housing, not trade.  However, hearing Krugman speak live (vs. his normal Op-Ed tirades), reminded me of how intelligent and thoughtful he can be.

Interestingly, in the same week, I caught this piece from his NY Time blog (Dec 28, 2007).   It’s about the current references to his original work on global trade, which is where I remember first seeing references to Krugman’s work.  He references this blog post, which discusses some of Krugman’s original positions on trade in some detail.

Of course, Krugman wrote a full Op-Ed on trade in the December 28 edition of the New York Times.  It’s available online here.  Strangely, it’s an extremely rational piece, and it makes me wonder if his politics are moderating a bit as we get closer to the 2008 election.

Some paragraphs worth sharing:

…recently we crossed an important watershed: we now import more manufactured goods from the third world than from other advanced economies. That is, a majority of our industrial trade is now with countries that are much poorer than we are and that pay their workers much lower wages.

For the world economy as a whole — and especially for poorer nations — growing trade between high-wage and low-wage countries is a very good thing. Above all, it offers backward economies their best hope of moving up the income ladder.

But for American workers the story is much less positive. In fact, it’s hard to avoid the conclusion that growing U.S. trade with third world countries reduces the real wages of many and perhaps most workers in this country. And that reality makes the politics of trade very difficult.

This is perhaps one of the most fairly balanced assessments I’ve seen on free-trade recently.  The macro-economics behind the benefits of free-trade between nations is overwhelmingly positive, in terms of the aggregate economic gains.   But I’ve learned to be very suspicious of arguments that persist over long periods of time, between well-educated people, on topics that theoretically should be very simple.  If they really were that simple, you’d expect that over time, most well-educated people would resolve the discussion and move on.

The oscillation between free trade and protectionism doesn’t surprise me historically at a political level – it’s pretty easy to understand why the steel worker, seeing his wages drop and/or his local plant disappear, wouldn’t push politically towards protectionism.  But there has to be something more to this argument.  The macro-economics of this situation are clear: cheaper foreign steel means less money for domestic steel makers, but cheaper steel for everyone else in the country.  That may not be much consolation for the steel worker, but it is the answer on why free trade in the aggregate, tends to benefit the country more than it hurts it.

(No, I’m not going to touch the recent China poisoned toys issue.  Yes, it’s obvious that we need some amount of regulation to prevent poisoned toothpaste and lead-painted toys, etc.)

More from Krugman’s article:

All this is textbook international economics: contrary to what people sometimes assert, economic theory says that free trade normally makes a country richer, but it doesn’t say that it’s normally good for everyone. Still, when the effects of third-world exports on U.S. wages first became an issue in the 1990s, a number of economists — myself included — looked at the data and concluded that any negative effects on U.S. wages were modest.

The trouble now is that these effects may no longer be as modest as they were, because imports of manufactured goods from the third world have grown dramatically — from just 2.5 percent of G.D.P. in 1990 to 6 percent in 2006.

And the biggest growth in imports has come from countries with very low wages. The original “newly industrializing economies” exporting manufactured goods — South Korea, Taiwan, Hong Kong and Singapore — paid wages that were about 25 percent of U.S. levels in 1990. Since then, however, the sources of our imports have shifted to Mexico, where wages are only 11 percent of the U.S. level, and China, where they’re only about 3 percent or 4 percent.

This is interesting.  Theoretically, it has always been roughly assumed that the high wage countries compensate for their wages, somewhat, with high productivity.  More value created per worker, usually due to heavy investment in education, capital, infrastructure, and low-risk environments.  But it’s possible that while mostly true, that logic reaches it’s limit at some point.  If labor in some countries is priced at 3-11% of US costs, and our trade shifts meaningfully in that direction, then that becomes a competitive depression on wages.

Once again, the economics are fairly clear that in the aggregate, those lower wages should mean cheaper goods for everyone.  But if a large percentage of our population faces this pressure all at once, it could lead to some extremely negative adjustment periods for not just those people, but for the entire economy.  This, in fact, is a potential explanation for some of the income disparity we’ve been seeing this decade as trade has shifted to China & Mexico.

One flaw I can see here already, potentially, is that a ever-declining percentage of our workforce is in manufacturing.  The last number I recall seeing was as low as 19%.  (please comment if I’m mistaken here). It’s tough to get to “most workers in this country” from there.

Now here is the part that scares me a bit – Paul Krugman’s conclusion:

So am I arguing for protectionism? No. Those who think that globalization is always and everywhere a bad thing are wrong. On the contrary, keeping world markets relatively open is crucial to the hopes of billions of people.

But I am arguing for an end to the finger-wagging, the accusation either of not understanding economics or of kowtowing to special interests that tends to be the editorial response to politicians who express skepticism about the benefits of free-trade agreements.

It’s often claimed that limits on trade benefit only a small number of Americans, while hurting the vast majority. That’s still true of things like the import quota on sugar. But when it comes to manufactured goods, it’s at least arguable that the reverse is true. The highly educated workers who clearly benefit from growing trade with third-world economies are a minority, greatly outnumbered by those who probably lose.

As I said, I’m not a protectionist. For the sake of the world as a whole, I hope that we respond to the trouble with trade not by shutting trade down, but by doing things like strengthening the social safety net. But those who are worried about trade have a point, and deserve some respect.

He’s right, the critics have a point.

Too often, opponents to free trade are kowtowing to special interests or misunderstanding economics.  Despite that fact, however, it’s clear that there are some significant macro-economic impacts from free trade that can not be brushed away, particularly around wage pressure and the percentage of the population affected.

I haven’t had time to formulate my own theories on how to weave through this complexity, but chances are that there is some analysis that could better quantify the impact of wage pressure of a given trade relationship.  That would give some guidance about when to slow down the pace of opening markets to phase in the pressures rather than having them catastrophically adjust over relatively small time periods.

From Aviation Week:

Syrian President Bashar al-Assad said the Israelis struck a construction site at Tall al-Abyad just south of the Turkish border on Sept. 6. Press reports from the region say witnesses saw the Israeli aircraft approach from the Mediterranean Sea while others found unmarked drop tanks in Turkey near the border with Syria. Israeli defense officials admitted Oct. 2 that the Israeli Air Force made the raid.

The big mystery of the strike is how did the non-stealthy F-15s and F-16s get through the Syrian air defense radars without being detected? Some U.S. officials say they have the answer.

U.S. aerospace industry and retired military officials indicated today that a technology like the U.S.-developed “Suter” airborne network attack system developed by BAE Systems and integrated into U.S. unmanned aircraft by L-3 Communications was used by the Israelis. The system has been used or at least tested operationally in Iraq and Afghanistan over the last year.

The technology allows users to invade communications networks, see what enemy sensors see and even take over as systems administrator so sensors can be manipulated into positions so that approaching aircraft can’t be seen, they say. The process involves locating enemy emitters with great precision and then directing data streams into them that can include false targets and misleading messages algorithms that allow a number of activities including control.

A Kuwaiti newspaper wrote that “Russian experts are studying why the two state-of-the art Russian-built radar systems in Syria did not detect the Israeli jets entering Syrian territory. Iran reportedly has asked the same question, since it is buying the same systems and might have paid for the Syrian acquisitions.”

I find it a little surprising that your could commercialize an exploit like this.  I’ve done enough security software work to know that it’s not surprising that any system engineered in the last 50 years would have vulnerabilities.  Thanks to the ongoing wars over security on the Internet, in fact, our ability to “crack” into systems seems to be growing at a rapid pace.

That being said, when an exploit is discovered, typically a patch is quickly produced.  For example, if they find a serious exploit tomorrow in a common piece of networking equipment, like a Linksys home router, typically a software patch would be quickly released to block that exploit.

As a result, if an exploit like this existed in serious military systems, you’d think that a patch would be quickly released to block it.  The lead times to produce military systems in volume would seem to preclude commercializing an exploit the way this article describes.

Then again, I guess the exploit would have two things going for it:

1) The exploit would not be used frequently, making it hard for the enemy to “simulate” or understand the exploit well enough to produce a patch.

2) Not everyone keeps up-to-date with their security patches… do you?

It would be a fascinating turn of events if the next-generation military advantage did not depend on speed, munition strength, or even targeting & accuracy.  Instead, the real advantage could go to the force who could most rapidly disable and coopt enemy systems.

Catching up on my friends’ blogs tonight. Found this tidbit from John really interesting.

Check out OpenCongress.org — an exceptionally important site brought to you by the same folks who bring you the very cool Democracy Player.

Sort of like a Wikipedia for US Congress, everything is hyperlinked, cross-referenced & RSSified.

It is a great way of figuring out what’s really happening in Washington, and I think is going to be a crucial resource leading up to the 2008 elections.

It’s really neat to see this kind of direct and open coverage of Washington. I’ve already subscribed to a few feeds, and I’m finding a lot of interesting things to dig into. Check it out.

Before I get into reviewing this book, let me just say that I’ve been an Orson Scott Card fan since I was 12. I’ve read almost every book he has published, even the way-far-out-there LDS material. Ender’s Game is one of my favorite books of all time.

This book, unfortunately, left a bad taste in my mouth, the same way that all of Michael Crighton’s books have since somewhere around Disclosure. It’s blunt, predictable, and seems written more for screenplay or a video game than as a full fledged novel.

There have been a lot of flame wars about this novel online, mostly from people who haven’t read the full book. Orson Scott Card has, for the past decade, developed a habit of sharing early chapters of books, for free, online, to solicit opinion and feedback from his fans. I think it’s safe to say that most science fiction fans, who skew to the left, didn’t take to kindly to a world where a “Progressive Restoration” raised its own army to “liberate” New York from the false US Government in power since 2000.

You can check out the fun at Amazon.com, in their book reviews. Liberal blogs like Lean Left skewer Card for his conservative mentality, although it turns out he’s a registered Democrat (My favorite part of that one is the fact that the author had not actually read the book. Sigh.) Here is a Podcast of an interview with Orson Scott Card. More interesting, here is an interview with Card about the state of video games on Wired.

Back to the book.

There are some redeeming elements worth noting.

First, maybe I’m just in a “Rome” state of mind these days, thanks to the HBO series, but I liked the idea that the United States of America is not currently comparable to the end days of the Roman Empire. Instead, the book posits that America today is like the last days of the Roman republic, in the immediate years before Octavian rose to power, quelled civil discontent, and established an Imperial line as Augustus Caeser.

Second, most critics haven’t read Orson Scott Card’s afterward to the novel, which really seems to make a heartfelt entreaty to move past the currrently hyper-partisan atmosphere. There is no doubt that Card skews conservative, but he states that there are dangerous extremists on both the left and the right, and that too many issues have been arbitrarily grouped together (abortion & global warming?) in order to villify and divide people as “red” or “blue”. This book is a clumsy expression of these sentiments, meant to highlight the dangers of such radical polarization, but it seems earnest.

As a side note, Card begins each chapter with quotes from one of his characters, a historian turned proto-dictator. Some of them are pretty neat:

If you always behave rationally, then reason becomes the leash by which your enemy pulls you. Yet if you knowingly make irrational decisions, have you not betrayed your own ability?

It is possible to be too much smarter than your opponent. If you give him credit for more subtlety than he has, he can achieve tactical surprise by doing the obvious.

In war planning, you must anticipate the actions of the enemy. Be careful lest your preventative measures teach the enemy which of his possible actions you most fear.

My prediction? Card uses these to write the next great trendy business leadership book, based on these pseudo-Sun-Tzu dictates…

In all seriousness, Orson Scott Card’s novels have become caricatures of his original style. Maybe it’s the price of success and insolation, maybe it’s just lowest common denominator publishing. I don’t know. I’m not unhappy that I read this book, but it felt about as deep and impactful as a reality show… within weeks I expect that I’ll have forgotten most of it.

Summary: If you like Orson Scott Card, reading this book isn’t worse than reading any of his other most recent novels. But you’d probably be better off going back and re-reading Ender’s Game again.

First, you need to turn something into a tradeable security. With derivatives, you can do this with almost anything. London has done it with the weather. The Kyoto Protocol has done it with Carbon Dioxide emissions. Kyoto introduced a “cap and trade” approach to regulating carbon dioxide, similar to the program put in place by the United States in the 1990s to control sulfer dioxide and acid rain. In a cap and trade system, countries limit the total amount of carbon dioxide emissions on a per country basis, and then issue those rights to their companies. Companies can then trade those rights with each other, and even potentially earn “new rights” by putting in place technology and programs to cut existing carbon dioxide emissions.

The Kyoto Protocol currently covers 160 countries, representing approximately 55% of all carbon dioxide emissions globally. The United States, China & India are the most notable signatories missing from the current pact.

Emissions trading has become a big market, and with global warming a hot topic again (sorry, I couldn’t resist), a lot of people have been looking at the carbon dioxide credits as more than just environmental regulation, but as an investment opportunity.

After all, it stands to reason that the right to release a ton of carbon dioxide into the air is not going to get cheaper going forward. And of course, if you buy that right, then some other company can’t, which means you potentially have taken that right off the market… until you sell it.

Now, what most people don’t know is that there is also a voluntary carbon dioxide emissions market here in the US, the Chicago Climate Exchange. There is also now a firm, called XShares, that is investigating creating an ETF based on the exchange.

In other news, UBS has created a new Emissions Index, based on the two European exchanges, which trade about 46% of all the global emissions rights today. There is no ETF for this index, yet, but where there is an index, there is usually an ETF to follow.

I’m going to file this away in my “watch” folder for the time being. Carbon emissions might be a very interesting commodity, since there will be strong secular pressure to limit the rights to emit greenhouse gasses in the future. Also, it stands to reason that lower emission caps in the future will mean increased costs for corporations, which means it might be an interesting diversification play versus the corporate stock & bond markets.

Still, I had to share this. I don’t know how I missed it, but in all the debate about what it means to live in a “red state” vs. a “blue state”, I found an interesting graphic when browsing Wikipedia.

It all started with the link to the 1976 Election page.

I immediately noticed that this chart had the Democrats in Red, the Republicans in Blue – the opposite of the current color scheme in use. In fact, I then found this very interesting piece on the origins of the entire color scheme here.

Prior to the 2000 presidential election, there was no universally recognized color scheme to represent the parties. The practice of using colors to represent parties on electoral maps dates back at least as far as the 1950s, when such a format was employed within the Hammond series of historical atlases. Color-based schemes became more widespread with the adoption of color television in the 1960s and nearly ubiquitous with the advent of color in newspapers. Early on, the most common—though again, not universal—color scheme was to use red for Democrats and blue for Republicans. This was the color scheme employed by NBC—David Brinkley famously referred to the 1984 map showing Reagan’s 49-state landslide as a “sea of blue”, but this color scheme was also employed by most news magazines. CBS during this same period, however, used the opposite scheme—blue for Democrats, red for Republicans. ABC was less consistent than its elder network brothers; in at least two presidential elections during this time before the emergence of cable new outlets, ABC used yellow for one major party and blue for the other. As late as 1996, there was still no universal association of one color with one party.[2]; if anything, the majority of outlets in 1996 were using blue for the GOP and red for the Democrats.

But in 2000, for the first time, all major media outlets used the same colors for each party: Red for Republicans, blue for Democrats. Partly as a result of this first-time universal color-coding, the terms Red States and Blue States entered popular usage in the weeks following the 2000 presidential election. Additionally, the closeness of the disputed election kept the colored maps in the public view for longer than usual, and red and blue thus became fixed in the media and in many people’s minds.[3] Journalists began to routinely refer to “blue states” and “red states” even before the 2000 election was settled, such as The Atlantic’s cover story by David Brooks in the December 2001 issue entitled, “One Nation, Slightly Divisible.” Thus red and blue became fixed in the media and in many people’s minds [4] despite the fact that no “official” color choices had been made by the parties.

Fascinating.  So we owe the current “red state”, “blue state” terminology to:

1. The invention of color TV
2. The standardization of treatment in 2000 by the networks
3. The decision to use the opposite treatment for liberal vs. conservative that the rest of the world uses (typical)

Probably the most interesting picture I found here was the link to Purple America:

As someone who has only participated in elections in either the SF Bay Area or Boston, it was nice to see that the nation as a whole, even now, is far more balanced than you might think.  People seem to quickly forget how shockingly close all of the last 4 elections have been.  Amnesia seems to be tied to your party squeaking out the win.

Anyway, just an intellectual tidbit for this evening.  I’ll be back to personal finance topics soon – those do seem to be the aggregate favorite for this blog.

Almost everyone is familiar with the blind spot you suffer when you drive a car.  Off to the right, and down to the back, there is a triangle that seems like it should be visible in your mirror – but it isn’t.  Trucks & vans often have a worse blind spot than cars.  It’s a fascinating thing – so obvious when you look at it on paper, but so hard to recognize when you are actually driving.

I think the same thing happens to people around history.  Most people learn their history in two places: in primary & secondary school, and then throughout life as they are living it.  For example, my most in depth course work in history was in high school when I took AP US History in the 11th grade (1990).  Incredible depth and memorization of names, treaties, bills and events in the 18th & 19th centuries, all the way through about 1965.  Once we got past Kennedy & Martin Luther King, all of a sudden, the textbooks turned to mush.  A few days here and there of miniscule coverage of Vietnam, Watergate, and a couple of oil crises for good measure.  Stagflation.  Voodoo economics.

High school is also the time when I began following current events in some detail.  I participated in policy debate on topics ranging from retirement savings, prison reform, nuclear proliferation and space exploration.  I read several newspapers daily.

I’ve noticed since then, however, that I have a historical blind spot that dates from the mid-1960s to the late 1970s.  Sorry, no memory of Ford or Carter, although technically I was alive at the time.  I have some memory of the early 1980s, which has made it easier to fill in detail about the decade over time.  (My favorite, of course, was re-watching the televised Reagan-Carter debate in 1980 on PBS.   Although it was a landslide for Reagan, both in the debate and election, both seemed so much more coherent and direct than any modern debate I recall watching.)

Is this common?  Do most people have a historical blind spot between the time that their in-school history material ran out, and before their personal experience began?  As I read more about Gerald Ford’s Presidency, it feels strange that I know more about the 1930s than the 1970s.

Let me be clear, I certainly knew about Nixon’s pardon.  But not the rich color around it.  Not the detail I’ve been seeing the recent newspaper coverage.  Actually, Wikipedia has been wonderful here as well.  Their section on Gerald Ford is great, and the detail about the 1976 election is also great.  I think I was missing a significant part of history here.

Anyway, I’m going to augment my reading list for 2007 with some more material on the 1970s.  I think my approach to it has been too segmented (space policy, energy policy, monetary policy, etc) rather than a holistic view.  I’ll likely start with some of the biographies that will be hitting the presses momentarily.

So far with this blog, I haven’t really solicited many opinions here. But maybe it’s time for me to try one of those “Tell me what you think” posts.

The question is:
“Will the United States move to realtime election results in the next 20 years?”

I’ll represent some of the key points from the discussion here, and I’d love it if you’d comment with your own thoughts and feedback. (I’ve simplified the arguments and made them more third person for readability)

Me: People are demanding realtime information more and more with the advent of technologies like the Internet. I know many people who want to know election results as they happen, not waiting until the polls closed. I think the United States might move to realtime election results in the next 20 years.

Uncle: Never. Releasing results before the polls close would definitely affect the outcome. It will never happen.

Me: No doubt it would influence the outcome. But it’s unclear to me that it would influence it in a bad way.

Uncle: If your candidate is losing, you might get discouraged and not go to the polls.

Me: Sure, if your candidate is losing, you might be discouraged from voting. Or, it might inspire you to actually go to the polls and vote. It’s hard to say that it would hurt anything, although it would change the dynamic.

Uncle: This country has a long tradition of secret ballots. Voting is a personal thing, it’s not supposed to be disclosed.

Me: It would still be anonymous. You could easily make sure to only report results in an anonymous fashion, not identifiable. Secret ballot is about people not facing persecution for who they voted for, not delayed results.

Uncle: It will never happen. No country reports elections like that, why would we change?

Me: Everything is moving towards more information and more transparency. It’s very hard to argue in a Democracy that less transparency is a good thing (though not impossible in some cases). Just because it hasn’t been historically possible or expected doesn’t mean that now that it is possible, it won’t be expected. The reason I say 20 years is that 20 years will roughly be the time before the “computer generations” – Gen X & younger – outnumber the Baby Boomers.

Uncle: I think you are way to focused on the computer thing. It will never happen.

I’ll give my Uncle the last word… not.

It’s not about computers, it’s about an insatiable demand for information immediately to help inform decisions. As it becomes common in more and more areas of life, it seems to me that people will expect it in others, like politics.

I’m actually not saying this necessarily will happen, but it’s interesting to think about:

1. Whether it will or won’t happen?
2. Would it be a good thing or a bad thing?

In 1980, Jimmy Carter conceded at 6:04pm, before the polls had closed on the west coast. Similar issues have taken place over the past two decades.

So, what do you think? Let’s see if we can break my comment record on this blog with more than three on this post!