The long-term stimulus: productivity

January 18th, 2009 by wemitchell

A key function of a head of state is to articulate national goals, reflecting what the populace already wants, but in a focused, actionable way.

Citizens follow that lead. Deng Xiaoping’s famous quote, “To get rich is glorious,” may be apocryphally attributed, but undoubtedly refocused China on capitalism, with results that speak for themselves.

Americans want to advance economically, but don’t know how.  The government is not helping. Unknown to nearly all Americans, there is a vanishingly simple formula:  maximize your net income per work hour.

What?  you may say.  It is not that simple.  What about controlling spending?  Education?  Savings and investment?  Retirement and vacations?  Yes, those matter, but all are contained within the above formula, if you define net income as any business does:  revenue minus expenses.

Controlling spending:  if you earn $100k this year and spend it all, your net income is zero.  To increase net income quickly, spend less.

Saving:  identical to controlling spending.  If you spend 20% less than you make, you have saved 20% of income.  

Investment:  identical to saving.  Bank accounts are an investment, but there are many other, better investments.  More importantly, investment income doesn’t consume your time:  conservative investments yield very high income per work hour.  Thus, spending less than you earn may not quickly increase your total gross income, but the increase per marginal work hour is incredibly high.

Education:  identical to investment.  It is a way of spending time or money to increase net income per work hour.

Retirement and vacations:  the fewer hours you work for a given income, the higher your income per work hour.  Thus, vacations and retirement go hand in hand with maximizing net income per work hour.  Again, all contained within the simple definition above.

In short, everything comes down to net income per work hour.  Economists would call this a measure of productivity.

The ultimate economically empowering statement from an American president would be “To increase productivity is glorious.”

Going truly paperless

January 16th, 2009 by wemitchell

The hardest part of going paperless is getting everyone to stop mailing you stuff.  Even when you tell American Express Merchant Services that you want everything by email, they still send a paper annual report.  There are still a few service providers that don’t even offer e-billing.  And you still have to fax signed contracts, right?

Wrong.

Take a snapshot of a document, upload it to Evernote.  They store it forever, for cheap, and they scan images for text, which you can then search from your computer or iPhone.

This is the end of physical files.  After 3 months of use, I have found Evernote’s text recognition to be almost perfect.  I type in “American Express,” it finds all the related images I’ve uploaded, and I can look at images of original documents.

Contracts?  Counterparties email them to me, I print, sign, photograph, and email back.  Evernote keeps a permanent searchable archive of the original signed document.  Again, no physical files.

At first, I used a Canon Digital Elph camera to capture the documents.  Would have preferred to use the camera on my iPhone — Evernote offers iPhone software — but the iPhone cam cannot focus closer than 3 feet or so, so it seemed useless.

Until today.  I put ordinary reading glasses in front of the iPhone camera.  Physics is physics:  reading glasses correct farsighted cameras just as well as farsighted humans.  I tried it, and it worked beyond expectations.  Now it’s a one-step process:  photograph a document with iPhone, and it’s stored and searchable at Evernote, forever.  Done.

Of course, it is cumbersome and un-hip to hold grandpa’s reading glasses in front of my phone.  Turns out that accessories maker Griffin has solved this problem with the Clarifi — an iPhone shell with built-in macro lens.

This, together with more obvious things like e-billing and Skype, permit true total business mobility.  For all you know, I’m writing this from Barcelona…

Why GetSatisfaction is great

December 22nd, 2008 by wemitchell

Suddenly even Fortune 500 firms like Apple are using GetSatisfaction, a sort of specialized social network for handling customer support.

GetSatisfaction transcends simple cost cutting.  Whether they know it or not, they are applying the “quality is free” ideas of W Edwards Deming to web-based support.  GS saves money and time for both vendor and user, while offering better support and lower cost, and actually improving the product at the same time.

How could it do all that?

To see, consider the challenges Eric and I faced with the products we created at Whitehorse Games in the 1990s.

Whitehorse was one of the early Web-based video game vendors, offering softgoods and Web-based software unlock in 1999.  This created new problems and opportunities:

  1. Customer feedback on a new release was instantaneous.
  2. Free downloads increased support requests by at least a factor of 10.
  3. 5% of problems created 95% of support requests, and you could discover this almost immediately.

Email load quickly became overwhelming:  users of demo software can be shockingly strident and demanding, considering that they have received something for nothing.  There is a tendency to just disengage:  forward the customer to a static FAQ that answers the most common problems, and deliberately delay personalized response in the hope they would go away.  This sounds harsh, but there are only so many hours in a day.  Whitehorse “solved” the problem by ending free trials — this reduced support load by over 90%, and did not hit sales at all, because, it turns out, most users of freebies will never pay for anything.

But I recall thinking, even then, that this missed a huge opportunity to improve the product.  Freebie users sometimes offer you something valuable when they take the time to complain.  If there were just some way to efficiently collect product suggestions, categorize them in a way that did not consume human time, the product cycle could be compressed to radically improve things in much shorter time.

In fact, in 2001, I briefly developed a startup idea around this, but my version was too complex (attempted to systematize the entire software process, including an outsourcing marketplace like Elance), too centralized (outsource support by direct-selling to individual vendors), and too narrowly marketed (attempted to deal only with software vendors).  

GetSatisfaction fixed all those problems and more.  They are a simple, broad solution to product support, with an efficient suggestion box built in.  Clever.  Hope they do well.

Here again, the goal.

December 21st, 2008 by wemitchell

$775 billion — the current proposed fiscal stimulus, aka deliberate deficit spending – is fearsome not for its scale, but for the risk it will be aimed at an unproductive goal.

Jobs are not the goal.  Increasing consumer spending is not the goal.  They are merely happy byproducts of something more important.

The goal — the objective of economic policy — is to permanently increase median GDP per work hour.

Every word of that definition matters.

Why per work hour?  Because no one is better off if GDP increases 10% by working 10% more hours, or by having a 10% larger population.  The measure of economic improvement must be GDP per work hour.

Why median?  Because if Wall Street earns an extra $100 billion, and everyone else stays the same, then GDP per capita went up, but in fact almost no one is better off.  Unlike the average, the median ignores statistical outliers — the best way to increase the median is to improve the productivity of the greatest number of people.

Why permanently?  Because otherwise, after the stimulus money is gone, you’re back where you started.  And anyway, simply handing out checks and keeping people busy is too unambitious. 

One cost effective way to permanently increase median GDP per work hour would be to spend stimulus money optimizing America for productivity and productivity growth.  Some easy examples:

  1. Move all government filings to Web forms, eliminating PDF and paper.  Concurrently, teach every adult to type and use a Web browser.
  2. Widely teach the benefits of productivity growth, so people know what solutions to look for.
  3. Widely teach probability and statistics, and their application to efficient production.
  4. Teach 10 million adult Americans to speak German, Japanese and Chinese.
  5. Translate all foreign production management publications into English, and republish them here.
  6. Eliminate the Big 3 automakers’ existing distribution model, and replace with a build-to-order model like that used for Mini Cooper.  Showroom contains just 1 or 2 of each basic model.  Fixed price.  You order the colors and options via Web form.  Car arrives a couple of weeks later.  This offers greater choice, while eliminating inventory, waste and the deadweight loss of the sales-push model.  Also provides instant product feedback from sales to manufacturer, allowing products to improve more quickly.
  7. Force the US military to use commercial platforms for its cars and trucks.  In particular, the Humvee would be replaced by an armored GM/Ford 4×4.  This would help GM/Ford, the Army, and the taxpayer at the same time.  For the Army, mass produced vehicles are not only cheaper, but also more reliable, cheaper to maintain, and better designed because each design sees more total use.  For GM/Ford, increased sales would push factory utilization back up toward breakeven, reducing average cost per vehicle.  For the taxpayer, the cost per Army vehicle would go down.  For the consumer, the price of 4×4’s goes down, because GM/Ford passes on some of its lower cost per vehicle.  Everyone wins.  It’s insane for the Army to use purpose-built designs.  They only do it out of momentum — it’s been that way since World War II.
  8. Change the tax structure to encourage production at the expense of consumption.
  9. Change the regulation of the media to encourage production-oriented content, and discourage consumption-oriented content.  (To see the pervasiveness of the problem, visit a magazine rack and notice that nearly every publication is essentially consumption-oriented.)
  10. Hire 5 times more patent examiners, double their salaries, and cut the small-entity patent filing fee.  Simultaneously, raise the bar on actually obtaining a software patent, particularly in software.
  11. Provide tax breaks for how-to publications that focus on exports and production management.

Instead of wasting money on yet more unused light rail lines — which are a nice idea, but wholly incompatible with existing city layouts –we could put $775b to real use.  Productivity-oriented education in particular has astonishingly high ROI compared with alternatives.

Freakonomics misses something

December 21st, 2008 by wemitchell

Have meant for years to write this.

Freakonomics (Levitt & Dubner, 2005) famously argued that Roe v Wade was the most statistically likely explanation for the dramatic fall in U.S. crime during the 1990s.  The hypothesis was that, after the early 1970s, unwanted babies were less often born, resulting in fewer maladapted folks to commit crimes 20 years later.

This was clever, unexpected and interesting, and did fit the data better than the half dozen alternative explanations the book considered.  However, it did not explain the dramatic rise in crime during the 1960s and 1970s.

Here is an alternative explanation the book did not consider:  post-traumatic stress disorder among returning veterans.  PTSD is well known to be linked to crime and violent behavior.  War-caused PTSD is known to trigger episodes of violent behavior, and over 30% of tested prison populations have PTSD.  

Large numbers of US soldiers began returning from Vietnam in the mid-1960s, about the same time as crime rates dramatically rose.  The rise in crime leveled off a few years after the US withdrew from Vietnam, and began to decline precipitously as the US veteran population aged.

Interestingly, the violent crime rate continued to fall until just a couple of years ago, when it turned back up again — coincidentally, just as large numbers of vets began to return from Iraq.

This idea leaves out a few things — for example, it does not explain why crime rates would not dramatically rise after WWII or Korea.  But for completeness, Levitt and Dubner should cover it.

America's Ace

December 18th, 2008 by wemitchell

Despite the debt, the profligacy, the failing basic institutions, America retains one unshakable core principle that constitutes a hard-to-copy competitive advantage:  the nation is defined by ideology, not ethnicity.

To see how big this advantage can be, consider the following solution to our industrial hollowing.  

For 20 years, we have received an unceremonious manufacturing beat-down from China.  But in the consumer-led recession, China is in perhaps worse shape than we.  they risk social instability unless 10% of GDP is generated from exports.  Sooner or later (probably sooner), central banks or no, the dollar will decline, and that trade imbalance will close.

At that point, assuming a dollar crash, it will suddenly be economically feasible to manufacture in the US, but because of the long-term hollowing, we lack the skill base.  

What if, at that point, America simply offered permanent residency to any person in China with a degree in mechanical engineering and 5 years experience designing manufacturing lines?

Instant result:  massive skills drain into the US.  Why?  For most people, it remains easier to start a business here, and easier to live an unfettered life here.

Could China do the reverse?  Not in a million years.  The nation is defined by ethnicity, so it cannot import talent.  That’s a weakness.

Rationalizing the auto industry

December 15th, 2008 by wemitchell

In the political debate over how and whether to save GM and Chrysler, microeconomics has been forgotten.

Autos pretend to be a brand-driven industry, but are more like a commodity industry. Under conditions of overcapacity, the highest-cost producers of a commodity shut down, while the lowest-cost continue to make money.  These shutdowns are most efficient if they happen at the plant level, not the firm level.

It’s not clear that union-busting — currently demanded by the Senate minority in return for a rescue — is economically necessary or politically constructive.  Current GM workers are actually paid less than Toyota workers in the US.  GM’s higher costs result not from current staff, but retirement obligations, mainly retiree healthcare.

GM is in an interesting position:  they are uncompetitive mainly due to retiree benefits.  In fact, it barely exaggerates to say that GM is going broke due to the US healthcare system.  The system is not cost effective, and has become less so over time, to the point that it is beginning to bring down even very large firms.  Fixing the cost effectiveness of US healthcare would dramatically improve US competitiveness, profitability, employment — and could by itself save GM.

But that takes time.  In the meantime, if GM is to be saved, logically it should be done as a workout or prepackaged bankruptcy, in which retirement liabilities are nationalized and the oldest, highest-cost plants are shut down.  GM is competitive enough that, with these two changes, they should survive.  Without these changes, they’ll just fail again.  

Reconciling the experts

November 20th, 2008 by wemitchell

Buffett is buying.  Soros is gloomy.  Who is right?  Probably both.

Schiller’s 125-year historical record suggests the broad index reverts to a long-term mean P/E ratio of about 16.5.  Today, it’s 32% below that, about 11.  So there is no question the market is cheap by historical measure.

But when will it turn?  There is the rub.

There is historical precedent to go much lower (in the 1970s, broad index P/E bottomed out at only 6 or 7 albeit while competing against much higher interest rates), so it would not be surprising to see a further market decline of as much as 40% — particularly if the Fed loses control of long-term interest rates.  

But for a very long holding period (15 years), mean reversion alone argues for buying now.  

Thus your strategy now depends upon your holding period.  This reconciles the conflicting public statements of famous investors.  Buffett holds forever, so he is buying.  Soros, Rogers et al play much shorter time frames, so they are staying out.  Both are rational, given their specialization.

Fewer, Nicer Things

November 18th, 2008 by wemitchell

The Last Viridian Note has it exactly right, but is ironically wordy for a minimalist treatise.

Massively paraphrasing:  ”fewer, nicer things.”  

I chose Evernote and GrandCentral precisely because they radically simplify. One phone number for life, one searchable repository for all documents.  Both detached from any particular hardware.  Also 1Password, which automates password storage and data entry. Another 100 fewer things to remember.

The specific experiment is to refit the business to run simply and securely from anywhere.  Nearly there. Slicehost is the last piece of the puzzle.

Simplification is relaxing.  Example:  gave away 80% of my wardrobe this spring.  The rest –  less than I had in high school — is high quality, aesthetic and unusual.  I like it, spouse gently horrified.

Office now little more than a laptop, California plein-air watercolors, and a cellphone.  The emotional barrier is with books.  I could and should eliminate hundreds, but there is irrational attachment. 

The Game of Capital

November 5th, 2008 by wemitchell

American capitalism has been so stable, for so long, that everyone has apparently forgotten what it is.  Capitalism is presumed by both liberals and conservatives to be an ideology of total deregulation.  That’s mistaken.

Capitalism is, and has always been, a game whose rules are designed and enforced by government to maximize the efficiency of capital allocation.  

“What?”  my laissez-faire readers argue.  ”Capitalism has inherent rules?”  No, they argue, capitalism is the totally free, utterly unfettered flow of capital.  The rules are what get in the way.

“What?”  my Bay Area friends argue.  ”Capitalism has inherent rules?”  No, they argue, capitalism is the unrestrained excess of the greedy.  The rules are what keep them at bay.

These positions both misunderstand the history and definition of capitalism.  Basic regulation — the rules that define incentives in the capital allocation game — are central.  Capitalism cannot function without them.  The objective is not to increase or decrease regulation, but rather to design a legal structure that maximizes the efficiency of capital allocation at minimum cost.

Consider:  capitalism depends upon private ownership.  But what does “ownership” mean?  Property is, at its core, a form of monopoly granted and enforced by government.  When you buy a house, what are you paying for?  Exclusive use.  Who protects that exclusivity?  What stops your neighbor from crashing on your couch whenever he wants?  Laws and police, paid for by tax.  Private ownership cannot exist without this government sanction and enforcement.  Thus regulation is inherent to capitalism.

This is a special case of the most general function of government:  to assign individual costs and benefits to externalities, in a way that makes most people better off.

The cost of such assignment can easily exceed the benefits, which is why so much of the regulation of the 1960s and 1970s was wasteful and counterproductive.  This set the stage for a conservative backlash that is only now running out of steam, as it hits the problems that exist at the other end of the regulatory scale.  As posted here years ago, Baja California demonstrates how poorly under-regulated capitalism works.

In the US, wasteful regulation and counterproductive deregulation are both driven mainly by politicians born before 1960, who, as posted here previously, grew up in conditions of essentially unlimited American power, stability and financial resources, and thus never developed the judgment necessary to make decisions under conditions of limited resources.  

With the passing of the torch to a new generation that grew up with declining living standards and American balkanization, we may reasonably hope for better cost/benefit analysis.