Quote of the Week (Outsourcing edition)

My efforts to slowly work down my backlog of drafts in the queue continues with your Quote of the Week. Yes, this article is a few weeks old, but that doesn't make it any more awesome. Kudos to this guy, slow claps all around.

This week's QUOTE OF THE WEEK

"A security audit of a US critical infrastructure company last year revealed that its star developer had outsourced his own job to a Chinese subcontractor and was spending all his work time playing around on the internet. The firm's telecommunications supplier Verizon was called in after the company set up a basic VPN system with two-factor authentication so staff could work at home. The VPN traffic logs showed a regular series of logins to the company's main server from Shenyang, China, using the credentials of the firm's top programmer, 'Bob'... 

After getting permission to study Bob's computer habits, Verizon investigators found that he had hired a software consultancy in Shenyang to do his programming work for him, and had FedExed them his two-factor authentication token so they could log into his account. He was paying them a fifth of his six-figure salary to do the work and spent the rest of his time on other activities."
                                                          - Iain Thompson, The Register

That is awesome. I can't exactly blame the company for letting Bob go, especially since he exposed the fact that he was apparently being overpaid by a factor of five. But if a company can outsource a job to China, why can't the employee do it himself? That's the kind of creativity this country needs! Bravo, Bob.

 [The Register]

The new music world

If you're sensing a bit of a theme here today, there's a reason for that—the majority of my backlog of posts consisted of updates to previous topics that I hadn't revisited in a while. In this post, I'm going to write an update on the ever-changing music industry, to discuss some recent developments. From the New York Times,

A decade after Apple revolutionized the music world with its iTunes store, the music industry is undergoing another, even more radical, digital transformation as listeners begin to move from CDs and downloads to streaming services like Spotify, Pandora and YouTube. 

As purveyors of legally licensed music, they have been largely welcomed by an industry still buffeted by piracy. But as the companies behind these digital services swell into multibillion-dollar enterprises, the relative trickle of money that has made its way to artists is causing anxiety at every level of the business. 

Late last year, Zoe Keating, an independent musician from Northern California, provided an unusually detailed case in point. In voluminous spreadsheets posted to her Tumblr blog, she revealed the royalties she gets from various services, down to the ten-thousandth of a cent. 

Even for an under-the-radar artist like Ms. Keating, who describes her style as “avant cello,” the numbers painted a stark picture of what it is like to be a working musician these days. After her songs had been played more than 1.5 million times on Pandora over six months, she earned $1,652.74. On Spotify, 131,000 plays last year netted just $547.71, or an average of 0.42 cent a play.

In general, it's a little bit hard to know whether to consider this a good thing or a bad thing, for the artists or the consumers. What's certainly clear is that we're moving toward a model where recorded music is little more than an advertisement for the artists, who will make the majority (if not all) of their money from live performances and touring.

Realistically, this is how the music industry has always effectively worked, with a select few exceptions. Recall this graphic, from my previous blog post about the Dave Matthews Band, which has likely set the model for the future of the music industry:

I certainly sympathize with those artists who are unable to make enough from live performances to support themselves, but I also find it unlikely that those artists would realistically be able to sell enough physical music to support themselves, either, under any economic arrangement or business model.

I generally assume that consumers of music have only a set amount of disposable income available to spend on their music, and that performers should generally want them to spend as much of that money as possible on the thing that nets them the greatest share of the money—that thing, always, has been live performances, and therefore the less money spent by consumers on physical music, the better. Maybe that's the wrong assumption to make, and consumers really will destroy the music industry with their choices, but I have serious trouble decrying the decline of the record label model. It was never a good deal for the artists, regardless of what some of them may think.

[New York Times]
(h/t Marginal Revolution)

Colleges suing students?

Wow, alright, I am drowning in a pile of unfinished blog drafts over here. I have a total of 14 unfinished posts  in my queue just from the last week, so I'm just gonna go ahead and post a few of them, rapid-fire style, just to get some of this stuff out there. You might get a little less of my ranting and raving in these posts than you'd usually expect, but maybe that's a good thing. And hey, it's better than another link dump, right?

First up, I'll consider this post to be an update on the burgeoning student loan crisis about which I've written numerous times. Per Bloomberg,

Needy U.S. borrowers are defaulting on almost $1 billion in federal student loans earmarked for the poor, leaving schools such as Yale University and the University of Pennsylvania with little choice except to sue their graduates. 

The record defaults on federal Perkins loans may jeopardize the prospects of current students since they are part of a revolving fund that colleges give to students who show extraordinary financial hardship. 

Yale, Penn and George Washington University have all sued former students over nonpayment, court records show. While no one tracks the number of lawsuits, students defaulted on $964 million in Perkins loans in the year ended June 2011, 20 percent more than five years earlier, government data show. Unlike most student loans -- distributed and collected by the federal government -- Perkins loans are administered by colleges, which use repayment money to lend to other poor students. 

The increase in the amount of defaulted loans among poor students comes as President Barack Obama says he wants to expand access to college for working-class families and increase funding for the Perkins program. Under his proposal, the pot for Perkins loans would increase to $8.5 billion from about $1 billion. The Education Department would service the loans instead of colleges.

Oh, this is gonna be fun... leave it to Yale, right? As is mentioned later in the article, student loan debt has soared in the last several years (total debt outstanding now exceeds $1 trillion, more than our nation's aggregate credit card debt), as tuition costs have gone nowhere but up in a world flush with government-guaranteed debt.

As Karl Denninger writes (okay, rants),

Let's cut the crap -- colleges market themselves to young men and women on the premise that their educational services will provide you a means to get a better job than you would otherwise obtain.  That's the entire purpose of a career-focused education and the only justification for the outrageous tuition charges they assess. 

Well, as it turns out if you fail to benefit from the alleged "education" that these people sold you, and in the process you borrowed money using Perkins loans, the college is very likely to come after you, including in court! 

Oh, and lest you think they'll just sue to the principal and accrued interest, nope. 

As I've pointed out to a number of High Schoolers contemplating going to college and taking out loans, there are statutory penalties that apply if you default.  In the case of Perkins loans these amount to an additional 30% of the principal, increasing to 40% on a second collection attempt and another 40% on top of that if they sue. 

That basically doubles the amount you owe. 

Of course colleges don't talk about this before you matriculate.  After all, "education" as offered in these edifices is only partial, and the representations, both expressed and implied are many -- but the warranties few.

Yikes. The implications of the student loan crisis could well be far-reaching, and it's a dynamic that we'll need to keep our eye on over the next few years, because a lot of these institutions are proving to be ruthless when it comes time to collect payment.

In the meantime, I'm hoping we see some guts from the students who are being sued—let's see a countersuit from the unemployed (or underemployed) college graduates against their colleges and universities, alleging fraudulent marketing and failure to deliver on the promises made. The suits may have little merit, but I think it's the lender's (and not the borrower's) responsibility to determine the creditworthiness of the borrower. If they made bad loans to bad students, they should be forced to pay the price. That's how loans are supposed to work, period.

[Bloomberg]
[Market Ticker]

The credentialization of America

Last week, I wrote a post about government policies gone bad in Chicago, and how those policies are getting in the way of innovation and economic growth. I wrote:

The fact of the matter is that most politicians don't have a clue about what it actually takes to promote economic growth, even while they recognize that it's the absolute only way out of our current budgetary morass, given those same politicians' utter unwillingness to do anything meaningful to address it. 

As I've written here before, if we really want sustainable economic growth, then we need to be incentivizing innovation and entrepreneurship, not stifling it with overly onerous regulations that turn a simple task like starting a food truck business into a Sisyphean struggle. But, of course, we seem to be consistently doing the opposite, just about everywhere we look. 

We pass regulations on top of regulations from coast to coast, and we issue overly broad patents that protect the large companies at the expense of the small and innovative start-ups. We pass bizarre "taxpayer relief" bills without reading them, rubber-stamping a plethora of corporate kickbacks and subsidies in the process when nobody's looking. And we require that ever more trivial jobs require credentials and continuing education, increasing the cost of pursuing just about any career path we may choose (I'll have more on that topic next week).

Well, here it is, next week, and I am a man of my word. I happen to follow the Bureau of Labor Statistics on Twitter, largely because it's amusing to do so. Last week, they posted a status talking all about certificates, and how they were the "fast track" to careers. They linked to this strange little marketing pamphlet, which talks all about how awesome these certificates are. In it, they wrote:

The U.S. Bureau of Labor Statistics (BLS) has identified 33 occupations as typically requiring a certificate or other postsecondary nondegree award for people entering those occupations. In 2010–11, according to NCES, the most popular disciplines for certificate programs were healthcare, personal and culinary services, and mechanic and repair technologies and technicians. But people also earned certificates in a wide range of other occupational areas, such as computer and information sciences and protective services.

This includes jobs like hairdressers, nannies, fitness trainers, all the way down to computer programmers and web administrators. Strangely enough, most accountants, preschool teachers, and paralegals reported that they didn't need any special sort of certificate, which is honestly a little bit bizarre.

Now, in many of these cases, the tendency toward requiring certificates provides a very valuable protection for consumers—they can be assured that they're getting at least a minimum level of competence from the people they hire, and that's usually a good thing. But as these credentials and certificates creep their way down into even the most "unskilled" of occupations, I have to wonder what the point of it all is.

Is all of this just making it harder for everyone to meet basic job requirements? And is that a good thing for the economy at large? Or are these requirements just destined to get in the way of economic growth, like the licensing requirements for food trucks in Chicago in my earlier post? I'm all for safeguarding certain professions and making sure that the people who are in high-risk or high-impact positions don't blow up the world, but I think we've gotten way beyond that now.

I've been through a few of these types of training courses on my own over the years (TIPS training was a personal favorite), and I can tell you first-hand: they're not all exactly academically rigorous. Generally speaking, I'm not any more or less likely to do the right thing as a bartender or a financial advisor or a manicurist or whatever else just because I forked over a few hundred bucks and took a couple of classes with some common-sense tests attached to the back of them. Ultimately, there's a big difference between knowing the right thing to do, and then actually doing the right thing. Shocking, I know.

As consumers, we can't be so willing to outsource our due diligence to these certificate-granting institutions, whichever they may be. Many times, we in fact allow ourselves to become more vulnerable as a result, because it's incredibly easy for a scam artist to get himself a license or certificate and then hide behind his "credentials". And in the process, we may actually have made it more difficult for an honest and hard-working man to get that same job. That's bad.

Maybe none of this matters, and I'm just howling at the moon a bit, but I don't think this world needs any more licenses and certificates and credentials than it already has. What it does need is more common sense, more personal accountability, and more innovation and entrepreneurship. Unfortunately, again, we seem to be headed in the wrong direction.

[Bureau of Labor Statistics]

Quote of the Week

We had two very serious contenders for Quote of the Week this week, and both of them are going to get a little bit of love here. The first one comes from Brazil, where a cat was caught trying to wriggle through prison gates while carrying a cell phone, drills, an earphone, batteries, and a phone charger. When discussing the case, prison guards shared that it was tough to get the cat to sell out his accomplices, because he wasn't talking. Shocking. Note to self: teach cat how to commit petty crimes.

But this week's winner comes from the great state of California, where a man is seemingly determined to prove that corporations are not, in fact, people (contrary to the beliefs of a certain electoral runner-up). From NBC News, it's your Quote of the Week.

This week's QUOTE OF THE WEEK

"When Jonathan Frieman of San Rafael, Calif., was pulled over for driving alone in the carpool lane, he argued to the officer that, actually, he did have a passenger. He waved his corporation papers at the officer, saying that corporations are people under California law... Frieman doesn't actually support this notion. For more than 10 years, Frieman says he had been trying to get pulled over to get ticketed and to take his argument to court—to challenge a judge to determine that corporations and people are not the same." 
                                                    - NBC News

At the heart of the issue is the Supreme Court's controversial 2010 decision in the "Citizens United" case, which essentially brought the issue of corporate personhood into the public eye and made it a hot-button political issue. It's still unclear exactly where the concept of corporation-as-person begins and ends, and this latest incident is clearly part of the process of drawing out those lines in the sand.

Unfortunately (and somewhat unsurprisingly), it doesn't look like Mr. Frieman's case is going anywhere. A judge has already ruled against him, and although an appeal is planned, it's unlikely to gain any traction. Nevertheless, kudos to the man for coming up with a creative way to draw attention to an issue that likely won't be going away any time soon. As far as Quotes of the Week go, this one is among my favorites.

[NBC News]

On government policies gone bad

In a post earlier today, I talked about unintended consequences and provided a link to this post from last year, in which I discussed the ramifications of "when regulatory bodies go wild". Unfortunately, John Cochrane (the self-dubbed "Grumpy Economist") shared a few similar examples from his own backyard of Chicago, showing that this regulatory madness is spreading, not abating. He writes,

If you travel from California or New York to Chicago, especially the beautiful but food-deserted campus of the University of Chicago, you will notice a striking absence: food trucks, which serve a bewlidering variety of tasty treats in other cities. 

Finally, last summer, our City council passed an ordinance allowing food trucks to cook food, along with a bewildering variety of restaurant-protecting restrictions, such as that they may not operate within 200 feet of a restaurant, they can't park for more than two hours, they must carry an on board GPS to verify position, and so on.   

Today, the Chicago Tribune reports on the success of this program:   

Of the 109 entrepreneurs who have applied for the Mobile Food Preparer licenses that allow onboard cooking, none has met the city's requirements... 

The process of getting a license is just too daunting, according to Rodriguez and Fuentes, who cite bad experiences with city bureaucracy, steep additional costs and the need to retrofit equipment among the reasons. 

"I think many food truck owners are hesitant to even pursue cooking onboard because of their haunting experience with working with the city," Rodriguez wrote in an email.  

(Kudos to Rodriguez for having the courage to write on the record, and good luck with her next application.)

....Chicago's code includes rules on ventilation and gas line equipment that "are meetable but extremely cumbersome and can raise the price of outfitting a truck by $10,000 to $20,000."...

...the additional ventilation equipment (with intake and exhaust fans similar to those in brick-and-mortar kitchens) also raises the height of trucks to 13 feet, making certain Chicago underpasses impassable. 

Aaron Crumbaugh, who operates the Wagyu Wagon ... said he is outfitting several trucks for franchisees in other cities whose processes for licensing are clear-cut.  "But here they don't know exactly what they want," he said. "Every time a truck comes in (health officials) say 'You need this' but then when you come back they say 'No you need that' and then the next time they find something else."

The Tribune did a much more balanced job of including quotes from city employees defending themselves. I'm a blog so I don't have to be balanced. The numbers speak for themselves. Zero. 

Yeah. Cochrane also shares a story from the Hyde Park Herald that discusses the ridiculous red tape that is currently preventing a South Side movie theater from opening on time. As Cochrane concludes, "Chicago, like the US, is broke. It says it wants more businesses. Until actual businesses try to open. Really, if we can't get food trucks and movie theater regulations to work, how do Dodd Frank and the EPA have a hope?"

Well said, John. The fact of the matter is that most politicians don't have a clue about what it actually takes to promote economic growth, even while they recognize that it's the absolute only way out of our current budgetary morass, given those same politicians' utter unwillingness to do anything meaningful to address it.

As I've written here before, if we really want sustainable economic growth, then we need to be incentivizing innovation and entrepreneurship, not stifling it with overly onerous regulations that turn a simple task like starting a food truck business into a Sisyphean struggle. But, of course, we seem to be consistently doing the opposite, just about everywhere we look.

We pass regulations on top of regulations from coast to coast, and we issue overly broad patents that protect the large companies at the expense of the small and innovative start-ups. We pass bizarre "taxpayer relief" bills without reading them, rubber-stamping a plethora of corporate kickbacks and subsidies in the process when nobody's looking. And we require that ever more trivial jobs require credentials and continuing education, increasing the cost of pursuing just about any career path we may choose (I'll have more on that topic next week).

Absolutely none of these government policies does anything but slow economic growth and the pace of innovation, and they must all therefore be considered counter-productive with respect to American prosperity. As Mr. Cochrane so eloquently wrote, if we can't get a food truck to start up in Chicago without violating some arcane city code, how can anybody ever do anything of any value in this country without breaking the law? I wonder.

[Grumpy Economist]

Still proud to be an American

Yeah, I know, sometimes it seems like I'm just a bitter and disillusioned America-hating complainer, and yes, there are definitely a lot of things that have disappointed me in recent years. But this is still the greatest country in the world, and this here is your daily reminder of why (h/t Paul Kedrosky, via The Economist):

Pity the poor Indians...

[The Economist]

Concentrated benefits and dispersed costs

I know, that's the most exciting headline you've ever seen on this blog. But it's also one of the most important dynamics in American politics and economics, and it's one that dominates just about everything that comes out of Washington these days. Thanks to Alex Tabarrok of the Marginal Revolution blog, we've got a nice video that explains what it's all about, focusing on why there's corn syrup instead of sugar in our Coke bottles.



Simply put, the people (farmers) who want there to be corn syrup instead of sugar in our Coke have more to gain (or lose) than the rest of us, so they make the most noise, donate the most money, and generally spend the most time and effort making sure that the laws of the land are written in a way that benefits them, even if it's at the expense of the greater good. The rest of us tend not to have enough of a dog in the fight, so we generally won't take the time to fight back, even if we're aware of the issue at hand (which we often are not). The problem is, sooner or later these little things start to add up in a way that matters significantly to us, but only in aggregate.

This video also provides a valuable lesson on the typical behavior of large companies in response to changes in input cost structure. When one input in the product they create increases dramatically in price, these companies are typically very resourceful at finding ways to replace that input at a lower cost (but similar enough quality). That's how we end up with corn syrup in absolutely every food in the grocery store, that's how all of our manufacturing jobs get outsourced to China and Vietnam (no, it's not about "currency manipulation"), and it's also one of the primary factors holding our official "inflation rate" in check.

Inflation rates are only useful statistics if we assume that the goods we're measuring are 100% the same over time, which they rarely are. Coke is different now than it was 30 years ago (and frankly, even five years ago), and so too are cars, houses, clothing, electronics, and more. That's usually a good thing, but not always. "Low inflation" is not a win for us as consumers if it means that the quality of our products is degrading over time—unfortunately, that's exactly what's been happening right under our noses, with a huge assist from government policies.

Concentrated benefits and dispersed costs—it's great when you're the focus of the concentration, not so great when you're the one bearing the costs... and when those small dispersed costs start piling up, it starts to become a pretty big cost, doesn't it?

[Marginal Revolution]

On housing and the low cost of money

I'm often writing about the perils of the Fed's monetary policy, but there are obviously some bright spots to be found out there. I'm sure by now that you've read at least one glowing article this year about the "housing recovery", and for the most part it's legitimate (even if there are some strange dynamics under the surface).

The question, of course, is whether this recovery is sustainable, and what will happen to housing prices if interest rates begin to rise from their freakishly low levels. That's a topic that Tim Iacono took on in a recent blog post, and I thought his findings were absolutely worth sharing (emphasis mine).

I’ve about had it with how giddy a large portion of the U.S. population has become about rising home prices. 

Don’t get me wrong, when first thinking about this, I was about as happy as anyone else to learn that property values are now rising sharply again since, after renting for six years, my wife and I finally bought a house about two years ago. So, we stand to benefit as much as anyone else. 

But, when you look at what’s driving home prices higher and how unnatural and unsustainable those factors are, suddenly the headlines sound more ominous than optimistic...  

Yes, low inventory is a big factor behind the home price surge as the flood of foreclosures has slowed to a trickle while strong investor demand and growing confidence amongst American consumers have surely tipped the scales in favor of higher prices. But, it is today’s freakishly low interest rates – engineered by the Federal Reserve – that have clearly played the biggest role in pushing home prices higher, simply because most people buy a house based on the monthly mortgage payment, not the purchase price. 

And when you see the impact record low rates have on purchase prices, you might be as concerned as I am... 

Based on a constant mortgage payment of $1,100 per month (what seemed to be a good national average based on this story and others like it), today’s 3.31 percent 30-year mortgage rate will finance a house at almost double the price that the 40-year average mortgage rate would!

While there are clearly other factors involved, it is the Federal Reserve’s asset purchase program that is largely responsible for these freakishly low rates (it is one of their stated policy objectives) and, while the central bank has promised to keep rates low for a long time and to continue buying mortgage-backed securities indefinitely, those actions are by no means guaranteed. 

This is a dynamic that I've been well aware of for a long time now, but it's still striking to see it laid out graphically like in Tim's piece. In just the last 12 months, 30-year mortgage rates have come down from 4.2% to 3.4%. Using Tim's $1,100 monthly payment, that means that a buyer who waited a year can now afford to buy a $276,000 home, as opposed to a $250,000 home last year.

That's an increase of 10.4% year-over-year because of the low cost of money, and yet home prices are only reported to have increased by 5 or 6% over the last year, even according to the rosiest estimates. Therefore, in any realistic terms, the price of housing has continued to decline this year, rather than rebound sharply as the headlines would have you believe.

If interest rates are really going to stay this low forever, then you shouldn't have much to worry about, and you can go ahead and buy real estate to your heart's content (just don't read these three posts before you do so). But as Wells Fargo is always reminding me in their constant mailings, "Interest rates rarely stay put for long!"

And if Wells Fargo is indeed correct, well then... Tim's chart tells us that housing's got another pretty significant leg down (like, 30 or 40%) to get back to those historical average rates. And that likely won't be pretty for anybody hoping to sell property at any point in the next few decades. Good luck!

[Iacono Research]

Quote of the Week (Fertility Edition)

I definitely had at least half a mind to give this week's Quote of the Week to Chiefs quarterback Brady Quinn, who did an admirable job of distilling a horrific incident down to a useful message (without preaching or being trite or condescending, like some people). It's rare that you see an athlete being so frank and dropping their guard like Quinn did (it happened around five minutes into the press conference, which started out pretty slowly), and I salute him for it.

As he mused, "when you ask someone how they're doing, do you really mean it... and when you answer someone back, are you really telling them the truth?" I think Quinn is right to decry the shallowness of many (or most) interpersonal relationships in our social media-driven era, and his words can definitely give us all some food for thought.

But I came across another excerpt yesterday that was even more academically intriguing, if somewhat less poignant and powerful. Courtesy of Marginal Revolution's Tyler Cowen, and echoing some of the comments I made in this blog post last week, I give you the New York Times' Ross Douthat, who discusses the reasons for and potential impact of America's plummeting fertility rate:

This week's QUOTE OF THE WEEK

"There’s been a broader cultural shift away from a child-centric understanding of romance and marriage. In 1990, 65 percent of Americans told Pew that children were “very important” to a successful marriage; in 2007, just before the current baby bust, only 41 percent agreed... The retreat from child rearing is, at some level, a symptom of late-modern exhaustion — a decadence that first arose in the West but now haunts rich societies around the globe. It’s a spirit that privileges the present over the future, chooses stagnation over innovation, prefers what already exists over what might be. It embraces the comforts and pleasures of modernity, while shrugging off the basic sacrifices that built our civilization in the first place."
                                            - Ross Douthat, New York Times

I think there's a lot of merit to Douthat's take on the matter. The decision to eschew having children is, in a sense, the pinnacle of short-term thinking (a dynamic which has clearly taken on a life of its own in recent generations). If we all made the decision to have no children, our society would (theoretically, anyway) disappear in a matter of decades. None of us would be here but for someone else's decision to procreate, and yet there is often no recognition of that fact when it comes time for us to make a similar decision.

The decision is, in fact, the ultimate indulgence of a rich and stagnant society, one that is made all the more possible and plausible by the emergence and standardization of birth control, the access to which the UN has bizarrely ruled a universal human right.

To be fair, for many people in my generation, the decision not to have children has been a direct by-product of the explosion of debt (student loans and other types) in recent decades, and in that respect it's a perfectly rational—yet still sub-optimal—decision. If you can't afford to have kids (or don't feel like you can), then you clearly shouldn't, lest those children be deprived or resented by their own parents.

Nevertheless, it's an interesting thought experiment to wonder what would happen if only the underprivileged people in the world (those who couldn't afford birth control, and therefore couldn't afford to decide not to have children) were procreating. What would the next generation look like? What would be the prospects for global economic growth? And what kinds of decisions would such a scenario lead governments and voters to make, if the rich and powerful had no direct connection to the next generation of humans?

I don't know the answers to all of these questions (especially since many of them are purely academic in nature), but I do know that those who have the weakest connection to the future are the least likely to make good decisions with respect to said future. And if we continue to make decisions that sacrifice the future to benefit today, then I'm pretty sure we're not going to like the future very much once we do get there.

[New York Times]
(h/t Marginal Revolution)

The "real" fiscal cliff

From Tyler Cowen at the Marginal Revolution blog, what he terms "the truly important news". I'll agree with his assessment.

Forget post-election dissection and the fiscal cliff, here is the stunner: 

The U.S. birthrate plunged last year to a record low, with the decline being led by immigrant women hit hard by the recession, according to a study released Thursday by the Pew Research Center. 

The overall birthrate decreased by 8 percent between 2007 and 2010, with a much bigger drop of 14 percent among foreign-born women. The overall birthrate is at its lowest since 1920, the earliest year with reliable records. The 2011 figures don’t have breakdowns for immigrants yet, but the preliminary findings indicate that they will follow the same trend. 

That’s the real fiscal cliff.  Yet The Washington Post reports that its most popular article today is “Starbucks’ new $7 coffee is its priciest ever."

Yeah, that's not good. As I mentioned on Twitter this morning, over the long run, without population growth there can be no economic growth. Worse yet, a steady decline in the ratio of non-working (retired) citizens to working age citizens means that there's virtually no way to keep Social Security solvent, or to have any hope of paying down our national debt.

Want to know why Japan's economy can't seem to get out of its own way? This is why:

Too few working people (we could also call them "taxpayers"), too many unproductive people to support, and not enough aggregate savings among the latter to support themselves without help from the former. That's a problem, and it's one that's difficult if not impossible to reverse.

When a population ages dramatically, in relative or absolute terms, that always creates issues from an economic standpoint. It's a simple problem, and yet it's one that no amount of modern economic complexity (or monetary policy) can overcome. As Tyler wrote, this is the real fiscal cliff.

[Marginal Revolution]

Shipping container homes

This bit of creative awesomeness comes courtesy of my man Killagroove: turning expired shipping containers into housing projects. It's resourceful, it's creative, and it's actually pretty attractive stuff, considering the source material. Pretty cool. Let's call it "recession chic".

The first U.S. multi-family condo built of used shipping containers is slated to break ground in Detroit early next year. 

Strong, durable and portable, shipping containers stack easily and link together like Legos. About 25 million of these 20-by-40 feet multicolored boxes move through U.S. container ports a year, hauling children’s toys, flat-screen TVs, computers, car parts, sneakers and sweaters. 

But so much travel takes its toll, and eventually the containers wear out and are retired. That’s when architects and designers, especially those with a “green” bent, step in to turn these cast-off boxes into student housing in Amsterdam, artists’ studios, emergency shelters, health clinics, office buildings. 

Despite an oft-reported glut of unused cargo containers lying idle around U.S. ports and ship yards – estimates have ranged from 700,000 to 2 million – the Intermodal Steel Building Units and Container Homes Association puts the number closer to 12,000, including what’s sold on Craigslist and eBay. 

Joel Egan, co-founder of HyBrid Architecture in Seattle, which has built cottages and office buildings from shipping containers for close to a decade and coined the term “cargotecture” to describe this method of construction, warns that although containers can be bought for as little as $2,500, they shouldn’t be seen as a low-cost housing solution. 

“Ninety-five percent of the cost still remains,” he says.

Cost-effective or not, it's definitely a novel way of re-using our scarce resources, and there's definitely value in that. Here's a quick look at some of the projects, all of which I've captioned.

Rosa Parks; Detroit, MI

The Box Office; Providence, RI

Aprisa Mexican Cuisine; Portland, OR

The Shipping Container House; Nederland, CO

[ABC News]

Reminder: there is no retirement

Even while our friends over in France continue to whistle past the graveyard and pretend that their official retirement age should in fact be lowered, rather than raised massively, Americans seem to be waking up to the obvious and inevitable. That is to say, for most Americans, retirement is now a pipe dream.

As they struggle to save for retirement, a growing number of middle-class Americans plan to postpone their golden years until they are in their 80's. 

Nearly one-third, or 30%, now plan to work until they are 80 or older -- up from 25% a year ago, according to a Wells Fargo survey of 1,000 adults with income less than $100,000. 

"It is so tough for Americans to save for retirement that the answer seems to be to work longer," said Joe Ready, director of Wells Fargo Institutional Retirement and Trust. 

Overall, 70% of respondents plan to work during retirement, many of whom plan to do so because they simply won't be able to afford to retire full time. 

But working well into your 70's, 80's or even 90's, isn't always realistic, said Ready. Nearly three-quarters of those who plan to work into their 80's say their employer won't want them working when they're that old, for example. Other roadblocks, like health issues, could arise as well.

Never mind the fact that many Americans won't even live until their 80s, this is an ugly statistic and trend. It's also terrible news for the next generation of college grads, who will emerge from school with mountains of debt and realize that there are no jobs for them because their parents (and grandparents?) are still holding them.

The simple fact is, we've convinced ourselves for decades now that low-interest rate policy and deficit spending gives us an economic free lunch, and that we'll therefore never have to endure another recession again. In reality, all low-interest rate policy has done is to pull forward years (if not decades) of economic growth into the current period, as workers spend now and cost themselves the ability to spend later (in retirement). Sooner or later we have to pay the price for those policies, and we're now seeing the side costs of all of that "prosperity" coming home to roost.

A devastatingly low number of 50-55 year olds in our country can currently afford to retire at anything approaching a reasonable age, and this problem will only get worse as our distressing gaps in pension and Social Security funding become more apparent (let's not even discuss their investment return assumptions right now). This is bad news for the older generation and the younger generation alike, and it all comes back to unrealistic monetary and interest rate policies. Thanks, Ben.

[CNN Money]
(h/t Tim Iacono)

The cult of the smartphone

Tim Iacono tipped me off to an interesting Wall Street Journal article about cell phones that I hadn't yet seen. It raised some points that I've been thinking about for quite some time, and I thought they were worth sharing here.

Heidi Steffen and her husband used to treat themselves most weeks to steak at Sodak Shores, a restaurant overlooking a lake near their hometown of Milbank, S.D. Then they each got an iPhone, and the rib-eyes started making fewer appearances. 

"Every weekend, we'd do something," said Ms. Steffen, a registered nurse whose husband works at a tire shop. "Now maybe once every month or two, we get out." 

More than half of all U.S. cellphone owners carry a device like the iPhone, a shift that has unsettled household budgets across the country. Government data show people have spent more on phone bills over the past four years, even as they have dialed back on dining out, clothes and entertainment—cutbacks that have been keenly felt in the restaurant, apparel and film industries... 

Labor Department data released Tuesday show spending on phone services rose more than 4% last year, the fastest rate since 2005. During and after the recession, consumers cut back broadly on their spending. 

But as more people paid up for $200 smartphones and bills that run around $100 a month, the average household's annual spending on telephone services rose to $1,226 in 2011 from $1,110 in 2007, when Apple Inc.'s iPhone first appeared. 

Families with more than one smartphone are already paying much more than the average—sometimes more than $4,000 a year—easily eclipsing what they pay for cable TV and home Internet... But the question for the industry is how much bigger bills can get before the cuts in other parts of the family budget grow too painful. 

The article goes on to discuss an interesting developing battle with respect to smartphone data plans—with data usage now skyrocketing, cell phone carriers like Verizon are now eliminating unlimited data plans for customers who wish to buy smartphones at the subsidized rate. This means that many customers will have to either choose to actually pay full price for their iPhones (which very few can afford to do), or else pay even more in their bills each month.

I've always found it amazing how much people will be willing to pay on a per-month basis in order to avoid actually paying full price for their phones—in many cases, over the course of two years with an iPhone, people will pay 4 to 5 times the actual retail cost of the device just on monthly bills, without even thinking about what they're doing.

It's a topic that blogger Karl Denninger has tackled at length on multiple occasions, especially when Sprint announced that they would be allowing iPhones on their prepaid network without a contract. Citing a Fox Business article, Denninger wrote:

Virgin Mobile USA, a prepaid brand of Sprint, on Thursday announced it will offer the Apple iPhone on a no-contract basis to customers starting on  June 29, but you may want to think twice before jumping ship from your current  carrier if you're already an iPhone owner. 

The "garf" is that you're going to have to pay cash for the phone -- in this case, $549 or $649, depending on the model you want.  No subsidy. 

But.... the plan is $35/month for 300 minutes of voice and unlimited text and data. 

Now consider that over two years if you buy the phone from AT&T it breaks down like this: 

$199 up front for the iPhone 4S 

$39.99/mo for base 450 minute service 

$30.00/mo for 3gb of data 

$20.00/mo for unlimited text messages 

====== 

$89.99/mo * 24 months = $2,159.76 + $199 = $2,358.76 over two years 

Now on Virgin, it's $649 up front and then $35/month * 24 months, or $1,489.00 over two years. 

Want to pay an extra $869 plus additional taxes and fees on the AT&T service that are billed separately but not on Virgin, which simply charges sales tax (this can easily be $200 or more over those two years.) 

Go right ahead. 

For everyone else just tell AT&T and Verizon to***** off.

Interesting analysis. For what it's worth, the cost of using an iPhone on Virgin is still pretty damned expensive, but at least you're not locked into a two-year contract at exorbitant rates just to pay off the effective "loan" that you took out to buy your overpriced phone.

Either way, even though I personally continue to do it (not with an iPhone, with an Android, but that's a story for a different day), I really can't figure out how so much of America can justify spending so much on phone service even as they're cutting back on just about everything else.

Sometimes I wonder, in our desperate attempts to stay "connected" to the world with our phones, are we risking becoming completely disconnected instead? Once we choose to stay home and play with our phones rather than going out and having meals with friends, I think that choice has already been made. It's a weird choice, but we are where we are.

[Wall Street Journal]
[Market Ticker]

Quote of the Week

As usual, I've got some catching up to do here on the blog. We'll start things off today with your belated Quote of the Week, then your Clip of the Week will be right behind it. I may throw in an extra post just for kicks, but I'll probably hold off on it until tomorrow—you all know how much I love writing on Fridays.

The leader in the clubhouse for this week's Quote was this post over on the Marginal Revolution blog, which shared some seriously bizarre tidbits about people's intense love for K-Pop (what's K-Pop? This is K-Pop; so is this). Fanaticism knows few bounds, apparently.

But then I came across this post at The Motley Fool, which was frankly so terrifying that I couldn't help but write about it on the blog. So here's your Quote of the Week... go America.

This week's QUOTE OF THE WEEK

"As part of the Dodd-Frank Act, lawmakers directed the [Securities & Exchange Commission] to figure out how much average investors knew about the stocks and mutual funds that they held. Here's what they found: You are an idiot... Statistically, the SEC found that American investors—regardless of age, race, or gender—'lack basic financial literacy,' and that they generally do not understand even 'the most elementary financial concepts such as compound interest and inflation.' The surveys suggest that certain sub-groups, including the elderly... 'have an even greater lack of investment knowledge' of concepts like the difference between stocks and bonds, and are unaware of investment costs and their impact on investment returns.
                                                  - Bill Mann, Motley Fool Funds

What's perhaps most concerning about this post is what Mann later points out—this study didn't consider ALL Americans, it ONLY CONSIDERED THOSE WHO ARE ALREADY DEEMED TO BE ACTIVE INVESTORS. If active investors can't adequately answer a question like "what's a stock", then I admit that I have seriously overestimated the intelligence level of my nation. Unfortunately, it appears that's the case.

Now, granted, my inner tin-foil-hat man does look at this survey data with a fair bit of skepticism, recognizing that the SEC has a vested interest in reporting that investors are gullible fools who need to be saved from themselves (by the SEC, of course). That said, I have a very hard time contradicting the study's results—frankly, it all sounds just about right.

If you watch the Presidential (and Vice Presidential) debates this fall, and you start to notice that the candidates are speaking about the economy and the markets in a way that seems designed to confuse, please know that it's absolutely on purpose—they assume that you don't understand this stuff, so it's in their interest to speak in circles so as to confuse you.

You won't know the difference either way, and you'll therefore be forced to choose the guy who "looked the best" doing it. That is, unless you choose to educate yourself. And if you read this blog, I'd like to think that you're already doing so. Otherwise, I've probably been confusing the hell out of you for a long time now. My bad, guys.

[Motley Fool]

3-D printing and patents

I've been writing a lot about 3-D printing lately (because I think it's awesome), and I also recently wrote a post about our nation's patent system (because I think it's broken). Last week, I came across an article from The Economist that brought those two topics together—in a way that might not make me particularly happy.

What could well be the next great technological disruption is fermenting away, out of sight, in small workshops, college labs, garages and basements. Tinkerers with machines that turn binary digits into molecules are pioneering a whole new way of making things—one that could well rewrite the rules of manufacturing in much the same way as the PC trashed the traditional world of computing. 

The machines, called 3D printers, have existed in industry for years. But at a cost of $100,000 to $1m, few individuals could ever afford one. Fortunately, like everything digital, their price has fallen. So much so, industrial 3D printers can now be had for $15,000, and home versions for little more than $1,000 (or half that in kit form). “In many ways, today’s 3D printing community resembles the personal computing community of the early 1990s,” says Michael Weinberg, a staff lawyer at Public Knowledge, an advocacy group in Washington, DC. 

As an expert on intellectual property, Mr Weinberg has produced a white paper that documents the likely course of 3D-printing's development—and how the technology could be affected by patent and copyright law. He is far from sanguine about its prospects. His main fear is that the fledgling technology could have its wings clipped by traditional manufacturers, who will doubtless view it as a threat to their livelihoods, and do all in their powers to nobble it. Because of a 3D printer's ability to make perfect replicas, they will probably try to brand it a piracy machine. 

Manufacturers of famous brands have had to contend with ripoffs since time immemorial. Whole neighborhoods exist in Hongkong, Bangkok and even Tokyo that turn out imitation designer handbags, shoes and watches. China has flooded the world with cheap replacement parts based on designs pirated from the original equipment manufacturers. 

But while the pirates' labour rates and material costs may be far lower, the tools they use to make fakes are essentially the same as those used by the original manufacturers. Equipment costs alone have therefore limited the spread of the counterfeiting industry. But give every sweatshop around the world a cheap 3D printer coupled to a laser scanner, and pirated goods could well proliferate... 

As with any disruptive technology—from the printing press to the photocopier and the personal computer—3D printing is going to upset existing manufacturers, who are bound to see it as a threat to their traditional way of doing business. And as 3D printing proliferates, the incumbents will almost certainly demand protection from upstarts with low cost of entry to their markets. 

Manufacturers are likely to behave much like the record industry did when its own business model—based on selling pricey CD albums that few music fans wanted instead of cheap single tracks they craved—came under attack from file-swapping technology and MP3 software. The manufacturers' most likely recourse will be to embrace copyright, rather than patent, law, because many of their patents will have expired. Patents apply for only 20 years while copyright continues for 70 years after the creator's death.

Oh, boy. I firmly believe that 3-D printing has the potential to transform the way that many industries—particularly those involved in manufacturing—operate in this country, and that it could even help our country to break its long-standing dependence on imported crude oil (if I don't have to ship a product to you, because you can print it yourself at home, then I can pretty much put UPS and FedEx out of business overnight, significantly cutting into the amount of fuel used in this country).

But it won't happen if we don't allow for the elimination of businesses made irrelevant by new technologies. Creative destruction has always been at the core of economic progress in this country (note: "economic progress" does not necessarily mean the same thing as "economic growth", as measured by the circulation of dollars—not all "wealth" is denominated in paper currency), and to the extent that patents impede this economic progress, they must be abolished.

I think we're reaching a very dangerous point in this country when it comes to patents and the way they are used—instead of being used as a tool to protect inventors and small business owners from being ripped off, they're now being used as a cudgel by the largest companies to protect their dominant industry position and create barriers to entry for smaller competitors.

If you doubt this assertion, please refer to this piece in yesterday's New York Times, which notes that Apple and Google this year spent more money on patent lawsuits and patent purchases than they did on research and development for new products. That's a new dynamic (it's the first year that this has been the case), and it's definitely not a positive one for our country.

When we put the interests of big business ahead of the interests of society at large, we put ourselves on a dangerous path toward economic stagnation and irrelevance. Unfortunately, the majority of public policy that has come about in the last decade has done just that—from auto industry bailouts to TARP to overly broad patent law to a whole laundry list of other programs and court rulings, the past decade has been a great one for big business, typically at the expense of the ordinary American.

We need this dynamic to reverse itself, because the nation's economic future is worth more than the income statements of its largest companies. Yes, they are different things.

[Economist]

P.S.- Another interesting dynamic to watch in the 3-D printing space is discussed in this article, which I didn't have the opportunity to address in this post. I don't think that guns are the best use of 3-D printers, but they're clearly drawing a lot of attention for various reasons. Interesting developing issue.

Quote of the Week

A few months ago, I wrote a post about the Black-Scholes pricing model, its role in the financial crisis, and how economists continue to do themselves a terrible disservice by insisting that their discipline is a physical science like physics or biology, rather than the inexact social science that it is. I wrote:

We all use models in our daily lives, because they help us to make sense of what are often very complex problems. Models simplify, organize, and categorize the variables in an uncertain world so that we can better understand the impacts of our decisions. But they DO NOT, ever, have the power to tell us what to do. You don't even need to know a thing about Black-Scholes (and trust me, a lot of people who should know a lot about it... don't) in order to accept that assertion as fact. 

The intelligent person knows to use a model only as a guide to confirm (or refute) what our intuition tells us. Very often, our painfully simple heuristic models (which you can learn or hear more about from Gerd Gigerenzer's speech, if you're a nerd like me) actually outperform very elegant statistical models. How can this be? The answer lies in this brilliant polemic from economist Robert Wenzel (which is almost as great as a similar recent rant from Jim Grant).

In the science of physics, we know that water freezes at 32 degrees. We can predict with immense accuracy exactly how far a rocket ship will travel filled with 500 gallons of fuel. There is preciseness because there are constants, which do not change and upon which equations can be constructed. 

There are no such constants in the field of economics since the science of economics deals with human action, which can change at any time. If potato prices remain the same for 10 weeks, it does not mean they will be the same the following day. I defy anyone in this room to provide me with a constant in the field of economics that has the same unchanging constancy that exists in the fields of physics or chemistry.  

And yet, in paper after paper here at the Federal Reserve, I see equations built as though constants do exist.

Wenzel is dead on. We all know that models are useful, but they do not remove responsibility for rational risk management—only people have the power to do that. When callous risk managers at huge investment banks take another man's model on faith, and make huge bets with billions of dollars on the line without sanity-checking the model, that's nobody's fault but theirs.

While my points were correct, I took a little while to get the point across. For a more pithy take on things, we'll turn to Barry Ritholtz, for this week's Quote of the Week.

This week's QUOTE OF THE WEEK

"Economists are neither Engineers nor Scientists, as each of these fields has a significant degree of precision in what they do, and test their hypotheses in a lab. The better choice for Economists are 'Historian' or 'Sociologists.' The sooner the profession loses its 'physics penis-envy', the better off we all will be."
                                                  - Blogger Barry Ritholtz

I'll just let that "physics penis-envy" line stand on its own, because I think it's the single greatest takedown of modern economics that I've ever seen.

As our economy becomes more and more dependent on the fantasy-land models put together on Ben Bernanke's laptop, I sincerely hope that the damage done by these grand experiments isn't so grave that we all end up suffering for decades. But if we allow ourselves to entrust ever more of our lives to these "scientists", we're certainly running that risk.

The future of automotive transportation

While I spend a lot of time on this blog decrying the current state of our economy (and political environment), I try my best to balance that cynicism with a fair amount of optimism about our future, especially where new technologies are concerned. If we can be courageous enough to allow for the breaking down of old paradigms (and for the failure of outdated and obsolete business models), the future for our nation is indeed incredibly bright.

In that vein, a pair of articles that I read over the weekend have me particularly excited. First up, from US News & World Report:

Last week, California became the third and by far the most important state to legalize driverless cars, joining Nevada and Florida. Google has been getting most of the attention here for its work developing driverless vehicles. But it is hardly alone. Major automakers have their own projects under development. 

Google may want to leapfrog existing technology to point the way toward a driverless future. Existing auto companies will seek incremental changes that protect their franchises while moving toward an automated future. It's not clear what the pace of commercialization will be for driverless cars. 

After all, many of the improvements promised at the 1939 World's Fair in New York still have not come to pass. And there will be no shortage of open-road lovers and skeptics reluctant to cede control of their cars to a bunch of computers—shades of Skynet and The Terminator. 

But as Google, Apple, and other new-tech giants have demonstrated, the pace of change is likely to be much faster when it comes to automated vehicles. Using increasingly sophisticated sensors and software, driverless cars hold out the promise of saving lives, fuel, and time. They react more quickly to accident threats. They don't panic. They can tie into traffic grids and do a much better job of balancing traffic flows. They can optimize fuel consumption. 

We already trust a lot to technology when we drive. We generally believe traffic signals and respond to GPS guidance and traffic congestion reports. We expect speed and fuel flows to respond properly when we use cruise controls. We use digitized cameras and back-up sensors. Newer cars monitor weather conditions and automatically trigger any number of safety responses. Increasingly, we even pay for auto insurance using on-board computers to record where and how we are driving. And many of these functions are voice-activated on newer vehicles.

For more on the Google Car project, check out this video on Bloomberg—you have to admit, it looks pretty awesome. But in case driverless cars don't get you all excited, I've got another car-related article that is equally awesome. From Yahoo Finance:

Tesla Motors today unveiled its highly anticipated Supercharger network. Constructed in secret, Tesla revealed the locations of the first six Supercharger stations, which will allow the Model S to travel long distances with ultra fast charging throughout California, parts of Nevada and Arizona.  

The technology at the heart of the Supercharger was developed internally and leverages the economies of scale of existing charging technology already used by the Model S, enabling Tesla to create the Supercharger device at minimal cost. The electricity used by the Supercharger comes from a solar carport system provided by SolarCity, which results in almost zero marginal energy cost after installation. Combining these two factors, Tesla is able to provide Model S owners1 free long distance travel indefinitely. 

Each solar power system is designed to generate more energy from the sun over the course of a year than is consumed by Tesla vehicles using the Supercharger. This results in a slight net positive transfer of sunlight generated power back to the electricity grid. In addition to lowering the cost of electricity, this addresses a commonly held misunderstanding that charging an electric car simply pushes carbon emissions to the power plant. The Supercharger system will always generate more power from sunlight than Model S customers use for driving. By adding even a small solar system at their home, electric car owners can extend this same principle to local city driving too. 

The six California locations unveiled today are just the beginning. By next year, we plan to install Superchargers in high traffic corridors across the continental United States, enabling fast, purely electric travel from Vancouver to San Diego, Miami to Montreal and Los Angeles to New York. Tesla will also begin installing Superchargers in Europe and Asia in the second half of 2013. 

The Supercharger is substantially more powerful than any charging technology to date, providing almost 100 kilowatts of power to the Model S, with the potential to go as high as 120 kilowatts in the future. This can replenish three hours of driving at 60 mph in about half an hour, which is the convenience inflection point for travelers at a highway rest stop. Most people who begin a road trip at 9:00 a.m. would normally stop by noon to have lunch, refresh and pick up a coffee or soda for the road, all of which takes about 30 minutes. 

"Tesla's Supercharger network is a game changer for electric vehicles, providing long distance travel that has a level of convenience equivalent to gasoline cars for all practical purposes. However, by making electric long distance travel at no cost, an impossibility for gasoline cars, Tesla is demonstrating just how fundamentally better electric transport can be," said Elon Musk, Tesla Motors co-founder and CEO. "We are giving Model S the ability to drive almost anywhere for free on pure sunlight."

Make it through that whole thing? Good. To date, I haven't been particularly excited about electric cars, in large part because previous models have mostly relied upon existing sources of electric energy, the majority of which is generated from the burning of fossil fuels (largely oil and coal). In other words, there's no real fundamental change, just a shifting of where the fuel is burned—in a power plant instead of in your car.

But if we can make a shift to solar, then that's a legitimate game-changer in the automobile world. Of course, as I've mentioned on here once before, what would be even cooler is if we could figure out a way to turn all of our highways into piezo-electric energy generators, with the cars effectively powering themselves, at least in part. Spray some transparent solar film on the outside of all the car's windows, and we could take this whole thing even another step further.

Yes, I know that some of this probably sounds insane, but I also think it's completely possible and plausible. The technology all exists, it's just a matter of harnessing it in a way (and scaling it up to a point) that makes it broadly useful and usable.

Do I think that a future of self-driving cars which use virtually no energy is possible? Absolutely. Do I think that we as humans have the courage to embrace that future, if it means destroying entire companies and industries in the process? That jury's still out. But I certainly hope so.

[US News]
[Yahoo Finance]