The Daily Cow

In the previous article, I briefly laid out the case for a jobless recovery in the short run. However, despite the immediate pain, it has positive long-term consequences.

• The federal government has more time to fix the entitlements issue with regards to the boomers. Their accumulated skills and experience are necessary in the workplace, and with last year's market decline, they have a stronger incentive to work--and pay taxes--than retire--and draw entitlement funds.
• Greater investment in capital will allow us to achieve the same level of production using fewer people, or equivalently, more production using the same number of people.
• The above, combined with our lessened propensity to consume, will help lower (or perhaps altogether eliminate) the trade imbalance (net exports)
• The savings rate going back to a more normal level will help investments in future growth

Perhaps the US will be in a less unsustainable path of unbridled consumption after this transformation.

There are three key reasons why this recovery will be fairly jobless in the short run:

• Aggregate demand is below the normal level because of increased propensity to save and the permanent rise in energy costs (Oil likely won't return to pre-Katrina levels)
• The workforce is above the normal level because of the recently-devastated retirement accounts of the boomers; they have to work a few more years to compensate for the lost retirement value
• Companies are increasingly turning towards technology and automation as the way to increase margins and profits. Capital investment is long-lasting and should provide them with increased capacity (at any given labor employment level).

The increased capacity due to both a larger workforce and capital expenditures, combined with lower aggregate demand for the final products will lead to a near-term squeeze on employment and wages. For the inflation hawks, this means wage-pressure inflation still has a long way to go before becoming an issue.

Before we worry about how many people go to bed hungry in the world, we must tackle an even more damaging yet easy-to-fix problem--how many people are simply malnourished.

It costs less than a dollar to fortify an entire ton of rice with essential nutrients like calcium, many metals (like iron), and vitamins, whether by genetically engineering them to be more nutritious or by artificially mixing them in. Yet, for that dollar, it produces at least a ten-fold (estimated 17x) return within that year in terms of boosted productivity--not to mention the higher standard of living, better health, and clearer mind. The social dividend from this minor investment will be on a scale magnitudes more significant than the global iodizing of salt.

So why don't developing nations invest in such a project? It has three options:

1. Pay for it: Distribute fortification materials to farmers, or expand the ambitions of agriculture research labs, and distribute engineered seeds. For the few hundreds of millions of dollars spent annually, more than that will be earned back in increased productivity (captured in taxes), better health (captured in lower health costs and higher happiness), and political points (for the democracies). This is the preferred option
2. Force it: By law, all rice has to be fortified. This has enforcement issues. Since farmers aren't paid to do it, they have no incentive to pay to do it themselves.
3. Hope for external help: This isn't exactly a complete option--but hope for help from an agency like the IMF or WFP--and simply deal with enforcement

Each idea has issues with centralization, because farmers aren't as concentrated as salt-producers, but if implemented correctly, will provide tangible returns ad infinitum. So why not give it a try?

Let's start with China and India.

The popular attack of government-backed enterprises is that it encourages inefficiency and takes the enterprise's focus off of profit. Is that true?

In the cases where the corporation must have other social agenda (promoting social welfare as a general goal), government backing definitely encourages that. Now, they have a large financier for any social task that is conducive to the government's goals, whatever they may be (Think: Samsung and Korea).

In other cases, is that attack true? Think back to the bailout days when banks left and right got money (but with strings) from the treasury. In response, the companies clamored to climb back to profitability in order to pay back the treasury and drop any suggestions that they were acting against the interests of the taxpayer.

And just now, after GM is 60% nationalized (Yup, we own 60% of GM now), it announces that it "cannot afford business as usual," implying that it could prior to nationalization.

Clearly, it is not always the case that having government backing for some enterprises or industries is the worse way of organizing economic activity, and in many cases it is the better way--for industries that have significant national impact or cannot sustain themselves.

Samsung could not have achieved a fifth of Korea's entire GDP and a third of its trade volume without the backing of the South Korean government. Given the facts, America should reexamine its fears of national industries, say, starting with health, insurance, and energy.

Apparently we are considering a second stimulus package even before the bulk of the first one has taken effect. If I designed the stimulus package the first time, I would have included $300b of money transfers and the same in cheap credit to states. Because states do not have the borrowing power the federal government does--especially at the dirt-cheap rates that states would love to have, they will be cutting back significantly on services this year while paying significantly more on interest (because increased fears of delinquency), an effect that will surely negate the federal stimulus.

Look at California for instance--even after cutting essential services and even education funds, it's still over $20b short for the year. With one of the nation's highest unemployment rates, it cannot afford to cut spending--but it must. It needs the $35b to continue normal functioning, avert the need to tap the financial markets, and perhaps even pay down some of the most expensive debts.

If we are producing a second stimulus package, it must include a significant transfer of funds and borrowing power to the states so they can get by without squeezing the economy further.

It would be:

1. 300 billion dollars to states, $1000 for each resident, with up to that much more at the Treasury rate, and insure state debt for 10 years. Let the states pay for education with this money
2. 200 billion dollars for infrastructure development: High speed rail, subway systems, upgrading/fixing bridges, modernized bus systems
3. 50 billion dollars for health: Modernization of infrastructure and preventive care (immunizations, etc)
4. 50 billion dollars for alternative energy research/production subsidies
5. 50 billion dollars for miscellaneous projects (WiMax for rural areas, for example) that promote equity and efficiency, not pet projects that benefit only very specific people (No pork)

As you notice, that's somewhat less than the stimulus we have in place today and contains no tax cuts.

After years of diligence and perseverance, multinational team invented an algorithm for movie-recommendation that improves upon Netflix's current algorithm by over 10%, beating the many other teams that vied for the same achievement. But this is all part of a contest: The team that accomplishes the goal (10% improvement in accuracy) and maintains their lead for a month wins one million dollars. The rest have just wasted their time.

Crowdsourcing is like an all-pay auction. One person benefits, and everyone else loses. In this case, even the team that "wins" isn't necessarily winning. Think about it: Netflix is a 2 billion-dollars-a-year business. If you start a competing company whose product recommendations are over 10% better than that of the leading competitor (Netflix), don't you think that you will get at least 0.01% of the 2 billion dollar business? That's 200,000 dollars, every year. If you don't think you can get even 0.01% of the business, then your algorithm isn't good enough.

Speaking of algorithms, I am curious how they determined the 10% rate, and how efficient the algorithm is. If it takes twice as much computing power to produce a recommendation that's 10% better, perhaps it does not make business sense (to double the cluster size). If it's an NP-hard algorithm that works only on small samples, then it's obviously not going to scale to all of Netflix. The semantics of the competition are important--so what are they?

I do wonder though: For those who participate in Crowdsourcing projects, do they expect to win? If so, how do they react to losing? If not, then are they participating just "for fun" or the experience? Really--what's the incentive?

Warren Buffet asserts: "If I have any serious illness, or something coming up of an important nature, an operation or anything like that, I think the thing to do is just tell -- the Berkshire shareholders about it. I work for them. They’re going to find out about it anyway, so I don’t see a big privacy issue or anything of the sort."

The fact that Steve Jobs' presence and health are materially relevant to the company and thus its shareholders, it is Apple's and Jobs' fiduciary responsibility to keep the public updated on the status of Jobs' health. If he did not want to be subject to such public scrutiny, he has every right to resign and let someone else take over his role. However, because he still remains the CEO of Apple, the shareholders deserve to know everything that may affect the value of their holdings.

It was wrong for Apple to cover the stories up. It's even more wrong for it to encourage others to cover it up--the hospital in which Jobs got the surgery (ironically, although there are patients waiting for more than a year for a liver, he was one to receive the first available liver, which smells of improper use of money, but that's another topic) reported that they did not admit Steve Jobs.

What a lie!

The LA Times poses the drug makers' decision to expand their market as a purely humanitarian decision. According to them, "U.S. drug makers agreed Saturday to shell out $80 billion over the next 10 years to lower the cost of medication"--which sounds like a pure donation for a good cause. What they overlooked is the economic motivations behind it, which is to ultimately increase profits by enlarging the market.

I've discussed monopoly pricing in the higher-education market and the practice of segmentation in general to charge different buyers different prices for essentially the same thing. If a monopolist (because of patent laws, each pharmaceutical company is in effect a monopolist) attempts to get more customers by lowering its prices, it must sacrifice the much larger profits from those willing to pay more. Therefore, the traditional monopolist with no means of pricing differently for different customers always produces less than the profit-maximizing level under conditions of price segmentation.

In this case, they are introducing the price-segmentation scheme in an extremely sneaky way. It's really no different than Apple selling (a non-redistributable version of) an iPod touch to me for $100 while selling the exact same device to Apple fans for $400; I would actually purchase an iPod touch for $100, which I am sure is above their cost of production, and this scheme allows them to sell the device to those who want it more, for more. To the LA Times, this would be Apple's humanitarian effort to bring light to us all (like Microsoft employees) by giving us a "discount" when in fact this expands their market and allows them to charge many of their existing customers much more.

Although for Apple, figuring out who's willing to spend how much is extremely difficult, the task is much easier for drug companies. People will spend as much as they can afford to purchase life-extending medicines--so to extend "discounts" to seniors for drugs not covered by Medicare is no altruistic deed. To illustrate the point, I've diagrammed the whole discussion in two simple standard supply-and-demand diagrams:

It is true that this overall system of pricing segmentation is socially more efficient than the incumbent system (the red triangle gets smaller), but that does not mean we consumers are better off. It's questionable whether the consumers as a whole benefit from this. Although it is true that the seniors who could not afford the drugs previously do benefit--and that's great--the drug companies are free to raise the price on the rest of us, so the entire concern regarding the cost of health care is definitely not alleviated.

The only group that's sure to benefit from this is represented by the green: the monopolists. They can sell the drugs for more to those of us who can afford it, and they can now sell the drugs to those who they previously could not reach--at a good profit. That's not to say that giving discounts to seniors who can't afford the drugs at "normal" prices, or increasing incentives for biotech companies to invest are bad consequences; we--and especially the media--just need to be more careful in interpreting their actions.

Sometimes, a discount is anything but a discount. It's a path to greater reach and profitability for the monopolists.

Last week, I discussed the immense leverage the higher education systems have with regards to pricing. This week I will cover how UC Berkeley is abusing its monopoly power.

The average student has suffered through years of cumulative tuition increases (9-10% annually), cutbacks in services, elimination of necessary classes, and escalation of living fees (food and residence). For example, I have a class that I absolutely need to take before graduation, and I signed up for it in the earliest time possible (sacrificing the slot that could've been used for another class) only to see it get cancelled without a single notice; now every substitute for that class is either completely full (including the waiting list) OR conflicts with my schedules. The cause of the cancellation? Budget. Stupid reason, because this is a mandatory class and cancelling it for one semester will only mean that there must be more the next semester.

The ostensible cause is the increasingly restrictive budget, but I don't believe it. The University assures us that it understands that we're all in financial hardships: It is giving underqualified minorities full subsidies to try their luck at Berkeley while it is giving the rest of us the middle finger. This favoritism is appalling. It has to stop.

The University is pulling away from its purpose as the institution whose purpose is to educate the public. It is becoming an institution that plunders the middle class to give life support to the poor; it is obviously standing at the wrong side of the balance between fair outcomes and fair mechanisms. It must rediscover its original mission to provide education for the masses, not by sacking the middle class to pay for the poor, but my making it affordable for everyone to get a good education.

If you cannot obtain at least 30000 dollars of long-term value from your education at Berkeley (your break-even point if everyone paid the same tuition), perhaps you need to re-examine what is wrong instead of taking my money anyway. Thanks.