Sunday, November 25, 2007

Economic Consequences of the George W Bush Presidency

The following is an excerpt from an article by the Nobel laureate in Economics Joseph Stiglitz. You are encouraged to read the full article in Vanity Fair of December 2007.

When we look back someday at the catastrophe that was
the Bush administration, we will think of many things:
the tragedy of the Iraq war, the shame of Guantanamo
and Abu Ghraib, the erosion of civil liberties. The
damage done to the American economy does not make
front-page headlines every day, but the repercussions
will be felt beyond the lifetime of anyone reading this

I can hear an irritated counterthrust already. The
president has not driven the United States into a
recession during his almost seven years in office.
Unemployment stands at a respectable 4.6 percent. Well,
fine. But the other side of the ledger groans with
distress: a tax code that has become hideously biased
in favor of the rich; a national debt that will
probably have grown 70 percent by the time this
president leaves Washington; a swelling cascade of
mortgage defaults; a record near-$850 billion trade
deficit; oil prices that are higher than they have ever
been; and a dollar so weak that for an American to buy
a cup of coffee in London or Paris-or even the
Yukon-becomes a venture in high finance.

And it gets worse. After almost seven years of this
president, the United States is less prepared than ever
to face the future. We have not been educating enough
engineers and scientists, people with the skills we
will need to compete with China and India. We have not
been investing in the kinds of basic research that made
us the technological powerhouse of the late 20th
century. And although the president now understands-or
so he says-that we must begin to wean ourselves from
oil and coal, we have on his watch become more deeply
dependent on both.

Up to now, the conventional wisdom has been that
Herbert Hoover, whose policies aggravated the Great
Depression, is the odds-on claimant for the mantle
'worst president' when it comes to stewardship of the
American economy. Once Franklin Roosevelt assumed
office and reversed Hoover's policies, the country
began to recover. The economic effects of Bush's
presidency are more insidious than those of Hoover,
harder to reverse, and likely to be longer-lasting.
There is no threat of America's being displaced from
its position as the world's richest economy. But our
grandchildren will still be living with, and struggling
with, the economic consequences of Mr. Bush.

Sunday, October 21, 2007

Unshackle the Cell Phone

Free My Phone

Cellphone carriers tell us what phones we can use, and what software and services can be offered on those phones. Consumers deserve better.
October 22, 2007

Suppose you own a Dell computer, and you decide to replace it with a Sony. You don't have to get the permission of your Internet service provider to do so, or even tell the provider about it. You can just pack up the old machine and set up the new one.



Now, suppose your new computer came with a particular Web browser or online music service, but you'd prefer a different one. You can just download and install the new software, and uninstall the old one. You can sign up for a new music service and cancel the old one. And, once again, you don't need to even notify your Internet provider, let alone seek its permission.

Oh, and the developers of such computers, software and services can offer you their products directly, without going through the Internet provider, without getting the provider's approval, and without giving the provider a penny. The Internet provider gets paid simply for its contribution to the mix: providing your Internet connection. But, for all practical purposes, it doesn't control what is connected to the network, or carried over the network.

WSJ's Walt Mossberg discusses the problems caused by the restrictions wireless companies place on customers' phones.

This is the way digital capitalism should work, and, in the case of the mass-market personal-computer industry, and the modern Internet, it has created one of the greatest technological revolutions in human history, as well as one of the greatest spurts of wealth creation and of consumer empowerment.

So, it's intolerable that the same country that produced all this has trapped its citizens in a backward, stifling system when it comes to the next great technology platform, the cellphone.

A shortsighted and often just plain stupid federal government has allowed itself to be bullied and fooled by a handful of big wireless phone operators for decades now. And the result has been a mobile phone system that is the direct opposite of the PC model. It severely limits consumer choice, stifles innovation, crushes entrepreneurship, and has made the U.S. the laughingstock of the mobile-technology world, just as the cellphone is morphing into a powerful hand-held computer.

Whether you are a consumer, a hardware maker, a software developer or a provider of cool new services, it's hard to make a move in the American cellphone world without the permission of the companies that own the pipes. While power in other technology sectors flows to consumers and nimble entrepreneurs, in the cellphone arena it remains squarely in the hands of the giant carriers.

The Soviet Ministry Model

That's why I refer to the big cellphone carriers as the "Soviet ministries." Like the old bureaucracies of communism, they sit athwart the market, breaking the link between the producers of goods and services and the people who use them.

To some extent, they try to replace the market system, and, like the real Soviet ministries, they are a lousy substitute. They decide what phones can be used on their networks and what software and services can be offered on those phones. They require the hardware and software makers to tailor their products to meet the carriers' specifications, not just so they work properly on the network, but so they promote the carriers' brands and their various add-on services.

How would you rate your cellphone carrier? Cast your vote and join the discussion.

Let me be clear: Any company that spends billions to build and maintain a wireless network deserves to be paid for its use, and deserves to make a profit and a return for its shareholders. Not only that, but companies like Verizon Wireless or AT&T Inc. should be free to build or sell phones or software or services.

What Is Needed

But, in my view, they shouldn't be allowed to pick and choose what phones run on their networks, and what software and services run on those phones. We need a wireless mobile device ecosystem that mirrors the PC/Internet ecosystem, one where the consumers' purchase of network capacity is separate from their purchase of the hardware and software they use on that network. It will take government action, or some disruptive technology or business innovation, to get us there.

[Go to podcast]
PODCAST: The mobile phone has become much more than just a portable communication device. WSJ's Jessica Vascellaro explains some of the ways we personalize our phones both functionally and aesthetically.

To my knowledge, only one phone maker, Apple Inc., has been permitted to introduce a cellphone with the cooperation of a U.S. carrier without that carrier having any say in the hardware and software design of the product. And that one example, the iPhone, was a special case, because Apple is currently the hottest digital brand on earth, with its own multibillion-dollar online and physical retail network.

Even so, Apple had to make a deal with the devil to gain the freedom to offer an unimpaired product directly to users. It gave AT&T exclusive rights to be the iPhone's U.S. network for an undisclosed period of years. It has locked and relocked the phone to make sure consumers can't override that restriction. This arrangement reportedly brings Apple regular fees from AT&T, but penalizes people who live in areas with poor AT&T coverage.

Apple has also, so far, barred users from installing third-party programs on the iPhone, though the company announced last week it will open the phone to such programs early next year. (Web-based iPhone programs -- those that run inside the Web browser -- have been available from day one.)

These restrictions have rubbed some of the luster off the best-designed hand-held computer ever made.

A few other "smart phones" sold primarily to businesses have been freer of carrier restrictions on third-party software and services than typical cellphones. But even these handsets, such as Palm Treos, Windows Mobile devices, and BlackBerrys, have been partly crippled by carriers in some cases.

As a technology reviewer, I have met with multiple small companies that had trouble getting their programs onto consumers' phones without the permission of the carriers; getting that permission often requires paying the carriers. Sure, there are some clumsy workarounds that can evade the carrier barrier, but it's nothing like the ability small software companies have had for decades to offer their products for installation on Windows or Macintosh computers.

[See the full report]
Take a look at various blogs that focus on triathlons and board games. Plus, as online advertising matures, so does the job of measuring results.
See the complete Technology report.

We also need much greater portability of phone hardware. Because the federal government failed to set a standard for wireless phone technology years ago, we have two major, incompatible cellphone technologies in the U.S. Verizon Communications Inc. and Sprint Nextel Corp. use something called CDMA. AT&T and Deutsche Telekom AG's T-Mobile use something called GSM. Except for a couple of oddball models, phones built for one of these technologies can't work on the other. So that limits consumer choice and consumer power. If you want to switch from AT&T to Verizon, you have to swallow the cost of a new phone.

But the problem is even worse. The government didn't require the CDMA companies to include a removable account-information chip, called a SIM card, in their phones. So, unlike people with GSM phones, Sprint and Verizon customers can't keep their phones if they switch between the two carriers, even though they use the same basic technology. And, the government allows the GSM carriers to "lock" their phones, so a SIM card from a rival carrier won't work in them, at least for a period of time. Techies can sometimes figure out how to get around this, but average folks can't.

The carriers defend these restrictions partly by pointing out that they subsidize the cost of the phones in order to get you to use their networks. That's also, they say, why they require contracts and charge early-termination fees. Without the subsidies, they say, that $99 phone might be $299, so it's only fair to keep you from fleeing their networks, at least too quickly.

But this whole cellphone subsidy game is an archaic remnant of the days when mobile phones were costly novelties. Today, subsidies are a trap for consumers. If subsidies were removed, along with the restrictions that flow from them, the market would quickly produce cheap phones, just as it has produced cheap, unsubsidized versions of every other digital product, from $399 computers to $79 iPods.

The Federal Communications Commission is selling some new wireless spectrum that will supposedly lead to fewer restrictions for technology companies and consumers, but it's far from certain that the carriers, with their legions of lobbyists and lawyers, will allow such a new day to dawn. Google Inc. is making noises about trying to bust open the cellphone prison, with new software and services, but that's no sure bet either.

Remember Landlines?

We've been through this before in the U.S., though many younger readers may not recall it.

Up until the 1970s, when the federal government intervened, you weren't allowed to buy your own landline phone, and companies weren't able to innovate, on price or features, in making and selling phones to the public. All Americans were forced to rent clumsy phones made by a subsidiary of the monopoly phone company, AT&T, which claimed that, unless it controlled what was connected to its network, the network might suffer.

Well, the government pried that market open, and the wired phone network not only didn't collapse, it became more useful and versatile, allowing, among other things, cheap connections to online data services.

I suspect that if the government, or some disruptive innovation, breaks the crippling power that the wireless carriers exert today, the free market will deliver a similar happy ending.

Monday, October 08, 2007

Subprime and the Role of Government

"The government that governs best is the government that governs least" appears to have become the singular dictum of the current administration. Even the war in Iraq has become the most privatized war in history. Many have even argued that the Federal Government's response or lack of response to hurricane Katrina was in essence a reflection of this ideological shift that questions the role that the Federal government is supposed to play in promoting the welfare of the nation.
So here we are again facing a new Katrina disaster, the subprime debacle where millions of families have to graple with foreclosures on their homes. The new Katrina is promising to be much more overwhelming than the old one. Actually the current debacle carries within it the seeds of a national recession not to mention the real human sufferings and stress that will ensue. Yet the government has failed to come up with a comprehensive plan to help avert the impending torrent of foreclosures on the grounds that government assisstance should not replace personal responsibility. It was more than acceptable. however, for the government to bail out the hedge funds and Wall Street from their misguided investment decisions. And I always thought that government is supposed to protect the weak and the poor.

Sunday, September 30, 2007

How American is the Mustang Car Revisited?

Now that GM and the UAW have reached an agreement that will be copied by both Ford and Chrysler which relieved the US manufacturers from the burden of uncertainty in delivering health care you would expect the US car manufacturing to recapture market share wouldn't you? Not so fast.
Back in 1987 the proportion of cars sold in the US that were not manufactured in North America surpassed 27%. But as Honda, Toyota, Nissan and others flocked into the US that proportion dropped to almost 10% by the late 1990's. That is no longer the case. Last year 23 % of automobiles sold in the US were manufactured outside the US, Mexico and Canada. I am afraid that the trend will continue . What that means is that at best the new UAW deal might reduce the rate of increase in the hemorhaging experienced by the big three but that it will not reverse the trend. If anything I would expect GM, Ford and Chrysler to import more cars to the US. Is car manufacturing the next textile industry? Is the US destined to become a services economy and is that something to worry about?

How American is the Mustang car ?

If you are in need of a new set of wheels and you happen to believe strongly that it is preferable to spend your hard earned money (cars are the second most expensive purchase that a typical American makes during a life time) on an automobile manufactured by an established US company then most likely you will avoid the Toyota Siena in favour of that traditional American legend the Ford Mustang. That would be a wrong decision.

The most common way to classify automotive vehicles by country of origin is to find out the country with the most value added attributed to it. Once such a simple exercise is performed on the above two vehicles of choice the results will blow you out of the water. They are actually border on being shocking. The Toyota Siena is assembled in the USA and the final value added for this mini van that is attributed to the US is a staggering 95%. The Ford Mustang on the other hand, is also assembled in the USA but the final tally shows that only 65% of the value added is done by US manufacturers.

What is truly paradoxical and difficult to explain is the fact that Toyota appears to be selling vehicles that are totally made in the US at a profit while Ford, Gm and Chrysler are downsizing their US operations, expanding overseas and yet are not even in the same league as Toyota. Global integration, product design and manufacturing philosophies have changed the rules of the game. Toyota manufactures in the US at a profit and gains market share while Ford out sources to less expensive countries, loses market share and operates at a loss. I would still buy the Mustang. It’s sportier:-)

Saturday, September 22, 2007

Decline in Unionization: Who Is Responsible?

A pivotal institution in the economic, social and political life of the United States is in real danger of extinction. Preventing organized labour from going the way of the do-do bird will not be an easy matter especially when the efforts to weaken labour unions by management and international economic relations are aided by the misguided policies of the labour unions themselves to deliver the proverbial one two punch.

The United States has never welcomed labour unions with open arms. At the height of unionization only 37% of the private sector work force was unionized; but that has dropped to an abysmal 8% of the private sector work force during 2004. Compare that to the current rates of 95% in Sweden , 60 % in Norway and 40% in Germany.

What is even more alarming is that the labour union disappearing act goes on. General Motors has announced the planned layoff of another 30,000 hourly workers in addition to the 20,000 planned layoff by Ford Motor and the potential total shut down of Delphi, the auto parts manufacturer. GM and the UAW have been trying to hammer out a new agreement for the last three weeks of constant negotiations. A deal might be announced in the next 24-48 hours but if I am to speculate I would say that the UAW is not in a position of strength. It will probably be asked to give back and give back some more. That should not be surprising when you learn that the UAW currently represents 180,000 auto workers when only seven years ago they represented more than twice as much.

It is common to explain the labour woes by references to Ronald Reagan who fired all PATCO employees and sent a strong message to take strong stands against demands by labour unions as it is also customary to blame globalization and the “race to the bottom” that it has engendered. But are the Labour Unions themselves to be viewed as victims and held blameless?

Whose idea was it to raise the effective cost of a typical UAW employee to $74 per hour? Was it company management that suggested setting up job banks in order to pay employees for not working? Who was it that insisted on total implementation of rigid work rules that in effect decreased competitiveness? The sad fact of the matter is that labour has played an active role in its own demise.

Thursday, September 20, 2007

Is a recession on the way?

What if Allan Greenspan is right and housing prices in the US tumble by around 15%? One possible scenario of such an eventuality has been sketched out by the Centre for Economic Policy and Research.

The main points of the study may be summed up as follows:

* The 15% drop in the price of the housing stock in the US would total $4 trillion in real terms
over 3 years. ($4,000,000,000,000.00) Yes that is a four followed by 12 zeros!!!!

* The above loss would translate into a decrease in wealth to the tune of $50,000.00 for each
homeowner. The above calculation assumes that we have 80,000,000 homeowners.

* Some parts of the country will face a 30% drop in prices while some others might not drop at

* Prices will not recover for a very long time, that is why it is called a bubble. The pre bubble
prices will not be retested for at least a decade and then only in nominal dollars.

* Job losses in the construction industry and related sectors could amount to over 1 million

* Financial crisis could deepen and spread.

* The negative "wealth effect" is estimated to bearound 5 percent of the change in the value of
the housing stock. The resulting contraction of $200 billion in aggregate consumer spending
combined with the associated job losses would result in setting the stage for a deep

Is it fair to excoriate Mr. Greenspan for the above mentioned failure? You bet that it is. If he had expected the above dire scenario then why didn't he take any measures to stop it or is this potential outcome composed only to attract attention and sell books? Would the real Greenspan step forward please? Don't hold your breath.

Thursday, September 13, 2007

Money Illusion

City light, and sounds, act like powerful magnets. Many of the youth want to move to NYC as soon as they graduate from college and find a job. And why not? The city is dynamic, full of life, never sleeps and yet offers better wages. It is because everything is so much more expensive in the city, thats why not.

Housing costs in the city and its environs are much more likely to take a much bigger bite of ones income as to make the differential in pay favouring the city disappear. The following shows the actual latest census data on this subject.

Proportion of Renters spending at least half their
income on rent, by County.

Bronx 32.9%

Kings County 30.0

Queens 28.0

Suffolk 33.9

Westchester 23.5

Once you are ready to make your move don't forget that spending 50-60% of your income on rent does not leave you with much for anything else. But hey, we all have different priorities.


"There Ain't No Such Thing As A Free Lunch" is one of the most fundamental and most enduring ideas in Economics. Interestingly enough the above expression expresses the same principle that ecologists consider to be paramount; everything is connected to everything else.

When would the "shallow" environmentalist, the world over, start applying the lessons of their discipline ?Don't we have the right to expect a policy designed to be environmentally friendly to live up to its billings or have we gotten soused to sloppy thinking that we have become enamored of faddish behaviour, superficial thinking and yes, even the willingness to deceive.

To understand that ethanol is not a solution to the energy crisis and that it should not be encouraged is a no-brainer. Studies have demonstrated clearly that the production of ethanol from corn in the US uses more energy than the energy that is produced as an output in the process. Add to that the evidence that a strong mixture of ethanol in the fuel appears to be corrosive and the obvious fact that there is no infrastructure to transport ethanol and distribute it across the land and it becomes rather clear that this so called solution is actually one way to aggravate the problem. But if we are to gloss over all of the above glaring shortcomings of ethanol production there is no excuse for not having seen that the rush to grow more subsidized corn by the farmers can only create a shortage of other crops whose production is replaced by corn. And sadly this is exactly what has happened. The projected wheat crop in the US is going to be smaller than expected and that, combined with an Australian draught , has resulted in a major increase in the price of wheat. The future contract hit today an all time high of over $9 per bushel. The price has more than doubled since April.
Ironically the poor nations will suffer the most as a result of our misguided "environmental" policies. The poor will have to deal with a greater incidence of malnutrition, we will have higher food prices, rich ethanol producers , corroded internal combustion engines and no relief from the energy shortage. Oh what tangled webs we weave when first we practice to deceive.