Nostradoofus

Krugman wrote the other day that Schumpeter’s macroeconomics falls apart because:

[Schumpeter says] mass unemployment is necessary, because you have to shift resources away from sectors that got too big, stimulus is a bad thing because it slows the necessary adjustment. And now as then, the whole notion falls apart when you ask why, say, a housing boom — which requires shifting resources into housing — doesn’t produce the same kind of unemployment as a housing bust that shifts resources out of housing.

Thus urged, I did ask myself why there would be unemployment in a housing bust, but not a boom.  The answer, Mr. Krugman, seems pretty obvious:

1. Investment bubbles collapse much faster than they inflate.  In the real world, labor can only redeploy so fast.  If capital reallocation exceeds that rate, you get unemployment.  So on the way up, capital redeploys slowly enough for labor to react smoothly.  No unemployment.  On the way down, capital redeploys much faster than labor can.  Presto, unemployment.
2. (more speculatively)  In the short run, bubbles increase the blended rate of return on capital for the whole economy.  Higher ROI permits overall employment to rise above the rate that would have prevailed without a bubble.  When it bursts, ROI falls, so unemployment rises.

This post asserts that click licenses will become unenforceable, unless they are standardized.

In the past year, you have probably clicked through dozens of license agreements in various software programs and Web pages.   (That estimate may be low:  you probably clicked through more than a dozen agreements last year simply to run system software upgrades.)

These are binding contracts. But have you read all of them? Any of them?

Of course not. There isn’t time. It could take over 100 hours a year — weeks of work time — just to read your clickthrough agreements. So you don’t. No one does.

This leaves you with a somewhat opaque legal relationship with your software and Web service vendors.  You have made commitments, but don’t know what they are.  Yet there is no alternative, because the aggregate complexity of all such agreements exceeds your real-world capacity to absorb their meaning.

I’m no lawyer, but this dilemma seemingly creates two problems with contract enforceability.

1. System software bug fixes with click licenses probably run contrary to the “implied warranty of fitness for use” in California and other states.  By selling you an operating system, Apple or Microsoft implicitly claim their product works.  When they send you a bug fix update, they are making good on that pre-existing warranty, and thus cannot require you to sign a new deal.
2. More generally, sooner or later, some consumer may claim in court that a reasonable man cannot be expected to understand all his clickthrough licenses, because there are just too many of them out there.  Hence they are all unenforceable.

If tech companies were smart, they would create an industry association to standardize consumer software and consumer web service licenses.  This would hugely decrease cost, both to companies (legal costs of drafting) and to consumers (read and understand a single license for all similar products).  This would simultaneously increase enforceability, since no one could claim it exceeded the resources of a reasonable man.

This is a specific instance of the complexity-vs-transparency dilemma mentioned in a previous post.

I’m largely a free marketeer, but one must appreciate the irony of arguing this case on the internet, a medium developed largely by federally funded research.

If America ends up in a sovereign debt default while trying to reflate, there are unexpected benefits.

While most empires collapse in war, America’s may collapse in peacetime. This would disappoint nationalists, and make us an even greater global laughingstock, but preserve lives and political stability.

There is almost no historical precedent for peaceful imperial decline. In “The Rise and Fall of the Great Powers,” Paul Kennedy can offer only the Hanseatic League, a Renaissance-era Scandinavian confederacy. Every other great power he covers was defeated or bankrupted by a major war.

Yes, I have heard we are in Iraq. At $80 billion a year, that strategic disaster seemed expensive, until the Fed starting throwing around thirteen-digit bailouts last year. If the country goes broke (or, by corollary, greatly erodes the purchasing power of the dollar), it seems Iraq won’t be the reason.

More immediately, we appear to be losing our position as the global reserve currency. This may also not be a bad outcome in the long run. Having the reserve currency creates moral hazard, as artificially low interest rates can be sustained for years without rational consequences (inflation and falling dollar). We may soon see better government by reestablishing (whether we want it or not) a more immediate, market-based connection between financial policy and currency value.

Our 4th-grader’s summer writing teacher — a UC Irvine professor — corrected the her misspelled “philosophocal” to instead read “philisophical.” Thanks, big improvement.

The teacher’s assistant then “corrected” a run-on sentence by adding a period in the middle, so that the second “sentence,” now a fragment, began with “but” and a comma — introducing multiple errors with a single change.

That was UC Irvine. The public schools are worse, though we live in a (purportedly) top district.  Either we are misinformed on that point — quite possible — or the situation is still worse elsewhere.

There are at least two potential solutions.  Teachers could learn to spell, or they could dispense with spelling entirely and rely on computer spellchecking. Either solution would be an improvement.

Microsoft’s latest competitive brainstorm is to give away Office, its flagship product, in online form.  This recalls an old comedy scene, in which a thief, cornered by police, points his gun at his own head and says, “Let me go or I’ll shoot!”

The media inexplicably painted this as a countermove against Google.  But, ah, how is dropping your own price to zero an offensive maneuver?

Microsoft still has momentum, but two big things changed in July 2009.

1. For the first time, a competitor with vast engineering resources pledged to release a free alternative operating system.  It will run on netbooks, the fastest-growing computer segment, and where Microsoft is weakest due to performance problems.
2. For the first time, Microsoft pledged to give away a version of Office.

Most of Microsoft’s profit comes from those two products, and ever-increasing price pressure is now nearly certain.  I had purchased MSFT very cheaply last November at about 20, on the stock market swoon, and was only too happy to dump it at a 20% profit last month.

One risks later embarrassment by mentioning specific trades, and that may well happen here.  I prefer to hold for years, so this runs against style.  Moreover, I still think MSFT could have years of stability ahead.  But I’m less sure of it than before.  Selling now offered over 30% CAGR pretax.  A very pretty bird in the hand.

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Yesterday morning, I heard two construction refit workers arguing in a parking lot next to their utility trucks.  One looked and sounded typically Californian, while the other was Hollywood’s interpretation of a Bronx hoodlum: musclebound, bandanna, prison tattoos, body piercings, and a deafeningly loud, apishly guttural New York accent, unusual out West.

Apish New Yorker was the smart one.

“Dang, it’s hot today.  I want an inside job,” said Californian.

“You’re a f***ing idiot,” said Apish New Yorker.  ”We got da perfect jobs.  In 10 years dere ain’t gonna be inside jobs.  Dey all goin’ ta India, and da recession jes’ makes ‘em go away faster.  Dey ain’t comin’ back.  You work on a phone or a computer, you history, you gonna be lining up to work for guys like me.  The face-ta-face job, dat’s da job dat sticks, ‘cuz dey can’t move it offshore.  Get wit’ da f***ing program.”

I might have put it differently, but pretty accurate.

It’s surprising to see big companies fail simply by misunderstanding the nature of competition in their own industry.  I do not mean misunderstanding their competitors — that is more common, and more understandable.  But to misunderstand the nature of competition itself, the terrain on which the battle is fought, never ceases to amaze.

Contemplate the decline of Network Solutions (hereafter NS), which was the #1 Internet domain name registrar in 2000, but now a fraction the size of GoDaddy (hereafter GD), which has registered 5x more names.

NS was a pain to use, but not unusable.  Support was bad, but not terrible.  GD beat them somewhat on these fronts, but they are not the reason for the lopsided outcome.

The battlefield was simply price. Domain name registration is a nearly pure commodity, and GD took over simply by charging less.

It didn’t have to end this way.  NS was much bigger, and hence presumably had at least a small cost advantage a decade ago.  If NS had simply charged a penny less than GD, there would be no GD.  That option no longer works, because GD now has huge scale and presumably the lowest costs.  Inexplicably, NS never reacted.

At the time, I recall reading that NS treated the business as a cash cow.  Rightly so:  domain registration is a good business for a sustainably low-cost producer, as with any commodity business.  But you have to connect the dots tactically, watch the competition, etc.

GoDaddy management, though undoubtedly sharp, really owes its biggest thanks to the mistakes of Network Solutions (which still charges triple vs GD).  If NS had done the right thing, no amount of brilliance at GD would have worked.

Another business facing this same situation is the Corporation Service Company, which most people have never heard of.  Venerable CSC provides “registered agent” services in Delaware.  Tons of corporations form in Delaware, because it has a huge stack of corporate case law, making lawsuits cheaper for both sides to resolve.  But to form there, you need a “registered agent” there.  CSC is the gorilla of that business.

But till recently, they were not a nimble gorilla.  As the world moved online, cheap one-person shops arose to provide the same service.  I saved 70% by changing to one of these.

Unlike Network Solutions, CSC got wise, simply phoned all their lost customers, matched the low offer, and got all their business back.  This is not brilliant — it’s simply doing the obvious, which NS didn’t.

There is little actual news on the healthcare debate.  Instead, as with much of modern media, we instead simply see dueling press releases, half repeated verbatim by MSNBC and Huffington Post, and the other half repeated verbatim by Fox News and the National Review.

Lost between the two megaphones are a few simple facts, mentioned by no one.

First, US healthcare is already socialized.  Requiring businesses to provide health insurance to employees is a market-distorting government intervention, functionally identical to a healthcare tax, except that coverage is less universal.  Free marketeers thus have little cause to argue against change — we would merely move from one socialist scheme to another one.  Free markets lost this fight in the 1960’s, so why argue for the status quo now?

Second, the Administration’s argument for a “keep-them-honest” public health insurer is based on the unproven assumption that existing health insurers are not competing.  Is that really true?  Why?  No one has explained this.  If health insurers are already free to compete for business, why are costs rising at quintuple the inflation rate?  Collusion?  That’s a problem we can attack through existing regulatory structures, not a new insurer.

There is no question that the existing system does three things wrong:

• Fails to independently measure and publicize the ROI (return on investment) of preventive medicine and lifestyle changes.
• Fails to provide high-ROI medicine to the uninsured population, which would be cheaper than fixing the same population’s acute problems later at charity hospitals.
• Fails to measure and publicize the ROI (positive or negative) of using expensive patented drugs and devices instead of cheap generic drugs and devices.

In short, the problem is a lack of transparency.  Sound familiar?

Google’s OS announcement is reported as a frontal assault on Microsoft, because that’s a story the media loves to tell.  Reporters just can’t help casting it that way.  They love the battle royal.

But this is not frontal assault. More like a joyride around the Maginot.

Logically GOOG would attack MSFT at its weakest, most inflexible point: netbooks, where Vista doesn’t run at all, and Windows 7 Beta is reportedly slow (and also unfinished).

Just as logically, GOOG would attack MSFT where switching costs are lowest. Netbooks are not used for heavyweight desktop software, and hence their users have lower OS switching costs than users of, say, Windows-based accounting software.

Why do it? Because user-friendly netbooks would hugely increase the total number of Google users. For now, netbook adoption is limited by the expense, footprint and slowness of Windows, and by the user-unfriendliness of Linux.

Linux distros, though super useful (I run several), have low consumer adoption because of less polished UI and peripheral support. These are solvable problems, but remain unsolved because no one entity has had both the resources and interest to polish up free software.

But given is an economic reason, it can be done. Apple built its slick UI and driver stack atop BSD Unix to sell more hardware. If Google thinks it can sell more ads and services atop a consumer-friendly Linux, they certainly have the resources to make Linux friendly to Peoria, Shenzen or Santiago.

Summary: they have no intention of moving up the ladder to heavyweight PCs. Instead, this is an “Innovator’s Dilemma” move, creating a low-end mass market product that will always remain economically unviable for Microsoft.