Obama on The BS Report

Awesome.

Some Links For Today

In books to watch out for: we have The Benefit and The Burden about taxes. Here is an interesting David Brooks review:

The U.S. does not have a significantly smaller welfare state than the European nations. We’re just better at hiding it. The Europeans provide welfare provisions through direct government payments. We do it through the back door via tax breaks…

David Bradford, a Princeton economist, has the best illustration of how the system works. Suppose the Pentagon wanted to buy a new fighter plane. But instead of writing a $10 billion check to the manufacturer, the government just issued a $10 billion “weapons supply tax credit.” The plane would still get made. The company would get its money through the tax credit. And politicians would get to brag that they had cut taxes and reduced the size of government!

Next we have a follow-up to this (linked to a few days ago) which is Grace Hopper visualizing a nanosecond. Great communicators are awesome. Sends a tingle up your leg, right, Chris?

China’s legislators are shockingly, shockingly rich.

Merkel on Buffett, part 1 and part 2. I haven’t bothered reading the whole letter this year and settled for David’s analysis.

Robin Hanson contemplates turbulence.

 

Heroes Of Innovation

Big article in the NYT previewing a biography of Bell Labs.

Michael Mandel rightly recognizes his own work in the agenda of the author, which is to establish a strong link between these fathers of many of today’s technologies and the alleged absence of such breakthroughs today.

I like stories of heroes building THINGS like real men do. You know, in factories and stuff. But in the rush to mood affiliation, nobody seems to want to confront two critical counter-factuals:

1. If Bell Labs hadn’t existed, would none of these technologies have existed today?
2. If Bell Labs still existed, would we have any different technologies today/tomorrow?

I hope that this book tries to delve into the scientific context of these researchers’ work. I’m reminded of a line about Einstein that went something like this: “most of his breakthroughs would have been discovered a few months or years after him by someone else: the world was ready for it. General relativity was different. We’d probably still be scratching our heads if he never came along.”

It’s a counterfactual, so who knows if that could be true. Regardless, I’d say it takes a serious shove to put these Bell Labs guys up on that pedestal.

P&C Stocks

David Merkel has an analysis out on insurance stocks. By the way, I deeply respect anyone willing to put original analysis out on the web, as David does frequently. That’s the stuff that drives the blogosphere.

His understanding is way broader than mine on theis business. He begins by dismissing Title and Credit insurers are no longer relevant stand-alone categories, which is great because I know nothing about them. He spends a few minutes on life and health insurers, which I also know nothing about.

I’m a P&C guy and haven’t had any training or experience in anything else. One thing Merkel didn’t get to is the P&C cycle. The best way of talking about this is through his graphs.

You can clearly see how tough it is for that group of insurers to break out past the 1.0 BV line. The market is very skeptical of the profits of those on the right side of the line.

Insurance is a cyclical business and right now we’re approaching the trough. The typical company below 1.0 BV and to the right of the line is probably only performing so well because they are releasing redundant reserves from prior years (translation: business a few years ago is proving more profitable than predicted, so offsets poor results today). Can’t go on forever.

The offshore businesses have a similar problem but the scale of the y axis obscures things a little bit. Almost all of these companies are below the 1.0 BV and the ROE band is shifted out. They’re more profitable and lower-value. Weird!

My gut feel for why this is has to do with the breakdown of business mix. Most insurance companies do two things: they originate/distribute insurance risk and they keep insurance risk. The first business is much more valuable than the second because the infrastructure of distribution is valuable.

Contrast this with reinsurers, who only hold insurance risk and probably dominate this offshore group. Their barriers to entry are super low (three guys, an office in Bermuda and a rolodex full of Reinsurance Brokers!). New entrants are kept away by the spectre of measly profits.

I was still in the reinsurance nursery for the last market turn. I’m looking forward to seeing that it’s like.

Oil Prices and Sumner’s Standing Order

Looks like oil prices are climbing again. If the economy keeps recovering, this increase is going to last a big longer than the last few. Calculated risk looks to James Hamilton in these situations. I’ll swipe a quote from an old Hamilton post via CR:

In my 2003 study, I found the evidence favored a specification with a longer memory, looking at where oil prices had been not just over the last year but instead over the last 3 years. My reading of developments during 2011 has been that, because of the very high gasoline prices we saw in 2008, U.S. car-buying habits never went back to the earlier patterns, and we did not see the same shock to U.S. automakers as accompanied some of the other, more disruptive oil shocks. My view has been that, in the absence of those early manifestations, we might not expect to see the later multiplier effects that account for the average historical response summarized in the figure above. If one uses the 3-year price threshold that the data seem to favor (e.g., equation (3.8) in my 2003 study), the inference would be that we’ll do just fine in 2011:H2, because oil prices in 2011 never exceeded what we saw in 2008.

Great stuff. We’re in a world where oil prices have stayed up long enough that the economy is adjusting to a new level of scarcity.

The other day we are treated to some more analysis:

The first question to be clear on is which crude oil price we’re talking about. Two of the popular benchmarks are West Texas Intermediate, traded in Oklahoma, and North Sea Brent. Historically these two prices were quite close, and it didn’t matter which one you referenced. But due to a lack of adequate transportation infrastructure in the United States, the two prices have diverged significantly over the last year.

Interesting stuff. Here’s a lot more from Hamilton on the Keystone XL pipeline. He’s definitely the best authority I know of on this stuff.

Anyway, now that it’s high oil price season again, I’m reminded of something Scott Sumner has taught me to watch out for, which he always talks about. I’m calling it his standing order: Never reason from a price change.

So what does this mean? Start with this quote:

One factor that’s been driving Brent and WTI up over the last few weeks has been rising tensions with Iran. But why should threats or fears alone affect the price we pay here and now? Phil Flynn, a senior market analyst at PFGBest Research in Chicago, offered this interpretation…

Ok, pop quiz: what happens to oil consumption in the US?

Think about what happens to consumption as the oil price rises and you’d say that consumption goes down. But you’d probably be wrong.

Sumner teaches us to ignore the price change when talking about its effects. Focus on the cause of the price change. What does a big problem in Iran mean for the US economy, other than oil? Not much.

The right answer, then? Oil consumption doesn’t change.

The App Economy

Michael Mandel’s article on the app economy is up. My initial comments here, though they now sound off mark against Mandel’s Atlantic piece.

My favorite bit:

Historically, industries that are job leaders during recessions tend to drive the expansion that follows. Once again, we confirm that innovation creates jobs in ways that cannot be anticipated beforehand. This is the future of industrialized countries.

It’s interesting to imagine what a world with a more substantial app economy would look like. More distributed, more virtual. This would probably be an economy marginally less dependent on large capital deployments and more dependent on open-source projects to upgrade infrastructure.

I’d be very interested to hear Tyler Cowen speculate on the implications for the app economy on TGS.

Some earlier comments of mine on the app economy.

Good Jobs

Here is David Pogue on the everlasting Foxconn saga. He is writing on the side of “our definition of sweat shops is a bit weird in the context of China”. Here is a salient quote:

The second enlightening twist, for me, was a note sent to me from a young man, born in China and now attending an American university.

My aunt worked several years in what Americans call “sweat shops.” It was hard work. Long hours, “small” wage, “poor” working conditions. Do you know what my aunt did before she worked in one of these factories? She was a prostitute.

And the article goes on with lots of interesting anecdotes. It’s good for my bias and all, so I post it here.

But the thing that intrigues me is a contradiction (hypocrisy?) in the way many in our culture look at manufacturing. We revere it, of course, but why? These don’t look like the kind of jobs that I want my kids to have.

It didn’t look like a sweatshop, frankly. The assembly-line work was certainly mind-numbingly repetitive — one woman files the burrs off the iPad’s Apple-logo hole 6,000 times a day — but that’s the nature of assembly-line work. Meanwhile, this factory was clean and modern.

More tellingly, the broadcast showed 3,000 young Chinese workers lining up at the gates for Foxconn’s Monday morning recruiting session.

Now, these workers know about the 2010 Foxconn suicides. They know that the starting salary is $2 an hour (plus benefits, and no payroll taxes). They know they’ll have 12-hour shifts, with two hourlong breaks. They know that workers sleep in a tiny dorm (six or eight to a room) for $17 a month.

And yet here they are, lining up to work! Apparently, even those conditions, so abhorrent to us, are actually better than these workers’ alternatives: backbreaking rural farm work that doesn’t prepare them to move up the work force food chain.

Isn’t a rich society one that is free from such toil? I still don’t really ‘get’ the manufacturing fetish.