Amazon I N C E P T I O N

Although this is a local issue, it demonstrates some universal issues in economic development. Amazon.com had started building a distribution center in Lexington County, South Carolina with the understanding that they would be exempt from collecting SC state sales tax (international readers, see sales tax primer at end), but a recent vote in the South Carolina House of Representatives quashed that implied promise, and now Amazon.com says it is pulling out of South Carolina...leaving behind a massive, half-built warehouse and an unfulfilled promise of 1200 jobs. I've given this a lot of thought and therefore am somewhat conflicted about the issue on a number Inception-like levels:

LEVEL 1

Since you are reading this on the Internet, you—like I—probably order stuff from online merchants on a regular basis. As such, we probably appreciate that nearly everything we order comes from another state, and therefore is free of sales tax. (Yes, I know I'm supposed to pay “use tax” on out-of-state purchases, but—really—who does that?) So, if Amazon.com came to South Carolina without this concession, everything I buy from Amazon (regardless of which distribution center it came from) would cost an additional 6%. Of course, I would not like that.

LEVEL 2

South Carolina, like every state (and nearly every government in the world) is suffering from budget shortfalls due in part to the recent economic upheaval. As a resident and tax payer, I would like to see more money joining my contribution to the states coffers so we can have “nice things” like other industrious states and countries have such as high-quality schools & universities, roads & other infrastructure, law enforcement, parks, etc. Therefore, at this level, I cringe that we were ready to forfeit this much needed revenue stream. (Granted, Amazon is never going collect or pay sales tax for any state.)

LEVEL 3

This distribution center would employ some 1,250 people in my area, undoubtedly there would also be multiplier effects as allied firms and other online retailers would consider this site, which—admittedly—is a great place for this type of business: minutes away from 3 interstate highways, regional postal, UPS, and FedEx hubs (who would probably also need to beef up their staff) within 5 miles, and plenty land for such expansion. Additionally, real estate values would go up in the area and new housing would probably be built. This would certainly benefit the economy of Columbia and of Lexington County. So, like many of my friends on Facebook and Twitter, I've got to be for that! However, I am not naive enough to think that 1,250 people will remain unemployed now; that's not the way a market economy works—there is no “lump of labor” that you just break a piece off. Lexington County already has one of the lowest unemployment rates in the state and is even lower than the national average.

LEVEL 4

Finally, there is the issue of fairness. Why should Amazon.com be exempt from collecting sales tax from South Carolina customers when all other retail businesses located in the state must do so? This is the argument of the business lobby that defeated this bill, and it is quite understandable. By not collecting SC sales tax, Amazon.com has an unfair competitive advantage.

While small business struggle to get established, nearly all states fight each other to land big businesses that promise to employ hundreds or thousands of its residents with generous concessions. They happily promise to forgo years of tax income, make commitments to upgrade infrastructure, create job training programs, and even loan or grant money and real estate to some firms. This is a legitimate economic development strategy that can create a successful technology cluster such as the one built around the BMW plant in Greenville, South Carolina. However, there is no guarantee of success, as seen by the now abandoned Mac Truck plant in Winnsboro, SC. So the question is, who should evaluate these opportunities? It seems to me that too often the big business draws up its own demands, and the local politicians immediately become cheerleaders regardless of how appropriate the project is for the long-term development of the region.

More importantly, I am interested in why underdeveloped states, regions, countries, or whatever need to prostitute themselves in front of industry in the first place. What disadvantages are otherwise turning away these industries, and what are the root causes of these negative aspects? I don't think that San Mateo and Santa Clara counties in California need to offer any special incentives to get technology firms to locate in Silicon Valley, nor does New York City have to do anything to keep the financial industry from leaving. Regardless of how sweet the incentives, the bulk of professionals in these industries would never move to some stiflingly boring Midwestern or southern state. I have written more about this previously in Promoting Innovation.

So, as I've said, I am conflicted about this; I wish states would collectively agree not to undercut each other, but I know this will never happen, so I guess I've got to pull for the home team and hope that some day in the future we will grow to the point where we don't need to introduce these market distortions.

Sales tax primer: In the United States, each state (and occasionally local governments as well) determines and collects a sales tax from 0% to 10% on all retail purchases (with some exceptions.) Unlike a value-added tax (VAT), this applies only to the final, end-user sale; manufactures don't pay this for raw material, and wholesalers don't collect it for sales to retailers. Also, this tax is only due from residents of the state in which the seller is located. While it is difficult to claim this exemption for small purchases you make when traveling to another state, mail order and e-commerce businesses simply don't charge it when shipping goods to an address outside of their state. (Oh, and to the consternation of foreign visitors, sales tax is almost never included in the posted price.)

Inception primer: The brilliant 2010 film Inception has spawned an Internet meme similar to “mind=blown” or “[insert strange twist], by M. Night Shyamalan” in which—to express how mind-blowing a concept is—you take almost any word that ends in “-ion”, put spaces between the letters, and make it bold. (e.g. Sales tax C O L L E C T I O N )

The film itself only makes sense when you realize [and this is not a spoiler] that the team has successive dreams within dreams, in which time exponentially slows down for each level, and if someone gets killed in a dream this person’s [un]consciousness goes to limbo, where time stretches out even more, such that DiCaprio’s character and wife spend a lifetime there one night many years ago. Also, since his wife has been dead for years, her appearance is merely a figment of his imagination, and thus her sabotage must be his self-flagellation.



UPDATE 5/21/2011: The South Carolina legislature relented and gave Amazon.com their sales tax exemption. Construction of their enormous warehouse (above) is moving along at a brisk pace. I'm happy that this major industry has located here, and I hope this area will become a distribution/logistics cluster. However I'm still uncomfortable that certain companies are allowed to ignore the obligation to collect sales tax from retail sales.

This American Life just had a brilliant show with the Planet Money team titled “How to Create a Job”; the main premise is that despite the big talk from politician and the economic development industry, they almost never create a job, they just shuffle them around from state to state. If you have a free hour, it's certainly worth the listen: (click here)

Freedom

I find the word “freedom” is thrown around a lot lately by people who apparently do not understand its actual meaning at best, or possibly use it in an intellectually dishonest manner. Ironically, it is usually coming from traditionalists, who—by definition—are not interested in dissent (which is, of course, what freedom protects.)

If we step back for a moment and examine the issue, it is obvious that the protection of freedom (be it freedom of speech, religion, assembly, association, or whatever) really matters most for dissenters. Even the most repressive regimes in the world do not attempt to silence anyone who says “our nation (or country or government) is the greatest in the world” or “the government and business leaders of our country have our best interests at heart” or “we seek to restore the traditional social order of our nation.” In all countries, those in the majority—especially the rich and powerful—rarely run into problems expressing their opinions. A wealthy businessman in Singapore, Hong Kong, or even mainland China is likely to be satisfied with the freedoms he has in these countries, which are normally considered repressive. It is the minority (ethnic, political, religious, intellectuals, etc.) who really value true freedom.

Before I go on, let me be clear that I am certainly no fan of Islam. It is indeed a dangerous and sometimes violent religion (but waning in power, as I have previously discussed.) However, I am shocked to see the reaction of Americans who are willing to give up cherished freedoms that are enshrined the US Constitution to address real, and—in many cases—imagined, threats to our country. Growing up in the US, we are taught that the earliest settlers were Puritans and Pilgrims who were not allowed to worship God as they saw fit in England, and thus came to New England for religious freedom. Thus it more than ironic that conservative elements of American society (who see themselves as spiritual heirs of these first religious dissenters) are the most willing to become the new oppressors.

Cordoba House
The right-wing demagoguery of the planned Islamic center to be built in lower Manhattan is the clearest and most chilling demonstration of the willingness of a significant portion of American population to roll back our much-cherished religious freedoms. (And the extent of our commitment to religious freedom in America is indeed unique, as evident in the fact that we allow such obvious cults as Scientology to exist—something that otherwise more progressive European countries such as Germany do not.) It is clear that certain conservative, “Christian,” patriotic activists care less for the actual freedom of religion enshrined in their supposedly beloved Constitution, than they care for fanning the flames intolerance. The evidence, in this case, is their deliberate misrepresentations and falsifications. First of all, the site is not at “Ground Zero”; it is an 8-block walk from the Liberty Street observation point, meaning practically no one visiting Ground Zero will ever see it! Second, it is not really a mosque; it is a multi-purpose building that will include a mosque in the same way that many public and private building may include a Christian chapel. Certainly there will no minaret blaring a call to pray five times a day. Even the name Cordoba has been subject to demagoguery, forcing supporters to rename it simply Park51. Despite what Newt Ginrich says, any student of history knows that the story of 8th to 11th century Cordoba, Spain is about a vibrant, multi-cultural center of trade and learning in an otherwise dark, medieval period, and not just about Muslim conquest. (And, of course, Catholic Spain eventually did re-conquer this territory, and the centerpiece mosque once again became a cathedral.) Furthermore, the leader of this project, Iman Rauf, is hardly some extremist Shiite or even Sunni Muslim. He is of the touchy-feely, mystical branch of Islam: Sufism (of whirling dervish fame.)

But all this doesn’t even matter, because—again—we have this pesky first amendment in our beloved Constitution that guarantees the freedom to practice even unpopular religions (within the limits of criminal law, building and safety regulations, etc.) If indeed the Muslim extremists hate us for our freedoms, as former president Bush said, then are we not playing right into their hands?

Koran Burning
The only thing that can be said about this pastor in Florida (who, as an attention whore, shall remain nameless) is that he is quite stupid: by burning a books, you are taking them out of circulation, and thus increasing their demand. Then, of course, there is the company you find yourself in (historically) as a book-burner (Hitler, et al.) Thankfully cooler heads were able to talk him out of this stunt, which would have certainly resulted in a number of directly attributable deaths around the world.

The real issue here is the media’s reaction. At most, this story was only worthy of a mention in the local media outlets of Gainesville, Florida; after all, his congregation numbered only 35 to 50. Responsibility for the spectacle that followed instead lays squarely on the shoulders of national and international media outlets that brought this to the attention of the world (and real Muslim extremists who might actually kill people over this issue.) The media often has to balance the public’s right to know with the potential harm a story may cause, and this was a clear case for staying quiet: no civic benefit, but definite harm to international relations, and a real potential for deaths.

Immigration
Although not related to religion, this issue again shows the true colors of supposedly Constitution-loving conservatives. In 1868, the fourteenth amendment was added to the Constitution, forever solidifying the concept of Jus soli, which we had inherited from English Common Law; it made it clear that any child born within the borders of the United States automatically becomes a US citizen (except children of diplomats.) But now, certain right-wing groups actually want to roll back this right because a number of Latin American immigrants (especially undocumented ones) are—horror of horrors—having children here! Despite the fact we are a country of immigrants, they insist on painting our most recent immigrants as criminals (this is nothing new, throughout our short history newcomers have often been labeled as trouble, be they Italian, Irish, Jewish, Asian, or Eastern European.) Today calling undocumented immigrants “illegal aliens” is apparently not strong enough; some people actually want to use the term “criminal immigrant” for people whose only crime is “not having their paperwork in order.” To which I always counter with “he who is without sin, cast the first stone,” and ask if their paperwork such as tax filings are entirely complete and accurate.

Constitution
In all these cases, what I am trying to point out is the incredible hypocrisy found in so much right-wing ideology. When I hear conservatives talk about the Constitution, it seems they regard it as an infallible document, somehow handed down from God on an American Mount Sinai to our founding fathers (who were Deists, by the way.) According to them, President Obama and liberals in general are trying to weaken or re-write this “holy” Constitution, stealing their rights. But what in fact has happened in the last several years is that the Republican, George Bush, rode roughshod over the Constitution, habeas corpus, and privacy rights. Now right-wing leaders want to further erode the constitutional freedoms of religion, association, and due process …all because they misunderstand what freedom is all about: namely guaranteeing rights for the weak, downtrodden and oppressed.

Europe
Before any of European readers start feeling too smug in this regard, let me remind them of a few recent items in the news: the French ban on head coverings, the Swiss referendum banning of minarets, the deportation of Romanian and Bulgarian (EU Citizen) Gypsies from France in direct contradiction to the founding EU concept of freedom of movement for goods, capital, services, and people; and recent election of far-right, anti-immigrant candidates in Sweden and the Netherlands.

United States of Europe

Recently, Mirena and I took a road trip from Sofia, Bulgaria to Thessaloniki, Greece to visit the IKEA store there, and then spend a few days enjoying the sun and sea a little bit further south. We had made nearly the same trip in 2006—before Bulgaria entered the EU—and were pleasantly surprised at how quick and easy the border crossing procedures had become. Three years ago, a line of cars and trucks stretched back at least one kilometer from the border, and the whole experience added over an hour to the trip. Each country still has an exit control as well as immigration/customs, but the whole thing—including waiting in a short line—took less than 15 minutes.

Although they are the newest EU members, Bulgaria and Romania will eventually join Schengen, meaning these border controls will be totally eliminated, as they already have been throughout most of the rest of Europe. Then a trip to a neighboring country will be little more than us driving to another state for some shopping and/or a weekend getaway. Now, I realize that language and cultural differences make this a bigger deal both in practice and psychologically, and nationalism runs deep in the Balkans—so a significant percentage of people will be more than happy to stay in their own country regardless of the benefits of this easier international travel. Never the less, this openness: namely the free flow of goods, people, and money—the very pillars of the European Union—is inexorably binding EU member nations together into something that is starting to look more and more like a super-nation. While this causes concern for some, I see it as a hopeful future—especially for the Balkans, which has been beset with petty infighting, fragmented markets, and most troubling—systemic corruption. In this new, friction-free super-nation countries will be forced to compete on a more or less level playing field: for investments, for shoppers, for weekend tourist, and even permanent residents.

Islam's Last Gasp

As witnessed by my post of June 2008, I have been intending to write about this subject for some time now. The recent events in Iran makes this issue more pressing, but I am under no illusion that this is the start of a Muslim version of the fall of the iron curtain (although that would certainly be welcomed!) I am just reminded of a disappointing time exactly 20 years ago this month that I thought we were seeing the beginning of a revolution in China. Although the Tiananmen Square protests did not result in the toppling of a repressive regime as we hoped then, China has certainly changed in the intervening years, so a gradual liberalization is hopefully possible in the Muslim world as well.

The other preliminary issue that must be addressed is the frenetic Internet activity regarding Iran’s recent elections, which—by too many people—is being used as evidence that the protests in Tehran represent the majority of Iranian public opinion. While “citizen journalism” (blogging, twittering, posting pictures & video) is a valuable supplement to traditional media and intelligence sources, especially when those are restricted, we must remember that we are hearing from a self-selected group. By virtue of the fact that these people speak English, have Internet access, Twitter accounts, camera phones, etc. we must assume that they are richer, better educated, and more western-oriented than the average Iranian. I don’t want to discount the suffering evident from some of the gruesome photos and videos we have recently seen from Tehran, but there seems too much incestuous (think “re-tweeting”) and unverifiable hysteria circulating around the Internet lately, contributing nothing, just decreasing the “signal-to-noise ratio” of any intelligent discussion. And don't get me started on the useless, feel-good actions of changing your avatar to green and setting your time zone to GMT +3.5. Jack Shafer of Slate agrees.

Bogeymen
I must first address America’s perception of the Muslim world. Especially since 2001, we have been led to believe that radical Islam is a cancer spreading over the world much in the same way as the supposed scourge of Soviet-style communism was in the previous century. It seems we must always have a bogeyman—an enemy to unite us. With the fall of the iron curtain in 1989, we—especially as Americans—were somewhat confused regarding our place in the world; we were the proverbial dog who finally caught the automobile he had always been barking at. There was no longer the clear division between countries, leaders, and movements that were pro-communism (our enemies) and those that were anti-communist and therefore our friends (which had, incidentally made us strange bedfellows with some really questionable characters!) Thankfully—and of course I say this tongue in cheek—a new enemy arrived just in time: Islamo-fascism. Ironically our first major enemy, Saddam Hussein, was actually quite secular and we actually climbed in bed with the strictest Muslims around—Saudi Arabia—to fight him. But our worldview was not sufficiently polarized until that fateful day in September 2001. Then we were bombarded from all sides: political leaders, religious leaders, military friends and elderly aunts were all wringing their hands over the danger posed by radical Islam. Terrorist training camps in Afghanistan, refugee unrest in and around Israel, Al-Qaeda in Iraq, the rise of Islamic parties in Egypt and Turkey, and even riots in France and England all seemed to be conclusive proof of the grave threat we were under (besides, of course, the 3000 countrymen we lost on American soil that day.) A population already growing faster through natural means (greater birthrate) now was proselytizing and radicalizing moderate/cultural Muslims from Europe to Africa and even Southeast Asia! And best of all, we now had a man—with a very distinctive visage—to pin our fears and anger on: Osama Bin Laden.

A Power Shift
Despite the fact there are some young men falling under the influence of radical clerics and running off to madrasas and training camps to become terrorists—a few of which then actually will commit acts of terrorism—they represent a minuscule percentage of young Muslims in the world. In fact, I predict that the saber rattling and actual terrorist attacks we have witnessed in the last decade or so, are in fact the death-throes fundamentalist Islam. We generally don’t hear much about the vast majority of young people—and this is important because the median age of most predominately Muslim countries is in the teens to twenties—who actually yearn for, if not devour, western pop culture and all its accoutrements. It seems only natural then that as older religious and political leaders die off, we will see liberalism sweep over—or at least creep into—these young nations. Of course power being what it is, I am not naïve enough to think that anyone is going to willingly give up their control regardless of their age; these leaders still want to groom their young, like-minded lieutenants to eventually take the reigns of power and carry on the status quo. But with the advent of modern communications, health care, and education, combined with family structure intended for a bygone era (i.e. numerous children,) it will continuously become more difficult for them to retain this power. I really do believe that we will see a change in our lifetime…and certainly this not limited to the Muslim world; it has happened and will continue to happen all over the world; young people in even the remotest corners of the world are being exposed to most exciting aspects of what the west has to offer via satellite TV and the Internet (granted, often an unrealistic view.) The grip of their elders and their culture/traditions naturally weakens in this onslaught.

Response
I trust that I have stated my case sufficiently to demonstrate that we don’t need to send troops to instill freedom and democracy in these lands; in fact, it is quite evident from our failures over the last seven years in Iraq and Afghanistan that this cannot work, and is a terrible waste of billions of dollars and thousands of lives. It should be obvious that we needn’t do anything but foster social engagement; if we really want to spend billions to conquer al-Qaeda, the Taliban, et. al, let’s just distribute free satellite dishes, TVs, Internet routers, computers, and license MTV programming for Voice of America and similar propaganda outlets—we can just let Hollywood “degenerate” the young people of the Muslim world to our liking! I say this half-jokingly, but also half-serious; we really need to look at the long-term cost/benefit of any strategy. In the July 19-25, 2008 of The Economist, I found a perceptive article titled “How to win the war within Islam” that summarized the situation thusly: “In the long run, al-Qaeda will be defeated by Muslims, not foreigners.”

References
Below is a chart listing the median age (meaning half of the population is younger than this age) in selected, predominately Muslim countries (by comparison, the US is 36.7 and EU countries are all within a couple of years of 40!)

Country	Median Age
Afghanistan	17.6
Egypt	24.8
Gaza Strip	17.4
Iran	27.0
Iraq	20.4
Jordan	24.3
Libya	23.9
Morocco	25.0
Pakistan	20.8
Saudi Arabia	21.6
Syria	21.7
Turkey	27.7

- CIA factbook accessed 24 June 2009

Further Reading
Interesting books about young Muslims:

• Muhajababes 25-year old author Allegra Stratton talks to other her age across Middle East
• Heavy Metal Islam by Mark LeVine; youth embracing western music in failed societies
• Lipstick Jihad by Azadeh Moaveni; teenagers being teenagers even under the watchful eye of morality police

A Tale of Two Tragedies

This might just get me in more trouble, but here goes...

A few days ago two young Bulgarki, in effect, chided me for being an insensitive boor in the face of tragedies affecting people I don’t personally know. I will argue that—at least when it comes to discussions of policy—we absolutely need the cold, hard calculation that only a disinterested third party can make.

This past week we witnessed two transportation-related catastrophes: on May 28th an old bus likely suffering from faulty brakes, plowed through a crowd of pedestrians near Yambol, Bulgaria killing 17 and injuring another 20. Then—of course—on the first of June, Air France 447 went down over the South Atlantic Ocean taking all 228 people aboard to a watery grave. While the numbers differ by an order of magnitude, the tragic loss is the same for the surviving friends and family whose lives were lost. Besides the grief they share, there must certainly be some anger and outrage over the fact that their loved ones’ lives were cut short. Everyone realizes that nothing can bring these people back, but I am sure each one of the victims' families would love to see measures taken to prevent another such incidents in the future, so at least their loved one did not die in vain…and certainly we should thoroughly investigate these accidents to determine the cause and possible changes in equipment or procedures that would prevent such an accident in the future. However—and this is where the cold, calculating third party comes in—it is necessary to determine the cost/benefit of any changes. For example, a $100,000 per plane retrofit may actually not be justified for an issue that occurs once in a million flights. This may sound callous, but in the larger scheme of things, it might be justified since this kind of money could be spent elsewhere, potentially save many more lives per dollar/euro or whatever metric you wish to use.

What is really ironic in this past week's accidents is the (probable) response: French and international officials will spend a million plus Euros on an extremely thorough investigation resulting in recommendations that will likely cost even more to implement, for what is likely a very rare confluence of event that caused this airliner to crash into the ocean. (Already they have issued a warning about the possible faulty airspeed indicators.) On the other hand, Bulgarian officials will likely go through the motions of a cursory investigation, whose results will be rubber-stamped and forever filed away in some obscure archive. Just like in the rest of Eastern Europe, auto, tuck, and bus drivers will continue to obtain their drivers licenses through bribes, vehicle inspections will continue to be a joke, and Bulgaria will continue to be one of the EU’s leader in highway deaths.

What really irks me though, is that all this seems acceptable to the general public! While air travel continues to be the safest method of travel (per passenger mile/km)—because we feel in control behind the wheel of our own vehicles—we accept and even insist on onerous restrictions and other measures to ostensibly make air travel safer [seriously, how am I going to make a bomb with a full-sized container of toothpaste or shampoo?!], yet we balk at any invasion of the supposed sanctity of our own vehicles, such as the reasonable expectation that you shouldn't use your mobile phone while driving. Probably the wisest use of any transportation safety budget would be to retrofit all automobiles with 5-point, racing-style seatbelts and issuing (and insisting on the use of) helmets for all auto passengers; just in the US, this would dramatically cut into the 40,000 plus deaths that occur on the roads every year! Of course the public would never accept this, so we spend more money on other issues that—in the end—save fewer lives.

Likewise, our opinion of the importance of any heath or safety issue is directly proportional to how “closed to home” the issue or incident hits. We are much more concerned if someone has been in affected in: our family, among our friends, then friends of friends, and finally the celebrities’ lives we follow. Instead we should look at the broad picture: what are the biggest killers and what are the most cost effective methods our governments can effectively implement to save live regardless familiarity, race, nationality, etc.

Devil's Advocate

As our economic woes deepen, everyone is eager to place blame at the feet of whatever nemesis his or her ideology deems fit. On the right, this entire downturn was precipitated by undisciplined and untrustworthy individuals getting sub-prime mortgages to buy homes outrageously out of their price range and then defaulting on said mortgages…triggering an avalanche that eventually lead us into the current credit crunch. Furthermore, many will claim that lenders were forced to do this because of federal “fair housing/lending” and “anti-redlining” regulations.

On the left, there is an agreement that sub-prime mortgages are at the heart of this mess, but blame is placed on the unscrupulous brokers who apparently tricked unsuspecting (and admittedly unsophisticated) homebuyers into taking risky loans just to make a quick commission, and on the “financial geniuses” who devised the now toxic “collateralized debt obligations” as well as other exotic derivatives. From this view, the whole of the rest of the cascade of events that has brought us to this point is entirely the fault of greedy (and by virtue of this unraveling—incompetent) executives, brokers, and associated “money-men.”

My view
I say there is enough blame to go around; we ALL contributed to this mess! Collectively and individually, as corporations, and governments—almost as a rule—we overextended ourselves in respect to debt; and from the most unsophisticated wage earner to the brightest minds working in the most prestigious investment firms, we all assumed that asset values, growth, and incomes would only go up. This crisis is finally the slap in the face that we all needed: we cannot borrow our way into prosperity! As the offspring of depression-era, immigrant parents, financial discipline and thriftiness was ground into me from an early age, so I have been aware of—and avoided at all costs—the trap of living beyond ones means. Never the less, I will not even hold myself blameless; I truly believe that all of us in the materialistic west have some culpability in this mess.

Reaction
No doubt, new government regulations addressing the problems that got us into this mess will be soon be put into effect; unfortunately, as backward-looking legislation, they will generally not address those issue that will eventually precipitate the next economic crisis. In fact, it is almost impossible to predict the future in this respect. The only thing we can hope for is that the laws our governments are creating will make the financial world a little more transparent; the bright light of transparency in the murky world of finance is the only reform that, in the long term, really ever works.

What I find disturbing though, is this “eat the rich” sentiment that lumps all executives and everyone in the financial industry together as greedy, incompetent, and useless. There is a disconcerting air of bolshevism in a lot of the rhetoric I’ve been hearing lately. Yes, a lot of the financial middlemen will rightly lose their jobs, and I admit that I feel a certain schadenfreude in seeing the business school colleagues who went into the finance specialty losing their lucrative positions. However it is naive to think that these functions are unnecessary and that “workers can control the means of production,” as the communist experiment of the last century disproved. We will always have executives and financiers who—by virtue of their extraordinary skills and intelligence—will demand and receive compensation commensurate with their abilities, just as highly skilled entertainers and athletes do without question.

The worst possible outcome would be the introduction of salary caps; they would most certainly be circumvented, further muddying the waters of the business and financial worlds—the opposite of what we want: transparency! Likewise, a ban on derivatives (which given the simplest definition—a bet on an underlying security—sounds like a good idea,) but would contribute more opaqueness, as these instruments would be reinvented in other forms. These exotic vehicles actually have a legitimate use: they hedge and balance other business transactions.

Bailouts
I am generally not in favour of “rescue packages” for private businesses, even large ones like General Motors that will effect dozens or hundreds of partners, thousands of employees, and maybe hundreds of thousands of others not directly employed by the company. I just have an aversion to anything that creates a distortion in the marketplace, be it subsidies, regulations, or taxes that affect one company or industry more severely than another (or, more perversely, prevents a business from entering a certain field/industry or—in the current situation—prevents it from failing/dissolving.)

That being said, I do understand why large financial institutions cannot be allowed to fail, as the resulting banking and credit crisis the would cause the entire economy grind to a screeching halt. Therefore the questions are: “how are bailout funds to be used” and “who decides how the money is used.” Specifically, whom do you trust more to “save” these firms: corporate executives—the rascals that caused (or at least contributed) the failure, or the rascals in Washington (or where ever your lawmakers/bureaucrats reside.) Quite frankly, I’m not sure of the answer myself.

Where does the money go?
On the most basic level, the problem with these troubled institutions is that their balance sheets were out of whack: their assets no longer equaled their liabilities, and therefore the government infused this money—fixing the problem. Now the question is: what happened to this bailout money? There aren’t little cubbyholes in the company’s treasury for general funds, bonus funds, electricity expenses, etc. it just become part of the company’s assets and is used in the same way that all the rest of its assets are used—fulfilling the company’s obligations to its stakeholders: investors, partners, employees, vendors, and yes—executives.

When you or I start a job, we generally negotiate or just accept a certain hourly wage or weekly to monthly salary plus a possibility of a bonus and benefits. At a certain level, these wages/salary become trivial compared to the prospect and promise of bonuses, stock options, golden parachutes, etc. Corporations must make these lucrative offers in order to hire & retain the best and brightest in the field, just as professional sports team have to offer star players multi-million dollar contracts. To those who are outraged at bonuses paid to executives at failing companies such as AIG, I ask: “where do you make the cutoff?” Imagine that you cut all bonuses and stock options for a CEO who earns a salary of $1 per year (actually very common), what is he to do? Furthermore, with this reputation, how do you expect to hire a new CEO in the future? Remember, in 1994, Ben & Jerry’s Ice Cream initially insisted that they would only pay their CEO seven times what the lowest paid employee made; despite their progressive credentials, they soon had to abandon this promise in order to find an individual of the caliber needed to guide what had become a large corporation.

Outcome
Regardless of what new regulations are enacted, we are seeing the end of the secretive back-room dealing-making that has characterized so much of the financial industry. Even if governments do nothing, the market will demand more transparency and lower costs (spreads) for financial transactions. The result will be higher returns for investors and less cost to borrowers, which of course means lower earnings for the businesses and individual that broker these transactions…and, of course, less of those high-paying financial-sector jobs.

More specifically, we will see a convergence of returns. We all know that riskier investments demand higher returns. This relationship is not punitive—it is not just to punish the reckless—it is to cover the inevitable losses that riskier investments entail. In the long-term everybody gets about the same return plus a premium proportionate with the volatility the investor must endure. What everyone has looked for was that elusive, safe investment with a higher than normal return. While there have always been a few of these, I predict that these “secret” investment will all but disappear, to the point at which we can finally say with certainty that the outliers on the risk to return graph are definitely scams (as should have been obvious with Madoff.)

The one bright spot for governments investing (and it is not just the US Federal government that is doing this) in private industry is that they are buying in at a low point; In a few years they will almost certainly have realized a substantial profit—at which time they should divest of these private concerns. It is a mistake to think that these bailouts are a gift from government to private industry; remember that Chrysler was bailed out in 1979, and by 1983 had totally repaid it 1.5 billion dollar loan to the government.

Opportunities
I find that, as individuals, this hand-wringing and finger-pointing is entirely useless; what does it help you or me to assign blame to this or that group, person, or ideology? In a time of turmoil such as now, it is prudent for a bright, young person to look around and ask, “where is this going, and where should I place myself to benefit from the inevitable changes ahead?” I really think now is the time to position oneself for the new business, regulatory, and financial climate that is coming upon us, and I am convinced that it will be characterized by more transparency—and therefore be more information-oriented, and consequently utilizing more information and communication technologies.

We have seen part of this technological revolution in finance on the personal investment front; we no longer call our broker to place a trade (from which he would take a percent or two in commission.) Instead we log on to our discount brokerage website and enter trades ourselves for a fixed $12-$15! Furthermore, on the NASDAQ stock exchange, there isn’t even a trading floor; it all takes place inside of computers. Yes, there are still brokers and market makers, but we’re definitely seeing the disintermediation of actual human beings transacting financial business. Likewise, we see that the computers of Experian, Equifax, and TransUnion (in communications with the computers of nearly all consumer credit providers) automatically determine an objective credit score for nearly every adult in America. Even loan origination (well, shopping at least) is being automated by sites such as LendingTree.com.

The ratings of corporate entities however, have long been suspect. With this crisis, we have confirmation that the stars and letter grades assigned to bonds, equities, and derivatives by the likes of Moody and MorningStar are worthless. So the obvious need is an objective system like that of the FICO (300-850) credit scores assigned individuals. I assume that someone like Dun & Bradstreet is ideally positioned to fill this need. Obviously you can’t as readily assign a single number to represent the fiscal health of a complex organization with all its divisions, subsidiaries, assets, investments, and liabilities, but together with governmental and market pressure for more transparency, I am convinced we will see the creation of one or more objective, independently audited corporate/financial rating service.

With the availability of all this data, the next obvious step is an electronic marketplace where businesses and investors can transact short and long-term lending directly without the packaging and interference of financier or their hefty commissions.

So, dear reader, if you agree with my predictions, how do you think an IT nerd with an MBA like me should position himself to catch this next wave? More specifically, where is this financial information revolution going to start—geographically and with what companies/groups? (Obviously I’m not talking about the existing and useless “financial news” industry that just speculates and rehashes earnings reports, annual reports & 10-Qs, nor the endless speculation of pundits.) I’m serious about this; I would appreciate any advice.

Do what you say

My parents taught me that it is better to say up front that you are not going to do something than to promise to do it and then not follow through. I use this common anecdote in explaining America's refusal to ratify the Kyoto Treaty to Europeans who brag—all high and mighty—about their commitment to reducing greenhouse gases (and, of course, imply that we—as a country—are the boorish, inconsiderate roommate of this planet.)

I've been following this issue for a while, watching as it has been becoming more and more apparent that the “first world” signatories to this treaty would not be able to live up to their promises. It seems that the EU—led by Germany—have almost totally backed out of their commitment; their “actual reductions might be as trivial as 4%” reports The Wall Street Journal.

So it looks like, collectively, we are the “good son” after all; when ask to step up to an impossible task, we simply said “sorry, we can't do it.”

I suppose the rebuttal would be: “at least Europe tried to make a difference,” to which I would ask did American business, innovators, and local government not try?

Oil Will NEVER Get Cheaper

The sting of higher fuel prices are probably nowhere more apparent than here in the southeast US where people drive more, earn less, and define themselves by the size of their pickup trucks and SUVs. Naturally, this distress has generated all kinds of strange theories on what’s causing these unprecedented fuel prices (actually, in constant dollar terms, we are only now returning to the elevated fuel costs of the 1970s.) Everyone from the lowly gas station attendant to Saudi oil sheik to the shadowy speculator have been a target of wrath from truck owners who have just spent $100 to fill up their tank. But what really is the cause of this increase?

The answer is simple: an unprecedented increase in global demand. Prior to the last decade, the demand for fuel—and for other resources such as metals—was more or less directly related to the economies of developed, western countries. What has changed now is that the rest of the (developing) world is catching up with us. Countries formerly behind the iron curtain and throughout much of Asia, Africa, Latin America have been held back economically for decades (by corrupt and/or incompetent governments, I would argue.) Now we are seeing economic (even if not political) liberalization across the board—you can nearly count the exceptions on one hand, and even in those countries, like Cuba and North Korea, micro-enterprises are starting to flourish. Why is this happening? Because even neo-communists like Hugo Chavez and Evo Morales recognize, at least to some extent, that freer markets are the key to economic prosperity—which, incidentally is why we shouldn’t worry so much about the leftist resurgence in South America.

The economic, regulatory, and even cultural barriers that had prevented progress over so much of the developing world have been lifting in the last two decades. This freedom, in turn, has resulted in upward mobility in the population of these countries as businesses grow and trade increases. As these people—who are the majority of the 6 billion of us here on this planet—move into a sort of middle-class (by world standards at least) they begin to demand the same kind of goods that we in the west have been used to for generations: richer food, comfortable housing with modern fixtures and appliances, and even motor vehicles. [update: see this article in February 12, 2009 The Economist]

Granted, this global “middle class” cannot be compared to America’s middle class in terms of conspicuous consumption and outright waste. In fact, nobody could reasonably expect any country, industrialized, “transitioning,” or developing, to ever approach the wasteful level of energy use of Americans. However, even if the rest of the world begins to use just one-fourth of the level of resources per capita of Americans, we are looking at an incredible amount of increase in demand for everything that is mined, manufactured, and grown.

Consider Tata Motors of India; its new $2500 “Nano” 4-seater is in the price range of this emerging, third-world middle class. This means that, theoretically, there could soon be a billion (or even billions of) new cars on this planet! Compare this to the millions of cars that are sold in the west, and you will see why I think that high fuel prices are here to stay; demand has exploded, and will continue to grow at an exponential rate—a rate that supply will have a hard time to match. I realize that fuel prices have dipped back down a little in the last few months (and SUV owners are breathing a little easier,) but I am talking long-term trends here. I have yet to see anyone demonstrate how global supply of fuel or any other natural resources—for that matter—can possibly rise as fast as worldwide demand is ramping up. [2016 Update] Do-oh, I guess that I didn't have any idea about fracking in in 2008

When you look at the potential (and likely) rise in global consumption of almost any resource now, it is downright scary! Furthermore, this surge has just begun; when it comes to gasoline, California alone still uses more gasoline than any other country beside the US (Wired article.) This year, China is poised to overtake this one state in gasoline usage, but certainly not the entire US. This is both an indictment of our (and especially California’s) car culture (China has 1.1 billion inhabitants compared to California’s 36 million,) and an alarming preview of how much more of this particular resource we will needed in the future.

What is being proposed?

Everyone is looking for a silver bullet to solve this problem. There is a widespread assumption that some breakthrough is on the horizon that will save us from having to face difficult choices, and—on the fringes—there are those that think technologies are being purposely suppressed by incumbent energy companies and even governments. Whether we are talking about ethanol, bio-diesel, hydrogen fuel cells, electric cars, solar panels, or wind power, what is consistently overlooked—or perhaps omitted—are the facts regarding the lead-time for these technologies, the energy debt they require, and the simple physics that prevent some from ever becoming an effective solution.

Regardless of how revolutionary a new energy source or method of using energy more efficiently may be, it is practically impossible for such an invention to ease our energy crunch this year, or next, or even 4 years from now. Assuming you’ve invented a widget that would make all current cars twice as efficient, and it is so simple that it requires no further research and development; it would still take years to manufacture, distribute, and install this device. (Incidentally, I trust that you already know that ALL after-market gas-saving devices out here are total scams, the only way they can work is by placebo effect—you may subconsciously drive more carefully after installing one of these devices.)

Likewise, if solar panels finally crossed that magical tipping point of economic feasibility, we simply couldn’t make them fast enough to supply our energy needs because the very manufacture, transportation, and installation of these “energy saviors” would require several times more energy than they produce in a year—not to mention the all the aluminum, steel, copper, glass, silicon, and various other esoteric (and often toxic) materials used to produce solar panels. The same goes for wind power, despite this article’s assertion that offshore wind farms could produce all of America’s current electric needs, neither the article nor any of the comments below it address the energy and natural resource requirement of such a enormous project. Please don’t misunderstand me, I am not against alternative energy; I think it’s a shame that America lags Europe in this respect—places like Germany and Denmark already produce a significant percentage of their electricity by wind and solar. All that I’m saying is that this can’t happen overnight. [Update 6-Sept-08] Just found this article that show how urban wind turbines are actually bad for the environment!

Hydrogen is being touted as the ultimate in alternative fuels for vehicles, since its only emission is water vapor. However, free hydrogen does not exist on earth; it only occurs in compounds with other elements: namely with oxygen, to form water; and with carbon to form various hydrocarbons. In order to isolate hydrogen from these compounds you have to use more energy than the hydrogen can ever produce, regardless of whether it is used in a combustion engine, fuel cell, or an entirely new, revolutionary technology. These are the laws of physics that simply can’t be broken (see this article.) Therefore, all hydrogen can ever be is a method of energy storage—just like a battery. This, in turn, would require even more clean electrical power generation than mentioned in the previous scenario in order to be a truly environmentally-friendly solution.

What can’t we do?

Obviously we cannot prevent the third world from developing. I use the word “cannot” in every sense of the word; it is nearly impossible to stop the “invisible hand” of the free market from expanding these economies, certainly any coercive action to keep the third world in its previously underdeveloped state would be unthinkably immoral, and even requiring—or just encouraging—policies that would mitigate the impacts that we have experienced in our development over the last century, seem incredibly hypocritical to third world populations that now want to “test out their new wheels!” In other words, I think we have no moral authority to prevent the third world from following the path we have already taken regardless of the economic and environmental outcomes.

What needs to be done?

Depending on your background and political biases, you likely lean towards either conservation or further development of existing supplies. Certainly everyone is for developing alternative energy sources—well except for those that feel their homes or properties will be directly or indirectly effected (interesting nutcases against wind turbines.) However, I think it is obvious that we need to do all of the above. Despite the manifestly evident need for conservation, no politician is going to propose this, since it reeks of weakness (remember Jimmy Carter’s “sweater speech”?) Thankfully, the market will take care of this…which brings me to my next point.

What will happen?

What will happen is that the market self-corrects. Naturally, as the demand for something increases, the price does as well—thereby tempering the demand while, at the same time, encouraging greater production of said resource and its substitutes (alternative energy in our case.) This is why it is so important that our leaders do nothing to distort the market. McCain and Clinton’s proposed gas tax holiday was just such a bone-headed idea: it would have softened the very necessary market signals that tell us, as consumers, to reign in our consumption and producers (including alternative energy upstarts) to ramp up production, exploration, research, and development. Likewise, incentives to produce ethanol from corn, which is horribly inefficient, has proven to be a boondoggle that nobody but Iowa corn growers benefit from.

The other option is to introduce a dizzying array of counter-balancing regulations, taxes, and subsidies: laws and incentives to force individual and industrial consumers to conserve artificially inexpensive resources plus incentives and outright subsidies to producers to increase production and develop new sources despite a price that is too low to make an economic case for such investments. These prohibitions and inducements would, of course, be gamed by all sides despite legions of bureaucrats to administer it all!

I have been planning to write and publish the post for some months now. What has happened in those intervening months seems to counter my thesis that fuel prices will remain high indefinitely. The reason that fuel prices have fallen (slightly) this summer is that demand has slumped—bringing about the concept of a “staycation” for instance, and production has risen—Canadian oil sands are now economically feasible for example. However, as I’ve said before, this is a temporary dip; the pent-up demand for fuel and other resources in the developing world will only continue to rise, negating the effect of all our conservation efforts. Furthermore, the higher cost producers require to maintain new sources such as marginal oil wells or oil sands means that we can never get back to the prices of the previous decades unless worldwide demand commensurately shrinks to that time as well, idling these more expensive resources. (Interesting CNN article about this)

We simply need to get it through our thick skulls that energy will never again be as cheap as it used to be. The recent rise in fuel prices is not an anomaly that will quickly pass; oil (and other natural resources) are indeed scarce enough to demand these prices (not to mention yet unknown cost of environmental impacts of using said resources.) We now need to reorganize our lives and communities to deal with this new reality. Ever the optimist, I actually think that—for the most part—we are learning this. For example, even the gearheads at Motor Trend are admiring compact, fuel efficient European cars.

[Update – March 2009] With gas still under $2/gallon, and no sight of a serious economic recovery in the near future (necessary for demand to rise,) one might think that I would want to retract this post. However, I stand by everything I have written here last year. I am confident that, in the long-term, I will be vindicated in saying this is just a temporary dip in the price of fuel. No one knows how long this recession will last, and even after a recovery there will be a surplus of oil that has been cached all around the world during this period of low demand. Never the less, I challenge anyone to claim the following is bad advice: “Do not allow your local car dealer to convince you that now is a good time to buy a gas-guzzling SUV or truck because gas prices are going to stay low. Within the service life of any new vehicle you buy now (let’s say around 5 years,) gas will rise back up to the $4-$5 per gallon range.”

[2016 Update] OK, I give up. I was wrong. Largely as a result of the fracking revolution, America suddenly has more oil than it needs. However, I still would not buy an SUV; regulatory pressure and long-suppressed uptick in resource demands from the developing world still loom in our future.

You can’t sing that, it’s my song!

I suppose the story is the same between young siblings and/or cousins in families across the world: a mother teaches her son or daughter a song, and the child takes ownership of the song to such an extent that you eventually hear something to the effect of: “You can’t sing that song, it’s my song!” when an older sibling (or cousin, or even uncle) provokes the little one by daring to sing his or her song.

It’s all very cute for small children, but we wouldn’t expect to see this kind of childish behavior among adults, and especially in the NGO world where everything is supposedly for the greater benefit of mankind. So it was with great interest that I read these recent articles about the explosion in commercial microfinance (positive and negative ) in BusinessWeek.

Microlending (a.k.a. micro-loans) have been the bailiwick of non-governmental development organizations (NGOs); I would goes so far as to say they have been the single, most effective use of these organizations’ funds. Their funding, which can come from a number of public and private sources, is given with the explicit or implicit stipulation that they will be used to help needy people of the underdeveloped world. Prior to Muhammad Yunus’s revolutionary idea of making tiny—by our standards—loans to poverty-stricken entrepreneurs in the developing world, development funds were generally either given to the governments of these developing countries, or used by the in-country aid agencies.

Of course, direct payments to a 3^rd world government or its associates does about as much good to the suffering people of in their country as wiring the money directly into their leaders’ personal bank accounts, because that is where most of it ends up anyway. Assuming this is an unfairly harsh characterization, at the very least and by virtue of the underdeveloped state of their economy, the policies put in place by these governments (of course it is always the previous regime’s fault) demonstrate that, collectively, the government is horribly incompetent—therefore, a direct payment is throwing good money after bad.

On the other extreme, you can send in your own people to administer the disbursement of these funds, but regardless of how idealistic they are, if they are intelligent, competent and successful, they will need to be properly compensated and will require a nice home with western amenities, an office with air conditioning, and a Land Rover to negotiate the poor roads. Besides eating away a good portion of the funding—ultimately intended for the suffering population you are trying to help—this also causes a certain amount of resentment from local staff and the population in general.

Regardless of which method you choose, you will only be able to help a small number of individuals or businesses in any particular country. This is the simple reality of the situation: the need is great, but your budget is limited—even if you have the backing of someone like USAID (the US government) or UNDP (the UN.) This, in turn, creates “islands” of development aid. While these “islands” usually have a geographic characteristic (concentrated around the capital and other major cities) it more accurately describes the network of people that are “in” the development community; in other words, those that get the help do so because they know people, know how to fill out a grant application, etc. Those that are outside of this “island” have little chance of getting any help (either monetary or technical), and again this is regardless of the idealistic and egalitarian intent the program may have been set up with—this is just how it work; some get seconds before equally deserving entities get anything.

Returning to the topic of microfinance, this is generally a wonderfully effective use of development funds. The purpose of each loan is to create or expand the business of a desperately under-served entrepreneur/small businessman—giving them something, even if only a subsistence job, where before was absolutely nothing. In effect, each loan is a direct, targeted (albeit very small) aid package to an individual, family, or small business that would otherwise have no access to capital due to a total lack of credit history, collateral, or any other traditional way to demonstrate creditworthiness. Incredibly, micro-loans—as they’ve been administered—have a surprisingly high repayment rate. This means that as loans are paid back (and with interest) this money can be lent out again and again—eventually benefiting many more people than any other development program could do with the same amount of money. Microlending has deservedly become popular throughout the development community; even the smallest NGOs and religious organizations are getting into the game. Since you are already on the Internet, you can even surf on over to kiva.org and make you own micro-loan!

Naturally, financial institutions have woken up to this lucrative market, and entered the mix. Now some in the NGO world, especially Mr. Yunus, are crying “foul!” However, in practice, the high ideals of people who say that we should not make money from the poor in this way are simply limiting the opportunities of a vast population who are simply not “connected” enough to be one of the few, lucky ones who gets a loan from an NGO. Regardless of their intent—in my mind at least—they come out looking like the child who says, “you can’t sing my song” or, worse the hood who says, “hey, that’s my turf!” The whole purpose of micro-finance is to provide capital to previously underserved populations; now that traditional players are doing so, Mr. Yunus and the rest of the NGO community should pat itself on the back for making a real, effective change in the world instead of worrying about their own turf.

Granted, part of their complaint is that these for-profit entities charge too much interest, but as more commercial players enter the market, the interest rate will naturally settle to a level commensurate with the risk of such loans. We know from basic economics that the riskier an investment, the higher interest (or other form return) that will be expected. This risk/reward curve gets a little discontinuous at the extreme where defaults are very common, but let’s remember that even the slimiest payday lender is providing credit to someone who has no other alternatives.

Likewise, I am concerned about the Mexican big-box retailers mentioned in this article that are marketing the western “have it now, pay later” lifestyle that may cause more harm than good to these desperately poor people; but who am I to say that only I and my fellow middle-income earners of the world should be allowed to have these modern conveniences? In this regard, concerns about payday/title loan sharks in the US and questionable lenders in the developing world both result in a very paternalistic view of the “great unwashed masses” of the world—which I am willing to concede is sometimes warranted, but doesn’t have a place in discussions of a free market.

Déjà vu

This issue reminds me of a very similar complaint last year from Nicholas Negroponte of the One Laptop Per Child project. (WSJ article) He was whining that Intel, Microsoft, HP, et al were chipping away at his non-profit’s business after he and his brilliant team from MIT developed the versatile and inexpensive (although never quite reaching the promised $100 price point) XO computer for underprivileged children across the world. Again, he should have simply declared victory—these huge incumbent companies are now making low-cost computers to fill a previously underserved market: the developing world. Instead he questioned their motivations—namely that they were just temporarily lowering their prices to get the developing world hooked on the WinTel platform (instead of his open-source platform.)

Disclaimer: This is in no way an indictment of any organization that I have been associated with, rather it is a general observation of international development efforts that I've seen during my stint in this field and from my continued interest in this area since then.

New material

I know I’ve said this before, but The Persistent Itch is back! I’ve missed having the recurring surge of creativity and intellectual stimulation required for coming up with a new posts for this blog. The following ideas have been bouncing around in my head for a while, and I am now committed to start writing posts beginning with these subject.

• World Resource Allocation

Who is to blame for ever increasing fuel and food costs? Bush, OPEC, speculators? No, actually the proverbial “starving child in China” and others in the developing world are “at fault” for trying live the life we in the west are accustomed to—and therefore we can’t really blame them.


• Islam’s Last Gasp

Terrorist training camps in Afghanistan, refugee unrest in and around Israel, Al-Qaeda in Iraq, the rise of Islamic parties in Egypt and Turkey, and even riots in France and England seem to point to a rising tide of Islamic extremism around the globe. However, I posit that this is actually fundamentalist Islam’s last gasp; an overwhelmingly young demographic in most predominantly Muslim countries are actually yearning for western products, music, and popular culture; those young people that are embracing extremist Islam are actually a tiny minority.


• Fair Trade

Juan Valdez gets an extra fifty cents per bag of coffee, which is great, but if I have to pay an extra three dollar to give him this fifty cents, is is really worth it? I suspect that, due to the less efficient supply chains of “sustainable, fair trade” companies, Juan gets a smaller percentage of my purchase price when I buy “fair trade.”


• Local Food

For all the talk of “food miles,” I suspect that a carrot shipped 500 miles in a Wal-Mart tractor-trailer (that is packed to the roof) actually has a smaller carbon footprint than the carrot brought 50 miles into town by the friendly, local organic farmer in his pickup truck or box van.


• Gift-o-marketing complex

Just as there may be sinister military/industrial complex convincing our leaders in the White House and Congress to buy, buy, buy expensive new weapon systems, associated goods, and services, there is a very real and sinister force that is influencing us to buy and gift items to friends, family, and acquaintances for an ever-increasing number of holidays and special occasions. I would not be surprised that within the next generation these marketers will have convinced Americans that it would be socially unacceptable to not exchange Arbor Day gifts among friends and family.


• Personal investing strategies

They say to build wealth, start an investment account with as little as $500; while I understand the sentiment, I think it’s downright stupid with for someone with $5000 or more of credit card debt—which is most Americans.


• Save by NOT buying at all!

While this concept is so obvious that I can’t imagine needing to expound on it, apparently a lot of people don’t seem to understand that unless you really need/require something, in the long run you will be happier and more prosperous by delaying or even denying yourself the purchase of unnecessary goods—more of my minimalist philosophies.

On the computer front, I have a new laptop—with which I am writing this right now—the diminutive Asus eee series 900. It’s a great little computer that attracts attention wherever I go and does 90% of what I need it to do—all for just a little over $500! Despite its ultra-portable form-factor, I actually don’t drag it around with me most of the time because I have a computer in my pocket that lets me surf the web, check my email, or jot down a note—the Apple iPhone. Thanks to Ziphone.org I didn’t have to sign up for the pricey AT&T data plan—especially since the EDGE (GPRS) data network is so slow it’s practically unusable.

Red Bank Hydro
After a nearly year-long lull in this project, the motor/generators were finally installed earlier this year, and as of 21 May 2008, we are officially making power! Unfortunately, this coincided with a drought period here in South Carolina, meaning we are only able to generate a fraction of this plant's potential, and only during the peak hours of 12:00-22:00. I have been gradually designing and installing progressively more sophisticated controls; the next step is to install a water level transducer and program the PID functionality of the PLC to ride the level of the lake. YouTube video

Twitter
As if blogging is not enough of a chore, I signed up for “Twitter” the micro-blogging (140 character maximum—for SMS) service. I did it only to secure http://twitter.com/froese but who knows, I might occasionally throw some status updates out there, so follow me if you have an account; in any case, I’m adding the feed to the right hand column here.

The real digital divide

The “digital divide” is supposedly a socio-economic division that is propelling young, rich and middle class kids into a wonderful, new, technology-based economy, while leaving behind lower classes—especially those growing up in the developing world. Earnest crusaders are bridging this gap by setting up computer labs in schools and community centers for disadvantaged youths, and even building $100 laptops for kids in the developing world. This is admirable, and I appreciate anyone giving their time and money to help disadvantaged kids, however I wonder: what is this really helping? Now these kids can create their own Facebook page and copy and paste from Wikipedia for their school projects like their more affluent peers—is this really a step in the right direction? By virtue of the fact you are sitting here reading my ramblings (and I have spent time writing them for this forum) we know that the Internet is more often just a time waster. The cynic in me (and I am probably not alone) looks at the picture below, and braces for an onslaught of even more 419-style email spam.

No, the real digital divide is a generational divide; its victims are often otherwise successful and affluent professionals, business leaders, “old-economy” corporations, and even entire sectors that just don’t get it. The most obvious example is the music and film industries; as entertainment is increasingly being distributed and delivered digitally, traditional distributors and retailers of these goods are becoming increasingly irrelevant. Instead of finding sensible ways of delivering this content to consumers (meaning cheaper and more convenient,) they have balked—either by ignoring the reality of how music is being “consumed,” or by proposing ridiculous schemes whereby consumers are locked into a particular technology, yet given no significant discount for buying this crippled product. Let’s face it, it is technologically impossible to create a format that can be played on a variety of players from different manufactures and—at the same time—be hacker-proof.

Therefore, I predict that the traditional distribution channels for music will shrivel up and eventually die, as the industry continues to push for more onerous restrictions (namely Digital Rights Management [DRM] schemes, constraints on the types and number of playback devices an individual can use, and limitations on sharing music among friends,) all of which will drive consumers to “pirating.” What will eventually replace the current “music labels,” will be an E-bay like marketplace where consumers buy music directly from the musicians—cutting out the middle man—at a fraction of the current retail price. Musicians will gladly allow consumers to freely share their music with friends, as this will grow their audience.

Likewise, the sale of movies will have to radically change as the general population will have access to ever increasing bandwidth, meaning high-resolution movies will be able to be delivered via the Internet. Certainly movie theaters/cinemas will continue thrive as they have through the advent of TV, VCR, and DVD. But if the movie studios think they can retail movies for the same prices as they do DVDs—which is what they are trying to do now—then they are kidding themselves. A downloaded movie has to priced at least half of what a DVD costs since you are providing your own storage, and no longer have access to a real, physical backup copy of the movie. [2016 Update: It looks like I didn't see the streaming revolution coming.]

I’ve actually gone out on a tangent with this rant on the entertainment industry. What I really wanted to say is that I have had the experience of helping people with their websites both at home and abroad, and I’ve noticed that otherwise successful business people of a certain age want their websites to look like a slick brochure. The result is a lot of websites with text in graphics, 100% Adobe Flash sites, and other obvious self-sabotage. On the Internet, content almost always trumps presentation: just look at the minimalist design of ultra-successful sites like Google and Craig's List.

Furthermore, what is more important nowadays is to be part of the Internet community rather than an “island” website unconnected to the rest of the net. In fact, it turns out that many individuals and small organizations simply don’t need their own website. An individual or artist/band will find that a MySpace profile is more useful and easier to create and maintain. Likewise, a professional will find LinkedIn to be more useful for networking, and even small net-based retailers would find Cafe Press, Yahoo! Store, or even Ebay to be a more efficient way to list and sell their merchandise. Hmm, Joel.Froese.com is up for renewal in May; I wonder if I really want to renew it now. [2016 Update: Indeed, I couldn't justify the $35/year price, and have let my original website expire.]

Petroleum: your all-natural, organic choice in energy

With trouble in the Middle East and gas prices approaching $3 per gallon, everyone is concerned about fuel prices. However, it seems most Americans have not changed their driving habits or dumped their gas-guzzling SUVs. Instead we are looking for salvation in biofuels (ethanol and bio-diesel) and hydrogen/fuel cell technology. What is conveniently forgotten is the cost of these technologies—both economic and environmental. The process of making biofuels generally consumes more than half of the energy that it produces, and is only feasible because of government subsidies. Worst of all, using agricultural resources for fuel instead of food means our grocery bills will increase—most adversely affecting the poor. Agricultural land, although plentiful, is a finite resource, as are the nutrients in that soil—which ironically, are usually supplemented by petroleum-based fertilizers. One insightful farmer noted “The ethanol craze means that we're going to burn up the Midwest's last six inches of topsoil in our gas-tanks.”

To me, it seems strange that ethanol and bio-diesel are considered a renewable, “green” energy source. I’m not an environmentalist; I just like pointing out the intellectual dishonesty of championing biofuels as a preferable alternative to petroleum. In terms carbon output, the only difference for biofuels is that the cultivation of inputs (corn, sugar, or switchgrass) supposedly offsets the burning of the resulting fuel later; however, in most cases, the land used to cultivate these crops would have some kind of carbon-sequestering plant life on it in any case. Furthermore, ground-level pollution from biofuel use and manufacture shows few advantages over petroleum. The fact of the matter is that biofuels are manufactured in a factory, whereas petroleum is naturally produced by the earth over millions of years from basically the same inputs. Granted, crude oil must be refined before it can be used (as gasoline, diesel, and other petrochemicals) but this processing is minimal compared to the manufacture of biofuels; in other words, switching from petroleum to biofuels requires expanding the capacity and/or number of already unpopular fuel plants (be they refineries or ethanol plants.)

The other alternatives for mobile/portable fuel are batteries, fuel cells, and hydrogen. These zero-emission energy sources sound great until you look at the source of the energy required to charge the system or extract hydrogen from water or other compounds (often petroleum.) Certainly real, renewable energy sources like wind, water, and solar power would be great, but realistically these sources contribute only a small percentage to the total electricity used in the US, and—for practical reasons—this will remain so for a long time; electrical power will likely continue to be produced mainly from the dirtiest source of energy: coal.

Therefore, I propose that the most sensible course of action is to continue to use this perfectly natural source of energy for as long as we still have it. By virtue of the fact that oil is becoming scarcer, the market will automatically reward makers of more efficient vehicles, engines, and other processes that use petroleum. Eventually, even more expensive alternatives energy sources will become economically feasible to develop—and without artificial incentives!

Of course I am all for conservation of all our natural resources; I am particularly irritated by the thoughtless waste that is characteristic of American society. Particularly when it comes to petroleum, this waste is directly responsible for making us dependent on some of the most reprehensible governments in the world, simply because they have the majority of the world's crude oil reserves. I say let’s tap the ANWR and other verboten reserves within our territory; there is no reason to let this perfectly good resource go to waste. Our current policy regarding these reserves are as if you were to go down to your wine cellar, (assuming you have such a thing) notice that racks are starting to look a little empty, and then swear off your finest, well-aged wines forever in favor of cheap domestic beer.

On Capitalism

Monday night, I watched an interesting documentary on PBS called Power of Choice: The Life and Ideas of Milton Friedman. The late Dr. Friedman was one greatest proponent of laissez-faire capitalism in the 20th century, and—thankfully—had the clout to be heard in Washington and around the world. I am convinced that much of economic boom of the past century is directly attributable to him.

Then, on Tuesday, I read a short article entitled “The Hard Rain That’s Falling on Capitalism” written by Ben Stein in the New York Times. I found this story through Reddit.com—a website which also lets you comment on the featured stories. I had been meaning to formulate my thoughts on capitalism for some time, and in responding to the mostly left-leaning critics, I finally got a start. However, newer stories are constantly making their way to the top on Reddit, and by the time I wrote these comments, most of the debate here had already subsided; therefore I will expand on my theories and observations here.

The criticism usually leveled at capitalism—and the US in particular—by the left and anti-globalists, is generally that this system only makes the rich richer (and by extension the poor get poorer.) Their proof tends to be pointing out specific cases of corporate corruption and other malfeasance, and instances of excessive compensation for top management. What they seem to suggest by this is that there was an idyllic time in the past characterized by more compassion and transparency in commerce.

With the exception of a few true, ideological communists, I think we all agree that the problem is not with capitalism as such, but corruption and the lack of transparency. This is especially egregious when big businesses use their influence extract subsidies from government or to induce the government to create barriers to new entrants (foreign or domestic) in their particular industry. Then there is the internal corruption, where management—usually through creative bookkeeping—steals from the corporation and, by extension, the shareholders and other stakeholders of the company. I admit this is a real problem, but I don’t believe it is an endemic or growing problem. I assume that this has always been going on; it was just not spoken about as much. I dare say the farther you look back in our history, the more corruption and back-room dealing you would discover—meaning the economic climate was less fair and transparent at any time in the past.

This is why, whenever a corporate scandal is uncovered, I gain—not lose—confidence in the business world. I believe the reason we hear more and more about these scandals is not because they are occurring with more frequency, but because the press is becoming more vigilant—uncovering and reporting more cases of malfeasance than ever before. The logical result would be fewer and fewer occurrences of malfeasance over time, since management knows they are being more closely watched. Pessimistically, it also means that future malfeasance will be more esoteric and harder to detect, but like with spam and viruses, it is a cat and mouse game between the good guys and the bad—alternately one-upping each other. If nothing else, this vigilance means the repertoire of deceptive practices available to unethical managers is constantly shrinking.

Let’s take the Enron debacle for example—could this happen again? Well, certainly not in the exact same way. More importantly though, the complicity of auditing firms in such scandals has been forever broken. Arthur Anderson is now defunct. Don’t you think that this has put the “fear of god” in the remaining big-3 accounting firms? This was a beautiful example of the free market at work—no government intervention was necessary; these firms now clearly understand their only really important asset is trust—specifically their reputation. If shareholders don’t trust an auditor, they will not approve them, and they will quickly lose all their clients—ending up bankrupt like Arthur Anderson. Certifying that the books of a client are accurate is no longer just a formality; it’s putting your reputation—and therefore your existence—on the line for these firms.

This trend toward greater transparency is self-perpetuating. It improves investor confidence, and investment naturally gravitates to its most efficient and profitable use.
The financial markets in London are a perfect example; previously characterized by widespread back-room dealing, they have recently been cleaned up, and are seeing a boom that is making them the premier international financial marketplace.

Therefore, my main assertion is that we are now seeing an emergence of truer, more open, equitable, and much more transparent capitalism—not just in the US, but also around the world (even China and left-leaning South American governments see the benefit of a free market.) Furthermore, this embrace of true (and global) capitalism is what is responsible for the exponential growth that we have seen in the world economy in the last 10-20 years. This boom is being felt not only in the industrialized world, but also throughout much of the developing world—particularly Asia. The result is that infrastructure is being built and the economies of the countries are growing faster than under any other economic regime/philosophy. Even the supposedly “exploited” workers of the developing world are earning more and are accumulating more valuable possessions than their forefathers could have imagined. I challenge you to find a more prosperous time in history.

In regards to the growing income gap between the rich and the poor, I can’t believe this is a result of poor getting poorer; the rich are simply getting richer at a faster rate—deservedly or not. And this group of super-rich is larger and more diverse than ever. Back in the day, there was only a handful of super-rich in the US; these families are household names today: Rockefellers, Vanderbilt, Carnegie, Morgan, Getty, et al. Today you have all kinds of innovators and entrepreneurs from unknown families (even from groups that were previously discriminated against) becoming fabulously wealthy.

For comparison, let’s go back to the idyllic “good old days” of yesteryear. A middle class working family lived in a tiny (by today’s standard) 2-bedroom saltbox house, had one car, never traveled by air, had no credit cards, no cable TV, no cell phones, no computers, no Internet access, etc.—all these things we now consider necessities and whose monthly payments now suck dry the wallets of the middle class. The working class is not poorer today; they are just stricken with affluenza.

The ultimate argument for capitalism is its results; find me an economic system that not only created the greatest amount of raw, economic power this world has ever seen, but also given nearly all strata of society more purchasing power and therefore a more comfortable life. This last part is very important to remember when we begin discussing real wages of the working class, which have supposedly been flat or even declining in the US since the 1970’s. The homes, cars, appliances, and especially electronics we buy today are many times better (in terms of quality, efficiency, durability, etc.) than anything you could buy in the 70’s, and certainly not as manifoldly expensive. Technological advances can explain only part of this effect; I am convinced that we have—and continue to—see an incredible increase in the value of goods we purchase over the years due to efficiencies realized thanks in large part to more open and transparent global capitalism. This “Wal-Mart effect” in fact makes us richer, and it is not sufficiently reflected in the usual empirical statistics.

Any argument against capitalism, would by definition propose an alternate (or at least modified) economic system. And again by definition, any system besides a pure, laissez-faire capitalism would require some type of government or at least collective controls that would introduce distortions into the marketplace—either placing more or less value on a resource than it would naturally be entitled to. I am not advocating pure capitalism, I only want to make you think: what aspect of the economy is so important that we need to tinker with it (and be more likely to screw up rather than improve), and who (politicians, bureaucrats) can we trust with these decisions? We have seen that concentrated central planning—namely communism—has failed miserably; where would you set the limits? Many people hold up European (and especially Scandinavian) socialism as the perfect balance between capitalism and communism, and in a lot of ways it is hard to argue with: they have the lowest poverty rates, highest wages, and—amazingly enough—export more value per capita than low cost, export-oriented Asian countries. (This is because they produce higher-end products and operate more efficiently largely due to their excellent educational and vocational training systems.) However, I am convinced that this supposedly most advanced economic system is not the answer for the developing world. Just as with your personal finances, you can’t spend your way into long-term prosperity.

Here is my 6-step program to economic prosperity for developing countries:

1. Tackle corruption.
2. Throw open the floodgates of laissez-faire capitalism to build wealth.
3. Institute a low, flat tax rate.
4. Invest tax revenues into infrastructure and education.
5. Add regulations slowly.
6. Add social programs as tax revenues allow.

I see doing this in any other order as “putting the horse before the cart.”

Well, that was longer than I expected it to be! Sorry for rambling on; I guess I should organize this a bit better, back it up with research, and write a more coherent article, but that’s not going to happen realistically!

Current Events

Mmm, Polonium wasabi. Muy caliente! (много лютив)

Seriously, I wonder: does radioactive hot taste caliente, picante, or neither. Related story