The Economy : Light at the End of the Tunnel ?

I wanted to post the cover of this week's The Economist, I thought it was a thought-provoking depiction.



Is recent M&A news a light at the end of the tunnel? Are there any natural parallels that might suggest otherwise? Click here for the article.

The Econalypse / Depression 2.0 and Kant's Categorical Imperative

In an earlier post I identified a few key drivers that lead to the Econalypse of 2009-2011 aka Depression 2.0: Maria distributed a list of companies about to close but still selling gift cards; I distributed that list very widely to make sure that I wasn't given any bum cards; and I took the few dollars remaining in my 401K out of the stock market.

Each of those actions, taken alone, made sense to me. Apparently they made sense to a lot of people, because it seems like a lot of people did the same things at about the same time, especially withdrawing from the stock market and avoiding retail outlets.

Brendan Koerner's recent Wired piece suggested that Depression 2.0 was driven not by M's list, but rather by a situation where rational micro-economic steps cause negative macro-economic effects. He wrote,

This is why colleges split economics into micro and macro. Unless your name is Madoff, your individual impact on the economy is negligible. You can't spend us out of Depression 2.0 all by your lonesome. Buy the Jet Ski; don't buy the Jet Ski. Whatever.

It's only when everyone decides to put off buying a Jet Ski—a reduction in aggregate demand—that things get dicey. When we all stop spending, the economy collapses, and theoretically, without a massive Keynesian infusion of government dollars, it's just you and the zombies.

It's sort of the opposite of moral hazard, where risky behavior bears reduced personal consequences; in Koerner's explanation of good micro / bad macro, judicious individual economic behaviors produce undesirable economic consequences.

Flogging the dead horse one more time: it's okay when I avoid buying gift cards at the mall, but when everybody does it there are serious economic consequences.

Koerner's good micro/ bad macro jumped off the page for me because not only is it a succinct demonstration of micro/macro economics, it's also a very tight example of Kant's Categorical Imperative. There aren't many instances of a philosophical maxim that map directly to an economic model.

Immanuel Kant's Categorical Imperative

Immanuel Kant was a philospher who sought to build a bridge between the empiricists (knowledge comes from experience) and the rationalists (knowledge comes from reason).

Kant described his Categorical Imperative with these words: "Act only according to that maxim whereby you can at the same time will that it should become a universal law."

In other words, act only in such a way that you're willing to have (literally) everybody do the same. If you're considering cheating on your taxes, you might reflect: What would happen if everybody cheated on their taxes? Realizing there would be dire implications if everybody did it, you would refrain from cheating on your taxes. If it's not all right for everybody to do it, then the individual has a duty to refrain from that action. This is a deontological or duty-bound ethic, which is concerned with the morality of motive rather than of effects.

You Kant Do That

In application, the Categorical Imperative says that you can't (get it? Kant?) do a lot of things. It's generally not a permissive approach.

Kant would not have taken his money out of the stock market.
Kant would not have avoided the retail chains.
If every man were a Kantian, maybe we wouldn't be in Depression 2.0 now.

The Econalypse / Depression 2.0 Killed Broadband

Years from now, forensic economists will study terabytes of historic information trying to identify the tipping point of the Econalypse of 2009-2011; when did the economy start an irreversible slide? What single datapoint broke the camel's back? For the record: It's Maria's fault. Maria is a lady I work with. She caused Depression 2.0 ; it started with the best of intentions in October 2008.

A buddy of Maria's faxed her a list of stores still selling gift cards, even though they'd probably be closing soon. Some of the names surprised me. I made copies and passed them around; I didn't want anybody giving me no-good giftcards. Good thing I distributed that list widely.

Later that day I was reviewing my 401K and I thought, if all those businesses are folding, I should get that last bit of money out of the stock market. So I transferred my 401K money to savings bonds. I was talking with friends about what turned us to the Bear side and I think I can pretty accurately say: it was that list of Maria's.

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Unexpected things happen in economic tipping points.
Used to be, the railroads were the mainstay of the economy.
Used to be, Pittsburgh made steel.
Used to be, real estate couldn't go wrong.
Used to be is no guarantee of future performance.
What would be Unexpected 2.0?

I've read about scenario planning and the way they use it at Royal Dutch/Shell. One of their techniques is to consider these questions: What's a current market assumption about something that's either plentiful/cheap or scarce/expensive? What would happen if the assumption turned out to be false?

So: what relatively recent trend is so firmly embedded in our assumptions that we can't imagine it going poof? What's new, popular, widely adopted, and we can't imagine doing without it? I suggest: high speed web access. Continual growth of high-speed web access underlies almost everybody's business strategy, The web is always becoming faster, cheaper, and more ubiquitous. It's an accepted article of faith. What would happen if that changed?

How could Depression 2.0 affect growth of domestic broadband? Suppose we have a four-year economic downturn and 13% of the country is unemployed. Suppose 30% of the country cancels their high-speed web access because it's an unwarranted luxury when next month's paycheck is uncertain?

How would the cable companies, with significant fixed costs and few variable costs, respond? They'd consolidate through M&A, raise rates, and allow cable to go dark. The ubiquitous web might be gone, and we'd be back in 1996. The people unaffected by the Econalypse will be online, but there'll be a broadband ghetto.

The pure-play businesses will suffer. The clicks-and-bricks will struggle. The bricks-and-mortars will do better. Newspapers and magazines, or any industry betting on the web for their salvation, will probably fold.

How will children do their papers without high-speed internet? Hello, public library with web access! Congratulations, banks that maintained branch offices!

All the businesses that shifted to the web-based version of customer relationships will suffer when their relationships move offline. Companies that moved their HR posture to self-serve, or that moved their information systems to the cloud, will have remote employees who can't access their key systems.

I'm just saying.

Syntax of Sin Tax and the Goverment-Military-Industrial Complex

This is a rant, way off my normal beat (Bikes, Bytes, Burgh), but and I hope it works. I've been noodling for a while about the current trend of public revenue sources, and a recent post at Pgh is a City prompted me to take up the keyboard.

Once upon a time, some behaviors were recognized as inconsistent with the public good, and at various times we have made them illegal (which is what we do with such things). These activities have included pornography, prostitution, gambling, loan sharking, drinking, and Sunday shopping. Used to be, there were rules against these things.

Funny things happen over time. "New normals" evolve, and when too much strife is going on there's a tendency to "define deviancy down". (I miss DP Moynihan.)

Sunday used to be a different day than the rest of the week. Blue laws closed clothing and liquor stores. No beer at convenience stores. No shooting at the range before noon. Sunday was a day for Church and Family. (This was back before Sunday was a day for Custody and Visitation.)

Stores wanted to open on Sunday. The new shopping centers wanted the money; the malls got waivers, and then the mom-and-pops felt the pinch. The money reached out to the politicians, and the rules were changed. Now if you work in a store, you're working Sundays and you're not in church or with your family. Does anybody believe that the total amount of money spent in the mall increased by 1/6th when they went from six days to seven days? But We've given Sundays away, we'll never put Humpty Dumpty together again, and I'm at a loss to say how we've benefited. If a group advocated closing stores on Sunday, pundits would wag "oh no, can't do that, if we lose the tax receipts we'd have to change seniors more for their prescriptions, and Aunt Mary will be eating catfood and cutting her pills in half". Hoisted on our own petard.

Drinking isn't a total evil; see the famous "If by whiskey" speech for the two sides of that coin. There's a lot of bad things that come from drinking: alcoholics, drunk driving, domestic violence, paychecks spent at the bar. There's money to be made, though; it's rare to see a bar or a distillery go out of business. There's an industry that has a stake in legal drinking, and they're not going to let the law mess with it. Prohibition tried once, but but the industry won in the end. And goverment makes money on it, especially in Allegheny County with the Onorato drink tax; we can't campaign against public drunkedness on the South Side, we need the tax receipts to keep the 35A bus from running out to Century Three Mall, even if they won't let the bus into the parking lot.

Cigarettes. Is there possibly any reason why these are legal, other than the money and the industry's influence? It kills our people, they die nasty extended deaths, the industry takes the profits and society pays for the hospitals and hospices, and we bemoan the tragedy of cancer without looking at root causes. Government taxes cigarettes heavily, which has the initial positive effect of making smoking somewhat more expensive, but while the long term effect is that government is dependent on tax receipts from smoking. We let this industry market death to our children because they let us put tax stamps on the cartons.



Gambling? Look at the state falling all over itself trying to figure out where to place the casinos. No community has benefited from casinos, which leach money out of the local population. But we don't want our people to go to Ohio or West Virginia, we want to abuse them right here because we want the tax receipts. There's a lot of money; casinos don't go out of business. Complete this sentence: The house always __________. The industry touches the politicians, and anybody who objects is a priggish moralist. We permit a once-illegal activity because of the money, justified by the artificial rhetoric of competition and tax receipts.

Prostitution? Too far out? Inconceivable, you say?? Illyrias' recent post describing a future Gov. Rendell legalizing and taxing NorthSide hookers North Shore sex workers is what prompted me to start writing this; it's the inevitable incremental step. Why are Burghers going to Vegas? What can they get there that they can't get here? Can't have them going to Morgantown for cash business, can we?

I thought about this topic, and I said to myself, this is a great evergreen story - I can jot this down on my list of things to blog about, and it's safe to let it sit for a few weeks until I get around to it, it's a timeless story that isn't going to be overcome by events (OBE'd). Then I read about the New York pornography tax crisis, and I realized that Illyrias' prediction was spot on.

New York has a funding crisis, and Governor Patterson proposes a tax on movie downloads - and not just the Sound of Music, mind you, but also Debbie Does Dallas. Porn industry spokesmen (just think about the existence of that phrase) complain that porn is part of the essence of New York, that tourists come to Times Square to buy these DVDs, and that taxing pornography is an attack upon the essence of New York. This unbelievable story makes Illerias' prediction seem all too inevitable.

Here's what I see: we've embraced things that were once unacceptable because of the tax receipts, and now we've got a vested interest in their survival, if not their success.

• I believe there are funding sources that are always unacceptable. Don't whore your mother.
• I think Thoreau would agree: what you tax, ends up owning you.
• If government (ie, us) wasn't paying for the cancer deaths, the blighted neighborhoods, and the corporate bailouts, and if industry wasn't taking huge amounts out of the population, we wouldn't have the expenses we're paying for, and we'd have more money to pursue the right priorities.
• I don't want to live in Las Vegas, New Orleans, or Amsterdam, and I don't mind missing their tax receipts.
• Here we go Steelers, here we...

I am reminded of the government-military-industrial complex that President Eisenhower warned about in his swansong speech.


Ike was right that the government-military-industrial complex is a powerful force in the federal system, but I think it's a sign of how far we've gone that the goverment-industry complex is also a persistent force in local government.

I will strive to avoid writing anything moralistic for the next ninety days.

Cloud Computing, Freemium Storage, and the Business Cycle

It's 10 pm, do you know where your kids files are?

When the economy is growing and new technology and applications are explored because they're nifty, rather than significant, a lot of people are geniuses. When the business cycles turns, which is a certainty, all the kicky little ephemeral things are blown away by reality. Fluff dies; very few people are geniuses in hard times.

Think about a concept like FaceBook, Twitter, Digg, Blogger, Flickr, Picasa, Google (gasp!) -- let's talk about a new startup, Vapor. A couple of hungry young classmates start it off as a cool project in the garage. They can do it on a shoestring, because all they've got is shoestrings, and they don't have dependents.

Vapor starts out as a concept, a logo, a web site and a server. They build a Web 2.0 application as a startup, then they get some venture capital (VC) money and begin to ramp up. Users come in because it's free and start contributing to the network. The connections among the users become valuable to them, and Vapor starts to fill a perceived need the audience never knew they had.

Soon, all the people in your (college class, family, soccer league) are on Vapor. Vapor gets its third round of VC funding. They're selling ads on their website, and Tshirts. There's no physical product, the value is in the accumulated network and the presence of so many people.

Vapor gets bought out by MegaCorp (which was the founder's fantasy all along). MegaCorp still lets you store your (pictures, diary, blog, contact info, travel plans) for free, and you can upgrade to premium services (hence freemium) like a concierge travel service, and a database listing the must-see's at the towns you're about to visit.

Businesses will offer these free services, these audacious proposals, because the barriers to entry are so low as to be non-existing, the marginal cost of storing data (photos, calendars, contacts, diaries, itineraries) approaches zero, the potential lifetime value of a customer is enormous, and the value of a relationship with a large group of web-accessing Americans is significant.

In other words, it costs almost nothing to store data, and if you can provide a little free service in a freemium model you might end up with a very valuable database. If it doesn't work you really haven't lost that much money, and you and your startup buddies have had fun, gained experience, and made contacts. There's a small likelihood of fantastic wealth, no risk or downside.

Ah, finally, the word appears: risk. What would happen if you kept a person's diary, and it was very important to somebody (like a publisher) and then your server blew up and you lost the data? That would be a bad thing; it doesn't fit the business plan. So the Vapor lawyer writes Terms of Service (TOS) that says, we're not responsible for any loss of files/data, and we're not responsible for any impact of your files/data. The audience is getting this for free, and they're getting what they've paid for.

But Then the economy goes through a prolonged bad patch. At first a little bit of bad times is a good thing for the sharks; the competitors with good ideas and shaky financing sell their concept cheap, and the sharks snatch them up and increase their odds of MegaCorp buyout Nirvana. But if the tough times get really serious and the funding dries up, all of a sudden the freemium companies can't keep storing your data for free; there is a bill that becomes due. It might not cost much per user but now they've got 30 million users, and they're not hungry youngsters in a garage anymore; they've got a building and whiteboards and Herman Miller chairs and kids, and all their stock options are underwater.

So what does Vapor 2.1 do? Hire an old-school CEO, update the logo, re-organize, fire people, and cut expenses. They calculate their burn rate vs. cash available, and hope that the world changes before the cash is gone. About halfway to the zero-cash date, they start shutting down free services in an attempt to delay the inevitable, in hopes of a savior.

And - I'm sorry to have gone on so long - what does this matter? Isn't this the American way? Why should a Pittsburgher care?

Because your photos are all on Flickr or Picasa, and if they fold you really don't have a copy anymore because your old laptop died in October, and there aren't any more copies of that picture of you giving Big Ben advice in training camp.

The freemium online storage companies (and that's what they are, really, is storage companies - storing your data online) have no obligation to preserve or back up your files. Their financial plan doesn't provide for treating your blog entries like future literature, or treating those photos of your kid and your grandmother like they're important.

So the first question of this post is a play on the old public service announcement: Do you know where your children are? Except today's slogan is: Do you know where your data is? Do you have backup copies of all your information that somebody's storing for free for you? Is there anything out there that you'd hate to lose?

There's a tendency to say, well those social services weren't serious business anyway, they weren't (harrumph!) Business-to-Business B2B endeavors, it'll never effect the important things (business).

The problem is that businesses are moving to Cloud Computing, where your servers aren't in your building or your data center - they're out there (somewhere), being run by an outsourcing vendor. These are rigorous systems with robust capabilities, but they're run as a commodity, on razor-thin margins, in a must-profit world. There have been some problems with the cloud. If some of these enterprise cloud storage outfits go poof, any business that relied upon them will probably follow suit.

(more1) , (more2)

The Time Economy

Had an interesting discussion with Dorothy about an executive coaching program she's invested in, it contains a lot of cool aspects but it's built on the notion of the economy of time. Sort of a cool idea. They build their analysis of prioritization around their basic view of an economy of time, the notion that there are transactions, value judgements, and tradeoffs that should reflect rational economic decisions- and where they don't reflect rational decisions, there's room for examination and improvement.

I love the notion of different economies- for instance, in one of his books the Pope refers to "the economy of salvation" - and although I've really focused on the information economy it may be that the time economy is the one that we're all living (and dying) in.

Dorothy's talk (which I really appreciated when I realized that a person treating her time as an economic unit was spending some time with me) reminded me of my friend Mark, who has said that his epitath (and the title of one of his books) will be "The Time Bastard".

Later on I realized that time spent performing stupid but essential tasks was really just a tax on people that can't delegate.