Nostradoofus

Even as the industry collapses around them, some newspapers seem not to fully understand their own business.

Traditional newspapers consist of reporters (gather content), editors (judge and shape content), ad sales staff, a printing facility and distribution trucks.  Reporters and editors provide the value to end users, and the ad sales pay for it all.

Newspapers were able to charge money largely because printing and distribution costs created barriers to entry for other newspapers.  You can’t afford to buy a printing plant and fleet of delivery trucks if you don’t have circulation, but you can’t get circulation without a printing plant and fleet of delivery trucks.  That’s a big barrier.  As a result, the city paper was the only way to reach a consumer in print on a daily basis.  Local monopoly.  They charged a lot for that, and this is why Warren Buffett loved to own newspapers.

Printing and distribution costs are now zero, thanks to the Web.  This lowers entry barriers, while pushing price down to marginal cost:  zero.  That’s why Web news is mostly free, and Web ads are nearly free.  Oddly, ten years into the collapse, news industry pundits still sometimes ask, “Why are we giving away content?”  They simply don’t understand that free-ness is a microeconomic certainty, given the conditions. Google internally describes the situation very simply:  ”information wants to be free.”  That was always true, but distribution costs created the opportunity for distribution control, which pushed up prices.  Until now.

So that whole industry is the walking dead, excepting a few very strongly branded papers.  What might replace the other 500 papers that disappear?

Go back to the second paragraph and look at the list of functions performed by newspapers.  Note how only two pieces of this puzzle are useful to the reader:  reporters and editors.  The rest, from the end user perspective, was just an unavoidable cost of getting the content.

So the real question in news is how to pay for information gathering and editing.  And we already have a partial answer to the editing problem:  bloggers.

Not all blogs are collections of random ruminations (as this one is).  There is a small but growing handful of blogs that act as meta-editors for the news.

For example, Calculated Risk and Naked Capitalism, two respected finance blogs, are increasingly quoted by traditional media.  They are written by industry professionals with over a decade each of experience in their respective specialties (mortgage and investment banking).

From the reader’s perspective, these two blogs do what the city newspaper editor used to do:  edit the news.  They read everything publicly available on a given story, condense it, and tell a pithy and interesting story.  

They also have a business model.  Each has a wide readership, which lets them sell ads.  Though each author could, so far, probably make more money doing something else, there are certainly cases where bloggers are already making a living by acting as meta-editors.

In short, the editing function may be a solved problem.  Each successful news blogger becomes a sort of one-person brand.  That brand sustains a readership, which in turn sustains an ad base.  

This leaves a harder problem:  news gathering.  Currently nearly all news bloggers are parasitical on newspaper reporting.  They don’t actually fly to Geneva to talk to a banker, but instead judge the comments the banker made to a NY Times reporter. Obviously this will fail when the newspapers go under.  What will pay for content gathering?

Basically, bloggers will eventually have to pay the Associated Press, or a lightweight Web-only equivalent of AP, for stories.  This will probably work once blogs completely replace news, but we are headed for a chasm, during which newspapers and AP have laid off all their reporters, but blogs (or their proxies) have not yet hired any back.

More hypothetically, there is probably a way to crowdsource some kinds of reporting.  If 100 people send “earthquake in Karachi” over Twitter, you know there is something going on.  This solves event reporting, but not the higher-end stuff like interviewing experts.

Whatever happens, there will be a transition period in which there is very little news gathering for print.  Reporting in that period will likely be done by non-newspaper sources:  government data, subsidized reporting (BBC, CS Monitor), television, and magazine investigative pieces.  The transition period might last years.

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The Republican Party has, for the first time in 40 years, an opportunity to remake itself.

In the 1960s, Nixon made a Faustian bargain, essentially exploiting racist frustration in the Deep South over the Civil Rights Act to lure southern Democrats to change sides. Thus began an uncomfortable but enduring coalition between laissez-faire businesspeople and relatively poor, uneducated, conservative magical-thinkers that might euphemistically be called “social issue populists.”

One could argue the Reagan Revolution was no revolution, but an incremental extensions of that same basic alliance to include one more group of social issue populists: Southern Baptists.  Again, it worked, in the short run.

This coalition won elections, but was essentially unholy, combining two completely different political philosophies into one party.  This could not last forever, so it didn’t. The laissez-faire business elite were increasingly outnumbered in their own party by populist ideologues with no interest in government, big or small.  

In the past several years, as Bush Jr.’s GOP turned shrill and spendy, it was itself abandoned by its centrist, non-ideological leaders, leaving behind mostly know-nothings.  Centrist, non-ideological Republican voters naturally followed them out the door, leaving the impotent, free-falling GOP we see today.

But there is an obvious strategic path to their salvation. One type of small government — specifically, high-ROI government, in which economical regulation enforces property rights, growth in median income per work hour, and a level competitive playing field — is still the right answer.  This position constitutes the under-represented center of American politics.  In coming years, there will probably come an opportunity to exploit frustration with a new status quo of high inflation and low ROI on spending.  The question is how long it will take for reason again to take root in GOP leadership, which is currently bush league (no pun intended), after the death or departure of most of the wiser heads.

I say this with all due respect, as a laissez-faire fiscal conservative currently without representation in either party.  Here’s hoping.

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I usually write about bigger themes, but FYI, an identity theft method popular for years in east Asia has recently hit US shores.  

It’s very clever.  Gangsters affix their own card reader over the card slot on your bank’s ATM machine.  When you insert your card, it passes through the gang’s reader and into the ATM.  You make your withdrawal as usual, and your card comes back.  Unbeknownst to you, the gang’s reader now has your card number, so they can create a duplicate of your ATM card.

But they still need your PIN, right?  Right.  That’s why they have a video camera installed across the street, with a telephoto lens aimed at the keypad.  They simply watch you type in your PIN.  Now they have a duplicate ATM card and your PIN.  Cha-ching.

This scam has been spotted recently in Orange County, California.  Fruits of globalization, I guess.  If you see something like it, do us all a favor and call the police.  Since the scam requires so much equipment, police have an excellent chance of catching the bad guys if they know where the equipment is.

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Proposed analytical framework for redesigning economic policy.  Common sense, but apparently not discussed anywhere else.

1.   Acknowledge history.  Current policy was essentially all forged in the 1930s. Forget deck-chair-rearranging debates about later initiatives:  the core assumptions — consumer-centrism, social safety net, regulatory structure, tax structure — were mostly crafted in the 30s.  

2.  Acknowledge changed circumstances.  In the 1930s, the United States was the lowest-cost producer of manufactured goods, the largest exporter, the largest creditor, had one of the highest savings rates, the best education system, and imported no energy.  Moreover, little was known about how to extend human life through medical technology or behavior.  All of these conditions have changed.

3.  Identify mismatched policies.  We went to a consumer-centric orientation in the 1930s in an effort to reverse deflation by unlocking America’s vast savings. Today, there are no savings to unlock, so consumer-centrism has nothing to unlock.  Securities regulation was designed around all securities that existed in the 1930s.  Many securities have been invented since then, so the old policy is unnecessarily narrow.  Medical insurance was developed piecemeal, in an era when there was very little that medicine could do.

4.  Choose one metric to optimize for.  I prefer median output per work hour, because it is simple, yet captures economic advancement and social equality at the same time.  Median productive life span might be a nice-to-have as well.

5.  Design new policies based on the above.

This leaves out some details, such as getting rid of policies that are bad under all circumstances (e.g. promoting consumer debt through tax subsidy), but the exercise will let almost anyone — even politicians — make smarter choices.

UPDATED 5/25/09:

Hereby retracted.  A reader sent various rebuttals, but the one that resonated is that subsidized loans are not really voluntary, because the unsubsidized rates are so much higher.

I checked, and found this was even more true than he suggested:  unsubsidized loans are now mostly unavailable at any price, due to the credit crisis.  Thus poorer students have no alternative to subsidized loans.  So the above would amount to an unavoidable invasion of privacy unduly targeting poorer students.

The reader posted other arguments.  Another that held some weight with me was that alcohol is far more abused, yet unregulated.

My goal in this proposal was to try to reverse a decades-long descent of American universities from educational institutions into a form of subsidized arrested development, in which late teens party their way through waning adolescence in the absence of either supervision or consequences.  But clearly this isn’t the way.

ORIGINAL:

Require recipients of federally subsidized student loans to take regular drug tests.

This does not violate privacy, because subsidized loans are voluntary.  If you don’t want to take a drug test, get unsubsidized loans instead.

Sometimes a situation arises so slowly, and becomes so established, that we forget how outrageous it is until we state it bluntly:  for decades, we have offered public subsidies for illegal drug use at universities.  Phrased thus, it doesn’t sound like such a good idea, and obviously delivers negative return on investment.

Among many other advantages, testing would be a social leveler:  the poorer students will be less able to afford drugs, putting them at an academic advantage. So we have a rare case where we can equalize opportunity while simultaneously making government more efficient.

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Fellow laissez-fairites, hang onto your hats…

Adam Smith’s “invisible hand” of free markets garners almost as much reverence as Isaac Newton’s laws of physics.  With good reason:  like Newton, his ideas are proven to govern most human-scale, real-world problems.

But of course, even Newton was wrong at the edges.  Small things and fast things do not obey Newton’s laws, much to Einstein’s and Feynman’s good fortune.  Newton is an approximation, albeit a very good one.

Similarly, it is interesting to at least ask the question:  under what conditions does Adam Smith describe the world poorly?  More specifically…

What if labor markets can actually be too flexible?

This might sometimes be the case in at least two ways.  First, in a deflationary spiral, if layoffs are very easy, then public companies will use them to stabilize quarterly earnings.  But in aggregate, this may actually accelerate the deflationary feedback loop, triggering a depression.

Second, what if too-easy substitution of cheap labor stalls domestic productivity growth per work hour — the only engine of long-term eocnomic advancement?

What if it’s actually a liability to have the reserve currency?

Having the reserve currency permits short-term interest rates to be held artificially low, while delaying the inflationary and exchange-rate consequences for many years.  Artificially low rates foster misallocated resources, including but not limited to investment bubbles.

1.   Individuals:  why save if you get a negative real return? Instead, pile into houses and stock.  If rates are really low, asset prices keep rising, so it’s short-run logical to borrow against your house and either double down on the stock market or buy an Escalade.
2.   Corporations:  why issue equity if you can issue debt almost for free?  Lever up, buy back the stock, go private.  Works great unless rates rise again someday, in which case the firm goes insolvent trying to roll over the debt.

Both of the above are short-run logical, long-run crazy.  But if rates are artificially low, and your currency artificially strong, for over a decade — a condition only possible for the reserve currency — then you start to get adults whose entire adult life has been governed by what should have been a short-run condition.  They know no other reality.

People thus learn lessons that cannot immediately be unlearned.  So if irrational conditions persist too long, their judgment is polluted for a long time. They are surprised, and slow to react and relearn, when rates suddenly spike, or assets suddenly crash.

Yes, this section is particularly heretical, yet fits the historical record:  the only two countries to experience massive industrial hollowing (US and UK) are also the only two modern reserve currencies.  No comparable hollowing occurred at industrial powers with no reserve currency (Japan, Germany).

So the reserve currency is not directly a liability, but perhaps is indirectly a liability, because it delays the consequences of bad financial policy for so many years.  This creates irresistible political temptation.  Riskless in the short run.  But then you get a whole generation of people trained to do dumb stuff.

The common thread of the above

Individuals heavily discount the future, even the likely future, if it is far enough away.  In these cases, Adam Smith may not operate efficiently when short-term optimization has long-term negative externalities.  

There is a very easy way to demonstrate this:  one day we’ll all be dead, but this future, though certain, is discounted to zero by most people day to day.  It is logical to assume the same discount applies to other futures, and thus that Adam Smith doesn’t work well under such circumstances.

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