Here's a nice piece by Declan McCullagh (via O'Reilly News) describing the crass protectionism to which the American administration is willing to descend in exchange for small amounts of cash, even when such policies clearly run against the interests of US consumers. After all the recent offshoring hysteria coming out of the US, it's nice to see at least some people in the tech world defend the principles of free trade. As if this weren't enough, no less a source of wrongheaded offshoring angst than the Interesting People mailing list has just published a link to this very fine article on why protectionism makes losers of us all.
Then, just when you think the battle might be turning in your favour, word arrives (to subscribers of The Economist only) that Dell — one company that you think really ought to get this stuff — is considering shifting call centre jobs from India to the US, and for no better reason than political pressure. A sad day indeed if it's true.
I've posted a couple of rants recently (1|2) about some of the stupider things people have said on the subjects of trade and 'offshoring' (among which, this is my current all-time favourite). So I figured, why not go for a hat-trick?
What these economically illeterate comments fail to acknowledge is that trade is not a zero-sum game. That's why everyone stands to gain from it. But don't take my word for it. According to McKinsey's conservative estimates (also reported on CNET), for every $1 of spending sent to India, the US gains at least $1.12 (in addition to the $0.33 that India gains). The US gains come from:
That last point is crucial, of course. The US economy has proved very flexible and its workforce is highly educated, which means that it's well equipped to move up the value scale. This is exactly what it has always done — to even greater effect than Europe and Japan. But at the indivudual level these wrenching changes are often extremely painful and people do get left behind. Governments and companies therefore have a geat responsibility to use some of the 'offshoring dividend' to support and retrain those directly affected.
But the overall long-term benefits to the world are so large that no one should seriously be arguing against global outsourcing. Yet quite a few otherwise intelligent people do. Sad isn't the word. It's closer to being tragic.
Dave Barry has a couple of delicious pieces (1|2) on a popular uprising against telemarketers — and what they're doing to try and protect their right to interrupt your dinner in your home with your family to inform you about (say) insurance in which you have no interest.
Now that I'm back in the UK — with anonymous call rejection activiated — the degree of the problem in the US is a fading memory. But I can still recall that it was a significant annoyance when we were living in San Diego. One evening my wife even got called up by a machine asking her to "Press 1 if you're interested in this great offer!". In other words, they don't want to waste the time of a human being (I use the term loosely) at their end unless they know you're interested, but they don't care about wasting the time of the 99.999% of people they call who already have insurance, thank you very much. Just like spammers, these people are pissing in the well and they deserve contempt.
Here's a snippet from the first of Barry's columns:
Leading the charge for the telemarketing industry is the American Teleservices Association (suggested motto: "Some Day, We Will Get a Dictionary and Look Up 'Services'"). This group argues that, if its members are prohibited from calling people who do not want to be called, then two million telemarketers will lose their jobs. Of course, you could use pretty much the same reasoning to argue that laws against mugging cause unemployment among muggers. But that would be unfair. Muggers rarely intrude into your home.
Nice one, Dave. It's a worryingly common fallacy that just because you have a job you're somehow entitled to keep doing it forever even if it turns out that you're not actually doing anything useful, or that someone else can it do it twice as well.
As Frederic Bastiat pointed out in the 19th century, of you follow this course long enough then you end up with a society that achieves nothing at great expense. Particularly entertaining is his famous satirical petition, issued by candlemakers complaining that they cannot possibly compete against the bright, cheap light flooding into their territory from the sun. If employment is to be preserved, they insist, laws must be passed requiring windows and curtains to remain closed.
It's hilarious, though quite far-fetched of course. Or so you think until you read American press reports about the jobless recovery or the outsourcing of well-paid jobs to India, and the shrill reactions these elicit. Then you realise that the economically illiterate, self-serving candlemakers are still among us.
Let me introduce you to the greatest technology ever invented.
This device can accept bicycles in one end and spit out scissors at the other. If you don't have bicycles to offer, it will take cars or chairs or flowers or cheese. If you don't want scissors it can offer you timber or fruit or microprocessors or people who'll answer your phonecalls. In fact, it will accept just about anything you can offer and provide anything you might want in return. This is wonderful because it allows you to concentrate on providing what you're best at (relative to everyone else) and still get your hands on all the things you need to live and enjoy life.
This unique 'technology', this remarkable 'device' is, of course, trade. It's the biggest booster of productivity and raiser living standards that has ever been devised. Weak politicians, kowtowing to vocal special interests, often try to stifle it but at least some are out to protect and promote it (1|2|3).
Then you read a piece like this. Blame India?! Blame India for what, exactly?
The Economist suggests a new term for the combination of institutional dysfunction and economic deflation that has robbed the Japanese population of around $650 billion over the last decade: dysflation.
The 7 August issue of The Economist has a wonderfully thought-provoking piece that starts from an uncontroversial premise — we should strive to maximise human happiness — and ends up at a surprising conclusion — we should therefore put up taxes.
How so? Well, it turns out that people value relative wealth much more highly than absolute wealth. As a result, if we were all to work harder and earn more money, none of us would end up any happier. In contrast, people behave very differently in relation to time off work &mdash they welcome having more of it regardless of whether or not other people are getting even longer vacations. The logical conclusion is that the tax system should encourage us to take more time off rather than to work even harder. That means a high marginal rate of income tax.
As someone who would readily consider emigrating again if UK taxes go much higher, I find it hard to go along with this completely (seeing my tax money being frittered away by a bunch of dickheads certainly subtracts from my total sum of happiness), but at least it made me see things in a new light.
The US government has stolen $44 trillion. How can they get away with it? Easy, the people they've stolen it from haven't been born yet. The Economist has the scoop (subscribers only, I fear).
The Pentagon's hastily retracted plan for a futures market in terrorism is actually a small diamond of idea hidden in a great steaming turd of misapplication and public relations incompetence.
One pioneer of using contrived markets of this kind to aid decision-making is Bernardo Huberman of HP Labs, with whom I've had several very interesting discussions on this and other topics. One of his ideas has been to get senior HP staff to bet real money on the company's financials in the coming year. The idea is that for relatively little outlay, HP can get a much more accurate forecast than would otherwise be possible. And those who guess the numbers right take home a nice bonus. Here's a short write-up from The Economist.
And if that's too heavy for you, you can always stick with Celebdaq.
Even wondered how hedge fund managers make their money? No? Well I'm going to tell you anyway. This from The Economist:
A convertible [bond] is, in effect, two financial instruments in one: a bond, plus a call option on the company's shares. Investors pay for the call option by forgoing some interest on the debt. However, companies issuing convertible debt have been selling the option too cheaply. The main determinant of the value of an option is the volatility of the underlying asset over the life of the option. In the case of convertibles, the more volatile the price of shares, the more the option is worth. And companies assumed that their shares would be less volatile than they actually were.Hedge funds have latched on to the opportunity for arbitrage this has thrown up. A hedge fund buys the convertible and sells the debt component, keeping the call option. It then sells the company's shares short, giving it a hedge against movements in the share price. As the share price moves up and down, the fund adjusts its short position, a tactic known as delta hedging. The hedge fund makes money if the shares turn out more volatile than was assumed by the issuer of the convertible.
Got that? Good, now go out and make yourself rich.
Tim Koller has a characteristically clear-headed piece in the McKinsey Quarterly about why accounting rules don't matter nearly as much as accounting transparency.
A fund manager once told me (correctly, I believe) that as a former economist he firmly believed that there must be a 'correct' equlibirium level between actively managed funds and automated tracking funds. Too many actively managed funds and opportunities for clever stock-pickers to justify their bonuses evaporate in an ultra-efficient market, too many tracker funds and there aren't enough intelligent traders looking at the business news to force share prices to their correct level.
For an investor, the important questions from all of this are, of course:
and
The answer offered in a recent editorial and survey in The Economist is pretty clear: there is currently too much money in managed funds. This is because fund managers have been rather good at selling them and their customers have been rather too willing to believe in the benefits of having their money actively managed.
These days it's much better instead to put your money in a tracker fund. (Unless eveyone else does the same thing of course; that would make actively managed funds relatively more attractive and turn the whole argument on its head... until everyone recognises this and goes back to active management... you get the idea.)
Looks like my acquaintance might have to go back to being an economist for a while.
Microsoft's decision to give shares instead of share options to their employees appears very sensible. And they even say that they're going to cost them properly, which will be real innovation. ;-)
This comes a day after it was announced that BT would pay its chief in shares, not cash (though, amazingly, now that I look I can't find this reported anywhere on the web). This is fine too, but senior managers have more direct short-term control over the share price than those lower down the ranks, so to truly align their interests with mainstream shareholders, they also need restrictions on how quickly they can dispose of them. Otherwise they have a perverse incentive to engineer boom-and-bust share price movements and dump their shares at the top.
While he was president, George Bush Sr. was once photographed holding a copy of The Economist as he left his plane (much to delight of marketing staff and journalists at the newspaper). I wonder if his son has the same title on his reading list. If so, he might not be too pleased to see this wonderful piece about why "he's governing like a Frenchman". <heh! heh!>
One of the great mysteries of the world when I was learning about macroeconomics back in the mid-90s was the size of the equity premium. In the long run, shares used to offer something like six percentage points greater annual growth than 'risk-free' government bonds – and it wasn't clear to anyone why shareholders should need such a large incentive to invest in firms.
Since then, of course, share prices have fallen and become more volatile, simultaneously reducing the equity premium and increasing the level at which it would become explicable to economists. So the mystery has been largely or entirely squeezed out.
Even so, a recent column in The Economist reports (with slightly unconvincing drama) that the Capital Asset Pricing Model (CAPM) on which this view of markets is based has outgrown its usefulness. In fact all they're really reporting is an attempt to refine the use of a figure known as 'beta'. This is a measure of the typical size and direction of movements in the share price of a given company in relation to movements in the stock market as a whole – and it's a key part of the CAPM. The refinement in question involves splitting beta into two so the that the effects of changes in profits and discount rates can be separated. This is important because the share prices of different types of companies appears to respond differently depending on whether the news is about profits or discount rate.
The same piece in The Economist also quotes an interesting report from McKinsey that argues for a recalculation of betas to remove the effect of the high-tech bubble. This would reduce the betas of high-tech firms and increase the betas of other companies (because, by definition, the beta of the whole market is equal to one). All this is important because the beta is used to calculate a company's cost of capital, so it affects decisions about which investments are and are not worth making.
The Economist's conclusion in response to all this seems spot on to me: The equity premium itself, treated for so long as an inexplicable but stable fact of financial life, appears to be something that rises and falls with time, albeit much more slowly (thank goodness) than share prices themselves.
Following the publication of a report by the UK Royal Institution of Chartered Surveyors, the BBC reports:
House prices in England and Wales have fallen for the fourth consecutive month, according to a new industry survey. Yet again London and the South East led the slide.
And also that:
The south continues to experience declining prices but despite this we are seeing confidence from London spreading out across the southern region.
So take from that what you will. Things really haven't got any less confusing than before.
The Economist is, as usual, a bit more coherent. Pam Woodall, their (excellent) economics editor, is in no doubt that we're seeing a real house price bubble (not only in the UK but also elsewhere) and reckons that we'll see a fall of 30% in real terms over the next few years.
As a homeowner, I'd welcome that. Rising house prices are good only for people cashing in on their homes, either by moving downmarket (I'm still trying to climb the property ladder) or borrowing money against their house (I don't need anyt more debt, thanks, especially with general inflation this low).
A recent paper in the McKinsey Quarterly concludes:
Channel change is scary. But with the right insights about customers, competitive conditions, and economics, manufacturers can successfully redirect their channel strategies and improve their performance.
Can someone send a copy to the RIAA?
Much more interesting than the already stale debate about whether or not Britain should join the Euro is the question of whether Germany should leave.
Should the radio spectrum be treated like land (in which you can buy your own plot for exclusive use) or sea (which can generally be used by anyone provided they abide by certain rules of behaviour)? Radio frequencies have historically been sold like land but new technical advances are making it feasible to treat them more like the sea. The Economist explains.
Nobody seems to know exactly what's going to happen to UK house prices over the next year or so. But it doesn't help when the same report gets such different coverage depending on whether you read about it on BBC News or Guardian Unlimited.
Clive Crook has written another great survey for The Economist, this time on global finance. The highlights for me:
Global financial flows do indeed need close regulation, much more so that flows of goods and services. This is a bit of climb-down (though a sensible one) from The Economist's normal hard line on liberalisation.
The best way to overcome the moral hazard experienced by banks is to force them to issue subordinated debt (debt that returns a fixed interest but doesn't get repaid in the event of a collapse). Nice logic!
Two interesting pieces recently, one by Charles Roxburgh at McKinsey and another by Jared Diamond of Guns, Germs & Steel fame.
Alot of the answers are familiar (sunk cost effect, herding instincts, special interest lobbies, tragedy of the commons, religion, ...) but seeing them all together in one place effectively dispells the myth that we're rational animals.