Wednesday, September 29, 2010

Brad DeLong should stop insulting Megan McArdle about her Math Skills


Brad DeLong really misses the point here.


When you're looking at PERCENTAGE OF GDP, you're looking at A sub t over GDP sub t.


When you look at the present value of these, however, and you're using different discount rates because of different growth rates, you end up with distorted percentages. This is very simple math.




Monday, September 27, 2010

Exercises in "Strict Rationality"

This is on strict rationalism. This is not coming from an emotional place, it's coming from a questioning place. Sorry for the very "Robin Hanson" style posts today.

I've always thought it's strange that people try to make me feel better on a bad day with "Well, if it's any consolation, (insert their bad news here)".
Your misery is uncorrelated with mine, and is strictly negative for me if I like you. How is that supposed to make me feel better? Making me feel like I'm not alone is stupid, because I WISH I were the only one in the whole world having a crappy day. I'm sure Robin Hanson would have something to say about the anthropological background to this, perhaps a reason that may be strong enough to counteract my "strictly rationally, this is stupid" reaction, but I'm guessing that whatever effects he'd bring up would be secondary to the primary logic. The intention of them saying it is clearly good - they want to signal that they understand my pain, and to help me feel not alone - and that intention can make me feel good, but isn't there some better way of signaling that intention without a negative factual?
Another example (which seems to me to be intuitively related, but I'm not quite sure how) is that it's rationally strange that people don't put "single" on facebook when they're single and would prefer a relationship. It should not be embarassing being single or wanting a relationship (these are part of being human in modern society), and reducing search cost should be a good thing for people with whom you may be compatible.
I understand the signaling value of looking like you could be in a relationship, but the person you're eventually getting with is going to find out anyway.

The only explanations I can think of is either a knee jerk preference for privacy (which I doubt, given the amount shared by many people online), or a "commitment and consistency" thing where people have to work to figure out if you're single, which increases your "mystery" and makes people want to act consistent with the initial effort they've put into figuring out if you're single - that you're worth time.
Relationships are hardly rational, so it's not quite so important to adhere to rationalism when seeking for one, but I know my initial reaction to someone who is single but doesn't have "single" up is that they don't really want a relationship and won't really put effort into finding or maintaining one - something strictly negative. My next reaction is "they're too self-conscious and don't have any confidence", and my next one is "well, if neither of those are the case, they think very tactically/politically". None of those three things should be things you want a single person you could be interested in to think. I don't know if this overpowers the commitment/consistency motive. Perhaps it depends on the person you're trying to attract - if you want someone very commitment/consistency oriented, it's good, whereas if you want someone adaptable, it's bad. I've always associated adaptability with intelligence, so if you want someone commitment/consistency oriented, it means you value bullheadedness. That means I still shouldn't really want you.

You could also argue that someone who posts single really wants a relationship more than normal and that is a negative signal. Someone who wants a relationship but not more than normal doesn't want to look "desperate", so they post nothing. Jury's out on this one, but it's certainly an unusual and unfortunate equilibrium - nobody has incentive to deviate now, but if the equilibrium were on a less negative interpretation, everyone would be better off, still with few obvious reasons to deviate. One could argue this equilibrium was reached by chance, but I doubt it - there's something "negatively emotional" in posting "single" and reading "single" that forces everyone to live in a suboptimal equilibrium.
Conforming to the equilibrium that may or may not exist, it's more of a tradeoff between the quantity of people reached with your message vs the quantity of people who filter you as "desperate". This may still be a confidence-related issue, as confident people may not worry about being seen as desperate when they're not desperate. It's all worth thinking about, at the very least.
A final example would be the extreme negative reaction of some people to hearing someone else say "I love you."  "I love you" is a factual statement and has two meanings to a listener: 1) the speaker claims to love the listener and 2) there are emotions that person is feeling that has led them to say "I love you".
Both of those things are good things for the listener - being loved is good, and having emotional attachment is often good. Sometimes, perhaps, a negative reaction can come from a feeling of "Oh no, I don't feel the same way to the same extent and I will have to hurt this person" or even "Oh no, I'm going to get attached and then they will hurt me one day", but I think we all know couples whose relationships that were going along wonderfully and had both people excited about the long term until one person said "I love you". This negative reaction by the other person is not a "rational" one.
This isn't to be judgmental - people are welcome to do or think what they like - as long as it doesn't affect anyone else directly, it doesn't matter to me, and people should do what makes them happy or comfortable. There's a difference between judging someone for being a weak person and judging someone for being a person. But these are three behaviors that require "irrationality" to make sense. More constructively, this isn't a statement of "people are irrational and that's stupid", it's a question: "How can I, as an imperfect and irrational person, 'practice' being rational, and when will it improve my behavior?" In these situations, that should be a good thing - for being happy, for finding love, or for nurturing it.

Prospect Theory and Utility, Price and Rights

Talking with my friend Damien over lunch today, I got to thinking about some very stupid questions:
1) Let's say someone offered you a sum of money, $X, to not wear jeans at all for the next year (presume it's suitably enforced so that you will always comply). How big would X have to be for you to accept?
2) Let's say someone offered you a sum of money, $X, to never use a fork or fork-like object (spork, etc) for eating ever again. Presume it's suitably enforced so that you will always comply. How big would X have to be for you to accept?
I'd expect significant variation in peoples' answers to both questions (I don't get to wear jeans to work anyway, for example, so not wearing jeans would impact me less than others - though I like jeans a lot more than most people do, I think. Women have more alternatives to jeans during leisure time - dresses, skirts - and I know some girls who never wear pants, ever. A lot of people are better than I am with chopsticks.), but the interesting part is how those sums relate to sums in the rest of my life.
Damien posited that about $100,000 would be enough to make him give up forks forever. (He claims that $200-$300 would be enough to give up jeans for a year, but I doubt that's true, given that he has spend that much on a pair of jeans before...). My answers were higher on both counts - at least a million for the fork question.
The funny thing is that a million dollars is a LOT of money (surprise!) - would I really forgo a lot of years of cumulative earnings just so I can use a fork, a utensil for which there are plenty of substitutes?
The reason for my answer, I think, comes down to a few things -
1) I'm young, live cheaply / don't have trouble managing my budget because there aren't that many things I really want to buy, and am probably wildly overoptimistic about my future earnings capacity relative to future expenditures (wedding, house, childrens' college, etc), and thus estimate that the marginal utility I will get from spending a million extra dollars over the rest of my life will be less than the marginal utility from using forks (the "rational" response except only a blind idiot would project future expenditures that low, and thus discount one MILLION dollars, and in any other context, I wouldn't make that discount),
2) path dependence - I have used a fork for my whole life and am good with it, but am much worse with chopsticks. A stupid reason, because I'm sure I'd get very good at using spoons or knives or chopsticks as replacements pretty quickly - I probably underestimate the ease of transition, which is part of...
3) prospect theory. I significantly overvalue potential losses and undervalue potential gains. As an investor who pays a lot of attention to the psychology that goes into my own decisions and my psychological reaction to risk and opportunity cost, I sometimes like to think I'm a little more immune from prospect theory than most, but apparently, I just suffer from overconfidence, just like everyone else...
Food for thought and self-reflection. Lunch break's over, back to work.

Thursday, September 23, 2010

Pharmaceutical Business Model

Historically, the Big Pharma business model has been that of a fully integrated pharmaceutical company, complete with basic research and development, clinical trials, sales and marketing, focused on the development of blockbuster drugs. This model has recently been roundly criticized.

A research article issued in January from Morgan Stanley (MS) titled "Pharmaceuticals: Exit Research and Create Value" created a stir when it called for Big Pharma to toss out all small molecule research. A group of MDs, PhDs, MBAs, and CFAs calculated that reinvesting internal research to in-licensing would result in a three-fold increase in returns. This process, they said, would even triple the number of new drugs reaching the market each year. Research and Development, Morgan Stanley said, should be replaced by Search and Development. The core competency of Big Phama should shift from in-house research to late stage development and commercialization.

Aside from the first extreme suggestion of divesting all research, there isn't much new in this prescription. Big Pharma has already shifted a large percentage of their early stage research spend outside the company. Pharma is in the midst of transferring ever more research to both CROs and biotechs alike. Where at one time only relatively simple functions were outsourced, nearly all research and development functions are now carried out by third parties to some extent.

The fastest growing trend today is outsourcing biology research and transferring development work to lower cost markets, especially Asia. It has been estimated over $300 million can be saved by performing drug development in India(1). In-licensing has increased to the point where approximately 30% of current Pharma revenue now comes from in-licensed compounds(2).

Forest Labs (FRX) is an example of a fully in-licensed pharmaceutical company. It did well for some time, but has recently suffered from the same problem as the rest of Pharma with its own pipeline gaps. Two drugs, Lexapro and Namenda, approved in 2002 and 2003, accounted for 87% of 2009 sales. Revenue growth is in the mid single digits, and its operating margin, at 18% is far below that of the average Pharma company- peculiar considering Forest has only 5000 employees and has no need to conduct discovery research. The stock has dropped by half since its 2007 high.

In any case, in-licensing is unlikely to be Big Pharma's savior. As this trend has intensified, the cost of quality compounds has gone up. Pharma historically favored in-licensing compounds post Phase II to reduce risk, but with increased costs, they have turned to earlier stage compounds. Today, even these have become pricier. Many companies backed by VCs have begun pushing for buyouts for their portfolio companies due to the inability to access the IPO market, further increasing the cost of acquiring compounds.

In-licensing allows Pharma to access novel technologies and may have some cost efficiencies for now, but it will only buy time for Big Pharma as costs spiral upwards. While ROI for Pharma compounds is a lowly 5%, the increasing costs combined with increasing failure rates of in-licensed compounds has reduced the ROI of compounds licensed at the Phase III stage from 12% in the 1995-2000 period to just 6% from 2000-2002(3).

Even as Pharma pays higher prices for biotech compounds, they will need to increase their diligence in selecting them. As Harvard Business School Professor Gary Pisano noted, biotech is even less efficient than Pharma in developing drugs(4). Pharma will certainly need to retain a highly innovative research group, and I imagine that is the case, if not for the sake of drug discovery, then at least to maintain the know-how to thoroughly vet compounds from biotech companies.

Another suggestion has been for Pharma to focus on limited therapeutic areas, citing biotech as examples of companies with core focuses that lead to greater levels of success in drug discovery. It appears this is not the case; a look at maturing companies such as Amgen (AMGN), Gilead (GILD), Genzyme (GENZ), and Biogen Idec (BIIB) shows they are all dependent on drugs discovered years ago. Indeed, they have all broadened their disease focus in recent years in an attempt to boost sagging growth. Of the largest biotechs only Celgene (CELG) has maintained its focus on its core disease area. However, when it comes to successful drug discovery, Celgene is no different from the others, with only a single drug developed in-house driving most of its growth.

Genentech (DNA), often highlighted as the epitome of innovative biotechs, has some of the world's best researchers, but even they have not developed a new drug since Avastin was approved in 2004. Their most recent attempt for accelerated approval with the antibody-drug conjugate T-DM1 has just been denied by the FDA- the new anticipated filing date is now 2012. Two other late stage molecules target HER2 and CD20, the same targets as Herceptin and Rituxan, two approved Genentech drugs. Contrast this with BMS, market cap $45 billion; since the start of 2005, it has received approval for five NMEs. It may receive approval for the novel cancer vaccine Ipilimumab as early as the end of this year. Pharma does not lack for innovation. The difference between Genentech and BMS? Genentech has yet to be hit by generic competition.

An interesting report from Accenture draws a line between two Pharma business models: Innovative Medicines and Integrated Therapeutics. Innovative Therapeutics companies focus on discovering novel medicines for high unment needs using world-class drug discovery capabilities. Integrated Therapeutics companies on the other hand provide a suite of medical solutions that include risk-sharing pricing contracts, drug delivery devices, companion diagnostics, or care management services. In this report, the authors suggest that companies must choose between these or models such as generics and OTC medicines(5).

I believe the pure Innovative Medicines model can no longer survive in the long run in the current regulatory and business environment. In the current environment, there will continue to be pipeline gaps due to shortened patent exclusivity, generic competition, and difficulty in developing new drugs. Depending on discovery alone will lead to highly cyclical earnings. In a model by researchers from Kellogg School of Management, a company aiming to maintain 18% earnings growth over a period of 15 years would need to increase its number of drug launches five fold, with each launch reaching double the average peak sales of the original drugs. This is not sustainable. In the period from 1992 to 2002, only "a handful of companies" were able to bring on average one or more NMEs to market per year(6). Even if one is lucky or resourceful enough to develop a drug, the regulatory environment is difficult, competition is fierce, and switching costs are low.

By deploying a model focused around Integrated Therapeutics, meaningful value is added to the product. The molecule alone is no longer the only differentiator. Done correctly, this creates a higher barrier to entry for competitors from both makers of novel drugs and generics. At the same time, it generates greater benefits for the many parties involved, including patients, payers, and drug makers.


  1. Pharmalicensing: The Productivity Tiger - Time and Cost Benefits of Clinical Drug Development in India
  2. McKinsey & Co: The New Math for Drug Licensing
  3. In Vivo: Rebuilding Big Pharma's Business Model November 2003
  4. Gary Pisano: Science Business: The Promise, the Reality, and the Future of Biotech
  5. Accenture: The Era of Outcomes- Emerging Pharmaceutical Business Models for High Performance
  6. Kellogg School of Management: Strategic Alternatives in the Pharmaceutical Industry

Wednesday, September 22, 2010

The Problem with Political Frustration on the Left

When I write "left" and "right", I somewhat interchange meanings. The first is "the Democrats who are actually in Congress and the White House" and "the Republicans who are actually in Congress". The second is fiscally speaking - the left being more statist and opposed to corporate America, and the right being more decentralized and favorable to corporate America. In this particular case, especially in the characterization of the "left", these are reasonably interchangeable.

I've said a million times before that just because your intentions are good doesnt mean your execution is. Stimulus, healthcare, energy and finreg are the right targets, and there's not some fundamental moral separation behind any of them (excepting climate deniers, who Congress very much should be ignoring).
Just because you want universal healthcare (largely a good idea) doesn't mean that there aren't implementations that are worse than the status quo and other implementations that are better than the status quo. The Republicans have a lot of very, very good ideas on the economy and healthcare that Democrats, by virtue of being much more statist, will not generate by themselves. I genuinely believe after midterms things will get much better because you wont have this nasty "we have to stick together or this country's going socialist" mentality on the right and you wont have this "we have massive majorities, we get whatever we want!" entitlement on the left.
In fact, the left blaming the right for being "the party of no" is, at least in my mind (with the bias that i am an investor, first and foremost), the single biggest impediment to good policy, and similarly a major impediment to recovery because it has meant that every single policy coming out of the left turns into a left pipedream with no real compromise. None of the policies brought out so far has attempted to integrate Republican ideas because everyone just decided from the get-go that the Republicans wouldn't listen. Thus, it becomes a self-fulfilling prophecy.

The attitude of "the Republicans messed up royally under Bush, so now they have to sit back and shut up while we fix everything" is really, really destructive, for both Democrats (whose polling numbers are equivalent to the Republicans', and who will almost certainly (rightly) be held responsible for massacring the recovery) and for the Republicans (who are being hijacked by crazy people as everyone reacts to Democratic policies). This is bad for the country.

Thus, it's hard for Republicans to not oppose everything when they've been ignored from the get-go. There are 41 Republicans in the Senate, some of whom are from NH and MA and liberal states. Getting them all to unify in opposition is like herding cats unless you set off a bomb from which all the cats run away. So I don't buy this "Republicans are all to blame" argument from Democrats, because no attempt was really made to integrate their ideas. Plus, when you have 60/59 senate votes and a house megamajority, you're responsible for your policy, end of story.
Anyway, the idea of identity as Dem vs Repub, and of being entitled to implement your own policy if you have a majority, are way underrated pieces of the trainwreck that has been the Obama economic recovery policy.
By the way, some of you may be surprised to know that I voted for Obama, and typically vote Democrat 80% of the time, largely because I find conservative social policy distasteful in a lot of areas (gay marriage, religion in schools, xenophobia, etc).

Keys to Investing in Tech Stocks

"To make real money in tech your company must do three things. Two out these three and the results will be (at best) inadequate.
You need to have an idea that effectively changes the world in some way (even small ideas are OK as there are surprising profits if you can pull the next two tricks).
You need to execute – that is you need to bring the idea to reality.
And you need to keep the competition out.
Of these normally number 3 is the thing that trips up tech companies – they work really hard to get the idea implemented and then someone with less expense – and with the benefit of watching your failures, trials and tribulations – copies the idea (usually slightly better or less clunky) and the margins go to zip. Microsoft is such a fantastic company not because they have the technology right – but because people build on them proprietary software (developers, developers, developers) and that makes people reluctant to change even if the new product is superior.
But a tech company can easily be tripped up on the execution phase as well. (Anyone remember Friendster? Remember when their site took 2 minutes to load a page because they couldn't get the IT implemented properly? And look how valuable the position they lost is…)."

Tuesday, September 14, 2010

Gender Equality and Sports Locker Rooms

I have a question. I hear all the time about issues surrounding women
reporters in mens' locker rooms - harassment, trysts with athletes,
general assertions of gender equality, etc.

I would be interested to know if it works in reverse. Are men allowed
inside women's locker rooms for interviews? I understand womens'
sports aren't as popular, generally, and the ones that are tend to be
individual sports with no "locker room" to enter. However, certainly
womens' college basketball and the WNBA are significant enough to
warrant news stories. Are male reporters allowed into those locker
rooms? Because if not, it's hard to argue that gender equality is
being respected.

On another note, why does it make us (including me) so uncomfortable
to consider men doing interviews in womens' locker rooms, but not the
converse? Does it have to do with stereotypes of gender roles (men as
self-confident, don't-care-what-people-think-of-me vs. women as demure
and vulnerable)?

Similarly, why do Clinton Portis' comments make us so uncomfortable? He said:
"You know, somebody got to spark her interest, or she's going to want
somebody. I don't know what kind of woman won't, if you get to go and
look at 53 men's [bodies]," Portis said. "I know you're doing a job,
but at the same time, the same way I'm going to cut my eye if I see
somebody worth talking to, I'm sure they do the same thing."

If a woman on a sports team said that a male reporter made her
uncomfortable because "of course he'd be checking some of us out", I
don't think anybody would dispute that. Why is Clinton Portis held to
a different standard?

I'm not necessarily agreeing or disagreeing that Portis was offensive
or that reporters of other genders in a locker room are appropriate or
not, just pointing out that 99% of people respond very differently
depending which gender is in which position.

Liquidity and Fast Traders: Real World Questions

This post is more inference than proof. Take it as you will.

The following are share counts executed on a trade I tried to fill
today, with times. "limit" indicates that those shares were executed
at my limit price. "limit - .01" means that I bought at the limit
price less one cent. The trade was posted at about 1:30pm, adjusted at
2:01pm for a higher limit price, and did not fill in its entirety. My
limit was top of the book for most of the afternoon (meaning I was
offering the best price of anyone displaying the shares they were
willing to buy).

This is a stock with a very low share price, for those who note the
large number of shares.

09/13/2010 02:01:13 PM    300.000        limit - .02
09/13/2010 02:01:13 PM     345.000       limit - .01
09/13/2010 02:09:20 PM    200.000        limit

09/13/2010 03:46:28 PM    381.000        limit
09/13/2010 03:50:05 PM    17.000          limit
09/13/2010 03:50:28 PM    1,000.000     limit
09/13/2010 03:50:40 PM    13.000         limit
09/13/2010 03:51:10 PM    26.000        limit
09/13/2010 03:51:40 PM    23.000     limit
09/13/2010 03:52:15 PM    17.000     limit
09/13/2010 03:52:50 PM    11.000     limit
09/13/2010 03:52:52 PM    100.000   limit
09/13/2010 03:53:20 PM    6.000     limit
09/13/2010 03:53:55 PM    3.000     limit
09/13/2010 03:54:25 PM    2.000     limit
09/13/2010 03:55:00 PM    2.000     limit
09/13/2010 03:59:50 PM    98.000    limit

Note the large number of small share-count trades executed after 3:45pm.

The market closes at 4pm. The last 15 minutes of the trade day are
filled with traders trying to unload shares they've picked up over the
course of the day so they avoid overnight exposure. Notably, these
traders picked up the shares after the day started, and ditched it
before the end of the day.

Interestingly, the bid-ask spread was just a penny, but if I had
executed my entire (small) order of 3333 shares, I would have spiked
the price 52% without hidden liquidity (which I'm sure would have
stopped the ascent at under 10% - still a big spike, but far less).

What does this tell us? Three things:
1) bid-ask spread is a crappy measure of liquidity
2) fast traders are a HUGE percentage of the market. Look at what
percentage of my shares came from traders unloading!
3) there is a lot of liquidity hidden from the market (largely either
fast traders themselves, or hidden by institutions to prevent fast
traders jumping ahead of large orders).

It's also instructive to note that fast traders are largely very
profitable, and they're making their money off of longer-term
investors (like me). I did a back of the envelope based on the depth
and change-frequency of the various bids and asks in the order book,
and I'd be surprised if HFT cost me less than 1%, and possibly 2%, of
my trade value - this was a micro cap (well under $70mm mkt cap), so
this shouldn't be a shocking number.

Thursday, September 9, 2010

Wise Words from Strange Places

From Michael Lewis' most recent piece on Greece:

"After about two hours I work up the nerve to ask him. To my surprise he takes me seriously. He points to a sign he has tacked up on one of his cabinets, and translates it from the Greek: the smart person accepts. the idiot insists.

He got it, he says, on one of his business trips to the Ministry of Tourism. "This is the secret of success for anywhere in the world, not just the monastery," he says, and then goes on to describe pretty much word for word the first rule of improvisational comedy, or for that matter any successful collaborative enterprise. Take whatever is thrown at you and build upon it. "Yes … and" rather than "No … but." "The idiot is bound by his pride," he says. "It always has to be his way. This is also true of the person who is deceptive or doing things wrong: he always tries to justify himself. A person who is bright in regard to his spiritual life is humble. He accepts what others tell him—criticism, ideas—and he works with them.""

Fascinating look at Greece. He clearly has his agenda and his story about what's going on in America, but it's still a great read.

Carbon Tax Shifting

Ali, a friend who spends a significant amount of time researching climate science, asked me recently about environmental tax shifting.
A condensed version of my response is reprinted here:
So tax shifting (as I understand it) is "Pigouvian tax one thing you'd like to discourage and then take the money and return it by cutting broad-based corporate or income taxes" (or, in reverse, subsidizing one thing you'd like to encourage and raise the money by raising broad-based taxes). 
Though I don't see this discussed anywhere, I think a more interesting variation is the idea that you can even return the money in a lump sum to the industries you're taxing - basically, by punishing companies based on per-unit behavior and returning the money to the industry in a lump sum, you give each company an incentive to do better than its peers without crippling the whole industry. For example, if Nike and Reebok are competing, and Nike's a lot more efficient about carbon than Reebok, basically, Reebok will have to pay Nike proportionate to the amount by which Reebok is worse. Reebok has an incentive to improve so they don't have to pay money to their biggest competitor - which hurts way more than paying society generally - Nike has an incentive to improve so they can cripple their biggest competitor, and the US still has a very viable shoe industry.
Environmentally, I see the more general idea proposed all the time with carbon taxes and gas taxes accompanied by corresponding cuts to income taxes.  The idea seems, to me at least, to make a lot more sense with gas taxes than with carbon taxes. That's partially because I see gas taxes as incentive compatible with behavior we want, whereas I think carbon taxes are a worse alternative to a combination of gas taxes and smart grid/battery charging station buildout (largely because they ignore international concerns about industry and assume widespread Coasian equivalence). If carbon taxes were industry-targeted, I'd be much happier about carbon taxes (though still accompanying, not to the exclusion of, a more general gas-tax-for-income-tax-and-smart-grid shift).
Note that all of this is relative to other carbon-mitigation options, and none of it tries to compare to the status quo, except maybe a gas tax (which is similar enough to what we've seen that we can reliably estimate effects). Whether or not a standard carbon tax or cap and trade would be better than the status quo (mostly relying on supply-side R&D and marketing) is beyond my ability to assess.
As with everything, tax shifting only works if the Pigouvian Taxes you're placing are more intelligently designed (from an incentive perspective - both in behavior you're trying to prevent, and in general economic deadweight loss) than the corporate/income taxes they're replacing.
The problem is that measuring effects of carbon taxes is really hard. We know so little about what climate change is actually going to do, and effects of a carbon tax are not linear, at all. Going from 0 to 1 on carbon taxes may produce different results than going from 9 to 10, and it's hard to calibrate the right level. At a certain point, carbon taxes are no longer useful because the economic impact of taxing that much impedes economic activity, which in turn reduces a lot of necessary investment and R&D to actually get out of the patterns of producing carbon emissions. It's the same fallacy as what you can observe in the people who want to jack up income taxes a lot - not everything is scalable the way activists would like them to be.
If it's not obvious, I generally support intra-industry tax shifting, gas taxes and smart grid/battery charging stations, and am very skeptical that the cap-and-trade or carbon tax options brought up publicly can be effective without major side effects.


Wednesday, September 8, 2010

Fascinating Development Case Study

A lot of third-world countries have a big landmine problem.

Training rats to detect landmines costs 1/3 what it costs to train
dogs, and they're less susceptible to African disease, they're too
light to trigger the landmines themselves and they're easier to
transport. Rats can also detect tuberculosis.

Rats live a lot shorter than dogs, so I wonder if this actually ends
up being economical, but if a lot of dogs get blown up by landmines or
die of disease, or transport is really expensive relative to training,
then this is valuable. It's particularly helpful because Africans are
more able to implement this themselves, as opposed to dogs, which may
require more foreign support.

In any case, it's an interesting development field study.

What's behind the new Google technology?

Google Instant brings up search results as you type, instead of waiting.

A lot of people are wondering why this was rolled out, because it
doesn't save that much time per search, could slow your internet
connection, and if you type something dumb, you may end up with links
you don't want to see (offensive, or virus-carrying parked domains
capitalizing on typos, or whatnot). At best, it seems like a tiny
incremental improvement.

However, those people are not necessarily following the money. This
format will increase impressions on ads substantially, because an
impression is counted if you click anywhere on the page at the time
the ad shows up. The value of an impression may not go down at all
(you get 'free' impressions for the people who don't click on the
page), and if it does go down, you'd still expect that impressions
don't collapse as much as the rate of impressions goes up (this is
almost a guarantee, actually)

Nothing to see here.

Two Interesting Atlantic Articles Relating to Israel

Fidel Castro to Ahmadinejad: 'Stop Slandering the Jews'

"Castro's message to Mahmoud Ahmadinejad, the President of Iran, was
not so abstract, however. Over the course of this first, five-hour
discussion, Castro repeatedly returned to his excoriation of
anti-Semitism. He criticized Ahmadinejad for denying the Holocaust and
explained why the Iranian government would better serve the cause of
peace by acknowledging the "unique" history of anti-Semitism and
trying to understand why Israelis fear for their existence."

Castro's self-reinvention is kind of hilarious, but the article is
really interesting. An interesting followup is here:
in which Castro admits that the statist Cuban system of government is
far too statist to be functional anymore, even for Cuba. And he visits
a dolphin show, run by a nuclear physicist and Che Guevara's daughter.

A sobering and nuanced look at the circumstances affecting any sort of
preventive strike against Iran's nuclear facilities, from an Iranian,
Israeli and American perspective.

Tuesday, September 7, 2010

Someone wanna explain the "tourism tax" to me?

On the one hand, I understand the value of marketing - most corporations charge "extra", built into their prices, to cover the cost of a) developing better products (R&D) and b) to inform the world that they should be using product X
On the other hand, charging a tourist fee to promote tourism doesn't make a ton of sense. The marketing value here (the secondary effect) needs to overcome the direct price effect - charging tourists more to come here should reduce the number of tourists who come here. Lord knows there are enough tourist destinations out there to provide competition.
(For those of you who dispute the idea that $14 is enough to make a dent, think on the margin. You need to be sure the elasticity is pretty darn low before the positive marketing effect outweighs the negative price effect)

Thursday, September 2, 2010

Why are both unemployment and corporate profits high?

Marginal Revolution, among others, have wondered why corporate profits are so high and corporations have so much cash, while employment has foundered.

I have two possible theories that I haven't heard mentioned anywhere else.

1) One answer may lie in projected growth rates.

Imagine a model in which labor is hired in anticipation of projected growth. Employees take a while to train, so you have to "skate to where the puck is going".

If corporations hire for projected output a few years forward, then corporations, in general, will hire more people when growth is expected to be robust. These people will be a negative drain for a year or two, but they'll become productive as they learn and the company grows into a position for them to be productive.

Imagine an exogenous shock reduces expected growth rates - whether the product of policy, the pop of an unpredicted housing bubble, or whatever - these new employees don't need to be there anymore. That structurally means that there will be fewer employees employed, but significantly, you're likely getting rid of the less trained employees - the ones who don't already add value - because they're likely to never have an opportunity to add value.

The result is that currently-unproductive employees get fired and margins go up. Additionally, the people who have been laid off are less experienced or less skilled (or less talented), so their time on unemployment is going to be much higher than a typical situation, where people are laid off but long term growth rates are unchanged.

This implies a significant structural overcapacity. Costs can be cut all over the place, leading to increased profits with lower employment and more long-term unemployment. This may get competed away but it takes time to feel comfortable enough that the status quo will continue that you'll tend towards equilibrium.


2) Falling costs also factor into this, as the fact that raw and intermediate materials have fallen in cost falls on raw and intermediate materials producers, many of whom are foreign. Thus, while our trade deficit kills us on manufacturing jobs, it helps us on (some, short-term oriented) corporate profits because our corporate profits line includes the cost savings of the raw-and intermediate-material consumers but not the revenue loss of the producers. Net corporate balance sheets look wonderful and profits go up, at least until either raw and intermediate prices go back up, or people become convinced enough that raw/intermediate prices will stay low that they enter and add competition.

If people think raw and intermediate prices will go back up, then investing for expanding future production makes no sense, you see no competition entering the market, and employment stays crappy even though corporate profits skyrocket.

(Note that this is perfectly compatible with the view - that I also hold - that the trade deficit is killing jobs in this country.)



It's also worth noting that manufacturing has been recovering wonderfully, thanks to the inventory boost. Hard to know if that will continue. Housing is still brutal (which is ahistorical given the level of housing underinvestment over the last 3 years, even counting the prior overinvestment), but manufacturing seems fine, thus far. Businesses are spending on equipment and software - more so than in most recoveries - so cash hoarding isn't the easiest answer. Perhaps companies don't want to deal with banks so they don't return cash to shareholders (though I hope they do so before the dividend and capital gains tax increases next year). Something, somewhere, is gumming up a normal housing recovery - whether it's banks, or policy.