12.12.11

Cloud Computing’s Dark Lining

Posted in Website Management at 5:19 pm by steve

What’s new under the sun? Cloud computing. It’s the notion that one ought not care which computer or computers do your computing work for you, as long as that work gets done to your own satisfaction. In principle, it’s a pretty good idea. After all, it’s the final product of your computing that you care about, not how it gets done. But as ever, the devil is in the details.

There are three obvious issues: coordination of data among multiple devices, data security, and obsolescence.

The newest of these issues, arises from the ownership of multiple devices. If a person has a smart phone, a tablet, a work computer, and a home computer, how does one coordinate all the data among all these devices? Since each device can talk to centralized devices across the internet, it makes sense to use such devices to coordinate data. The solution is to provide each user with a centralized account which runs a rule based engine that manages how information moves from one device to the other. There is much to think about in the implementation of such an engine, but all the functionality can be defined and implemented in one centralized location. Problem solved.

The two remaining issues are more problematic. One is data security. It’s a big topic that gets a lot of attention. The fundamental issue is that if all one’s data lives on one’s own devices and if one takes adequate precautions, that data stays private. The counter argument is that because cloud computing depends on data security, companies that offer cloud computing services can actually provide much higher levels of data security than does the average user with a home computer and an internet connection.

There are lots of arguments on either side of the issue, and it is possible that there might be more than one good answer. Sometimes a central location is best, provided it is effectively guarded. Occasionally local storage might be much safer. The nature of your security needs depends on the nature of your data. Back in the 1980’s when I first started thinking about these issues a friend said, “If you want foolproof data security, keep your data in a device that has no physical connection to any public network.” In other words, if you don’t want someone to gain control of your nuclear reactor, make it physically impossible for someone to login remotely.

The second issue gets no attention, but deserves to get a lot more. Durability of function. The opposite of instant obsolescence. Cloud computing, implemented badly, can lead to things not working that once did. And that’s bad.

Many years ago I started making a wall calendar for my wife. I used Adobe Illustrator to make 31 day templates for seven types of months, then edited them with the month’s name then deleted extraneous days. Then I’d type in text for special events like anniversaries and birthdays. Next, I’d use a color printer to print photos from the year’s events. Finally, I’d assemble everything. It was a painstaking process that often took two or three hours. My wife loved the product and has asked for a calendar each of the last ten years. Four years ago when I discovered Shutterfly I was pleased with how quickly I could put together a calendar. The quality of the photos was almost as good as those I printed. And once I had entered everyone’s birthdays, the system remembered them from year to year. The whole process was easier and faster.

This year, however, when I went to Shutterfly and tried to upload my photos it didn’t work. This surprised me for two reasons. One is that it worked before. Another is that file upload utilities in php and javascript are pretty straightforward. I noticed that Shutterfly was advertising a nifty new fast upload utility and thought I might use that. To do so, I had to go to Apple and download the latest version of iPhoto. I went there and discovered that I could not use the newest version of iPhoto with system 10.4.xx which I was running. And in order to run any newer system of OS X, I needed a new computer. Sometime within the last year Shutterfly had evidently “upgraded” their service. As a consequence of this “upgrade,” a cloud computing task that I had come to take for granted was no longer available to me from this computer. If I wanted to use this particular service, I needed to buy a new computer.

That’s a problem. When one purchases a computer and the software necessary to cope with one’s own particular computing tasks, so long as the hardware functions the tasks get done. I still have Adobe Illustrator and a color printer, so I could still do this the hard way, even though I have used “the cloud” for many years. However, when one purchases a computer and uses software that lives in the cloud, whether the software works is a matter of chance. If a software designer makes an “improvement” that causes the solution to become unavailable to your computer, you must either stop using the service or buy a new computer. That’s not okay.

Imagine buying a new car not knowing whether it would be completely barred from all roads and public thoroughfares next year. What if it could travel in east and southbound lanes but not in west or northbound ones? Or what if it could go everywhere but within the ten mile radius of your house? It’s a crazy idea. But that’s how cloud computing can work. If one is to spend to buy an expensive new car, one expects to be able to drive it pretty much anywhere. And if one buys a new computer to perform specific tasks, one does not expect those tasks to become unavailable for simple, arbitrary reasons.

I have done a little work with online tools, and I know that the methods used to upload files are built into php and javascript. They are properties of platform-independent and standards based tools. It seems to me that not only would it have been easy to implement their improvement without making file upload not work on my computer, it would have been more difficult to make file upload not work. Not only is it unnecessary that one implement an “improvement” that forces trailing edge users to buy new hardware, it may actually be more difficult to do so. Shutterfly could have implemented their “upgrade” differently. But they didn’t.

That’s a special hazard of cloud computing.

One could argue that the whole issue of new features not running on old platforms is an old issue. It’s not new to cloud computing. Ever since the first Apple II was made obsolete by the first Mac new features in new operating systems have made older computing hardware and software less useful by comparison. The problem is almost ubiquitous for web designers. How does one design web sites using the best newfangled tools without causing people with trailing-edge browsers to lose functionality? What about all those iPad users who don’t have access to Flash?

Indeed, one of the more difficult problems in web design is how to implement with the highest levels of functionality without leaving too many people behind. I know that my G4 is an old computer. It bogs down when there is too much javascript running in the background. But good design cannot mean leaving people with old computers out of the picture entirely. Rather, it should mean offering them a lower level of functionality, one consistent with their expectations when they bought their computer.

It is one thing to cause a user to wish for features and functions he did not previously imagine and use this as leverage on his wallet. It is quite another to promise and deliver on one set of features, then later to render them inoperable on older equipment but operable on newer equipment. And to do so in the name of “improvement.” The former is the brisk cadence of a market-driven economy to which we march. The latter is a form of extortion. Fine as the line might be, it must be drawn.

12.01.11

Joe Paterno, Fallen God

Posted in News Commentary at 6:35 pm by steve

Joe Paterno was a deity in the land where I grew up. When I was in first grade He took over the job of head football coach at Penn State, an institution that cast long shadows over all of the state of Pennsylvania. Probably half the college bound high school students in the state aspired to attend the institution. Besides football it has a couple of things going for it. It has a reputation for being a school with fairly high academic standards and one that produces fairly good fodder for the corporate middle management machine: companies like their recruits.

It is impossible to argue that the Sandusky scandal was inevitable, but there were a number of things about the campus and the culture which transformed the scandal from being insignificant to being big. And there are some aspects of the culture that made a big scandal more likely, not the least of which was the monumental importance of football in campus life.

The campus has one unique attribute. Unlike many major universities like Rutgers, Ohio State, Texas, Maryland, USC, or Michigan which are in or near large metro areas, Penn States location in ‘Happy Valley’ is equally remote from all parts of the state. It takes two to four hours to drive there from pretty much any population center in the state. This means that college students are trapped there during the school term. Stripped of external distractions associated with highschool friends, family, and cultural activities that attend the lives of college students in urban locations - especially those near their childhood homes homes - college students at Penn State can focus on their studies.

The university itself does have a fairly rich cultural life - in comparison to any town of the same size. It shows movies on Friday and Saturday nights for a dollar. Not just one or two, but dozens, and they are well attended. It hosts performances from internationally known artists. I attended a performance by violinist Pinchas Zuckerman. It has special entertainments. For example, when I was a freshman, I participated in an event which was supposed to break the Guiness world record as the world’s largest musical chair competition. Gratefully, I was eliminated early on.

But by far the most popular events of the year are now and have been the football games. Many universities with fair to middling football teams can draw tens of thousands of attendees to its games. And many are able to inspire their alumni to return and support the program. Penn State is probably well above average at inspiring alumni to attend games. They pack the stadium for every home game, and people need to travel a long way in order to make this happen. Fans are loyal. And there are good reasons for it.

People of this age are predisposed by nature to bond closely and permanently with friends and places. We bond with where we live as youth. Augmenting this tendency is the tendency to bond with others with whom we share adversity. Soldiers bond for life - especially those who have served closely for a long time under difficult conditions. It’s one of the reasons we are drawn to movies about war, that special camaraderie. Students at Penn State work hard in class. That’s one form of adversity. They party hard over the weekend. That’s another. They endure brutal weather. That’s yet another. It is frequently true that the weather is brutal during football games, making the bonding experience associated with football stronger yet. Of course, it’s not the same as being shelled, but the effect on bonding can still be pretty strong. This may explain why alumni from far away flock to this remote location to pack the stadium.

Football games offer a kind of shared experience that people of all ages crave: there is spectacle, hazard, pain, struggle, and with a winning team, a kind of transcendence. Football is not just a game. It is not just a sport. It is a a tribal ritual. And it is a religion. And the best religions are headed by the most powerful deities. Not just any coach can serve as one.

Requirements for deification of a football coach include timelessness, power, benevolence, and admiration. JoePa has all. No other coach has served for so long. None has won more games. Few coaches have been more admired for their roles both on field and off the field - at least up until the Sandusky affair. There is no question that Joe Paterno was highly talented and dedicated. But perhaps his job did not take god-like talents.

Penn State draws easily from a pool of students as large as that of any state institution in the nation. Most states with larger populations have a larger number of state institutions dedicated to higher education and these institutions tend to compete effectively for football talent. This is less true of Pennsylvania where Penn State has THE football program. Pennsylvania has other good schools, but many are private. And the University of Pittsburgh has not had so strong a program since the mid eighties. Furthermore, New Jersey, its eastern neighbor has a state university system that might serve even a smaller portion of its college-bound students than Pennsylvania’s university system does. So it’s easy to recruit there. The upshot is that if Penn State had just a mediocre football program, it would not be especially difficult to attract the best local talent from Pennsylvania, New York, Maryland, New Jersey, Ohio, and West Virginia.

One would reasonably argue that recruiting is not everything in football. In professional football this is certainly true. But one reason that recruiting plays a limited role there is that the recruitment system is set up to encourage a kind of evenness of talent among teams. Losing teams get recruiting advantages. This is not true in college football. So recruiting becomes a more important tool in success. Teams that win have recruiting advantages. Teams with good coaches and rich programs have recruiting advantages. So one might argue that all not much more is needed to have a winning program at Penn State than to dedicate the required resources to recruiting good football players and training them according to the best practices.

When I was a student there, Franco Harris had been signed recently by the Pittsburgh Steelers and was breaking all sorts of records for running the ball. Joe Paterno had signed his younger brother and the word was that this brother’s ability to move a football down the field was no less impressive than was his famous brother’s at the same age. Penn State’s success has always depended heavily on a good running game and for a few years it seemed assured.

But Franco’s younger brother was not as good at academic pursuits as he was at running the football. Despite the fact that the University had a great number of courses that serious students derided as ‘football’ courses, Franco’s brother did not pass his freshmen year. At the time it was considered standard practice for football coaches to intercede on the behalf of their proteges, allowing them to continue attending even when students with similar academic problems would not be allowed to return; but Joe Paterno did not. Franco’s brother did not play a second season. Fans were upset, but most of the people who were at Penn State for the educational credentials saw the logic of Paterno’s argument which went something like this:

“People attend the university to get an education and earn credentials. That includes football players. If we promote football players through the system without placing on them the appropriate academic burdens we cheat other students by diluting the standard of achievement that a degree should hold. But, more importantly, we fail the footbal players themselves, who must not be led to believe that football is the only thing in life.”

Perhaps there were more events like this that helped form public opinion about Joe Paterno, but this one is symbolic of how students - even those who were not football fans - saw the man. Among great coaches he was exceptional. For football fans he was an icon of a great institution, an institution that made them feel part of something greater than themselves. For others associated with Penn State, he was a man with a kind of halo. He brought people who were disinclined to academic pursuits into the fold, making it a little bit safer to be a smart person instead of a jock.

While I was still a student, I went Christmas carolling with a few friends. We chose to carol in a little development not half a mile north of campus. After half an hour or so, we found ourselves in front of a small house. One of the carollers in our party said “Hey, This is Joe Paterno’s house,” but I was skeptical. Just the year before, coach Jackie Sherill had left University of Pittsburgh to coach at Texas A&M, signing a contract for a million dollars. The house we stood before was small, plain, and simple. It was perhaps two or three decades old. And it was the sort of place you would expect to find shared by two or three grad students, not the home of a world renown football coach. We sang a few songs. Nobody came to the door. We left.

If Joe lived there, it certainly reinforced his reputation as being an Underdog sort of guy: diminutive, humble, and lovable. In addition to being superhuman in the field of football.

By then college football was changing. Soon after I graduated, Florida was ranked Number One. They had done it by throwing the ball down the field. The impression JoePa’s team gave over four decades of play was that Joe simply did not believe in moving the football through the air, except, perhaps, when there was no other choice — as in kicking an extra point.

As a graduate who lived in other parts of the country I was never a football fan but I was grateful to JoePa for giving Penn State a name outside zip codes that began with 16, 17, 18, or 19. I also felt a certain frustration that his methods were firmly entrenched in a different century.

A similar ambivalence accompanies my view of the Sandusky Scandal. The world that made JoePa a deity, now finds it convenient to condemn him as a dirty old man who secretly condoned his assistants despicable behavior. It’s simpler to paint him black or white. Gray has too many shades. So, Is he a God of Penn State football or more a Godfather? Is he the builder of a solid institution, or the protector of pederasts? Is he a great football coach, or just a dirty little old man hiding behind glasses that went out of style before nearly everyone on earth was born?

It’s not so simple. No matter how you tell the story, some things will be true. There is a certain amount of humility to JoePa. And there is certainly dedication to the Penn State program - a rare kind of loyalty. But it would seem that this very loyalty blinded him to the faults of men whose actions he was accountable for. Perhaps he either misunderstood the nature or the extent of the problem - never believing that Sandusky was going to harm yet another boy. Or perhaps he did understand the severity of the problem and wished not to expose the football program to disgrace. Maybe he had promises from Sandusky that he would behave, or agreements with the President to keep wraps on the thing for the sake of the University’s public image. JoePa may have exercised imperfect judgment, putting loyalty to an institution above obligations to small people and to the law. But I wonder how many people who are functionaries in large institutions have not done just that?

In retrospect, it is easy to see that Paterno made at least one bad decision by failing to expurgate his organization of Sandusky’s disease. Sandusky did a great deal of harm and he should have been removed decades ago. Paterno bears a great deal of responsibility for this - even if he did not fully understand the scope of the problem. But to depict JoePa too simply risks setting up other similar problems.

A writer in the Nation blames “patriarchy” for the mess. It’s tempting. Nobody seems more like the patriarch than JoePa. He’s old. He’s powerful. He’s male. He’s part of a system dominated by men. He’s been so since long before many of us were born - so he’s all but immortal. It was a network of men who protected him. And he is a man protecting a network of men. Patriarchy, plain and simple.

But, one wonders, would a network of women with the same responsibilities, information, and resources, have made a different decision? Or would they have given in to the same forces in a similar attempt to protect the institutional interests that JoePa and the president of the university did? It is highly likely that there are many women who - if they had been in Joe Paterno’s position would have done so. And it seems that - on average - a woman would have been more likely to do the right thing. There might not have been many men who would as well.

I think it might be less a problem of gender itself than it is a problem of roles and how men and women choose roles in society. I tend to imagine that functionaries within business or educational institutions who put the lives of little people ahead of the well being of large institutions are rarely elevated above the mail room regardless of their qualifications or competencies. In other words, the qualities that tend most to elevate people to high positions in institutions tend to cause them to place institutional concerns higher than individual ones. It is a necessary point of view - much of the time - in order to be effective in such a position. Much of the time, too, there is no moral difficulty with the choice. The difficulty comes only when one reacts reflexively rather than reflectively to potentially big problems involving little people.

Even though it can sometimes result in horrid results, putting institutional needs ahead of the needs of individuals it serves is actually a requirement if its functionaries if the institution is to endure. It is the way they survive the sins of omission and sins of comission of thie functionaries. Consider, for example, the Catholic church and it’s treatment of similar problems. Some of the people who occupy the highest places today had once been in charge of minimizing damage from such problems. And the solution in that case was not public prosecution of priests, it was transfers. It might be argued that JoePa’s acts were not materially worse than those of a Pope’s.

It is both a great travesty and a great tragedy that Sandusky was not prosecuted decades ago. Nevertheless, perhaps we should simply be grateful that the scandal was exposed to the light of day and the perpetrator prosecuted.

06.23.10

Operations Abstracted : Company Crashed

Posted in News Commentary at 8:16 pm by steve

“What the hell did we do to deserve this?” - Tony Hayward CEO of BP after the Deepwater Horizon spill.

“Who cares, it’s done, end of story, will probably be fine” - unidentified BP employee in an e-mail before the Deepwater Horizon spill (Economist 19JUN2010 p65.) writing about the use of six centralizers rather than the 21 recommended by the drilling company.

On April 20th Deepwater Horizon burped, blew up, and started spewing oil at what is now estimated to be 60,000 barrels per day. In one hundred twenty days, that’s just short of 2 million barrels of oil. And at $100 / barrel, that amounts to about $200 million in lost product alone. Add to that the cleanup cost which could reach nearly $ 100 billion and the accident begins to look like a rather costly error.

For some brief period of time there was some question about whether this was simply a case of bad fortune. But within days of the accident it became clear that BP systematically cut corners over the whole life of the project. The quotation above suggests that BP employees knew that their work was shoddy; but hoped for the best.

A similar situation held for the piping. Virtually all major oil companies use double walled pipe, but BP chose to use cheaper single walled one, even though the decision violated their own standard

There were problems with the blowout preventer leaking hydraulic fluid and failing tests. Tests of the cement job were unsatisfactory.

It is common practice to circulate drilling mud before removing it in order to remove any gas that it has absorbed precisely to prevent blowouts. BP skipped this step. Similarly, there were serious questions about the quality of the cement job, due in part to the decision not to circulate and degas the drilling mud.

Arguments between the drilling company, Transocean and BP broke out on the rig days before the accident about how to remove the drilling mud. Transocean employees argued that BP’s method took unnecessary and potentially dangerous risks, to which BP’s Mr. Harrell said - referring to the faulty blowout protector - “I guess that’s what we have those pinchers for.” But on the day of the accident, the guy running to push the activation button didn’t get there in time. So we’ll never know whether it would have worked.

The stories about this accident demonstrate a theme. The theme is that BP considered being on time and under budget much more important than it considered safety. And that’s a culture of the company that goes back at least four years. It was in May of 2007 when John Browne resigned after the Prudhoe Bay oil spill and the Texas City refinery explosion that killed 15 employees. One explanation was a pattern of “willful and egregious” (Economist)breaches of safety procedures. Another explanation was that BP had systematically fired its most experienced and most technically savvy employees and had promoted its movers and shakers - the guys who did best at cutting corners. See also, the kind of guy’s who would write “… end of story, will probably be fine.”

Soon after Tony Hayward took the reigns from John Browne he decided to reorient the company. The goal was to improve shareholder value (at least in the short term). He eliminated the alternative energy operations, rendering the newly minted “Beyond Petroleum” slogan to mean nothing, literally. Nothing lay beyond petroleum for BP.

In May 2009, almost a year before the Gulf coast oil spill, Hayward gave a lecture at the Stanford Business school in which he outlined the many problems that he faced when he came to BP. A major issue, he noted, was that “We had too many people that [sic] were working to save the world. We had sort of lost track of the fact that our primary purpose in life is to create value for our shareholders…our primary purpose in life was not to save the world.”

BP’s “Beyond Petroleum” rebranding was, admittedly, the work of Hayward’s predecessor, Lord Browne, and Hayward was focused on developing the company’s core competencies. Then again, with only 6% of BP’s capital expenditure going into renewable energy sources, it’s not as if the company’s radical change ever extended much beyond its PR campaign.

See full article from DailyFinance: http://srph.it/9D107T

The question of how to treat alternative energy is an old one in oil companies: “Are we a primary energy company, or are we just an oil company?” Every oil company has people who believe passionately in one version or the other. One argument is that oil production and refining is a core competency, and that other forms of energy require other technologies and other forms of marketing and are, therefore, distractions. But if you are going to use the argument that you will focus on oil because that is your core competency, you really ought to be good at it.

If Tony Hayward came to Washington and said, “Sorry, we put our best people on alternative energy precisely because we want to end the dependency on oil,” then the appropriate response would be “Well you need to be better at doing oil, don’t you?” And that could be the end of the discussion. But if you have sacked all your best oil engineers because they cost too much, and if you have cut corners in every conceivable measure in the drilling operation - taking exceptions to industry standards and practices at every step, and if you have killed all the alternative energy programs, then it looks like the only concern you have is the bottom line - safety be damned. And after a huge accident such as Deepwater Horizon, it looks like you have been penny wise and dollar foolish.

It’s not behavior that helps the customer. It’s not behavior that helps the public. And ultimately, it’s not behavior that helps the shareholder. BP lost half it’s market capitalization as a result of the accident. And they suspended their dividends - which will make a lot of Brits, Her Majesty included, very upset.

But the failure to behave in a way consistent with generating long term value is not unique to the top levels of BP. It affects other companies.

People at the highest levels of any corporation at times need to abstract the operations of their companies in various ways in order to avoid getting bogged down in details. So operations of all sorts are viewed as black boxes. It’s both necessary and appropriate to do, sometimes.

But one of the great temptations is to view all operations as black boxes that work pretty much regardless of what you do to them, carefully ignoring all the details regarding what is required to make them work. The second half of the problem is to view the profits that operations produce as simply the difference between the cost of inputs and the revenue from sales. If you put these views together without any other information, the only logical step in maximizing profits is to increase sales and to cut costs.

One cuts costs fastest by cutting people. And one cuts the most expensive people first. Sometimes much can be gained by cutting corners in raw materials or processes. Or by cutting out safety redundancies in projects. But in this frame of thinking, because the operation is abstracted at the highest levels and is assumed to work regardless of conditions or constraints, then cutting costs on people or on materials, or on projects, or on quality assurance processes by definition cannot affect the outcome of operations. Operations keep on working, regardless. In this view of the unconditionally functional black box, there can be no straw that breaks the camel’s back.

What happened to BP resembles this in many ways. They kept cutting costs on pipe maintenance until oil leaked at Prudhoe Bay. They kept cutting operating costs at the Texas City refinery until it blew up. They kept cutting costs in drilling until they had produced the most costly oil leak in the history of the US. It demonstrates a serious problem in corporate culture, a problem that goes all the way to the top of the company.

Interestingly, what is happening at BP resembles what has recently been going on at Johnson and Johnson. In a Business Week interview, six or eight years ago soon after he became chairman of the board, Bill Weldon presaged his primary approach to managing the company. The days of 30% per year revenue growth were gone for good, he announced. So the company would have to cut costs.

Wave after wave of hiring freezes and job cuts followed. The first several cuts evidently produced no problems that were serious. But over the last year a significant portion of the products produced by J&J’s consumer pharmaceuticals company within J&J has been removed from the marketplace for quality defects. And the FDA is contemplating filing criminal charges against J&J employees. It’s a black eye for the most visible part of J&J’s business, and it will change for a decade or two how people judge J&J’s commitment to the quality of its products.

In all the details, BP’s Deepwater Horizon accident and J&J’s consumer products recalls are different. But in at least one way they are the same. They arose from a rather profound failure of one or more of the people at the top of the corporation to acknowledge the crucial importance of operations - a failure to acknowledge that cutting costs might start by cutting fat, but it eventually slices away muscle and bone and essential organs until, eventually, the body collapses or bleeds to death.

Treating operations as a black box that always functions, regardless of how it is treated, can produce serious problems. The further the CEO gets from operations, the more likely is the failure. Hubris, and the arts of networking and persuasion are crucial tools for CEOs. Many times CEOs succeed in getting their way because nearly all the constraints they face are political; it is, therefore, tempting for them to believe that the only political constraints exist. And to behave accordingly

But in the end, the real world does constrain our actions. It’s why we have standards and tests and procedures inside companies and in governmental agencies. It’s why companies and governmental agencies hire, train, and retain good people. It’s why CEO’s need to listen carefully and provide the resources for people to do their jobs properly. It’s why sprawling corporations have compliance and process excellence departments that report to the highest levels of the corporation, not to managers of individual business units. And it’s why CEO’s need to be quick to fire people who cut corners in order bolster profits.

Eventually, treating operations as a little black box that just keeps on cranking out profits - no matter what you do to it - will be the beginning of the end for your company.

06.14.10

Resource Wars

Posted in News Commentary, Politics at 4:15 pm by steve

Any science fiction or futurist writer worth his weight in muddy water would tell you that one of the more realistic plots for how civilization grinds to a a bloody end involves protracted resource wars between major players. There is a sense in which both of the first two World Wars can be viewed as resource wars. Japan sought access to cheap resources throughout Asia. Germany sought access to cheap resources throughout the mideast. And British fought to keep access to cheap resources in Africa, India, and the Far East. Ultimately, it is about who is to control resources that virtually every war is fought.

When Dubya invaded Iraq and the rest of the world declared that the whole thing was a charade, an elaborate grab for oil resources, most Americans were skeptical. But now that we see what has happened since, it seems like a most plausible explanation. The control of oil is, indeed, the most economically salient outcome of the invasion.

Iraq has the second largest proven reserves of oil in the whole world, surpassed only by the stated reserves of Saudi Arabia. And since Saudi Arabia keeps their stated reserves constant regardless how much oil they withdraw, nobody completely believes those statements. Which means that Iraq may hold more oil than any nation in the world. Regardless of rank, there are 112 billion barrels of proven reserves and almost twice that much in speculative reserves. At $100 per barrel, the value of the oil exceeds $10 trillion.

The US has spent in excess of $1 trillion on the war in Iraq. It has spent more than half a billion dollars on building the embassy alone. These acts suggest a seriousness of purpose. More telling are the permanent bases it intends to occupy indefinitely outside of populous areas, and the fact that they are located not far from the oil fields they are designed to protect. There can be no question that one [presumed] outcome of the invasion is the political stabilization of the area and improved access to the oil found there. Even the negotiations with Iraqis over the pricing of oil sought major pricing concessions that would have brought significant excess profits to the oil majors who operated there. So there simply can be no question about whether oil was a major motivating factor. The only question is whether it was the only motivating factor.

(I have never heard it argued before, but I think it is worth arguing that the US was willing to move out of South Vietnam at the point where it was decided that synthetic rubbers could do the job once done by natural latex rubbers and therefore Vietnam was no longer a source of an essential strategic resource. Without any rubber, the US’ major industry at the time - the auto industry - would fail. With rubber it would thrive.)

There never was any question about whether the war in Iraq was about terrorism. The Saddam regime was hostile to al Qaida and to radical Wahibbists in general. It was a regime interested in commerce with the west and with the Orient. And it was strongly motivated by sanctions.

Similarly, there never was much question about whether the war in Iraq was about weapons of mass destruction. Iraq had quite visibly dismantled its WMD programs. And there never was much evidence to the contrary. Furthermore, WMD is never the real reason one nation invades another. At least until the statehood of Israel it was assumed that a nation had the right to defend itself against aggressors with what armaments it could assemble.

What of the role of neocons? Neocons had grabbed the reigns of public opinion in the US and controlled most of the high-powered policy decision-making in Washington. Richly financed by the arms industry who sorely needed real action in order to justify continued lavish defense department expenditures exceeding half a trillion dollars per year, Neocons manufactured rationalizations for the war in Iraq. There can be some doubt, however, whether their arguments were purely mercenary or whether they were calculated to serve the interests of some other group.

They had, after all, advocated a US led occupation of Iraq and Iran some years before 2001, suggesting that war with Iraq and Iran had nothing to do with terrorism, in their minds. The level of preparedness for the invasions and for the bodies of law that followed the putative trigger to the invasion is remarkable, suggesting almost prescience on their part. Or perhaps when one prepares to invade nations to extract their resources, a considerable amount of the right kind of theater makes the job politically possible.

The fact that there exists something in excess of $10 trillion of proven oil reserves in Iraq, the fact that there might be two or three times that quantity there, the fact that political instability threatened access to those reserves, and the fact that an occupying force provides powerful incentive to create political stability within Iraq ought to be sufficient to suggest rather forcefully that the primary motivating force for the invasion was access to oil.

The invasion of Afghanistan has always made a little less sense. Afghanistan was the source of opium valued recently at more than $50 billion per year, and the Taliban had shut down the trade in the year prior to the invasion. After the invasion, the trade bourgeoned. So if one were to imagine, hypothetically, that the parties who benefitted most from this revenue stream also were officials instrumental in making the decision to invade Afghanistan, then the invasion would begin to make sense as a means of restoring the opium trade and the revenue that flowed from it. But it was easy to wonder if that was all. In comparison to the bountiful resources captured in Iraq, Afghanistan hardly seems worthwhile. At least until today.

A story in today’s New York Times sets Afghanistan’s mineral wealth in excess of $1 trillion, pronouncing its bounty huge in comparison even to the rich trade in opiates. Bear in mind that it will take twenty years at least to develop and extract its mineral wealth and $50 billion for 20 years is $1 trillion; therefore, if the mineral resources dwarf the opiate trade we are talking more of three or five or ten trillion dollars worth of resources.

This story begins to bring us closer to understanding the real reason for the invasion. The article suggests that this is new information. It also suggests that the information was known by the Soviets during their occupation of Afghanistan in the 1980’s but was unknown and ignored by the US until some time in the last coupla years. That’s a little hard to believe.

Perhaps it is true that before the survey spoken of in the article, the quantity and quality of Afghanistan’s mineral wealth was less certain; but there can be little question that it was completely unknown. Satellite reconnaissance could have scoured the rocky terrain of the country using special spectrographic techniques that would reveal the concentration of every valuable mineral known to man over almost every square foot of the nation. And this could have been done, probably, in the ‘nineties. So a very good estimate of the mineral wealth there could have been known to high level officials a decade ago, maybe two. The specialists who reported back recently could have merely been doing verification work, not exploration work.

So if we consider the total mineral wealth of Afghanistan and Iraq to be a minimum of $20 trillion and possibly as much as $30 trillion or more, and if we consider that the people who profit most from this mineral wealth will be using other people’s money to secure access to it, then the invasions of both countries would seem like a great deal for them.

The hypothetical question is: if there were to exist a great pot of money that was between $20 trillion and $30 trillion in size; and if that pot of money is known to only to a small group of military-industrialists, and if that group needed a good story to provide political cover to use military force to grab the loot, what do you suppose they might do?

If you stood a chance of getting $10 million for a pivotal part in selling half-truths and outright lies to the American public in support of a goal of access to $10 trillion worth of minerals, what would you do? What do you think your next door neighbor would do?

I mean, after all: those resources are unavailable until the region is politically stable. So the invasion physically improves the lives of all who benefit from the commercial successes of industry and trade as practiced in Europe, North America, and Asia. Doesn’t the end justify the means?

Of course it is impossible to prove just by examining events how people were individually motivated, but there can be no question that the wars in Afghanistan and Iraq gave western nations access to tens of trillions of dollars worth of strategic mineral resources that might have been unavailable otherwise. There can be little question that access to resources figured prominently in the decision to go to war. And that no war could be publicly justified on these terms, so there had to be another reason for public consumption.

The resource wars have begun.

06.05.10

Obama and Slippery Slope Reasoning

Posted in Energy - NonRenewable, Politics at 9:37 pm by steve

Who’s Bad?
From all the press about Obama and the oil well, you’d think that the President himself descended a mile beneath the Gulf and chewed through the steel pipeline with his own teeth. Had he actually done this, then I think one could argue that the oil spill in the Gulf was at least partly his own fault. But he didn’t. And it isn’t.

So why are political opponents trying to tar and feather Obama for the Gulf Coast oil spill? Let’s look at some possible reasons:

1) It happened on his watch. In 1883 Krakatoa erupted, sending 21 cubic kilometers of earth into the atmosphere. Chester Arthur was President of the US at the time. Despite this disaster, historians judge Arthur on his achievement in passing the Civil Service Reform Act. Lots of things happen on a President’s watch that are not his fault. Katrina itself was not Dubya’s fault. The disaster itself was not the problem. The lack of response was not even the problem. The problem was a rather wretched and deep denial that there was a problem. It was Dubya’s insistence that everything was under control when, in fact, almost nothing was being done. It was denial of a problem when there was a very real problem and denial of services by a federal agency whose reason for existence was to provide those services.

There is no such agency for oil spills. And there was no denial of the problem.

2) Obama advocated for offshore drilling. According to a book review in a recent issue of the Economist, a recent executive of Royal Dutch Shell argues that the reason for the spill is that US policy has forbidden drilling in easy places offshore; therefore oil companies must drill in difficult places. Had oil drilling along the eastern seaboard been allowed - as Obama advocated days before the disaster - BP would not have been drilling where it did in the Gulf. It’s a self-serving argument. It’s not clear that the depth of the well contributed at all to the problem. In fact, it is possible that a deeper well might have made control of the high pressure gas a little easier. So while agreeing with this executive would help our argument, we find it difficult to agree.

Still, it is one thing to advocate for offshore drilling in a responsible way. It is another to chant “Drill, baby, drill” like some mantra by a crazed sex addict. One is an act of reason; the other an act of mischievous passion.

Curiously, it is the people who yelled loudest “Drill, baby, Drill” who are most shrill in their criticism of Obama on this issue. So if we were to give them credit for possessing a shred of sanity, it is impossible that they would be arguing “We ought to drill offshore, but Obama is insane for advocating it.”

3) Katrina and Oil are both disasters to hit the Louisiana coast. Bush got blamed for Katrina; therefore Obama must get blamed for Oil.
In other words, it’s a habit of the mind. Habits of the mind are frequently quite illogical; and they frequently produce ideas that are completely false. But their effects can be quite persistent. So we need to look at this a little more closely.

Katrina is not Deepwater

What do these two events have in common.
1) They affected the Gulf Coast.
2) People were hurt.
3) The effect was big.
4) Someone was president at the time.
5) Both stories got a lot of attention from a bored press.

What is different about these two events:
1) Katrina was a natural disaster. The oil leak is a man-made one.

2) There were several days’ warning in advance of Katrina, none for the oil disaster. So the federal agency charged with preparing for natural disasters, FEMA, could have been doing something to make sure that it was ready to help if help were needed. No such agency exists for oil spills. Even if we were to assume it might be a good idea to cobble together such an agency (and it’s not) it would take years of political wrangling to get it operational.

3) The problem in New Orleans was the failure of a safety system for which the federal government had direct responsibility. The problem with the oil well was the failure of a company to adhere to the highest standard of safety processes. A Wall Street Journal investigation discussed in The Week clearly establishes nearly half a dozen distinct points at which BP departed from industry best practices, sometimes with stark criticism from their contractors. Even procedures required by the US government permit may have been ignored.

4) It is reasonable to make governmental entities responsible in helping to minimize damage during hurricanes and other natural disasters, it is reasonable to expect the government to be responsive when natural disasters strike. Agencies are charged with the task and their work is funded. It is not reasonable, however, to make governmental entities responsible for minimizing damage caused by man-made disasters, especially when those disasters are caused by profit-maximizing activities of companies that externalize the cost of failures. To do so tempts the most egregious abuses. Both the mortgage system bubble and the blown well in the Gulf are examples. Governments ought to step in not to save the institutions themselves, but to save American taxpayers from ruinous results. Sometimes, as in the case of TARP the one has required the other.

5) Bush attempted to use the Katrina disaster for grandstanding purposes; Obama has attempted to use the oil disaster as an opportunity to tighten up what little control the federal government has over the permitting process.

6) Bush supporters have, since Reagan uttered the incantation “Government is the Problem”, argued that less government oversight is unconditionally better. Such reasoning increased the probability of damage from events such as Katrina. Such reasoning increased the probability of an oil spill disaster such as the one in the Gulf. Such reasoning led to the deregulation of the banking industry that led to the need for the TARP program.

In short, it was the idea that “government is the problem” that underlay the real problem in both cases. That Obama opponents don’t immediately see this and capitulate on this dangerous mythology is testimony to the idea that hubris and deception too often trump reason and interest in the common good in US politics.

7) Katrina and events like it are inevitable. They are conditions of nature that arise regardless of how we behave. The question is in how to deal with them. The Bush Administration dealt with them by not showing up for a while. While we would like to believe that spills from offshore oil wells are avoidable - this is the first one in about forty years - they are likely to occur so long those who drill wells are not held to the highest standards and held accountable when they fail to adhere to those standards. In this respect, Obama has been showing up.

What ought to be baffling to most sane people is the idea that government has no place in regulating the behavior of oil companies; but that it is fully responsible for cleaning up their messes. What kind of a world does that create? A little more care in drilling probably would have averted this particular disaster. And that extra care might have cost a few millions of dollars. But instead, we have a spill that could cost billions in lost product and tens of billions to clean up. Limits on liability externalize that cost, shifting it to taxpayers. If oil companies had to pay more, they would have less incentive to cut corners, and the cost of oil production for them and for us could be a little lower, once the cost of big disasters is properly accounted for as a cost of production.

Oil Must Flow
Americans are totally dependent on oil. It is a dangerous addiction. And it is an addiction impossible to cure before the oil runs out. Until that time, even if we could spill enough oil into the oceans to kill every kind of marine life found there, we will be drilling for oil in the oceans. There is no other choice. To do otherwise means giving up most of the conveniences that we enjoy: things like food and water, good jobs, internet connectivity, and so on. Cheap energy got us all this stuff. And when cheap energy is gone, so will be the stuff. My grandparents lived without the aid of fossil fuel and theirs was a hard life filled with privation. I am not prepared to live it. Neither, I think, is the greenest of the radical greens.

So the oil must flow. What responsibility does Obama have? He has the responsibility to use the event to fix problems inside the federal government’s permitting office. He has a responsibility to use this event to frame America’s oil dependency as a problem. He has the responsibility to push for laws that hold oil companies liable for larger fines when they have some measure of culpability in oil spills.

Moral Hazard
Obama, however, has absolutely no responsibility to protect anyone from the fallout. While it is reasonable to see the government play a role in responses to natural disasters, it is less reasonable that the government should play a role in cleaning up disasters caused by failures of large corporations. TARP, for instance, was not about saving bankers from the consequences of their own bad decisions, it was about saving the American public from those consequences. The American government does not have the expertise to clean up oil spills. Nor is there any reason it should. If oil spills are to be a regular part of American life, then oil companies must be responsible for doing it themselves, or for funding third party efforts to do it.

It might be tempting to say that because no single entity has as many resources to clean up disasters as the federal government, that it ought to be the responsible party. In the case of natural disasters, it makes sense. But in the case of disasters caused by institutions that are acting irresponsibly in order to increase profits as is the case for banks and for oil companies, this line of thinking invites the very kind of excesses that cause disasters.

This is one slippery slope we cannot afford to slide down.

02.21.10

This Time is Different - Book Review

Posted in Policy, Book Reviews - Non-Fiction at 6:23 pm by steve

The idea of comparing the asset bubble and the recent contraction against eight hundred years of financial information and anecdote is a powerful one. Human nature is pretty much the same as it has always been; and investment trends are driven in part by search for value and in part by departures from these involving greed and fear. So the same kinds of things happen over and over. The specific financial vehicles that zoom about and crash into hard walls change from generation to generation; but the motivations that drive them remain the same. So it seems reasonable to have high hopes for “This Time is Different: Eight Hundred Years of Financial Folly.”

The authors mine a rich vein of financial data, crunching numbers from a number of large and sometimes difficult to access databases. They evaluate this data carefully, employing good statistical tools; and they build a robust and persuasive model for credit-worthiness of soveriegn entities.

The book starts with a careful definition of terms. It defines inflation. It defines default. It produces solid working definitions for the concepts the authors wish to develop. Before long it is easy to see that its primary focus is on the failure of sovereign nations to meet debt obligations, although there is also a chapter dedicated to banking crises.
Early on, the authors divide nations into three groups:

  1. Underdeveloped nations into which invested money virtually disappears forever, producing no evident beneficial results and a constant stream of default.
  2. Developing nations in which invested money sometimes yields good returns and sometimes creates default situations.
  3. Developed nations in which defaults are rare.

They dismiss the nations in the first category as being hopeless in terms of debt. They claim little interest in the third group of nations because, they claim, these nations take access to capital markets seriously. And they behave accordingly. Defaults sometimes occur. But they are rare. And they are almost never serial. By comparison, nations in group 2 default more frequently and serial default is not uncommon. When they do default, the losses are frequently larger. They are interested in producing a model to predict which group 2 nations are actually good credit risks and which are poor ones.

They go on to suggest that group 2 nations - when they become sufficiently stable - tend to “graduate” and become group 3 nations. In light of the recent debt crisis in Greece, it is interesting to note that Greece is among the half dozen or so of the group 2 nations they suggest worthy of graduating to group 3 status.

Among the truly enlightening models they produce is a graph of cumulative percent chance of default for a sovereign nation as a function of its debt service obligations as a portion of its tax revenues. Predictably, as an increasing portion of tax revenue is consumed by debt service, the probability of default increases. This is a graph that every policymaker who votes on a budget should be able to draw from memory; because it tends to make clear that the risks get big quickly. The same graph serves to prove that a nation whose people and institutions hold more debt is more likely to default for the same level of national debt than one where private debt is small. The lesson: debt destabilizes.

Interesting, too, is the fact that short term debt tends to be more destabilizing because it is so cheap; being cheap tempts overleverage. But the real problem is that it has to be rolled over so frequently. A loss of confidence among creditors means that the debt cannot be refinanced. And default is the only option. A loss of confidence that lasts two years could cause a nation that uses only short term instruments to default on a very large portion of its debt, creating a financial trainwreck.

Financial trainwrecks happen from time to time, and few are so potentially devastating as a broad, sytematic bank failure of the sort that prevailed during the Great Depression, otherwise renamed implicitly by this book as the First Contraction. The greatest part of its harm came from widespread bank failures. Similarly, the greatest threat of the banking crisis of 2009 or Second Contraction was the possible effects of widespread bank failure.
In light of the fact that bank failures wreak much more havoc on western economies than sovereign defaults, it is a bit of a mystery why a single chapter of seventeen is dedicated to bank failures. This chapter is primarily dedicated to convincing us that bank failures are relatively common, even in nations that have good credit sense - the type 3 or developed nations. Furthermore, there is not much the authors have to say about their causes or about how to manage them. It is almost as if the authors take the events as givens and the consequences as unavoidable. After all, bank failures are caused by the fluctuation in value of the assets banks hold as collateral for their debts.
The authors miss the opportunity to quote JP Morgan who - when asked what the stock market will do answered presciently “It will fluctuate.” This means one thing to a person or an enterprise with no leverage, especially when there is a quick recovery. In this case, a downturn in asset prices is nothing but a buying opportunity. But fluctuation means something else entirely to people and business entities that are highly leveraged. The authors make the case that it is the business of banks to deal in leverage. The more leverage a bank uses, the more lucrative its business is in good times. Therefore, inevitable fluctuations must inevitably lead to bank failures. And bank failures wreck economies.

Banks tend to amplify the effects of productivity gains by making it easy for saved surplusses to be reinvested to cause further productivity gains. At least that is so when banks invest in enterprises that expand the pool of real wealth. But, the authors point out, the amplification effect of banks works the same way during business contractions, amplifying the pain of the contraction. This is especially true when banks fail. Assets are frozen or lost. Consumers and businesses fail to pay their bills. Institutions are forced to downsize or to reorganize or to go out of business entirely. And even the ones that do not cannot borrow to expand their successful businesses because credit is fozen. The leverage that banks use, then, amplifies the pain of the inevitable economic contraction.

The book was published during the banking crisis of 2009, and its title is suggestive of the thinking that drove the economy into a ditch: “This time is different.” There was, in the early and mid 2000’s a broad consensus among the financial actors that the things that caused asset fluctuations no longer existed. And that, therefore, house prices would go up at a certain minimum rate each year. Therefore, the best way to make money was to borrow and buy derivatives tied to real estatedasset values. That this happened with a decade of the “dotcom” bust - in which precisely the same arguments were being made for businesses the likes of Cisco Systems whose market capitalization was so big and growing so fast that if it kept doing so for another decade or two would surpass the whole GNP of the US - suggests that the level of sheer stupidity within the walls of the financial community can only be exceeded by a kind of blind testosterone-driven hubris.

The title implies that this book will help us understand why someone might have thought that the dotcom and real estate bubbles of the Greenspan/Bernanke era must be different. But it doesn’t. It implies that it will help us understand why exactly these bubbles were the same as other bubbles. But because its primary focus is on the size of debt and its manageability it fails completely to explain the formation and bursting of asset bubbles.

When it comes to helping describe the conditions that set the stage for the Second Contraction, or the 2009 banking crisis, the authors make the compelling case that:

1) the banking regulations that were in place from WWII until 1970 stabilized the global banking system to the point that bank failures were quite rare.

2) deregulation of banking in the 1970s through the 1990s created an environment in which bank failures increased worldwide.

Then, after firmly establishing that banks inevitably fail, that in failing they crash the economies of whole nations and sometimes the whole world, and that the trend of liberalization has led to a trend of increasing instability in the banking system - a mathematically necessary consequence of increasing leverage and lower barriers - they do something very odd. They suggest that re-regulation should not be used to solve the problem of banking failures. But they give no alternative solutions.

How is one to interpret this line of reasoning?

One interpretation is that the authors view the the banking system as an institution whose purpose is to serve the financial needs of bankers. In this light, the whole of the book makes sense. Most of the book is dedicated, then, to helping bankers correctly assess risk in dealing with sovereign entities. Bank failure is simply an inevitable consequence of asset fluctuation and is to be managed by arranging for sovereigns to dump money into the banking system to keep it liquid during downturns. This maximizes the returns of bank because they risk nothing by being overleveraged. The book is of, by, and for bankers. And the way that the title and subtitle appeal to non-bankers is accidental. The book might better be titled “A banker’s guide to minimizing risk in lending to sovereign nations.”

Similarly, the schema of complete deregulation and saving banks during downturns by handing them money is an excellent way to maximize the amount of capital bankers siphon away from more productive activities in the economy; but it may not be such a good way of assuring that they are very good at serving their social function as reliable intermediaries or of assuring that those rich, group 3 nations continue to be good credit risks.

The authors struggle to explain why, precisely, developed nations tend to be good credit risks. In the end, they fail to produce any convincing argument - even one they themselves find compelling. What we come away with is the especially unsatisfying is the argument that it can’t happen because it hasn’t yet. Or not for a long time. That seems to be the argument for why developed nations will not default on debt. Ever.

If we persist in believing it cannot happen because it has not, it’s only a short time before we will find ourselves hearing “This Time is Different.”

12.28.09

Product Review - Epson Photo R1900

Posted in Uncategorized at 8:33 pm by steve

The perfect is the enemy of the good. - Volaire

Read any official review of the Epson photo printer R1900 and you will find nothing but raves. It prints dots smaller and more accurately than any other. And it produces skin tones like no other. Furthermore, because it is capable of handling rolls of paper, you can print huge pictures at eye-popping resolutions. The only thing better is being there.

As a user of HP all-in one printers for five or seven years, I decided to upgrade about a year ago. I considered competitive printers by Canon and HP and settled on the R1900 because there was general agreement that its photo quality was as close to perfect as is generally available anywhere at any cost.

One or more review articles pointed out that because Epson uses smaller ink nozzles to deliver tinier ink droplets - a feature that allows finer color gradations - the print nozzles would clog. I was willing to set up special photo-printing sessions once or twice per year to accommodate this problem. I knew that this alone would cost about three or four ink cartridges worth of ink - meaning that the first print would always cost $40.

What I did not know, however, was how truly tiny the ink cartridges were. Not until I decided to print this year’s Christmas letter on th Epson Photo R1900. It took about an hour to unclog the print heads. And it took about $40 worth of ink. But fortunately, they all cleared out and I was able to print. I printed a two-page letter, eighty copies of it. When I was all finished, I had used 12 ink cartridges and 8 gloss optimizers. That’s $159 worth of ink and an additional $27 worth of gloss optimizer. The cost of supplies for the job was $186, or just shy of $1.20 per page.

Bear in mind that these letters are mostly white space. There were two tiny photos and a little spot color. To make matters worse, the gloss optimizer smudged the ink and curled the paper making the whole job look really shoddy. To produce a single print took maybe a minute. Maybe two. It took two maybe three hours to produce the 160 pages of letters. And about a week to beging flattening the curled pages.

Curiously, when each ink cartidge became empty, the printer utility stopped working correctly. Sometimes the utility would not work at all. At other times it would simply show a missing cartridge and fail to identify any of the cartidges by name. This would force the impatient to replace ALL cartridges each time one was empty, multiplying the cost of ink eight-fold! Or one could replace the cartridges one at a time until things worked again, starting with the one that the printer utility said was missing. This usually did the trick. Still, the idea that the print-utility - whose main purpose is to tell you which cartridge to replace - stops working at precisely the point in time it is needed makes using the printer a Kafkaesque experience.

Epson 87 Ink Cartridges
There is no point arguing whether the R1900 can be a good printer for some purposes. If one needs the ultimate in photo reproduction at any cost on very expensive archival paper, this may be a good printer. For printing very subtle skin tone gradations there may be nothing better. But if one is doing anything less demanding this printer is a monumental waste of money. It pays to just go out and buy another printer for each other kind of job. I already bought a laser-jet printer for my occasional black and white jobs. Now I am preparing to buy another ink-jet printer for photo proofing.

In short, the Epson Photo R1900 is in a category by itself. Other photo printers may be described as photo-capable printers, meaning that they do reasonably well in other tasks; but they are especially well suited to printing photos. The R1900 single-handedly defines the large photo ONLY category. One only uses it to make large prints of photos. To use it for any other purpose is simply a waste time of money.

06.02.09

The Fall of GM

Posted in Social, Culture, Politics at 10:05 pm by steve

“When GM goes bust, we’re all in trouble.” That way my father’s point of view in the mid 1960’s. At that point in history, GM was the biggest auto company in the world. Perhaps it was the biggest company in the world. Now it is in bankrupcy. Its bondholders, its retired workers, its suppliers, and everyone who had any kind of contractual relationship with GM will be severely burned.

The bankrupcy of GM ought to give us pause. How can a company that was once the world’s largest non-governmental institution be insolvent? If we answer this question well we might learn some very useful things about capitalism, about work, about power, and about anglophone culture. To the extent that we learn useful things and change our practices, we may prevent many more of America’s most powerful institutions from similar failures.

Returns to Scale - And its Limitations

The seeds of GM’s failure were sown early on in its existence. General Motors had grown to be the biggest car company in much the same way that Rockefeller’s Standard Oil had grown - mostly by expanding its economic reach by using profits to buy up competitors and improve margins. It was a practice of using high level economic might that depended very little on other techniques. It required that one acquire competitors by whatever means were effective. Then, one exploited commonality between lines to decrease tooling and production costs. Usually the simple fact of being big enough brought sufficient returns to scale that GM as a firm did not have to be much better than anyone at anything. It did not have to be better at marketing or manufacturing or design or testing. It merely had to be almost as good. Everything else could be done by manipulation of the levers of power.

When Tucker set up a manufacturing line to produce cars in the mid ninteen fifties, GM and other Detroit auto companies used their pull to have him prosecuted for defrauding investors. They claimed he never intended to build cars. The actual cars that he produced were never allowed to be introduced as evidence. He was shut down. He posed a threat to the standard way of doing business. And he was shut down by a manipulation of the legal system.

When the movie was made about his story in the early nineties, a good portion of the dozen or so cars he manufactured, were still roadworthy. Tucker represented the independent, entrepreneurial spirit in America. His ambition was to give Americans the choice of a superior automobile. This represented the peak of Detroit’s power. But five decades of waning power may not have changed Detroit’s way of thinking about the business, much.

In the minds of auto executives, automobiles have just vehicles of exchange. One built them to the lowest possible standard at the lowest possible cost and sold them at the highest possible price. One assumed that the consumer was ingnorant of all he could not see. Beauty in cars was skin deep. And when the paint peeled because of corrosion, that just meant it was time to buy another one. In this view of the business, reliability, performance, and pretty much everything other element of value to a customer were irrelevant if the customer could not sense it at the time of purchase. That meant a kind of race to the bottom.

For decades, Detroit auto companies had their way with the American consumer. Things began to change in 1972. That was when the first oil crisis struck. That was the year the US hit peak oil as predicted by Hubbert in the 1950’s. This would mean that oil production in the US would necessarily decline, and that the US would have to import ever more oil in order to consume the same amount as ever. That was the year OPEC cut oil exports to the US. They did the same in 1977. Oil prices spiked. Jimmy Carter signed a law requiring disclosure of fuel efficiency on each new car. Small cars soon earned a significant market niche.

Detroit exploited that niche by introducing the forgetable Vega and the notorious Pinto. But the Japanese used the event to enter the US market in a different way. An early TV advertisement featured a couple slamming the doors of their Toyota. The implicit message was “It may be a low cost car that sips fuel, but it is still a car of high production value.” The message stuck.

During this decade three Japanese car companies introduced models into the US market: Toyota, Honda, and Nissan. Each of these companies has grown. And, in fact, within the last few years - before the credit crunch - Toyota had already grown to be the world’s largest car company. Toyota has been building cars in the US for two decades using American labor and (some) American parts. And they have been building more reliable cars with less labor input than any other car maker. Honda’s cars are not far behind in terms of reliability. And they generally garner high praise for being fun to drive. Japanese car makers gained ground with American customers by building a reputation for high reliability and high value.

Given that they had serious scale disadvantages at the start, how could Japanese producers have hoped to be successful? There are many answers. The fundamental answer is that they paid less per car for labor and materials and they produced cars that earned for their brands a deserved reputation for reliability and value. And how did they do that?

US businessmen will argue that the labor unions were too strong and that they drew too much capital out of US car companies. This is probably true. But it is probably also true that this is more of an excuse than a reason.

There were two factors that made the labor cost lower for Japanese manufacturers. One is that labor rates were slightly lower. They ran non-union shops and paid wages that were high in local terms but low in comparison to union rates. The other reason was that Japanese had much less labor in their auto assembly processes than the US car companies. The Japanese had evolved a better manufacturing method.

The Stratification Problem

There are several related reasons the Japanese managers were able to get more value from American workers than American managers. One was the idea of KAIZEN. It is the idea of empowering workers to do things that allow them to become more productive. And its’s the idea that workers are invested in their work at every level. They work hard. And this work brings them not just a paycheck, but a meaningful place in society. They engage with all their talents.

Furthermore, position in society - i.e. status - is not a matter of categorical difference but one of function. The world is not split into nobility and “villains;” rather, people higher in the hierarchy have greater responibilities that account for their greater authority. They may have better educations and even better breeding; but they are not somehow categorically different from the people who labor in the factories. These are ideas that are deeply engrained in German and Japanese culture. There is a touch of this same idea in the French notion about work and place in society. It’s much less true in Anglophone countries where the notion of two classes still prevails.

A by-product of the classless workplace idea is that there is a constant dialogue that occurs vertically within an organization. It assumes that decisions are made closest to the groups that will be affected by them. And that competent people with strong training backgrounds, exercising good sense, and motivated by an interest in the success of the organization work out decisions in a way that gains the most advantages and avoids the most pitfals. Management is charged with enabling the virtually continuous flow of incremental improvements by providing financial and engineering support. Management, in this view of the world, derives power from its ability to make good decisions. And to make available the resources to implement.

Even if no practical business decisions were to come out of this dialogue, the dialogue itself creates a kind of shared interest in the business and its operations that knits together people at different levels of the organization. This sense of shared mission allows for give and take in all business arenas including negotiations about pay.

But it also produces good business decisions.

In this model good decisions are both the reason for existence of the power structure, and its product. This vertical dialogue keeps management in the loop about operations. It means that they stay connected with the part of the business that adds the real value.

In Detroit, by contrast, there was a kind of invisible line drawn between workers and management. Management was allowed to set goals and working rules for workers. They were required to make sure the raw materials showed up. And to make sure the finished goods got sold. And to make sure that new products were designed and tooling made. But if there were minor problems that cost time and money on the manufacturing floor, it was the workaround that ruled. The only thing that was to be negotiated between management and workers was compensation.

Similarly, it was assumed that a manufacturing plant, once it was built, was perfect. Nothing could be done to make it work better. Sure, there was an operating budget for keeping things in good repair, but there was no persistent attention paid to the question of how manufacturing processes could be streamlined to make them all better. All decisions were made by people at one level - the highest level with an interest in the outcome. And exempt employees rarely spoke to or saw non-exempt employees except at ceremonial functions.

Reinforcing this separation between workers and management was a culture of entitlement. Whereas in Japan the CEO’s of companies were rarely compensated more than 200 times what workers were; in the US 2000 times or more was not uncommon. Furthermore, the people who ran companies in the US were invariably promoted up through marketing and finance divisions. Anyone who actually knew about and cared about operations was treated as a second-class citizen. A manager might be “rotated through” an operating plant, but he was rarely expected to do much outside of learning what products it made.

Everyone knew that the real money came not from being good at making a product, but by being good at selling it. There may be some truth to that proposition when everyone who is selling cars sells cars that are essentially equivalent in terms of measurable value/cost. But the proposition becomes false when this is not true. Ignore operational excellence long enough and eventually you end up on the wrong side of the value proposition. You lose money. Then you go broke.

Denying the Value Proposition

This is where Detroit has been dangerously wrong for five decades. Early on it embraced designed obsolescence. Then, when Toyota and Honda began delivering cars with greatly enhanced reliability or with measurably superior fuel mileage; when Volkswagon began delivering cars with the road performance and feel that approached that of BMW; and when Volvo and Saab delivered cars with superior safety characteristics, the issue of quality began to plague Detroit. It was clear that one could not simply plead “Rich Corinthian Leather” and sell as many cars as you could ever make. One had to figure out how to deliver value in terms of reliability, drivability, fit and finish.

Improvements in reliability since the early eighties suggest that Detroit understood that it could not afford to be much worse than all its competition in every measurable quality; but it is not clear Detroit ever did get very good at managing the value proposition. When measured against most of their competition, they are both worse than the Japanese in terms of reliability - not just on average but in almost every product line - and worse than the Germans and Scandanavians in terms of performance. Instead of really trying learn how to be better, Ford and GM bought Volvo, Saab, Mazda, and Opel.

But even its foreign acquisitions did less good than they might have. There was enough expertise in those enterprises to teach American managers a few things. But it didn’t happen. Enough of the managers came up in Detroit country clubs that if any outsiders from Europe who understood operational excellence landed in the US, they were immediately gelded. Foreign ways were immediately discounted and failure was swift. The game was the only slightly different overseas. There was nothing to be gained by over-investing in foreign operations, especially in Europe. Rather, the slow strangulation of high profile brands served Detroit’s goal of focusing on high mark-up products without delivering high end performance.

What buying those brands could have brought was people who understood how one can cultivate niche markets and serve specific needs very well and competitively. They might also have brought people who understood how to hire and train highly skilled craftsmen, treat them well, and negotiate with them as adults.

But the idea of exploiting niches is one so foreign to GM that its very name denies the possibility. So what if the people who pay a high premium for a Volvo do so because they perceive high value in not being sliced to bits in the event of an accident? So what if they want to know the car has special features that help prevent accidents as well as limit injury?These all add costs. And they cannot be spread out over the entire product line. So why do it? The simple rule that governed their whole business was a kind of interchangeability of all components across all platforms that improved returns to scale. But it also led to a king of lowest common denominator thinking. The only possible place to spend in making a car better was in optional features that were bolted on at the very end of the manufacturing process

Niche markets simply could not exist in the GM framework of thinking. Then, when in the 1990’s more than half of the automobile market was “niche” markets: when Toyota, Honda, Mazda, Volkswagon, BMW, Volvo, Saab, Hyundai, and a few other companies sold most of the cars, Detroit made most of its money on pickup trucks and SUV’s. By denying the very existence of niches, Detroit had backed itself into a place where it sold niche vehicles. But the niche that they were selling into was soon to be a rapidly contracting one. Meanwhile their costs were higher than the competition because they had counted on returns to scale and consumer ignorance to save their bacon.

One question corporate strategists never quite wrestled with was this “Will the SUVs and Pickup Trucks supplant other kinds of autos?” Detroit simply did business as if the answer had to be “Yes.” But that is a daft proposition on the face of it, for it assumes that everyone is either a soccer mom or a farmer/construction worker. And that probably accounts less than 20% of the US population. In an age when fuel prices must rise because of limitations on natural resources, it is insane build a business model on the proposition of building ever larger, more fuel-guzzling vehicles.

By contrast, it is reasonable to argue that one must have at least a meaningful token position in small autos. Because the markups are so small, doing so forces one to hone manufacturing toward operational excellence. One might actually become a far better car company by competing in the economy classes and losing a token amount of money every year at it than by avoiding it and avoiding the whole question of operational excellence.

Furthermore, one knows that eventually fuel must become expensive. So making small cars keeps one in a position of being able to move toward smaller cars the next time fuel prices go up. This is but one strategic error Detroit has made. And it has been making it since the 1970’s.

By the mid 1990’s one might argue that Detroit must have chosen to build trucks and SUV’s out of necessity - the necessity of a set of companies playing a losing hand. Detroit’s niche had always been to make cars that were cheaply wrought or ones that were wasteful of resources. The Japanese had no domestic markets for these vehicles, so Detroit could still have some advantages here. So it focussed on these areas. But even here it was not safe. Toyota brought its skill in making reliable cars to the truck and SUV market. It leveraged it reputation for reliability and scored meaningful hits on Detroit’s home turf with the likes of the Toyota Land Cruiser.

Bad Decisions - Consequence of Culture

We might all disagree about which decisions were GM’s worst. Or which choices doomed Detroit to failure. But the simple fact that it has been losing market share to Toyota and Honda for four decades is a testament to the fact that it is making worse decisions than Toyota and Honda for four decades. Back in the mid 1980’s there was an article in a major business publication that told us Japanese management held US workers in high regard for their skill, knowledge, dedication, and energy; but they viewed US managers with contempt. Perhaps there is something to be learned from the way managers of Japanese and continental European companies manage.

Since that moment, the Japanese had their little problem with banking, suggesting that not all Japanese ideas are uniformly good. But we have had our own little problem with banking. And during the two decades of retrenchment in Japan, the Japanese have continued to invest heavily in their own automated manufacturing lines. The Japanese have more industrial robots per capita than any nation on earth.

Whether this is a good business practice remains to be seen, but there can be no question that the Japanese are serious about being good at manufacturing. Americans, on the other hand, are serious only at being good at investing. It’s good to be good at investing. But it’s a short-sited view. The people who invest capital usually get the short term return; but it is generally where manufacturing operations are profitable that great wealth is generated. When a nation ships its stock of capital offshore, the bulk of the wealth generated from that capital accrues offshore. The Germans and Japanese understand this well. Americans seem completely oblivious.

The idea of investing to improve on-shore productive capacity fits hand-in-glove with the idea of Kaizen. For example, if one finds that one is paying manufacturing workers too much to make a good profit, then the goal must be to improve the productivity of the workers by increasing automation. Or by using some other high impact technique such as building out the product line so that even with marked increases in productivity, there is still a need for each worker. But in every case it requires a kind of joint interest in the long term success of the business. One cannot manage from quarter to quarter or year to year. One must take a long term view of the the business that , in ten years, sets one’s own organization far ahead of where it is today. In the case of the Detroit car company, long term is defined as being roughly the duration of a labor contract - a couple of years, maybe. And every technological change is fought because it increases business risk -especially changes that would bring big improvements in anything.

A great example of this is the Fiero. In the early 1980’s an ambitious manager decided to build a mid-engine two-seater sports car within the Pontiac brand. For reasons that are impossible to understand, he got enough support to start production. The car was ambitious for a number of reasons. One was that it used all plastic (through color) body panels that were virtually immune to denting, rusting, or scratch damage. The car was well received by the press. During its one or two years in production it sold well and it had even garnered its own cult following. What was truly amazing was that it broke every rule in the book. It was well built, reliable, sporty, stylish, and yet it sold for about the cost of a subcompact. When Pontiac stopped production everyone outside Detroit asked “Why?” To many, it seemed like the best answer was because it simply went too far. It appeared that the most compelling reason for its being withdrawn was that it was so good it made everyone else look bad by comparison. And, if the rumor is correct, that was the end of that particular manager’s career at GM: he was fired because he was so damn successful at creating customer value.
Inside American business, the problem of making bad decisions, is not just an issue of choice. It is an issue of identity. The process is lampooned weekly in Scott Adams’ Dilbert cartoon strip and the BBC program The Office. Americans make bad decisions partly because we have embrace bad mental habits in our mental conception the workplace and the various relationships that exist in that context.

The Wrong Work Ethic

One of the issues is that management in many companies in the US operates on a “clubby” mentality: The company is viewed as a club. The offices are its clubhouse. (We are tempted to think of nine-year-olds and treehouses…) Exempt employees are its club members who are elected for their good looks, brains, and athletic prowess. Or maybe because they are well connected. Education at an exclusive, expensive private university is a kind of imprimateur marking suitable club members.

Issues of technical competence are of little or no importance. Showing up at work matters not because it allows one an opportunity to work and produce wealth, but because it is symbolic of commitment to the club. It is possible for institutions to get by on this sort of culture for some time. But when they are pitted against rivals that have more productive ethics, they are doomed to failure.

A friend of mine worked in the IT branch of a major financial company in Manhattan. He joked that people showed up at 9:00. They would drink coffee and hang out in each other’s offices until lunch. Then, to look industrious, they would have sandwiches delivered to their offices. Then they would hang out in each others offices until about 3:00. At about 4:00 everyone would realize that they had a day’s worth of work to do. They would go to their own offices and work until 8:00 or 9:00 pm. Then they would go home. They would return the next day dog-tired and incapable of mounting any meaningful effort. So they would spend most the day going from office to office bragging about what long hours they worked. One’s work status depended most on being present and visible. And maybe on being good looking or witty.

In a business publication some time ago I remember reading of how German workers who came to the US were shocked at the lax culture. They were shocked to see how US workers treated the work place as a place for socialization. In contrast, when in Germany they would go to work, hardly ever talk to their cohorts at work, and then leave promptly at 5:00. Evidently the French do much the same, except they leave earlier. Paris’ afternoon rush hour starts around 2:30. The European conception of the workplace is that it is a place to work. It is not a place to socialize. Europeans work hard, expect results, and go elsewhere to socialize.

Common to the European and Japanese cultures are ideas that value training, competency, focus, and hard work. It assumes specialization and specific spheres of influence based on technical competency. This body of thinking has many consequences. One is that Japanese and European exempt employees can be quite effective during their work days. The French, for example, have the highest GNP per hour worked. Another is that when one views the work place as a place to produce output rather than a place to acquire status, one behaves toward problems differently.

This idea of technical competency allows all decisions to be made at the lowest level possible. It assures that exceptions are handled more quickly and in ways that will typically have the leas possible negative impact on the business.

By contrast, in “clubby” cultures, decisions are management’s reason for existence. And problems are signs of failure. Should ever a problem rear its head in an institution with clubby nature, the management reaction is simply to make the problem go away. The first two or three steps involve a denial of the problem’s existence. In some cases evidence of a problem disappears after it has been denied effectively at high levels. A good chain of management is defined by its ability not to cause problems to be solved, but to cause them to disappear. If nothing else works, one simply silences the person who brought the problem to the attention of others. There are hundreds of techniques to doing this ranging from discrediting the person to firing them. There are firms where such techniques are much more useful in acquiring positions of rank than are demonstrated ability in actually making the reason for the complaint disappear.

In such an atmosphere, the very act of observing a problem tempts disclosing it. And disclosure means punishment and tempts dismissal. This trains the whole organization to be oblivious to problems and to deny problems in the face of any and all evidence of problems. Only management consultants are allowed to see problems. But even here, management consultants must go around to every business of the same kind, see that everyone’s business is in serious danger of collapse because of the same problem, then they must recommend to all their clients some incremental solution that poses no threat either to the entrenched power structure or to the way the company sees itself. In such a culture, it is only a matter of time until the institution collapses.

Specialization and Technical Competency

Not every US company has this sort of a problem. A friend of mine worked at Hewlett Packard in the early nineties. HP had come up as a maker of high-end electronic instrumentation. It had a reputation for no-holds-barred product excellence and high margins. It had just gotten into the laser printer business, and it had brought its culture of excellence into that business. This friend would tell me stories about the way business decisions were made at HP.

One of the questions that people frequently asked in business discussions was “Are you technical or non-technical?” The assumption behind this question was that two kinds of issues bear on a business decision. One is technical issues. These are ones that require a deep understanding of the way things actually are. You cannot convince a broken glass that it is not broken. You either have to repair it or get a new glass. Technical people are good at understanding this sort of thing - much better than non-technical people, usually. The other type of issus is non-technical issues which deal much more with the way things are perceived, the way people are influenced, the way power and resources flow within an institution. Technical people are sometimes much less good at understanding these sorts of things. So when a person makes an assertion in a business meeting, it is helpful to know whether that assertion is backed by the authority of expertise.

No good business plan of action could go forward unless the technical people understood how to overcome the technical obstacles. No business plan could go forward unless the non-technical people understood how to overcome other kinds of business obstacles. The question implicitly gives credence to this idea. ( We note in passing that the question could persist long after the practice of managing in the way we just mentioned has ceased. For instance, it could be used to disqualify people from voicing legitimate concerns. And in such cases it would serve a purpose opposite to the one we attributed to it..)

The question itself betrays a number of bits of brilliance that might help explain HP’s early success. It suggests that business decisions take into consideration technical and non-technical ideas. It suggests that competence and good judgment in one’s field of expertise ( technical or non-technical) are highly valued. It demonstrates an implicit assumption that people are expected to come to the table with core competencies, and that decisions rely on the competencies and good judgements of all specialists. This is a sign of a workplace where work is defined in terms of delivering value to customers more than it is in terms of gaining personal status.

Decisions are not imposed from the top down. They percolate up from the operating groups of the company. It is suggestive of the idea that people at all levels are expected to voice objections and suggest problems before decisions are made.

This is an idea completely consistent with the Japanese idea of kaizen. It is an idea consistent with the continental European idea of highly trained crafts-people. It is an idea NOT consistent with the idea of business place as club. It is not consistent with the Adam Smith idea that a person in a craft or trade can learn all that there is to know about it with three weeks of on the job training.

Canary in a Coal Mine

The failure of GM is not a result of the financial crisis. My wife, who spent twenty some years as an executive in a health-care company predicted six years ago that GM would collapse if it did not get its health care related expense problems fixed. And, in fact, a huge part of GM’s financial collapse owes to financial obligations it owes in support of health care costs. Had the UAW been served by the Japanese health care system, those costs would already be something like half of what they are today and GM might not yet be entering bankrupcy. So GM’s failure ought to tell us something about the cost of not fixing health care in the US.

But Rick Waggoner, until recently the chairman of GM, insisted right up until the day he was thrown out that GM would never seek bankrupcy protection. Either he was completely delusional, or he was unwilling to publicly admit a serious problem. What is scary is that within the clubby atmosphere of the Detroit business world it is precisely this aspect of his behavior that was the most likely to get him the chairmanship. And it was the most likely to keep him there while that mentality was responsible for filling the chairman position.

The clubby practice of denying problems has kept Detroit from being as good as its competition at design, manufacturing, or reliability for something like five decades. It has imperilled American Motors, Chrysler, Ford, and GM. AMC went out of business long ago, though its Jeep brand - still plagued with reliability problems ( ironically ) staggers on as part of an ailing Chrysler.

It is inevitable that a few brands will disappear over the next decade. It will not be long before the category “commuter car” becomes a special category. And, in fact, it will not be a great surprise if some cities begin to try to create special incentives to drivers to use smaller, cheaper electric powered commuter cars.

But the bigger question is how far will the Anglophone world need to fall behind the rest of the world in order to discover that:

1) Operational excellence and technical competence counts. The notion of continuous improvement implicitly acknowledges the idea that problems exist and need to be solved. It implicitly depends on technical competence and good judgement.

2) Decisions must be made on the basis of information not just on the basis of preserving power. When considerations of power usurp the decision making process, bad decisions are made. And the consequence is a more serious erosion of power. Power is a natural consequence of good decisions.

3) The workplace is a temple for the sacred purpose of generating wealth, and power is a natural consequencs of being good at this. If one thinks of the workplace as being a place to gain status or power first, then one risks trading business assets and advantages for personal gain. That’s a morally reprehensible point of view.

4) Entitlements don’t create wealth; they create fiefdoms, slave plantations. What creates wealth is an efficient means of production or distribution. And what creates excess wealth is an incrementally more efficient means of production or distribution. Once everyone else has learned your tricks, you need to create new ones; so you must cultivate expertise and set it to work within a culture that is very good at defining and implementing low risk incremental change.

GM’s failure ought to teach us these lessons. If we learn them well, we might yet forestall a general economic disaster. Apart from the sheer monumental good fortune of its accidental discovery five centuries ago, America’s good fortune as a nation stems from healthy institutions of all sorts. It depends completely on a low level of institutional corruption and on a high level of sanity, wisdom, expertise, and business intelligence. It depends on hard work at all levels. It depends on productivity at all levels. It depends on management that is actively engaged in identifying problems and fixing them. It depends on capital and on a continuous re-investment of profits in the efforts that improve effectiveness at all levels. It depends on a high level of trust and trustworthiness among all interested parties in an institution.

All of these attributes were compromised by the clubby atmosphere that smothered Detroit. GM is bankrupt. So are the practices that got it there.

05.15.09

WSJ Out of Touch?

Posted in Social, Policy at 6:21 pm by steve

There was a terrific graph in the Wall Street Journal yesterday (pC1). It showed pay in the financial sector normalized against pay in all other non-farm endeavors over the last century. A hundred years ago the ratio was around 1.5. For every dollar people in other non-farm jobs earned, people in the financial sector earned a dollar and a half. This ratio climbed until the early 1930’s. Then it levelled off around 1.6. In 1940 it fell precipitously to 1.2. It continued to drift downward until 1980 when it was almost at parity. Since 1980 it has risen steeply. In 1998 it exceeded 1.6. And recently it has exceeded 1.7 - the highest level in at least a century. The financial industry has been seeing outsized pay for almost the last three decades.

What is one to think of this? On the one hand, we note that with the expansion of America’s middle classes, with their growing ability to save and invest, has come a dramatic increase in the amount of capital seeking good management. Even in the ninteen fifties and sixties, investment in the capital markets was seen as an endeavor of rich people. But by the end of the 1980’s everyone with a good job was salting money away in the capital markets. Assuming some modest returns to scale and inprovements in productivity due to improving IT systems, it seems reasonable to assume that pay in the sector would increase. It would be in everyone’s best interest for it to do so, so long as the financial system grew more efficient at allocating a growing pool of resources.

A second factor in assessing the rise in financial sector pay is the argument that the financial sector works by allocating resources to the most efficient means of production. A healthy financial sector does this better than an ailing one. And it is definitely worth a lot of money to get this allocation system working efficiently. This is a reasonable and supportable argument. And to the extent that rising pay in the finiancial sector has led to more efficient means of production - in excess of the premiums to pay within financial sector itself - we are all better off for it.

We are not prepared to argue whether these conditions are strictly satisfied. The market is not always completely efficient. That, however, is the topic of another discussion.

Moving beyond that issue we see two monumental problems that attach to the situation of stratospheric pay levels within the financial industry: Transparency and Opportunity Cost.

There is a lot of talk about transparency. Not coincidentally, the same WSJ page features and article about regulations pertaining to derivatives and other esoteric financial instruments.

There ought to be discussions about this, because when wealth is transferrred to the financial system in excess of the value added by that system, we all become impoverished. Lack of transparency is the magic that makes such a transfer possible. Madoff’s whole scheme worked because of lack of transparency. He claimed to have magical powers. And people believed him.

Lack of transparency leads to chicanery: It is what makes that transfer seem desirable when it is actually not so. There are a thousand highly paid political operatives working on resoring transparency. And if capitalism is to function correctly, they damn well better take a good crack at it. In light of this work ther is a glimmer of hope that it will be fixed by good legislation. ( In Journal-Talk, Regulation)

When all the processes in the financial market are open, frank, truthful, unbiased, unpuffed, unwrapped, and in plain view of all interested parties, there is some small hope that the market can approach efficiency. The size of the distortions tends to be limited, at least. When it is otherwise - when the distortions become a huge part of the system, the financial industry will swallow up great gobs of capital, pay it to its operatives, and weath-making enterprises - companies that manufacture and distribute goods and services that add real value to peoples’ lives - will quickly starve for lack of capital. That is the fast-track to serfdom.

The second problem with stratospheric pay in finance is opportunity cost. Every economic activity requires an input of talent. When all talent flees any activity it is usually not long before the activity stands on shaky ground. It is not long before it begins to crumble. When I was leaving college, for instance, steel producing companies were losing money on US operations. There were lots of reasons. Part of it was that factory floor pay in the US was an order of magnitude higher than it was in the far east. And unskilled labor in the far east was more productive. So it made sense to invest there rather than here. In any case, steel companies, when they offered jobs to degreed engineering graduates, paid the worst. So on average, they probably also got the worst. This drove them into a kind of inevitable downward spiral. There still exist a few specialty steel makers. But most of the industry is located offshore.

Every manufacturing industry in the US competes for talent with the financial industry. It does so for engineering, business, and finance professionals. If the financial industry is paying more than any manufacturing industry, where will people with the best talent go?

There is absolutely no question that finance needs good people to allocate resources among businesses. But what if all businesses are handicapped by their inability to hire the best talent? The process of efficient allocation no longer produces the best economic result. I am told by my wife who graduated from Columbia Business School in the late 1980’s that almost all the best people specialized in finance. They planned to work on Wall Street because that’s where they could make the most money. At that point in time the ratio between finance and other non-farm pay was 1.2. In other words, that level of pay proved no hinderence to the financial system in terms of attracting talent. The additional fifty cents on the dollar amounts to excess profit drained from the capital pool that could be used to rebuild manufacturing in the US or rebuild a crumbling infrastructure.

The readers of WSJ tend to be more closely connected with the financial system than readers of any othe publication, so it is not unexpected that WSJ should advocate for their interests. The readers of the WSJ will likely be people who view with suspicion and animosity any regulation that threatens to derail the gravy train. Maybe, though, that is precisely what needs to happen.

05.05.09

Conservative vs Liberal

Posted in Uncategorized at 9:19 pm by steve

For some time I have been playing with the idea that good political decisions can only be made when the issues are framed by the right thesis and antithesis. When these are all categorically wrong, a good decision is impossible. When even one side is wrong, the chance of a good decision probably falls below half. The goal of this piece is to create a list of interests that frame political decisions and assign their defense to Liberal or Conservative . The idea is that when liberal and conservative points of view are engaged in defending the right sorts of ideals and poltical principles, there is some hope that political dialogue can find good solutions generally consistent with the broad interests of the body politic (i.e. all the people affected by legislation created by these debates.)

Conservative Liberal
Individual Strength & Achievement Institutional Strength and Effectiveness, Especially Public Ones
Right Action Right Thought
Educate for Commerce & Industry Educate for Shared Culture & Good Government
Trust Myself, My Group, My Country Be Skeptical. Seek Useful Ideas. Seek Friends, and Make Allies
Depend on the Known, Old, Trusted Seek New Modes of Thought, Expression, Action
Be Tough, Be Virtuous Be Smart, Be Cool
Government Should Leave Me Alone Government Should Help Society Work Better
Conserve Capital Protect Environment, Protect Laborers
Wealth Lies in Ownership & Productivity Wealth Lies in Commerce & Efficient Distribution

Take, for example, the question of education. On one hand education provides shared experiences, shared values, shared culture that allows the possibility of a civil dialogue on issues. It also, properly executed, would give us the tools to look at questions from different points of view and to better assess arguments on the basis of the merits of the evidence. It would allow us to reach informed decisions rather than simply aligning with our group. On the other hand, education must make us productive and effective in the economic sphere. Otherwise our society becomes weak and servile in an economic sense. If we build a society that is especially weak in a liberal sense, then we all become slaves of a wicked, corrupt, but highly effective central authority.

Sadly, America has a second rate education system that is worse at preparing Americans for all academic pursuits than are most European systems. And we have a system that is worse at preparing Americans for all vocational/technical pursuits than certainly the German educational system. By no measure is it first rate.

There are many reasons for the decline, many of which have to do with adult’s attitudes about education. But some of the reason lies in the Reagan era decision to dumb down education to make Americans good only at the three R’s Restin’, Recitation, and Revival Meetin’s. There’s no thinkin’ involved. Because that threatens the powers that be. And, evidently the same people imagined that vocational training just makes workers more expensive, not more productive. ( It’s thinking as old as anglophone economics: it’s one of the great fallacies of Adam Smith’s Wealth of Nations. )

The problem arises because conservatives do not have a position on education that drives us to be more productive as people. Conservatives do not argue that we need to be better in vocational training. And they argue against the utility of science. This is strictly medieval thinking. And it threatens to eliminate the middle classes. The problem of inferior education also arises because liberals tend to undervalue the social, political, and cultural values and tools of thought that are rightly taught in liberal arts colleges, in high schools, and in elementary schools.

Getting the educational system to work is more than getting public policy straightened out. But that step is necessary.

Turn next to the issue of individual liberty. America has very nearly come off the rails entirely. One of the great problems of modern conservatism since about 1880 is that conserving individual liberty has been at odds with conserving capital. Large institutions find convenience and profit in trampling the property rights, the environmental rights, the privacy rights and personal liberties of individuals. In matters of labor and commerce the Democratic party has tended to represent the interests of individuals against corporations.

But conservatives have represented themselves as the party of personal liberty - freedom from government intrusion - even as they attempted to eliminate all checks on abitrary executive power agianst individuals. There was precious little space for liberals to defend personal liberty. Fortunately this is a category that has had some constitutional protection. But no attribute of political life can be preserved in the absence of deep support both in individuals and in institutions.

These two examples raise the question of how well all of the interests of a democratic society can be represented by a two party system. For it is inevitable that conflicts of logical consistency will arise from time to time within a party’s framework making it impossible for a party to effectively advocate for issues that are rightly in its scope of interest.

I set out in an attempt to describe a kind of canonical policy framework (in its form now, far from complete) that would frame issues in a way that would lead to productive policy debate and good decisions on public policy. It still seems like a good exercise. But it might prove that no two party system is capable of managing all policies over the whole univers of political discourse in a way that is both consistent and productive of good results.

This is just a very quick sketch of the idea. My hope is to expand upon this in the future, both by adding items to the chart and by explaining the entries. The main goal is to provide principled positions on big-issue sorts of policy that allow productive policy debate. We note in passing that we have tried to frame positions on both sides of the aisle in positive terms because the public “goods” that each side is defending are worthy of defense.

Perhaps this exercise will lead to a strong argument that a two party system is incapable of reaching a good decision a large portion of the time because of the logical limitations on internal consistency and lack of independence between category areas.

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